PAINEWEBBER MANAGED INVESTMENTS TRUST, 497, 1996-02-08

PAINEWEBBER MANAGED INVESTMENTS TRUST
497, 1996-02-08

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PaineWebber U.S. Government Income Fund
PaineWebber Investment Grade Income Fund
PaineWebber High Income Fund
1285 Avenue of the Americas, New York, New York 10019
Prospectus -- November 10, 1995
- -------------------------------------------------------------------------------
[_] Professional Management

[_] Portfolio Diversification

[_] Dividend and Capital Gain Reinvestment

[_] Flexible PricingSM

[_] Low Minimum Investment

[_] Automatic Investment Plan

[_] Systematic Withdrawal Plan

[_] Exchange Privileges

[_] Suitable for Retirement Plans

These Funds are series of PaineWebber Managed Investments Trust ("Trust").
This Prospectus concisely sets forth information about the Funds a prospective
investor should know before investing. Please retain this Prospectus for fu-
ture reference.

PAINEWEBBER HIGH INCOME FUND INVESTS PREDOMINANTLY IN LOWER RATED BONDS, COM-
MONLY REFERRED TO AS "JUNK BONDS." BONDS OF THIS TYPE ARE CONSIDERED TO BE
SPECULATIVE WITH RESPECT TO THE PAYMENT OF INTEREST AND RETURN OF PRINCIPAL.
PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN
THIS FUND.

A Statement of Additional Information dated November 10, 1995 (which is incor-
porated by reference herein) has been filed with the Securities and Exchange
Commission. The Statement of Additional Information can be obtained without
charge, and further inquiries can be made, by contacting the Funds, your
PaineWebber investment executive or PaineWebber's correspondent firms or by
calling toll-free 1-800-647-1568.
------------------------------------------------------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Prospectus Page 1
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND

Table of Contents
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 3
Financial Highlights....................................................... 9
Flexible Pricing System.................................................... 16
Investment Objectives and Policies......................................... 17
Purchases.................................................................. 27
Exchanges.................................................................. 31
Redemptions................................................................ 32
Conversion of Class B Shares............................................... 33
Other Services and Information............................................. 33
Dividends and Taxes........................................................ 34
Valuation of Shares........................................................ 36
Management................................................................. 36
Performance Information.................................................... 38
General Information........................................................ 38
Appendix A................................................................. A-1
Appendix B................................................................. B-1
Appendix C................................................................. C-1
</TABLE>
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Prospectus Page 2
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND

Prospectus Summary
- --------------------------------------------------------------------------------

See the body of the Prospectus for more information on the topics discussed
in this summary.

The Funds: This Prospectus describes three separate, diversified
series (each a "Fund") of an open-end management in-
vestment company. Each Fund has its own investment ob-
jective and policies.

Investment Objectives
and Policies:
PaineWebber U.S. High current income consistent with the preservation
Government Income of capital and liquidity; invests primarily in U.S.
Fund ("U.S. government securities.
Government Income
Fund")

PaineWebber High current income consistent with the preservation
Investment Grade of capital and liquidity; invests primarily in invest-
Income Fund ment grade corporate bonds and other fixed income se-
("Investment Grade curities.
Income Fund")

PaineWebber High Highest level of current income available without un-
Income Fund ("High due risk; invests primarily in high risk, high yield-
Income Fund") ing medium and lower quality corporate bonds.

Total Net Assets at
October 31, 1995:

U.S. Government Investment Grade High Income
Income Fund Income Fund Fund
$578.7 million $369.2 million $606.3 million

Investment Adviser: Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins"), an asset management subsidiary of
PaineWebber Incorporated ("PaineWebber"), manages over
$44.6 billion in assets. See "Management."

Purchases: Shares of beneficial interest are available exclu-
sively through PaineWebber and its correspondent firms
for investors who are clients of PaineWebber or those
firms ("PaineWebber clients") and, for other invest-
ors, through PFPC Inc., the Funds' transfer agent
("Transfer Agent").

Flexible Pricing Investors may select Class A, Class B or Class C
System: shares, each with a public offering price that re-
flects different sales charges and expense levels. See
"Flexible Pricing System," "Purchases," "Redemptions"
and "Conversion of Class B Shares."

Class A Shares Offered at net asset value plus any applicable sales
charge (maximum is 4% of public offering price).

Class B Shares Offered at net asset value (a maximum contingent de-
ferred sales charge of 5% is imposed on most redemp-
tions made within six years of date of purchase).
Class B shares automatically convert into Class A
shares (which pay lower ongoing expenses) approxi-
mately six years after purchase.
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Prospectus Page 3
<PAGE>

Class C Shares Offered at net asset value without an initial sales
charge (for shares purchased on or after November 10,
1995, a contingent deferred sales charge of 0.75% is
imposed on most redemptions made within one year of
date of purchase). Class C shares pay higher ongoing
expenses than Class A shares and do not convert into
another Class.

Exchanges: Shares may be exchanged for shares of the correspond-
ing Class of most PaineWebber mutual funds.

Redemptions: PaineWebber clients may redeem through PaineWebber;
other shareholders must redeem through the Transfer
Agent.

Dividends: Declared daily and paid monthly; net capital gain is
distributed annually. See "Dividends and Taxes."

Reinvestment: All dividends and capital gain distributions are paid
in Fund shares of the same Class at net asset value
unless the shareholder has requested cash.

Minimum Purchase: $1,000 for first purchase; $100 for subsequent pur-
chases.

Other Features:
Class A Shares Automatic investment plan Quantity discounts on
initial sales charge
Systematic withdrawal plan 365-day reinstatement
privilege
Rights of accumulation

Class B Shares Automatic investment plan Systematic withdrawal plan

Class C Shares Automatic investment plan Systematic withdrawal plan

WHO SHOULD INVEST. Each Fund has its own suitability considerations and risk
factors, as summarized below and described in detail under "Investment
Objectives and Policies." While no single Fund is intended to provide a
complete or balanced investment program, each can serve as one component of an
investor's long-term program to accumulate assets for retirement, college
tuition or other major goals.

U.S. GOVERNMENT INCOME FUND. Investing primarily in U.S. government
securities, including U.S. Treasury obligations and obligations issued or
guaranteed by U.S. government agencies or instrumentalities and related
repurchase agreements, U.S. Government Income Fund is designed for investors
seeking high current income consistent with the preservation of capital and
liquidity.

INVESTMENT GRADE INCOME FUND. Investing in a diversified range of investment
grade bonds and other fixed income securities, Investment Grade Income Fund
is designed for investors seeking high current income consistent with the
preservation of capital and liquidity.

HIGH INCOME FUND. Investing in a diversified range of high risk, high yield
medium to lower quality bonds, High Income Fund is designed for investors
seeking the highest level of current income available without undue risk.

RISK FACTORS. There can be no assurance that any Fund will achieve its
investment objective, and each Fund's net asset value per share will vary
inversely with movements in interest rates. Mitchell Hutchins attempts to
reduce the risks associated with investments in debt securities through
diversification, credit analysis and attention to current trends in interest
rates and other factors. U.S. Government Income Fund normally concentrates at
least 25% of its total assets in mortgage- and asset-backed securities.
Investing in mortgage- and asset-backed securities involves special risks, such
as those relating to the prepayment of principal on the underlying
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Prospectus Page 4
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
Prospectus Summary
(Continued)
- --------------------------------------------------------------------------------
obligations, in addition to the risks present in the case of other types of
debt securities. During 1994, the value and liquidity of many mortgage-backed
securities declined sharply due primarily to increases in interest rates. There
can be no assurance that such declines will not recur. The market value of
certain mortgage-backed securities in which U.S. Government Income Fund and
Investment Grade Income Fund may invest, including interest-only and principal-
only classes of mortgage-backed securities and inverse floating rate
securities, can be extremely volatile and these securities may become illiquid.
Certain investment grade debt securities in which Investment Grade Income Fund
and High Income Fund may invest have speculative characteristics. Investment
Grade Income Fund and High Income Fund are permitted to purchase high risk,
high yield debt securities rated lower than investment grade by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's, a division of The
McGraw Hill Companies, Inc. ("S&P"), or comparably rated by another nationally
recognized statistical rating organization ("NRSRO"), which may be subject to
greater risks of default and price fluctuation than investment grade securities
and are considered predominantly speculative. High risk, high yield securities
are especially subject to adverse changes in general economic conditions and in
the industries in which the issuers are engaged, to changes in the financial
condition of the issuers and to price fluctuations in response to changes in
interest rates. Investment Grade Income Fund and High Income Fund may invest in
U.S. dollar-denominated securities of foreign issuers the value of which is
linked to the value of foreign currencies. High Income Fund is permitted to
invest in securities of foreign issuers that are denominated and traded in
currencies other than the U.S. dollar. Foreign securities involve certain
considerations not typically associated with investing in securities of U.S.
issuers. These include risks relating to political, social and economic
developments abroad and to the differences between the regulations to which
U.S. and foreign issuers and markets are subject. The value of these
investments also can be adversely affected by fluctuations in foreign currency
values. Some foreign currencies can be volatile and may be subject to
governmental controls or intervention. The use of options, futures contracts
and interest rate protection transactions and (for U.S. Government Income Fund)
dollar rolls and reverse repurchase agreements also entails special risks.
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Prospectus Page 5
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SHAREHOLDER TRANSACTION EXPENSES(1)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum sales charge on purchases of shares (as a
percentage of public offering price).............. 4% None None
Sales charge on reinvested dividends............... None None None
Exchange fee....................................... $5.00 $5.00 $5.00
Maximum contingent deferred sales charge (as a
percentage of net asset value at the time of
purchase or redemption, whichever is lower)....... None(2) 5% 0.75%(3)
</TABLE>

ANNUAL FUND OPERATING EXPENSES(4)
(as a percentage of average net assets)

<TABLE>
<CAPTION>
U.S. GOVERNMENT INVESTMENT GRADE HIGH
INCOME FUND INCOME FUND INCOME FUND
----------------------- ----------------------- -----------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees......... 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
12b-1 fees(5)........... 0.25 1.00 0.75 0.25 1.00 0.75 0.25 1.00 0.75
Other expenses.......... 0.20 0.22 0.20 0.22 0.22 0.20 0.16 0.14 0.13
---- ---- ---- ---- ---- ---- ---- ---- ----
Total operating
expenses............... 0.95% 1.72% 1.45% 0.97% 1.72% 1.45% 0.91% 1.64% 1.38%
==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- -------
(1) Sales charge and exchange fee waivers are available for all shares and
reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge generally
declines by 1% annually thereafter, reaching zero after six years. See
"Purchases."
(2) Purchases of Class A shares of $1 million or more are not subject to an
initial sales charge. A contingent deferred sales charge of 1% will be
applied to most redemptions of such shares within one year of purchase. See
"Purchases."
(3) A contingent deferred sales charge of 0.75% will be applied to most
redemptions of Class C shares within one year of purchase. See "Purchases."
(4) See "Management" for additional information. All expenses are those
actually incurred for the fiscal year ended November 30, 1994.
(5) 12b-1 fees have two components, as follows:

12b-1 distribution fees are asset-based sales charges. Long-term Class B and
Class C shareholders may pay more in direct and indirect sales charges
(including distribution fees) than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc.
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Prospectus Page 6
<PAGE>

An investor would directly or indirectly pay the following expenses on a $1,000
investment in each Fund, assuming a 5% annual return:

<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
U.S. GOVERNMENT INCOME FUND
Class A Shares (1).................................... $49 $69 $ 90 $152
Class B Shares:
Assuming a complete redemption at end of period
(2)(3).............................................. $67 $84 $113 $164
Assuming no redemption (3)........................... $17 $54 $ 93 $164
Class C Shares:
Assuming a complete redemption at end of period(2)... $22 $46 $ 79 $174
Assuming no redemption............................... $15 $46 $ 79 $174
INVESTMENT GRADE INCOME FUND
Class A Shares (1).................................... $50 $70 $ 91 $154
Class B Shares:
Assuming a complete redemption at end of period
(2)(3).............................................. $67 $84 $113 $165
Assuming no redemption (3)........................... $17 $54 $ 93 $165
Class C Shares:
Assuming a complete redemption at end of period (2).. $22 $46 $ 79 $174
Assuming no redemption............................... $15 $46 $ 79 $174
HIGH INCOME FUND
Class A Shares (1).................................... $49 $68 $ 88 $147
Class B Shares:
Assuming a complete redemption at end of period
(2)(3).............................................. $67 $82 $109 $157
Assuming no redemption (3)........................... $17 $52 $ 89 $157
Class C Shares:
Assuming a complete redemption at end of period (2).. $22 $44 $ 76 $166
Assuming no redemption............................... $14 $44 $ 76 $166
</TABLE>
- -------
(1) Assumes deduction at the time of purchase of the maximum 4% initial sales
charge.
(2) Assumes deduction at the time of redemption of the maximum applicable
contingent deferred sales charge.
(3) Ten-year figures assume conversion of Class B shares to Class A shares at
end of sixth year.

THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND A FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
The actual expenses attributable to each Class of a Fund's shares will depend
upon, among other things, the level of average net assets and the extent to
which a Fund incurs variable expenses, such as transfer agency costs.
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Prospectus Page 7
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(THIS PAGE INTENTIONALLY LEFT BLANK)
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Prospectus Page 8
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND

Financial Highlights
----------------------------------------------------------------------------

The tables on the following pages provide selected per share data and ratios
for one Class A share, one Class B share and one Class C share of each Fund for
each of the periods shown. This information is supplemented by the financial
statements and accompanying notes appearing in the Funds' Annual Report to
Shareholders for the fiscal year ended November 30, 1994, which are
incorporated by reference into the Statement of Additional Information. The
financial statements and notes, as well as the information in the tables
appearing on the following pages insofar as it relates to each of the five
years in the period ended November 30, 1994, have been audited by Ernst & Young
LLP, independent auditors, whose report thereon is included in the Annual
Report to Shareholders. The financial statements and notes and the financial
information in the table below, insofar as they relate to the six months ended
May 31, 1995, have been taken from the records of the Fund without examination
by the independent auditors, who do not express an opinion thereon. Further
information about the performance of each Fund is also included in the Annual
Report to Shareholders, which may be obtained without charge. The information
appearing below for the periods prior to the year ended November 30, 1990 also
has been audited by Ernst & Young LLP, whose reports thereon were unqualified.
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Prospectus Page 9
<PAGE>

<TABLE>
<CAPTION>
U.S. GOVERNMENT INCOME FUND
------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------
FOR THE
SIX
MONTHS
ENDED
MAY 31, FOR THE YEARS ENDED NOVEMBER 30,
1995 -----------------------------------------------------------------------------------
(UNAUDITED) 1994 1993 1992 1991 1990 1989 1988 1987
----------- -------- -------- -------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................. $ 8.50 $ 10.03 $ 9.98 $ 9.97 $ 9.47 $ 9.51 $ 9.28 $ 9.31 $ 10.27
-------- -------- -------- -------- -------- -------- -------- ---------- ----------
NET INCREASE (DECREASE)
FROM INVESTMENT
OPERATIONS:
Net investment income...... 0.30 0.60 0.67 0.75 0.77 0.76 0.80 0.80 0.81
Net realized and unrealized
gains (losses) from
investment transactions... 0.45 (1.53) 0.05 0.01 0.49 (0.05) 0.23 -- (0.85)
-------- -------- -------- -------- -------- -------- -------- ---------- ----------
Net increase (decrease) in
net asset value resulting
from operations........... 0.75 (0.93) 0.72 0.76 1.26 0.71 1.03 0.80 (0.04)
-------- -------- -------- -------- -------- -------- -------- ---------- ----------
LESS DISTRIBUTIONS:
Dividends from net
investment income......... (0.30) (0.60) (0.67) (0.75) (0.76) (0.75) (0.80) (0.80) (0.85)
Distributions from net
realized gains from
investment transactions... -- -- -- -- -- -- -- -- (0.07)
Return of capital.......... -- -- -- -- -- -- -- (0.03) --
-------- -------- -------- -------- -------- -------- -------- ---------- ----------
Total dividends and
distributions to
shareholders.............. (0.30) (0.60) (0.67) (0.75) (0.76) (0.75) (0.80) (0.83) (0.92)
-------- -------- -------- -------- -------- -------- -------- ---------- ----------
Net asset value, end of
period.................... $ 8.95 $ 8.50 $ 10.03 $ 9.98 $ 9.97 $ 9.47 $ 9.51 $ 9.28 $ 9.31
======== ======== ======== ======== ======== ======== ======== ========== ==========
Total investment
return (1)................ 9.08% (9.62)% 7.38% 7.92% 13.80% 8.36% 11.66% 8.93% (0.21)%
======== ======== ======== ======== ======== ======== ======== ========== ==========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's omitted)........... $405,579 $428,722 $648,923 $703,198 $737,189 $795,240 $963,226 $1,279,535 $2,018,208
Ratio of expenses to
average net assets........ 1.01%* 0.95% 0.91% 0.93% 0.87% 0.66% 0.72% 0.67% 0.68%
Ratio of net investment
income to average net
assets.................... 7.02%* 6.48% 6.60% 7.42% 7.94% 8.57% 8.82% 8.83% 8.44%
Portfolio turnover rate.... 91.33% 358.07% 83.13% 28.33% 71.22% 34.48% 124.54% 302.09% 98.00%
</TABLE>
- -------
#Commencement of offering of shares.
*Annualized.
(1) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends and other distributions
at net asset value on the payable dates, and a sale at net asset value on
the last day of each period reported. The figures do not include sales
charges; results for Class A and Class B shares would be lower if sales
charges were included. Total investment returns for periods of less than one
year have not been annualized.
(2) Formerly Class D shares.
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Prospectus Page 10
<PAGE>

<TABLE>
<CAPTION>
U.S. GOVERNMENT INCOME FUND
- -------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C (2)
- ---------------------- -------------------------------------------------------- ----------------------------------------------
FOR THE FOR THE
SIX SIX
MONTHS FOR THE FOR THE PERIOD MONTHS FOR THE FOR THE PERIOD
FOR THE YEARS ENDED ENDED YEARS ENDED JULY 1, 1991# ENDED YEARS ENDED JULY 2, 1992#
NOVEMBER 30, MAY 31, NOVEMBER 30, TO MAY 31, NOVEMBER 30, TO
- ---------------------- 1995 ---------------------------- NOVEMBER 30, 1995 ------------------ NOVEMBER 30,
1986 1985 (UNAUDITED) 1994 1993 1992 1991 (UNAUDITED) 1994 1993 1992
- ---------- ---------- ----------- ------- -------- -------- -------------- ----------- ------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.18 $ 9.78 $ 8.50 $ 10.03 $ 9.98 $ 9.98 $ 9.59 $ 8.49 $ 10.02 $ 9.98 $ 10.13
- ---------- ---------- ------- ------- -------- -------- ------- ------- ------- -------- --------
0.96 1.03 0.27 0.53 0.60 0.67 0.29 0.28 0.55 0.62 0.25
0.32 0.63 0.45 (1.53) 0.05 0.01 0.39 0.45 (1.53) 0.04 (0.15)
- ---------- ---------- ------- ------- -------- -------- ------- ------- ------- -------- --------
1.28 1.66 0.72 (1.00) 0.65 0.68 0.68 0.73 (0.98) 0.66 0.10
- ---------- ---------- ------- ------- -------- -------- ------- ------- ------- -------- --------
(0.96) (1.03) (0.27) (0.53) (0.60) (0.68) (0.29) (0.28) (0.55) (0.62) (0.25)
(0.23) (0.23) -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- -- --
- ---------- ---------- ------- ------- -------- -------- ------- ------- ------- -------- --------
(1.19) (1.26) (0.27) (0.53) (0.60) (0.68) (0.29) (0.28) (0.55) (0.62) (0.25)
- ---------- ---------- ------- ------- -------- -------- ------- ------- ------- -------- --------
$ 10.27 $ 10.18 $ 8.95 $ 8.50 $ 10.03 $ 9.98 $ 9.98 $ 8.94 $ 8.49 $ 10.02 $ 9.98
========== ========== ======= ======= ======== ======== ======= ======= ======= ======== ========
13.51% 18.23% 8.66% (10.31)% 6.57% 6.98% 6.78% 8.81% (10.08)% 6.75% 0.62%
========== ========== ======= ======= ======== ======== ======= ======= ======= ======== ========
$3,139,662 $1,646,231 $91,314 $99,581 $161,158 $132,357 $23,532 $58,050 $68,400 $143,473 $127,026
0.66% 0.68% 1.78%* 1.72% 1.66% 1.67% 1.68%* 1.52%* 1.45% 1.40% 1.44%*
9.35% 10.04% 6.25%* 5.71% 5.79% 6.38% 6.40%* 6.55%* 5.99% 6.06% 6.13%*
224.38% 255.67% 91.33% 358.07% 83.13% 28.33% 71.22% 91.33% 358.07% 83.13% 28.33%
</TABLE>
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Prospectus Page 11
<PAGE>

FOR THE SIX
MONTHS
ENDED FOR THE YEARS ENDED NOVEMBER 30,
MAY 31, -------------------------------------------------------------------------------
1995
(UNAUDITED) 1994 1993 1992 1991 1990 1989 1988 1987
----------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 9.67 $ 11.08 $ 10.38 $ 10.17 $ 9.50 $ 9.82 $ 9.53 $ 9.42 $ 10.74
-------- -------- -------- -------- -------- -------- -------- -------- --------
NET INCREASE (DECREASE)
FROM INVESTMENT
OPERATIONS:
Net investment income... 0.39 0.77 0.79 0.81 0.82 0.84 0.86 0.83 0.88
Net realized and
unrealized gains
(losses) from
investment
transactions........... 0.74 (1.41) 0.70 0.22 0.66 (0.33) 0.27 0.10 (1.15)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net increase (decrease)
in net asset value
resulting from
operations............. 1.13 (0.64) 1.49 1.03 1.48 0.51 1.13 0.93 (0.27)
-------- -------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net
investment income...... (0.39) (0.77) (0.79) (0.82) (0.81) (0.83) (0.84) (0.81) (0.92)
Distributions from net
realized gains from
investment
transactions........... -- -- -- -- -- -- -- -- (0.08)
Return of capital....... -- -- -- -- -- -- -- (0.01) (0.05)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions to
shareholders........... (0.39) (0.77) (0.79) (0.82) (0.81) (0.83) (0.84) (0.82) (1.05)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period................. $ 10.41 $ 9.67 $ 11.08 $ 10.38 $ 10.17 $ 9.50 $ 9.82 $ 9.53 $ 9.42
======== ======== ======== ======== ======== ======== ======== ======== ========
Total investment
return (1)............. 11.96% (5.99)% 14.77% 10.39% 16.17% 5.55% 12.28% 10.24% (2.69)%
======== ======== ======== ======== ======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DA-
TA:
Net assets, end of
period
(000's omitted)........ $271,463 $271,553 $204,418 $197,795 $220,216 $225,424 $269,381 $334,106 $543,919
Ratio of expenses to
average net assets..... 0.96%* 0.97% 0.96% 1.01% 0.91% 0.66% 0.65% 0.70% 0.72%
Ratio of net investment
income to
average net assets..... 7.74%* 7.50% 7.24% 7.81% 8.32% 8.76% 8.96% 8.83% 8.67%
Portfolio turnover rate. 68.32% 142.15% 27.25% 43.88% 45.68% 31.42% 46.99% 34.61% 87.53%
</TABLE>
- -------
# Commencement of offering of shares.
* Annualized.
(1) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends and other distributions
at net asset value on the payable dates, and a sale at net asset value on
the last day of each period reported. The figures do not include sales
charges; results for Class A and Class B shares would be lower if sales
charges were included. Total investment returns for periods of less than
one year have not been annualized.
(2) Formerly Class D shares.
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Prospectus Page 12
<PAGE>

FOR THE YEARS FOR THE SIX FOR THE FOR THE FOR THE SIX FOR THE FOR THE
ENDED NOVEMBER MONTHS YEARS ENDED PERIOD MONTHS YEARS ENDED PERIOD
30, ENDED NOVEMBER 30, JULY 1, 1991# ENDED NOVEMBER 30, JULY 2, 1992#
- ------------------ MAY 31, -------------------------- TO MAY 31, ----------------- TO
1995 NOVEMBER 30, 1995 NOVEMBER 30,
1986 1985 (UNAUDITED) 1994 1993 1992 1991 (UNAUDITED) 1994 1993 1992
- -------- -------- ----------- ------- ------- ------- ------------- ----------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.27 $ 9.81 $ 9.67 $ 11.07 $ 10.38 $ 10.17 $ 9.79 $ 9.67 $ 11.08 $ 10.38 $ 10.48
- -------- -------- ------- ------- ------- ------- ------ ------- ------- ------- -------
1.00 1.06 0.35 0.69 0.71 0.73 0.31 0.36 0.72 0.74 0.28
0.69 0.71 0.74 (1.40) 0.69 0.22 0.38 0.74 (1.41) 0.70 (0.10)
- -------- -------- ------- ------- ------- ------- ------ ------- ------- ------- -------
1.69 1.77 1.09 (0.71) 1.40 0.95 0.69 1.10 (0.69) 1.44 0.18
- -------- -------- ------- ------- ------- ------- ------ ------- ------- ------- -------
(1.00) (1.06) (0.35) (0.69) (0.71) (0.74) (0.31) (0.36) (0.72) (0.74) (0.28)
(0.22) (0.25) -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- -- --
- -------- -------- ------- ------- ------- ------- ------ ------- ------- ------- -------
(1.22) (1.31) (0.35) (0.69) (0.71) (0.74) (0.31) (0.36) (0.72) (0.74) (0.28)
- -------- -------- ------- ------- ------- ------- ------ ------- ------- ------- -------
$ 10.74 $ 10.27 $ 10.41 $ 9.67 $ 11.07 $ 10.38 $10.17 $ 10.41 $ 9.67 $ 11.08 $ 10.38
======== ======== ======= ======= ======= ======= ====== ======= ======= ======= =======
17.36% 19.44% 11.55% (6.60)% 13.81% 9.56% 6.76% 11.69% (6.40)% 14.21% 1.32%
======== ======== ======= ======= ======= ======= ====== ======= ======= ======= =======
$474,632 $213,789 $74,624 $69,359 $52,301 $20,862 $5,368 $41,042 $45,473 $47,527 $16,067
0.68% 0.78% 1.70%* 1.72% 1.70% 1.74% 1.67%* 1.46%* 1.45% 1.44% 1.49%*
9.27% 10.55% 7.00%* 6.73% 6.40% 6.88% 6.87%* 7.28%* 6.99% 6.61% 6.83%*
80.72% 166.30% 68.32% 142.15% 27.25% 43.88% 45.68% 68.32% 142.15% 27.25% 43.88%
</TABLE>
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<PAGE>

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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
Financial Highlights
(Continued)
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH INCOME FUND
----------------------------------------------------------------------------------------------
CLASS A
----------------------------------------------------------------------------------------------
FOR THE
SIX MONTHS
ENDED FOR THE YEARS ENDED NOVEMBER 30,
MAY 31, ---------------------------------------------------------------------------------
1995
(UNAUDITED) 1994 1993 1992 1991 1990 1989 1988 1987
----------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 7.14 $ 8.73 $ 7.92 $ 7.30 $ 5.61 $ 7.47 $ 8.60 $ 8.94 $ 10.46
-------- -------- -------- -------- -------- -------- -------- -------- --------
NET INCREASE (DECREASE)
FROM INVESTMENT
OPERATIONS:
Net investment income... 0.41 0.86 0.89 0.98 0.98 0.99 1.10 1.18 1.23
Net realized and
unrealized gains
(losses) from
investment
transactions........... 0.10 (1.59) 0.83 0.61 1.69 (1.88) (1.15) (0.33) (1.39)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net increase (decrease)
in net asset value
resulting from
operations............. 0.51 (0.73) 1.72 1.59 2.67 (0.89) (0.05) 0.85 (0.16)
-------- -------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net
investment income...... (0.41) (0.86) (0.91) (0.97) (0.98) (0.97) (1.08) (1.19) (1.28)
Distributions from net
realized gains from
investment
transactions........... -- -- -- -- -- -- -- -- (0.08)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions to
shareholders........... (0.41) (0.86) (0.91) (0.97) (0.98) (0.97) (1.08) (1.19) (1.36)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period................. $ 7.24 $ 7.14 $ 8.73 $ 7.92 $ 7.30 $ 5.61 $ 7.47 $ 8.60 $ 8.94
======== ======== ======== ======== ======== ======== ======== ======== ========
Total investment return
(1).................... 7.51% (9.20)% 22.89% 22.99% 51.11% (12.95)% (0.76)% 9.81% (2.28)%
======== ======== ======== ======== ======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000 omitted)... $270,426 $268,397 $360,281 $279,685 $243,210 $184,990 $322,426 $532,450 $683,692
Ratio of expenses to
average net assets..... 0.94%* 0.91% 0.93% 0.98% 1.05% 0.85% 0.71% 0.70% 0.67%
Ratio of net investment
income to average net
assets................. 11.72%* 10.43% 10.61% 12.68% 15.12% 15.20% 13.50% 13.55% 12.05%
Portfolio turnover rate. 41.28% 155.77% 182.26% 185.43% 116.97% 109.68% 131.88% 111.31% 145.39%
</TABLE>
- -------
# Commencement of offering of shares.
* Annualized.
(1) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends and other distributions
at net asset value on the payable dates, and a sale at net asset value on
the last day of each period reported. The figures do not include sales
charges; results for Class A and Class B shares would be lower if sales
charges were included. Total investment returns for periods of less than one
year have not been annualized.
(2) Formerly Class D shares.
-------------
Prospectus Page 14
<PAGE>

FOR THE YEARS FOR THE FOR THE FOR THE FOR THE YEARS
ENDED SIX MONTHS FOR THE YEARS ENDED PERIOD SIX MONTHS ENDED FOR THE
NOVEMBER 30, ENDED NOVEMBER 30, JULY 1, ENDED NOVEMBER 30, PERIOD JULY
- ------------------ MAY 31, ---------------------------- 1991# TO MAY 31, ------------------- 2, 1992# TO
1995 NOVEMBER 30, 1995 NOVEMBER 30,
1986 1985 (UNAUDITED) 1994 1993 1992 1991 (UNAUDITED) 1994 1993 1992
- -------- -------- ----------- -------- -------- ------- ------------ ----------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.21 $ 9.86 $ 7.14 $ 8.72 $ 7.91 $ 7.29 $ 6.85 $ 7.15 $ 8.74 $ 7.92 $ 7.80
- -------- -------- -------- -------- -------- ------- ------- -------- -------- -------- -------
1.30 1.25 0.39 0.80 0.83 0.92 0.41 0.40 0.82 0.85 0.33
0.39 0.50 0.08 (1.58) 0.82 0.61 0.44 0.09 (1.59) 0.82 0.11
- -------- -------- -------- -------- -------- ------- ------- -------- -------- -------- -------
1.69 1.75 0.47 (0.78) 1.65 1.53 0.85 0.49 (0.77) 1.67 0.44
- -------- -------- -------- -------- -------- ------- ------- -------- -------- -------- -------
(1.30) (1.25) (0.38) (0.80) (0.84) (0.91) (0.41) (0.39) (0.82) (0.85) (0.32)
(0.14) (0.15) -- -- -- -- -- -- -- -- --
- -------- -------- -------- -------- -------- ------- ------- -------- -------- -------- -------
(1.44) (1.40) (0.38) (0.80) (0.84) (0.91) (0.41) (0.39) (0.82) (0.85) (0.32)
- -------- -------- -------- -------- -------- ------- ------- -------- -------- -------- -------
$ 10.46 $ 10.21 $ 7.23 $ 7.14 $ 8.72 $ 7.91 $ 7.29 $ 7.25 $ 7.15 $ 8.74 $ 7.92
======== ======== ======== ======== ======== ======= ======= ======== ======== ======== =======
17.31% 18.91% 6.96% (9.77)% 21.89% 22.07% 11.93% 7.23% (9.62)% 22.19% 5.21%
======== ======== ======== ======== ======== ======= ======= ======== ======== ======== =======
$770,137 $128,810 $244,748 $235,480 $286,525 $99,645 $18,274 $121,560 $115,196 $176,161 $35,992
0.69% 0.78% 1.69%* 1.64% 1.66% 1.70% 1.73%* 1.45%* 1.38% 1.39% 1.45%*
12.07% 12.15% 10.97%* 9.66% 9.69% 11.42% 12.43%* 11.17%* 9.91% 9.81% 10.67%*
169.38% 117.72% 41.28% 155.77% 182.26% 185.43% 116.97% 41.28% 155.77% 182.26% 185.43%
</TABLE>
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<PAGE>

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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND

Flexible Pricing System
----------------------------------------------------------------------------

DIFFERENCES AMONG THE CLASSES

The primary distinctions among the Classes of each Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of distribution fees.
These differences are summarized in the table below. Each Class has distinct
advantages and disadvantages for different investors, and investors may choose
the Class that best suits their circumstances and objectives.

<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES (AS A %
OF AVERAGE DAILY NET
SALES CHARGE ASSETS) OTHER INFORMATION
------------ ------------------------- -----------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge Service fee of 0.25% Initial sales charge waived
of 4% of the public offering or reduced for certain
price purchases
CLASS B Maximum contingent deferred Service fee of 0.25%; Shares convert to Class A
sales charge of 5% upon distribution fee of shares approximately six
redemption; declines to zero 0.75% years after issuance
after six years
CLASS C Contingent deferred sales Service fee of 0.25%; --
charge of 0.75% upon distribution fee of
redemption for first year 0.50%
</TABLE>

FACTORS TO CONSIDER IN CHOOSING A CLASS OF SHARES

In deciding which Class of shares to purchase, investors should consider the
cost of sales charges together with the cost of the ongoing annual expenses
described below, as well as any other relevant facts and circumstances.

SALES CHARGES. Class A shares are sold at net asset value plus an initial sales
charge of up to 4% of the public offering price. Because of this initial sales
charge, not all of a Class A shareholder's purchase price is invested in the
Fund. Class B shares are sold with no initial sales charge, but a contingent
deferred sales charge of up to 5% applies to most redemptions made within six
years of purchase. Class C shareholders pay no initial sales charges, although
a contingent deferred sales charge of 0.75% applies to most redemptions made
within one year after purchase. Thus, the entire amount of a Class B or Class C
shareholder's purchase price is immediately invested in the Fund.

WAIVERS AND REDUCTIONS OF CLASS A SALES CHARGES. Class A share purchases over
$100,000 and Class A share purchases made under a Fund's reduced sales charge
plan may be made at a reduced sales charge. In considering the combined cost of
sales charges and ongoing annual expenses, investors should take into account
any reduced sales charges on Class A shares for which they may be eligible.

The entire initial sales charge on Class A shares is waived for certain
eligible purchasers. Because Class A shares bear lower ongoing annual expenses
than Class B shares or Class C shares, investors eligible for complete waivers
should purchase Class A shares.

ONGOING ANNUAL EXPENSES. Class A, B and C shares of each Fund pay an annual
12b-1 service fee of 0.25% of average daily net assets. Class B shares pay an
annual 12b-1 distribution fee of 0.75%, and Class C shares pay an annual 12b-1
distribution fee of 0.50%, of average daily net assets. Annual 12b-1
distribution fees are a form of asset-based sales charge. An investor should
consider both ongoing annual expenses and initial or contingent sales charges
in estimating the costs of investing in the respective Classes of Fund shares
over various time periods.

For example, assuming a constant net asset value, the cumulative distribution
fees on a Fund's Class B and Class C shares would approximate
-------------
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<PAGE>

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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND

the expenses of the 4% maximum initial sales charge on the Class A shares if
the shares were held for approximately 5 1/2 years in the case of the Class B
shares and approximately 8 years in the case of the Class C shares. Class B
shares convert to Class A shares (which do not bear the expense of ongoing
distribution fees) approximately six years after purchase. The cumulative
distribution fees on a Fund's Class C shares would approximate the cumulative
distribution fees on the Class B shares if the shares were held for 9 years.
Thus, an investor who would be subject to the maximum initial sales charge on
Class A shares and who expects to hold shares of a Fund for less than 9 years
generally should expect to pay the lowest cumulative expenses by purchasing
Class C shares.

The foregoing examples do not reflect, among other variables, the cost or
benefit of bearing sales charges or distribution fees at the time of purchase,
upon redemption or over time, nor can they reflect fluctuations in the net
asset value of Fund shares, which will affect the actual amount of expenses
paid. Expenses borne by Classes may differ slightly because of the allocation
of other Class-specific expenses. The "Example of Effect of Fund Expenses"
under "Prospectus Summary" shows for each Fund the cumulative expenses an
investor would pay over time on a hypothetical investment in each Class of Fund
shares, assuming an annual return of 5%.

OTHER INFORMATION

PaineWebber investment executives may receive different levels of compensation
for selling one particular Class of Fund shares rather than another. Investors
should understand that distribution fees and initial and contingent deferred
sales charges all are intended to compensate Mitchell Hutchins for distribution
services.

See "Purchases," "Redemptions" and "Management" for a more complete description
of the initial and contingent deferred sales charges, service fees and distri-
bution fees for Class A, B and C shares of each Fund. See also "Conversion of
Class B Shares," "Dividends and Taxes" and "General Information" for other dif-
ferences among the three Classes.
- --------------------------------------------------------------------------------

Investment Objectives and Policies
- --------------------------------------------------------------------------------

INVESTMENT OBJECTIVES AND PRIMARY INVESTMENTS

The investment objective of U.S. GOVERNMENT INCOME FUND is to provide high
current income consistent with the preservation of capital and liquidity. The
Fund invests primarily in U.S. government securities.

The investment objective of INVESTMENT GRADE INCOME FUND is to provide high
current income consistent with the preservation of capital and liquidity. The
Fund invests in a diversified range of investment grade bonds and other fixed
income securities.

The investment objective of HIGH INCOME FUND is to provide the highest level of
current income available without undue risk. The Fund invests in a diversified
range of high risk, high yield medium to lower quality bonds.

There can be no assurance that any Fund will achieve its investment objective.
Each Fund's net asset value will fluctuate based upon changes in the value of
its portfolio securities. Each Fund's investment objective and certain
investment limitations as described in the Statement of Additional Information
are fundamental policies and may not be changed without shareholder approval.
In addition, U.S. Government Income Fund's policy of normally concentrating at
least 25% of its total assets in mortgage- and asset-backed securities is
fundamental and may not be changed without shareholder approval. All other
investment policies may be changed by the Trust's board of trustees without
shareholder approval.

U.S. GOVERNMENT INCOME FUND

Under normal conditions, U.S. Government Income Fund invests at least 65% of
its total assets in U.S. government securities, including mortgage-backed
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities ("U.S. government mortgage-backed securities"), other
obligations issued or
-------------
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<PAGE>

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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND

guaranteed by the U.S. government, its agencies or instrumentalities and
repurchase agreements with respect to those securities. Up to 35% of the Fund's
total assets may be invested in mortgage-and asset-backed securities that are
issued by private issuers and that at the time of purchase have been rated AAA
by S&P or Aaa by Moody's, have an equivalent rating from another NRSRO or, if
unrated, have been determined by Mitchell Hutchins to be of comparable quality.
As a matter of fundamental policy, the Fund normally concentrates at least 25%
of its total assets in mortgage- and asset-backed securities issued or
guaranteed by private issuers or by agencies or instrumentalities of the U.S.
government. In addition, the Fund may invest up to 5% of its total assets in
investment grade corporate bonds. (See "Investment Grade Income Fund" below for
a definition of "investment grade.")

Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Multi-class pass-through securities and collateralized
mortgage obligations are collectively referred to herein as CMOs. The U.S.
government mortgage-backed securities in which U.S. Government Income Fund may
invest include mortgage-backed securities issued or guaranteed as to the
payment of principal and interest (but not as to market value) by the
Government National Mortgage Association ("Ginnie Mae"), the Federal National
Mortgage Association ("Fannie Mae"), or the Federal Home Loan Mortgage
Corporation ("Freddie Mac"). Other mortgage-backed securities, in which the
Fund may invest up to 35% of its total assets, are issued by private issuers,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and
special purpose entities (collectively, "Private Mortgage Lenders"). Payments
of principal and interest (but not the market value) of such private mortgage-
backed securities may be supported by pools of mortgage loans or other
mortgage-backed securities that are guaranteed, directly or indirectly, by the
U.S. government or one of its agencies or instrumentalities, or they may be
issued without any government guarantee of the underlying mortgage assets but
with some form of non-government credit enhancement. For more information
concerning the types of mortgage-backed securities in which the Fund may
invest, see Appendix A to this Prospectus.

U.S. Government Income Fund's policy of investing at least 25% of its total
assets in mortgage- and asset-backed securities has the effect of increasing
the Fund's exposure to the risks related to such securities and might cause the
Fund's net asset value per share to fluctuate more than otherwise would be the
case. See "Risks of Mortgage- and Asset-Backed Securities."

Non-mortgage-related U.S. government securities in which U.S. Government Income
Fund may invest include U.S. Treasury obligations and other obligations backed
by the full faith and credit of the U.S. government and securities that are
supported primarily or solely by the creditworthiness of the issuer, such as
securities issued by the Resolution Funding Corporation, the Student Loan
Marketing Association, the Federal Home Loan Banks and the Tennessee Valley
Authority.

U.S. Government Income Fund may invest in certain zero coupon securities that
are U.S. Treasury notes and bonds that have been stripped of their unmatured
interest coupon receipts or interests in such U.S. Treasury securities or
coupons. The SEC staff currently takes the position that "stripped" U.S.
government securities that are not issued through the U.S. Treasury are not
U.S. government securities. As long as the SEC takes this position,
Certificates of Accrual Treasury Securities ("CATS") and Treasury Income Growth
Receipts ("TIGRs") that are not issued through the U.S. Treasury will not be
counted as U.S. government securities for purposes of the 65% investment
requirement.

Asset-backed securities have structural characteristics similar to mortgage-
backed securities. However, the underlying assets are not first lien mortgage
loans or interests therein, but include assets such as motor vehicle
installment sale contracts, other installment sale contracts, home equity
loans, leases of various types of real and personal property and receivables
from revolving credit (credit card) agreements. Such assets are securitized
through the use of trusts or special purpose corporations. Payments or
distributions of principal and interest on asset-backed securities may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution
unaffiliated with the issuer or other credit enhancements may be present.
-------------
Prospectus Page 18
<PAGE>

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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND

U.S. Government Income Fund also may seek to enhance income or to reduce the
risks associated with ownership of the securities in which it invests through
the use of options, futures contracts, options on futures contracts, interest
rate protection transactions, dollar rolls and reverse repurchase agreements.
See "Hedging and Related Income Strategies" and "Dollar Rolls and Reverse
Repurchase Agreements."

INVESTMENT GRADE INCOME FUND

Investment Grade Income Fund invests in a diversified range of investment grade
bonds and other fixed income securities. Investment grade bonds are those bonds
that, at the time of purchase, are assigned one of the four highest grades by
S&P or Moody's, are comparably rated by another NRSRO or, if unrated, are
determined by Mitchell Hutchins to be of comparable quality to such rated
securities. Under normal circumstances, the Fund invests at least 65% of its
total assets in investment grade corporate bonds and securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities. Up to 35%
of the Fund's total assets may be invested in corporate bonds that are below
investment grade, preferred stocks, convertible securities, certain mortgage-
and asset-backed securities described below, commercial paper or variable
amount master notes issued by companies having at the time of purchase an issue
of outstanding debt securities rated investment grade by S&P or Moody's or
commercial paper rated A-1 by S&P or P-1 by Moody's, and other money market
instruments, including repurchase agreements. Up to 10% of the Fund's total
assets may be invested in U.S. dollar-denominated securities of foreign issuers
the value of which is linked to the value of foreign currencies. The Fund may
also seek to enhance income or to reduce the risks associated with ownership of
the securities in which it invests through the use of options, futures
contracts, options on futures contracts and interest rate protection
transactions. See "Hedging and Related Income Strategies."

Investment Grade Income Fund may invest in mortgage-backed securities that are
issued or guaranteed as to the payment of principal and interest (but not as to
market value) by the U.S. government, its agencies or instrumentalities or
issued by private issuers and rated in the four highest ratings of S&P or
Moody's. The Fund also may invest in asset-backed securities that are rated in
the two highest ratings assigned by S&P or Moody's. See "Risk Factors." The
Fund may invest up to 10% of its total assets in classes of mortgage-backed
securities that receive different proportions of the interest and principal
distributions from the underlying mortgage assets. See "Other Investment
Policies and Risk Factors--Risks of Mortgage- and Asset-Backed Securities."

During its 1994 fiscal year, Investment Grade Income Fund had 100% of its
average annual net assets in debt securities that received a rating from S&P or
Moody's or another NRSRO and 0% of its average annual net assets in debt
securities that were not so rated. The Fund had the following percentages of
its average annual net assets invested in rated securities: AAA/Aaa (including
cash items)--16.5, AA/Aa--5.4%, A/A--29.9%, BBB/Baa--29.9%, BB/Ba--10.0%, B/B--
8.1% and CCC/Caa--0.2%. It should be noted that this information reflects the
average composition of the Fund's assets during the fiscal year ended November
30, 1994 and is not necessarily representative of the Fund's assets as of the
end of that fiscal year, the current fiscal year or at any time in the future.

HIGH INCOME FUND

High Income Fund invests in a diversified range of high risk, high yield medium
to lower quality bonds. Generally, higher yielding bonds carry ratings assigned
by S&P, Moody's or another NRSRO that are lower than those assigned to
investment grade bonds, or are unrated, and thus carry higher investment risk
than investment grade bonds. See "Risk Factors." Under normal circumstances, at
least 65% of the Fund's assets are invested in high risk, high yielding, income
producing corporate debt securities that at the time of purchase are rated B or
better by S&P or Moody's, comparably rated by another NRSRO or are unrated but
determined to be of comparable quality by Mitchell Hutchins. Up to 35% of the
Fund's total assets may be invested in debt securities rated below B by S&P or
Moody's or comparably rated by another NRSRO, preferred stocks, securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
equity securities (including common stocks, warrants and rights) when attached
to fixed income securities or as a part of a unit including fixed income
securities, or in connection with a conversion or exchange of fixed income
securities and money market instruments, including repurchase agreements. The
Fund will not invest more than 5% of its total assets in the securities
-------------
Prospectus Page 19
<PAGE>

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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND

of a single issuer. The Fund may invest in securities selling at a substantial
discount from par; such securities carry with them the potential for capital
gain, but will not normally be purchased unless they also provide a high level
of current income. The Fund may invest up to 25% of its net assets in
securities of foreign issuers, with no more than 10% of its net assets in
securities of foreign issuers that are denominated and traded in currencies
other than the U.S. dollar. The Fund may also seek to enhance income or to
reduce the risks associated with ownership of the debt securities in which it
invests through the use of options, futures contracts, options on futures
contracts, forward currency contracts and interest rate protection
transactions. See "Hedging and Related Income Strategies."

During its 1994 fiscal year, High Income Fund had 70.82% of its average annual
net assets in debt securities that received a rating from S&P or Moody's or
another NRSRO and 22.7% of its average annual net assets in debt securities
that were not so rated. The Fund had the following percentages of its average
annual net assets invested in rated securities: AAA/Aaa (including cash
items)--3.94%, AA/Aa--0%, A/A--0%, BBB/Baa--0%, BB/Ba--4.53%, B/B--47.85%,
CCC/Caa--13.36%, CC--0.68%, C--0.26% and D--0.20%. It should be noted that this
information reflects the average composition of the Fund's assets during the
fiscal year ended November 30, 1994 and is not necessarily representative of
the Fund's assets as of the end of that fiscal year, the current fiscal year or
at any time in the future.

OTHER INVESTMENT POLICIES AND RISK FACTORS

RISK FACTORS. Each Fund's net asset value fluctuates based on changes in the
value of its portfolio securities. Neither the issuance by, nor the guarantee
of, a U.S. government agency nor even the highest rating by a NRSRO constitutes
assurance that the security will not fluctuate in value or that a Fund will
receive the originally anticipated yield on the security. An investment in a
Fund also is subject to the risks discussed below.

INTEREST RATE SENSITIVITY. The investment income of each Fund is based on the
income earned on the securities it holds, less expenses incurred; thus, each
Fund's investment income may be expected to fluctuate in response to changes in
such expenses or income. For example, the investment income of a Fund may be
affected if it experiences a net inflow of new money that is then invested in
securities whose yield is higher or lower than that earned on then-current
investments. Generally, the value of the debt securities held by the Funds, and
thus the net asset value per share of each Fund, will rise when interest rates
decline. Conversely, when interest rates rise, the value of fixed income
securities, and thus the net asset value per share of each Fund, may be
expected to decline.

- --RISKS OF MORTGAGE- AND ASSET-BACKED SECURITIES. The yield characteristics of
the mortgage- and asset-backed securities in which U.S. Government Income Fund
and Investment Grade Income Fund may invest differ from those of traditional
debt securities. Among the major differences are that interest and principal
payments are made more frequently on mortgage- and asset-backed securities
(usually monthly) and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if a Fund purchases these securities at a premium, a prepayment
rate that is faster than expected will reduce yield to maturity, while a
prepayment rate that is slower than expected will have the opposite effect of
increasing yield to maturity. Conversely, if a Fund purchases these securities
at a discount, faster than expected prepayments will increase, while slower
than expected prepayments will reduce, yield to maturity. Amounts available for
reinvestment by a Fund are likely to be greater during a period of declining
interest rates and, as a result, are likely to be reinvested at lower interest
rates than during a period of rising interest rates. Accelerated prepayments on
securities purchased by a Fund at a premium also impose a risk of loss of
principal because the premium may not have been fully amortized at the time the
principal is prepaid in full. The market for privately issued mortgage- and
asset-backed securities is smaller and less liquid than the market for U.S.
government mortgage-backed securities. CMO classes may be specially structured
in a manner that provides any of a wide variety of investment characteristics,
such as yield, effective maturity and interest rate sensitivity. As market
conditions change, however, and particularly during periods of rapid or
unanticipated changes in market interest rates, the attractiveness of the CMO
classes and the ability of the structure to provide the anticipated investment
characteristics may be significantly
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reduced. These changes can result in volatility in the market value, and in
some instances reduced liquidity, of the CMO class.

The rate of interest payable on CMO classes may be set at levels that are
either above or below market rates at the time of issuance, so that the
securities will be sold at a substantial premium to, or discount from, par
value. In the most extreme case, one class will be entitled to receive all or a
portion of the interest but none of the principal from the underlying mortgage
assets (the interest-only or "IO" class) and one class will be entitled to
receive all or a portion of the principal but none of the interest (the
principal-only or "PO" class). IOs and POs may also be created from mortgage-
backed securities that are not CMOs. The yields on IOs, POs and other mortgage-
backed securities that are purchased at a substantial premium or discount
generally are extremely sensitive to the rate of principal payments (including
prepayments) on the underlying mortgage assets. If the mortgage assets
underlying an IO experience greater than anticipated principal prepayments, an
investor may fail to recoup fully his or her initial investment even if the
security is government issued or guaranteed or is rated AAA or the equivalent.

Some CMO classes are structured to pay interest at rates that are adjusted in
accordance with a formula, such as a multiple or fraction of the change in a
specified interest rate index, so as to pay at a rate that will be attractive
in certain interest rate environments but not in others. For example, an
inverse floating rate CMO class pays interest at a rate that increases as a
specified interest rate index decreases but decreases as that index increases.
For other CMO classes, the yield may move in the same direction as market
interest rates--i.e. the yield may increase as rates increase and decrease as
rates decrease--but may do so more rapidly or to a greater degree. The market
value of such securities generally is more volatile than that of a fixed rate
obligation. Such interest rate formulas may be combined with other CMO
characteristics. For example, a CMO class may be an "inverse IO," on which the
holders are entitled to receive no payments of principal and are entitled to
receive interest at a rate that will vary inversely with a specified index or a
multiple thereof.

During 1994, the value and liquidity of many mortgage-backed securities
declined sharply due primarily to increases in interest rates. There can be no
assurance that such declines will not recur. The market value of certain
mortgage-backed securities in which U.S. Government Income Fund and Investment
Grade Income Fund may invest, including IO and PO classes of mortgage-backed
securities and inverse floating rate securities, can be extremely volatile and
these securities may become illiquid. Mitchell Hutchins seeks to manage each
Fund so that the volatility of the Fund's portfolio, taken as a whole, is
consistent with the Fund's investment objective. If market interest rates or
other factors that affect the volatility of securities held by a Fund change in
ways that Mitchell Hutchins does not anticipate, the Fund's ability to meet its
investment objective may be reduced.

See Appendix A to this Prospectus for more information concerning the types of
mortgage-backed securities in which U.S. Government Income Fund and Investment
Grade Income Fund may invest.

- --RISKS OF LOWER RATED SECURITIES. High Income Fund may invest all of its
assets in corporate bonds rated below investment grade and Investment Grade
Income Fund may invest up to 35% of its assets in such bonds. Investment Grade
Income Fund must normally invest at least 65% of its assets in debt securities
rated investment grade and U.S. Government Income Fund may invest up to 5% of
its total assets in such securities. Investment grade bonds include debt
securities rated BBB by S&P, Baa by Moody's or comparably rated by another
NRSRO. Moody's considers securities rated Baa to have speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to a weakened capacity for such securities to make principal and
interest payments than is the case for higher grade debt securities. Debt
securities rated below investment grade are deemed by these agencies to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal and may involve major risk exposure to adverse conditions.
Such securities are commonly referred to as "junk bonds." Investment Grade
Income Fund and High Income Fund each may invest up to 35% of its assets in
debt securities rated lower than B, which include securities that are in
default or face the risk of default with respect to the payment of principal or
interest. Such securities are generally unsecured and are often subordinated to
other
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creditors of the issuer. To the extent a Fund is required to seek recovery upon
a default in the payment of principal or interest on its portfolio holdings,
the Fund may incur additional expenses and may have limited legal recourse in
the event of a default. Investment Grade Income Fund and High Income Fund are
also permitted to purchase debt securities that are not rated by a NRSRO but
that Mitchell Hutchins determines to be of comparable quality to that of rated
securities in which those Funds may invest. Such securities are included in the
computation of any percentage limitations applicable to the comparable rated
securities. In the event that, due to a downgrade of one or more debt
securities, an amount in excess of 35% of Investment Grade Income Fund's total
assets (5% of total assets for U.S. Government Income Fund) is held in
securities rated below investment grade and comparable unrated securities,
Mitchell Hutchins will engage in an orderly disposition of such securities to
the extent necessary to reduce the Fund's holdings of these securities to 35%
of total assets (5% of total assets for U.S. Government Income Fund) or less.

Ratings of debt securities represent the NRSROs' opinions regarding their
quality, are not a guarantee of quality and may be reduced after a Fund has
acquired the security. Mitchell Hutchins would consider such an event in
determining whether the Fund should continue to hold the security but is not
required to dispose of it. Credit ratings attempt to evaluate the safety of
principal and interest payments and do not reflect an assessment of the
volatility of the security's market value or the liquidity of an investment in
the security. Also, NRSROs may fail to make timely changes in credit ratings in
response to subsequent events, so that an issuer's financial condition may be
better or worse than the rating indicates. See Appendix B to this Prospectus
for further information regarding S&P's and Moody's ratings.

Lower rated debt securities generally offer a higher current yield than that
available from higher grade issues, but they involve higher risks, in that they
are especially subject to adverse changes in general economic conditions and in
the industries in which the issuers are engaged, to changes in the financial
condition of the issuers and to price fluctuation in response to changes in
interest rates. During periods of economic downturn or rising interest rates,
highly leveraged issuers may experience financial stress, which could adversely
affect their ability to make payments of principal and interest and increase
the possibility of default. In addition, such issuers may not have more
traditional methods of financing available to them, and may be unable to repay
debt at maturity by refinancing. The risk of loss due to default by such
issuers is significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness.

The market for lower rated securities has expanded rapidly in recent years, and
its growth paralleled a long economic expansion. In the past, the prices of
many lower rated debt securities declined substantially, reflecting an
expectation that many issuers of such securities might experience financial
difficulties. As a result, the yields on lower rated debt securities rose
dramatically. However, such higher yields did not reflect the value of the
income stream that holders of such securities expected, but rather the risk
that holders of such securities could lose a substantial portion of their value
as a result of the issuers' financial restructuring or default. There can be no
assurance that such declines will not recur. The market for lower rated debt
securities generally is thinner and less active than that for higher quality
securities, which may limit a Fund's ability to sell such securities at fair
value in response to changes in the economy or the financial markets. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of lower rated securities,
especially in a thinly traded market.

Although Mitchell Hutchins will attempt to minimize the speculative risks
associated with investments in such securities through diversification, credit
analysis and attention to current trends in interest rates and other factors,
investors should carefully review the objectives and policies of Investment
Grade Income Fund and High Income Fund and consider their ability to assume the
investment risks involved before making an investment in these Funds.

- --RISKS OF ZERO COUPON SECURITIES. Each Fund may invest in certain zero coupon
securities that are "stripped" U.S. Treasury notes and bonds. High Income Fund
may also invest in zero coupon securities of corporate issuers and other
securities that are issued with original issue
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discount ("OID") and payment-in-kind ("PIK") securities. Federal tax law
requires that a holder of a security with OID accrue a portion of the OID on
the security as income each year, even though the holder may receive no
interest payment on the security during the year. Accordingly, although the
investing Fund will receive no payments on its zero coupon securities prior to
their maturity or disposition, it will have income attributable to such
securities. Similarly, while PIK securities may pay interest in the form of
additional securities rather than cash, that interest must be included in High
Income Fund's annual income.

Companies such as the Funds, which seek to qualify for pass-through federal
income tax treatment as regulated investment companies, must distribute
substantially all of their net investment income each year, including non-cash
income. Accordingly, each Fund will be required to include in its dividends an
amount equal to the income attributable to its zero coupon, other OID and PIK
securities. See "Taxes" in the Statement of Additional Information. Those
dividends will be paid from the cash assets of a Fund or by liquidation of
portfolio securities, if necessary, at a time when the Fund otherwise might not
have done so. Zero coupon and PIK securities usually trade at a substantial
discount from their face or par value and will be subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities that make current distributions of
interest in cash.

- --RISKS OF FOREIGN SECURITIES. Investment Grade Income Fund may invest up to
10% of its net assets in U.S. dollar-denominated securities of foreign issuers
or foreign branches of U.S. banks that are traded in the U.S. securities
markets or in U.S. dollar-denominated securities, the value of which is linked
to the value of foreign currencies. High Income Fund may invest up to 25% of
its net assets in securities of foreign issuers, with no more than 10% of its
net assets in securities of foreign issuers that are denominated and traded in
currencies other than the U.S. dollar. The foreign securities in which these
Funds may invest involve risks relating to political, social and economic
developments abroad, as well as risks resulting from the differences between
the regulations to which U.S. and foreign issuers and markets are subject.
Individual foreign economies may differ favorably or unfavorably from the U.S.
economy. Securities of many foreign companies may be less liquid and their
prices more volatile than securities of comparable U.S. companies. Foreign
securities may from time to time be difficult to liquidate rapidly without
significantly depressing the price of such securities. There may be less
publicly available information concerning foreign issuers of securities held by
the Funds than is available concerning U.S. issuers.

High Income Fund and Investment Grade Income Fund may each invest in dollar-
denominated securities whose value is linked to the value of foreign
currencies, and High Income Fund may invest in non-U.S. dollar denominated
securities. Accordingly, changes in foreign currency exchange rates will affect
the Fund's net asset value, the value of dividends and interest earned, gains
and losses realized on the sale of securities and net investment income to be
distributed to shareholders by the Fund. In addition, some foreign currency
values may be volatile and there is the possibility of governmental controls on
currency exchange or governmental intervention in currency markets. Any of
these factors could adversely affect the Fund.

The costs attributable to foreign investing that High Income Fund must bear
frequently are higher than those attributable to domestic investing. For
example, the costs of maintaining custody of securities in foreign countries
exceed custodian costs related to domestic securities.

High Income Fund may enter into forward currency contracts to set the rate at
which currency exchanges will be made for specific contemplated transactions.
The Fund might also enter into forward currency contracts for the purchase or
sale of a specified currency at a specified future date either with respect to
contemplated transactions or with respect to portfolio positions. For example,
when Mitchell Hutchins anticipates making a currency exchange transaction in
connection with the purchase or sale of a security, the Fund may enter into a
forward currency contract in order to set the exchange rate at which the
transaction will be made. The Fund also may enter into a forward contract to
sell an amount of a foreign currency approximating the value of some or all of
its securities denominated in that currency.

High Income Fund may use forward contracts in one currency or a basket of
currencies to hedge
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against fluctuations in the value of another currency when Mitchell Hutchins
anticipates there will be a correlation between the two and may use forward
currency contracts to shift the Fund's exposure to foreign currency
fluctuations from one country to another. The purpose of entering into these
contracts is to minimize the risk to the Fund from adverse changes in the
relationship between the U.S. dollar and foreign currencies.

High Income Fund may also write covered put and call options and purchase put
and call options on foreign currencies to hedge against movements in currency
exchange rates. The risks of these hedging strategies are similar to those of
the other hedging strategies in which the Fund may engage, as described under
"Hedging and Related Income Strategies." See the Statement of Additional
Information for more information on currency hedging strategies.

HEDGING AND RELATED INCOME STRATEGIES. Each Fund may use options (both
exchange-traded and over-the-counter ("OTC")), futures contracts and interest
rate protection transactions to attempt to enhance income and to reduce the
overall risk of its investments (hedge). Hedging strategies may be used in an
attempt to manage a Fund's average duration and other risks of its investments,
which can affect fluctuations in the Fund's net asset value. A Fund's ability
to use these strategies may be limited by market conditions, regulatory limits
and tax considerations. The use of options and futures solely to enhance income
may be considered a form of speculation. Appendix C to this Prospectus
describes the hedging instruments that the Funds may use and the Statement of
Additional Information contains further information on these strategies.

Each Fund may write (sell) covered call and put options, buy call and put
options, buy and sell interest rate futures contracts and buy call or put
options or write covered call options on such futures contracts. Each Fund may
enter into options and futures contracts under which the full value of its
portfolio is at risk. Under normal circumstances, however, the Fund's use of
these instruments will place at risk a much smaller portion of its assets.

The Funds may enter into interest rate protection transactions, including
interest rate swaps, caps, collars and floors, to preserve a return or spread
on a particular investment or portion of a portfolio or to protect against any
increase in the price of securities a Fund anticipates purchasing at a later
date. A Fund will enter into interest rate protection transactions only with
banks and recognized securities dealers believed by Mitchell Hutchins to
present minimal credit risks in accordance with guidelines established by the
Trust's board of trustees. A Fund would use these transactions as a hedge and
not as a speculative investment.

The Funds might not employ any of the strategies described above, and no
assurance can be given that any strategy used will succeed. If Mitchell
Hutchins incorrectly forecasts interest rates, market values or other economic
factors in utilizing a strategy for a Fund, the Fund would be in a better
position if it had not entered into the transaction at all. The use of these
strategies involves certain special risks, including (1) the fact that skills
needed to use hedging instruments are different from those needed to select the
Funds' securities, (2) possible imperfect correlation, or even no correlation,
between price movements of hedging instruments and price movements of the
investments being hedged, (3) the fact that, while hedging strategies can
reduce the risk of loss, they can also reduce the opportunity for gain, or even
result in losses, by offsetting favorable price movements in hedged investments
and (4) the possible inability of a Fund to purchase or sell a portfolio
security at a time that otherwise would be favorable for it to do so, or the
possible need for a Fund to sell a portfolio security at a disadvantageous
time, due to the need for the Fund to maintain "cover" or to segregate
securities in connection with hedging transactions and the possible inability
of a Fund to close out or to liquidate its hedged position.

DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS. U.S. Government Income Fund may
enter into dollar rolls, in which the Fund sells mortgage-backed or other
securities for delivery in the current month and simultaneously contracts to
purchase substantially similar securities on a specified future date. In the
case of dollar rolls involving mortgage-backed securities, the mortgage-backed
securities that are purchased will be of the same type and will have the same
interest rate as those sold, but will be supported by different pools of
mortgages. The Fund forgoes principal and interest paid during the roll period
on the securities sold, but the Fund is compensated by the difference between
the
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current sales price and the lower price for the future purchase as well as by
any interest earned on the proceeds of the securities sold. The Fund also could
be compensated through the receipt of fee income equivalent to a lower forward
price.

U.S. Government Income Fund may also enter into reverse repurchase agreements
in which the Fund sells securities to a bank or dealer and agrees to repurchase
them at a mutually agreed-upon date and price. The market value of securities
sold under reverse repurchase agreements typically is greater than the proceeds
of the sale, and, accordingly, the market value of the securities sold is
likely to be greater than the value of the securities in which the Fund invests
those proceeds. Thus, reverse repurchase agreements involve the risk that the
buyer of the securities sold by the Fund might be unable to deliver them when
the Fund seeks to repurchase. In the event the buyer of securities under a
reverse repurchase agreement files for bankruptcy or becomes insolvent, such
buyer or its trustee or receiver may receive an extension of time to determine
whether to enforce the Fund's obligation to repurchase the securities, and the
Fund's use of the proceeds of the reverse repurchase agreement may effectively
be restricted pending such decision.

The dollar rolls and reverse repurchase agreements entered into by U.S.
Government Income Fund normally will be arbitrage transactions in which the
Fund will maintain an offsetting position in securities or repurchase
agreements that mature on or before the settlement date on the related dollar
roll or reverse repurchase agreement. Since the Fund will receive interest on
the securities or repurchase agreements in which it invests the transaction
proceeds, such transactions may involve leverage. However, since such
securities or repurchase agreements will mature on or before the settlement
date of the related dollar roll or reverse repurchase agreement, Mitchell
Hutchins believes that such arbitrage transactions do not present the risks to
the Fund that are associated with other types of leverage.

Dollar rolls and reverse repurchase agreements will be considered to be
borrowings and, accordingly, will be subject to U.S. Government Income Fund's
limitations on borrowings, which will restrict the aggregate of such
transactions (plus any other borrowings) to 33 1/3% of the Fund's total assets.
The Fund will not enter into dollar rolls or reverse repurchase agreements,
other than in arbitrage transactions as described above, in an aggregate amount
in excess of 5% of the Fund's total assets. The Fund has no present intention
to enter into dollar rolls other than in such arbitrage transactions, and it
has no present intention to enter into reverse repurchase agreements other than
in such arbitrage transactions or for temporary or emergency purposes. The Fund
may borrow money for temporary or emergency purposes, but not in excess of an
additional 5% of its total assets.

REPURCHASE AGREEMENTS. Each Fund may use repurchase agreements. Repurchase
agreements are transactions in which a Fund purchases securities from a bank or
recognized securities dealer and simultaneously commits to resell the
securities to the bank or dealer at an agreed-upon date and price reflecting a
market rate of interest unrelated to the coupon rate or maturity of the
purchased securities. Repurchase agreements carry certain risks not associated
with direct investments in securities, including possible decline in the market
value of the underlying securities and delays and costs to each Fund if the
other party to the repurchase agreement becomes insolvent. Each Fund intends to
enter into repurchase agreements only with banks and dealers in transactions
believed by Mitchell Hutchins to present minimum credit risks in accordance
with guidelines established by the Trust's board of trustees.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Fund may purchase debt
securities, including mortgage- and asset-backed securities, on a "when-issued"
basis or may purchase or sell securities for "delayed delivery." In when-issued
or delayed delivery transactions, delivery of the securities occurs beyond
normal settlement periods, but a Fund generally would not pay for such
securities or start earning interest on them until they are delivered. However,
when a Fund purchases securities on a when-issued or delayed delivery basis, it
immediately assumes the risks of ownership, including the risk of price
fluctuation. Failure by a counter party to deliver a security purchased on a
when-issued or delayed delivery basis may result in a loss or missed
opportunity to make an alternative investment. Depending on market conditions,
a Fund's when-issued and delayed delivery purchase commitments could cause its
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net asset value per share to be more volatile, because such securities may
increase the amount by which the Fund's total assets, including the value of
when-issued and delayed delivery securities held by the Fund, exceeds its net
assets.

Rule 144A establishes a "safe harbor" from the requirements of the Securities
Act of 1933 ("1933 Act"). Institutional markets for restricted securities have
developed as a result of Rule 144A, providing both readily ascertainable values
for restricted securities an the ability to liquidate an investment to satisfy
share redemption orders. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held
by a Fund, however, could affect adversely the marketability of such portfolio
securities and the Fund might be unable to dispose of such securities promptly
or at favorable prices.

A Fund may not be able to sell illiquid securities when Mitchell Hutchins
considers it desirable to do so or may have to sell such securities at a price
lower than could be obtained if they were more liquid. Also the sale of
illiquid securities may require more time and may result in higher dealer
discounts and other selling expenses than does the sale of securities that are
not illiquid. Illiquid securities may be more difficult to value due to the
unavailability of reliable market quotations for such securities, and
investments in illiquid securities may have an adverse impact on net asset
value.

LENDING OF PORTFOLIO SECURITIES. Each Fund is authorized to lend up to 10% of
the total value of its portfolio securities to broker-dealers or institutional
investors that Mitchell Hutchins deems qualified. Lending securities enables
the Fund to earn additional income, but could result in a loss or delay in
recovering the securities.

PORTFOLIO TURNOVER. Each Fund's portfolio turnover rate may vary greatly from
year to year and will not be a limiting factor when Mitchell Hutchins deems
portfolio changes appropriate. A higher turnover rate for a particular Fund
(100% or more) will involve correspondingly greater transaction costs, which
will be borne directly by that Fund, and may increase the potential for short-
term capital gains.

DERIVATIVES. The Funds may invest in instruments or securities that commonly
are referred to as "derivatives," because their value depends on (or "derives"
from) the value of an underlying asset, reference rate or index. Derivative
instruments include options, futures contracts, interest rate protection
contracts and similar instruments that may be used by the Funds in hedging and
related income strategies. There is only limited consensus as to what
constitutes a "derivative" security. However, in Mitchell Hutchins' view, the
derivative securities in which one or more of the Funds may invest include
"stripped" securities, such as CATS and TIGRs, and specially structured types
of mortgage- and asset-backed securities, such as IOs, POs and inverse
floaters, and, in the case of High Income Fund, dollar-denominated securities
whose value is linked to foreign currencies. The market value of derivative
instruments and securities sometimes is more volatile than that of other
investments, and each type of derivative instrument may pose its own special
risks. Mitchell Hutchins takes these risks into account in its management of
the Funds.

OTHER INVESTMENT POLICIES. As noted above, Investment Grade Income Fund and
High Income
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Fund each may invest up to 35% of its assets in money market instruments. In
addition, when Mitchell Hutchins believes unusual circumstances warrant a
defensive position, each Fund temporarily may commit all or any portion of its
assets to cash or money market instruments. Such instruments may include
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, commercial paper rated at least A-1 by S&P or P-1 by Moody's
(Investment Grade Income Fund) or without regard to rating (High Income Fund),
bank certificates of deposit, bankers' acceptances and repurchase agreements
secured by any of the foregoing. The money market investments of U.S.
Government Income Fund will be limited to obligations of the U.S. government,
its agencies or instrumentalities and repurchase agreements secured by such
obligations. The Funds may also engage in short sales of securities "against
the box" to defer realization of gains or losses for tax purposes.

Investment Grade Income Fund and High Income Fund each may enter into reverse
repurchase agreements with banks and dealers and may borrow money for temporary
or emergency purposes, but not in excess of 10% of its total assets.

New types of mortgage- and asset-backed securities, derivative securities,
hedging instruments and risk management techniques are developed and marketed
from time to time. Each Fund may invest in these securities and instruments and
use these techniques to the extent consistent with its investment objective and
limitations and with regulatory and tax considerations.

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

Purchases
- --------------------------------------------------------------------------------

GENERAL. Class A shares are sold to investors subject to an initial sales
charge. Class B shares are sold without an initial sales charge but are subject
to higher ongoing expenses than Class A shares and a contingent deferred sales
charge payable upon most redemptions. Class B shares automatically convert to
Class A shares approximately six years after issuance. Class C shares are sold
without an initial but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge of 0.75% payable on most
redemptions made within one year of purchase. Class C shares do not convert
into another Class. See "Flexible Pricing System" and "Conversion of Class B
Shares."

Shares of the Funds are available through PaineWebber and its correspondent
firms or, for shareholders who are not PaineWebber clients, through the
Transfer Agent. Investors may contact a local PaineWebber office to open an
account. The minimum initial investment for each Fund is $1,000 and the minimum
for additional purchases is $100. These minimums may be waived or reduced for
investments by employees of PaineWebber or its affiliates, certain pension
plans and retirement accounts and participants in the Funds' automatic
investment plan. Purchase orders will be priced at the net asset value per
share next determined (see "Valuation of Shares") after the order is received
by PaineWebber's New York City offices or by the Transfer Agent, plus any
applicable sales charge for Class A shares. Each Fund and Mitchell Hutchins
reserve the right to reject any purchase order and to suspend the offering of
Fund shares for a period of time.

When placing purchase orders, investors should specify whether the order is for
Class A, Class B or Class C shares. All share purchase orders that fail to
specify a Class will automatically be invested in Class A shares.

PURCHASES THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. Purchases through
PaineWebber investment executives or correspondent firms may be made in person
or by mail, telephone or wire; the minimum wire purchase is $1 million.
Investment executives and correspondent firms are responsible for transmitting
purchase orders to PaineWebber's New York City offices promptly. Investors may
pay for purchases with checks drawn on U.S. banks or with funds held in
brokerage accounts at PaineWebber or its correspondent firms. Payment is due on
the third Business Day after the order is received at PaineWebber's New York
City offices. A "Business Day" is any day, Monday through Friday, on which the
New York Stock Exchange, Inc. ("NYSE") is open for business.
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PURCHASES THROUGH THE TRANSFER AGENT. Investors who are not PaineWebber clients
may purchase shares of the Funds through the Transfer Agent. Shares of a Fund
may be purchased, and an account with the Fund established, by completing and
signing the purchase application at the end of this Prospectus and mailing it,
together with a check to cover the purchase, to the Transfer Agent: PFPC Inc.,
Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington, Delaware 19899.
Subsequent investments need not be accompanied by an application.

INITIAL SALES CHARGE--CLASS A SHARES. The public offering price of Class A
shares is the next determined net asset value, plus any applicable sales
charge, which will vary with the size of the purchase as shown in the following
table:

INITIAL SALES CHARGE SCHEDULE--CLASS A SHARES

<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE DISCOUNT TO
OF SELECTED DEALERS
---------------------------------- AS A PERCENTAGE
OFFERING NET AMOUNT INVESTED OF OFFERING
AMOUNT OF PURCHASE PRICE (NET ASSET VALUE) PRICE
------------------ -------- ------------------- ----------------
<S> <C> <C> <C>
Less than $100,000 4.00% 4.17% 3.75%
$100,000 to $249,999 3.00 3.09 2.75
$250,000 to $499,999 2.25 2.30 2.00
$500,000 to $999,999 1.75 1.78 1.50
$1,000,000 and over(1) None None 1.00
</TABLE>
- -------
(1) Mitchell Hutchins pays compensation to PaineWebber out of its own
resources. Most redemptions of these shares within one year of purchase will
be subject to a contingent deferred sales charge of 1.0%. See "Contingent
Deferred Sales Charge--Class A Shares."

Mitchell Hutchins may at times agree to reallow a higher discount to
PaineWebber, as exclusive dealer for each Fund's shares, than those shown
above. To the extent PaineWebber or any dealer receives 90% or more of the
sales charge, it may be deemed an "underwriter" under the 1933 Act.

REDUCED SALES CHARGE PLANS--CLASS A SHARES. If an investor or eligible group of
related Fund investors purchases Class A shares of a Fund concurrently with
Class A shares of other PaineWebber mutual funds, the purchases may be combined
to take advantage of the reduced sales charge applicable to larger purchases.
In addition, the right of accumulation permits a Fund investor or eligible
group of related Fund investors to pay the lower sales charge applicable to
larger purchases by basing the sales charge on the dollar amount of Class A
shares currently being purchased, plus the net asset value of the investor's or
group's total existing Class A shareholdings in other PaineWebber mutual funds.

An "eligible group of related Fund investors" includes an individual, the
individual's spouse, parents and children, the individual's individual
retirement account ("IRA"), certain companies controlled by the individual and
employee benefit plans of those companies, and trusts or Uniform Gifts to
Minors Act/Uniform Transfers to Minors Act accounts created by the individual
or eligible group of individuals for the benefit of the individual and/or the
individual's spouse, parents or children. The term also includes a group of
related employers and one or more qualified retirement plans of such employers.
For more information, an investor should consult the Statement of Additional
Information or contact a PaineWebber investment executive or correspondent firm
or the Transfer Agent.

SALES CHARGE WAIVERS--CLASS A SHARES. Class A shares of the Funds are available
without a sales charge through exchanges for Class A shares of most other
PaineWebber mutual funds. See "Exchanges." In addition, Class A shares may be
purchased without a sales charge, and exchanges of any Class of shares made
without the $5.00 exchange fee, by employees, directors and officers of
PaineWebber or its affiliates, directors or trustees and officers of any
PaineWebber mutual fund, their spouses, parents and children and advisory
clients of Mitchell Hutchins. Class A shares may also be purchased without a
sales charge by employee benefit plans qualified under section 401 or 403(b) of
the Internal Revenue Code (the "Code"), including salary reduction plans
qualified under section 401(k) of the Code, subject to minimum requirements
established by Mitchell Hutchins with respect to number of employees or amount
of purchase. Currently, the employers establishing the plan must have 100 or
more eligible employees or the amount invested or to be invested during the
subsequent 13-month period in the Fund or any other PaineWebber mutual fund
must total at least $1 million. If investments by an employee benefit plan
without a sales charge are made through a dealer (including PaineWebber) who
has executed a dealer agreement with Mitchell Hutchins, Mitchell Hutchins may
make a payment, out of its own resources, to the dealer in an amount not to
exceed 1% of the amount invested.

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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND

Class A shares of the Funds also may be purchased without a sales charge if the
purchase is made through a PaineWebber investment executive who formerly was
employed as a broker with another firm registered as a broker-dealer with the
SEC, provided (1) the purchaser was the investment executive's client at the
competing brokerage firm, (2) within 90 days of the purchase of Class A shares
the purchaser redeemed shares of one or more mutual funds for which that
competing firm or its affiliates was principal underwriter, provided the
purchaser either paid a sales charge to invest in those funds, paid a
contingent deferred sales charge upon redemption or held shares of those funds
for the period required not to pay the otherwise applicable contingent deferred
sales charge and (3) the total amount of shares of all PaineWebber mutual funds
purchased under this sales charge waiver does not exceed the amount of the
purchaser's redemption proceeds from the competing firm's funds. To take
advantage of this waiver, an investor must provide satisfactory evidence that
all the above-noted conditions are met. Qualifying investors should contact
their PaineWebber investment executives for more information.

Certificate holders of unit investment trusts ("UITs") sponsored by PaineWebber
may acquire Class A shares of any Fund without regard to minimum investment
requirements and without sales charges by electing to have dividends and other
distributions from their UIT investment automatically invested in Class A
shares.

Class A shares may be acquired without a sales charge if issued by a Fund in
connection with a reorganization pursuant to which the Fund acquires
substantially all of the assets and liabilities of another investment company
in exchange solely for shares of the Fund.

CONTINGENT DEFERRED SALES CHARGE--CLASS A SHARES. Class A shares purchased
without an initial sales charge due to the sales charge waiver for purchases of
$1 million or more and held less than one year are subject to a contingent
deferred sales charge upon redemption equal to 1% of the lower of (a) the net
asset value of the shares at the time of purchase or (b) the net asset value of
the shares at the time of redemption. The holding period of Class A shares
acquired through an exchange with another PaineWebber mutual fund is calculated
from the date the Class A shares of the other PaineWebber mutual fund were
initially purchased without a sales charge, and Class A shares acquired through
an exchange will be considered to represent, as applicable, dividend and
capital gain distribution reinvestments in such other funds. Redemption order
will be determined as described for Class B shares (see "Contingent Deferred
Sales Charge--Class B Shares"). Class A shares held one year or longer and
Class A shares acquired through reinvestment of dividends or capital gains
distributions are not subject to this contingent deferred sales charge. The
contingent deferred sales charge is waived for exchanges, as described below,
and for most redemptions in connection with the systematic withdrawal plan.
THIS CONTINGENT DEFERRED SALES CHARGE DOES NOT APPLY TO REDEMPTIONS OF CLASS A
SHARES PURCHASED PRIOR TO NOVEMBER 10, 1995. For federal income tax purposes,
the amount of the contingent deferred sales charge will reduce the gain or
increase the loss, as the case may be, realized on the redemption. The amount
of any contingent deferred sales charge will be paid to Mitchell Hutchins.

CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. The public offering price of
the Class B shares is the next determined net asset value, and no initial sales
charge is imposed. A contingent deferred sales charge, however, is imposed upon
most redemptions of Class B shares.

The maximum contingent deferred sales charge for Class B shares equals 5% of
the lower of (a) the net asset value of the shares at the time of purchase or
(b) the net asset value of the shares at the time of redemption. Class B shares
held six years or longer and Class B shares acquired through reinvestment of
dividends or capital gains distributions are not subject to the contingent
deferred sales charge. The following table shows the contingent deferred sales
charge percentages charged in each year following purchase:

<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
REDEMPTION PERCENTAGE OF
DURING NET ASSET VALUE
---------- -------------------
<S> <C>
1st Year Since Purchase..................................... 5%
2nd Year Since Purchase..................................... 4
3rd Year Since Purchase..................................... 3
4th Year Since Purchase..................................... 2
5th Year Since Purchase..................................... 2
6th Year Since Purchase..................................... 1
7th Year Since Purchase..................................... None
</TABLE>
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND

In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption is made first of Class B shares
representing the reinvestment of dividends and capital gains distributions and
then of other shares held by the shareholder for the longest period of time.
The holding period of Class B shares acquired through an exchange with another
PaineWebber mutual fund will be calculated from the date that the Class B
shares were initially acquired in one of the other PaineWebber mutual funds,
and Class B shares being redeemed will be considered to represent, as
applicable, dividend and capital gain distribution reinvestments in such other
funds. This will result in any contingent deferred sales charge being imposed
at the lowest possible rate. For federal income tax purposes, the amount of the
contingent deferred sales charge will reduce the gain or increase the loss, as
the case may be, realized on the redemption. The amount of any contingent
deferred sales charge will be paid to Mitchell Hutchins.

SALES CHARGE WAIVERS--CLASS B SHARES. The contingent deferred sales charge will
be waived for exchanges, as described below, and for most redemptions in
connection with each Fund's systematic withdrawal plan. In addition, the
contingent deferred sales charge will be waived for a total or partial
redemption made within one year of the death of the shareholder. The contingent
deferred sales charge waiver is available where the decedent is either the sole
shareholder or owns the shares with his or her spouse as a joint tenant with
right of survivorship. This waiver applies only to redemption of shares held at
the time of death. The contingent deferred sales charge will also be waived in
connection with a lump-sum or other distribution in the case of an IRA, a self-
employed individual retirement plan (so-called "Keogh Plan") or a custodial
account under Section 403(b) of the Internal Revenue Code following attainment
of age 59 1/2; any total or partial redemption resulting from any distribution
following retirement in the case of a tax-qualified retirement plan; and a
redemption resulting from a tax-free return of an excess contribution to an
IRA.

Contingent deferred sales charge waivers will be granted subject to
confirmation (by PaineWebber in the case of shareholders who are PaineWebber
clients or by the Transfer Agent in the case of all other shareholders) of the
shareholder's status or holdings, as the case may be.

PURCHASES OF CLASS C SHARES. The public offering price of the Class C shares is
the next determined net asset value. No initial sales charge is imposed.

CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES. Class C shares held less than
one year will be subject to a contingent deferred sales charge on redemptions
in an amount equal to .75% of the lower of (a) the net asset value of the
shares at the time of purchase or (b) the net asset value of the shares at the
time of redemption. The holding period of Class C shares acquired through an
exchange with another PaineWebber mutual fund is calculated from the date the
Class C shares of the other PaineWebber mutual fund were initially purchased
without a sales charge, and Class C shares will be considered to represent, as
applicable, dividend and capital gain distribution reinvestments in such other
funds. Redemption order will be determined as described for Class B shares (see
"Contingent Deferred Sales Charge--Class B Shares"). Redemptions of Class C
shares acquired through an exchange and held less than one year will be subject
to the same contingent deferred sales charge that would have been imposed on
Class C shares of the PaineWebber mutual fund originally purchased that were
subsequently exchanged into Class C shares of the Fund. Class C shares held one
year or longer and Class C shares acquired through reinvestment of dividends or
capital gains distributions are not subject to this contingent deferred sales
charge. The contingent deferred sales charge is waived for exchanges, as
described below, and for most redemptions in connection with the systematic
withdrawal plan. THIS CONTINGENT DEFERRED SALES CHARGE DOES NOT APPLY TO
REDEMPTIONS OF CLASS C SHARES PURCHASED PRIOR TO NOVEMBER 10, 1995. For federal
income tax purposes, the amount of the contingent deferred sales charge will
reduce the gain or increase the loss, as the case may be, realized on the
redemption. The amount of any contingent deferred sales charge will be paid to
Mitchell Hutchins.
-------------
Prospectus Page 30
<PAGE>

Exchanges
- --------------------------------------------------------------------------------

Shares of each Fund may be exchanged for shares of the corresponding Class of
the other Funds or the PaineWebber mutual funds, or may be acquired through an
exchange of shares of the corresponding Class of those funds. No initial sales
charge is imposed on the shares being acquired, and no contingent deferred
sales charge is imposed on the shares being disposed of, through an exchange.
However, contingent deferred sales charges may apply to redemptions of shares
of PaineWebber mutual funds acquired through an exchange. A $5.00 exchange fee
is charged for each exchange, and exchanges may be subject to minimum
investment requirements of the fund into which exchanges are made.

The other PaineWebber mutual funds, with which Fund shares may be exchanged
include:

PAINEWEBBER INCOME FUNDS

.Global Income Fund

.Low Duration U.S. Government Income Fund

.Strategic Income Fund

PAINEWEBBER TAX-FREE INCOME FUNDS

.California Tax-Free Income Fund

.Municipal High Income Fund

.National Tax-Free Income Fund

.New York Tax-Free Income Fund

PAINEWEBBER GROWTH FUNDS

.Capital Appreciation Fund

.Emerging Markets Equity Fund

.Global Equity Fund

.Growth Fund

.Regional Financial Growth Fund

.Small Cap Growth Fund

.Small Cap Value Fund

PAINEWEBBER GROWTH AND INCOME FUNDS

.Balanced Fund

.Growth and Income Fund

.Tactical Allocation Fund

.Utility Income Fund

PAINEWEBBER MONEY MARKET FUND

PaineWebber clients must place exchange orders through their PaineWebber
investment executives or correspondent firms unless the shares to be exchanged
are held in certificate form. Shareholders who are not PaineWebber clients or
who hold their shares in certificated form must place exchange orders in
writing with the Transfer Agent: PFPC Inc., Attn: PaineWebber Mutual Funds,
P.O. Box 8950, Wilmington, Delaware 19899. All exchanges will be effected based
on the relative net asset values per share next determined after the exchange
order is received at PaineWebber's New York City offices or by the Transfer
Agent. See "Valuation of Shares." Shares of the Funds purchased through
PaineWebber or its correspondent firms may be exchanged only after the
settlement date has passed and payment for such shares has been made.

OTHER EXCHANGE INFORMATION. This exchange privilege may be modified or
terminated at any time, upon at least 60 days' notice when such notice is
required by SEC rules. See the Statement of Additional Information for further
details. This exchange privilege is available only in those jurisdictions where
the sale of the PaineWebber mutual fund shares to be acquired through such
exchange may be legally made. Before making any exchange, shareholders should
contact their PaineWebber investment executives or correspondent firms or the
Transfer Agent to obtain more information and prospectuses of the PaineWebber
mutual funds to be acquired through the exchange.
-------------
Prospectus Page 31
<PAGE>

Redemptions
- --------------------------------------------------------------------------------

Fund shares may be redeemed at their net asset value (subject to any applicable
contingent deferred sales charge) and redemption proceeds will be paid after
receipt of a redemption request, as described below. PaineWebber clients may
redeem non-certificated shares through PaineWebber or its correspondent firms;
all other shareholders must redeem through the Transfer Agent. If a redeeming
shareholder owns shares of more than one Class, the shares will be redeemed in
the following order unless the shareholder specifically requests otherwise:
Class A shares, then Class C shares, and finally Class B shares.

REDEMPTION THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. PaineWebber clients may
submit redemption requests to their investment executives or correspondent
firms in person or by telephone, mail or wire. As each Fund's agent,
PaineWebber may honor a redemption request by repurchasing Fund shares from a
redeeming shareholder at the shares' net asset value next determined after
receipt of the request by PaineWebber's New York City offices. Within three
Business Days after receipt of the request, repurchase proceeds (less any
applicable contingent deferred sales charge) will be paid by check or credited
to the shareholder's brokerage account at the election of the shareholder.
PaineWebber investment executives and correspondent firms are responsible for
promptly forwarding redemption requests to PaineWebber's New York City offices.

PaineWebber reserves the right not to honor any redemption request, in which
case PaineWebber promptly will forward the request to the Transfer Agent for
treatment as described below.

REDEMPTION THROUGH THE TRANSFER AGENT. Fund shareholders who are not
PaineWebber clients or who wish to redeem certificated shares must redeem their
shares through the Transfer Agent by mail; other shareholders also may redeem
Fund shares through the Transfer Agent. Shareholders should mail redemption
requests directly to the Transfer Agent: PFPC Inc., Attn: PaineWebber Mutual
Funds, P.O. Box 8950, Wilmington, Delaware 19899. A redemption request will be
executed at the net asset value next computed after it is received in "good
order" and redemption proceeds will be paid within seven days of the receipt of
the request. "Good order" means that the request must be accompanied by the
following: (1) a letter of instruction or a stock assignment specifying the
number of shares or amount of investment to be redeemed (or that all shares
credited to a Fund account be redeemed), signed by all registered owners of the
shares in the exact names in which they are registered, (2) a guarantee of the
signature of each registered owner by an eligible institution acceptable to the
Transfer Agent and in accordance with SEC rules, such as a commercial bank,
trust company or member of a recognized stock exchange, (3) other supporting
legal documents for estates, trusts, guardianships, custodianships,
partnerships and corporations and (4) duly endorsed share certificates, if any.
Shareholders are responsible for ensuring that a request for redemption is
received in "good order."

ADDITIONAL INFORMATION ON REDEMPTIONS. A shareholder who holds non-certificated
Fund shares may have redemption proceeds of $1 million or more wired to the
shareholder's PaineWebber brokerage account or a commercial bank account
designated by the shareholder. Questions about this option, or redemption
requirements generally, should be referred to the shareholder's PaineWebber
investment executive or correspondent firm, or to the Transfer Agent if the
shares are not held in a PaineWebber brokerage account. If a shareholder
requests redemption of shares which were purchased recently, a Fund may delay
payment until it is assured that good payment has been received. In the case of
purchases by check, this can take up to 15 days.

Because the Funds incur certain fixed costs in maintaining shareholder
accounts, each Fund reserves the right to redeem all Fund shares in any
shareholder account of less than $500 net asset value. If a Fund elects to do
so, it will notify the shareholder and provide the shareholder the opportunity
to increase the amount invested to $500 or more within 60 days of the notice. A
-------------
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND

Fund will not redeem accounts that fall below $500 solely as a result of a
reduction in net asset value per share.

Shareholders who have redeemed Class A shares may reinstate their Fund account
without a sales charge up to the dollar amount redeemed by purchasing Class A
shares of the same Fund within 365 days of the redemption. To take advantage of
this reinstatement privilege, shareholders must notify their PaineWebber
investment executive or correspondent firm at the time the privilege is
exercised.
- --------------------------------------------------------------------------------

Conversion of Class B Shares
- --------------------------------------------------------------------------------

A shareholder's Class B shares will automatically convert to Class A shares in
the same Fund approximately six years after the date of issuance, together with
a pro rata portion of all Class B shares representing dividends and other
distributions paid in additional Class B shares. The Class B shares so
converted will no longer be subject to the higher expenses borne by Class B
shares. The conversion will be effected at the relative net asset values per
share of the two Classes on the first Business Day of the month in which the
sixth anniversary of the issuance of the Class B shares occurs. See "Valuation
of Shares." If a shareholder effects one or more exchanges among Class B shares
of the PaineWebber mutual funds during the six-year period, the holding periods
for the shares so exchanged will be counted toward the six-year period.
- --------------------------------------------------------------------------------

Other Services and Information
- --------------------------------------------------------------------------------

Investors interested in the services described below should consult their
PaineWebber investment executives or correspondent firms or call the Transfer
Agent toll-free at 1-800-647-1568.

AUTOMATIC INVESTMENT PLAN. Shareholders may purchase shares of the Funds
through an automatic investment plan, under which an amount specified by the
shareholder of $50 or more each month will be sent to the Transfer Agent from
the shareholder's bank for investment in a Fund. In addition to providing a
convenient and disciplined manner of investing, participation in the automatic
investment plan enables the investor to use the technique of "dollar cost
averaging." When under the plan a shareholder invests the same dollar amount
each month, the shareholder will purchase more shares when a Fund's net asset
value per share is low and fewer shares when the net asset value per share is
high. Using this technique, a shareholder's average purchase price per share
over any given period will be lower than if the shareholder purchased a fixed
number of shares on a monthly basis during the period. Of course, investing
through the automatic investment plan does not assure a profit or protect
against loss in declining markets. Additionally, since the automatic investment
plan involves continuous investing regardless of price levels, an investor
should consider his or her financial ability to continue purchases through
periods of low price levels.

SYSTEMATIC WITHDRAWAL PLAN. Shareholders who own non-certificated Class A or
Class C shares with a value of $5,000 or more or Class B shares with a value of
$20,000 or more may have PaineWebber redeem a portion of their shares monthly,
quarterly or semi-annually under the systematic withdrawal plan. Shareholders
who participate in the systematic withdrawal plan must elect to have all
dividends reinvested in additional shares of the same Class. The minimum amount
for all withdrawals of Class A or Class C shares is $100, and minimum monthly,
quarterly and semi-annual withdrawal amounts for Class B shares are $200, $400
and $600, respectively. Quarterly withdrawals are made in March, June,
September and December, and semi-annual withdrawals are made in June and
December. Provided that the shareholder does not withdraw an amount exceeding
12% (in the first year after purchase for
-------------
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND

Class A and Class C shares, annually for Class B shares) of his or her "Initial
Account Balance," a term that means the value of the Fund account at the time
the shareholder elects to participate in the systematic withdrawal plan, no
contingent deferred sales charge is imposed on such withdrawals. A
shareholder's participation in the systematic withdrawal plan will terminate
automatically if the Initial Account Balance (plus the net asset value on the
date of purchase of Fund shares acquired after the election to participate in
the systematic withdrawal plan), less aggregate redemptions made other than
pursuant to the systematic withdrawal plan, is less than $5,000 for Class A and
Class C shareholders or $20,000 for Class B shareholders. Purchases of
additional shares of a Fund concurrent with withdrawals are ordinarily
disadvantageous to shareholders because of tax liabilities and, for Class A
shares, sales charges.

INDIVIDUAL RETIREMENT ACCOUNTS. Shares of the Funds may be purchased through
IRAs available through the Funds. In addition, a Self-Directed IRA is available
through PaineWebber under which investments may be made in the Funds as well as
in other investments available through PaineWebber. Investors considering
establishing an IRA should review applicable tax laws and should consult their
tax advisers.

TRANSFER OF ACCOUNTS. If a shareholder holding shares of a Fund in a
PaineWebber brokerage account transfers his or her brokerage account to another
firm, the Fund shares normally will be transferred to an account with the
Transfer Agent. However, if the other firm has entered into a selected dealer
agreement with Mitchell Hutchins relating to a Fund, the shareholder may be
able to hold Fund shares in an account with the other firm.
- --------------------------------------------------------------------------------

Dividends and Taxes
- --------------------------------------------------------------------------------

DIVIDENDS. Dividends from each Fund's net investment income are declared daily
and paid monthly on or about the 15th day of each month. Net investment income
includes accrued interest and discount, less amortization of premium and
accrued expenses. High Income Fund may, but is not required to, distribute with
any dividend all or a portion of any net realized gains from foreign currency
transactions.

Substantially all of each Fund's net capital gain (the excess of net long-term
capital gain over net short-term capital loss) and net short-term capital gain,
if any, together with, for High Income Fund, any undistributed net realized
gains from foreign currency transactions, are distributed annually. The Funds
may make additional distributions if necessary to avoid a 4% excise tax on
certain undistributed income and capital gain. While High Income Fund will not
declare any dividend in excess of the amount of net investment income and net
realized gains from foreign currency transactions available for distribution at
the time of declaration, it is possible that net losses from foreign currency
transactions after that time could convert a portion of such a dividend to a
non-taxable return of capital.

Dividends and other distributions on all Classes of shares of a Fund are
calculated at the same time and in the same manner. Dividends on Class B and
Class C shares of a Fund are expected to be lower than those on its Class A
shares because of the higher expenses resulting from distribution fees borne by
the Class B and Class C shares. For the same reason, dividends on Class B
shares are expected to be lower than those on Class C shares. Dividends on each
Class also might be affected differently by the allocation of other Class-
specific expenses. See "Valuation of Shares."

Shares purchased through PaineWebber investment executives and correspondent
firms begin earning dividends on the Business Day following the date payment
for such shares is due; shares purchased through the Transfer Agent begin
earning dividends on the Business Day following the Transfer Agent's receipt of
payment for such shares. Shares acquired through an exchange begin earning
dividends on the Business Day following the day on which the exchange is
effected.

Each Fund's dividends and capital gain distributions are paid in additional
Fund shares of
-------------
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND

the same Class at net asset value unless the shareholder has requested cash
payments. Shareholders who wish to receive dividends and/or capital gain
distributions in cash, either mailed to the shareholder by check or credited to
the shareholder's PaineWebber account, should contact their PaineWebber
investment executives or correspondent firms or complete the appropriate
section of the application form.

TAXES. Each Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code so that it will be relieved
of federal income tax on that part of its investment company taxable income
(consisting generally of net investment income, net short-term capital gain
and, for High Income Fund, net gains from certain foreign currency
transactions) and net capital gain that is distributed to its shareholders.

Dividends from a Fund's investment company taxable income (whether paid in cash
or in additional shares) generally are taxable to its shareholders as ordinary
income. Distributions of a Fund's net capital gain (whether paid in cash or in
additional shares) are taxable to its shareholders as long-term capital gain,
regardless of how long they have held their Fund shares. Shareholders not
subject to tax on their income generally will not be required to pay tax on
amounts distributed to them.

Each Fund notifies its shareholders following the end of each calendar year of
the amounts of dividends and capital gain distributions paid (or deemed paid)
that year.

Each Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to any individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number. Withholding at that rate also is required from
dividends and capital gain distributions payable to such shareholders who
otherwise are subject to backup withholding.

A redemption of shares of a Fund may result in taxable gain or loss to the
redeeming shareholder, depending on whether the redemption proceeds payable to
the shareholder are more or less than the shareholder's adjusted basis for the
redeemed shares (which normally includes any initial sales charge paid on Class
A shares). An exchange of Fund shares for shares of another PaineWebber mutual
fund generally will have similar tax consequences. However, special tax rules
apply when a shareholder (1) disposes of Class A shares of a Fund through a
redemption or exchange within 90 days of purchase and (2) subsequently acquires
Class A shares of a PaineWebber mutual fund without paying a sales charge due
to the 365-day reinstatement privilege or the exchange privilege. In these
cases, any gain on the disposition of the original Class A shares will be
increased, or loss decreased, by the amount of the sales charge paid when the
shares were acquired, and that amount will increase the basis of the
PaineWebber mutual fund shares subsequently acquired. In addition, if shares of
a Fund are purchased within 30 days before or after redeeming other Fund shares
(regardless of Class) at a loss, all or a portion of that loss will not be
deductible and will increase the basis of the newly purchased shares.

No gain or loss will be recognized to a shareholder as a result of a conversion
of Class B shares into Class A shares.

The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders; see the
Statement of Additional Information for a further discussion. There may be
other federal, state or local tax considerations applicable to a particular
investor. Prospective investors are urged to consult their tax advisers.
-------------
Prospectus Page 35
<PAGE>

Valuation of Shares
- --------------------------------------------------------------------------------

The net asset value of each Fund's shares fluctuates and is determined
separately for each Class as of the close of regular trading on the NYSE
(currently 4:00 p.m., Eastern time) each Business Day. Each Fund's net asset
value per share is determined by dividing the value of the securities held by
the Fund plus any cash or other assets minus all liabilities by the total
number of Fund shares outstanding.

Each Fund values its assets based on their current market value when market
quotations are readily available. If such value cannot be established, assets
are valued at fair value as determined in
good faith by or under the direction of the Trust's board of trustees. The
amortized cost method of valuation generally is used to value debt obligations
with 60 days or less remaining to maturity, unless the board of trustees
determines that this does not represent fair value. Investments of High Income
Fund denominated in foreign currencies are valued daily in U.S. dollars based
on the then-prevailing exchange rate. It should be recognized that judgment
plays a greater role in valuing lower rated debt securities in which High
Income Fund and Investment Grade Income Fund may invest because there is less
reliable, objective data available.
- --------------------------------------------------------------------------------

Management
- --------------------------------------------------------------------------------

The Trust's board of trustees, as part of its overall management
responsibility, oversees various organizations responsible for the Funds' day-
to-day management. Mitchell Hutchins, investment adviser and administrator of
each Fund, makes and implements all investment decisions and supervises all
aspects of each Fund's operations. Mitchell Hutchins receives a monthly fee for
these services at the annual rate of 0.50% of each Fund's average daily net
assets.

Each Fund also pays PaineWebber an annual fee of $4.00 per active shareholder
account held at PaineWebber for certain services not provided by the Transfer
Agent. Each Fund incurs other expenses, and, for the fiscal year ended November
30, 1994, the Funds' total expenses for their Class A, Class B and Class C
shares, stated as a percentage of average net assets, were as follows: 0.95%,
1.72% and 1.45% for U.S. Government Income Fund, 0.97%, 1.72% and 1.45% for
Investment Grade Income Fund and 0.91%, 1.64% and 1.38% for High Income Fund.

Mitchell Hutchins is located at 1285 Avenue of the Americas, New York, New York
10019. It is a wholly owned subsidiary of PaineWebber, which is in turn wholly
owned by Paine Webber Group Inc., a publicly owned financial services holding
company. As of October 31, 1995, Mitchell Hutchins was adviser or sub-adviser
of 38 investment companies with 75 separate portfolios and aggregate assets of
over $29 billion.

Nirmal Singh and Craig M. Varrelman have been responsible for the day-to-day
management of U.S. Government Income Fund's portfolio since December 1994. Mr.
Singh is a first vice president of Mitchell Hutchins, and Mr. Varrelman is a
first vice president of Mitchell Hutchins. Prior to joining Mitchell Hutchins
in September 1993, Mr. Singh was with Merrill Lynch Asset Management, Inc.,
where he was a member of the portfolio management team responsible for managing
several diversified funds, including mortgage-backed securities funds with
assets totaling approximately $8 billion. From 1990 to 1993, Mr. Singh was a
senior portfolio manager at Nomura Mortgage Fund Management Corporation, where
he was responsible for managing approximately $3 billion in mortgage assets.
From 1987 to 1990, Mr. Singh was a vice president of Lehman Brothers. Mr.
Varrelman has been with Mitchell Hutchins as a portfolio manager since 1988.

Mary B. King and Julieanna Berry are responsible for the day-to-day management
of Investment Grade Income Fund's portfolio. Mrs. King has held her fund
responsibilities since February 1991 and was joined by Mrs. Berry in June 1995.
Mrs.
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King is a vice president of the Trust and also a first vice president of
Mitchell Hutchins. She has been employed by Mitchell Hutchins since 1985. Mrs.
Berry is a vice president of Mitchell Hutchins and has been employed as a
portfolio manager since 1989.

Thomas J. Libassi has been responsible for the day-to-day management of High
Income Fund's portfolio since May 1994. Mr. Libassi is a vice president of the
Trust and also a senior vice president of Mitchell Hutchins. Prior to May 1994,
Mr. Libassi was a vice president of Keystone Custodian Funds Inc. with
portfolio management responsibility for approximately $900 million in assets
primarily invested in high yield debt securities.

Other members of Mitchell Hutchins' domestic fixed income and high yield groups
provide input on market outlook, interest rate factors and other considerations
pertaining to fixed income investments.

Mitchell Hutchins investment personnel may engage in securities transactions
for their own accounts pursuant to a code of ethics which establishes
procedures for personal investing and restricts certain transactions.

DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins is the distributor of each Fund's
shares and has appointed PaineWebber as the exclusive dealer for the sale of
those shares. Under separate plans of distribution pertaining to the Class A
shares, Class B shares and Class C shares ("Class A Plan," "Class B Plan" and
"Class C Plan," collectively, "Plans"), each Fund pays Mitchell Hutchins
monthly service fees at the annual rate of 0.25% of the average daily net
assets of each Class of shares. Each Fund also pays Mitchell Hutchins monthly
distribution fees at the annual rate of 0.75% of the average daily net assets
of the Class B shares and 0.50% of the average daily net assets of the Class C
shares.

Under all three Plans, Mitchell Hutchins uses the service fees primarily to pay
PaineWebber for shareholder servicing, currently at the annual rate of 0.25% of
the aggregate investment amounts maintained in each Fund by PaineWebber
clients. PaineWebber passes on a portion of these fees to its investment
executives to compensate them for shareholder servicing that they perform and
retains the remainder to offset its own expenses in servicing and maintaining
shareholder accounts. These expenses may include costs of the PaineWebber
branch office in which the investment executive is based, such as rent,
communications equipment, employee salaries and other overhead costs.

Mitchell Hutchins uses the distribution fees under the Class B Plan and Class C
Plan to offset the commissions it pays to PaineWebber for selling the Funds'
Class B and Class C shares. PaineWebber passes on to its investment executives
a portion of these commissions and retains the remainder to offset its expenses
in selling Class B and Class C shares. These expenses may include the branch
office costs noted above. In addition, Mitchell Hutchins uses the distribution
fees under the Class B and Class C Plans, respectively, to offset each Fund's
marketing costs attributable to such Class, such as preparation of sales
literature, advertising and printing and distributing prospectuses and other
shareholder materials to prospective investors. Mitchell Hutchins also may use
the distribution fees to pay additional compensation to PaineWebber and other
costs allocated to Mitchell Hutchins' and PaineWebber's distribution
activities, including employee salaries, bonuses and other overhead expenses.

Mitchell Hutchins expects that, from time to time, PaineWebber will pay
shareholder servicing fees and sales commissions to its investment executives
at the time of sale of Class C shares of one or more of the Funds. If
PaineWebber makes such payments, it will retain the service and distribution
fees on Class C shares until it has been reimbursed and thereafter will pass a
portion of the service and distribution fees on Class C shares on to its
investment executives.

Mitchell Hutchins receives the proceeds of the initial sales charge paid upon
the purchase of Class A shares and the contingent deferred sales charge paid
upon certain redemptions of shares, and may use these proceeds for any of the
distribution expenses described above. See "Purchases."

During the period they are in effect, the Plans and related distribution
contracts pertaining to each Class of shares ("Distribution Contracts")
obligate the Funds to pay service and distribution fees to Mitchell Hutchins as
compensation for its service and distribution activities, not as reimbursement
for specific expenses incurred. Thus, even if Mitchell Hutchins' expenses
exceed
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its service or distribution fees for any Fund, the Fund will not be obligated
to pay more than those fees, and, if Mitchell Hutchins' expenses are less than
such fees, it will retain its full fees and realize a profit. Each Fund will
pay the service and distribution fees to Mitchell Hutchins until either the
applicable Plan or Distribution Contract is terminated or not renewed. In that
event, Mitchell Hutchins' expenses in excess of service and distribution fees
received or accrued through the termination date will be Mitchell Hutchins'
sole responsibility and not obligations of the Fund. In their annual
consideration of the continuation of each Fund's Plans, the trustees will
review the Plan and Mitchell Hutchins' corresponding expenses for each Class
separately from the Plan and corresponding expenses for the other two Classes.
- --------------------------------------------------------------------------------

Performance Information
- --------------------------------------------------------------------------------

Each Fund performs a standardized computation of annualized total return and
may show this return in advertisements or promotional materials. Standardized
return shows the change in value of an investment in the Fund as a steady
compound annual rate of return. Actual year-by-year returns fluctuate and may
be higher or lower than standardized return. Standardized return for the Class
A shares reflects deduction of the Fund's maximum initial sales charge at the
time of purchase, and standardized return for the Class B shares and Class C
shares reflects deduction of the applicable contingent deferred sales charge
imposed on a redemption of shares held for the period. One-, five-and ten-year
periods will be shown, unless the Class has been in existence for a shorter
period. Total return calculations assume reinvestment of dividends and other
distributions.

Each Fund may use other total return presentations in conjunction with
standardized return. These may cover the same or different periods as those
used for standardized return and may include cumulative returns, average annual
rates, actual year-by-year rates or any combination thereof. Non-standardized
return does not reflect initial or contingent deferred sales charges and would
be lower if such charges were included.

Each Fund also may advertise its yield. Yield reflects investment income net of
expenses over a 30-day (or one-month) period on a Fund share, expressed as an
annualized percentage of the maximum offering price per share for Class A
shares and net asset value per share for Class B shares and Class C shares at
the end of the period. Yield computations differ from other accounting methods
and therefore may differ from dividends actually paid or reported net income.

Total return and yield information reflects past performance and does not
necessarily indicate future results. Investment return and principal values
will fluctuate, and proceeds upon redemption may be more or less than a
shareholder's cost.

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

General Information
- --------------------------------------------------------------------------------

ORGANIZATION. PaineWebber Managed Investments Trust is registered with the SEC
as an open-end management investment company and was organized as a business
trust under the laws of the Commonwealth of Massachusetts by Declaration of
Trust dated November 21, 1986. The trustees have authority to issue an
unlimited number of shares of beneficial interest of separate series, par value
$.001 per share. In addition to the Funds, shares of two other series have been
authorized.

The shares of beneficial interest of each Fund are divided into four Classes,
designated Class A shares, Class B shares, Class C shares and Class Y shares.
Each Class represents interests in the same assets of each Fund. Class A, B and
C differ as follows: (1) each Class has exclusive voting
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rights on matters pertaining to its plan of distribution, (2) Class A shares
are subject to an initial sales charge, (3) Class B shares bear ongoing
distribution fees, are subject to a contingent deferred sales charge upon most
redemptions and will automatically convert to Class A shares approximately six
years after issuance, (4) Class C shares are not subject to an initial sales
charge, but are subject to a contingent deferred sales charge if redeemed
within one year of purchase, bear ongoing distribution fees and do not convert
into another Class and (5) each Class may bear differing amounts of certain
other Class-specific expenses. Class Y shares, which may be offered only to
limited classes of investors, are subject to neither an initial or contingent
deferred sales charge nor ongoing service or distribution fees. The Trust's
board of trustees does not anticipate that there will be any conflicts among
the interests of the holders of the different Classes of shares of a Fund. On
an ongoing basis, the board of trustees will consider whether any such conflict
exists and, if so, take appropriate action.

The different sales charges and other expenses applicable to the different
Classes of Fund shares may affect the performance of those Classes. More
information concerning Class Y shares of U.S. Government Income Fund may be
obtained from a PaineWebber investment executive or correspondent firm or by
calling 1-800-647-1568. The other Funds do not currently offer Class Y shares.

The Trust does not hold annual shareholder meetings. There normally will be no
meetings of shareholders to elect trustees unless fewer than a majority of the
trustees holding office have been elected by shareholders. Shareholders of
record holding at least two-thirds of the outstanding shares of the Trust may
remove a trustee by votes cast in person or by proxy at a meeting called for
that purpose. The trustees are required to call a meeting of shareholders for
the purpose of voting upon the question of removal of any trustee when so
requested in writing by the shareholders of record holding at least 10% of the
Trust's outstanding shares. Each share of each Fund has equal voting rights,
except as noted above. Each share of each Fund is entitled to participate
equally in dividends and other distributions and the proceeds of any
liquidation except that, due to the differing expenses borne by the four
Classes, these dividends and proceeds are likely to be lower on the Class B and
Class C shares than on the Class A shares and are likely to be lower on every
other Class of shares than for Class Y shares. The shares of the Funds will be
voted separately except when an aggregate vote of all series is required by the
Investment Company Act of 1940 ("1940 Act").

To avoid additional operating costs and for investor convenience, the Funds no
longer issue share certificates. Ownership of shares of each Fund is recorded
on a share register by the Transfer Agent, and shareholders have the same
rights of ownership with respect to such shares as if certificates had been
issued.

CUSTODIAN AND TRANSFER AGENT. State Street Bank and Trust Company, One Heritage
Drive, North Quincy, Massachusetts 02171, is custodian of each Fund's assets
and employs foreign sub-custodians, approved by the Trust's board of trustees
in accordance with the applicable requirements of the 1940 Act, to provide
custody of High Income Fund's foreign assets. PFPC Inc., a subsidiary of PNC
Bank, National Association, whose principal business address is 400 Bellevue
Parkway, Wilmington, Delaware 19809, is the Funds' transfer and dividend
disbursing agent.

CONFIRMATIONS AND STATEMENTS. Shareholders receive confirmations of purchases
and redemptions of shares of the Funds. PaineWebber clients receive statements
at least quarterly that report their Fund activity and consolidated year-end
statements that show all Fund transactions for that year. Shareholders who are
not PaineWebber clients receive quarterly statements from the Transfer Agent.
Shareholders also receive audited annual and unaudited semi-annual financial
statements of the Funds.
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MORTGAGE-BACKED SECURITIES

The U.S. government securities in which the U.S. Government Income Fund and
Investment Grade Income Fund may invest include mortgage-backed securities
issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. Other mortgage-
backed securities in which the Funds may invest will be issued by Private
Mortgage Lenders. Such private mortgage-backed securities may be supported by
pools of mortgage loans or other mortgage-backed securities that are
guaranteed, directly or indirectly, by the U.S. government or one of its
agencies or instrumentalities, or they may be issued without any government
guarantee of the underlying mortgage assets but with some form of non-
government credit enhancement. New types of mortgage-backed securities are
developed and marketed from time to time and, consistent with their investment
limitations, the Funds expect to invest in those new types of mortgage-backed
securities that Mitchell Hutchins believes may assist the Funds in achieving
their investment objectives. Similarly, the Funds may invest in mortgage-backed
securities issued by new or existing governmental or private issuers other than
those identified herein.

GINNIE MAE CERTIFICATES

Ginnie Mae guarantees certain mortgage pass-through certificates ("Ginnie Mae
certificates") that are issued by Private Mortgage Lenders and that represent
ownership interests in individual pools of residential mortgage loans. These
securities are designed to provide monthly payments of interest and principal
to the investor. Timely payment of interest and principal is backed by the full
faith and credit of the U.S. government. Each mortgagor's monthly payments to
his lending institution on his residential mortgage are "passed through" to
certificateholders such as the Funds. Mortgage pools consist of whole mortgage
loans or participations in loans. The terms and characteristics of the mortgage
instruments are generally uniform within a pool but may vary among pools.
Lending institutions that originate mortgages for the pools are subject to
certain standards, including credit and other underwriting criteria for
individual mortgages included in the pools.

FANNIE MAE CERTIFICATES

Fannie Mae facilitates a national secondary market in residential mortgage
loans insured or guaranteed by U.S. government agencies and in privately
insured or uninsured residential mortgage loans (sometimes referred to as
"conventional mortgage loans" or "conventional loans") through its mortgage
purchase and mortgage-backed securities sales activities. Fannie Mae issues
guaranteed mortgage pass-through certificates ("Fannie Mae certificates"),
which represent pro rata shares of all interest and principal payments made and
owed on the underlying pools. Fannie Mae guarantees timely payment of interest
and principal on Fannie Mae certificates. The Fannie Mae guarantee is not
backed by the full faith and credit of the U.S. government.

FREDDIE MAC CERTIFICATES

Freddie Mac also facilitates a national secondary market for conventional
residential and U.S. government-insured mortgage loans through its mortgage
purchase and mortgage-backed securities sales activities. Freddie Mac issues
two types of mortgage pass-through securities: mortgage participation
certificates ("PCs") and guaranteed mortgage certificates ("GMCs"). Each PC
represents a pro rata share of all interest and principal payments made and
owed on the underlying pool. Freddie Mac generally guarantees timely monthly
payment of interest on PCs and the ultimate payment of principal, but it also
has a PC program under which it guarantees timely payment of both principal and
interest. GMCs also represent a pro rata interest in a pool of mortgages. These
instruments, however, pay interest semi-annually and return principal once a
year in guaranteed minimum payments. The Freddie Mac guarantee is not backed by
the full faith and credit of the U.S. government.

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PRIVATE, RTC AND SIMILAR MORTGAGE-BACKED SECURITIES

Mortgage-backed securities issued by Private Mortgage Lenders are structured
similarly to the pass-through certificates and collateralized mortgage
obligations ("CMOs") issued or guaranteed by Ginnie Mae, Fannie Mae and Freddie
Mac. Such mortgage-backed securities may be supported by pools of U.S.
government or agency insured or guaranteed mortgage loans or by other mortgage-
backed securities issued by a government agency or instrumentality, but they
generally are supported by pools of conventional (i.e., non-government
guaranteed or insured) mortgage loans. Since such mortgage-backed securities
normally are not guaranteed by an entity having the credit standing of Ginnie
Mae, Fannie Mae and Freddie Mac, they normally are structured with one or more
types of credit enhancement. See "--Types of Credit Enhancement." These credit
enhancements do not protect investors from changes in market value.

The Resolution Trust Corporation ("RTC"), which was organized by the U.S.
government in connection with the savings and loan crisis, holds assets of
failed savings associations as either a conservator or receiver for such
associations, or it acquires such assets in its corporate capacity. These
assets include, among other things, single family and multifamily mortgage
loans, as well as commercial mortgage loans. In order to dispose of such assets
in an orderly manner, RTC has established a vehicle registered with the SEC
through which it sells mortgage-backed securities. RTC mortgage-backed
securities represent pro rata interests in pools of mortgage loans that RTC
holds or has acquired, as described above, and are supported by one or more of
the types of private credit enhancements used by Private Mortgage Lenders.

COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE PASS-THROUGHS

CMOs are debt obligations that are collateralized by mortgage loans or mortgage
pass-through securities (such collateral collectively being called "Mortgage
Assets"). CMOs may be issued by Private Mortgage Lenders or by government
entities such as Fannie Mae or Freddie Mac. Multi-class mortgage pass-through
securities are interests in trusts that are comprised of Mortgage Assets and
that have multiple classes similar to those in CMOs. Unless the context
indicates otherwise, references herein to CMOs include multi-class mortgage
pass-through securities. Payments of principal of and interest on the Mortgage
Assets (and in the case of CMOs, any reinvestment income thereon) provide the
funds to pay debt service on the CMOs or to make scheduled distributions on the
multi-class mortgage pass-through securities.

In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMO, also referred to as a "tranche," is issued at a specific fixed or
floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of a CMO (other than any PO class)
on a monthly, quarterly or semi-annual basis. The principal and interest on the
Mortgage Assets may be allocated among the several classes of a CMO in many
ways. In one structure, payments of principal, including any principal
prepayments, on the Mortgage Assets are applied to the classes of a CMO in the
order of their respective stated maturities or final distribution dates so that
no payment of principal will be made on any class of the CMO until all other
classes having an earlier stated maturity or final distribution date have been
paid in full. In some CMO structures, all or a portion of the interest
attributable to one or more of the CMO classes may be added to the principal
amounts attributable to such classes, rather than passed through to
certificateholders on a current basis, until other classes of the CMO are paid
in full.

Parallel pay CMOs are structured to provide payments of principal on each pay-
ment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier.

ARM AND FLOATING RATE MORTGAGE-BACKED SECURITIES

ARM mortgage-backed securities are mortgage-backed securities that represent a
right to receive interest payments at a rate that is adjusted to reflect the
interest earned on a pool of mortgage loans bearing variable or adjustable
rates of interest (such mortgage loans are referred to as "ARMs"). Floating
rate

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mortgage-backed securities are classes of mortgage-backed securities that have
been structured to represent the right to receive interest payments at rates
that fluctuate in accordance with an index but that generally are supported by
pools comprised of fixed-rate mortgage loans. Because the interest rates on ARM
and floating rate mortgage-backed securities are reset in response to changes
in a specified market index, the values of such securities tend to be less
sensitive to interest rate fluctuations than the values of fixed-rate
securities.

TYPES OF CREDIT ENHANCEMENT

To lessen the effect of failures by obligors on Mortgage Assets to make
payments, mortgage-backed securities may contain elements of credit
enhancement. Such credit enhancement falls into two categories: (1) liquidity
protection and (2) protection against losses resulting after default by an
obligor on the underlying assets and collection of all amounts recoverable
directly from the obligor and through liquidation of the collateral. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets (usually the bank, savings association or
mortgage banker that transferred the underlying loans to the issuer of the
security), to ensure that the receipt of payments on the underlying pool occurs
in a timely fashion. Protection against losses resulting after default and
liquidation ensures ultimate payment of the obligations on at least a portion
of the assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor, from
third parties, through various means of structuring the transaction or through
a combination of such approaches. The Funds will not pay any additional fees
for such credit enhancement, although the existence of credit enhancement may
increase the price of a security. Credit enhancements do not provide protection
against changes in the market value of the security.

Examples of credit enhancement arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal
thereof and interest thereon, with the result that defaults on the underlying
assets are borne first by the holders of the subordinated class), creation of
"spread accounts" or "reserve funds" (where cash or investments, sometimes
funded from a portion of the payments on the underlying assets, are held in
reserve against future losses) and "over-collateralization" (where the
scheduled payments on, or the principal amount of, the underlying assets exceed
that required to make payment of the securities and pay any servicing or other
fees). The degree of credit enhancement provided for each issue generally is
based on historical information regarding the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in such a security.

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DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS

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

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

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

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

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

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

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

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

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

Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B 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.

DESCRIPTION OF S&P CORPORATE DEBT RATINGS

AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong; AA. Debt rated AA has a very
strong capacity to pay interest and repay

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principal and differs from the highest rated issues only in small degree; A.
Debt rated A has a strong capacity to pay interest and repay principal although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.

BBB. Debt rated BBB is regarded as having adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in this
category than for debt in higher rated categories.

BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation.

BB. Iindicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.

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

D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.

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.

NR: "NR" indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as matter of policy.

DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS

PRIME-1. Issuers assigned this highest rating have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by the following characteristics: leading market positions
in well established industries; high rates of return on funds employed;
conservative capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in earnings coverage of fixed financial charges
and high internal cash generation; well established access to a range of
financial markets and assured sources of alternate liquidity.

PRIME-2. Issuers assigned this rating 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, will 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 assigned this rating have an acceptable capacity for repayment
of short-term promissory obligations. The effect of industry characteristics
and market composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection
measurements and the requirement for relatively high financial leverage.
Adequate alternate liquidity is maintained.

NOT PRIME. Issuers assigned this rating do not fall within any of the Prime
rating categories.

DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS

A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety; A-1. This
designation indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics are denoted with a plus (+) sign
designation; A-2. Capacity for timely payment on issues with this designation
is strong.

-------------
Prospectus Page B-2
<PAGE>

----------------------------------------------------------------------------
PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND

However, the relative degree of safety is not as high as for issues designated
A-1; A-3. Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations; B. Issues rated B are regarded as having only an adequate
capacity for timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities; C. This rating is assigned to short-term
debt obligations with a doubtful capacity for payment; D. This rating indicates
that the issue is either in default or is expected to be in default upon
maturity.

-------------
Prospectus Page B-3
<PAGE>

THE FUNDS MAY USE THE FOLLOWING INSTRUMENTS:

Options on Debt Securities and Foreign Currencies. A call option is a short-
term contract pursuant to which the purchaser of the option, in return for a
premium, has the right to buy the security or currency underlying the option at
a specified price at any time during the term of the option. The writer of the
call option, who receives the premium, has the obligation, upon exercise of the
option during the option term, to deliver the underlying security or currency
against payment of the exercise price. A put option is a similar contract which
gives its purchaser, in return for a premium, the right to sell the underlying
security or currency at a specified price during the term of the option. The
writer of the put option, who receives the premium, has the obligation, upon
exercise of the option during the option term, to buy the underlying security
or currency at the exercise price.

Options on Indices of Debt Securities. An index assigns relative values to the
securities included in the index and fluctuates with changes in the market
values of such securities. Index options operate in the same way as more
traditional options except that exercises of index options are effected with
cash payment and do not involve delivery of securities. Thus, upon exercise of
an index option, the purchaser will realize, and the writer will pay, an amount
based on the difference between the exercise price and the closing price of the
index.

Interest Rate Futures Contracts. An interest rate futures contract is a
bilateral agreement pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of the specified type of debt security called
for in the contract at a specified future time and at a specified price.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of debt securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery.

Options on Futures Contracts. Options on futures contracts are similar to
options on securities, except that an option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a
specified price at any time during the option term. Upon exercise of the
option, the delivery of the futures position to the holder of the option will
be accompanied by delivery of the accumulated balance that represents the
amount by which the market price of the futures contract exceeds, in the case
of a call, or is less than, in the case of put, the exercise price of the
option on the future. The writer of an option, upon exercise, will assume a
short position in the case of a call and a long position in the case of a put.

Forward Currency Contracts. A forward currency contract involves an obligation
to purchase or sell a specific currency at a specified future date, which may
be any fixed number of days from the contract date agreed upon by the parties,
at a price set at the time the contract is entered into.

-------------
Prospectus Page C-1
<PAGE>

Application Form

THE PAINEWEBBER
MUTUAL FUNDS [_] [_] - [_] [_] [_] [_] [_] - [_] [_]
PaineWebber Account No.
- --------------------------------------------------------------------------------
INSTRUCTIONS DO NOT USE THIS FORM IF YOU WOULD LIKE YOUR ACCOUNT SERVICED
THROUGH PAINEWEBBER. INSTEAD, CALL YOUR PAINEWEBBER INVESTMENT
EXECUTIVE (OR YOUR LOCAL PAINEWEBBER OFFICE TO OPEN AN ACCOUNT).

ALSO, DO NOT USE THIS FORM TO OPEN A Return this completed
RETIREMENT PLAN ACCOUNT. FOR form to: PFPC Inc. P.O.
RETIREMENT PLAN FORMS OR FOR Box 8950 Wilmington,
ASSISTANCE IN COMPLETING THIS FORM Delaware 19899 ATTN:
CONTACT PFPC INC. AT 1-800-647-1568. PaineWebber Mutual Funds
PLEASE PRINT
- --------------------------------------------------------------------------------
<TABLE>
<C> <S>
--------------------------------------------------------------------------------------
[1] INITIAL INVESTMENT ($1,000 MINIMUM)
--------------------------------------------------------------------------------------

ENCLOSED IS A CHECK FOR:
$________(payable to PaineWebber U.S. Government Income Fund) to purchase Class A [_]
Class B [_] or Class C [_] shares
$________(payable to PaineWebber Investment Grade Income Fund) to purchase
Class A [_] Class B [_] or Class C [_] shares
$________(payable to PaineWebber High Income Fund) to purchase Class A [_]
Class B [_] or Class C [_] shares
(Check one; if no Class is specified, Class A shares will be purchased)
A separate check is required for your investment in each Fund.
--------------------------------------------------------------------------------------
[2] ACCOUNT REGISTRATION
--------------------------------------------------------------------------------------

Not valid / /
without 1. Individual ______________ ___________________ ________________
signature and First Name Last Name MI Soc. Sec. No.
Soc. Sec. or
Tax ID # on / /
accompanying 2. Joint Tenancy ___________ ___________________ ________________
Form W-9 First Name Last Name MI Soc. Sec. No.
- --As joint ("Joint Tenants with Rights of Survivorship" unless otherwise specified)
tenants, use
Lines 1 and 2 / /
- --As custodian 3. Gifts to Minors _____________________________ ________________
for a minor, Minor's Name Soc. Sec. No.
use Lines 1
and 3 Under the ___________________________________ Uniform Gifts to Minors Act/Uniform Transfers to Minors Act
- --In the name State of Residence of Minor
of a
corporation, 4. Other Registrations _________________________ _____________________
trust or other Name Tax Ident. No.
organization
or any 5. If Trust, Date of Trust Instrument: ________________________________
fiduciary
capacity, use
Line 4
---------------------------------------------------------------------------------------
[3] ADDRESS
---------------------------------------------------------------------------------------

__________________________________________ U.S. Citizen [_] YES [_] NO*
Street

__________________________________________ _________________________________________
City State Zip Code *Country of Citizenship

---------------------------------------------------------------------------------------
[4] DISTRIBUTION OPTIONS See Prospectus
---------------------------------------------------------------------------------------

Please select one of the following:

[_] Reinvest both dividends and capital gain distributions in additional shares

[_] Pay dividends to my address above; reinvest capital gain distributions

[_] Pay both dividends and capital gain distributions in cash to my address above

[_] Reinvest dividends and pay capital gain distributions in cash to my address above
NOTE: If a selection is not made, both dividends and capital gain distributions will be paid
in additional Fund shares of the same Class.

</TABLE>
<PAGE>
<TABLE>
<C> <S>
--------------------------------------------------------------------------------------------
[5] SPECIAL OPTIONS (For More Information--Check Appropriate Box)
--------------------------------------------------------------------------------------------
[_] Prototype IRA Application [_] Automatic Investment Plan [_] Systematic Withdrawal Plan

--------------------------------------------------------------------------------------------
[6] RIGHTS OF ACCUMULATION--CLASS A SHARES (See Prospectus)
--------------------------------------------------------------------------------------------
Indicate here any other account(s) in the group of funds that would qualify
for the cumulative quantity discount as outlined in the Prospectus.

_____________________ ___________ _____________________
Fund Name Account No. Registered Owner

---------------------------------------------------------------------------------------------
[7] PLEASE INDICATE BELOW IF YOU ARE AFFILIATED WITH PAINEWEBBER
---------------------------------------------------------------------------------------------
"Affiliated" persons are defined as officers, directors/trustees and employees of the PaineWebber funds,
PaineWebber or its affiliates, and their parents, spouses and children.

______________________________________________________________________________________
Nature of Relationship

--------------------------------------------------------------------------------------------
[8] SIGNATURE (S) AND TAX CERTIFICATION (S)
--------------------------------------------------------------------------------------------
I warrant that I have full authority and am of legal age to purchase shares of the Fund and have received and read a
current Prospectus of the Fund and agree to its terms. The Fund and its Transfer Agent will not be liable for acting upon
instructions or inquiries believed genuine. Under penalties of perjury, I certify that (1) my taxpayer identification
number provided in this application is correct and (2) I am not subject to backup withholding because (i) I have not been
notified that I am subject to backup withholding as a result of failure to report interest or dividends or (ii) the IRS
has notified me that I am no longer subject to backup withholding (strike out clause (2) if incorrect).

________________________________________ _________________________ _________
Individual (or Custodian) Joint Registrant (if any) Date

________________________________________ _________________________ _________
Corporate Officer, Partner, Trustee, etc. Title Date

--------------------------------------------------------------------------------------------
[9] INVESTMENT EXECUTIVE IDENTIFICATION (To Be Completed By Investment Executive Only)
--------------------------------------------------------------------------------------------

____________________________ ____________________________
Broker No./Name Branch Wire Code

( )
____________________________ ____________________________
Branch Address Telephone

--------------------------------------------------------------------------------------------
[10] CORRESPONDENT FIRM IDENTIFICATION (To Be Completed By Correspondent Firm Only)
--------------------------------------------------------------------------------------------

____________________________ ____________________________
Name Address

____________________________ ____________________________
MAIL COMPLETED FORM TO YOUR PAINEWEBBER INVESTMENT EXECUTIVE
OR CORRESPONDENT FIRM OR TO: PFPC INC., P.O. BOX 8950, WILMINGTON, DELAWARE 19899.
</TABLE>
<PAGE>

Shares of the Funds can be exchanged for shares of the following PaineWebber
Mutual Funds:

PAINEWEBBER INCOME FUNDS

.Global Income Fund
.Low Duration U.S. Government Income Fund
.Strategic Income Fund

PAINEWEBBER TAX-FREE INCOME FUNDS
.California Tax-Free Income Fund
.Municipal High Income Fund
.National Tax-Free Income Fund
.New York Tax-Free Income Fund

PAINEWEBBER GROWTH FUNDS

.Capital Appreciation Fund
.Emerging Markets Equity Fund
.Global Equity Fund
.Growth Fund
.Regional Financial Growth Fund
.Small Cap Growth Fund
.Small Cap Value Fund

PAINEWEBBER GROWTH AND INCOME FUNDS

.Balanced Fund
.Growth and Income Fund
.Tactical Allocation Fund
.Utility Income Fund

PAINEWEBBER MONEY MARKET FUND

----------

A prospectus containing more complete information for any of the above funds,
including charges and expenses, can be obtained from a PaineWebber investment
executive or correspondent firm. Read the prospectus carefully before
investing.

[RECYCLED LOGO APPEARS HERE]
Recycled Paper
PAINEWEBBER

U.S. GOVERNMENT
INCOME FUND
INVESTMENT GRADE
INCOME FUND
HIGH INCOME FUND

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS
OR THEIR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
FUNDS OR THEIR DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.

PROSPECTUS
November 10, 1995

- -----------------------------
<PAGE>

PAINEWEBBER U.S. GOVERNMENT INCOME FUND
PAINEWEBBER INVESTMENT GRADE INCOME FUND
PAINEWEBBER HIGH INCOME FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019

STATEMENT OF ADDITIONAL INFORMATION

The three Funds named above (each a "Fund") are diversified series of
PaineWebber Managed Investments Trust ("Trust"), a professionally managed
mutual fund. PaineWebber U.S. Government Income Fund ("U.S. Government Income
Fund") seeks to provide high current income consistent with the preservation of
capital and liquidity; it invests primarily in U.S. government securities.
PaineWebber Investment Grade Income Fund ("Investment Grade Income Fund") also
seeks to provide high current income consistent with the preservation of
capital and liquidity; it invests primarily in investment grade corporate bonds
and other fixed income securities. PaineWebber High Income Fund ("High Income
Fund") seeks to provide the highest level of current income available without
undue risk; it invests primarily in high risk, high yielding medium and lower
quality corporate bonds. The Funds' investment adviser, administrator and
distributor is Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a
wholly owned subsidiary of PaineWebber Incorporated ("PaineWebber"). As
distributor for the Funds, Mitchell Hutchins has appointed PaineWebber to serve
as exclusive dealer for the sale of Fund shares. This Statement of Additional
Information is not a prospectus and should be read only in conjunction with the
Funds' current Prospectus, dated November 10, 1995. A copy of the Prospectus
may be obtained by calling any PaineWebber investment executive or
correspondent firm, or by calling toll-free 1-800-647-1568. This Statement of
Additional Information is dated November 10, 1995, as revised December 1, 1995.

INVESTMENT POLICIES AND RESTRICTIONS

The following supplements the information contained in the Prospectus
concerning the investment policies and limitations of the Funds.

YIELD FACTORS AND RATINGS. Standard & Poor's, a division of The McGraw Hill
Companies, Inc. ("S&P"), Moody's Investors Service, Inc. ("Moody's") and other
nationally recognized statistical rating organizations ("NRSROs") are private
services that provide ratings of the credit quality of debt obligations. A
description of the ratings assigned to debt obligations by S&P and Moody's is
included in Appendix B to the Prospectus. The process by which S&P and Moody's
determine ratings for mortgage -and asset-backed securities includes
consideration of the likelihood of the receipt by security holders of all
distributions, the nature of the underlying securities, the credit quality of
the guarantor, if any, and the structural, legal and tax aspects associated
with such securities. Not even the highest such ratings represents an
assessment of the likelihood that principal prepayments will be made by
mortgagors or the degree to which such prepayments may differ from that
originally anticipated, nor do such ratings address the possibility that
investors may suffer a lower than anticipated yield or that investors in such
securities may fail to recoup fully their initial investment due to
prepayments.
<PAGE>

A Fund may use these ratings in determining whether to purchase, sell or hold
a security. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. Consequently, debt obligations with the same
maturity, interest rate and rating may have different market prices. Also,
rating agencies may fail to make timely changes in credit ratings in response
to subsequent events so that an issuer's current financial condition may be
better or worse than the rating indicates. The rating assigned to a security by
a NRSRO does not reflect an assessment of the volatility of the security's
market value or of the liquidity of an investment in the security. Subsequent
to its purchase by any Fund, an issue of debt obligations may cease to be rated
or its rating may be reduced below the minimum rating required for purchase by
that Fund.

In addition to ratings assigned to individual bond issues, Mitchell Hutchins
will analyze interest rate trends and developments that may affect individual
issuers, including factors such as liquidity, profitability and asset quality.
The yields on bonds and other debt securities in which the Funds invest are
dependent on a variety of factors, including general money market conditions,
general conditions in the bond market, the financial condition of the issuer,
the size of the offering, the maturity of the obligation and its rating. There
is a wide variation in the quality of bonds, both within a particular
classification and between classifications. An issuer's obligations under its
bonds are subject to the provisions of bankruptcy, insolvency and other laws
affecting the rights and remedies of bond holders or other creditors of an
issuer; litigation or other conditions may also adversely affect the power or
ability of issuers to meet their obligations for the payment of interest and
principal on their bonds.

SPECIAL CHARACTERISTICS OF MORTGAGE- AND ASSET-BACKED SECURITIES

The yield characteristics of mortgage- and asset-backed securities differ
from those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other obligations generally may be prepaid at any time. Prepayments on a
pool of mortgage loans are influenced by a variety of economic, geographic,
social and other factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Similar factors apply to prepayments
on asset-backed securities, but the receivables underlying asset-backed
securities generally are of a shorter maturity and thus are less likely to
experience substantial prepayments. Such securities, however, often provide
that for a specified time period the issuers will replace receivables in the
pool that are repaid with comparable obligations. If the issuer is unable to do
so, repayment of principal on the asset-backed securities may commence at an
earlier date. Mortgage- and asset-backed securities may decrease in value as a
result of increases in interest rates and may benefit less than other fixed-
income securities from declining interest rates because of the risk of
prepayment.

The rate of interest on mortgage-backed securities is lower than the interest
rates paid on the mortgages included in the underlying pool due to the annual
fees paid to the servicer of the mortgage pool for passing through monthly
payments to certificateholders and to any guarantor, and due to any yield
retained by the issuer. Actual yield to the holder may vary from the coupon
rate, even if adjustable, if the mortgage-backed securities are purchased or
traded in the secondary market at a premium or discount. In addition, there is
normally some delay between the time the

2
<PAGE>

issuer receives mortgage payments from the servicer and the time the issuer
makes the payments on the mortgage-backed securities, and this delay reduces
the effective yield to the holder of such securities.

Yields on pass-through securities are typically quoted by investment dealers
and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools
of fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of
a pool of mortgage-related securities. Conversely, in periods of rising
interest rates, the rate of prepayment tends to decrease, thereby lengthening
the actual average life of the pool. However, these effects may not be present,
or may differ in degree, if the mortgage loans in the pools have adjustable
interest rates or other special payment terms, such as a prepayment charge.
Actual prepayment experience may cause the yield of mortgage-backed securities
to differ from the assumed average life yield. Reinvestment of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting the yield of the Fund.

The U.S. Government Income and Investment Grade Income Funds may invest in
adjustable rate mortgage ("ARM") and floating rate mortgage-backed securities.
Because the interest rates on ARM and floating rate mortgage-backed securities
are reset in response to changes in a specified market index, the values of
such securities tend to be less sensitive to interest rate fluctuations than
the values of fixed-rate securities. As a result, during periods of rising
interest rates, ARMs generally do not decrease in value as much as fixed rate
securities. Conversely, during periods of declining rates, ARMs generally do
not increase in value as much as fixed rate securities. ARM mortgage-backed
securities represent a right to receive interest payments at a rate that is
adjusted to reflect the interest earned on a pool of ARMs. ARMs generally
provide that the borrower's mortgage interest rate may not be adjusted above a
specified lifetime maximum rate or, in some cases, below a minimum lifetime
rate. In addition, certain ARMs provide for limitations on the maximum amount
by which the mortgage interest rate may adjust for any single adjustment
period. ARMs also may provide for limitations on changes in the maximum amount
by which the borrower's monthly payment may adjust for any single adjustment
period. In the event that a monthly payment is not sufficient to pay the
interest accruing on the ARM, any such excess interest is added to the mortgage
loan ("negative amortization"), which is repaid through future payments. If the
monthly payment exceeds the sum of the interest accrued at the applicable
mortgage interest rate and the principal payment that would have been necessary
to amortize the outstanding principal balance over the remaining term of the
loan, the excess reduces the principal balance of the ARM. Borrowers under ARMs
experiencing negative amortization may take longer to build up their equity in
the underlying property and may be more likely to default.

3
<PAGE>

Home Loan Bank Cost of Funds index ("COFI"), that tend to lag behind changes in
market interest rates. The values of ARM mortgage-backed securities supported
by ARMs that adjust based on lagging indices tend to be somewhat more sensitive
to interest rate fluctuations than those reflecting current interest rate
levels, although the values of such ARM mortgage-backed securities still tend
to be less sensitive to interest rate fluctuations than fixed-rate securities.

Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. As with ARM
mortgage-backed securities, interest rate adjustments on floating rate
mortgage-backed securities may be based on indices that lag behind market
interest rates. Interest rates on floating rate mortgage-backed securities
generally are adjusted monthly. Floating rate mortgage-backed securities are
subject to lifetime interest rate caps, but they generally are not subject to
limitations on monthly or other periodic changes in interest rates or monthly
payments.

CONVERTIBLE SECURITIES. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Before conversion, convertible securities
have characteristics similar to nonconvertible debt securities in that they
ordinarily provide a stable stream of income with generally higher yields than
those of common stocks of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure but are
usually subordinated to comparable nonconvertible securities. While no
securities investment is without some risk, investments in convertible
securities generally entail less risk than the issuer'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 fixed
income security. Convertible securities have unique investment characteristics
in that they generally (1) have higher yields than common stocks, but lower
yields than comparable nonconvertible securities, (2) are less subject to
fluctuation in value than the underlying stock since they have fixed income
characteristics and (3) provide the potential for capital appreciation if the
market price of the underlying common stock increases.

The value of a convertible security is a function of its "investment value"
(determined by its yield comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
its "conversion value" (the security's worth, at market value, if converted
into the underlying common stock). The investment value of a convertible
security is influenced by changes in interest rates, with investment value
declining as interest rates increase and increasing as interest rates decline.
The credit standing of the issuer and other factors also may have an effect on
the convertible security's investment value. The conversion value of a
convertible security is determined by the market price of the underlying common
stock. If the conversion value is low relative to the investment value, the
price of the convertible security is governed principally by its investment
value and generally the conversion value decreases as the convertible security
approaches maturity. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition,
a convertible security generally will sell at a premium over its

4
<PAGE>

conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding a fixed income
security.

Investment Grade Income Fund has no current intention of converting any
convertible securities it may own into equity or holding them as equity upon
conversion, although it may do so for temporary purposes. A convertible
security may be subject to redemption at the option of the issuer at a price
established in the convertible security's governing instrument. If a
convertible security held by the Fund is called for redemption, the Fund will
be required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party.

ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which a Fund has valued the
securities and includes, among other things, purchased over-the-counter ("OTC")
options, repurchase agreements maturing in more than seven days and restricted
securities other than those Mitchell Hutchins has determined are liquid
pursuant to guidelines established by the Trust's board of trustees. The assets
used as cover for OTC options written by a Fund will be considered illiquid
unless the OTC options are sold to qualified dealers who agree that the Fund
may repurchase any OTC option it writes at a maximum price to be calculated by
a formula set forth in the option agreement. The cover for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option. Illiquid restricted securities may be sold only
in privately negotiated transactions or in public offerings with respect to
which a registration statement is in effect under the Securities Act of 1933
("1933 Act"). Where registration is required, a Fund may be obligated to pay
all or part of the registration expenses and a considerable period may elapse
between the time of the decision to sell and the time the Fund may be permitted
to sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.

Not all restricted securities are illiquid. In recent years a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and notes.
These instruments are often restricted securities because the securities are
sold in transactions not requiring registration. Institutional investors
generally will not seek to sell these instruments to the general public, but
instead will often depend either on an efficient institutional market in which
such unregistered securities can be readily resold or on an issuer's ability to
honor a demand for repayment. Therefore, the fact that there are contractual or
legal restrictions on resale to the general public or certain institutions is
not dispositive of the liquidity of such investments.

Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
have developed as a result of Rule 144A, providing both readily ascertainable
values for restricted securities and the ability to liquidate an investment to
satisfy share redemption orders. Such markets include automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc. An insufficient number of qualified
institutional buyers interested in purchasing Rule 144A-eligible restricted
securities held by a Fund,

5
<PAGE>

however, could affect adversely the marketability of such portfolio securities,
and a Fund might be unable to dispose of such securities promptly or at
favorable prices.

The Trust's board of trustees has delegated the function of making day-to-day
determinations of liquidity to Mitchell Hutchins, pursuant to guidelines
approved by the board. Mitchell Hutchins takes into account a number of factors
in reaching liquidity decisions, including but not limited to (1) the frequency
of trades for the security, (2) the number of dealers that make quotes for the
security, (3) the number of dealers that have undertaken to make a market in
the security, (4) the number of other potential purchasers and (5) the nature
of the security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). Mitchell
Hutchins monitors the liquidity of restricted securities in each Fund's
portfolio and reports periodically on such decisions to the board of trustees.

REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a Fund
purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to
the coupon rate or maturity of the purchased securities. A Fund maintains
custody of the underlying securities prior to their repurchase; thus, the
obligation of the bank or dealer to pay the repurchase price on the date agreed
to is, in effect, secured by such securities. If the value of these securities
is less than the repurchase price, plus any agreed-upon additional amount, the
other party to the agreement must provide additional collateral so that at all
times the collateral is at least equal to the repurchase price, plus any
agreed-upon additional amount. The difference between the total amount to be
received upon repurchase of the securities and the price that was paid by a
Fund upon their acquisition is accrued as interest and included in the Fund's
net investment income.

Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to a Fund if the other party to
a repurchase agreement becomes insolvent. Each Fund intends to enter into
repurchase agreements only with banks and dealers in transactions believed by
Mitchell Hutchins to present minimum credit risks in accordance with guidelines
established by the Trust's board of trustees. Mitchell Hutchins reviews and
monitors the creditworthiness of those institutions under the board's general
supervision.

REVERSE REPURCHASE AGREEMENTS. Investment Grade Income Fund and High Income
Fund each may enter into reverse repurchase agreements with banks and
securities dealers up to an aggregate value of not more than 10% of its total
assets. Such agreements involve the sale of securities held by the Fund subject
to the Fund's agreement to repurchase the securities at an agreed-upon date and
price reflecting a market rate of interest. Such agreements are considered to
be borrowings and may be entered into only for temporary or emergency purposes.
While a reverse repurchase agreement is outstanding, a Fund's custodian
segregates assets to cover the amount of the Fund's obligations under the
reverse repurchase agreement. See "Investment Policies and Restrictions--
Segregated Accounts."

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. As stated in the Prospectus,
each Fund may purchase securities on a "when-issued" or delayed delivery basis.
A security purchased on a when-issued or delayed delivery basis is recorded as
an asset on the commitment date and is subject to changes in market value
generally based upon changes in the level of interest rates. Thus, fluctuation
in the value of the security from the time of the commitment date will affect a
Fund's

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<PAGE>

net asset value. When a Fund agrees to purchase securities on a when-issued
basis, its custodian segregates assets to cover the amount of the commitment.
See "Investment Policies and Restrictions--Segregated Accounts." The Funds
purchase when-issued securities only with the intention of taking delivery, but
may sell the right to acquire the security prior to delivery if Mitchell
Hutchins deems it advantageous to do so, which may result in capital gain or
loss to a Fund.

FOREIGN SECURITIES. Investment Grade Income Fund may invest up to 10% of its
net assets in U.S. dollar-denominated securities of foreign issuers or foreign
branches of U.S. banks that are traded in the U.S. securities markets, or in
U.S. dollar-denominated securities the value of which is linked to the value of
foreign currencies. High Income Fund may invest up to 25% of its net assets in
securities of foreign issuers, with no more than 10% of its net assets in
securities of foreign issuers that are denominated and traded in currencies
other than the U.S. dollar. An investment in these Funds may involve risks
relating to political, social and economic developments abroad as well as risks
resulting from the differences between the regulations to which U.S. and
foreign issuers and markets are subject. These risks include expropriation,
confiscatory taxation, withholding taxes, political or social instability or
diplomatic developments. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource self-
sufficiency and balance of payments positions. To the extent these Funds invest
in foreign securities, the securities may not be registered with the Securities
and Exchange Commission ("SEC"), nor the issuers thereof subject to its
reporting requirements. Accordingly, there may be less publicly available
information concerning foreign issuers of securities held by these Funds than
is available concerning U.S. companies. Foreign companies are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory requirements comparable to those applicable to U.S. companies.
Securities of many foreign companies may be less liquid and their prices more
volatile than those of securities of comparable U.S. companies. Transactions in
foreign securities may be subject to less efficient settlement practices. Legal
remedies for defaults and disputes may have to be pursued in foreign courts,
whose procedures differ substantially from those of U.S. courts. Foreign
securities trading practices, including those involving securities settlement
where High Income Fund assets may be released prior to receipt of payment, may
expose that Fund to increased risk in the event of a failed trade or the
insolvency of a foreign broker-dealer.

If the value of a foreign currency rises against the value of the U.S.
dollar, the value of Fund assets denominated in that currency or linked to that
currency will increase; correspondingly, if the value of a foreign currency
declines against the value of the U.S. dollar, the value of Fund assets
denominated in that currency or linked to that currency will decrease. The
exchange rates between the U.S. dollar and other currencies are determined by
supply and demand in the currency exchange markets, international balances of
payments, governmental intervention, speculation and other economic and
political conditions.

The costs attributable to foreign investing borne by High Income Fund
frequently are higher than those attributable to domestic investing. For
example, the cost of maintaining custody of foreign securities exceeds
custodian costs for domestic securities, and transaction and settlement costs
of foreign investing also frequently are higher than those attributable to
domestic investing. Costs associated with the exchange of currencies also make
foreign investing more expensive than domestic investing. Investment income on
certain foreign securities in which the Fund may invest

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<PAGE>

may be subject to foreign withholding or other government taxes that could
reduce the return of these securities. Tax treaties between the United States
and foreign countries, however, may reduce or eliminate the amount of foreign
tax to which the Fund would be subject.

LENDING OF PORTFOLIO SECURITIES. As indicated in the Prospectus, each Fund is
authorized to lend up to 10% of the total value of its portfolio securities to
broker-dealers or institutional investors that Mitchell Hutchins deems
qualified, but only when the borrower maintains with the Fund's custodian
collateral either in cash or money market instruments, marked to market daily,
in an amount at least equal to the market value of the securities loaned, plus
accrued interest and dividends. In determining whether to lend securities to a
particular broker-dealer or institutional investor, Mitchell Hutchins will
consider, and during the period of the loan will monitor, all relevant facts
and circumstances, including the creditworthiness of the borrower. Each Fund
will retain authority to terminate any loans at any time. A Fund may pay
reasonable administrative and custodial fees in connection with a loan and may
pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. A Fund will
receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest or other distributions on the
securities loaned. A Fund will regain record ownership of loaned securities to
exercise beneficial rights, such as voting and subscription rights and rights
to dividends, interest or other distributions, when regaining such rights is
considered to be in the Fund's interest.

LOAN PARTICIPATIONS AND ASSIGNMENTS. Although they have no intention of doing
so during the coming year, Investment Grade Income Fund and High Income Fund
each may invest up to 5% of its total assets in secured or unsecured fixed or
floating rate loans ("Loans") arranged through private negotiations between a
borrowing corporation and one or more financial institutions ("Lenders"). The
Funds' investments in Loans are expected in most instances to be in the form of
participations ("Participations") in Loans and assignments ("Assignments") of
all or a portion of Loans from third parties. Participations typically will
result in a Fund's having a contractual relationship only with the Lender, not
with the borrower. A Fund will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by the Lender of the payments from the
borrower. In connection with purchasing Participations, the Funds generally
have no direct right to enforce compliance by the borrower with the terms of
the loan agreement relating to the Loan, nor any rights of set-off against the
borrower, and the Funds may not directly benefit from any collateral supporting
the Loan in which they have purchased the Participation. As a result, the Funds
will assume the credit risk of both the borrower and the Lender that is selling
the Participation. In the event of the insolvency of the Lender selling a
Participation, a Fund may be treated as a general creditor of the Lender and
may not benefit from any set-off between the Lender and the borrower. The Funds
will acquire Participations only if the Lender interpositioned between the Fund
and the borrower is determined by Mitchell Hutchins to be creditworthy.

When a Fund purchases Assignments from Lenders, it acquires direct rights
against the borrower on the Loan. However, since Assignments are arranged
through private negotiations between potential assignees and assignors, the
rights and obligations acquired by a Fund as the purchaser of an Assignment may
differ from, and be more limited than, those held by the assigning Lender.

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<PAGE>

Assignments and Participations are generally not registered under the 1933
Act and thus are subject to each Fund's limitation on investment in illiquid
securities to 10% of its net assets. Because there is no liquid market for such
securities, the Funds anticipate that such securities could be sold only to a
limited number of institutional investors. The lack of a liquid secondary
market will have an adverse impact on the value of such securities and on the
Funds' ability to dispose of particular Assignments or Participations when
necessary to meet the Funds' liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the
borrower.

SEGREGATED ACCOUNTS. When a Fund enters into certain transactions that
involve obligations to make future payments to third parties, including dollar
rolls, reverse repurchase agreements or the purchase of securities on a when-
issued or delayed delivery basis, the Fund will maintain with an approved
custodian in a segregated account cash, U.S. government securities or other
liquid high-grade debt securities, marked to market daily, in an amount at
least equal to the Fund's obligation or commitment under such transactions. As
described below under "Hedging and Related Income Strategies," segregated
accounts may also be required in connection with certain transactions involving
options or futures contracts, interest rate protection transactions or forward
currency contracts.

INVESTMENT LIMITATIONS. U.S. Government Income Fund may not (1) purchase the
securities of any issuer if as a result more than 5% of the total assets of the
Fund would be invested in the securities of that issuer; provided that
securities issued or guaranteed by the U.S. government, its agencies and
instrumentalities are not subject to this limitation and further provided that
up to 25% of the value of the Fund's assets may be invested without regard to
this limitation; (2) issue senior securities or borrow money, except from banks
or through reverse repurchase agreements and dollar rolls, and then in an
aggregate amount not in excess of 33 1/3% of the Fund's total assets (including
the amount of the borrowings and senior securities issued but reduced by any
liabilities not constituting senior securities) at the time of such borrowings,
except that the Fund may borrow up to an additional 5% of its total assets (not
including the amount borrowed) for temporary or emergency purposes; (3)
purchase securities if, as a result of the purchase, the Fund would have more
than 25% of the value of its total assets invested in securities of issuers in
any one industry, except that this limitation does not apply to (a) obligations
issued or guaranteed by the U.S. government, its agencies and instrumentalities
and (b) investments in mortgage-backed and asset-backed securities, which
(whether or not issued or guaranteed by an agency or instrumentality of the
U.S. government) shall be considered a single industry for purposes of this
limitation; (4) underwrite securities of other issuers, except to the extent
that, in connection with the disposition of portfolio securities, the Fund may
be deemed an underwriter under federal securities laws; (5) purchase or sell
real estate, except that investments in Government National Mortgage
Association ("Ginnie Mae") certificates and other debt securities secured by
real estate or real estate interests are not subject to this limitation; (6)
purchase securities on margin, make short sales of securities or maintain a
short position in any security, except that the Fund may (a) make margin
deposits, make short sales and maintain short positions in connection with its
use of options, futures contracts and options on futures contracts, and (b)
sell short "against the box"; (7) purchase or sell commodities or commodity
contracts, except that the Fund may purchase or sell interest rate futures
contracts and options thereon; (8) invest in oil, gas or mineral exploration or
development programs, except that the Fund may invest in issuers which invest
in such programs; (9) purchase securities of other open-end investment
companies, except in connection with a merger, consolidation or acquisition;
(10)

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<PAGE>

make loans, except through repurchase agreements and except in connection with
the loan of securities as described herein; provided that for purposes of this
restriction the acquisition of bonds or other debt obligations shall not be
deemed to be the making of a loan; or (11) hold more than 10% of the
outstanding voting securities of any issuer.

Investment Grade Income Fund and High Income Fund each may not (1) purchase
the securities of any issuer if as a result more than 5% of the total assets of
the Fund would be invested in the securities of that issuer; provided that
securities issued or guaranteed by the U.S. government, its agencies and
instrumentalities are not subject to this limitation and further provided that
up to 25% of the value of the Fund's assets may be invested without regard to
this limitation; (2) issue senior securities or borrow money, except from banks
or through reverse repurchase agreements for temporary or emergency purposes,
and then in an aggregate amount not in excess of 10% of the Fund's total assets
at the time of such borrowings; provided that a Fund will not purchase
securities while borrowings (including reverse repurchase agreements) in excess
of 5% of its total assets are outstanding; (3) purchase securities if, as a
result of the purchase, the Fund would have more than 25% of the value of its
total assets invested in securities of issuers in any one industry, except that
this limitation does not apply to obligations issued or guaranteed by the U.S.
government, its agencies and instrumentalities; (4) underwrite securities of
other issuers, except to the extent that, in connection with the disposition of
portfolio securities, the Fund may be deemed an underwriter under federal
securities laws; (5) purchase or sell real estate, except that investments in
Ginnie Mae certificates and other debt securities secured by real estate or
real estate interests are not subject to this limitation; (6) purchase
securities on margin, make short sales of securities or maintain a short
position in any security, except that a Fund may (a) make margin deposits, make
short sales and maintain short positions in connection with its use of options,
futures contracts and options on futures contracts and (b) sell short "against
the box"; (7) purchase or sell commodities or commodity contracts, except that
a Fund may purchase or sell interest rate futures contracts and options
thereon; (8) invest in oil, gas or mineral exploration or development programs,
except that a Fund may invest in issuers which invest in such programs; (9)
purchase securities of other open-end investment companies, except in
connection with a merger, consolidation or acquisition; (10) make loans, except
through repurchase agreements and except in connection with the loan of
securities as described herein; provided that for purposes of this restriction
the acquisition of bonds or other debt obligations shall not be deemed to be
the making of a loan; or (11) hold more than 10% of the outstanding voting
securities of any issuer.

The foregoing fundamental investment limitations cannot be changed for any
Fund without the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Fund or (2) 67% or more of the shares of the Fund
present at a shareholders' meeting if more than 50% of the outstanding shares
are represented at the meeting in person or by proxy.

The following investment restrictions may be changed for any Fund by the vote
of the Trust's board of trustees without shareholder approval: (1) no Fund may
purchase any security if as a result more than 5% of the value of the Fund's
total assets would be invested in securities of companies that together with
any predecessors have been in continuous operation for less than three years;
(2) no Fund may invest more than 10% of its net assets in illiquid securities,
a term that 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 and includes, among other

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<PAGE>

things, repurchase agreements maturing in more than seven days; (3) no Fund may
make investments in warrants, if such investments, valued at the lower of cost
or market, exceed 5% of the value of its net assets, which amount may include
warrants that are not listed on the New York Stock Exchange, Inc. ("NYSE") or
the American Stock Exchange, Inc., provided that such unlisted warrants, valued
at the lower of cost or market, do not exceed 2% of the Fund's net assets, and
further provided that this restriction does not apply to warrants attached to,
or sold as a unit with, other securities; and (4) neither U.S. Government
Income Fund nor Investment Grade Income Fund will invest more than 35% of its
total assets in debt securities rated Ba or lower by Moody's or BB or lower by
S&P, comparably rated by another NRSRO or determined by Mitchell Hutchins to be
of comparable quality. This non-fundamental policy (4) can be changed only upon
30 days' advance notice to shareholders.

If a percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or the amount of total assets will not be considered a
violation of any of the Funds' investment limitations or restrictions or of a
Fund's investment policies.

The Funds will continue to interpret fundamental investment limitation (5) to
prohibit investment in real estate limited partnerships. The Funds will
continue to interpret fundamental investment limitation (8) to prohibit
investment in oil, gas or mineral leases.

HEDGING AND RELATED INCOME STRATEGIES

GENERAL DESCRIPTION OF HEDGING STRATEGIES. As discussed in the Prospectus,
Mitchell Hutchins may use a variety of financial instruments ("Hedging
Instruments"), including certain options, futures contracts (sometimes referred
to as "futures") and options on futures contracts to attempt to hedge a Fund's
portfolio and to enhance income. Mitchell Hutchins also may attempt to hedge a
Fund's portfolio through the use of interest rate protection transactions, and
High Income Fund may use forward currency contracts for hedging purposes. The
particular Hedging Instruments used by the Funds are described in Appendix C to
the Prospectus.

Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Hedging Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in a Fund's portfolio. Thus, in a short hedge a Fund takes a
position in a Hedging Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged. For example, a
Fund might purchase a put option on a security to hedge against a potential
decline in the value of that security. If the price of the security declined
below the exercise price of the put, the Fund could exercise that put and thus
limit its loss below the exercise price to the premium paid plus transaction
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, the Fund might be
able to close out the put option and realize a gain to offset the decline in
the value of the security.

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<PAGE>

price is expected to move in the same direction as the price of the prospective
investment being hedged. For example, a Fund might purchase a call option on a
security it intends to purchase in order to hedge against an increase in the
cost of the security. If the price of the security increased above the exercise
price of the call, the Fund could exercise the call and thus limit its
acquisition cost to the exercise price plus the premium paid and transaction
costs. Alternatively, the Fund might be able to offset the price increase by
closing out an appreciated call option and realizing a gain.

Each Fund may purchase and write (sell) covered straddles on securities or
indices of debt securities. A long straddle is a combination of a call and a
put option purchased on the same security or on the same futures contract,
where the exercise price of the put is less than or equal to the exercise price
of the call. A Fund might enter into a long straddle when Mitchell Hutchins
believes it likely that interest rates will be more volatile during the term of
the option than the option pricing implies. A short straddle is a combination
of a call and a put written on the same security where the exercise price of
the put is less than or equal to the exercise price of the call. A Fund might
enter into a short straddle when Mitchell Hutchins believes it unlikely that
interest rates will be as volatile during the term of the option as the option
pricing implies.

Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that a Fund owns or
intends to acquire. Hedging Instruments on debt securities may be used to hedge
either individual securities or broad fixed income market sectors.

The use of Hedging Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded, the
Commodity Futures Trading Commission ("CFTC") and various state regulatory
authorities. In addition, a Fund's ability to use Hedging Instruments will be
limited by tax considerations. See "Taxes."

In addition to the products, strategies and risks described below and in the
Prospectus, Mitchell Hutchins expects to discover additional opportunities in
connection with options, futures contracts and other hedging techniques. These
new opportunities may become available as Mitchell Hutchins develops new
techniques, as regulatory authorities broaden the range of permitted
transactions and as new options, futures contracts or other techniques are
developed. Mitchell Hutchins may utilize these opportunities to the extent that
they are consistent with the Funds' investment objectives and permitted by the
Funds' investment limitations and applicable regulatory authorities. The Funds'
Prospectus or Statement of Additional Information will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.

SPECIAL RISKS OF HEDGING STRATEGIES. The use of Hedging Instruments involves
special considerations and risks, as described below. Risks pertaining to
particular Hedging Instruments are described in the sections that follow:

(1) Successful use of most Hedging Instruments depends upon Mitchell
Hutchins' ability to predict movements of the overall securities and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. While Mitchell Hutchins is experienced in the
use of Hedging Instruments, there can be no assurance that any particular
hedging strategy adopted will succeed.

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<PAGE>

(2) There might be imperfect correlation, or even no correlation, between
price movements of a Hedging Instrument and price movements of the investments
being hedged. For example, if the value of a Hedging Instrument used in a short
hedge increased by less than the decline in value of the hedged investment, the
hedge would not be fully successful. Such a lack of correlation might occur due
to factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which Hedging Instruments are
traded.

(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Fund entered into a
short hedge because Mitchell Hutchins projected a decline in the price of a
security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Hedging Instrument. Moreover, if the price of the
Hedging Instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would
have been in a better position had it not hedged at all.

(4) As described below, a Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If a Fund were unable to
close out its positions in such Hedging Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. These requirements might impair a Fund's ability
to sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that a Fund sell a portfolio
security at a disadvantageous time. A Fund's ability to close out a position in
a Hedging Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of a contra party to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to the Fund.

COVER FOR HEDGING STRATEGIES. Transactions using Hedging Instruments, other
than purchased options, expose a Fund to an obligation to another party. A Fund
will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities, currencies (for High Income
Fund) or other options, futures contracts or (for High Income Fund) forward
currency contracts or (2) cash, receivables and short-term liquid debt
securities, with a value sufficient at all times to cover its potential
obligations to the extent not covered as provided in (1) above. Each Fund will
comply with SEC guidelines regarding cover for hedging transactions and will,
if the guidelines so require, set aside cash, U.S. government securities or
other liquid, high-grade debt securities in a segregated account with its
custodian in the prescribed amount.

Assets used as cover or held in a segregated account cannot be sold while the
position in the corresponding Hedging Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
a Fund's assets to cover or segregated accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.

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<PAGE>

OPTIONS. The Funds may purchase put and call options, and write (sell)
covered put and call options, on debt securities and (for High Income Fund)
foreign currencies. The purchase of call options serves as a long hedge, and
the purchase of put options serves as a short hedge. Writing covered put or
call options can enable a Fund to enhance income by reason of the premiums paid
by the purchasers of such options. In addition, writing covered put options
serves as a limited long hedge, because increases in the value of the hedged
investment would be offset to the extent of the premium received for writing
the option. However, if the market price of the security underlying a covered
put option declines to less than the exercise price of the option, minus the
premium received, the Fund would expect to suffer a loss. Writing covered call
options serves as a limited short hedge, because declines in the value of the
hedged investment would be offset to the extent of the premium received for
writing the option. However, if the security or currency appreciates to a price
higher than the exercise price of the call option, it can be expected that the
option will be exercised and the Fund will be obligated to sell the security or
currency at less than its market value. The securities or other assets used as
cover for OTC options written by a Fund would be considered illiquid to the
extent described under "Investment Policies and Restrictions--Illiquid
Securities."

The value of an option position will reflect, among other things, the current
market value of the underlying investment, the time remaining until expiration,
the relationship of the exercise price to the market price of the underlying
investment, the historical price volatility of the underlying investment and
general market conditions. Options normally have expiration dates of up to nine
months. Generally, OTC options on debt securities 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. Options
that expire unexercised have no value.

A Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a
closing sale transaction. Closing transactions permit a Fund to realize profits
or limit losses on an option position prior to its exercise or expiration.

The Funds may purchase or write both exchange-traded and OTC options.
Exchange markets for options on debt securities and foreign currencies exist
but are relatively new, and these instruments are primarily traded on the OTC
market. Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction.
In contrast, OTC options are contracts between the Fund and its contra party
(usually a securities dealer or a bank) with no clearing organization
guarantee. Thus, when the Fund purchases or writes an OTC option, it relies on
the contra party to make or take delivery of the underlying investment upon
exercise of the option. Failure by the contra party 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. A Fund will enter into OTC option transactions only
with contra parties that have a net worth of at least $20 million.

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<PAGE>

A Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. Each Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although a Fund
will enter into OTC options only with contra parties that are expected to be
capable of entering into closing transactions with the Fund, there is 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 contra party, the Fund might be unable to close out an OTC option
position at any time prior to its expiration.

If a Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call
option written by a Fund could cause material losses because the Fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.

A Fund may purchase and write put and call options on indices of debt
securities in much the same manner as the more traditional options discussed
above, except the index options may serve as a hedge against overall
fluctuations in the debt securities market (or market sectors) rather than
anticipated increases or decreases in the value of a particular security.

GUIDELINES FOR OPTIONS. Each Fund's use of options is governed by the
following guidelines, which can be changed by the Trust's board of trustees
without shareholder vote:

1. A Fund may purchase a put or call option, including any straddles or
spreads, only if the value of its premium, when aggregated with the premiums on
all other options purchased by the Fund, does not exceed 5% of the Fund's total
assets.

2. The aggregate value of securities underlying put options written by any
Fund determined as of the date the put options are written, will not exceed 50%
of the Fund's net assets.

3. The aggregate premiums paid on all options (including options on
securities, foreign currencies and indices of debt securities and options on
futures contracts) purchased by the Fund that are held at any time will not
exceed 20% of the Fund's net assets.

FUTURES. The Funds may purchase and sell interest rate futures contracts and
purchase put and call options, and write covered put and call options, on such
futures contracts. The purchase of futures or call options thereon can serve as
a long hedge, and the sale of futures or the purchase of put options thereon
can serve as a short hedge. Writing covered call options on futures contracts
can serve as a limited short hedge, and writing covered put options on futures
contracts can serve as a limited long hedge, using a strategy similar to that
used for writing covered call options on securities or indices.

Futures strategies also can be used to manage the average duration of a
Fund's portfolio. If Mitchell Hutchins wishes to shorten the average duration
of a Fund, the Fund may sell an interest rate futures contract or a call option
thereon, or purchase a put option on that futures contract. If Mitchell
Hutchins wishes to lengthen the average duration of a Fund, the Fund may buy an
interest rate futures contract or a call option thereon or sell a put option
thereon.

15
<PAGE>

Each Fund may also write put options on interest rate futures contracts while
at the same time purchasing call options on the same futures contracts in order
synthetically to create a long futures contract position. Such options would
have the same strike prices and expiration dates. A Fund will engage in this
strategy only when it is more advantageous to the Fund than is purchasing the
futures contract.

No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash, U.S. government
securities or other liquid, high-grade debt securities, in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call option on a futures contract, in accordance with applicable
exchange rules. Unlike margin in securities transactions, initial margin on
futures contracts does not represent a borrowing, but rather is in the nature
of a performance bond or good-faith deposit that is returned to the Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, the
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.

Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of a Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Fund purchases or
sells a futures contract or writes a put or call option thereon, it is subject
to daily variation margin calls that could be substantial in the event of
adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.

Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
Each Fund intends to enter into futures transactions only on exchanges or
boards of trade where there appears to be a liquid, secondary market. However,
there can be no assurance that such a market will exist for a particular
contract at a particular time.

Under certain circumstances, futures exchanges may establish daily limits on
the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.

If a Fund were unable to liquidate a futures or options position due to the
absence of a liquid secondary market or the imposition of price limits, it
could incur substantial losses. The Fund would continue to be subject to market
risk with respect to the position. In addition, except in the case of purchased
options, the Fund would continue to be required to make daily variation margin
payments and might be required to maintain the position being hedged by the
future or option or to maintain cash or securities in a segregated account.

16
<PAGE>

Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options
markets are subject to daily variation margin calls and might be compelled to
liquidate futures or related options positions whose prices are moving
unfavorably to avoid being subject to further calls. These liquidations could
increase price volatility of the instruments and distort the normal price
relationship between the futures or options and the investments being hedged.
Also, because initial margin deposit requirements in the futures market are
less onerous than margin requirements in the securities markets, there might be
increased participation by speculators in the futures markets. This
participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.

GUIDELINES FOR FUTURES AND RELATED OPTIONS. Each Fund's use of futures and
related options is governed by the following guidelines which can be changed by
the Trust's board of trustees without shareholder vote:

1. To the extent a Fund enters into futures contracts and options on futures
positions including, for High Income Fund, options on foreign currencies traded
on a commodities exchange that are not for bona fide hedging purposes (as
defined by the CFTC), the aggregate initial margin and premiums on those
positions (excluding the amount by which options are "in-the-money") may not
exceed 5% of the Fund's net assets.

2. The aggregate premiums paid on all options (including options on
securities, foreign currencies and indices of debt securities and options on
futures contracts) purchased by a Fund that are held at any time will not
exceed 20% of the Fund's net assets.

3. The aggregate margin deposits on all futures contracts and options thereon
held at any time by the Fund will not exceed 5% of the Fund's total assets.

FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. High Income Fund
may use options on foreign currencies, as described above, and forward currency
contracts, as described below, to hedge against movements in the values of the
foreign currencies in which that Fund's securities are denominated. Such
currency hedges can protect against price movements in a security High Income
Fund owns or intends to acquire that are attributable to changes in the value
of the currency in which it is denominated. Such hedges do not, however,
protect against price movements in the securities that are attributable to
other causes.

High Income Fund might seek to hedge against changes in the value of a
particular currency when no Hedging Instruments on that currency are available
or such Hedging Instruments are more expensive than certain other Hedging
Instruments. In such cases, High Income Fund may hedge against price movements
in that currency by entering into transactions using Hedging Instruments on
another currency or a basket of currencies, the value of which Mitchell
Hutchins believes will have a positive correlation to the value of the currency
being hedged. The risk that movements in the price of the Hedging Instrument
will not correlate perfectly with movements in the price of the currency being
hedged is magnified when this strategy is used.

17
<PAGE>

The value of Hedging Instruments on foreign currencies depends on the value
of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Hedging
Instruments, High Income Fund could be disadvantaged by having to deal in the
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than
for round lots.

There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain open,
significant price and rate movements might take place in the underlying markets
that cannot be reflected in the markets for the Hedging Instruments until they
reopen.

Settlement of hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency.
Thus, High Income Fund might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
might be required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.

FORWARD CURRENCY CONTRACTS. High Income Fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. Such transactions may serve as long
hedges--for example, High Income Fund may purchase a forward currency contract
to lock in the U.S. dollar price of a security denominated in a foreign
currency that the Fund intends to acquire. Forward currency transactions may
also serve as short hedges--for example, High Income Fund may sell a forward
currency contract to lock in the U.S. dollar equivalent of the proceeds from
the anticipated sale of a security denominated in a foreign currency.

As noted above, High Income Fund also may seek to hedge against changes in
the value of a particular currency by using forward contracts on another
foreign currency or a basket of currencies, the value of which Mitchell
Hutchins believes will have a positive correlation to the value of the currency
being hedged. In addition, the Fund may use forward currency contracts to shift
its exposure to foreign currency fluctuations from one country to another. For
example, if the Fund owned securities denominated in a foreign currency and
Mitchell Hutchins believed that currency would decline relative to another
currency, it might enter into a forward contract to sell an appropriate amount
of the first foreign currency, with payment to be made in the second foreign
currency. Transactions that use two foreign currencies are sometimes referred
to as "cross hedging." Use of a different foreign currency magnifies the risk
that movements in the price of the Hedging Instrument will not correlate or
will correlate unfavorably with the foreign currency being hedged.

18
<PAGE>

The cost to High Income 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 contra party to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the contra party to do so would result in
the loss of any expected benefit of the transaction.

As is the case with futures contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. 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 contra party. 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 contra party, the Fund might be unable to close out a forward currency
contract at any time prior to maturity. 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 the securities or currencies
that are the subject of the hedge or to maintain cash or securities 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, High Income Fund might
need to purchase or sell foreign currencies in the spot (cash) market to the
extent such foreign currencies are not covered by forward 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.

LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS. High Income Fund may
enter into forward currency contracts or maintain a net exposure to such
contracts only if (1) the consummation of the contracts would not obligate the
Fund to deliver an amount of foreign currency in excess of the value of the
position being hedged by such contracts or (2) the Fund maintains appropriate
assets in a segregated account in an amount not less than the value of its
total assets committed to the consummation of the contract and not covered as
provided in (1) above, as marked to market daily.

INTEREST RATE PROTECTION TRANSACTIONS

The Funds may enter into interest rate protection transactions, including
interest rate swaps and interest rate caps, collars and floors. Interest rate
swap transactions involve an agreement between two parties to exchange payments
that are based, respectively, on variable and fixed rates of interest and that
are calculated on the basis of a specified amount of principal (the "notional
principal amount") for a specified period of time. Interest rate cap and floor
transactions involve an agreement between two parties in which the first party
agrees to make payments to the counterparty when a designated market interest
rate goes above (in the case of a cap) or below (in the case of a floor) a
designated level on predetermined dates or during a specified time period.

19
<PAGE>

Interest rate collar transactions involve an agreement between two parties in
which payments are made when a designated market interest rate either goes
above a designated ceiling level or goes below a designated floor on
predetermined dates or during a specified time period. The Funds intend to use
these transactions as a hedge and not as a speculative investment. Interest
rate protection transactions are subject to risks comparable to those described
above with respect to other hedging strategies.

The Funds may enter into interest rate swaps, caps, collars and floors on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest
rate swaps on a net basis, i.e., the two payment streams are netted out, with
the Fund receiving or paying, as the case may be, only the net amount of the
two payments. Inasmuch as these interest rate protection transactions are
entered into for good faith hedging purposes, and inasmuch as segregated
accounts will be established with respect to such transactions, Mitchell
Hutchins and the Funds believe such obligations do not constitute senior
securities and, accordingly, will not treat them as being subject to its
borrowing restrictions. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and appropriate Fund assets having an aggregate net
asset value at least equal to the accrued excess will be maintained in a
segregated account, as described above in "Investment Policies and
Restrictions--Segregated Accounts." The Funds also will establish and maintain
such segregated accounts with respect to its total obligations under any
interest rate swaps that are not entered into on a net basis and with respect
to any interest rate caps, collars and floors that are written by the Funds.

The Funds will enter into interest rate protection transactions only with
banks and recognized securities dealers believed by Mitchell Hutchins to
present minimal credit risks in accordance with guidelines established by the
Trust's board of trustees. If there is a default by the other party to such a
transaction, a Fund will have to rely on its contractual remedies (which may be
limited by bankruptcy, insolvency or similar laws) pursuant to the agreements
related to the transaction.

The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. Caps, collars and floors are more
recent innovations for which documentation is less standardized, and
accordingly, they are less liquid than swaps.

20
<PAGE>

TRUSTEES AND OFFICERS

The trustees and executive officers of the Trust, their ages, business
addresses and principal occupations during the past five years are:

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
---------------------- ------------------- --------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.; Trustee and Mr. Bewkes is a director and a consul-
69** Chairman of the tant to Paine Webber Group Inc. ("PW
Board of Trustees Group") (holding company of
PaineWebber and Mitchell Hutchins).
Prior to 1988, he was chairman of the
board, president and chief executive
officer of American Bakeries Company.
Mr. Bewkes is also a director of In-
terstate Bakeries Corporation, NaPro
BioTherapeutics, Inc. and a director
or trustee of 24 other investment com-
panies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Meyer Feldberg; 53 Trustee Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of
101 Uris Hall Business, Columbia University. Prior
New York, New York 10027 to 1989, he was president of the Illi-
nois Institute of Technology. Dean
Feldberg is also a director of AMSCO
International Inc., Federated Depart-
ment Stores, Inc., and New World Com-
munications Group Incorporated and a
director or trustee
of 16 other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
George W. Gowen; 66 Trustee Mr. Gowen is a partner in the law firm
666 Third Avenue of Dunnington, Bartholow & Miller.
New York, New York 10017 Prior to May 1994, he was a partner in
the law firm of Fryer, Ross & Gowen.
Mr. Gowen is also a director of Colum-
bia Real Estate Investments, Inc. and
a director or trustee of 14 other in-
vestment companies for which Mitchell
Hutchins
or PaineWebber serves as investment
adviser.
</TABLE>

21
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
---------------------- ------------------- --------------------
<S> <C> <C>
Frederic V. Malek; 58 Trustee Mr. Malek is chairman of Thayer Capital
901 15th Street, N.W. Partners (investment bank) and a co-
Suite 300 chairman and director of CB Commercial
Washington, D.C. 20005 Group Inc. (real estate). From January
1992 to November 1992, he was campaign
manager of Bush-Quayle '92. From 1990
to 1992, he was vice chairman and,
from 1989 to 1990, he was president of
Northwest Airlines Inc., NWA Inc.
(holding company of Northwest Airlines
Inc.) and Wings Holdings Inc. (holding
company of NWA Inc.). Prior to 1989,
he was employed by the Marriott Corpo-
ration (hotels, restaurants, airline
catering and contract feeding), where
he most recently was an executive vice
president and president of Marriott
Hotels and Resorts. Mr. Malek is also
a director of American Management Sys-
tems, Inc., Automatic Data Processing,
Inc., Avis, Inc., FPL Group, Inc., ICF
International, Manor Care, Inc., Na-
tional Education Corporation and
Northwest Airlines Inc. and a director
or trustee of 14 other investment com-
panies for which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
Judith Davidson Moyers; 60 Trustee Mrs. Moyers is president of Public Af-
Public Affairs Television fairs Television, Inc., an educational
356 W. 58th Street consultant and a home economist. Mrs.
New York, New York 10019 Moyers is also a director of Ogden
Corporation and a director or trustee
of 14 other investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>

22
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
---------------------- ------------------- --------------------
<S> <C> <C>
Margo N. Alexander; 48 President Mrs. Alexander is president, chief ex-
ecutive officer and a director of
Mitchell Hutchins. Prior to January
1995, Mrs. Alexander was an executive
vice president of PaineWebber. Mrs.
Alexander is also a director or
trustee of one investment company and
president of 31 other investment com-
panies for which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
Julieanna Berry; 32 Vice President Ms. Berry is a vice president and port-
folio manager of Mitchell Hutchins.
Teresa M. Boyle; 37 Vice President Ms. Boyle is a first vice president and
manager--advisory administration of
Mitchell Hutchins. Prior to November
1993, she was compliance manager of
Hyperion Capital Management, Inc., an
investment advisory firm. Prior to
April 1993, Ms. Boyle was a vice pres-
ident and manager--legal administra-
tion of Mitchell Hutchins. Ms. Boyle
is also a vice president of 31 other
investment companies for which Mitch-
ell Hutchins or PaineWebber serves as
investment adviser.
Gigi L. Capes; 31 Vice President and Ms. Capes is a vice president and the
Assistant Treasurer tax manager of the mutual fund finance
division of Mitchell Hutchins. Prior
to 1992, she was a tax senior consul-
tant with KPMG Peat Marwick. Ms. Capes
is also a vice president and assistant
treasurer of 31 other investment com-
panies for which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
Joan L. Cohen; 31 Vice President and Ms. Cohen is a vice president and at-
Assistant Secretary torney of Mitchell Hutchins. Prior to
December 1993, she was an associate at
the law firm of Seward & Kissel. Ms.
Cohen is also a vice president and as-
sistant secretary of 24 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
</TABLE>

23
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
---------------------- ------------------- --------------------
<S> <C> <C>
Karen L. Finkel; 37 Vice President Mrs. Finkel is a first vice president
and portfolio manager of Mitchell
Hutchins. Mrs. Finkel is also a vice
president of one other investment com-
pany for which Mitchell Hutchins
serves as investment adviser.
Ellen R. Harris; 49 Vice President Ms. Harris is a managing director of
Mitchell Hutchins. Ms. Harris is also
a vice president of two other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
Mary B. King; 31 Vice President Mrs. King is a first vice president and
a portfolio manager of Mitchell
Hutchins. Mrs. King is also a vice
president of one other investment com-
pany for which Mitchell Hutchins
serves as investment adviser.
Thomas J. Libassi; 36 Vice President Mr. Libassi is a senior vice president
of Mitchell Hutchins. Prior to May
1994, he was a vice president of Key-
stone Custodian Funds Inc. with port-
folio management responsibility. Mr.
Libassi is also a vice president of
three other investment companies for
which Mitchell Hutchins serves as in-
vestment adviser.
C. William Maher; 34 Vice President and Mr. Maher is a first vice president and
Assistant Treasurer a senior manager of the mutual fund
finance division of Mitchell Hutchins.
Mr. Maher is also a vice president and
assistant treasurer of 31 other in-
vestment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
Dennis McCauley; 49 Vice President Mr. McCauley is a managing director and
chief investment officer--fixed income
of Mitchell Hutchins. Prior to Decem-
ber 1994, he was Director of Fixed In-
come Investments of IBM Corporation.
Mr. McCauley is also a vice president
of 17 other investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>

24
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
---------------------- ------------------- --------------------
<S> <C> <C>
Ann E. Moran; 38 Vice President and Ms. Moran is a vice president of Mitch-
Assistant Treasurer ell Hutchins. Ms. Moran is also a vice
president and assistant treasurer of
31 other investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Dianne E. O'Donnell; 43 Vice President Ms. O'Donnell is a senior vice presi-
and Secretary dent and deputy general counsel of
Mitchell Hutchins. Ms. O'Donnell is
also a vice president and secretary of
31 other investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Victoria E. Schonfeld; 44 Vice President Ms. Schonfeld is a managing director
and general counsel of Mitchell
Hutchins. From April 1990 to May 1994,
she was a partner in the law firm of
Arnold & Porter. Ms. Schonfeld is also
a vice president of 31 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
Paul H. Schubert; 32 Vice President Mr. Schubert is a first vice president
and Assistant and a senior manager of the mutual
Treasurer fund finance division of Mitchell
Hutchins. From August 1992 to August
1994, he was a vice president at
BlackRock Financial Management L.P.
Prior to August 1992, he was an audit
manager with Ernst & Young LLP. Mr.
Schubert is also a vice president and
assistant treasurer of 31 other in-
vestment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
</TABLE>

25
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
---------------------- ------------------- --------------------
<S> <C> <C>
Nirmal Singh; 39 Vice President Mr. Singh is a first vice president of
Mitchell Hutchins. Prior to September
1993, he was a member of the portfolio
management team at Merrill Lynch Asset
Management, Inc. Mr. Singh is also
vice president of four other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
Julian F. Sluyters; 35 Vice President and Mr. Sluyters is a senior vice president
Treasurer and the director of the mutual fund
finance division of Mitchell Hutchins.
Prior to 1991, he was an audit senior
manager with Ernst & Young LLP. Mr.
Sluyters is also a vice president and
treasurer of 31 other investment com-
panies for which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
Mark A. Tincher; 40 Vice President Mr. Tincher is a managing director and
chief investment officer--U.S. equity
investments of Mitchell Hutchins.
Prior to March 1995, he was a vice
president and directed the U.S. funds
management and equity research areas
of Chase Manhattan Private Bank. Mr.
Tincher is also vice president of ten
other investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Gregory K. Todd; 38 Vice President and Mr. Todd is a first vice president and
Assistant Secretary associate general counsel of Mitchell
Hutchins. Prior to 1993, he was a
partner in the law firm of Shereff,
Friedman, Hoffman & Goodman. Mr. Todd
is also a vice president and assistant
secretary of 31 other investment
companies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
</TABLE>

26
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
---------------------- ------------------- --------------------
<S> <C> <C>
Craig M. Varrelman; 37 Vice President Mr. Varrelman is a first vice president
of Mitchell Hutchins. Mr. Varrelman is
also vice president of four other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Keith A. Weller; 34 Vice President and Mr. Weller is a first vice president
Assistant Secretary and associate general counsel of
Mitchell Hutchins. From September 1987
to May 1995, he was an attorney in
private practice. Mr. Weller is also a
vice president and assistant secretary
of 23 other investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
- --------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mr. Bewkes is an "interested person" of the Trust as defined in the
Investment Company Act of 1940 ("1940 Act") by virtue of his position with
PW Group.

The Trust pays trustees who are not "interested persons" of the Trust $5,000
annually and $250 per meeting of the board or any committee thereof. Trustees
are reimbursed for any expenses incurred in attending meetings. Trustees and
officers of the Trust own in the aggregate less than 1% of the shares of each
Fund. Because PaineWebber and Mitchell Hutchins perform substantially all of
the services necessary for the operation of the Trust and the Funds, the Trust
requires no employees. No officer, director or employee of Mitchell Hutchins or
PaineWebber presently receives any compensation from the Trust for acting as a
trustee or officer.

27
<PAGE>

The Table below includes certain information relating to the compensation of
the Trust's trustees.

COMPENSATION TABLE

<TABLE>
<CAPTION>
PENSION OR
RETIREMENT ESTIMATED TOTAL
AGGREGATE BENEFITS ANNUAL COMPENSATION
COMPENSATION ACCRUED AS PART BENEFITS FROM THE TRUST
FROM THE OF THE TRUST'S UPON AND THE
NAME OF PERSON, POSITION TRUST* EXPENSES RETIREMENT TRUST COMPLEX+
- ------------------------ ------------ --------------- ---------- --------------
<S> <C> <C> <C> <C>
E. Garrett Bewkes, Jr. . -- -- -- --
Trustee and Chairman of
the Board of Trustees
Meyer Feldberg.......... $10,250 -- -- $86,050
Trustee
George W. Gowen......... $ 9,250 -- -- $71,425
Trustee
Frederic V. Malek....... $ 9,750 -- -- $77,875
Trustee
Judith Davidson Moyers.. $ 9,750 -- -- $71,125
Trustee
</TABLE>
- --------
* Represents fees paid to each trustee during the fiscal year ended November
30, 1994.
+ Represents total compensation paid to each trustee during the calendar year
ended December 31, 1994.

INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS

INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of each Fund pursuant to a contract with the Trust
dated April 21, 1988 ("Advisory Contract"). Under the Advisory Contract, the
Trust pays Mitchell Hutchins an annual fee, computed daily and paid monthly, at
the rate of 0.50% of each Fund's average daily net assets.

During the fiscal years ended November 30, 1994, November 30, 1993 and
November 30, 1992, respectively, the Trust paid (or accrued) to Mitchell
Hutchins investment advisory and administrative fees of $3,958,127, $4,999,240
and $4,192,907 with respect to the U.S. Government Income Fund, $1,897,899,
$1,393,289 and $1,145,651 with respect to the Investment Grade Income Fund and
$4,047,201, $3,100,195 and $1,638,701 with respect to the High Income Fund.

Under a service agreement pursuant to which PaineWebber provides certain
services to each Fund not otherwise provided by the Funds' transfer agent,
which agreement is reviewed by the Trust's board of trustees annually, during
the fiscal years ended November 30, 1994, November 30, 1993 and November 30,
1992, PaineWebber earned fees under the service agreement in the amounts of
$196,490, $217,612 and $196,379 for U.S. Government Income Fund, $97,475,
$60,450 and $52,565 for Investment Grade Income Fund and $181,748, $137,332 and
$91,997 for High Income Fund.

28
<PAGE>

Under the terms of the Advisory Contract, each Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Trust not readily identifiable as belonging
to a particular Fund are allocated among the Funds by or under the direction of
the Trust's board of trustees in such manner as the board deems fair and
equitable. Expenses borne by the Funds include the following (or each Fund's
share of the following): (1) the cost (including brokerage commissions) of
securities purchased or sold by the Fund and any losses incurred in connection
therewith; (2) fees payable to and expenses incurred on behalf of the Fund by
Mitchell Hutchins; (3) organizational expenses; (4) filing fees and expenses
relating to the registration and qualification of the Fund's shares under
federal and state securities laws and maintenance of such registrations and
qualifications; (5) fees and salaries payable to trustees who are not
interested persons of the Trust or Mitchell Hutchins; (6) all expenses incurred
in connection with the trustees' services, including travel expenses; (7) taxes
(including any income or franchise taxes) and governmental fees; (8) costs of
any liability, uncollectible items of deposit and any other insurance or
fidelity bonds; (9) any costs, expenses or losses arising out of a liability of
or claim for damages or other relief asserted against the Trust or a Fund for
violation of any law; (10) legal, accounting and auditing expenses, including
legal fees of special counsel for the independent trustees; (11) charges of
custodians, transfer agents and other agents; (12) costs of preparing share
certificates; (13) expenses of setting in type and printing prospectuses and
supplements thereto, statements of additional information and supplements
thereto, reports and proxy materials for existing shareholders, and costs of
mailing such materials to existing shareholders; (14) any extraordinary
expenses (including fees and disbursements of counsel) incurred by the Trust or
a Fund; (15) fees, voluntary assessments and other expenses incurred in
connection with membership in investment company organizations; (16) costs of
mailing and tabulating proxies and costs of meetings of shareholders, the board
and any committees thereof; (17) the cost of investment company literature and
other publications provided to trustees and officers; and (18) costs of
mailing, stationery and communications equipment.

As required by state regulation, Mitchell Hutchins will reimburse a Fund if
and to the extent that the aggregate operating expenses of the Fund in any
fiscal year exceed applicable limits. Currently, the most restrictive such
limit applicable to a Fund is 2.5% of the first $30 million of the Fund's
average daily net assets, 2.0% of the next $70 million of its average daily net
assets and 1.5% of its average daily net assets in excess of $100 million.
Certain expenses, such as brokerage commissions, taxes, interest, distribution
fees and extraordinary items, are excluded from this limitation. For the fiscal
years ended November 30, 1994, November 30, 1993 and November 30, 1992, no
reimbursements were required pursuant to such limitations.

Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Trust or
any Fund in connection with the performance of the Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. The Advisory Contract
terminates automatically with respect to each Fund upon assignment and is
terminable at any time without penalty by the Trust's board of trustees or by
vote of the holders of a majority of the Fund's outstanding voting securities
on 60 days' written notice to Mitchell Hutchins or by Mitchell Hutchins on 60
days' written notice to the Trust.

29
<PAGE>

The following table shows the approximate net assets as of October 31, 1995,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment company
may fall into more than one of the categories below.

<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($ MIL)
------------------- ----------
<S> <C>
Domestic (excluding Money Market)......................... $ 5,680.0
Global.................................................... 2,893.3
Equity/Balanced........................................... 2,748.3
Fixed Income (excluding Money Market)..................... 5,825.0
Taxable Fixed Income................................... 4,083.1
Tax-Free Fixed Income.................................. 1,741.9
Money Market Funds........................................ 20,479.4
</TABLE>

Mitchell Hutchins personnel may invest in securities for their own accounts
pursuant to a code of ethics that describes the fiduciary duty owed to
shareholders of other PaineWebber funds and other Mitchell Hutchins' advisory
accounts by all Mitchell Hutchins' directors, officers and employees,
establishes procedures for personal investing and restricts certain
transactions. For example, employee accounts generally must be maintained at
PaineWebber, personal trades in most securities require pre-clearance and
short-term trading and participation in initial public offerings generally are
prohibited. In addition, the code of ethics puts restrictions on the timing of
personal investing in relation to trades by PaineWebber funds and other
Mitchell Hutchins advisory clients.

DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
Class A, Class B and Class C shares of each Fund under separate distribution
contracts with the Trust dated July 7, 1993 and November 10, 1995,
(collectively, "Distribution Contracts") that require Mitchell Hutchins to use
its best efforts, consistent with its other businesses, to sell shares of the
Funds. Shares of the Funds are offered continuously. Under separate exclusive
dealer agreements between Mitchell Hutchins and PaineWebber dated July 7, 1993
and November 10, 1995, relating to the Class A, Class B and Class C shares of
each Fund (collectively, "Exclusive Dealer Agreements"), PaineWebber and its
correspondent firms sell each Fund's shares.

Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares of the Funds adopted by the Trust in the manner prescribed under
Rule 12b-1 under the 1940 Act ("Class A Plan," "Class B Plan" and "Class C
Plan," collectively, "Plans"), each Fund pays Mitchell Hutchins a service fee,
accrued daily and payable monthly, at the annual rate of 0.25% of the average
daily net assets of each Class of shares. Under the Class B Plan, each Fund
also pays Mitchell Hutchins a distribution fee, accrued daily and payable
monthly, at the annual rate of 0.75% of the average daily net assets of the
Class B shares. Under the Class C Plan, each Fund pays Mitchell Hutchins a
distribution fee, accrued daily and payable monthly, at the annual rate of
0.50% of the average daily net assets of the Class C shares.

Among other things, each Plan provides that (1) Mitchell Hutchins will submit
to the Trust's board of trustees at least quarterly, and the trustees will
review, reports regarding all amounts

30
<PAGE>

expended under the Plan and the purposes for which such expenditures were made,
(2) the Plan will continue in effect only so long as it is approved at least
annually, and any material amendment thereto is approved, by the Trust's board
of trustees, including those trustees who are not "interested persons" of the
Trust and who have no direct or indirect financial interest in the operation of
the Plan or any agreement related to the Plan, acting in person at a meeting
called for that purpose, (3) payments by a Fund under the Plan shall not be
materially increased without the affirmative vote of the holders of a majority
of the outstanding shares of the relevant Class and (4) while the Plan remains
in effect, the selection and nomination of trustees who are not "interested
persons" of the Trust shall be committed to the discretion of the trustees who
are not "interested persons" of the Trust.

In reporting amounts expended under the Plans to the trustees, Mitchell
Hutchins will allocate expenses attributable to the sale of each Class of Fund
shares to such Class based on the ratio of sales of such Class to the sales of
all three Classes of shares. The fees paid by one Class of Fund shares will not
be used to subsidize the sale of any other Class of Fund shares.

For the fiscal year ended November 30, 1994, the Funds paid (or accrued) the
following fees to Mitchell Hutchins under the Class A, Class B and Class C
Plans:

<TABLE>
<CAPTION>
INVESTMENT
U.S. GOVERNMENT GRADE HIGH INCOME
INCOME FUND INCOME FUND FUND
--------------- ----------- -----------
<S> <C> <C> <C>
Class A.............................. $1,371,619 $646,924 $ 847,482
Class B.............................. 1,319,942 671,234 2,961,114
Class C.............................. 790,524 402,653 1,307,520
</TABLE>

Mitchell Hutchins estimates that it and its parent corporation, PaineWebber,
incurred the following shareholder service-related and distribution-related
expenses with respect to the Funds during the fiscal year ended November 30,
1994:

CLASS A

<TABLE>
<CAPTION>
INVESTMENT
U.S. GOVERNMENT GRADE HIGH INCOME
INCOME FUND INCOME FUND FUND
--------------- ----------- -----------
<S> <C> <C> <C>
Marketing and advertising........... $ 161,227 $ 50,003 $ 61,185
Printing of prospectuses and state-
ments of additional information.... 1,236 982 699
Branch network costs allocated and
interest expense................... 1,991,104 824,751 1,016,724
Service fees paid to investment
executives......................... 617,229 291,116 381,367
</TABLE>

31
<PAGE>

CLASS B

<TABLE>
<CAPTION>
INVESTMENT
U.S. GOVERNMENT GRADE HIGH INCOME
INCOME FUND INCOME FUND FUND
--------------- ----------- -----------
<S> <C> <C> <C>
Marketing and advertising........... $ 135,692 $ 48,258 $ 119,321
Amortization of commissions......... 689,021 308,688 1,448,036
Printing of prospectuses and state-
ments of additional information.... 1,041 620 1,338
Branch network costs allocated and
interest expense................... 2,605,457 827,178 2,153,766
Service fees paid to investment
executives......................... 148,493 75,514 333,125
</TABLE>

CLASS C

<TABLE>
<CAPTION>
INVESTMENT
U.S. GOVERNMENT GRADE HIGH INCOME
INCOME FUND INCOME FUND FUND
--------------- ----------- -----------
<S> <C> <C> <C>
Marketing and advertising........... $ 123,828 $ 20,869 $ 90,456
Amortization of commissions......... 190,342 121,415 455,832
Printing of prospectuses and state-
ments of additional information.... 976 264 1,003
Branch network costs allocated and
interest expense................... 2,315,803 344,602 1,512,065
Service fees paid to investment
executives......................... 118,579 60,338 195,932
</TABLE>

"Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing Fund shares. These internal
costs encompass office rent, salaries and other overhead expenses of various
departments and areas of operations of Mitchell Hutchins. "Branch network costs
allocated and interest expense" consist of an allocated portion of the expenses
of various PaineWebber departments involved in the distribution of each Fund's
shares, including the PaineWebber retail branch system.

In approving the Funds' overall Flexible PricingSM system of distribution,
the Trust's board of trustees considered several factors, including that
implementation of Flexible Pricing would (1) enable investors to choose the
purchasing option best suited to their individual situation, thereby
encouraging current shareholders to make additional investments in the Funds
and attracting new investors and assets to the Funds to the benefit of each
Fund and its shareholders, (2) facilitate distribution of the Funds' shares and
(3) maintain the competitive position of the Funds in relation to other funds
that have implemented or are seeking to implement similar distribution
arrangements.

In approving the Class A Plan for each Fund, the trustees considered all the
features of the distribution system, including (1) the conditions under which
initial sales charges would be imposed and the amount of such charges, (2)
Mitchell Hutchins' belief that the initial sales charge combined with a service
fee would be attractive to PaineWebber investment executives and correspondent
firms, resulting in greater growth of the Fund than might otherwise be the
case, (3) the advantages

32
<PAGE>

to the shareholders of economies of scale resulting from growth in the Fund's
assets and potential continued growth, (4) the services provided to the Fund
and its shareholders by Mitchell Hutchins, (5) the services provided by
PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins
and (6) Mitchell Hutchins' shareholder service-related expenses and costs.

In approving the Class B Plan for each Fund, the trustees considered all the
features of the distribution system, including (1) the conditions under which
contingent deferred sales charges would be imposed and the amount of such
charges, (2) the advantage to investors in having no initial sales charges
deducted from the Fund's purchase payments and instead having the entire amount
of their purchase payments immediately invested in Fund shares, (3) Mitchell
Hutchins' belief that the ability of PaineWebber investment executives and
correspondent firms to receive sales commissions when Class B shares are sold
and continuing service fees thereafter while their customers invest their
entire purchase payments immediately in Class B shares would prove attractive
to the investment executives and correspondent firms, resulting in greater
growth of the Fund than might otherwise be the case, (4) the advantages to the
shareholders of economies of scale resulting from growth in the Fund's assets
and potential continued growth, (5) the services provided to the Fund and its
shareholders by Mitchell Hutchins, (6) the services provided by PaineWebber
pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins and (7)
Mitchell Hutchins' shareholder service- and distribution-related expenses and
costs. The trustees also recognized that Mitchell Hutchins' willingness to
compensate PaineWebber and its investment executives, without the concomitant
receipt by Mitchell Hutchins of initial sales charges, was conditioned upon its
expectation of being compensated under the Class B Plan.

In approving the Class C Plan for each Fund, the trustees considered all the
features of the distribution system, including (1) the advantage to investors
in having no initial sales charges deducted from the Fund's purchase payments
and instead having the entire amount of their purchase payments immediately
invested in Fund shares, (2) the advantage to investors in being free from
contingent deferred sales charges upon redemption for shares held more than one
year and paying for distribution on an ongoing basis, (3) Mitchell Hutchins'
belief that the ability of PaineWebber investment executives and correspondent
firms to receive sales compensation for their sales of Class C shares on an
ongoing basis, along with continuing service fees, while their customers invest
their entire purchase payments immediately in Class C shares and generally do
not face contingent deferred sales charges, would prove attractive to the
investment executives and correspondent firms, resulting in greater growth to
the Fund than might otherwise be the case, (4) the advantages to the
shareholders of economies of scale resulting from growth in the Fund's assets
and potential continued growth, (5) the services provided to the Fund and its
shareholders by Mitchell Hutchins, (6) the services provided by PaineWebber
pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins and (7)
Mitchell Hutchins' shareholder service- and distribution-related expenses and
costs. The trustees also recognized that Mitchell Hutchins' willingness to
compensate PaineWebber and its investment executives without the concomitant
receipt by Mitchell Hutchins of initial sales charges or contingent deferred
sales charges upon redemption, was conditioned upon its expectation of being
compensated under the Class C Plan.

With respect to each Plan, the trustees considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The trustees

33
<PAGE>

also considered the benefits that would accrue to Mitchell Hutchins under each
Plan in that Mitchell Hutchins would receive service, distribution and advisory
fees that are calculated based upon a percentage of the average net assets of
each Fund, which fees would increase if the Plan were successful and the Funds
attained and maintained significant asset levels.

Under the Distribution Contract between the Trust and Mitchell Hutchins for
the Class A shares and similar prior distribution contracts, for the periods
set forth below, Mitchell Hutchins earned the following approximate amounts of
sales charges and retained the following approximate amounts, net of
concessions to PaineWebber as exclusive dealer:

U.S. GOVERNMENT INCOME FUND

<TABLE>
<CAPTION>
FISCAL YEARS ENDED
NOVEMBER 30,
------------------------------
1992 1993 1994
---------- ---------- --------
<S> <C> <C> <C>
Earned..................................... $1,434,701 $ 555,888 $121,124
Retained................................... 100,280 48,390 10,336

INVESTMENT GRADE INCOME FUND

<CAPTION>
FISCAL YEARS ENDED
NOVEMBER 30,
------------------------------
1992 1993 1994
---------- ---------- --------
<S> <C> <C> <C>
Earned..................................... $ 183,364 $ 255,824 $137,013
Retained................................... 12,481 19,389 79,808

HIGH INCOME FUND

<CAPTION>
FISCAL YEARS ENDED
NOVEMBER 30,
------------------------------
1992 1993 1994
---------- ---------- --------
<S> <C> <C> <C>
Earned..................................... $ 936,778 $1,443,963 $793,898
Retained................................... 67,841 104,383 55,058
</TABLE>

For the fiscal years set forth below, Mitchell Hutchins earned and retained
the following contingent deferred sales charges paid upon certain redemptions
of Class B shares:

<TABLE>
<CAPTION>
U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
--------------------------- ---------------------------- ----------------
<S> <C> <C>
1992 $288,330 $ 97,031 $ 294,997
1993 633,594 90,989 703,272
1994 927,086 359,379 1,899,408
</TABLE>

PORTFOLIO TRANSACTIONS

Subject to policies established by the board of trustees, Mitchell Hutchins
is responsible for the execution of each Fund's portfolio transactions and the
allocation of brokerage transactions. In

34
<PAGE>

executing portfolio transactions, Mitchell Hutchins seeks to obtain the best
net results for each Fund, taking into account such factors as the price
(including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm involved.
Generally, bonds are traded on the OTC market on a "net" basis without a stated
commission through dealers acting for their own account and not as brokers.
Prices paid to dealers in principal transactions generally include a "spread,"
which is the difference between the prices at which the dealer is willing to
purchase and sell a specific security at that time. During the fiscal year
ended November 30, 1994, U.S. Government Income Fund, Investment Grade Income
Fund and High Income Fund paid approximately $0, $21,500 and $74,838,
respectively, in brokerage commissions. During the fiscal year ended November
30, 1993, U.S. Government Income Fund and Investment Grade Income Fund paid no
brokerage commissions. During the fiscal year ended November 30, 1993, High
Income Fund paid approximately $4,145 in brokerage commissions. During the
fiscal year ended November 30, 1992, U.S. Government Income Fund, Investment
Grade Income Fund and High Income Fund paid approximately $3,906, $7,810 and
$0, respectively, in brokerage commissions.

No Fund has any obligation to deal with any broker or group of brokers in the
execution of portfolio transactions. The Funds contemplate that, consistent
with the policy of obtaining the best net results, brokerage transactions may
be conducted through Mitchell Hutchins or its affiliates, including
PaineWebber. The Trust's board of trustees has adopted procedures in conformity
with Rule 17e-1 under the 1940 Act to ensure that all brokerage commissions
paid to Mitchell Hutchins or its affiliates are reasonable and fair. Specific
provisions in the Advisory Contract authorize Mitchell Hutchins and any of its
affiliates that are members of a national securities exchange to effect
portfolio transactions for the Funds on such exchange and to retain
compensation in connection with such transactions. Any such transactions will
be effected and related compensation paid in accordance with applicable SEC
regulations. During the fiscal year ended November 30, 1994, U.S. Government
Income Fund and Investment Grade Income Fund paid no brokerage commissions to
PaineWebber or any other affiliate of Mitchell Hutchins. During the fiscal year
ended November 30, 1994, High Income Fund paid approximately $30,915 in
brokerage commissions to PaineWebber, which represented 41.30% of the total
brokerage commissions paid by the Fund and 34.19% of all portfolio transactions
involving payment of commissions. During the fiscal years ended November 30,
1993, and November 30, 1992, the Funds paid no brokerage commissions to
PaineWebber or any other affiliate of Mitchell Hutchins.

Transactions in futures contracts are executed through futures commission
merchants ("FCMs"), who receive brokerage commissions for their services. Each
Fund's procedures in selecting FCMs to execute that Fund's transactions in
futures contracts, including procedures permitting the use of Mitchell Hutchins
and its affiliates, are similar to those in effect with respect to brokerage
transactions in securities.

Consistent with the interests of a Fund and subject to the review of the
Trust's board of trustees, Mitchell Hutchins may cause a Fund to purchase and
sell portfolio securities through brokers which provide the Fund with research,
analysis, advice and similar services. In return for such services, the Fund
may pay to those brokers a higher commission than may be charged by other
brokers, provided that Mitchell Hutchins determines in good faith that such
commission is reasonable in terms either of that particular transaction or of
the overall responsibility of Mitchell Hutchins to

35
<PAGE>

that Fund and its other clients and that the total commissions paid by the Fund
will be reasonable in relation to the benefits to the Fund over the long term.
During the fiscal year ended November 30, 1994, the Funds directed no portfolio
transactions to brokers chosen because they provided research services.

For purchases or sales with broker-dealer firms which act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with these transactions,
Mitchell Hutchins will not purchase securities at a higher price or sell
securities at a lower price than would otherwise be paid if no weight was
attributed to the services provided by the executing dealer. Moreover, Mitchell
Hutchins will not enter into any explicit soft dollar arrangements relating to
principal transactions and will not receive in principal transactions the types
of services which could be purchased for hard dollars. Mitchell Hutchins may
engage in agency transactions in OTC debt securities in return for research and
execution services. These transactions are entered into only in compliance with
procedures ensuring that the transaction (including commissions) is at least as
favorable as it would have been if effected directly with a market-maker that
did not provide research or execution services. These procedures include
Mitchell Hutchins receiving multiple quotes from dealers before executing the
transaction on an agency basis.

Information and research services furnished by brokers or dealers through
which or with which a Fund effects securities transactions may be used by
Mitchell Hutchins in advising other funds or accounts and, conversely, research
services furnished to Mitchell Hutchins by dealers or brokers in connection
with other funds or accounts Mitchell Hutchins advises may be used by Mitchell
Hutchins in advising the Fund. Information and research received from such
brokers or dealers will be in addition to, and not in lieu of, the services
required to be performed by Mitchell Hutchins under the Advisory Contract.

Investment decisions for the Funds and other investment accounts managed by
Mitchell Hutchins are made independently of each other in light of differing
considerations for the various accounts. However, the same investment decision
may occasionally be made for the Fund involved and one or more of such
accounts. In such cases, simultaneous transactions are inevitable. Purchases or
sales are then averaged as to price and allocated between the Fund and such
other account(s) as to amount according to a formula deemed equitable to the
Fund and such account(s). While in some cases this practice could have a
detrimental effect upon the price or value of the security as far as a Fund is
concerned, or upon its ability to complete its entire order, in other cases it
is believed that coordination and the ability to participate in volume
transactions will be beneficial to the Fund.

The Funds will not purchase securities that are offered in underwritings in
which Mitchell Hutchins or any of its affiliates is a member of the
underwriting or selling group except pursuant to procedures adopted by the
Trust's board of trustees pursuant to Rule 10f-3 under the 1940 Act. Among
other things, these procedures require that the commission or spread paid in
connection with such a purchase be reasonable and fair, that the purchase be at
not more than the public offering price prior to the end of the first business
day after the date of the public offering and that Mitchell Hutchins or any
affiliate thereof not participate in or benefit from the sale to the Fund.

36
<PAGE>

PORTFOLIO TURNOVER. Each Fund's annual portfolio turnover rate may vary
greatly from year to year, but it will not be a limiting factor when management
deems portfolio changes appropriate. The portfolio turnover rate is calculated
by dividing the lesser of a Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year. During the fiscal years ended
November 30, 1994 and November 30, 1993, respectively, the portfolio turnover
rates were 358.07% and 83.13% for the U.S. Government Income Fund; 142.15% and
27.25% for the Investment Grade Income Fund; and 155.77% and 182.26% for the
High Income Fund. The increase in U.S. Government Income Fund's portfolio
turnover rate during the fiscal year ended November 30, 1994 from the portfolio
turnover rate of the prior fiscal year is due largely to the Fund's use of
dollar rolls.

REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND
REDEMPTION INFORMATION AND OTHER SERVICES

COMBINED PURCHASE PRIVILEGE--CLASS A SHARES. Investors and eligible groups of
related Fund investors may combine purchases of Class A shares of the Funds
with concurrent purchases of Class A shares of any other PaineWebber mutual
fund and thus take advantage of the reduced sales charges for Class A shares
indicated in the table of sales charges in the Prospectus. The sales charge
payable on the purchase of Class A shares of the Funds and Class A shares of
such other funds will be at the rates applicable to the total amount of the
combined concurrent purchases.

An "eligible group of related Fund investors" can consist of any combination
of the following:

(a) an individual, that individual's spouse, parents and children;

(b) an individual and his or her Individual Retirement Account ("IRA");

(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25%
or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);

(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);

(e) an individual (or eligible group of individuals) and a trust created
by the individual(s), the beneficiaries of which are the individual and/or
the individual's spouse, parents or children;

(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers to
Minors Act account created by the individual or the individual's spouse; or

(g) an employer (or group of related employers) and one or more qualified
retirement plans of such employer or employers (an employer controlling,
controlled by or under common control with another employer is deemed
related to that other employer).

(h) individual accounts related together under one registered investment
adviser having full discretion and control over the accounts. The
registered investment adviser must communicate at least quarterly through a
newsletter or investment update establishing a relationship with all of the
accounts.

37
<PAGE>

RIGHTS OF ACCUMULATION--CLASS A SHARES. Reduced sales charges are available
through a right of accumulation, under which investors and eligible groups of
related Fund investors (as defined above) are permitted to purchase Class A
shares of the Funds among related accounts at the offering price applicable to
the total of (1) the dollar amount then being purchased plus (2) an amount
equal to the then-current net asset value of the purchaser's combined holdings
of Class A Fund shares and Class A shares of any other PaineWebber mutual fund.
The purchaser must provide sufficient information to permit confirmation of his
or her holdings, and the acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time.

WAIVERS OF SALES CHARGES--CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where the
decedent is either the sole shareholder or owns the shares with his or her
spouse as a joint tenant with right of survivorship. This waiver applies only
to redemption of shares held at the time of death.

Certain PaineWebber mutual funds offered shares subject to contingent
deferred sales charges before the implementation of the Flexible Pricing system
on July 1, 1991 ("CDSC Funds"). The contingent deferred sales charge is waived
with respect to redemptions of Class B shares of CDSC Funds purchased prior to
July 1, 1991 by officers, directors (trustees) or employees of the CDSC Funds,
Mitchell Hutchins or their affiliates (or their spouses and children under age
21). In addition, the contingent deferred sales charge will be reduced by 50%
with respect to redemptions of Class B shares of CDSC Funds purchased prior to
July 1, 1991 with a net asset value at the time of purchase of at least $1
million. If Class B shares of a CDSC Fund purchased prior to July 1, 1991 are
exchanged for Class B shares of a Fund, any waiver or reduction of the
contingent deferred sales charge that applied to the Class B shares of the CDSC
Fund will apply to the Class B shares of the Fund acquired through the
exchange.

ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of the Funds may be exchanged for shares of the
corresponding Class of most other PaineWebber mutual funds. Shareholders will
receive at least 60 days' notice of any termination or material modification of
the exchange offer, except no notice need be given of an amendment whose only
material effect is to reduce the exchange fee and no notice need be given if,
under extraordinary circumstances, either redemptions are suspended under the
circumstances described below or a Fund temporarily delays or ceases the sales
of its shares because it is unable to invest amounts effectively in accordance
with the Fund's investment objective, policies and restrictions.

If conditions exist which make cash payments undesirable, each Fund reserves
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Fund and valued in the same way as they would
be valued for purposes of computing the Fund's net asset value. Any such
redemption in kind will be made with readily marketable securities, to the
extent available. If payment is made in securities, a shareholder may incur
brokerage expenses in converting these securities into cash. The Trust has
elected, however, to be governed by Rule 18f-1 under the 1940 Act, under which
a Fund is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund during any 90-day period for
one

38
<PAGE>

shareholder. This election is irrevocable unless the SEC permits its
withdrawal. A Fund may suspend redemption privileges or postpone the date of
payment during any period (1) when the NYSE is closed or trading on the NYSE is
restricted as determined by the SEC, (2) when an emergency exists, as defined
by the SEC, that makes it not reasonably practicable for a Fund to dispose of
securities owned by it or fairly to determine the value of its assets or (3) as
the SEC may otherwise permit. The redemption price may be more or less than the
shareholder's cost, depending on the market value of a Fund's portfolio at the
time.

SYSTEMATIC WITHDRAWAL PLAN. On or about the 15th of each month for monthly
plans and on or about the 15th of the months selected for quarterly or semi-
annual plans, PaineWebber will arrange for redemption by a Fund of sufficient
Fund shares to provide the withdrawal payment specified by participants in the
Funds' systematic withdrawal plan. The payment generally is mailed
approximately five business days after the redemption date. Withdrawal payments
should not be considered dividends but redemption proceeds, with the tax
consequences described under "Dividends and Taxes" in the Prospectus. If
periodic withdrawals continually exceed reinvested dividends, a shareholder's
investment may be correspondingly reduced. A shareholder may change the amount
of the systematic withdrawal or terminate participation in the systematic
withdrawal plan at any time without charge or penalty by written instructions
with signatures guaranteed to PaineWebber or PFPC Inc. ("Transfer Agent").
Instructions to participate in the plan, change the withdrawal amount or
terminate participation in the plan will not be effective until five days after
written instructions with signatures guaranteed are received by the Transfer
Agent. Shareholders may request the forms needed to establish a systematic
withdrawal plan from their PaineWebber investment executives, correspondent
firms or the Transfer Agent at 1-800-647-1568.

REINSTATEMENT PRIVILEGE--CLASS A SHARES. As described in the Prospectus,
shareholders who have redeemed their Class A shares may reinstate their account
without a sales charge. Shareholders may exercise the reinstatement privilege
by notifying the Transfer Agent of such desire and forwarding a check for the
amount to be purchased within 365 days after the date of redemption. The
reinstatement will be made at the net asset value per share next computed after
the notice of reinstatement and check are received. The amount of a purchase
under this reinstatement privilege cannot exceed the amount of the redemption
proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised; however, a loss arising out of a
redemption will not be deductible to the extent the redemption proceeds are
reinvested, if the reinstatement privilege is exercised within 30 days after
redemption, and an adjustment will be made to the shareholder's tax basis for
the shares acquired pursuant to the reinstatement privilege. Gain or loss on a
redemption also will be adjusted for federal income tax purposes by the amount
of any sales charge paid on Class A shares, under the circumstances and to the
extent described in "Dividends and Taxes" in the Prospectus.

PAINEWEBBER RMA RESOURCE ACCUMULATION PLANSM; PAINEWEBBER RESOURCE MANAGEMENT
ACCOUNT(R) (RMA(R)).

Shares of the PaineWebber mutual funds (each a "PW Fund" and, collectively,
the "PW Funds") are available for purchase by customers of PaineWebber and its
correspondent firms who maintain Resource Management Accounts ("RMA
accountholders") through the RMA Resource Accumulation Plan ("Plan"). The Plan
allows an RMA accountholder to continually invest in one or

39
<PAGE>

more of the PW Funds at regular intervals, with payment for shares purchased
automatically deducted from the client's RMA account. The client may elect to
invest at monthly or quarterly intervals and may elect either to invest a fixed
dollar amount (minimum $100 per period) or to purchase a fixed number of
shares. A client can elect to have Plan purchases executed on the first or
fifteenth day of the month. Settlement occurs three Business Days (defined
under "Valuation of Shares") after the trade date, and the purchase price of
the shares is withdrawn from the investor's RMA account on the settlement date
from the following sources and in the following order: uninvested cash
balances, balances in RMA money market funds, or margin borrowing power, if
applicable to the account.

To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client
Agreement and Instruction Form available from PaineWebber. The investor must
have received a current prospectus for each PW Fund selected prior to enrolling
in the Plan. Information about mutual fund positions and outstanding
instructions under the Plan are noted on the RMA accountholder's account
statement. Instructions under the Plan may be changed at any time, but may take
up to two weeks to become effective.

The terms of the Plan, or an RMA accountholder's participation in the Plan,
may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds
may be offered through the Plan.

PERIODIC INVESTING AND DOLLAR COST AVERAGING.

Periodic investing in the PW Funds or other mutual funds, whether through the
Plan or otherwise, helps investors establish and maintain a disciplined
approach to accumulating assets over time, de-emphasizing the importance of
timing the market's highs and lows. Periodic investing also permits an investor
to take advantage of "dollar cost averaging". By investing a fixed amount in
mutual fund shares at established intervals, an investor purchases more shares
when the price is lower and fewer shares when the price is higher, thereby
increasing his or her earning potential. Of course, dollar cost averaging does
not guarantee a profit or protect against a loss in a declining market, and an
investor should consider his or her financial ability to continue investing
through periods of low share prices. However, over time, dollar cost averaging
generally results in a lower average original investment cost than if an
investor invested a larger dollar amount in a mutual fund at one time.

PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT.

In order to enroll in the Plan, an investor must have opened an RMA account
with PaineWebber or one of its correspondent firms. The RMA account is
PaineWebber's comprehensive asset management account and offers investors a
number of features, including the following:

. monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold
MasterCard (R) transactions during the period, and provide realized and
unrealized gain and loss estimates for most securities held in the
account;

40
<PAGE>

. comprehensive preliminary 9-month and year-end summary statements that
provide information on account activity for use in tax planning and tax
return preparation;

. automatic "sweep" of uninvested cash into the accountholder's choice of
the seven RMA money market funds--RMA Money Market Portfolio, RMA U.S.
Government Portfolio, RMA Tax-Free Fund, RMA California Municipal Money
Fund, RMA Connecticut Municipal Money Fund, RMA New Jersey Municipal
Money Fund and RMA New York Municipal Money Fund. Each money market fund
attempts to maintain a stable price per share of $1.00, although there
can be no assurance that it will be able to do so. Investments in the
money market funds are not insured or guaranteed by the U.S. government;

. check writing, with no per-check usage charge, no minimum amount on
checks and no maximum number of checks that can be written. RMA
accountholders can code their checks to classify expenditures. All
canceled checks are returned each month;

. Gold MasterCard, with or without a line of credit, which provides RMA
accountholders with direct access to their accounts and can be used with
automatic teller machines worldwide. Purchases on the Gold MasterCard are
debited to the RMA account once monthly, permitting accountholders to
remain invested for a longer period of time;

. 24-hour access to account information through toll-free numbers, and more
detailed personal assistance during business hours from the RMA Service
Center;

. expanded account protection to $25 million in the event of the
liquidation of PaineWebber. This protection does not apply to shares of
the RMA money market funds or the PW Funds because those shares are held
at the transfer agent and not through PaineWebber; and

. automatic direct deposit of checks into the investor's RMA account and
automatic withdrawals from the account.

The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.

CONVERSION OF CLASS B SHARES

Class B shares of each Fund automatically convert to Class A shares of that
Fund, based on the relative net asset value per share of each of the two
Classes, as of the close of business on the first Business Day (as defined
below) of the month in which the sixth anniversary of the initial issuance of
such Class B shares of the Fund occurs. For the purpose of calculating the
holding period required for conversion of Class B shares, the date of initial
issuance shall mean (1) the date on which such Class B shares were issued, or
(2) for Class B shares obtained through an exchange, or a series of exchanges,
the date on which the original Class B shares were issued. If a shareholder
acquired Class B shares of a Fund through an exchange of Class B shares of a
CDSC Fund that were acquired prior to July 1, 1991, the shareholder's holding
period for purposes of conversion is determined based on the date the CDSC Fund
shares were initially issued. For purposes of conversion to Class A shares,
Class B shares purchased through the reinvestment of dividends and other
distributions paid in respect of Class B shares are held in a separate sub-
account. Each time any Class B shares in the shareholder's regular account
(other than those in the sub-account) convert to Class A shares, a pro rata
portion of the Class B shares in the sub-account also convert to Class A
shares. The portion is

41
<PAGE>

determined by the ratio that the shareholder's Class B shares converting to
Class A bears to the shareholder's total Class B shares not acquired through
dividends and other distributions.

The availability of the conversion feature is subject to (1) the continuing
applicability of a ruling of the Internal Revenue Service that the dividends
and other distributions paid on Class A and Class B shares will not result in
"preferential dividends" under the Internal Revenue Code and (2) the continuing
availability of an opinion of counsel to the effect that the conversion of
shares does not constitute a taxable event. If the conversion feature ceased to
be available, the Class B shares would not be converted and would continue to
be subject to the higher ongoing expenses of the Class B shares beyond six
years from the date of purchase. Mitchell Hutchins has no reason to believe
that these conditions for the availability of the conversion feature will not
continue to be met.

VALUATION OF SHARES

Each Fund determines the net asset value per share separately for each Class
of shares as of the close of regular trading (currently 4:00 p.m., Eastern
time) on the NYSE on each Business Day, which is defined as each Monday through
Friday when the NYSE is open. Currently the NYSE is closed on the observance of
the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

Where market quotations are readily available, portfolio securities are
valued based upon market quotations, provided such quotations adequately
reflect, in the judgment of Mitchell Hutchins, the fair value of the security.
Where such market quotations are not readily available, securities are valued
based upon appraisals received from a pricing service using a computerized
matrix system or based upon appraisals derived from information concerning the
security or similar securities received from recognized dealers in those
securities. The amortized cost method of valuation generally is used with
respect to debt obligations with 60 days or less remaining until maturity
unless the Trust's board of trustees determines that this does not represent
fair value. All other securities or assets will be valued at fair value as
determined in good faith by or under the direction of the Trust's board of
trustees. All investments of High Income Fund that are quoted in foreign
currency are valued daily in U.S. dollars on the basis of the foreign currency
exchange rate prevailing at the time such valuation is determined by the Fund's
custodian.

Foreign currency exchange rates are generally determined prior to the close
of trading on the NYSE. Occasionally events affecting the value of foreign
investments and such exchange rates occur between the time at which they are
determined and the close of trading on the NYSE, which events will not be
reflected in a computation of High Income Fund's net asset value on that day.
If events materially affecting the value of such investments or currency
exchange rates occur during such time period, the investments will be valued at
their fair value by or under the direction of the Trust's board of trustees.
The foreign currency exchange transactions of High Income Fund conducted on a
spot (that is, cash) basis are valued at the spot rate for purchasing or
selling currency prevailing on the foreign exchange market. This rate under
normal conditions differs from the prevailing exchange rate in an amount
generally less than one-tenth of one percent due to the costs of converting
from one currency to another.

42
<PAGE>

PERFORMANCE INFORMATION

Each Fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.

TOTAL RETURN. Average annual total return quotes ("Standardized Return") used
in a Fund's Performance Advertisements are calculated according to the
following formula:

P(1+T)/n/ = ERV
where:
P = a hypothetical initial payment of $1,000 to purchase shares of a
specified Class
T = average annual total return of shares of that Class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of that period.

Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value for Class A shares, the
maximum 4% sales charge is deducted from the initial $1,000 payment and, for
Class B and Class C shares, the applicable contingent deferred sales charge
imposed on a redemption of Class B and Class C shares held for the period is
deducted. All dividends and other distributions are assumed to have been
reinvested at net asset value.

Each Fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). Each Fund calculates Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in Fund
shares and assuming the reinvestment of all dividends and other distributions.
The rate of return is determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the initial
value. Neither initial nor contingent deferred sales charges are taken into
account in calculating Non-Standardized Return; the inclusion of these charges
would reduce the return.

Both Standardized Return and Non-Standardized Return for Class B shares for
periods of over six years will reflect conversion of the Class B shares to
Class A shares at the end of the sixth year.

43
<PAGE>

The following table shows performance information for the Class A, Class B
and Class C (formerly Class D) shares of the Funds for the periods indicated.
All returns for periods of more than one year are expressed as an average
annual return:

<TABLE>
<CAPTION>
U.S. GOVERNMENT INVESTMENT GRADE
INCOME FUND INCOME FUND HIGH INCOME FUND
--------------------------- -------------------------- ---------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fiscal year ended
November 30, 1994:
Standardized Return*.. (13.25)% (15.31)% (10.83)% (9.74)% (11.60)% (7.15)% (12.80)% (14.77)% (10.37)%
Non-Standardized
Return............... (9.62)% (10.31)% (10.08)% (5.99)% (6.60)% (6.40)% (9.20)% (9.77)% (9.62)%
Inception** to November
30, 1994:
Standardized Return*.. 7.59 % 2.05 % (1.43)% 9.30 % 6.07 % 3.32 % 10.27 % 12.20 % 6.40 %
Non-Standardized
Return............... 8.02 % 2.60 % (1.43)% 9.74 % 6.57 % 3.32 % 10.72 % 12.64 % 6.40 %
Five years ended
November 30, 1994:
Standardized Return*.. 4.38 % NA NA 6.99 % NA NA 11.62 % NA NA
Non-Standardized
Return............... 5.25 % NA NA 7.86 % NA NA 12.53 % NA NA
Ten years ended November
30, 1994:
Standardized Return*.. 7.28 % NA NA 8.99 % NA NA 9.92 % NA NA
Non-Standardized
Return............... 7.72 % NA NA 9.44 % NA NA 10.36 % NA NA
</TABLE>
- --------
*All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charges imposed on a redemption of shares held for the
period.
**The inception date for the Class A shares of each Fund was August 31, 1984.
The inception date for the Class B shares of each Fund was July 1, 1991. The
inception date for the Class C shares of each Fund was July 2, 1992.

YIELD. Yields used in each Fund's Performance Advertisements are calculated
by dividing the Fund's interest income attributable to a Class of shares for a
30-day period ("Period"), net of expenses attributable to such Class, by the
average number of shares of such Class entitled to receive dividends during the
Period and expressing the result as an annualized percentage (assuming
semiannual compounding) of the maximum offering price per share (in the case of
Class A shares)

44
<PAGE>

or the net asset value per share (in the case of Class B and Class C shares) at
the end of the Period. Yield quotations are calculated according to the
following formula:

a-b
YIELD = 2[( --- + 1)/6/ - 1]
cd

where: a = interest earned during the Period attributable to a Class of
shares
b = expenses accrued for the Period attributable to a Class of shares
(net of reimbursements)
c = the average daily number of shares of the Class outstanding
during the Period that were entitled to receive dividends
d = the maximum offering price per share (in the case of Class A
shares) or the net asset value per share (in the case of Class B
and Class C shares) on the last day of the Period

Except as noted below, in determining net investment income earned during the
Period (variable "a" in the above formula), each Fund calculates interest
earned on each debt obligation held by it during the Period by (1) computing
the obligation's yield to maturity, based on the market value of the obligation
(including actual accrued interest) on the last business day of the Period or,
if the obligation was purchased during the Period, the purchase price plus
accrued interest and (2) dividing the yield to maturity by 360, and multiplying
the resulting quotient by the market value of the obligation (including actual
accrued interest) to determine the interest income on the obligation for each
day of the period that the obligation is in the portfolio. Once interest earned
is calculated in this fashion for each debt obligation held by the Fund,
interest earned during the Period is then determined by totalling the interest
earned on all debt obligations. For purposes of these calculations, the
maturity of an obligation with one or more call provisions is assumed to be the
next date on which the obligation reasonably can be expected to be called or,
if none, the maturity date. With respect to Class A shares, in calculating the
maximum offering price per share at the end of the period (variable "d" in the
above formula), the Funds' current maximum 4% initial sales charge on Class A
shares is included.

The following table shows the yield for the Class A, Class B and Class C
shares of each Fund for the 30-day period ended November 30, 1994.

<TABLE>
<CAPTION>
U.S. GOVERNMENT INVESTMENT GRADE HIGH INCOME
INCOME FUND INCOME FUND FUND
--------------- ---------------- -----------
<S> <C> <C> <C>
Class A......................... 6.22% 8.00% 12.74%
Class B......................... 5.70% 7.58% 12.49%
Class C......................... 5.97% 7.87% 12.76%
</TABLE>

OTHER INFORMATION. In Performance Advertisements, each Fund may compare its
Standardized Return and/or its Non-Standardized Return with data published by
Lipper Analytical Services, Inc. ("Lipper") for U.S. government funds (U.S.
Government Income Fund), corporate bond (BBB) funds (Investment Grade Income
Fund) and high yield funds (High Income Fund); CDA Investment Technologies,
Inc. ("CDA"); Wiesenberger Investment Companies Service ("Wiesenberger");
Investment Company Data Inc. ("ICD"); or Morningstar Mutual Funds
("Morningstar"); or with the performance of U.S. Treasury securities of various
maturities,

45
<PAGE>

recognized stock, bond and other indices, including (but not limited to) the
Salomon Brothers Bond Index, First Boston High Yield Index, Merrill Lynch High
Yield Indices, Shearson Lehman Bond Index, Shearson Lehman Government/Corporate
Bond Index, the Standard & Poor's 500 Composite Stock Index ("Standard & Poor's
500"), the Dow Jones Industrial Average, and changes in the Consumer Price
Index as published by the U.S. Department of Commerce. Such comparisons also
may include economic data and statistics published by the United States Bureau
of Labor Statistics, such as the cost of living index, information and
statistics on the residential mortgage market or the market for mortgage-backed
securities, such as those published by the Federal Reserve Bank, the Office of
Thrift Supervision, Ginnie Mae, Fannie Mae and Freddie Mac and the Lehman
Mortgage-Backed Securities Index. Each Fund also may refer in such materials to
mutual fund performance rankings and other data, such as comparative asset,
expense and fee levels, published by Lipper, CDA, Wiesenberger, ICD or
Morningstar. Performance Advertisements also may refer to discussions of the
Funds and comparative mutual fund data and ratings reported in independent
periodicals, including (but not limited to) THE WALL STREET JOURNAL, MONEY
Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW
YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS.
Comparisons in Performance Advertisements may be in graphic form.

A Fund may include discussions or illustrations of the effects of compounding
in Performance Advertisements. "Compounding" refers to the fact that, if
dividends or other distributions on a Fund investment are reinvested by being
paid in additional Fund shares, any future income or capital appreciation of
the Fund would increase the value, not only of the original Fund investment,
but also of the additional Fund shares received through reinvestment. As a
result, the value of the Fund investment would increase more quickly than if
dividends or other distributions had been paid in cash.

The Funds may also compare their performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Investment Technologies,
Inc. Certificate of Deposit Index, the Bank Rate Monitor National Index and the
averages of yields of CDs of major banks published by Banxquote(R) Money
Markets. In comparing a Fund's performance to CD performance, investors should
keep in mind that bank CDs are insured in whole or in part by an agency of the
U.S. government and offer fixed principal and fixed or variable rates of
interest, and that bank CD yields may vary depending on the financial
institution offering the CD and prevailing interest rates. Fund shares are not
insured or guaranteed by the U.S. government and returns thereon and net asset
values will fluctuate. The securities held by the Funds generally have longer
maturities than most CDs and may reflect interest rate fluctuations for longer
term securities. An investment in a Fund involves greater risks than an
investment in either a money market fund or a CD.

TAXES

In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code, each Fund must distribute to
its shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-term
capital gain and, for High Income Fund, net gains from certain foreign currency
transactions) ("Distribution Requirement") and must meet several additional
requirements. With

46
<PAGE>

respect to each Fund, these requirements include the following: (1) the Fund
must derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of securities or foreign currencies, or other income
(including gains from options, futures or forward currency contracts) derived
with respect to its business of investing in securities or those currencies
("Income Requirement"); (2) the Fund must derive less than 30% of its gross
income each taxable year from the sale or other disposition of securities, or
any of the following, that were held for less than three months--options or
futures (other than those on foreign currencies), or foreign currencies (or
options, futures or forward contracts thereon) that are not directly related to
the Fund's principal business of investing in securities (or options and
futures with respect to securities) ("Short-Short Limitation"); (3) at the
close of each quarter of the Fund's taxable year, at least 50% of the value of
its total assets must be represented by cash and cash items, U.S. government
securities, securities of other RICs and other securities that are limited, in
respect of any one issuer, to an amount that does not exceed 5% of the value of
the Fund's total assets; and (4) at the close of each quarter of the Fund's
taxable year, not more than 25% of the value of its total assets may be
invested in securities (other than U.S. government securities or the securities
of other RICS) of any one issuer.

Dividends and other distributions declared by a Fund in November or December
of any year and payable to shareholders of record on a date in either of those
months will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.

U.S. Government Income Fund invests exclusively in debt securities and
receives no dividend income; accordingly, no portion of the dividends or other
distributions paid by this Fund will be eligible for the dividends-received
deduction allowed to corporations. Although High Income Fund and Investment
Grade Income Fund are authorized to hold equity securities, it is expected that
any dividend income received by the Funds will be minimal.

If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any dividend or capital gain distribution, the shareholder will
pay full price for the shares and receive some portion of the price back as a
taxable distribution.

Interest and dividends, if any, received by High Income Fund may be subject
to income, withholding or other taxes imposed by foreign countries and U.S.
possessions that would reduce the yield on its securities. Tax conventions
between certain countries and the United States, however, may reduce or
eliminate these foreign taxes, and many foreign countries do not impose taxes
on capital gains in respect of investments by foreign investors.

Each Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary income for that year and capital gain net income for the
one-year period ending on November 30 of that year, plus certain other amounts.

47
<PAGE>

The use of hedging and option income strategies, such as writing (selling)
and purchasing options and futures and entering into forward currency
contracts, involves complex rules that will determine for income tax purposes
the character and timing of recognition of the gains and losses a Fund realizes
in connection therewith. Income from foreign currencies (except certain gains
therefrom that may be excluded by future regulations), and income from
transactions in options, futures and forward currency contracts derived by a
Fund with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures (other than those
on foreign currencies) will be subject to the Short-Short Limitation if they
are held for less than three months. Income from the disposition of foreign
currencies, and options, futures and forward contracts on foreign currencies,
that are not directly related to a Fund's principal business of investing in
securities (or options and futures with respect to securities) also will be
subject to the Short-Short Limitation if they are held for less than three
months.

If a Fund satisfies certain requirements, any increase in value of a position
that is part of a "designated hedge" will be offset by any decrease in value
(whether realized or not) of the offsetting hedging position during the period
of the hedge for purposes of determining whether the Fund satisfies the Short-
Short Limitation. Thus, only the net gain (if any) from the designated hedge
will be included in gross income for purposes of that limitation. Each Fund
will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent a Fund does not qualify for this treatment,
it may be forced to defer the closing out of certain options, futures and
forward currency contracts beyond the time when it otherwise would be
advantageous to do so, in order for the Fund to continue to qualify as a RIC.

Each Fund may acquire zero coupon or other securities issued with original
issue discount ("OID"). As a holder of such securities, a Fund would have to
include in its gross income the OID that accrues on the securities during the
taxable year, even if the Fund receives no corresponding payment on the
securities during the year. Similarly, High Income Fund must include in its
gross income securities it receives as "interest" on payment-in-kind
securities. Each Fund has elected similar treatment with respect to securities
purchased at a discount from their face value ("market discount"). Because each
Fund annually must distribute substantially all of its investment company
taxable income, including any accrued OID, market discount and other non-cash
income, to satisfy the Distribution Requirement and to avoid imposition of the
Excise Tax, a Fund may be required in a particular year to distribute as a
dividend an amount that is greater than the total amount of cash it actually
receives. Those distributions will be made from the Fund's cash assets or from
the proceeds of sales of portfolio securities, if necessary. The Fund may
realize capital gains or losses from those sales, which would increase or
decrease its investment company taxable income or net capital gain (the excess
of net long-term capital gain over net short-term capital loss). In addition,
any such gains may be realized on the disposition of securities held for less
than three months. Because of the Short-Short Limitation, any such gains would
reduce the Fund's ability to sell other securities, or certain options, futures
or forward currency contracts, held for less than three months that it might
wish to sell in the ordinary course of its portfolio management.

48
<PAGE>

OTHER INFORMATION

PAINEWEBBER MANAGED INVESTMENT TRUST. Effective April 1, 1991, the names of
the three series described herein were changed to U.S. Government Income Fund,
Investment Grade Income Fund and High Income Fund. Prior to that date, the
series' names were U.S. Government Portfolio (GNMA Portfolio prior to July 1,
1990), Investment Grade Bond Portfolio and High Yield Bond Portfolio,
respectively. Prior to November 10, 1995, the Class C shares were called "Class
D shares".

PaineWebber Managed Investments Trust is an entity of the type commonly known
as a "Massachusetts business trust." Prior to February 26, 1992, the Trust's
name was PaineWebber Fixed Income Portfolios. Under Massachusetts law,
shareholders could, under certain circumstances, be held personally liable for
the obligations of the Trust or a Fund. However, the Trust's Declaration of
Trust disclaims shareholder liability for acts or obligations of the Trust or
the Funds and requires that notice of such disclaimer be given in each note,
bond, contract, instrument, certificate or undertaking made or issued by the
trustees or by any officers or officer by or on behalf of the Trust, a Fund,
the trustees or any of them in connection with the Trust. The Declaration of
Trust provides for indemnification from each Fund's property for all losses and
expenses of any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder's incurring financial loss on account of
shareholder liability is limited to circumstances in which a Fund itself would
be unable to meet its obligations, a possibility that Mitchell Hutchins
believes is remote and not material. Upon payment of any liability incurred by
a shareholder solely by reason of being or having been a shareholder, the
shareholder paying such liability will be entitled to reimbursement from the
general assets of the Fund. The trustees intend to conduct the operations of
each Fund in such a way as to avoid, as far as possible, ultimate liability of
the shareholders for liabilities of the Fund.

CLASS-SPECIFIC EXPENSES. Each Fund might determine to allocate certain
expenses (in addition to distribution fees) to the specific Classes of the
Fund's shares to which those expenses are attributable. For example, Class B
shares bear higher transfer agency fees per shareholder account than those
borne by Class A or Class C shares. The higher fee is imposed due to the higher
costs incurred by the Transfer Agent in tracking shares subject to a contingent
deferred sales charge because, upon redemption, the duration of the
shareholder's investment must be determined in order to determine the
applicable charge. Moreover, the tracking and calculations required by the
automatic conversion feature of the Class B shares will cause the Transfer
Agent to incur additional costs. Although the transfer agency fee will differ
on a per account basis as stated above, the specific extent to which the
transfer agency fees will differ between the Classes as a percentage of net
assets is not certain, because the fee as a percentage of net assets will be
affected by the number of shareholder accounts in each Class and the relative
amounts of net assets in each Class.

COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 M Street, NW,
Washington, DC 20036-5891, counsel to the Funds, has passed upon the legality
of the shares offered by the Funds' Prospectus. Kirkpatrick & Lockhart LLP also
acts as counsel to Mitchell Hutchins and PaineWebber in connection with other
matters.

INDEPENDENT AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New
York 10019, serves as independent auditors for the Trust.

49
<PAGE>

FINANCIAL STATEMENTS

The Funds' Annual Report to Shareholders for the fiscal year ended November
30, 1994 and its Semi-Annual Report to Shareholders for the six months ended
April 30, 1995, are separate documents supplied with this Statement of
Additional Information and the financial statements, accompanying notes and
(with respect to the Annual Report to Shareholders) report of independent
auditors appearing therein are incorporated by reference in this Statement of
Additional Information.

50
<PAGE>

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR THEIR DISTRIBUTOR. THE
PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN
OFFERING BY THE FUNDS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.

-----------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions...................................... 1
Hedging and Related Income Strategies..................................... 11
Trustees and Officers..................................................... 21
Investment Advisory and Distribution Arrangements......................... 28
Portfolio Transactions.................................................... 34
Reduced Sales Charges, Additional Exchange and Redemption Information and
Other Services........................................................... 37
Conversion of Class B Shares.............................................. 41
Valuation of Shares....................................................... 42
Performance Information................................................... 43
Taxes..................................................................... 46
Other Information......................................................... 49
Financial Statements...................................................... 50
</TABLE>

[LOGO OF RECYCLED PAPER APPEARS HERE]

PAINEWEBBER

U.S. GOVERNMENT
INCOME FUND

PAINEWEBBER

INVESTMENT GRADE
INCOME FUND

PAINEWEBBER

HIGH INCOME FUND

- --------------------------------------------------------------------------------
Statement of Additional Information

November 10, 1995, as revised December 1, 1995
- --------------------------------------------------------------------------------
PAINEWEBBER

<PAGE>

PAINEWEBBER U.S. GOVERNMENT INCOME FUND

CLASS Y SHARES

1285 Avenue of the Americas New York, New York 10019

PaineWebber U.S. Government Income Fund ("Fund"), a series of PaineWebber
Managed Investments Trust ("Trust"), seeks high current income consistent with
the preservation of capital and liquidity. The Fund invests primarily in U.S.
government securities.

This Prospectus concisely sets forth information about the Fund a prospective
investor should know before investing. Please retain this Prospectus for future
reference. A Statement of Additional Information dated Novem- ber 10, 1995
(which is incorporated by reference herein) has been filed with the Securities
and Exchange Commission. The Statement of Additional Information can be ob-
tained without charge, and further inquiries can be made, by contacting the
Fund, your PaineWebber investment executive or PaineWebber's correspondent
firms or by calling toll-free 1-800-647-1568. Participants in the PaineWebber
Savings Investment Plan ("PW SIP") may make further inquiries by contacting the
PaineWebber Incorporated Benefits Department, 10th Floor, 1000 Harbor Boule-
vard, Weehawken, New Jersey 07087 or by calling 1-201-902-4444.

The Class Y shares described in this Prospectus are currently offered for sale
primarily to participants in the INSIGHT Investment Advisory Program
("INSIGHT"), when purchased through that program, and the trustee of the PW
SIP on behalf of that Plan. See "Purchases."
----------------

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

The date of this Prospectus is November 10, 1995.

PaineWebber Incorporated
<PAGE>

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE
ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CON-
NECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
BY THE FUND OR ITS DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
--------------

FUND EXPENSES

The following tables are intended to assist investors in understanding the
expenses associated with investing in Class Y shares of the Fund.

SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales charge on purchases of shares ...................................... None
Sales charge on reinvested dividends...................................... None
Redemption fee or deferred sales charge................................... None

ANNUAL FUND OPERATING EXPENSES*
(as a percentage of average net assets)
Management fees........................................................... 0.50%
12b-1 fees................................................................ 0.00%
Other expenses............................................................ 0.15%
----
Total operating expenses.................................................. 0.65%
====
</TABLE>
* See "Management" for additional information. The fees and expenses are those
actually incurred for the fiscal year ended November 30, 1994. Participation
in INSIGHT is subject to payment of an advisory fee at the maximum annual
rate of 1.50% of assets held through INSIGHT. This account charge is not in-
cluded in the table because non-INSIGHT participants are permitted to pur-
chase Class Y shares of the Fund.

EXAMPLE OF EFFECT OF FUND EXPENSES

An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Fund, assuming a 5% annual return:

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C>
$7 $21 $36 $81
</TABLE>

This Example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund Operating
Expenses remain the same in the years shown. The above tables and the
assumption in the Example of a 5% annual return are required by regulations of
the Securities and Exchange Commission ("SEC") applicable to all mutual funds;
the assumed 5% annual return is not a prediction of, and does not represent,
the projected or actual performance of the Class Y shares of the Fund.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EX-
PENSES, AND THE FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
The actual expenses attributable to the Fund's Class Y shares will depend upon,
among other things, the level of average net assets and the extent to which the
Fund incurs variable expenses, such as transfer agency costs.

2
<PAGE>

FINANCIAL HIGHLIGHTS

The table below provides selected per share data and ratios for one Class Y
share of the Fund for each of the periods shown. This information is
supplemented by the financial statements and accompanying notes appearing in
the Fund's Annual Report to Shareholders for the fiscal year ended November 30,
1994, which are incorporated by reference into the Statement of Additional
Information. The financial statements and notes, as well as the information in
the table appearing below insofar as it relates to the fiscal year ended
November 30, 1994 and for the prior periods, have been audited by Ernst & Young
LLP, independent auditors, whose report thereon is included in the Annual
Report to Shareholders. The financial statements and notes and the financial
information in the table below, insofar as they relate to the six months ended
May 31, 1995, have been taken from the records of the Fund without examination
by the independent auditors, who do not express an opinion thereon. Further
information about the Fund's performance is also included in the Annual Report
to Shareholders, which may be obtained without charge.
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS FOR THE FOR THE PERIOD
ENDED YEARS ENDED SEPTEMBER 11, 1991 #
MAY 31, NOVEMBER 30, TO
1995 ----------------------- NOVEMBER 30,
(UNAUDITED) 1994 1993 1992 1991
----------- ------ ------ ------ --------------------
<S> <C> <C> <C> <C> <C>
Net asset value, $ 8.49 $10.02 $ 9.97 $ 9.97 $ 9.88
beginning of period.... ------ ------ ------ ------ ------
Net increase (decrease)
from investment
operations:
Net investment income... 0.31 0.62 0.70 0.77 0.18
Net realized and
unrealized gains
(losses) from
investment 0.45 (1.53) 0.05 0.01 0.09
transactions........... ------ ------ ------ ------ ------
Net increase (decrease)
in net assets resulting 0.76 (0.91) 0.75 0.78 0.27
from operations........ ------ ------ ------ ------ ------
Less distributions:
Dividends from net
investment (0.31) (0.62) (0.70) (0.78) (0.18)
income................. ------ ------ ------ ------ ------
Net asset value, end of $ 8.94 $ 8.49 $10.02 $ 9.97 $ 9.97
period................. ====== ====== ====== ====== ======
Total investment return 9.26% (9.37)% 7.69% 8.13% 2.37%
(1).................... ====== ====== ====== ====== ======
Ratios/Supplemental
Data:
Net assets, end of
period (000's omitted). $6,245 $4,955 $6,232 $5,517 $4,514
Ratio of expenses to
average net assets..... 0.69%* 0.65% 0.62% 0.63% 0.72%*
Ratio of net investment
income to average net
assets................. 7.29%* 6.76% 6.87% 7.70% 8.36%*
Portfolio turnover rate. 91.33% 358.07% 83.13% 28.33% 71.22%
</TABLE>
- -------
# Commencement of offering of shares.
* Annualized.
(1) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends and other distributions
at net asset value on the payable date and a sale at net asset value on the
last day of each period reported. Total investment returns for periods of
less than one year have not been annualized.

3
<PAGE>

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to provide high current income consistent
with the preservation of capital and liquidity. The Fund is a diversified se-
ries of an open-end management investment company. Mitchell Hutchins Asset Man-
agement Inc. ("Mitchell Hutchins") is the Fund's investment adviser and admin-
istrator.

Under normal conditions, the Fund invests at least 65% of its total assets in
U.S. government securities, including mortgage-backed securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities ("U.S.
government mortgage-backed securities"), other obligations issued or guaranteed
by the U.S. government, its agencies or instrumentalities and repurchase agree-
ments with respect to those securities. Up to 35% of the Fund's total assets
may be invested in mortgage- and asset-backed securities that are issued by
private issuers and that at the time of purchase have been rated AAA by Stan-
dard & Poor's, a division of The McGraw Hill Companies, Inc. ("S&P"), or Aaa by
Moody's Investors Service, Inc. ("Moody's"), have an equivalent rating from an-
other nationally recognized statistical rating organization ("NRSRO") or, if
unrated, have been determined by Mitchell Hutchins to be of comparable quality.
As a matter of fundamental policy, the Fund normally concentrates at least 25%
of its total assets in mortgage- and asset-backed securities issued or guaran-
teed by private issuers or by agencies or instrumentalities of the U.S. govern-
ment; this fundamental policy may not be changed without shareholder approval.
In addition, the Fund may invest up to 5% of its total assets in investment
grade corporate bonds. Investment grade bonds are those bonds that, at the time
of purchase, are assigned one of the four highest grades by S&P or Moody's, are
comparably rated by another NRSRO or, if unrated, are determined by Mitchell
Hutchins to be of comparable quality to such rated securities.

Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Multi-class pass-through securities and collateralized
mortgage obligations are collectively referred to herein as CMOs. The U.S. gov-
ernment mortgage-backed securities in which the Fund may invest include mort-
gage-backed securities issued or guaranteed as to the payment of principal and
interest (but not as to market value) by the Government National Mortgage Asso-
ciation ("Ginnie Mae"), the Federal National Mortgage Association ("Fannie
Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac"). Other
mortgage-backed securities, in which the Fund may invest up to 35% of its total
assets, are issued by private issuers, generally originators of and investors
in mortgage loans, including savings associations, mortgage bankers, commercial
banks, investment bankers and special purpose entities (collectively, "Private
Mortgage Lenders"). Payments of principal and interest (but not the market val-
ue) of such private mortgage-backed securities may be supported by pools of
mortgage loans or other mortgage-backed securities that are guaranteed, di-
rectly or indirectly, by the U.S. government or one of its agencies or instru-
mentalities, or they may be issued without any government guarantee of the un-
derlying mortgage assets but with some form of non-government credit enhance-
ment. For more information concerning the types of mortgage-backed securities
in which the Fund may invest, see Appendix A to this Prospectus.

Non-mortgage-related U.S. government securities in which the Fund may invest
include U.S. Treasury obligations and other obligations

4
<PAGE>

backed by the full faith and credit of the U.S. government and securities that
are supported primarily or solely by the creditworthiness of the issuer, such
as securities issued by the Resolution Funding Corporation, the Student Loan
Marketing Association, the Federal Home Loan Banks and the Tennessee Valley Au-
thority.

The Fund may invest in certain zero coupon securities that are U.S. Treasury
notes and bonds that have been stripped of their unmatured interest coupon re-
ceipts or interests in such U.S. Treasury securities or coupons. The SEC staff
currently takes the position that "stripped" U.S. government securities that
are not issued through the U.S. Treasury are not U.S. government securities. As
long as the SEC takes this position, Certificates of Accrual Treasury Securi-
ties ("CATS") and Treasury Income Growth Receipts ("TIGRs") that are not issued
through the U.S. Treasury will not be counted as U.S. government securities for
purposes of the 65% investment requirement.

Asset-backed securities have structural characteristics similar to mortgage-
backed securities. However, the underlying assets are not first lien mortgage
loans or interests therein, but include assets such as motor vehicle install-
ment sale contracts, other installment sale contracts, home equity loans,
leases of various types of real and personal property and receivables from re-
volving credit (credit card) agreements. Such assets are securitized through
the use of trusts or special purpose corporations. Payments or distributions of
principal and interest on asset-backed securities may be guaranteed up to cer-
tain amounts and for a certain time period by a letter of credit or a pool in-
surance policy issued by a financial institution unaffiliated with the issuer
or other credit enhancements may be present.

The Fund also may seek to enhance income or to reduce the risks associated
with ownership of the securities in which it invests through the use of op-
tions, futures contracts, options on futures contracts and interest rate pro-
tection transactions. See "Hedging and Related Income Strategies."

RISK FACTORS. The Fund's net asset value fluctuates based on changes in the
value of its portfolio securities. Neither the issuance by, nor the guarantee
of, a U.S. government agency, nor even the highest rating by a NRSRO consti-
tutes assurance that the security will not fluctuate in value or that the Fund
will receive the originally anticipated yield on the security. An investment in
the Fund also is subject to the risks discussed below.

INTEREST RATE SENSITIVITY. The investment income of the Fund is based on the
income earned on the securities it holds, less expenses incurred; thus, the
Fund's investment income may be expected to fluctuate in response to changes in
such expenses or income. For example, the investment income of the Fund may be
affected if it experiences a net inflow of new money that is then invested in
securities whose yield is higher or lower than that earned on then-current in-
vestments. Generally, the value of the debt securities held by the Fund, and
thus the net asset value per share of the Fund, will rise when interest rates
decline. Conversely, when interest rates rise, the value of fixed income secu-
rities, and thus the net asset value per share of the Fund, may be expected to
decline.

--RISKS OF MORTGAGE- AND ASSET-BACKED SECURITIES. The yield characteristics
of the mortgage- and asset-backed securities in which the Fund may invest dif-
fer from those of traditional debt securities. Among the major differences are
that interest and principal payments are made more frequently on mortgage- and
asset-backed securities (usually monthly) and that principal may be prepaid at
any time because the underlying mortgage loans or

5
<PAGE>

other assets generally may be prepaid at any time. As a result, if the Fund
purchases these securities at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Conversely, if the Fund purchases these securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity. Amounts available for reinvestment by the Fund are
likely to be greater during a period of declining interest rates and, as a re-
sult, are likely to be reinvested at lower interest rates than during a period
of rising interest rates. Accelerated prepayments on securities purchased by
the Fund at a premium also impose a risk of loss of principal because the pre-
mium may not have been fully amortized at the time the principal is prepaid in
full. The market for privately issued mortgage- and asset-backed securities is
smaller and less liquid than the market for U.S. government mortgage-backed se-
curities. CMO classes may be specially structured in a manner that provides any
of a wide variety of investment characteristics, such as yield, effective matu-
rity and interest rate sensitivity. As market conditions change, however, and
particularly during periods of rapid or unanticipated changes in market inter-
est rates, the attractiveness of the CMO classes and the ability of the struc-
ture to provide the anticipated investment characteristics may be significantly
reduced. These changes can result in volatility in the market value and, in
some instances, reduced liquidity, of the CMO class.

The rate of interest payable on CMO classes may be set at levels that are ei-
ther above or below market rates at the time of issuance, so that the securi-
ties will be sold at a substantial premium to, or at a discount from, par val-
ue. In the most extreme case, one class will be entitled to receive all or a
portion of the interest but none of the principal from the underlying mortgage
assets (the interest-only or "IO" class) and one class will be entitled to re-
ceive all or a portion of the principal but none of the interest (the princi-
pal-only or "PO" class). IOs and POs may also be created from mortgage-backed
securities that are not CMOs. The yields on IOs, POs and other mortgage-backed
securities that are purchased at a substantial premium or discount generally
are extremely sensitive to the rate of principal payments (including prepay-
ments) on the underlying mortgage assets. If the mortgage assets underlying an
IO experience greater than anticipated principal prepayments, an investor may
fail to recoup fully his or her initial investment even if the security is gov-
ernment issued or guaranteed or is rated AAA or the equivalent.

Some CMO classes are structured to pay interest at rates that are adjusted in
accordance with a formula, such as a multiple or fraction of the change in a
specified interest rate index, so as to pay at a rate that will be attractive
in certain interest rate environments but not in others. For example, an in-
verse floating rate CMO class pays interest at a rate that increases as a spec-
ified interest rate index decreases but decreases as that index increases. For
other CMO classes, the yield may move in the same direction as market interest
rates--i.e., the yield may increase as rates increase and decrease as rates de-
crease--but may do so more rapidly or to a greater degree. The market value of
such securities generally is more volatile than that of a fixed rate obliga-
tion. Such interest rate formulas may be combined with other CMO characteris-
tics. For example, a CMO class may be an "inverse IO," on which the holders are
entitled to receive no payments of principal and are entitled to receive inter-
est at a rate that will vary inversely with a specified index or a multiple
thereof.

During 1994, the value and liquidity of many mortgage-backed securities de-
clined sharply due primarily to increases in interest

6
<PAGE>

rates. There can be no assurance that such declines will not recur. The market
value of certain mortgage-backed securities in which the Fund may invest, in-
cluding IO and PO classes of mortgage-backed securities and inverse floating
rate securities, can be extremely volatile and these securities may become il-
liquid. Mitchell Hutchins seeks to manage the Fund so that the volatility of
the Fund's portfolio, taken as a whole, is consistent with the Fund's invest-
ment objective. If market interest rates or other factors that affect the the
volatility of securities held by the Fund change in ways that Mitchell Hutchins
does not anticipate, the Fund's ability to meet its investment objective may be
reduced.

See Appendix A to this Prospectus for more information concerning the types
of mortgage-backed securities in which the Fund may invest.

--RISKS OF ZERO COUPON SECURITIES. The Fund may invest in certain zero coupon
securities that are "stripped" U.S. Treasury notes and bonds. Zero coupon secu-
rities pay no interest to holders prior to maturity. However, a portion of the
original issue discount on the zero coupon securities must be included in the
Fund's income. Accordingly, to continue to qualify for tax treatment as a regu-
lated investment company and to avoid a certain excise tax (see "Taxes" in the
Statement of Additional Information), the Fund may be required to distribute as
dividends amounts that are greater than the total amount of cash it actually
receives. These distributions must be made from the Fund's cash assets or, if
necessary, from the proceeds of sales of portfolio securities. The Fund will
not be able to purchase additional income-producing securities with cash used
to make such distributions and its current income ultimately may be reduced as
a result. Zero coupon securities usually trade at a deep discount from their
face or par value and will be subject to greater fluctuations of market value
in response to changing interest rates than debt obligations of comparable ma-
turities that make current distributions of interest in cash.

HEDGING AND RELATED INCOME STRATEGIES. The Fund may use options (both ex-
change-traded and over-the-counter ("OTC')), futures contracts and interest
rate protection transactions to attempt to enhance income and to reduce the
overall risk of its investments (hedge). Hedging strategies may be used in an
attempt to manage the Fund's average duration and other risks of its invest-
ments, which can affect fluctuations in the Fund's net asset value. The Fund's
ability to use these strategies may be limited by market conditions, regulatory
limits and tax considerations. The use of options and futures solely to enhance
income may be considered a form of speculation. Appendix B to this Prospectus
describes the hedging instruments that the Fund may use, and the Statement of
Additional Information contains further information on these strategies.

The Fund may write (sell) covered call and put options, buy call and put op-
tions, buy and sell interest rate futures contracts and buy call or put options
or write covered call options on such futures contracts. The Fund may enter
into options and futures contracts under which the full value of its portfolio
is at risk. Under normal circumstances, however, the Fund's use of these in-
struments will place at risk a much smaller portion of its assets.

The Fund may enter into interest rate protection transactions, including in-
terest rate swaps, caps, collars and floors, to preserve a return or spread on
a particular investment or portion of a portfolio or to protect against any in-
crease in the price of securities it anticipates purchasing at a later date.
The Fund will enter into interest rate protection transactions only with banks
and recognized securities dealers believed by Mitchell Hutchins to present min-
imal credit risks in accordance with guidelines established

7
<PAGE>

by the Trust's board of trustees. The Fund would use these transactions as a
hedge and not as a speculative investment.

The Fund might not employ any of the strategies described above, and no as-
surance can be given that any strategy used will succeed. If Mitchell Hutchins
incorrectly forecasts interest rates, market values or other economic factors
in utilizing a strategy for the Fund, the Fund would be in a better position if
it had not entered into the transaction at all. The use of these strategies in-
volves certain special risks, including (1) the fact that skills needed to use
hedging instruments are different from those needed to select the Fund's secu-
rities, (2) possible imperfect correlation, or even no correlation, between
price movements of hedging instruments and price movements of the investments
being hedged, (3) the fact that, while hedging strategies can reduce the risk
of loss, they can also reduce the opportunity for gain, or even result in loss-
es, by offsetting favorable price movements in hedged investments and (4) the
possible inability of the Fund to purchase or sell a portfolio security at a
time that otherwise would be favorable for it to do so, or the possible need
for the Fund to sell a portfolio security at a disadvantageous time, due to the
need for the Fund to maintain "cover" or to segregate securities in connection
with hedging transactions and the possible inability of the Fund to close out
or to liquidate its hedged position.

New financial products and risk management techniques continue to be devel-
oped. The Fund may use these instruments and techniques to the extent consis-
tent with its investment objective and regulatory and federal tax considera-
tions.

DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS. The Fund may enter into dol-
lar rolls, in which the Fund sells mortgage-backed or other securities for de-
livery in the current month and simultaneously contracts to purchase substan-
tially similar securities on a specified future date. In the case of dollar
rolls involving mortgage-backed securities, the mortgage-backed securities that
are purchased will be of the same type and will have the same interest rate as
those sold, but will be supported by different pools of mortgages. The Fund
forgoes principal and interest paid during the roll period on the securities
sold in a dollar roll, but the Fund is compensated by the difference between
the current sales price and the lower price for the future purchase as well as
by any interest earned on the proceeds of the securities sold. The Fund also
could be compensated through the receipt of fee income equivalent to a lower
forward price. At the time the Fund enters into a dollar roll, an approved cus-
todian will segregate cash or liquid, high-grade debt securities having a value
not less than the forward price.

The Fund may also enter into reverse repurchase agreements in which the Fund
sells securities to a bank or dealer and agrees to repurchase them at a mutu-
ally agreed-upon date and price. The market value of securities sold under re-
verse repurchase agreements typically is greater than the proceeds of the sale,
and accordingly, the market value of the securities sold is likely to be
greater than the value of the securities in which the Fund invests those pro-
ceeds. Thus, reverse repurchase agreements involve the risk that the buyer of
the securities sold by the Fund might be unable to deliver them when the Fund
seeks to repurchase. In the event the buyer of securities under a reverse re-
purchase agreement files for bankruptcy or becomes insolvent, such buyer or its
trustee or receiver may receive an extension of time to determine whether to
enforce the Fund's obligation to repurchase the securities and the Fund's use
of the proceeds of the reverse repurchase agreement may effectively be re-
stricted pending such decision.

8
<PAGE>

The dollar rolls and reverse repurchase agreements entered into by the Fund
normally will be arbitrage transactions in which the Fund will maintain an off-
setting position in securities or repurchase agreements that mature on or be-
fore the settlement date on the related dollar roll or reverse repurchase
agreement. Since the Fund will receive interest on the securities or repurchase
agreements in which it invests the transaction proceeds, such transactions may
involve leverage. However, since such securities or repurchase agreements must
satisfy the quality requirements of the Fund, and will mature on or before the
settlement date on the related dollar roll or reverse repurchase agreement,
Mitchell Hutchins believes that such arbitrage transactions do not present the
risks to the Fund that are associated with other types of leverage.

Dollar rolls and reverse repurchase agreements will be considered to be
borrowings and, accordingly, will be subject to the Fund's limitations on
borrowings, which will restrict the aggregate of such transactions (plus any
other borrowings) to 33 1/3% of the Fund's total assets. The Fund will not en-
ter into dollar rolls or reverse repurchase agreements, other than in arbitrage
transactions as described above, in an aggregate amount in excess of 5% of the
Fund's total assets. The Fund has no present intention to enter into dollar
rolls other than in such arbitrage transactions, and it has no present inten-
tion to enter into reverse repurchase agreements other than in such arbitrage
transactions or for temporary or emergency purposes. The Fund may borrow money
for temporary or emergency purposes, but not in excess of an additional 5% of
its total assets.

REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
Fund purchases securities from a bank or recognized securities dealer and si-
multaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to
the coupon rate or maturity of the purchased securities. Repurchase agreements
carry certain risks not associated with direct investments in securities, in-
cluding possible decline in the market value of the underlying securities and
delays and costs to the Fund if the other party to the repurchase agreement be-
comes insolvent. The Fund intends to enter into repurchase agree-ments only
with banks and dealers in transactions believed by Mitchell Hutchins to present
minimum credit risks in accordance with guidelines established by the Trust's
board of trustees.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase securities
on a "when-issued" basis or may purchase or sell securities for "delayed deliv-
ery". In when-issued or delayed delivery transactions, delivery of the securi-
ties occurs beyond normal settlement period, but the Fund generally would not
pay for such securities or start earning interest on them until they are deliv-
ered. However, when the Fund purchases securities on a when-issued or delayed
delivery basis, it immediately assumes the risks of ownership, including the
risk of price fluctuation. Failure by a counter party to deliver a security
purchased on a when-issued or delayed delivery basis may result in a loss or
missed opportunity to make an alternative investment. Depending on market con-
ditions, the Fund's when-issued and delayed delivery purchase commitments could
cause its net asset value per share to be more volatile, because such securi-
ties may increase the amount by which the Fund's total assets, including the
value of when-issued and delayed delivery securities held by the Fund, exceed
its net assets.

ILLIQUID SECURITIES. The Fund may invest up to 10% of its net assets in il-
liquid securities. The term "illiquid securities" for this purpose

9
<PAGE>

means securities that cannot be disposed of within seven days in the ordinary
course of business at approximately the price at which the Fund has valued the
securities. Under current guidelines of the staff of the SEC, IOs and POs are
considered illiquid. However, IO and PO classes of fixed-rate mortgage-backed
securities issued by the U.S. government or one of its agencies or instrumen-
talities will not be considered illiquid if Mitchell Hutchins has determined
that they are liquid pursuant to guidelines established by the Trust's board of
trustees. Illiquid securities also are considered to include, among other
things, written OTC options, repurchase agreements with maturities in excess of
seven days and securities whose disposition is restricted under the federal se-
curities laws (other than "Rule 144A" securities that Mitchell Hutchins has de-
termined to be liquid under procedures approved by the Trust's board of trust-
ees).

Rule 144A establishes a "safe harbor" from the requirements of the Securities
Act of 1933 ("1933 Act"). Institutional markets for restricted securities have
developed as a result of Rule 144A, providing both readily ascertainable values
for restricted securities and the ability to liquidate an investment to satisfy
share redemption orders. An insufficient number of qualified institutional buy-
ers interested in purchasing Rule 144A-eligible restricted securities held by
the Fund, however, could affect adversely the marketability of such portfolio
securities and the Fund might be unable to dispose of such securities promptly
or at favorable prices.

The Fund may not be able to sell illiquid securities when Mitchell Hutchins
considers it desirable to do so or may have to sell such securities at a price
lower than could be obtained if they were more liquid. Also the sale of illiq-
uid securities may require more time and may result in higher dealer discounts
and other selling expenses than does the sale of securities that are not illiq-
uid. Illiquid securities may be more difficult to value due to the unavailabil-
ity of reliable market quotations for such securities, and investments in il-
liquid securities may have an adverse impact on net asset value.

LENDING OF PORTFOLIO SECURITIES. The Fund is authorized to lend up to 10% of
the total value of its portfolio securities to broker-dealers or institutional
investors that Mitchell Hutchins deems qualified. Lending securities enables
the Fund to earn additional income, but could result in a loss or delay in re-
covering the securities.

PORTFOLIO TURNOVER. The Fund's portfolio turnover rate may vary greatly from
year to year and will not be a limiting factor when Mitchell Hutchins deems
portfolio changes appropriate. A higher turnover rate for the Fund (100% or
more) will involve correspondingly greater transaction costs, which will be
borne directly by the Fund, and may increase the potential for short-term capi-
tal gains.

DERIVATIVES. The Fund may invest in instruments or securities that commonly
are referred to as "derivatives," because their value depends on (or "derives"
from) the value of an underlying asset, reference rate or index. Derivative in-
struments include options, futures contracts, interest rate protection con-
tracts and similar instruments that may be used by the Fund in hedging and re-
lated income strategies. There is only limited consensus as to what constitutes
a "derivative" security. However, in Mitchell Hutchins' view, the derivative
securities in which the Fund may invest include "stripped" securities, such as
CATS and TIGRs, and specially structured types of mortgage- and asset-backed
securities, such as IOs, POs and inverse floaters. The market value of deriva-
tive instruments and securities sometimes is more volatile than that of other
investments, and each type of derivative may pose its own special

10
<PAGE>

risks. Mitchell Hutchins takes these risks into account in its management of
the Fund.

OTHER INFORMATION. When Mitchell Hutchins believes unusual circumstances war-
rant a defensive position, the Fund temporarily may commit all or any portion
of its assets to cash or money market instruments. Such instruments will be
limited to obligations of the U.S. government, its agencies or instrumentali-
ties and repurchase agreements secured by such obligations. The Fund may also
engage in short sales of securities "against the box" to defer realization of
gains or losses for tax purposes.

There can be no assurance that the Fund will achieve its investment objec-
tive. The Fund's net asset value will fluctuate based upon changes in the value
of its portfolio securities. The Fund's investment objective and certain other
investment limitations as described in the Statement of Additional Information
are fundamental policies and may not be changed without shareholder approval.
All other investment policies may be changed by the Trust's board of trustees
without shareholder approval.

PURCHASES

Class Y shares are sold to eligible investors at the net asset value next de-
termined (see "Valuation of Shares") after the purchase order is received at
PaineWebber's New York City offices, or for purchases by the trustee of the PW
SIP, by the Fund's transfer agent ("Transfer Agent"). No initial or contingent
deferred sales charges is imposed, nor are Class Y shares subject to Rule 12b-1
distribution or service fees. Mitchell Hutchins is the distributor of the
Fund's shares and has appointed PaineWebber Incorporated ("PaineWebber") as the
exclusive dealer for the sale of those shares. The Fund and Mitchell Hutchins
reserve the right to reject any purchase order and to suspend the offering of
the Class Y shares for a period of time.

PURCHASES BY INSIGHT PARTICIPANTS. An investor who purchases $50,000 or more
of shares of mutual funds that are available to INSIGHT participants (which in-
clude the PaineWebber mutual funds in the Flexible Pricing System SM and cer-
tain specified other mutual funds) may take part in INSIGHT, a total portfolio
asset allocation program sponsored by PaineWebber, and thus become eligible to
purchase Class Y shares. INSIGHT offers comprehensive investment services, in-
cluding a personalized asset allocation investment strategy using an appropri-
ate combination of funds, monitoring of investment performance and comprehen-
sive quarterly reports that cover market trends, portfolio summaries and per-
sonalized account information. Participation in INSIGHT is subject to payment
of an advisory fee to PaineWebber at the maximum annual rate of 1.50% of assets
held through the program (generally charged quarterly in advance), which covers
all INSIGHT investment advisory services and program administration fees. Em-
ployees of PaineWebber and its affiliates are entitled to a 50% reduction in
the fee otherwise payable for participation in INSIGHT. INSIGHT clients may
elect to have their INSIGHT fees charged to their PaineWebber accounts (by the
automatic redemption of money market fund shares) or, if a qualified plan, in-
voiced. Please contact your PaineWebber investment executive or PaineWebber's
correspondent firms or call 1-800-647-1568 for more information concerning mu-
tual funds that are available to INSIGHT participants or for other INSIGHT
information.

PURCHASES BY THE TRUSTEE OF THE PW SIP. Class Y shares also are offered for
sale to the trustee of the PW SIP, a defined contribution plan sponsored by
Paine Webber Group Inc. ("PW Group"). The trustee of the PW SIP purchases
Class Y shares to implement the investment choices of individual plan partici-
pants with respect to their PW SIP contributions. INDIVIDUAL PLAN PARTICIPANTS
SHOULD CONSULT THE

11
<PAGE>

PLAN INFORMATION STATEMENT AND SUMMARY PLAN DESCRIPTION OF THE PW SIP (COLLEC-
TIVELY, "PLAN DOCUMENTS") FOR A DESCRIPTION OF THE PROCEDURES AND LIMITATIONS
APPLICABLE TO MAKING AND CHANGING INVESTMENT CHOICES. Copies of the Plan Docu-
ments are available from the PaineWebber Incorporated Benefits Department, 10th
Floor, 1000 Harbor Boulevard, Weehawken, New Jersey 07087 (telephone 1-201-902-
4444).

As described in the Plan Documents, the average net asset value per share at
which Class Y shares of the Fund are purchased by the trustee of the PW SIP for
the accounts of individual participants might be more or less than the net as-
set value per share prevailing at the time that such participants made their
investment choices or made their contributions to the PW SIP.

ACQUISITION OF CLASS Y SHARES BY OTHERS. Present holders of Class Y shares of
a former Mitchell Hutchins/Kidder, Peabody ("MH/KP") mutual fund who are not
current INSIGHT participants may acquire Class Y shares of the Fund, but only
when those shares are issued in connection with the reorganization of the MH/KP
mutual fund into the Fund. This category includes former employees of Kidder,
Peabody & Co., Incorporated, their associated accounts and present and former
directors and trustees of the MH/KP mutual funds. Dividends and other distribu-
tions on Class Y shares of the Fund issued in connection with the reorganiza-
tion will be paid in additional Class Y shares at net asset value, unless the
shareholder has requested cash payments. These holders may not otherwise pur-
chase additional Class Y shares.

The Fund is authorized to offer Class Y shares to other employee benefit and
retirement plans of PW Group and its affiliates and certain investment advisory
programs that are sponsored by PaineWebber and that may invest in PaineWebber
mutual funds. At present, however, INSIGHT participants and the PW SIP are the
only purchasers in these categories.

REDEMPTIONS

Class Y shares may be redeemed at their net asset value and redemption pro-
ceeds will be paid after receipt of a redemption request, as described below.

REDEMPTIONS THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. INSIGHT participants
who are Class Y shareholders may submit redemption requests to their investment
executives or correspondent firms in person or by telephone, mail or wire. As
the Fund's agent, PaineWebber may honor a redemption request by repurchasing
Class Y shares from a redeeming shareholder at the shares' net asset value next
determined after receipt of the request by PaineWebber's New York City offices.
Within three Business Days after receipt of the request, repurchase proceeds
will be paid by check or credited to the shareholder's brokerage account at the
election of the shareholder. PaineWebber investment executives and correspon-
dent firms are responsible for promptly forwarding redemption requests to
PaineWebber's New York City offices. A "Business Day" is any day, Monday
through Friday, on which the New York Stock Exchange, Inc. ("NYSE") is open for
business.

PaineWebber reserves the right not to honor any redemption request, in which
case PaineWebber promptly will forward the request to the Transfer Agent for
treatment as described below.

REDEMPTION THROUGH THE TRANSFER AGENT. Shareholders also may redeem Class Y
shares through the Fund's transfer agent, PFPC Inc. ("Transfer Agent"). Share-
holders should mail redemption requests directly to the Transfer Agent: PFPC
Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington, Delaware
19899. A redemption request will be executed at the net asset value next com-
puted after it is received in "good order," and redemption proceeds will be
paid within seven days of the re-

12
<PAGE>

ceipt of the request. "Good order" means that the request must be accompanied
by the following: (1) a letter of instruction or a stock assignment specifying
the number of shares or amount of investment to be redeemed (or that all shares
credited to the Fund account be redeemed), signed by all registered owners of
the shares in the exact names in which they are registered, (2) a guarantee of
the signature of each registered owner by an eligible institution acceptable to
the Transfer Agent and in accordance with SEC rules, such as a commercial bank,
trust company or member of a recognized stock exchange and (3) other supporting
legal documents for estates, trusts, guardianships, custodianships, partner-
ships and corporations. Shareholders are responsible for ensuring that a re-
quest for redemption is received in "good order."

REDEMPTIONS FOR PARTICIPANTS IN PW SIP. The trustee of the PW SIP redeems
Class Y shares to implement the investment choices of individual plan partici-
pants with respect to their PW SIP contributions, as described in the Plan Doc-
uments referenced under "Purchases" above. As described in the Plan Documents,
the average net asset value per share at which Class Y shares are redeemed by
the trustee of the PW SIP might be more or less than the net asset value per
share prevailing at the time that such participants made their investment
choices.

ADDITIONAL INFORMATION ON REDEMPTIONS. A shareholder (other than a partici-
pant in the PW SIP) may have redemption proceeds of $1 million or more wired to
the shareholder's PaineWebber brokerage account or a commercial bank account
designated by the shareholder. Questions about this option, or redemption re-
quirements generally, should be referred to the shareholder's PaineWebber in-
vestment executive or correspondent firm. If a shareholder requests redemption
of shares which were purchased recently, the Fund may delay payment until it is
assured that good payment has been received. In the case of purchases by check,
this can take up to 15 days.

Because the Fund incurs certain fixed costs in maintaining shareholder ac-
counts, the Fund reserves the right to redeem all Fund shares in any share-
holder account having a net asset value below the lesser of $500 or the current
minimum for initial purchases. If the Fund elects to do so, it will notify the
shareholder and provide the shareholder the opportunity to increase the amount
invested to the minimum required level or more within 60 days of the notice.
The Fund will not redeem accounts that fall below the minimum required level
solely as a result of a reduction in net asset value per share.

DIVIDENDS AND TAXES

DIVIDENDS. Dividends from the Fund's net investment income are declared daily
and paid monthly on or about the 15th day of each month. Net investment income
includes accrued interest and discount, less amortization of premium and ac-
crued expenses. Substantially all of the Fund's net capital gain (the excess of
net long-term capital gain over net short-term capital loss) and net short-term
capital gain, if any, are distributed annually with the Fund's next regular
dividend. The Fund may make additional distributions if necessary to avoid a 4%
excise tax on undistributed income and capital gain.

PW SIP PARTICIPANTS: Dividends and capital gain distributions are paid in ad-
ditional Class Y shares at net asset value unless the Transfer Agent is in-
structed otherwise.

INSIGHT PARTICIPANTS: Dividends and other distributions are paid in addi-
tional Class Y shares at net asset value unless the shareholder has requested
cash payments. Share-

13
<PAGE>

holders who wish to receive dividends and/or capital gain distributions in
cash, either mailed to the shareholder by check or credited to the sharehold-
er's PaineWebber account, should contact their PaineWebber investment execu-
tives or correspondent firms.

TAXES. The Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code so that it will be relieved
of federal income tax on that part of its investment company taxable income
(consisting generally of net investment income and net short-term capital
gain) and net capital gain that is distributed to its shareholders.

PW SIP PARTICIPANTS. Qualified profit-sharing plans such as the PW SIP pay
no federal income tax. Individual participants in the PW SIP should consult
the Plan Documents and their own tax advisers for information on the tax con-
sequences associated with participating in the PW SIP.

INSIGHT PARTICIPANTS: Dividends from the Fund's investment company taxable
income (whether paid in cash or in additional shares) generally are taxable to
its shareholders as ordinary income. Distributions of the Fund's net capital
gain (whether paid in cash or in additional shares) are taxable to its share-
holders as long-term capital gain, regardless of how long they have held their
Fund shares. Shareholders not subject to tax on their income generally will
not be required to pay tax on amounts distributed to them.

The Fund notifies its shareholders following the end of each calendar year
of the amounts of dividends and capital gain distributions paid (or deemed
paid) that year.

The Fund is required to withhold 31% of all dividends, capital gain distri-
butions and re- demption proceeds payable to any individuals and certain other
noncorporate shareholders who do not provide the Fund with a correct taxpayer
identification number. Withholding at that rate also is required from divi-
dends and capital gain distributions payable to such shareholders who other-
wise are subject to backup withholding.

A redemption of shares of the Fund may result in taxable gain or loss to the
redeeming shareholder, depending on whether the redemption proceeds payable to
the shareholder are more or less than the shareholder's adjusted basis for the
redeemed shares. An exchange of Fund shares for shares of another PaineWebber
mutual fund generally will have similar tax consequences. In addition, if
shares of the Fund are purchased within 30 days before or after redeeming the
other Fund shares at a loss, all or a portion of that loss will not be deduct-
ible and will increase the basis of the newly acquired shares.

The foregoing is only a summary of some of the important federal tax consid-
erations generally affecting the Fund and its shareholders; see the Statement
of Additional Information for a further discussion. There may be other feder-
al, state or local tax considerations applicable to a particular investor.
Prospective investors are urged to consult their tax advisers.

VALUATION OF SHARES

The net asset value of the Fund's shares fluctuates and is determined as of
the close of regular trading on the NYSE (currently 4:00 p.m., Eastern time)
each Business Day. Net asset value per share is computed by dividing the value
of the securities held by the Fund plus any cash or other assets minus all li-
abilities by the total number of Fund shares outstanding.

The Fund values its assets based on their current market value when market
quotations

14
<PAGE>

are readily available. If such value cannot be established, assets are valued
at fair value as determined in good faith by or under the direction of the
Trust's board of trustees. The amortized cost method of valuation generally is
used to value debt obligations with 60 days or less remaining to maturity, un-
less the board of trustees determines that this does not represent fair value.

MANAGEMENT

The Trust's board of trustees, as part of its overall management responsi-
bility, oversees various organizations responsible for the Fund's day-to-day
management. Mitchell Hutchins, the Fund's investment adviser and administra-
tor, makes and implements all investment decisions and supervises all aspects
of the Fund's operations. Mitchell Hutchins receives a monthly fee for these
services at the annual rate of 0.50% of the Fund's average daily net assets.

The Fund incurs various other expenses in its operations and, for the fiscal
year ended November 30, 1994, the Fund's total expenses for its Class Y
shares, stated as a percentage of average net assets, was 0.65%.

Mitchell Hutchins is located at 1285 Avenue of the Americas, New York, New
York 10019. It is a wholly owned subsidiary of PaineWebber, which is in turn
wholly owned by PW Group, the sponsor of the PW SIP and a publicly owned fi-
nancial services holding company. At October 31, 1995, Mitchell Hutchins was
adviser or sub-adviser to 38 investment companies with 75 separate portfolios
and aggregate assets of over $29 billion.

Nirmal Singh and Craig M. Varrelman have been responsible for the day-to-day
management of the Fund's portfolio since December 1994. Mr. Singh is a first
vice president of Mitchell Hutchins, and Mr. Varrelman is a first vice presi-
dent of Mitchell Hutchins. Prior to joining Mitchell Hutchins in September
1993, Mr. Singh was with Merrill Lynch Asset Management, Inc., where he was a
member of the portfolio management team responsible for managing several di-
versified funds, including mortgage-backed securities funds with assets total-
ing approximately $8 billion. From 1990 to 1993, Mr. Singh was a senior port-
folio manager at Nomura Mortgage Fund Management Corporation, where he was re-
sponsible for managing approximately $3 billion in mortgage assets. From 1987
to 1990, Mr. Singh was a vice president of Lehman Brothers. Mr. Varrelman has
been with Mitchell Hutchins as a portfolio manager since 1988.

Other members of Mitchell Hutchins domestic fixed income group provide input
on market outlook, interest rate factors and other considerations pertaining
to fixed income investment.

Mitchell Hutchins investment personnel may engage in securities transactions
for their own accounts pursuant to a code of ethics which establishes proce-
dures for personal investing and restricts certain transactions.

PERFORMANCE INFORMATION

The Fund performs a standardized computation of annualized total return and
may show this return in advertisements or promotional materials. Standardized
return shows the change in value of a Fund investment as a steady compound an-
nual rate of return. Actual year-by-year returns fluctuate and may be higher
or lower than standardized return. One-, five- and ten-year periods will be
shown, unless the Class has been in existence for a shorter period. Total re-
turn calculations assume reinvestment of dividends and other distributions.

15
<PAGE>

The Fund may use other total return presentations in conjunction with stan-
dardized return. These may cover the same or different periods than those used
for standardized return and may include cumulative returns, average annual
rates, actual year-by-year rates or any combination thereof.

The Fund also may advertise its yield. Yield reflects investment income net
of expenses over a 30-day (or one-month) period on a Class Y share, expressed
as an annualized percentage of the net asset value per share at the end of the
period. Yield computations differ from other accounting methods and therefore
may differ from dividends actually paid or reported net income.

GENERAL INFORMATION

ORGANIZATION. PaineWebber Managed Investments Trust is registered with the
SEC as an open-end management investment company and was organized as a busi-
ness trust under the laws of the Commonwealth of Massachusetts by Declaration
of Trust dated November 21, 1986. The trustees have authority to issue an un-
limited number of shares of beneficial interest of separate series, par value
$.001 per share. Shares of four series, including the Fund, have been autho-
rized.

The shares of beneficial interest of the Fund are divided into four classes,
designated Class A, Class B, Class C and Class Y shares. Each Class represents
interests in the same assets of the Fund. Class A, B and C differ as follows:
(1) each Class has exclusive voting rights on matters pertaining to its plan of
distribution, (2) Class A shares generally are subject to an initial sales
charge, (3) Class B shares bear ongoing distribution fees, may be subject to a
contingent deferred sales charge upon most redemptions and will automatically
convert to Class A shares approximately six years after issuance, (4) Class C
shares are not subject to an initial sales charge, but are subject to a contin-
gent deferred sales charge if redeemed within one year of purchase, bear ongo-
ing distribution fees and do not convert into another Class and (5) each Class
may bear differing amounts of certain Class-specific expenses. Class Y shares
are subject to neither an initial or contingent deferred sales charge nor ongo-
ing service or distribution fees.

The different sales charges and other expenses applicable to the different
classes of Fund shares may affect the performance of those classes. More infor-
mation concerning the other Classes of shares of the Fund may be obtained from
a PaineWebber investment executive or correspondent firm or by calling
1-800-647-1568.

The Trust does not hold annual shareholder meetings. There normally will be
no meetings of shareholders to elect trustees unless fewer than a majority of
the trustees of the Trust holding office have been elected by shareholders.
Shareholders of record holding at least two-thirds of the outstanding shares of
the Trust may remove a trustee by votes cast in person or by proxy at a meeting
called for that purpose. The trustees are required to call a meeting of share-
holders for the purpose of voting upon the question of removal of any trustee
when so requested in writing by the shareholders of record holding at least 10%
of the Trust's outstanding shares. Each share of the Fund has equal voting
rights, except as noted above. Each share of the Fund is entitled to partici-
pate equally in dividends and other distributions and the proceeds of any liq-
uidation ex-

16
<PAGE>

cept that, due to the differing expenses borne by the four Classes, these divi-
dends and proceeds are likely to be lower for the other Classes than for the
Class Y shares. The shares of the Fund and the other series of the Trust will
be voted separately except when an aggregate vote of all series is required by
the Investment Company Act of 1940 ("1940 Act").

To avoid additional operating costs and for investor convenience, share cer-
tificates are not issued. Ownership of shares of the Fund is re corded on a
share register by the Transfer Agent and shareholders have the same rights of
ownership with respect to such shares as if certificates had been issued.

CUSTODIAN AND TRANSFER AGENT. State Street Bank and Trust Company, One Heri-
tage Drive, North Quincy, Massachusetts 02171 is custodian of the Fund's as-
sets. PFPC Inc., a subsidiary of PNC Bank, National Association, whose princi-
pal business address is 103 Bellevue Parkway, Wilmington, Delaware 19809, is
the Fund's transfer and dividend disbursing agent.

CONFIRMATIONS AND STATEMENTS. Shareholders receive confirmations of purchases
and re demptions of shares of the Fund. PaineWebber clients receive statements
at least quarterly that report their activity and consolidated year-end state-
ments that show all Fund transactions for that year. Shareholders also receive
audited annual and semi-annual financial statements of the Fund. The PW SIP re-
ceives confirmations of purchases and redemptions of shares of the Fund and
quarterly statements from the Transfer Agent. The PW SIP also receives audited
annual and unaudited semi-annual financial statements of the Fund. PW SIP par-
ticipants receive periodic information, including quarterly statements, about
their plan participation from the PW SIP plan administrator.

17
<PAGE>

APPENDIX A

MORTGAGE-BACKED SECURITIES

The U.S. government securities in which the Fund may invest include mortgage-
backed securities issued or guaranteed by Ginnie Mae, the Fannie Mae or the
Freddie Mac. Other mortgage-backed securities in which the Fund may invest will
be issued by Private Mortgage Lenders. Such private mortgage-backed securities
may be supported by pools of mortgage loans or other mortgage-backed securities
that are guaranteed, directly or indirectly, by the U.S. government or one of
its agencies or instrumentalities, or they may be issued without any government
guarantee of the underlying mortgage assets but with some form of non-govern-
ment credit enhancement. New types of mortgage-backed securities are developed
and marketed from time to time and, consistent with its investment limitations,
the Fund expects to invest in those new types of mortgage-backed securities
that Mitchell Hutchins believes may assist the Fund in achieving its investment
objective. Similarly, the Fund may invest in mortgage-backed securities issued
by new or existing governmental or private issuers other than those identified
herein.

GINNIE MAE CERTIFICATES. Ginnie Mae guarantees certain mortgage pass-through
certificates ("Ginnie Mae certificates") that are issued by Private Mortgage
Lenders and that represent ownership interests in individual pools of residen-
tial mortgage loans. These securities are designed to provide monthly payments
of interest and principal to the investor. Timely payment of interest and prin-
cipal is backed by the full faith and credit of the U.S. government. Each mort-
gagor's monthly payments to his lending institution on his residential mortgage
are "passed through" to certificateholders such as the Fund. Mortgage pools
consist of whole mortgage loans or participations in loans. The terms and char-
acteristics of the mortgage instruments are generally uniform within a pool but
may vary among pools. Lending institutions that originate mortgages for the
pools are subject to certain standards, including credit and other underwriting
criteria for individual mortgages included in the pools.

FANNIE MAE CERTIFICATES. Fannie Mae facilitates a national secondary market
in residential mortgage loans insured or guaranteed by U.S. government agencies
and in privately insured or uninsured residential mortgage loans (sometimes re-
ferred to as "conventional mortgage loans" or "conventional loans") through its
mortgage purchase and mortgage-backed securities sales activities. Fannie Mae
issues guaranteed mortgage pass-through certificates ("Fannie Mae certifi-
cates"), which represent pro rata shares of all interest and principal payments
made and owed on the underlying pools. Fannie Mae guarantees timely payment of
interest and principal on Fannie Mae certificates. The Fannie Mae guarantee is
not backed by the full faith and credit of the U.S. government.

FREDDIE MAC CERTIFICATES. Freddie Mac also facilitates a national secondary
market for conventional residential and U.S. government-insured mortgage loans
through its mortgage purchase and mortgage-backed securities sales activities.
Freddie Mac issues two types of mortgage pass-through securities: mortgage par-
ticipation certificates ("PCs") and guaranteed mortgage certificates ("GMCs").
Each PC represents a pro rata share of all interest and principal payments made
and owed on the underlying pool. Freddie Mac generally guarantees timely
monthly payment of interest on PCs and the ultimate payment of principal, but
it also has a PC program under which it guarantees timely pay-

18
<PAGE>

ment of both principal and interest. GMCs also represent a pro rata interest in
a pool of mortgages. These instruments, however, pay interest semi-annually and
return principal once a year in guaranteed minimum payments. The Freddie Mac
guarantee is not backed by the full faith and credit of the U.S. government.

PRIVATE RTC AND SIMILAR MORT-GAGE-BACKED SECURITIES. Mortgage-backed
securities issued by Private Mortgage Lenders are structured similarly to the
pass-through certificates and collateralized mortgage obligations ("CMOs")
issued or guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac. Such mortgage-
backed securities may be supported by pools of U.S. government or agency insured
or guaranteed mortgage loans or by other mortgage-backed securities issued by a
government agency or instrumentality, but they generally are supported by pools
of conventional (i.e., non-government guaranteed or insured) mortgage loans.
Since such mortgage-backed securities normally are not guaranteed by an entity
having the credit standing of Ginnie Mae, Fannie Mae and Freddie Mac, they
normally are structured with one or more types of credit enhancement. See "--
Types of Credit Enhancement." These credit enhancements do not protect investors
from changes in market value.

The Resolution Trust Corporation ("RTC"), which was organized by the U.S.
government in connection with the savings and loan crisis, holds assets of
failed savings associations as either a conservator or receiver for such asso-
ciations, or it acquires such assets in its corporate capacity. These assets
include, among other things, single family and multifamily mortgage loans, as
well as commercial mortgage loans. In order to dispose of such assets in an or-
derly manner, RTC has established a vehicle registered with the SEC through
which it sells mortgage-backed securities. RTC mortgage-backed securities rep-
resent pro rata interests in pools of mortgage loans that RTC holds or has ac-
quired, as described above, and are supported by one or more of the types of
private credit enhancements used by Private Mortgage Lenders.

COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE PASS-THROUGHS.
CMOs are debt obligations that are collateralized by mortgage loans or mortgage
pass-through securities (such collateral collectively being called "Mortgage
Assets"). CMOs may be issued by Private Mortgage Lenders or by government enti-
ties such as Fannie Mae or Freddie Mac. Multi-class mortgage pass-through secu-
rities are interests in trusts that are comprised of Mortgage Assets and that
have multiple classes similar to those in CMOs. Unless the context indicates
otherwise, references herein to CMOs include multi-class mortgage pass-through
securities. Payments of principal of and interest on the Mortgage Assets (and
in the case of CMOs, any reinvestment income thereon) provide the funds to pay
debt service on the CMOs or to make scheduled distributions on the multi-class
mortgage pass-through securities.

19
<PAGE>

are applied to the classes of a CMO in the order of their respective stated ma-
turities or final distribution dates so that no payment of principal will be
made on any class of the CMO until all other classes having an earlier stated
maturity or final distribution date have been paid in full. In some CMO struc-
tures, all or a portion of the interest attributable to one or more of the CMO
classes may be added to the principal amounts attributable to such classes,
rather than passed through to certificateholders on a current basis, until
other classes of the CMO are paid in full.

Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier.

ARM AND FLOATING RATE MORTGAGE-BACKED SECURITIES. ARM mortgage-backed securi-
ties are mortgage-backed securities that represent a right to receive interest
payments at a rate that is adjusted to reflect the interest earned on a pool of
mortgage loans bearing variable or adjustable rates of interest (such mortgage
loans are referred to as "ARMs"). Floating Rate mortgage-backed securities are
classes of mortgage-backed securities that have been structured to represent
the right to receive interest payments at rates that fluctuate in accordance
with an index but that generally are supported by pools comprised of fixed-rate
mortgage loans. Because the interest rates on ARM and Floating Rate mortgage-
backed securities are reset in response to changes in a specified market index,
the values of such securities tend to be less sensitive to interest rate fluc-
tuations than the values of fixed-rate securities.

TYPES OF CREDIT ENHANCEMENT. To lessen the effect of failures by obligors on
Mortgage Assets to make payments, mortgage-backed securities may contain ele-
ments of credit enhancement. Such credit enhancement falls into two categories;
(1) liquidity protection and (2) protection against losses resulting after de-
fault by an obligor on the underlying assets and collection of all amounts re-
coverable directly from the obligor and through liquidation of the collateral.
Liquidity protection refers to the provision of advances, generally by the en-
tity administering the pool of assets (usually the bank, savings association or
mortgage banker that transferred the underlying loans to the issuer of the se-
curity), to ensure that the receipt of payments on the underlying pool occurs
in a timely fashion. Protection against losses resulting after default and liq-
uidation ensures ultimate payment of the obligations on at least a portion of
the assets in the pool. Such protection may be provided through guarantees, in-
surance policies or letters of credit obtained by the issuer or sponsor, from
third parties, through various means of structuring the transaction or through
a combination of such approaches. The Fund will not pay any additional fees for
such credit enhancement, although the existence of credit enhancement may in-
crease the price of a security. Credit enhancements do not provide protection
against changes in the market value of the security.

Examples of credit enhancement arising out of the structure of the transac-
tion include "senior-subordinated securities" (multiple class securities with
one or more classes subordinate to other classes as to the payment of principal
thereof and interest thereon, with the result that defaults on the underlying
assets are borne first by the holders of the subordinated class), creation of
"spread accounts" or "reserve funds" (where cash or investments, sometimes
funded from a portion of the payments on the underlying assets, are held in re-
serve against future losses) and "over-collateralization"

20
<PAGE>

(where the scheduled payments on, or the principal amount of, the underlying
assets exceed that required to make payment of the securities and pay any ser-
vicing or other fees). The degree of credit enhancement provided for each issue
generally is based on historical information regarding the level of credit risk
associated with the underlying assets. Delinquency or loss in excess of that
anticipated could adversely affect the return on an investment in such a secu-
rity.

21
<PAGE>

APPENDIX B

THE FUND MAY USE THE FOLLOWING INSTRUMENTS:

Options on Debt Securities. A call option is a short-term contract pursuant
to which the purchaser of the option, in return for a premium, has the right to
buy the security underlying the option at a specified price at any time during
the term of the option. The writer of the call option, who receives the premi-
um, has the obligation, upon exercise of the option during the option term, to
deliver the underlying security against payment of the exercise price. A put
option is a similar contract which gives its purchaser, in return for a premi-
um, the right to sell the underlying security at a specified price during the
option term. The writer of the put option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to buy the un-
derlying security at the exercise price.

Options on Indices of Debt Securities. An index assigns relative values to
the securities included in the index and fluctuates with changes in the market
values of such securities. Index options operate in the same way as more tradi-
tional options except that exercises of index options are effected with cash
payment and do not involve delivery of securities. Thus, upon exercise of an
index option, the purchaser will realize, and the writer will pay, an amount
based on the difference between the exercise price and the closing price of the
index.

Interest Rate Futures Contracts. An interest rate futures contract is a bi-
lateral agreement pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of the specified type of debt security called
for in the contract at a specified future time and at a specified price. Al-
though interest rate futures contracts by their terms call for actual delivery
or acceptance of debt securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery.

Options on Futures Contracts. Options on futures contracts are similar to op-
tions on securities, except that an option on a futures contract gives the pur-
chaser the right, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a spec-
ified price at any time during the option term. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be accom-
panied by delivery of the accumulated balance that represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future. The writer of an option, upon exercise, will assume a short position in
the case of a call and a long position in the case of a put.

22
<PAGE>

PAINEWEBBER
U.S. GOVERNMENT
INCOME FUND

Class Y Shares

PROSPECTUS

November 10, 1995

TABLE OF CONTENTS
<TABLE>
<S> <C>
Fund Expenses............................................................... 2
Financial Highlights........................................................ 3
Investment Objective and Policies........................................... 4
Purchases................................................................... 11
Redemptions................................................................. 12
Dividends and Taxes......................................................... 13
Valuation of Shares......................................................... 14
Management.................................................................. 15
Performance Information..................................................... 15
General Information......................................................... 16
Appendix A.................................................................. 18
Appendix B.................................................................. 22
</TABLE>

[LOGO OF RECYCLED PAPER APPEARS HERE]

PAINEWEBBER U.S. GOVERNMENT INCOME FUND

CLASS Y SHARES

1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019

STATEMENT OF ADDITIONAL INFORMATION

PaineWebber U.S. Government Income Fund ("Fund") is a diversified series of
PaineWebber Managed Investments Trust ("Trust"), a professionally managed
mutual fund. The Fund seeks to provide high current income consistent with the
preservation of capital and liquidity and invests primarily in U.S. government
securities. The Fund's investment adviser, administrator and distributor is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
subsidiary of PaineWebber Incorporated ("PaineWebber"). As distributor for the
Fund, Mitchell Hutchins has appointed PaineWebber to serve as exclusive dealer
for the sale of Fund shares. The Class Y shares described in this Statement of
Additional Information are currently offered for sale only to the trustee of
the PaineWebber Savings Investment Plan acting on behalf of that Plan. This
Statement of Additional Information is not a prospectus and should be read only
in conjunction with the Fund's current Prospectus, dated November 10, 1995. A
copy of the Prospectus may be obtained by calling any PaineWebber investment
executive or correspondent firm or by calling toll-free 1-800-647-1568.
Participants in the PaineWebber Savings Investment Plan may obtain a copy of
the Prospectus by contacting the PaineWebber Incorporated Benefits Department,
1000 Harbor Boulevard, 10th Floor, Weehawken, New Jersey 07087 or by calling 1-
201-902-4444. This Statement of Additional Information is dated November 10,
1995, as revised December 1, 1995.

INVESTMENT POLICIES AND RESTRICTIONS

The following supplements the information contained in the Prospectus
concerning the investment policies and limitations of the Fund.

S&P's highest rating category is AAA. Moody's highest rating category is Aaa.
Publications of S&P indicate that it assigns such ratings to securities for
which the obligor's "capacity to pay interest and repay principal is extremely
strong." Publications of Moody's indicate that it assigns such ratings to
securities that "are judged to be of the best quality" and "carry the smallest
degree of investment risk," that interest payments on such securities "are
protected by a large or by an exceptionally stable margin and principal is
secure" and that 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." The process by which S&P and Moody's determine
ratings for mortgage-
<PAGE>

and asset-backed securities includes consideration of the likelihood of the
receipt by security holders of all distributions, the nature of the underlying
securities, the credit quality of the guarantor, if any, and the structural,
legal and tax aspects associated with such securities. Neither of such ratings
represents an assessment of the likelihood that principal prepayments will be
made by mortgagors or the degree to which such prepayments may differ from that
originally anticipated, nor do such ratings address the possibility that
investors may suffer a lower than anticipated yield or that investors in such
securities may fail to recoup fully their initial investment due to
prepayments.

It should be emphasized that ratings are general and are not absolute
standards of quality. Consequently, debt obligations with the same maturity,
interest rate and rating may have different market prices. Also, rating
agencies may fail to make timely changes in credit ratings in response to
subsequent events so that an issuer's current financial condition may be better
or worse than the rating indicates. The rating assigned to a security by a
NRSRO does not reflect an assessment of the volatility of the security's market
value or of the liquidity of an investment in the security. Subsequent to its
purchase by the Fund, an issue of debt obligations may cease to be rated or its
rating may be reduced below the minimum rating required for purchase by the
Fund.

In addition to ratings assigned to individual bond issues, Mitchell Hutchins
will analyze interest rate trends and developments that may affect individual
issuers, including factors such as liquidity, profitability and asset quality.
The yields on debt securities, including mortgage- and asset-backed securities
in which the Fund invests, are dependent on a variety of factors, including
general money market conditions, general conditions in the bond market, the
financial condition of the issuer, the size of the offering, the maturity of
the obligation and its credit rating. There is a wide variation in the quality
of bonds, both within a particular classification and between classifications.
An issuer's obligations under its debt securities are subject to the provisions
of bankruptcy, insolvency and other laws affecting the rights and remedies of
bond holders or other creditors of an issuer; litigation or other conditions
may also adversely affect the power or ability of issuers to meet their
obligations for the payment of interest and principal on their bonds.

SPECIAL CHARACTERISTICS OF MORTGAGE- AND ASSET-BACKED SECURITIES

2
<PAGE>

may decrease in value as a result of increases in interest rates and may
benefit less than other fixed-income securities from declining interest rates
because of the risk of prepayment.

The Fund may invest in adjustable rate mortgage ("ARM") and floating rate
mortgage-backed securities. Because the interest rates on ARM and floating rate
mortgage-backed securities are reset in response to changes in a specified
market index, the values of such securities tend to be less sensitive to
interest rate fluctuations than the values of fixed-rate securities. As a
result, during periods of rising interest rates, ARMs generally do not decrease
in value as much as fixed rate securities. Conversely, during periods of
declining rates, ARMs generally do not increase in value as much as fixed rate
securities. ARM mortgage-backed securities represent a right to receive
interest payments at a rate that is adjusted to reflect the interest earned on
a pool of ARMs. ARMs generally provide that the borrower's mortgage interest
rate may not be adjusted above a specified lifetime maximum rate or, in some
cases, below a minimum lifetime rate. In addition, certain ARMs provide for
limitations on the maximum amount by which the mortgage interest rate may
adjust for any single adjustment period. ARMs also may provide for limitations
on changes in the maximum amount by which the borrower's monthly payment may
adjust for any single adjustment period. In the event that a monthly payment is
not sufficient to pay the interest accruing on the ARM, any

3
<PAGE>

such excess interest is added to the mortgage loan ("negative amortization"),
which is repaid through future payments. If the monthly payment exceeds the sum
of the interest accrued at the applicable mortgage interest rate and the
principal payment that would have been necessary to amortize the outstanding
principal balance over the remaining term of the loan, the excess reduces the
principal balance of the ARM. Borrowers under ARMs experiencing negative
amortization may take longer to build up their equity in the underlying
property and may be more likely to default.

The rates of interest payable on certain ARMs, and therefore on certain ARM
mortgage-backed securities, are based on indices, such as the one-year constant
maturity Treasury rate, that reflect changes in market interest rates. Others
are based on indices, such as the 11th District Federal Home Loan Bank Cost of
Funds index ("COFI") that tend to lag behind changes in market interest rates.
The values of ARM mortgage-backed securities supported by ARMs that adjust
based on lagging indices tend to be somewhat more sensitive to interest rate
fluctuations than those reflecting current interest rate levels, although the
values of such ARM mortgage-backed securities still tend to be less sensitive
to interest rate fluctuations than fixed-rate securities.

ILLIQUID SECURITIES. The Fund may invest up to 10% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose 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 and includes, among other things, purchased over-the-counter ("OTC")
options, repurchase agreements maturing in more than seven days and restricted
securities other than those Mitchell Hutchins has determined are liquid
pursuant to guidelines established by the Trust's board of trustees. The assets
used as cover for OTC options written by the Fund will be considered illiquid
unless the OTC options are sold to qualified dealers who agree that the Fund
may repurchase any OTC option it writes at a maximum price to be calculated by
a formula set forth in the option agreement. The cover for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option. Illiquid restricted securities may be sold only
in privately negotiated transactions or in public offerings with respect to
which a registration statement is in effect under the Securities Act of 1933
("1933 Act"). Where registration is required, the Fund may be obligated to pay
all or part of the registration expenses and a considerable period may elapse
between the time of the decision to sell and the time the Fund may be permitted
to sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.

Not all restricted securities are illiquid. In recent years a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private

4
<PAGE>

placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are sold in transactions not requiring registration.
Institutional investors generally will not seek to sell these instruments to
the general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily
resold or on an issuer's ability to honor a demand for repayment. Therefore,
the fact that there are contractual or legal restrictions on resale to the
general public or certain institutions is not dispositive of the liquidity of
such investments.

The Trust's board of trustees has delegated the function of making day-to-day
determinations of liquidity to Mitchell Hutchins, pursuant to guidelines
approved by the board. Mitchell Hutchins takes into account a number of factors
in reaching liquidity decisions, including but not limited to (1) the frequency
of trades for the security, (2) the number of dealers that make quotes for the
security, (3) the number of dealers that have undertaken to make a market in
the security, (4) the number of other potential purchasers and (5) the nature
of the security and how trading is effected (e.g., the time needed to sell the
security, how offers are solicited and the mechanics of transfer). Mitchell
Hutchins monitors the liquidity of restricted securities in the Fund's
portfolio and reports periodically on such decisions to the board of trustees.

REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
Fund purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to
the coupon rate or maturity of the purchased securities. The Fund maintains
custody of the underlying securities prior to their repurchase; thus, the
obligation of the bank or dealer to pay the repurchase price on the date agreed
to is, in effect, secured by such securities. If the value of these securities
is less than the repurchase price, plus any agreed-upon additional amount, the
other party to the agreement must provide additional collateral so that at all
times the collateral is at least equal to the repurchase price, plus any
agreed-upon additional amount. The difference between the total amount to be
received upon repurchase of the securities and the price that was paid by the
Fund upon their acquisition is accrued as interest and included in the Fund's
net investment income.

5
<PAGE>

Hutchins to present minimum credit risks in accordance with guidelines
established by the Trust's board of trustees. Mitchell Hutchins reviews and
monitors the creditworthiness of those institutions under the board's general
supervision.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. As stated in the Prospectus, the
Fund may purchase securities on a "when-issued" or delayed delivery basis. A
security purchased on a when-issued or delayed delivery basis is recorded as an
asset on the commitment date and is subject to changes in market value
generally based upon changes in the level of interest rates. Thus, fluctuation
in the value of the security from the time of the commitment date will affect
the Fund's net asset value. When the Fund agrees to purchase securities on a
when-issued basis, its custodian segregates assets to cover the amount of the
commitment. See "Investment Policies and Restrictions--Segregated Accounts."
The Fund purchases when-issued securities only with the intention of taking
delivery, but may sell the right to acquire the security prior to delivery if
Mitchell Hutchins deems it advantageous to do so, which may result in capital
gain or loss to the Fund.

LENDING OF PORTFOLIO SECURITIES. As indicated in the Prospectus, the Fund is
authorized to lend up to 10% of the total value of its portfolio securities to
broker- dealers or institutional investors that Mitchell Hutchins deems
qualified, but only when the borrower maintains with the Fund's custodian
collateral either in cash or money market instruments, marked to market daily,
in an amount at least equal to the market value of the securities loaned, plus
accrued interest and dividends. In determining whether to lend securities to a
particular broker-dealer or institutional investor, Mitchell Hutchins will
consider, and during the period of the loan will monitor, all relevant facts
and circumstances, including the creditworthiness of the borrower. The Fund
will retain authority to terminate any loans at any time. The Fund may pay
reasonable administrative and custodial fees in connection with a loan and may
pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Fund will
receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest or other distributions on the
securities loaned. The Fund will regain record ownership of loaned securities
to exercise beneficial rights, such as voting and subscription rights and
rights to dividends, interest or other distributions, when regaining such
rights is considered to be in the Fund's interest.

SEGREGATED ACCOUNTS. When the Fund enters into certain transactions that
involve obligations to make future payments to third parties, including dollar
rolls, reverse repurchase agreements or the purchase of securities on a when-
issued or delayed delivery basis, the Fund will maintain with an approved
custodian in a segregated account cash, U.S. government securities or other
liquid high-grade debt securities, marked to market daily, in an amount at
least equal to the Fund's obligation or commitment under such transactions, As
described below under "Hedging and Related Income Strategies," segregated
accounts may also be required in connection with certain transactions involving
options or futures contracts or interest rate protection transactions.

INVESTMENT LIMITATIONS. The Fund may not (1) purchase the securities of any
issuer if as a result more than 5% of the total assets of the Fund would be
invested in the securities of that issuer; provided that securities issued or
guaranteed by the U.S. government, its agencies and instrumentalities are not
subject to this limitation and further provided that up to 25% of the value of
the Fund's assets may be invested without regard to this limitation; (2) issue
senior securities or

6
<PAGE>

borrow money, except from banks or through reverse repurchase agreements and
dollar rolls, and then in an aggregate amount not in excess of 33 1/3% of the
Fund's total assets (including the amount of the borrowings and senior
securities issued but reduced by any liabilities not constituting senior
securities) at the time of such borrowings, except that the Fund may borrow up
to an additional 5% of its total assets (not including the amount borrowed) for
temporary or emergency purposes; (3) purchase securities if, as a result of the
purchase, the Fund would have more than 25% of the value of its total assets
invested in securities of issuers in any one industry, except that this
limitation does not apply to (a) obligations issued or guaranteed by the U.S.
government, its agencies and instrumentalities and (b) investments in mortgage-
backed and asset-backed securities, which (whether or not issued or guaranteed
by an agency or instrumentality of the U.S. government) shall be considered a
single industry for purposes of this limitation; (4) underwrite securities of
other issuers, except to the extent that, in connection with the disposition of
portfolio securities, the Fund may be deemed an underwriter under federal
securities laws; (5) purchase or sell real estate, except that investments in
Government National Mortgage Association certificates and other debt securities
secured by real estate or real estate interests are not subject to this
limitation; (6) purchase securities on margin, make short sales of securities
or maintain a short position in any security, except that the Fund may (a) make
margin deposits, make short sales and maintain short positions in connection
with its use of options, futures contracts and options on futures contracts and
(b) sell short "against the box"; (7) purchase or sell commodities or commodity
contracts, except that the Fund may purchase or sell interest rate futures
contracts and options thereon; (8) invest in oil, gas or mineral exploration or
development programs, except that the Fund may invest in issuers which invest
in such programs; (9) purchase securities of other open-end investment
companies, except in connection with a merger, consolidation or acquisition;
(10) make loans, except through repurchase agreements and except in connection
with the loan of securities as described herein; provided that for purposes of
this restriction the acquisition of bonds or other debt obligations shall not
be deemed to be the making of a loan; or (11) hold more than 10% of the
outstanding voting securities of any issuer.

The foregoing fundamental investment limitations cannot be changed without
the affirmative vote of the lesser of (1) more than 50% of the outstanding
shares of the Fund or (2) 67% or more of the shares of the Fund present at a
shareholders' meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy.

The following investment restrictions may be changed by the vote of the
Trust's board of trustees without shareholder approval. The Fund may not (1)
purchase any security if as a result more than 5% of the value of the Fund's
total assets would be invested in securities of companies that together with
any predecessors have been in continuous operation for less than three years;
(2) invest more than 10% of its net assets in illiquid securities, a term that
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 and includes, among other things, repurchase agreements maturing in
more than seven days; (3) make investments in warrants, if such investments,
valued at the lower of cost or market, exceed 5% of the value of its net
assets, which amount may include warrants that are not listed on the New York
Stock Exchange, Inc. ("NYSE") or the American Stock Exchange, Inc., provided
that such unlisted warrants, valued at the lower of cost or market, do not
exceed 2% of the Fund's net assets, and further provided that this restriction
does not apply to

7
<PAGE>

warrants attached to, or sold as a unit with, other securities; or (4) invest
more than 35% of its total assets in debt securities rated Ba or lower by
Moody's, BB or lower by S&P, comparably rated by another NRSRO or determined by
Mitchell Hutchins to be of comparable quality. This non-fundamental policy (4)
can be changed only upon 30 days' advance notice to shareholders.

If a percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or the amount of total assets will not be considered a
violation of any of the Fund's investment limitations, restrictions or
investment policies.

The Fund will continue to interpret fundamental investment limitation (5) to
prohibit investment in real estate limited partnerships.

HEDGING AND RELATED INCOME STRATEGIES

GENERAL DESCRIPTION OF HEDGING STRATEGIES. As discussed in the Prospectus,
Mitchell Hutchins may use a variety of financial instruments ("Hedging
Instruments"), including certain options, futures contracts (sometimes referred
to as "futures") and options on futures contracts, to attempt to hedge the
Fund's portfolio and to enhance income. Mitchell Hutchins also may attempt to
hedge the Fund's portfolio through the use of interest rate protection
transactions. The particular Hedging Instruments are described in Appendix B to
the Prospectus.

Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Hedging Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in the Fund's portfolio. Thus, in a short hedge the Fund takes
a position in a Hedging Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged. For example,
the Fund might purchase a put option on a security to hedge against a potential
decline in the value of that security. If the price of the security declined
below the exercise price of the put, the Fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transaction
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, the Fund might be
able to close out the put option and realize a gain to offset the decline in
the value of the security.

Conversely, a long hedge is a purchase or sale of a Hedging Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge the Fund takes a position in a Hedging Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, the Fund might purchase a call option on
a security it intends to purchase in order to hedge against an increase in the
cost of the security. If the price of the security increased above the exercise
price of the call, the Fund could exercise the call and thus limit its
acquisition cost to the exercise price plus the premium paid and transaction
costs. Alternatively, the Fund might be able to offset the price increase by
closing out an appreciated call option and realizing a gain.

8
<PAGE>

The Fund may purchase and write (sell) covered straddles on securities or
indices of debt securities. A long straddle is a combination of a call and a
put option purchased on the same security or on the same futures contract,
where the exercise price of the put is less than or equal to the exercise price
of the call. The Fund might enter into a long straddle when Mitchell Hutchins
believes it likely that interest rates will be more volatile during the term of
the option than the option pricing implies. A short straddle is a combination
of a call and a put written on the same security where the exercise price of
the put is less than or equal to the exercise price of the call. The Fund might
enter into a short straddle when Mitchell Hutchins believes it unlikely that
interest rates will be as volatile during the term of the option as the option
pricing implies.

Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that the Fund owns or
intends to acquire. Hedging Instruments on debt securities may be used to hedge
either individual securities or broad fixed income market sectors.

The use of Hedging Instruments is subject to applicable regulations of the
Securities and Exchange Commission ("SEC"), the several options and futures
exchanges upon which they are traded, the Commodity Futures Trading Commission
("CFTC") and various state regulatory authorities. In addition, the Fund's
ability to use Hedging Instruments will be limited by tax considerations. See
"Taxes."

In addition to the products, strategies and risks described below and in the
Prospectus, Mitchell Hutchins expects to discover additional opportunities in
connection with options, futures contracts and other hedging techniques. These
new opportunities may become available as Mitchell Hutchins develops new
techniques, as regulatory authorities broaden the range of permitted
transactions and as new options, futures contracts or other techniques are
developed. Mitchell Hutchins may utilize these opportunities to the extent that
they are consistent with the Fund's investment objective and permitted by the
Fund's investment limitations and applicable regulatory authorities. The Fund's
Prospectus or Statement of Additional Information will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.

(1) Successful use of most Hedging Instruments depends upon Mitchell
Hutchins' ability to predict movements of the overall securities markets, which
requires different skills than predicting changes in the prices of individual
securities. While Mitchell Hutchins is experienced in the use of Hedging
Instruments, there can be no assurance that any particular hedging strategy
adopted will succeed.

9
<PAGE>

(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if the Fund entered into a
short hedge because Mitchell Hutchins projected a decline in the price of a
security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Hedging Instrument. Moreover, if the price of the
Hedging Instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would
have been in a better position had it not hedged at all.

(4) As described below, the Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If the Fund were unable to
close out its positions in such Hedging Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. These requirements might impair the Fund's ability
to sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. The Fund's ability to close out a position
in a Hedging Instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a market, the
ability and willingness of a contra party to enter into a transaction closing
out the position. Therefore, there is no assurance that any hedging position
can be closed out at a time and price that is favorable to the Fund.

COVER FOR HEDGING STRATEGIES. Transactions using Hedging Instruments, other
than purchased options, expose the Fund to an obligation to another party. The
Fund will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities or other options or futures
contracts or (2) cash, receivables and short-term liquid debt securities, with
a value sufficient at all times to cover its potential obligations to the
extent not covered as provided in (1) above. The Fund will comply with SEC
guidelines regarding cover for hedging transactions and will, if the guidelines
so require, set aside cash, U.S. government securities or other liquid, high-
grade debt securities in a segregated account with its custodian in the
prescribed amount.

Assets used as cover or held in a segregated account cannot be sold while the
position in the corresponding Hedging Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
the Fund's assets to cover or segregated accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.

OPTIONS. The Fund may purchase put and call options, and write (sell) covered
put and call options, on debt securities in which it is authorized to invest.
The purchase of call options serves as a long hedge, and the purchase of put
options serves as a short hedge. Writing covered put or call options can enable
the Fund to enhance income by reason of the premiums paid by the purchasers of
such options. In addition, writing covered put options serves as a limited long
hedge because increases in the value of the hedged investment would be offset
to the extent of the premium received for writing the option. However, if the
market price of the security underlying a covered put option declines to less
than the exercise price of the option, minus the premium received, the

10
<PAGE>

Fund would expect to suffer a loss. Writing covered call options serves as a
limited short hedge, because declines in the value of the hedged investment
would be offset to the extent of the premium received for writing the option.
However, if the security appreciates to a price higher than the exercise price
of the call option, it can be expected that the option will be exercised and
the Fund will be obligated to sell the security at less than its market value.
The securities or other assets used as cover for OTC options written by a Fund
would be considered illiquid to the extent described under "Investment Policies
and Restrictions--Illiquid Securities."

The Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, the Fund may terminate its
obligation under a call option that it had written by purchasing an identical
call option; this is known as a closing purchase transaction. Conversely, the
Fund may terminate a position in a put or call option it had purchased by
writing an identical put or call option; this is known as a closing sale
transaction. Closing transactions permit the Fund to realize profits or limit
losses on an option position prior to its exercise or expiration.

The Fund may purchase or write both exchange-traded and OTC options. Exchange
markets for options on debt securities exist but are relatively new, and these
instruments are primarily traded on the OTC market. Exchange-traded options in
the United States are issued by a clearing organization affiliated with the
exchange on which the option is listed which, in effect, guarantees completion
of every exchange-traded option transaction. In contrast, OTC options are
contracts between the Fund and its contra party (usually a securities dealer or
a bank) with no clearing organization guarantee. Thus, when the Fund purchases
or writes an OTC option, it relies on the contra party to make or take delivery
of the underlying investment upon exercise of the option. Failure by the contra
party 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. The Fund will enter
into OTC option transactions only with contra parties that have a net worth of
at least $20 million.

The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the
Fund will enter into OTC options only with contra parties that are expected to
be capable of entering into closing transactions with the Fund, there is 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 contra party, the Fund might be unable to close out an OTC option
position at any time prior to its expiration.

11
<PAGE>

If the Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call
option written by the Fund could cause material losses because the Fund would
be unable to sell the investment used as cover for the written option until the
option expires or is exercised.

The Fund may purchase and write put and call options on indices of debt
securities in much the same manner as the more traditional options discussed
above, except the index options may serve as a hedge against overall
fluctuations in the debt securities market (or market sectors) rather than
anticipated increases or decreases in the value of a particular security.

GUIDELINES FOR OPTIONS. The Fund's use of options is governed by the
following guidelines which can be changed by the Trust's board of trustees
without shareholder vote:

1. The Fund may purchase a put or call option, including any straddles or
spreads, only if the value of its premium, when aggregated with the
premiums on all other options purchased by the Fund, does not exceed 5% of
the Fund's total assets.

2. The aggregate value of securities underlying put options written by
the Fund, determined as of the date the put options are written, will not
exceed 50% of the Fund's net assets.

3. The aggregate premiums paid on all options (including options on
securities and indices of debt securities and options on futures contracts)
purchased by the Fund that are held at any time will not exceed 20% of the
Fund's net assets.

FUTURES. The Fund may purchase and sell interest rate futures contracts. The
Fund may also purchase put and call options, and write covered put and call
options, on futures in which it is allowed to invest. The purchase of futures
or call options thereon can serve as a long hedge, and the sale of futures or
the purchase of put options thereon can serve as a short hedge. Writing covered
call options on futures contracts can serve as a limited short hedge, and
writing covered put options on futures contracts can serve as a limited long
hedge, using a strategy similar to that used for writing covered call options
on securities or indices.

Futures strategies also can be used to manage the average duration of the
Fund's portfolio. If Mitchell Hutchins wishes to shorten the average duration
of the Fund, the Fund may sell a futures contract or a call option thereon, or
purchase a put option on that futures contract. If Mitchell Hutchins wishes to
lengthen the average duration of the Fund, the Fund may buy a futures contract
or a call option thereon or sell a put option thereon.

The Fund may also write put options on interest rate futures contracts while
at the same time purchasing call options on the same futures contracts in order
synthetically to create a long futures contract position. Such options would
have the same strike prices and expiration dates. The Fund will engage in this
strategy only when it is more advantageous to the Fund than is purchasing the
futures contract.

12
<PAGE>

No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash, U.S. government
securities or other liquid, high-grade debt securities, in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call option on a futures contract, in accordance with applicable
exchange rules. Unlike margin in securities transactions, initial margin on
futures contracts does not represent a borrowing, but rather is in the nature
of a performance bond or good-faith deposit that is returned to the Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, the
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.

Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the future position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a call option thereon, it is subject to
daily variation margin calls that could be substantial in the event of adverse
price movements. If the Fund has insufficient cash to meet daily variation
margin requirements, it might need to sell securities at a time when such sales
are disadvantageous.

Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Fund intends to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there
can be no assurance that such a market will exist for a particular contract at
a particular time.

If the Fund were unable to liquidate a futures or options position due to the
absence of a liquid secondary market or the imposition of price limits, it
could incur substantial losses. The Fund would continue to be subject to market
risk with respect to the position. In addition, except in the case of purchased
options, the Fund would continue to be required to make daily variation margin
payments and might be required to maintain the position being hedged by the
future or option or to maintain cash or securities in a segregated account.

13
<PAGE>

options markets are subject to daily variation margin calls and might be
compelled to liquidate futures or related options positions whose prices are
moving unfavorably to avoid being subject to further calls. These liquidations
could increase price volatility of the instruments and distort the normal price
relationship between the futures or options and the investments being hedged.
Also, because initial margin deposit requirements in the futures market are
less onerous than margin requirements in the securities markets, there might be
increased participation by speculators in the futures markets. This
participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.

GUIDELINES FOR FUTURES AND RELATED OPTIONS. The Fund's use of futures and
related options is governed by the following guidelines which can be changed by
the Trust's board of trustees without shareholder vote:

1. To the extent the Fund enters into futures contracts and options on
futures positions that are not for bona fide hedging purposes (as defined
by the CFTC), the aggregate initial margin and premiums on those positions
(excluding the amount by which options are "in-the-money") may not exceed
5% of the Fund's net assets.

2. The aggregate premiums paid on all options (including options on
securities and indices of debt securities and options on futures contracts)
purchased by a Fund that are held at any time will not exceed 20% of the
Fund's net assets.

3. The aggregate margin deposits on all futures contracts and options
thereon held at any time by the Fund will not exceed 5% of the Fund's total
assets.

INTEREST RATE PROTECTION TRANSACTIONS

The Fund may enter into interest rate protection transactions, including
interest rate swaps and interest rate caps, collars and floors. Interest rate
swap transactions involve an agreement between two parties to exchange payments
that are based, respectively, on variable and fixed rates of interest and that
are calculated on the basis of a specified amount of principal (the "notional
principal amount") for a specified period of time. Interest rate cap and floor
transactions involve an agreement between two parties in which the first party
agrees to make payments to the counterparty when a designated market interest
rate goes above (in the case of a cap) or below (in the case of a floor) a
designated level on predetermined dates or during a specified time period.
Interest rate collar transactions involve an agreement between two parties in
which payments are made when a designated market interest rate either goes
above a designated ceiling level or goes below a designated floor on
predetermined dates or during a specified time period. The Fund intends to use
these transactions as a hedge and not as a speculative investment. Interest
rate protection transactions are subject to risks comparable to those described
above with respect to other hedging strategies.

The Fund may enter into interest rate swaps, caps, collars and floors on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest
rate swaps on a net basis, i.e., the two payment streams are netted out, with
the Fund receiving or paying, as the case may be, only the net amount of the
two payments. Inasmuch

14
<PAGE>

as these interest rate protection transactions are entered into for good faith
hedging purposes, and inasmuch as segregated accounts will be established with
respect to such transactions, Mitchell Hutchins and the Fund believe such
obligations do not constitute senior securities and, accordingly, will not
treat them as being subject to its borrowing restrictions. The net amount of
the excess, if any, of the Fund's obligations over its entitlements with
respect to each interest rate swap will be accrued on a daily basis and
appropriate Fund assets having an aggregate net asset value at least equal to
the accrued excess will be maintained in a segregated account as described
above in "Investment Policies and Restrictions--Segregated Accounts." The Fund
also will establish and maintain such segregated accounts with respect to its
total obligations under any interest rate swaps that are not entered into on a
net basis and with respect to any interest rate caps, collars and floors that
are written by the Fund.

The Fund will enter into interest rate protection transactions only with
banks and recognized securities dealers believed by Mitchell Hutchins to
present minimal credit risks in accordance with guidelines established by the
Trust's board of trustees. If there is a default by the other party to such a
transaction, the Fund will have to rely on its contractual remedies (which may
be limited by bankruptcy, insolvency or similar laws) pursuant to the
agreements related to the transaction.

15
<PAGE>

TRUSTEES AND OFFICERS

The trustees and executive officers of the Trust, their business addresses
and principal occupations during the past five years are:

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ------------------- --------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.; Trustee and Chairman of Mr. Bewkes is a director and a con-
69** the Board of Trustees sultant to Paine Webber Group Inc.
("PW Group") (holding company
of PaineWebber and Mitchell
Hutchins). Prior to 1988, he was
chairman of the board, president
and chief executive officer of
American Bakeries Company. Mr.
Bewkes is also a director of Inter-
state Bakeries Corporation, NaPro
BioTherapeutics, Inc. and a direc-
tor or trustee of 24 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Meyer Feldberg; 53 Trustee Mr. Feldberg is Dean and Professor
Columbia University of Management of the Graduate
101 Uris Hall School of Business, Columbia Uni-
New York, New York 10027 versity. Prior to 1989, he was
president of the Illinois Institute
of Technology. Dean Feldberg is
also a director of AMSCO Interna-
tional Inc., Federated Department
Stores, Inc., and New World Commu-
nications Group Incorporated and is
a director or trustee of 16 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as an investment adviser.
George W. Gowen; 66 Trustee Mr. Gowen is a partner in the law
666 Third Avenue firm of Dunnington, Bartholow &
New York, New York 10017 Miller. Prior to May 1994, he was a
partner in the law firm of Fryer,
Ross & Gowen. Mr. Gowen is also a
director of Columbia Real Estate
Investments, Inc. and a director or
trustee of 14 other investment com-
panies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
</TABLE>

16
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ------------------- --------------------
<S> <C> <C>
Frederic V. Malek; 58 Trustee Mr. Malek is chairman of Thayer Cap-
901 15th Street, N.W. ital Partners (investment bank) and
Suite 300 a co-chairman and director of CB
Washington, D.C. 20005 Commercial Group Inc. (real es-
tate). From January 1992 to Novem-
ber 1992, he was campaign manager
of Bush-Quayle '92. From 1990 to
1992, he was vice chairman and,
from 1989 to 1990, he was president
of Northwest Airlines Inc., NWA
Inc. (holding company of Northwest
Airlines Inc.) and Wings Holdings
Inc. (holding company of NWA Inc.)
Prior to 1989, he was employed by
the Marriott Corporation (hotels,
restaurants, airline catering and
contract feeding), where he most
recently was an executive vice
president and president of Marriott
Hotels and Resorts. Mr. Malek is
also a director of American Manage-
ment Systems, Inc., Automatic Data
Processing, Inc., Avis, Inc., FPL
Group, Inc., ICF International,
Manor Care, Inc., National Educa-
tion Corporation and Northwest Air-
lines Inc. and a director or
trustee of 14 other investment com-
panies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
Judith Davidson Moyers; Trustee Mrs. Moyers is president of Public
60 Affairs Television, Inc., an educa-
Public Affairs Televi- tional consultant and a home econo-
sion mist. Mrs. Moyers is also a direc-
356 W. 58th Street tor of Ogden Corporation and a di-
New York, New York 10019 rector or trustee of 14 other in-
vestment companies for which Mitch-
ell Hutchins or PaineWebber serves
as investment adviser.
</TABLE>

17
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ------------------- --------------------
<S> <C> <C>
Margo N. Alexander; 48 President Mrs. Alexander is president, chief
executive officer and a director of
Mitchell Hutchins. Prior to January
1995, Mrs. Alexander was an execu-
tive vice president of PaineWebber.
Mrs. Alexander is also a director
or trustee of one investment com-
pany and president of 31 other in-
vestment companies for which Mitch-
ell Hutchins or PaineWebber serves
as investment adviser.
Julieanna Berry; 32 Vice President Ms. Berry is a vice president and
portfolio manager of Mitchell
Hutchins.
Teresa M. Boyle; 37 Vice President Ms. Boyle is a first vice president
and manager--advisory administra-
tion of Mitchell Hutchins. Prior to
November 1993, she was compliance
manager of Hyperion Capital Manage-
ment, Inc., an investment advisory
firm. Prior to April 1993, Ms.
Boyle was vice president and manag-
er-- legal administration of Mitch-
ell Hutchins. Ms. Boyle is also
vice president of 31 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Gigi L. Capes; 31 Vice President and Ms. Capes is a vice president and
Assistant Treasurer the tax manager of the mutual fund
finance division of Mitchell
Hutchins. Prior to 1992, she was a
tax senior consultant with KPMG
Peat Marwick. Ms. Capes is also a
vice president and assistant trea-
surer of 31 other investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>

18
<PAGE>

<TABLE>
<CAPTION>
NAME AND ADDRESS*; BUSINESS EXPERIENCE;
AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ------------------ ------------------- --------------------
<S> <C> <C>
Joan L. Cohen; 31 Vice President and Ms. Cohen is a vice president and
Assistant Secretary attorney of Mitchell Hutchins.
Prior to December 1993, she was an
associate at the law firm of Seward
& Kissel. Ms. Cohen is also a vice
president and assistant secretary
of 24 other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Karen L. Finkel; 37 Vice President Mrs. Finkel is a first vice presi-
dent and portfolio manager of
Mitchell Hutchins. Mrs. Finkel is
also a vice president of one other
investment company for which Mitch-
ell Hutchins serves as investment
adviser.
Ellen R. Harris; 49 Vice President Ms. Harris is a managing director of
Mitchell Hutchins. Ms. Harris is
also a vice president of two other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Mary B. King; 31 Vice President Mrs. King is a first vice president
and a portfolio manager of Mitchell
Hutchins. Mrs. King is also a vice
president of one other investment
company for which Mitchell Hutchins
serves as investment adviser.
Thomas J. Libassi; 36 Vice President Mr. Libassi is a senior vice presi-
dent of Mitchell Hutchins. Prior to
May 1994, he was a vice president
of Keystone Custodian Funds Inc.
with portfolio management responsi-
bility. Mr. Libassi is also a vice
president of three other investment
companies for which Mitchell
Hutchins serves as investment ad-
viser.
</TABLE>

19
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ------------------- --------------------
<S> <C> <C>
C. William Maher; 34 Vice President and Mr. Maher is a first vice president
Assistant Treasurer and the senior manager of the mu-
tual fund finance division of
Mitchell Hutchins. Mr. Maher is
also a vice president and assistant
treasurer of 31 other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Dennis McCauley; 49 Vice President Mr. McCauley is a managing director
and chief investment officer--fixed
income of Mitchell Hutchins. Prior
to December 1994, he was Director
of Fixed Income Investments of IBM
Corporation. Mr. McCauley is also a
vice president of 17 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Ann E. Moran; 38 Vice President and Ms. Moran is a vice president of
Assistant Treasurer Mitchell Hutchins. Ms. Moran is
also a vice president and assistant
treasurer of 31 other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Dianne E. O'Donnell; 43 Vice President and Ms. O'Donnell is a senior vice pres-
Secretary ident and deputy general counsel of
Mitchell Hutchins. Ms. O'Donnell is
also a vice president and secretary
of 31 other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>

20
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ------------------- --------------------
<S> <C> <C>
Victoria E. Schonfeld; Vice President Ms. Schonfeld is a managing director
44 and general counsel of Mitchell
Hutchins. From April 1990 to May
1994, she was a partner in the law
firm of Arnold & Porter. Ms. Schon-
feld is also a vice president of 31
other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Paul H. Schubert; 32 Vice President and Mr. Schubert is a first vice presi-
Assistant Treasurer dent and a senior manager of the
mutual fund finance division of
Mitchell Hutchins. From August 1992
to August 1994, he was a vice pres-
ident at BlackRock Financial Man-
agement, L.P. Prior to August 1992,
he was an audit manager with Ernst
& Young LLP. Mr. Schubert is also a
vice president and assistant trea-
surer of 31 other investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Nirmal Singh; 39 Vice President Mr. Singh is a first vice president
of Mitchell Hutchins. Prior to Sep-
tember 1993, he was a member of the
portfolio management team at Mer-
rill Lynch Asset Management, Inc.
Mr. Singh is also vice president of
four other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Julian F. Sluyters; 35 Vice President and Mr. Sluyters is a senior vice presi-
Treasurer dent and the director of the mutual
fund finance division of Mitchell
Hutchins. Prior to 1991, he was an
audit senior manager with Ernst &
Young LLP. Mr. Sluyters is also a
vice president and treasurer of 31
other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>

21
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ------------------- --------------------
<S> <C> <C>
Mark A. Tincher; 40 Vice President Mr. Tincher is a managing director
and chief investment officer--U.S.
equity investments of Mitchell
Hutchins. Prior to March 1995, he
was a vice president and directed
the U.S. funds management and eq-
uity research areas of Chase Man-
hattan Private Bank. Mr. Tincher is
also vice president of ten other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Gregory K. Todd; 38 Vice President and Mr. Todd is a first vice president
Assistant Secretary and associate general counsel of
Mitchell Hutchins. Prior to 1993,
he was a partner in the law firm of
Shereff, Friedman, Hoffman &
Goodman. Mr. Todd is also a vice
president and assistant secretary
of 31 other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Craig M. Varrelman; 37 Vice President Mr. Varrelman is a first vice presi-
dent of Mitchell Hutchins. Mr. Var-
relman is also vice president of
four other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Keith A. Weller; 34 Vice President and Mr. Weller is a first vice president
Assistant Secretary and associate general counsel of
Mitchell Hutchins. From September
1987 to May 1995, he was an attor-
ney in private practice. Mr. Weller
is also a vice president and assis-
tant secretary of 23 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
- --------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mr. Bewkes is "interested person" of the Trust as defined in the
Investment Company Act of 1940 ("1940 Act") by virtue of his position with PW
Group.

22
<PAGE>

The Trust pays trustees who are not "interested persons" of the Trust $5,000
annually and $250 per meeting of the board or any committee thereof. Trustees
are reimbursed for any expenses incurred in attending meetings. Trustees and
officers of the Trust own in the aggregate less than 1% of the shares of the
Fund. Because PaineWebber and Mitchell Hutchins perform substantially all of
the services necessary for the operation of the Trust and the Fund, the Trust
requires no employees. No officer, director or employee of Mitchell Hutchins or
PaineWebber presently receives any compensation from the Trust for acting as a
trustee or officer.

The table below includes certain information relating to the compensation of
the Trust's trustees.

COMPENSATION TABLE

<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT ESTIMATED COMPENSATION
AGGREGATE BENEFITS ANNUAL FROM THE
COMPENSATION ACCRUED AS PART BENEFITS TRUST AND THE
FROM THE OF THE TRUST'S UPON TRUST
NAME OF PERSON, POSITION TRUST(degrees) EXPENSES RETIREMENT COMPLEX+
- ------------------------ -------------- --------------- ---------- -------------
<S> <C> <C> <C> <C>
E. Garret Bewkes, Jr.
Trustee and Chairman of
the Board
of Trustees............ -- -- -- --
Meyer Feldberg,
Trustee................ $10,250 -- -- $86,050
George W. Gowen,
Trustee................ $ 9,250 -- -- $71,425
Frederick V. Malek,
Trustee................ $ 9,750 -- -- $77,875
Judith Davidson Moyers,
Trustee................ $ 9,750 -- -- $71,125
</TABLE>
- --------
(degrees) Represents fees paid to each trustee during the fiscal year ended
November 30, 1994.
+ Represents total compensation paid to each trustee during the year ended
December 31, 1994.

23
<PAGE>

INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS

INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of the Fund pursuant to a contract with the Trust
dated April 21, 1988 ("Advisory Contract"). Under the Advisory Contract, the
Trust pays Mitchell Hutchins an annual fee, computed daily and paid monthly, at
the rate of 0.50% of the Fund's average daily net assets. During the fiscal
years ended November 30, 1994, November 30, 1993 and November 30, 1992,
respectively, the Trust paid (or accrued) to Mitchell Hutchins investment
advisory and administrative fees of $3,958,127, $4,999,240 and $4,192,907 with
respect to the Fund.

Under a service agreement pursuant to which PaineWebber provides certain
services to the Fund not otherwise provided by the Fund's transfer agent, which
agreement is reviewed by the Trust's board of trustees annually, during the
fiscal years ended November 30, 1994, November 30, 1993 and November 30, 1992,
PaineWebber earned fees under the service agreement in the approximate amounts
of $196,490, $217,612 and $196,379, respectively, for the Fund.

Under the terms of the Advisory Contract, the Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Trust not readily identifiable as belonging
to a particular series of the Trust are allocated among the series of the Trust
by or under the direction of the Trust's board of trustees in such manner as
the board deems fair and equitable. Expenses borne by the Fund include the
following (or the Fund's share of the following): (1) the cost (including
brokerage commissions) of securities purchased or sold by the Fund and any
losses incurred in connection therewith; (2) fees payable to and expenses
incurred on behalf of the Fund by Mitchell Hutchins; (3) organizational
expenses; (4) filing fees and expenses relating to the registration and
qualification of the Fund's shares under federal and state securities laws and
maintenance of such registrations and qualifications; (5) fees and salaries
payable to trustees who are not interested persons of the Trust or Mitchell
Hutchins; (6) all expenses incurred in connection with the trustees' services,
including travel expenses; (7) taxes (including any income or franchise taxes)
and governmental fees; (8) costs of any liability, uncollectible items of
deposit and any other insurance or fidelity bonds; (9) any costs, expenses or
losses arising out of a liability of or claim for damages or other relief
asserted against the Trust or the Fund for violation of any law; (10) legal,
accounting and auditing expenses, including legal fees of special counsel for
the independent trustees; (11) charges of custodians, transfer agents and other
agents; (12) costs of preparing share certificates; (13) expenses of setting in
type and printing prospectuses and supplements thereto, statements of
additional information and supplements thereto, reports and proxy materials for
existing shareholders, and costs of mailing such materials to existing
shareholders; (14) any extraordinary expenses (including fees and disbursements
of counsel) incurred by the Trust or the Fund; (15) fees, voluntary assessments
and other expenses incurred in connection with membership in investment company
organizations; (16) costs of mailing and tabulating proxies and costs of
meetings of shareholders, the board and any committees thereof; (17) the cost
of investment company literature and other publications provided to trustees
and officers; and (18) costs of mailing, stationery and communications
equipment.

As required by state regulation, Mitchell Hutchins will reimburse the Fund if
and to the extent that the aggregate operating expenses of the Fund in any
fiscal year exceed applicable limits. Currently, the most restrictive such
limit applicable to the Fund is 2.5% of the first $30 million of

24
<PAGE>

the Fund's average daily net assets, 2.0% of the next $70 million of its
average daily net assets and 1.5% of its average daily net assets in excess of
$100 million. Certain expenses, such as brokerage commissions, taxes, interest,
distribution fees and extraordinary items, are excluded from this limitation.
For the fiscal years ended November 30, 1994, November 30, 1993 and November
30, 1992, no reimbursements were required pursuant to such limitations.

Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Trust or
the Fund in connection with the performance of the Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. The Advisory Contract
terminates automatically with respect to the Fund upon assignment and is
terminable at any time without penalty by the Trust's board of trustees or by
vote of the holders of a majority of the Fund's outstanding voting securities
on 60 days' written notice to Mitchell Hutchins or by Mitchell Hutchins on 60
days' written notice to the Trust.

<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($ MIL)
------------------- ----------
<S> <C>
Domestic (excluding Money Market)............................... $ 5,680.0
Global.......................................................... 2,893.3
Equity/Balanced................................................. 2,748.3
Fixed Income (excluding Money Market)........................... 5,825.0
Taxable Fixed Income.......................................... 4,083.1
Tax-Free Fixed Income......................................... 1,741.9
Money Market Funds.............................................. 20,479.4
</TABLE>

Mitchell Hutchins personnel may invest in securities for their own accounts
pursuant to a code of ethics that describes the fiduciary duty owed to
shareholders of the PaineWebber mutual funds and other Mitchell Hutchins'
advisory accounts by all Mitchell Hutchins' directors, officers and employees,
establishes procedures for personal investing and restricts certain
transactions. For example, employee accounts generally must be maintained at
PaineWebber, personal trades in most securities require pre-clearance and
short-term trading and participation in initial public offerings generally are
prohibited. In addition, the code of ethics puts restrictions on the timing of
personal investing in relation to trades by PaineWebber mutual funds and other
Mitchell Hutchins advisory clients.

DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
shares of the Fund under a distribution contract with the Trust dated July 1,
1991 ("Distribution Contract") that requires Mitchell Hutchins to use its best
efforts, consistent with its other businesses, to sell shares of the Fund.
Class Y shares of the Fund are offered continuously. Under an exclusive dealer
contract

25
<PAGE>

between Mitchell Hutchins and PaineWebber dated July 1, 1991 ("Exclusive Dealer
Contract"), PaineWebber sells the Fund's Class Y shares.

PORTFOLIO TRANSACTIONS

Subject to policies established by the board of trustees, Mitchell Hutchins
is responsible for the execution of the Fund's portfolio transactions and the
allocation of brokerage transactions. In executing portfolio transactions,
Mitchell Hutchins seeks to obtain the best net results for the Fund, taking
into account such factors as the price (including the applicable brokerage
commission or dealer spread), size of order, difficulty of execution and
operational facilities of the firm involved. Generally, bonds are traded on the
OTC market on a "net" basis without a stated commission through dealers acting
for their own account and not as brokers. Prices paid to dealers in principal
transactions generally include a "spread," which is the difference between the
prices at which the dealer is willing to purchase and sell a specific security
at that time. During the fiscal years ended November 30, 1994, November 30,
1993 and November 30, 1992, the Fund paid approximately $0, $0 and $3,906,
respectively, in brokerage commissions.

The Fund has no obligation to deal with any broker or group of brokers in the
execution of portfolio transactions. The Fund contemplates that, consistent
with the policy of obtaining the best net results, brokerage transactions may
be conducted through Mitchell Hutchins or its affiliates, including
PaineWebber. The Trust's board of trustees has adopted procedures in conformity
with Rule 17e-1 under the 1940 Act to ensure that all brokerage commissions
paid to Mitchell Hutchins or its affiliates are reasonable and fair. Specific
provisions in the Advisory Contract authorize Mitchell Hutchins and any of its
affiliates that are members of a national securities exchange to effect
portfolio transactions for the Fund on such exchange and to retain compensation
in connection with such transactions. Any such transactions will be effected
and related compensation paid in accordance with applicable SEC regulations.
During the fiscal years ended November 30, 1994, November 30, 1993 and November
30, 1992, the Fund did not pay any brokerage commissions to PaineWebber or any
other affiliates of Mitchell Hutchins.

Transactions in futures contracts are executed through futures commission
merchants ("FCMs"), who receive brokerage commissions for their services. The
Fund's procedures in selecting FCMs to execute the Fund's transactions in
futures contracts, including procedures permitting the use of Mitchell Hutchins
and its affiliates, are similar to those in effect with respect to brokerage
transactions in securities.

Consistent with the interests of the Fund and subject to the review of the
Trust's board of trustees, Mitchell Hutchins may cause the Fund to purchase and
sell portfolio securities through brokers who provide the Fund with research,
analysis, advice and similar services. In return for such services, the Fund
may pay to those brokers a higher commission than may be charged by other
brokers, provided that Mitchell Hutchins determines in good faith that such
commission is reasonable in terms either of that particular transaction or of
the overall responsibility of Mitchell Hutchins to the Fund and its other
clients and that the total commissions paid by the Fund will be reasonable in
relation to the benefits to the Fund over the long term. During the fiscal year
ended

26
<PAGE>

November 30, 1994, the Fund directed no portfolio transactions to brokers
chosen because they provided research services.

For purchases or sales with broker-dealer firms which act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with these transactions,
Mitchell Hutchins will not purchase securities at a higher price or sell
securities at a lower price than would otherwise be paid if no weight was
attributed to the services provided by the executing dealer. Moreover, Mitchell
Hutchins will not enter into any explicit soft dollar arrangements relating to
principal transactions and will not receive in principal transactions the types
of services which could be purchased for hard dollars. Mitchell Hutchins may
engage in agency transactions in OTC equity and debt securities in return for
research and execution services. These transactions are entered into only in
compliance with procedures ensuring that the transaction (including
commissions) is at least as favorable as it would have been if effected
directly with a market-maker that did not provide research or execution
services. These procedures include Mitchell Hutchins receiving multiple quotes
from dealers before executing the transaction on an agency basis.

Information and research services furnished by dealers or brokers with or
through which the Fund effects securities transactions may be used by Mitchell
Hutchins in advising other funds or accounts and, conversely, research services
furnished to Mitchell Hutchins by dealers or brokers in connection with other
funds or accounts Mitchell Hutchins advises may be used by Mitchell Hutchins in
advising the Fund. Information and research received from such brokers or
dealers will be in addition to, and not in lieu of, the services required to be
performed by Mitchell Hutchins under the Advisory Contract.

Investment decisions for the Fund and other investment accounts managed by
Mitchell Hutchins are made independently of each other in light of differing
considerations for the various accounts. However, the same investment decision
may occasionally be made for the Fund and one or more of such accounts. In such
cases, simultaneous transactions are inevitable. Purchases or sales are then
averaged as to price and allocated between the Fund and such other account(s)
as to amount according to a formula deemed equitable to the Fund and such
account(s). While in some cases this practice could have a detrimental effect
upon the price or value of the security as far as the Fund is concerned, or
upon its ability to complete its entire order, in other cases it is believed
that coordination and the ability to participate in volume transactions will be
beneficial to the Fund.

The Fund will not purchase securities that are offered in underwritings in
which Mitchell Hutchins or any of its affiliates is a member of the
underwriting or selling group except pursuant to procedures adopted by the
Trust's board of trustees pursuant to Rule 10f-3 under the 1940 Act. Among
other things, these procedures require that the commission or spread paid in
connection with such a purchase be reasonable and fair, that the purchase be at
not more than the public offering price prior to the end of the first business
day after the date of the public offering and that Mitchell Hutchins or any
affiliate thereof not participate in or benefit from the sale to the Fund.

PORTFOLIO TURNOVER. The Fund's annual portfolio turnover rate may vary
greatly from year to year, but it will not be a limiting factor when management
deems portfolio changes appropriate. The portfolio turnover rate is calculated
by dividing the lesser of the Fund's annual sales and

27
<PAGE>

purchases of portfolio securities (exclusive of purchases or sales of
securities whose maturities at the time of acquisition were one year or less)
by the monthly average value of the securities in the portfolio during the
year. During the fiscal years ended November 30, 1994 and November 30, 1993,
respectively, the Fund's portfolio turnover rates were 358.07% and 83.13%. The
increase in the Fund's portfolio turnover rate during the fiscal year ended
November 30, 1994 from the portfolio turnover rate of the prior fiscal year is
due largely to the Fund's use of dollar rolls.

VALUATION OF SHARES

The Fund determines the net asset value per share separately for each Class
of shares as of the close of regular trading (currently 4:00 p.m., Eastern
time) on the NYSE on each Business Day, which is defined as each Monday through
Friday when the NYSE is open. Currently the NYSE is closed on the observance of
the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

Where market quotations are readily available, portfolio securities are
valued based upon market quotations, provided such quotations adequately
reflect, in the judgment of Mitchell Hutchins, the fair value of the security.
Where such market quotations are not readily available, securities are valued
based upon appraisals received from a pricing service using a computerized
matrix system or based upon appraisals derived from information concerning the
security or similar securities received from recognized dealers in those
securities. The amortized cost method of valuation generally is used with
respect to debt obligations with 60 days or less remaining to maturity unless
the Trust's board of trustees determines that this does not represent fair
value. All other securities or assets will be valued at fair value as
determined in good faith by or under the direction of the Trust's board of
trustees.

PERFORMANCE INFORMATION

The Fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represents past performance and is not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.

TOTAL RETURN CALCULATIONS. Average annual total return quotes ("Standardized
Return") used in the Fund's Performance Advertisements are calculated according
to the following formula:

P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares
of a specified Class
T = average annual total return of shares of that Class
n = number of years
ERV
= ending redeemable value of a hypothetical $1,000 payment made
at the beginning of that period.

28
<PAGE>

The Fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The Fund calculates Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in Fund
shares and assuming the reinvestment of all dividends and other distributions.
The rate of return is determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the initial
value.

The following table shows performance information for Class Y shares
(formerly Class C shares) of the Fund for the periods indicated. All returns
for periods of more than one year are expressed as an annualized average
return:

<TABLE>
<CAPTION>
CLASS Y
-------
<S> <C>
Fiscal Year Ended November 30, 1994:
Standardized Return*................................................. (9.37)%
Non-Standardized Return.............................................. (9.37)%
Inception September 11, 1991 to November 30, 1994:
Standardized Return*................................................. 2.43 %
Non-Standardized Return.............................................. 2.43 %
</TABLE>
- --------
* Class Y shares do not impose an initial or a contingent deferred sales
charge; therefore, Non-Standardized Return is identical to Standardized
Return.

YIELD. Yields used in the Fund's Performance Advertisements are calculated by
dividing the Fund's interest income attributable to a Class of shares for a 30-
day period ("Period"), net of expenses attributable to such Class, by the
average number of shares of such Class entitled to receive dividends during the
Period, and expressing the result as an annualized percentage (assuming semi-
annual compounding) of the net asset value per share at the end of the Period.
Yield quotations are calculated according to the following formula:

YIELD = 2[(a-b + 1)/6/-1]
cd
<TABLE>
<C> <C> <S>
interest earned during the Period attributable to a Class of
where: a = shares
b = expenses accrued for the Period attributable to a Class of shares
(net of reimbursements)
c = the average daily number of shares of the Class outstanding
during the Period that were entitled to receive dividends
d = the net asset value per share on the last day of the Period.
</TABLE>

29
<PAGE>

Except as noted below, in determining net investment income earned during the
Period (variable "a" in the above formula), the Fund calculates interest earned
on each debt obligation held by it during the Period by (1) computing the
obligation's yield to maturity, based on the market value of the obligation
(including actual accrued interest) on the last business day of the Period or,
if the obligation was purchased during the Period, the purchase price plus
accrued interest and (2) dividing the yield to maturity by 360, and multiplying
the resulting quotient by the market value of the obligation (including actual
accrued interest) to determine the interest income on the obligation for each
day of the period that the obligation is in the portfolio. Once interest earned
is calculated in this fashion for each debt obligation held by the Fund,
interest earned during the Period is then determined by totalling the interest
earned on all debt obligations. For purposes of these calculations, the
maturity of an obligation with one or more call provisions is assumed to be the
next date on which the obligation reasonably can be expected to be called or,
if none, the maturity date. The yield of the Fund's Class Y shares for the 30-
day period ended November 30, 1994 was 6.80%.

OTHER INFORMATION. In Performance Advertisements the Fund may compare its
Standardized Return and/or its Non-Standardized Return with data published by
Lipper Analytical Services, Inc. ("Lipper") for U.S. government funds, CDA
Investment Technologies, Inc. ("CDA"), Wiesenberger Investment Companies
Service ("Wiesenberger"), Investment Company Data Inc. ("ICD") or Morningstar
Mutual Funds ("Morningstar"), or with the performance of U.S. Treasury
securities of various maturities, recognized stock, bond and other indices,
including (but not limited to) the Salomon Brothers Bond Index, Shearson Lehman
Bond Index, Shearson Lehman Government/Corporate Bond Index, the Standard &
Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average, and
changes in the Consumer Price Index as published by the U.S. Department of
Commerce. Such companies also may include economic data and statistics
published by the United States Bureau of Labor Statistics, such as the cost of
living index, information and statistics on the residential mortgage market or
the market for mortgage-backed securities, such as those published by the
Federal Reserve Bank, the Office of Thrift Supervision, Ginnie Mae, Fannie Mae
and Freddie Mac and the Lehman Mortgage-Backed Securities Index. The Fund also
may refer in such materials to mutual fund performance rankings and other data,
such as comparative asset, expense and fee levels, published by Lipper, CDA,
Wiesenberger, ICD or Morningstar. Performance Advertisements also may refer to
discussions of the Fund and comparative mutual fund data and ratings reported
in independent periodicals, including (but not limited to) THE WALL STREET
JOURNAL, MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRONS,
FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE
KIPLINGER LETTERS. Comparisons in Performance Advertisements may be in graphic
form.

The Fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on a Fund investment are reinvested
by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original
Fund investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.

30
<PAGE>

The Fund may also compare its performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Investment Technologies,
Inc. Certificate of Deposit Index and the Bank Rate Monitor National Index and
the averages of yields of CDs of major banks published by Banxquote (R) Money
Markets. In comparing the Fund's performance to CD performance, investors
should keep in mind that bank CDs are insured in whole or in part by an agency
of the U.S. government and offer fixed principal and fixed or variable rates of
interest, and that bank CD yields may vary depending on the financial
institution offering the CD and prevailing interest rates. Fund shares are not
insured or guaranteed by the U.S. government and returns thereon and net asset
value will fluctuate. The securities held by the Fund generally have longer
maturities than most CDs and may reflect interest rate fluctuations for longer
term securities. An investment in the Fund involves greater risks than an
investment in either a money market fund or a CD.

TAXES

In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code, the Fund must distribute to
its shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income and net short-
term capital gain) ("Distribution Requirement") and must meet several
additional requirements. These requirements include the following: (1) the Fund
must derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of securities, or other income (including gains from options
or futures) derived with respect to its business of investing in securities
("Income Requirement"); (2) the Fund must derive less than 30% of its gross
income each taxable year from the sale or other disposition of securities,
options or futures held for less than three months ("Short-Short Limitation");
(3) at the close of each quarter of the Fund's taxable year, at least 50% of
the value of its total assets must be represented by cash and cash items, U.S.
government securities, securities of other RICs and other securities that are
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets; and (4) at the close of each quarter of
the Fund's taxable year, not more than 25% of the value of its total assets may
be invested in securities (other than U.S. government securities or the
securities of other RICs) of any one issuer.

Dividends and other distributions declared by the Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by
the shareholders on December 31 of that year if the distributions are paid by
the Fund during the following January.

The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary income for that year and capital gain net income for the
one-year period ending on November 30 of that year, plus certain other amounts.

The use of hedging and option income strategies, such as writing (selling)
and purchasing options and futures, involves complex rules that will determine
for income tax purposes the character and timing of recognition of the gains
and losses the Fund realizes in connection

31
<PAGE>

therewith by the Fund. Income from transactions in options and futures derived
by the Fund with respect to its business of investing in securities will
qualify as permissible income under the Income Requirement. However, income
from the disposition of options and futures will be subject to the Short-Short
Limitation if they are held for less than three months.

If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The
Fund will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent the Fund does not qualify for this
treatment, it may be forced to defer the closing out of certain options and
futures beyond the time when it otherwise would be advantageous to do so, in
order for the Fund to continue to qualify as a RIC.

The Fund may acquire zero coupon or other securities issued with original
issue discount ("OID"). As the holder of such securities, the Fund would have
to include in its gross income the OID that accrues on the securities during
the taxable year, even if the Fund receives no corresponding payment on the
securities during the year. The Fund has elected similar treatment with respect
to securities purchased at a discount from their face value ("market
discount"). Because the Fund annually must distribute substantially all of its
investment company taxable income, including any accrued OID and market
discount to satisfy the Distribution Requirement, the Fund may be required in a
particular year to distribute as a dividend an amount that is greater than the
total amount of cash it actually receives. Those distributions will be made
from the Fund's cash assets or from the proceeds of sales of portfolio
securities, if necessary. The Fund may realize capital gains or losses from
those sales, which would increase or decrease the Fund's investment company
taxable income or net capital gain (the excess of net long-term capital gain
over net short-term capital loss). In addition, any such gains may be realized
on the disposition of securities held for less than three months. Because of
the Short-Short Limitation, any such gains would reduce the Fund's ability to
sell other securities, or certain options or futures, held for less than three
months that it might wish to sell in the ordinary course of its portfolio
management.

OTHER INFORMATION

PAINEWEBBER MANAGED INVESTMENTS TRUST. Prior to April 1, 1991, the name of
the Fund was U.S. Government Portfolio (GNMA Portfolio prior to July 1, 1990).
Prior to November 10, 1995, the Fund's Class Y shares were called "Class C"
shares.

The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Prior to February 26, 1992, the Trust's name was PaineWebber
Fixed Income Portfolios. Under Massachusetts law, shareholders could, under
certain circumstances, be held personally liable for the obligations of the
Trust or the Fund. However, the Trust's Declaration of Trust disclaims
shareholder liability for acts or obligations of the Trust or the Fund and
requires that notice of such disclaimer be given in each note, bond, contract,
instrument, certificate or undertaking made or issued by the trustees or by any
officers or officer by or on behalf of the Trust, the Fund, the trustees

32
<PAGE>

or any of them in connection with the Trust. The Declaration of Trust provides
for indemnification from the Fund's property for all losses and expenses of any
shareholder held personally liable for the obligations of the Fund. Thus, the
risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund itself would be unable
to meet its obligations, a possibility that Mitchell Hutchins believes is
remote and not material. Upon payment of any liability incurred by a
shareholder solely by reason of being or having been a shareholder, the
shareholder paying such liability will be entitled to reimbursement from the
general assets of the Fund. The trustees intend to conduct the operations of
the Fund in such a way as to avoid, as far as possible, ultimate liability of
the shareholders for liabilities of the Fund.

COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 M Street, NW,
Washington, DC 20036-5891, counsel to the Fund, has passed upon the legality of
the shares offered by the Prospectus. Kirkpatrick & Lockhart LLP also acts as
counsel to Mitchell Hutchins and PaineWebber in connection with other matters.

INDEPENDENT AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New
York 10019, serves as independent auditors for the Trust.

FINANCIAL STATEMENTS

The Fund's Annual Report to Shareholders for the fiscal year ended November
30, 1994 and its Semi-Annual Report to Shareholders for the six months ended
May 31, 1995, are separate documents supplied with this Statement of Additional
Information and the financial statements, accompanying notes and (with respect
to the Annual Report to Shareholders) report of independent auditors appearing
therein relating to the Fund are incorporated by reference in this Statement of
Additional Information.

33
<PAGE>

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS
AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY
THE FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY
NOT LAWFULLY BE MADE.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions....................................... 1
Hedging and Related Income Strategies...................................... 8
Trustees and Officers...................................................... 16
Investment Advisory and Distribution Arrangements.......................... 24
Portfolio Transactions..................................................... 26
Valuation of Shares........................................................ 28
Performance Information.................................................... 28
Taxes...................................................................... 31
Other Information.......................................................... 32
Financial Statements....................................................... 33
</TABLE>

RECYCLED PAPER
(C)1995 PAINEWEBBER INCORPORATED
[RECYCLED LOGO APPEARS HERE]

PaineWebber
U.S. Government
Income Fund

Class Y Shares

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Statement of Additional Information
November 10, 1995,
as revised December 1, 1995

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