PAINEWEBBER MANAGED INVESTMENTS TRUST, 497, 1996-05-08

PAINEWEBBER MANAGED INVESTMENTS TRUST
497, 1996-05-08

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

PaineWebber U.S. Government Income Fund
PaineWebber Low Duration 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 -- April 1, 1996, as revised May 3, 1996.
- --------------------------------------------------------------------------------
These Funds are series of PaineWebber Managed Investments Trust ("Trust"). This
Prospectus concisely sets forth information about the Funds a prospective in-
vestor should know before investing. Please retain this Prospectus for future
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 April 1, 1996, as revised May 3,
1996 (which is incorporated by reference herein), has been filed with the Secu-
rities 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.
- --------------------------------------------------------------------------------

[_] Professional Management [_] Low Minimum Investment

[_] Portfolio Diversification [_] Automatic Investment Plan

[_] Dividend and Capital Gain [_] Systematic Withdrawal Plan
Reinvestment

[_] Flexible PricingSM [_] Exchange Privileges

[_] Suitable For Retirement Plans
- --------------------------------------------------------------------------------

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 THEACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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Prospectus Page 1

<PAGE>

Table of Contents
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 3
Financial Highlights....................................................... 9
Flexible Pricing System.................................................... 18
Investment Objectives and Policies......................................... 19
Purchases.................................................................. 31
Exchanges.................................................................. 35
Redemptions................................................................ 36
Conversion of Class B Shares............................................... 37
Other Services and Information............................................. 37
Dividends and Taxes........................................................ 38
Valuation of Shares........................................................ 40
Management................................................................. 40
Performance Information.................................................... 42
General Information........................................................ 43
Appendix A................................................................. 45
Appendix B................................................................. 48
Appendix C................................................................. 51
</TABLE>

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Prospectus Page 2

<PAGE>

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

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

The Funds: This Prospectus describes four separate, diversified
series (each, a "Fund") of an open-end management in-
vestment company. Each Fund has its own investment
objective 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 Low Highest level of income consistent with the preserva-
Duration tion of capital and low volatility of net asset val-
U.S. Government ue; invests primarily in U.S. government securities.
Income Fund ("Low Seeks to limit the volatility of its net asset value
Duration per share by maintaining, under normal circumstances,
Income Fund") an overall portfolio duration of from one to three
years.

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

PaineWebber High High income; invests primarily in high risk, high
Income Fund ("High yielding medium and lower quality corporate bonds.
Income Fund")

Total Net Assets at
March 31, 1996:

U.S. Government Low Duration Investment Grade High Income
Income Fund Income Fund Income Fund Fund
$518.4 million $267.7 million $343.7 million $529.0 million

Investment Adviser: Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins"), an asset management subsidiary of
PaineWebber Incorporated ("PaineWebber"), manages
over $45.4 billion in assets. See "Management."

Sub-Adviser: Pacific Investment Management Company ("PIMCO")
serves as sub-adviser for Low Duration Income Fund.
PIMCO manages approximately $78 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
investors, 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," "Redemp-
tions" and "Conversion of Class B Shares."

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Prospectus Page 3

<PAGE>

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, ex-
cept for Low Duration Income Fund, which has a maxi-
mum contingent deferred sales charge of 3% on most
redemptions made within four years of date of pur-
chase). Class B shares automatically convert into
Class A shares (which pay lower ongoing expenses) ap-
proximately six years after purchase.

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 and $100 for subsequent
purchases, except for Low Duration Income Fund, which
is $100 for initial and subsequent purchases.

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

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, U.S. Government Income Fund is designed for investors seeking
high current income consistent with the preservation of capital and
liquidity.

LOW DURATION INCOME FUND. Also investing primarily in U.S. government
securities, Low Duration Income Fund seeks to limit the volatility

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Prospectus Page 4

<PAGE>

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 high income.

RISK FACTORS. There can be no assurance that any Fund will achieve its
investment objective, and each Fund's net asset value per share generally will
vary inversely with movements in interest rates. Mitchell Hutchins or PIMCO,
as applicable, 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 and Low Duration Income Fund each 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 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, 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. High Income Fund is permitted to invest
up to 25% of its total assets in securities that do not currently provide
income but that Mitchell Hutchins believes have the potential for capital
appreciation.

Investment Grade Income Fund and High Income Fund may invest in U.S. dollar-
denominated securities of foreign issuers that are traded in U.S. securities
markets or 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 and Low Duration Income
Fund, dollar rolls and reverse repurchase agreements also entails special
risks.

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Prospectus Page 5

<PAGE>

<TABLE>
<CAPTION>
U.S. GOVERNMENT INCOME FUND
INVESTMENT GRADE INCOME FUND
HIGH INCOME FUND LOW DURATION INCOME FUND
----------------------------------- --------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
--------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Shareholder Transaction
Expenses(1)
Maximum sales charge on
purchases of shares
(as a percentage of
public offering price). 4% None None 3% None None
Sales charge on rein-
vested dividends....... None None None None None None
Exchange fee............ $5.00 $5.00 $5.00 $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) None(2) 3% 0.75%(3)
</TABLE>

<TABLE>
<CAPTION>
U.S. GOVERNMENT
INCOME FUND LOW DURATION INCOME FUND
----------------------- --------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Annual Fund Operating
Expenses(4)
(as a percentage of av-
erage net assets)
Management fees........ 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
Other expenses......... 0.25 0.28 0.27 0.40 0.52 0.50
---- ---- ---- -------- -------- --------
Total operating ex-
penses................ 1.00% 1.78% 1.52% 1.15% 2.02% 1.75%
==== ==== ==== ======== ======== ========
<CAPTION>
INVESTMENT GRADE
INCOME FUND HIGH INCOME FUND
----------------------- --------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Annual Fund Operating
Expenses(4)
(as a percentage of av-
erage net assets)
Management fees........ 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
Other expenses......... 0.20 0.20 0.20 0.18 0.18 0.19
---- ---- ---- -------- -------- --------
Total operating ex-
penses................ 0.95% 1.70% 1.45% 0.93% 1.68% 1.44%
==== ==== ==== ======== ======== ========
</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 (3% for Low
Duration Income Fund) applies to redemptions during the first year after
purchase; the charge generally declines by 1% annually thereafter, reaching
zero after six years (four years for Low Duration Income Fund). See
"Purchases."

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Prospectus Page 6

<PAGE>

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
12b-1 service fees................................. 0.25% 0.25% 0.25%
12b-1 distribution fees............................ 0.00 0.75 0.50
</TABLE>

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.

EXAMPLE OF EFFECT OF FUND EXPENSES

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>
U.S. GOVERNMENT INCOME
FUND
----------------------
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Class A Shares(1)........................................ $50 $71 $ 93 $158
Class B Shares:
Assuming a complete redemption at end of period(2)(3)... $68 $86 $116 $170
Assuming no redemption(3)............................... $18 $56 $ 96 $170
Class C Shares:
Assuming a complete redemption at end of period(2)...... $23 $48 $ 83 $181
Assuming no redemption.................................. $15 $48 $ 83 $181
</TABLE>

<TABLE>
<CAPTION>
LOW DURATION INCOME
FUND
----------------------
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Class A Shares(4)........................................ $41 $65 $ 91 $166
Class B Shares:
Assuming a complete redemption at end of period(2)(3)... $51 $83 $109 $192
Assuming no redemption(3)............................... $21 $63 $109 $192
Class C Shares:
Assuming a complete redemption at end of period(2)...... $25 $55 $ 95 $206
Assuming no redemption.................................. $18 $55 $ 95 $206
</TABLE>

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Prospectus Page 7

<PAGE>

<TABLE>
<CAPTION>
HIGH INCOME FUND
----------------------
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Class A Shares(1)........................................ $49 $68 $ 89 $150
Class B Shares:
Assuming a complete redemption at end of period(2)(3)... $67 $83 $111 $160
Assuming no redemption(3)............................... $17 $53 $ 91 $160
Class C Shares:
Assuming a complete redemption at end of period(2)...... $22 $46 $ 79 $172
Assuming no redemption.................................. $15 $46 $ 79 $172
</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.
(4) Assumes deduction at the time of purchase of the maximum 3% initial sales
charge.

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 any Class of the Funds' shares.

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 8

<PAGE>

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 Reports to
Shareholders for the fiscal year ended November 30, 1995, 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, 1995, have been audited by Ernst & Young
LLP, independent auditors, whose reports thereon are included in the Annual
Reports to Shareholders. Further information about the performance of each Fund
is also included in the Annual Reports to Shareholders, which may be obtained
without charge. The information appearing below for the periods prior to the
year ended November 30, 1991 also has been audited by Ernst & Young LLP, whose
reports thereon were unqualified.

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Prospectus Page 9
<PAGE>

Financial Highlights
(Continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. GOVERNMENT INCOME FUND
------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
------------------------------------------------------------------------------------------------
1995 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 investment income...... 0.58 0.60 0.67 0.75 0.77 0.76 0.80 0.80 0.81
Net realized and unrealized
gains (losses) from
investment, options and
futures transactions...... 0.62 (1.53) 0.05 0.01 0.49 (0.05) 0.23 -- (0.85)
-------- -------- -------- -------- -------- -------- -------- ---------- ----------
Net increase (decrease) in
net asset value resulting
from investment
operations................ 1.20 (0.93) 0.72 0.76 1.26 0.71 1.03 0.80 (0.04)
-------- -------- -------- -------- -------- -------- -------- ---------- ----------
Dividends from net
investment income......... (0.58) (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.............. (0.58) (0.60) (0.67) (0.75) (0.76) (0.75) (0.80) (0.83) (0.92)
-------- -------- -------- -------- -------- -------- -------- ---------- ----------
Net asset value, end of
period.................... $ 9.12 $ 8.50 $ 10.03 $ 9.98 $ 9.97 $ 9.47 $ 9.51 $ 9.28 $ 9.31
======== ======== ======== ======== ======== ======== ======== ========== ==========
Total investment
return (1)................ 14.70% (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)................... $430,285 $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........ 1.03%(2) 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.................... 6.65%(2) 6.48% 6.60% 7.42% 7.94% 8.57% 8.82% 8.83% 8.44%
Portfolio turnover rate.... 206% 358% 83% 28% 71% 34% 125% 302% 98%
</TABLE>
- -------
#Commencement of issuance of shares.
*Annualized.
**Formerly Class D.
(1) Total return is calculated assuming a $1,000 investment on the first day
of each period reported, reinvestment of all dividends and other distribu-
tions 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 each Class would be lower if sales charges were includ-
ed. Total investment returns for periods of less than one year have not been
annualized.
(2) These ratios include non-recurring reorganization expenses of 0.03% for
each Class of shares.
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Prospectus Page 10
<PAGE>

- --------------------------------------------------------------------------------
PaineWebber U.S. Government Income Fund Low Duration U.S. Government Income
Fund Investment Grade Income Fund High Income Fund
Financial Highlights
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C**
- ------------ -------------------------------------------------------- ----------------------------------------------
FOR THE
YEAR FOR THE FOR THE PERIOD FOR THE FOR THE PERIOD
ENDED YEARS ENDED JULY 1, 1991# YEARS ENDED JULY 2, 1992#
NOVEMBER 30, NOVEMBER 30, TO NOVEMBER 30, TO
- ------------ ---------------------------------------- NOVEMBER 30, ------------------------------ NOVEMBER 30,
1986 1995 1994 1993 1992 1991 1995 1994 1993 1992
- ------------ ------- ------- -------- -------- -------------- ------- ------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.18 $ 8.50 $ 10.03 $ 9.98 $ 9.98 $ 9.59 $ 8.49 $ 10.02 $ 9.98 $ 10.13
---------- ------- ------- -------- -------- ------- ------- ------- -------- --------
0.96 0.51 0.53 0.60 0.67 0.29 0.53 0.55 0.62 0.25
0.32 0.63 (1.53) 0.05 0.01 0.39 0.63 (1.53) 0.04 (0.15)
---------- ------- ------- -------- -------- ------- ------- ------- -------- --------
1.28 1.14 (1.00) 0.65 0.68 0.68 1.16 (0.98) 0.66 0.10
---------- ------- ------- -------- -------- ------- ------- ------- -------- --------
(0.96) (0.52) (0.53) (0.60) (0.68) (0.29) (0.54) (0.55) (0.62) (0.25)
(0.23) -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- --
---------- ------- ------- -------- -------- ------- ------- ------- -------- --------
(1.19) (0.52) (0.53) (0.60) (0.68) (0.29) (0.54) (0.55) (0.62) (0.25)
---------- ------- ------- -------- -------- ------- ------- ------- -------- --------
$ 10.27 $ 9.12 $ 8.50 $ 10.03 $ 9.98 $ 9.98 $ 9.11 $ 8.49 $ 10.02 $ 9.98
========== ======= ======= ======== ======== ======= ======= ======= ======== ========
13.51% 13.81% (10.31)% 6.57% 6.98% 6.78% 14.12% (10.08)% 6.75% 0.62%
========== ======= ======= ======== ======== ======= ======= ======= ======== ========
$3,139,662 $82,469 $99,581 $161,158 $132,357 $23,532 $53,832 $68,400 $143,473 $127,026
0.66% 1.81%(2) 1.72% 1.66% 1.67% 1.68%* 1.55%(2) 1.45% 1.40% 1.44%*
9.35% 5.88%(2) 5.71% 5.79% 6.38% 6.40%* 6.17%(2) 5.99% 6.06% 6.13%*
224% 206% 358% 83% 28% 71% 206% 358% 83% 28%
</TABLE>
----------
Prospectus Page 11
<PAGE>

- -------------------------------------------------------------------------------
PaineWebber U.S. Government Income Fund Low Duration U.S. Government
Income FundInvestment Grade Income Fund High Income Fund
Financial Highlights
(Continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LOW DURATION INCOME FUND
-----------------------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C***
-------------------------------------- ----------------------------------- --------------------------------------
FOR THE YEARS FOR THE YEARS FOR THE YEARS
ENDED FOR THE PERIOD ENDED NOVEMBER FOR THE PERIOD ENDED FOR THE PERIOD
NOVEMBER 30, MAY 3, 1993# 30, MAY 3, 1993# NOVEMBER 30, MAY 3, 1993#
------------------ TO NOVEMBER 30, --------------- TO NOVEMBER 30, ------------------ TO NOVEMBER 30,
1995 1994 1993 1995 1994 1993 1995 1994 1993
-------- -------- --------------- ------ ------- --------------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period......... $ 2.25 $ 2.48 $ 2.50 $ 2.25 $ 2.48 $ 2.50 $ 2.25 $ 2.47 $ 2.50
-------- -------- -------- ------ ------- ------- -------- -------- ----------
Net investment
income......... 0.13 0.12 0.07 0.11 0.10 0.06 0.12 0.11 0.06
Net realized and
unrealized
gains (losses)
from
investment,
futures and
options
transactions... 0.09 (0.29) (0.02) 0.09 (0.29) (0.02) 0.09 (0.28) (0.03)
-------- -------- -------- ------ ------- ------- -------- -------- ----------
Net increase
(decrease) in
net asset value
from
operations..... 0.22 (0.17) 0.05 0.20 (0.19) 0.04 0.21 (0.17) 0.03
-------- -------- -------- ------ ------- ------- -------- -------- ----------
Dividends from
net investment
income......... (0.13) (0.12) (0.07) (0.11) (0.10) (0.06) (0.12) (0.11) (0.06)
-------- -------- -------- ------ ------- ------- -------- -------- ----------
Contribution to
capital from
adviser........ -- .06 -- -- .06 -- -- .06 --
-------- -------- -------- ------ ------- ------- -------- -------- ----------
Net asset value,
end of period.. $ 2.34 $ 2.25 $ 2.48 $ 2.34 $ 2.25 $ 2.48 $ 2.34 $ 2.25 $ 2.47
======== ======== ======== ====== ======= ======= ======== ======== ==========
Total investment
return (1)..... 10.25% (4.50)%** 1.88% 9.30% (5.24)%** 1.47% 9.60% (4.99)%** 1.20%
======== ======== ======== ====== ======= ======= ======== ======== ==========
Ratios/Supplemental
Data:
Net assets, end
of period
(000's)........ $127,961 $158,712 $551,243 $9,147 $13,382 $31,706 $180,169 $296,182 $1,186,181
Ratio of
expenses to
average net
assets (2)..... 1.15% 0.84% 0.81%* 2.02% 1.62% 1.62%* 1.75% 1.36% 1.35%*
Ratio of net
investment
income to
average net
assets (2)..... 5.89% 5.16% 4.85%* 5.03% 4.40% 4.31%* 5.31% 4.65% 4.52%*
Portfolio
turnover rate.. 242% 246% 97% 242% 246% 97% 242% 246% 97%
</TABLE>
- -------
# Commencement of issuance of shares.
* Annualized.
** Net of $0.06 contribution of capital from Adviser. If such contribution
had not been made, the total investment returns would have been (7.02)%
for Class A, (7.74)% for Class B and (7.50)% for Class C (formerly Class
D).
*** Formerly Class D.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends 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 each Class would be lower if sales charges were
included. Total investment returns for periods of less than one year have
not been annualized.
(2) During the year ended November 30, 1994, Mitchell Hutchins waived a
portion of its advisory and administration fees. If such waivers had not
been made, the annualized ratios of expenses to average net assets, and
net investment income to average net assets, respectively, would have been
0.88% and 5.12% for Class A, 1.66% and 4.35% for Class B, and 1.39% and
4.61% for Class C (formerly Class D).

-----------
Prospectus Page 12
<PAGE>

(THIS PAGE INTENTIONALLY LEFT BLANK)

-----------
Prospectus Page 13
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PaineWebber U.S. Government Income Fund Low Duration U.S. Government Income
Fund
Investment Grade Income Fund High Income Fund
Financial Highlights
(Continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT GRADE INCOME FUND
-----------------------------------------------------------------------------------------
CLASS A
-----------------------------------------------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
-----------------------------------------------------------------------------------------
1995 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 investment income... 0.76 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........... 1.01 (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............. 1.77 (0.64) 1.49 1.03 1.48 0.51 1.13 0.93 (0.27)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Dividends from net
investment income...... (0.76) (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........... (0.76) (0.77) (0.79) (0.82) (0.81) (0.83) (0.84) (0.82) (1.05)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period................. $ 10.68 $ 9.67 $ 11.08 $ 10.38 $ 10.17 $ 9.50 $ 9.82 $ 9.53 $ 9.42
======== ======== ======== ======== ======== ======== ======== ======== ========
Total investment
return (1)............. 18.95% (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)................ $258,898 $271,553 $204,418 $197,795 $220,216 $225,424 $269,381 $334,106 $543,919
Ratio of expenses to
average net assets..... 0.95% 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..... 7.42% 7.50% 7.24% 7.81% 8.32% 8.76% 8.96% 8.83% 8.67%
Portfolio turnover rate. 149% 142% 27% 44% 46% 31% 47% 35% 88%
</TABLE>
- -------
# Commencement of issuance of shares.
* Annualized.
** Formerly Class D.
(1) Total return is calculated assuming a $1,000 investment on the first day
of each period reported, reinvestment of all dividends and other distribu-
tions 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 each Class would be lower if sales charges were
included. Total investment returns for periods of less than one year have
not been annualized.
-----------
Prospectus Page 14
<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PaineWebber U.S. Government Income Fund Low Duration U.S. Government Income
Fund
Investment Grade Income Fund High Income Fund
Financial Highlights
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT GRADE INCOME FUND
- ----------------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C**
- ------------ -------------------------------------------------- -----------------------------------------
FOR THE FOR THE
FOR THE FOR THE PERIOD FOR THE PERIOD
YEAR ENDED YEARS ENDED JULY 1, 1991# YEARS ENDED JULY 2, 1992#
NOVEMBER 30, NOVEMBER 30, TO NOVEMBER 30, TO
- ------------ ----------------------------------- NOVEMBER 30, -------------------------- NOVEMBER 30,
1986 1995 1994 1993 1992 1991 1995 1994 1993 1992
- ------------ ------- ------- ------- ------- ------------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.27 $ 9.67 $ 11.07 $ 10.38 $ 10.17 $ 9.79 $ 9.67 $ 11.08 $ 10.38 $ 10.48
-------- ------- ------- ------- ------- ------ ------- ------- ------- -------
1.00 0.68 0.69 0.71 0.73 0.31 0.70 0.72 0.74 0.28
0.69 1.00 (1.40) 0.69 0.22 0.38 1.01 (1.41) 0.70 (0.10)
-------- ------- ------- ------- ------- ------ ------- ------- ------- -------
1.69 1.68 (0.71) 1.40 0.95 0.69 1.71 (0.69) 1.44 0.18
-------- ------- ------- ------- ------- ------ ------- ------- ------- -------
(1.00) (0.68) (0.69) (0.71) (0.74) (0.31) (0.70) (0.72) (0.74) (0.28)
(0.22) -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- --
-------- ------- ------- ------- ------- ------ ------- ------- ------- -------
(1.22) (0.68) (0.69) (0.71) (0.74) (0.31) (0.70) (0.72) (0.74) (0.28)
-------- ------- ------- ------- ------- ------ ------- ------- ------- -------
$ 10.74 $ 10.67 $ 9.67 $ 11.07 $ 10.38 $10.17 $ 10.68 $ 9.67 $ 11.08 $ 10.38
======== ======= ======= ======= ======= ====== ======= ======= ======= =======
17.36% 17.97% (6.60)% 13.81% 9.56% 6.76% 18.37% (6.40)% 14.21% 1.32%
======== ======= ======= ======= ======= ====== ======= ======= ======= =======
$474,632 $71,372 $69,359 $52,301 $20,862 $5,368 $39,150 $45,473 $47,527 $16,067
0.68% 1.70% 1.72% 1.70% 1.74% 1.67%* 1.45% 1.45% 1.44% 1.49%*
9.27% 6.67% 6.73% 6.40% 6.88% 6.87%* 6.95% 6.99% 6.61% 6.83%*
81% 149% 142% 27% 44% 46% 149% 142% 27% 44%
</TABLE>
-----------
Prospectus Page 15
<PAGE>

- -------------------------------------------------------------------------------
PaineWebber U.S. Government Income Fund Low Duration U.S. Government
Income Fund
Investment Grade Income Fund High Income Fund
Financial Highlights
(Continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH INCOME FUND
-------------------------------------------------------------------------------------------
CLASS A
-------------------------------------------------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
-------------------------------------------------------------------------------------------
1995 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 investment income... 0.79 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........... (0.17) (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............. 0.62 (0.73) 1.72 1.59 2.67 (0.89) (0.05) 0.85 (0.16)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Dividends from net
investment income...... (0.80) (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........... (0.80) (0.86) (0.91) (0.97) (0.98) (0.97) (1.08) (1.19) (1.36)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period................. $ 6.96 $ 7.14 $ 8.73 $ 7.92 $ 7.30 $ 5.61 $ 7.47 $ 8.60 $ 8.94
======== ======== ======== ======== ======== ======== ======== ======== ========
Total investment return
(1).................... 9.01% (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's)......... $248,619 $268,397 $360,281 $279,685 $243,210 $184,990 $322,426 $532,450 $683,692
Ratio of expenses to
average net assets..... 0.93% 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................. 11.17% 10.43% 10.61% 12.68% 15.12% 15.20% 13.50% 13.55% 12.05%
Portfolio turnover rate. 94% 156% 182% 185% 117% 110% 132% 111% 145%
</TABLE>
- -------
# Commencement of offering of shares.
* Annualized.
**Formerly Class D shares.
(1)Total return is calculated assuming a $1,000 investment on the first day of
each period, 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; re-
sults for each Class would be lower if sales charges were included. Total
investment returns for periods of less than one year have not been
annualized.
-----------
Prospectus Page 16
<PAGE>

- --------------------------------------------------------------------------------
PaineWebber U.S. Government Income Fund Low Duration U.S. Government Income
Fund
Investment Grade Income Fund High Income Fund
Financial Highlights
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH INCOME FUND
- --------------------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C**
- ------------ ---------------------------------------------------- -------------------------------------------
FOR THE FOR THE
YEAR PERIOD FOR THE
ENDED JULY 1, FOR THE YEARS ENDED PERIOD JULY
NOVEMBER 30, FOR THE YEARS ENDED NOVEMBER 30, 1991# TO NOVEMBER 30, 2, 1992# TO
- ------------ -------------------------------------- NOVEMBER 30, ----------------------------- NOVEMBER 30,
1986 1995 1994 1993 1992 1991 1995 1994 1993 1992
- ------------ -------- -------- -------- ------- ------------ -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.21 $ 7.14 $ 8.72 $ 7.91 $ 7.29 $ 6.85 $ 7.15 $ 8.74 $ 7.92 $ 7.80
-------- -------- -------- -------- ------- ------- -------- -------- -------- -------
1.30 0.74 0.80 0.83 0.92 0.41 0.76 0.82 0.85 0.33
0.39 (0.18) (1.58) 0.82 0.61 0.44 (0.18) (1.59) 0.82 0.11
-------- -------- -------- -------- ------- ------- -------- -------- -------- -------
1.69 0.56 (0.78) 1.65 1.53 0.85 0.58 (0.77) 1.67 0.44
-------- -------- -------- -------- ------- ------- -------- -------- -------- -------
(1.30) (0.75) (0.80) (0.84) (0.91) (0.41) (0.76) (0.82) (0.85) (0.32)
(0.14) -- -- -- -- -- -- -- -- --
-------- -------- -------- -------- ------- ------- -------- -------- -------- -------
(1.44) (0.75) (0.80) (0.84) (0.91) (0.41) (0.76) (0.82) (0.85) (0.32)
-------- -------- -------- -------- ------- ------- -------- -------- -------- -------
$ 10.46 $ 6.95 $ 7.14 $ 8.72 $ 7.91 $ 7.29 $ 6.97 $ 7.15 $ 8.74 $ 7.92
======== ======== ======== ======== ======= ======= ======== ======== ======== =======
17.31% 8.05% (9.77)% 21.89% 22.07% 11.93% 8.45% (9.62)% 22.19% 5.21%
======== ======== ======== ======== ======= ======= ======== ======== ======== =======
$770,137 $212,946 $235,480 $286,525 $99,645 $18,274 $103,911 $115,196 $176,161 $35,992
0.69% 1.68% 1.64% 1.66% 1.70% 1.73%* 1.44% 1.38% 1.39% 1.45%*
12.07% 10.42% 9.66% 9.69% 11.42% 12.43%* 10.63% 9.91% 9.81% 10.67%*
169% 94% 156% 182% 185% 117% 94% 156% 182% 185%
</TABLE>
Prospectus Page 17
-----------
<PAGE>

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
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------------------ ------------------------ ----------------------
<C> <S> <C> <C>
Class A Maximum initial sales Service fee of 0.25% Initial sales charge
charge of 4% (3% for Low waived or reduced for
Duration Income Fund) of certain purchases
the public offering
price
Class B Maximum contingent de- Service fee of 0.25%; Shares convert to
ferred sales charge of distribution fee of Class A shares
5% upon redemption (3% 0.75% approximately six
for Low Duration Income years after issuance
Fund); declines to zero
after six years (four
years for Low Duration
Income Fund)
Class C Contingent deferred Service fee of 0.25%; --
sales charge of 0.75% distribution fee of
upon redemption for 0.50%
first year
</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 (3% for Class A shares
of Low Duration Income Fund). 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 (for
Low Duration Income Fund, a contingent deferred sales charge of up to 3%
applies to most redemptions made within four 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
----------
Prospectus Page 18
<PAGE>

For example, assuming a constant net asset value, the cumulative distribution
fees on the Class B shares of U.S. Government Income Fund, Investment Grade
Income Fund and High Income Fund would approximate 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. For these Funds, the cumulative distribution fees
on their Class C shares would approximate the expenses of the 4% maximum
initial sales charge on the Class A shares if the shares were held for
approximately eight years.

For Low Duration Income Fund, the cumulative distribution fees on its Class B
or Class C shares would approximate the 3% maximum initial sales charge on its
Class A shares if the shares were held approximately four years in the case of
the Class B shares or approximately six 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
nine 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 nine years (six years for Low Duration Income Fund) 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 descrip-
tion of the initial and contingent deferred sales charges, service fees and
distribution fees for Class A, B and C shares of each Fund. See also "Conver-
sion of Class B Shares," "Dividends and Taxes" and "General Information" for
other differences 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 LOW DURATION INCOME FUND is to achieve the highest
level of income consistent with the preservation of capital and low volatility
of net asset value. The Fund invests primarily in U.S. government securities
and seeks to limit the volatility of its net asset value per share by
maintaining, under normal circumstances, an overall portfolio duration of from
one to three years.

The investment objective of INVESTMENT GRADE INCOME FUND is to provide high
current income consistent with the preservation of capital and

----------
Prospectus Page 19
<PAGE>

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 high income. The
Fund invests primarily in a diversified range of high risk, high yield medium
to lower quality corporate 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, the policy of each of U.S. Government Income Fund and Low
Duration Income Fund 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 AND LOW DURATION INCOME FUND

Under normal conditions, U.S. Government Income Fund and Low Duration Income
Fund each 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 agreements with
respect to those securities. While these instruments may be guaranteed as to
the payment of interest and principal, they are not guaranteed as to market
value. Up to 35% of each Fund's total assets may be invested in privately
issued mortgage- and asset-backed securities 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 or
PIMCO, as applicable, to be of comparable quality. As a matter of fundamental
policy, each 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.

Low Duration Income Fund seeks to limit the volatility of its net asset value
per share by maintaining, under normal circumstances, an overall portfolio
duration of from one to three years. U.S. Government Income Fund has no fixed
portfolio duration policy. Duration is a measure of the expected life of a
fixed income security on a present value basis. See "Duration."

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. Issuers and
guarantors of the U.S. government mortgage-backed securities in which U.S.
Government Income Fund and Low Duration Income Fund may invest include the
Government National Mortgage Association ("Ginnie Mae"), the Federal National
Mortgage Association ("Fannie Mae"), and the Federal Home Loan Mortgage
Corporation ("Freddie Mac"). Private issuers of mortgage-backed securities in
which each Fund may invest are 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 Funds may invest, see Appendix A to this Prospectus.

Each 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 and Low

----------
Prospectus Page 20
<PAGE>

Duration 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 and Low Duration 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"), which are not issued through the
U.S. Treasury, will not be counted as U.S. government securities for purposes
of the 65% investment requirement. See "Risks of Zero Coupon Securities."

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.

Each 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, reverse repurchase agreements and dollar rolls. 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 20% of the Fund's net assets may be invested 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.
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 "Risks of Mortgage- and
Asset-Backed Securities."

During its 1995 fiscal year, Investment Grade Income Fund had 100% of its
average annual net assets in

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debt securities that received a rating from S&P or Moody's or another
NRSRO.The Fund had the following percentages of its average annual net assets
invested in rated securities: AAA/Aaa (including cash items)--13%, AA/Aa--7%,
A/A--35%, BBB/Baa--29%, BB/Ba--15%, B/B--1% and CCC/Caa--0%. It should be
noted that this information reflects the average composition of the Fund's
assets during the fiscal year ended November 30, 1995 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 primarily 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 "Risks of Lower Rated
Securities." Under normal circumstances, at least 65% of the Fund's total
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) which may be 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 may invest in securities selling at a
substantial discount from par.

High Income Fund is permitted to invest up to 25% of its total assets in
securities that do not currently provide income but that Mitchell Hutchins
believes have the potential for capital appreciation. These securities include
debt securities that are not currently paying income and equity securities,
such as common stock, warrants, rights and preferred stocks, that are not
paying current income. The Fund may invest up to 35% 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 1995 fiscal year, High Income Fund had 80% of its average annual
net assets in debt securities that received a rating from S&P or Moody's or
another NRSRO and 15% 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)--2%, AA/Aa--0%, A/A--0%, BBB/Baa--0%, BB/Ba--21%, B/B--51%, CCC/Caa--
6%. It should be noted that this information reflects the average composition
of the Fund's assets during the fiscal year ended November 30, 1995 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. The investment income of a Fund also 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,
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<PAGE>

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,
Low Duration 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. 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 reduced. These changes can result in volatility in the market
value, and in some instances reduced liquidity, of the CMO class.

Certain classes of CMOs and other mortgage-backed securities are structured in
a manner that makes them extremely sensitive to changes in prepayment rates.
Interest-only ("IO") and principal-only ("PO") classes are examples of this.
IOs are entitled to receive all or a portion of the interest, but none (or only
a nominal amount) of the principal payments, from the underlying mortgage
assets. If the mortgage assets underlying an IO experience greater than
anticipated principal prepayments, then the total amount of interest payments
allocable to the IO class, and therefore the yield to investors, generally will
be reduced. In some instances, an investor in an IO may fail to recoup all of
his or her initial investment, even if the security is government issued or
guaranteed or is rated AAA or the equivalent. Conversely, PO classes are
entitled to receive all or a portion of the principal payments, but none of the
interest, from the underlying mortgage assets. PO classes are purchased at
substantial discounts from par, and the yield to investors will be reduced if
principal payments are slower than expected. Some IOs and POs, as well as other
CMO classes, are structured to have special protections against the effects of
prepayments. These structural protections, however, normally are effective only
within certain ranges of prepayment rates and thus will not protect investors
in all circumstances.

While Low Duration Income Fund generally may invest in CMO classes that are
structured to sell at a premium or a discount or that are sensitive to changes
in prepayment rates, that Fund may not invest in IO or PO classes. U.S.
Government Income Fund and Investment Grade Income Fund are not subject to any
similar limitation.

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. Low Duration Income Fund may not invest in inverse floating
rate mortgage- or asset-backed securities. U.S. Government Income Fund and

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<PAGE>

Investment Grade Income Fund are not subject to any similar limitation.

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, 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 or PIMCO, as
applicable, 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
or PIMCO 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, Low Duration
Income Fund and Investment Grade Income Fund may invest.

- --RATINGS OF DEBT SECURITIES. 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 or PIMCO
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.

- --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. 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 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 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.

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

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<PAGE>

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 discount ("OID") and payment-
in-kind ("PIK") securities. Zero coupon securities usually trade at a
substantial discount from their face or par value; PIK securities often trade
at a discount from their face or par value. Both zero coupon and PIK
securities are 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.

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.

- --RISKS OF FOREIGN SECURITIES. Investment Grade Income Fund may invest up to
20% 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 35% 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

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<PAGE>

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 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 one or more of 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. In addition,
Low Duration Income Fund may buy and sell debt security index 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, a 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

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<PAGE>

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 or PIMCO 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 or PIMCO 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.

DERIVATIVES. Some of the instruments described above may be referred to as
"derivatives," because their value depends on (or "derives" from) the value of
an underlying asset, reference rate or index. These instruments include
options, futures contracts, interest rate protection contracts and similar
instruments that may be used in hedging and related income strategies. There
is only limited consensus as to what constitutes a "derivative" security.
However, in Mitchell Hutchins' and PIMCO's view, derivative securities also
include "stripped" securities, such as CATS and TIGRs, specially structured
types of mortgage- and asset-backed securities, such as IOs, POs and inverse
floaters, and 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 and
PIMCO take these risks into account in their management of the Funds.

DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS. U.S. Government Income Fund
and Low Duration Income Fund each 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 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 and Low Duration Income Fund each 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 and

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<PAGE>

Low Duration 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, because such
securities or repurchase agreements will mature on or before the settlement
date of the related dollar roll or reverse repurchase agreement, Mitchell
Hutchins and PIMCO believe that such arbitrage transactions do not present the
risks 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 Funds' limitations on
borrowings, which will restrict the aggregate of such transactions (plus any
other borrowings) to 33 1/3% of each Fund's total assets. The Funds 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 each Fund's total assets. The Funds have no present intention to enter
into dollar rolls other than in such arbitrage transactions, and have no
present intention to enter into reverse repurchase agreements other than in
such arbitrage transactions or for temporary or emergency purposes. Each 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 declines 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 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, exceed its net assets.

ILLIQUID SECURITIES. Each Fund may invest up to 10% (15% for Low Duration
Income Fund) 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
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 instrumentalities 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 securities laws (other than "Rule
144A" securities that Mitchell Hutchins or PIMCO has determined to be liquid
under procedures approved by the Trust's board of trustees).

Rule 144A establishes a "safe harbor" from the requirements of the Securities
Act of 1933 ("1933
----------
Prospectus Page 28
<PAGE>

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
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 or
PIMCO 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
liquid. Illiquid securities may be more difficult to value due to the
unavailability of reliable market quotations for such securities.

LENDING OF PORTFOLIO SECURITIES. Each Fund is authorized to lend up to 33 1/3%
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.

DURATION. Duration is a measure of the expected life of a fixed income
security that was developed as a more precise alternative to the concept "term
to maturity." Duration incorporates a bond's yield, coupon interest payments,
final maturity and call features into one measure and is one of the
fundamental tools used by Mitchell Hutchins or PIMCO, as applicable, in
portfolio selection for the Funds. Traditionally, a debt security's "term to
maturity" has been used as a proxy for the sensitivity of the security's price
to changes in interest rates (which is the "interest rate risk" or
"volatility" of the security). However, "term to maturity" measures only the
time until a debt security provides for a final payment, taking no account of
the pattern of the security's payments prior to maturity. Duration is a
measure of the expected life of a fixed income security on a present value
basis. Duration takes the length of the time intervals between the present
time and the time that the interest and the principal payments are scheduled
to be made or, in the case of a callable bond, expected to be received, and
weights them by the present values of the cash to be received at each future
point in time. For any fixed income security with interest payments occurring
prior to the payment of principal, duration is always less than maturity. For
example, depending upon its coupon and the level of market yields, a Treasury
note with a remaining maturity of five years might have a duration of 4.5
years. For mortgage-backed and other securities that are subject to
prepayments, put or call features or adjustable coupons, the difference
between the remaining stated maturity and the duration is likely to be much
greater.

Futures, options and options on futures have durations that, in general, are
closely related to the duration of the securities that underlie them. Holding
long futures or call option positions (backed by a segregated account of cash
and cash equivalents) will lengthen a Fund's duration by approximately the
same amount as would holding an equivalent amount of the underlying
securities. Short futures or put options have durations roughly equal to the
negative duration of the securities that underlie these positions, and have
the effect of reducing portfolio duration by approximately the same amount as
would selling an equivalent amount of the underlying securities.

There are some situations in which the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the frequency
of the coupon reset. Another example where the interest rate exposure is not
properly captured by the standard duration calculation is the case of
mortgage-backed securities. The stated final maturity of such securities is
generally 30 years, but current prepayment rates are critical in determining
the securities' interest rate exposure. In these and other similar situations,
Mitchell Hutchins and PIMCO will use more sophisticated analytical techniques
that incorporate the economic life of a security into the determination of its
duration and, therefore, its interest rate exposure.

Duration allows Mitchell Hutchins or PIMCO to make certain predictions as to
the effect that changes in the level of interest rates will have on the value
of a Fund's portfolio. For example, when the level of

----------
Prospectus Page 29
<PAGE>

interest rates increases by 1%, a fixed income security having a positive
duration of three years generally will decrease in value by approximately 3%.
Accordingly, if Mitchell Hutchins or PIMCO calculates the duration of the
Fund's portfolio as being three years, it normally would expect the portfolio
to change in value by approximately 3% for every 1% change in the level of
interest rates. However, various factors, such as changes in anticipated
prepayment rates, qualitative considerations and market supply and demand, can
cause particular securities to respond somewhat differently to changes in
interest rates than indicated in the above example. Moreover, in the case of
mortgage-backed and other complex securities, duration calculations are
estimates and are not precise. This is particularly true during periods of
market volatility. Accordingly, the net asset value of a Fund's portfolio may
vary in relation to interest rates by a greater or lesser percentage than
indicated by the above example.

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 or PIMCO
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.

OTHER INVESTMENT POLICIES. Each Fund may hold up to 35% of its total assets in
cash or money market instruments for liquidity purposes or pending investment.
In addition, when Mitchell Hutchins or PIMCO 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 (Low Duration Income Fund and 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.
Investment Grade Income Fund and High Income Fund each may invest up to 5% of
its net assets in participations in, or assignments of, all or a portion of
secured or unsecured fixed or floating rate loans arranged through private
negotiations between a borrowing corporation and one or more financial
institutions.

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.

----------
Prospectus Page 30
<PAGE>

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 sales charge 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 ($100 for Low
Duration Income Fund) 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 plans. 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.

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 calling
PaineWebber at 1-800-647-1568 to obtain an application form, completing and
signing the application form 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 SCHEDULES-- CLASS A SHARES

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

<TABLE>
<CAPTION>
SALES CHARGE
AS A DISCOUNT TO
PERCENTAGE OF SELECTED
------------------- DEALERS
NET AMOUNT AS A
INVESTED PERCENTAGE
OFFERING (NET ASSET OF OFFERING
AMOUNT OF PURCHASE PRICE 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>
----------
Prospectus Page 31
<PAGE>

LOW DURATION INCOME FUND

<TABLE>
<CAPTION>
SALES CHARGE
AS A DISCOUNT TO
PERCENTAGE OF SELECTED
------------------- DEALERS
NET AMOUNT AS A
INVESTED PERCENTAGE
OFFERING (NET ASSET OF OFFERING
AMOUNT OF PURCHASE PRICE VALUE) PRICE
------------------ -------- ---------- -----------
<S> <C> <C> <C>
Less than $100,000.............................. 3.00% 3.09% 2.75%
$100,000 to $249,999............................ 2.50 2.56 2.25
$250,000 to $499,999............................ 2.00 2.04 1.75
$500,000 to $999,999............................ 1.50 1.52 1.25
$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 a 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.
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

----------
Prospectus Page 32
<PAGE>

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 gain 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% (3%
for Low Duration Income Fund) 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 (four years or
longer for Low Duration Income Fund) 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:

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

<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

LOW DURATION INCOME FUND

<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
REDEMPTION PERCENTAGE OF
DURING NET ASSET VALUE
---------- -------------------
<S> <C>
1st Year Since Purchase..................................... 3%
2nd Year Since Purchase..................................... 2
3rd Year Since Purchase..................................... 2
4th Year Since Purchase..................................... 1
5th Year Since Purchase..................................... None
</TABLE>

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

----------
Prospectus Page 33
<PAGE>

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.

Class B shareholders of Low Duration Income Fund who exchange those shares for
Class B shares of other PaineWebber mutual funds will be subject to the
contingent deferred sales charge schedule of the Class B shares acquired
through the exchange, which, in most instances, is both higher than that
applicable to the Class B shares of Low Duration Income Fund and is imposed
over a longer period. Class B shareholders of one of these other funds who
acquire Class B shares of Low Duration Income Fund through an exchange will
continue to be subject to the contingent deferred sales charge of their
original fund.

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 (or a credit equal to the amount of the charge will
be applied to the shareholder's account) 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 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 any 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 and Class C 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"). The amount of the contingent deferred sales charges imposed on
redemptions of Class C shares may be different for other PaineWebber mutual
funds. 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. 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 34
<PAGE>

Exchanges
- -------------------------------------------------------------------------------
Shares of each Fund may be exchanged for shares of the corresponding Class of
other PaineWebber mutual funds (including the other 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

. 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

. Financial Services 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 certificated 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 35
<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 having a net asset value below the lesser of $500 or the
current minimum for initial purchases. If a Fund elects to do so, it will
notify the shareholder and provide the shareholder the opportunity to increase
the amount invested to the required minimum level or more within 60 days of
the notice. A Fund will not redeem accounts that fall below the
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<PAGE>

minimum required level 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.

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Other Services and Information
- -------------------------------------------------------------------------------
Investors interested in the services described below should consult their
PaineWebber investment executives or correspondent firms or call PaineWebber
Mutual Funds Shareholder Services 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

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Prospectus Page 37
<PAGE>

exceeding 12% (in the first year after purchase for 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. 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, and, for High Income Fund, any undistributed net realized gains
from foreign currency transactions, are distributed annually. A Fund 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 of a Fund are expected to be lower than those on its 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.
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Prospectus Page 38
<PAGE>

Each Fund's dividends and other distributions are paid in additional Fund
shares of the same Class at net asset value unless the shareholder has
requested cash payments. Shareholders who wish to receive dividends and/or
other 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 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 of that Fund (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.
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Prospectus Page 39
<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 each Fund's
day-to-day management. Mitchell Hutchins, investment adviser and administrator
of each Fund, supervises all aspects of each Fund's operations, supervises the
activities of PIMCO as sub-adviser for Low Duration Income Fund and makes and
implements all investment decisions for U.S. Government Income Fund,
Investment Grade Income Fund and High Income Fund. Mitchell Hutchins receives
a monthly fee for these services at the annual rate of 0.50% of each Fund's
average daily net assets.

PIMCO, as sub-adviser for Low Duration Income Fund, makes and implements all
investment decisions for that Fund. Under the sub-advisory contract, Mitchell
Hutchins (not the Fund) pays PIMCO a fee for its services as sub-adviser at
the annual rate of 0.25% of the 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, 1995, the Funds' total expenses for their Class A, Class B and
Class C shares, respectively, stated as a percentage of average net assets,
were as follows: 1.03%,1.81% and 1.55% for U.S. Government Income Fund, 1.15%,
2.02% and 1.75% for Low Duration Income Fund, 0.95%, 1.70% and 1.45% for
Investment Grade Income Fund and 0.93%, 1.68% and 1.44% 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 February 29, 1996, Mitchell Hutchins was adviser or
sub-adviser of 32 investment companies with 66 separate portfolios and
aggregate assets of over $31.2 billion.

PIMCO is located at 840 Newport Center Drive, Suite 360, Newport Beach,
California 92658. PIMCO is a subsidiary of PIMCO Advisors L.P., a publicly
held investment advisory firm. As of February 29, 1996, PIMCO had
approximately $78 billion in assets under management and was adviser or sub-
adviser of investment companies with 47 portfolios and aggregate assets of
approximately $8.5 billion.
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Prospectus Page 40
<PAGE>

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 and Mr. Varrelman are both first vice presidents 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. From 1990 to 1993, Mr. Singh was a senior portfolio manager
at Nomura Mortgage Fund Management Corporation. Mr. Varrelman has been with
Mitchell Hutchins as a portfolio manager since 1988.

William C. Powers, a Managing Director of PIMCO, is responsible for the day-
to-day management of Low Duration Income Fund's portfolio. Mr. Powers has
participated in the management of the portfolio since PIMCO assumed sub-
advisory responsibilities for the Fund in October 1994. Since 1991, Mr. Powers
has been a senior member of the fixed income portfolio management group of
PIMCO. He was previously associated with Salomon Brothers Inc and Bear Stearns
as a Senior Managing Director.

James F. Keegan and Julieanna Berry are responsible for the day-to-day
management of Investment Grade Income Fund's portfolio. Mr. Keegan is a senior
vice president of Mitchell Hutchins. Prior to joining Mitchell Hutchins in
March 1996, Mr. Keegan was a director with Merrion Group, L.P. From 1987 to
1994, he was a vice president of global investment management of Bankers Trust
Company. Mrs. Berry is a vice president of Mitchell Hutchins and has been
employed as a portfolio manager since 1989. Mrs. Berry has held her fund
responsibilities since June 1995.

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 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 for U.S. Government
Income Fund, Investment Grade Income Fund and High Income Fund.

Mitchell Hutchins and PIMCO investment personnel may engage in securities
transactions for their own accounts pursuant to codes of ethics which
establish procedures for personal investing and restrict 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
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Prospectus Page 41
<PAGE>

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 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.
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Prospectus Page 42
<PAGE>

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, one other series has 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 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 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 and Low
Duration 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.

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
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Prospectus Page 43

<PAGE>

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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Prospectus Page 44
<PAGE>

Appendix A
Mortgage-Backed Securities
- -------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES

The U.S. government securities in which U.S. Government Income Fund, Low
Duration Income Fund and Investment Grade Income Fund may invest include
mortgage-backed securities issued or guaranteed by Ginnie Mae, Fannie Mae or
Freddie Mac. While these mortgage-backed securities may be guaranteed as to
payment of interest and principal, they are not guaranteed as to market value.
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 or PIMCO 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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<PAGE>

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, held assets of
failed savings associations as either a conservator or receiver for such
associations, or it acquired such assets in its corporate capacity. These
assets included, 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 established a vehicle registered with the SEC through
which it sold mortgage-backed securities. RTC mortgage-backed securities
represent pro rata interests in pools of mortgage loans that RTC held or had
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
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<PAGE>

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 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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<PAGE>

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 principal and differs

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<PAGE>

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 indicates 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
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<PAGE>

for timely payment on issues with this designation is strong. 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.

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<PAGE>

Income Fund Investment Grade Income Fund High Income Fund

Appendix C

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THE FOLLOWING ARE DESCRIPTIONS OF INSTRUMENTS THAT ONE OR MORE OF THE FUNDS
MAY USE:

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.

Debt Security Index Futures Contracts. A debt security index futures contract
is a bilateral agreement pursuant to which one party agrees to accept, and the
other party agrees to make, delivery of an amount of cash equal to a specified
dollar amount times the difference between the index value at the close of
trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the securities comprising the index
is made; generally, contracts are closed out prior to the expiration date of
the contract.

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.

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<PAGE>

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PaineWebber U.S. Government Income Fund
PaineWebber Low Duration U.S. Government Income Fund
PaineWebber Investment Grade Income Fund
PaineWebber High Income Fund

Prospectus -- April 1, 1996, as revised May 3, 1996
- -----------------------------------------------------------------------------
Shares of the Funds can be exchanged for shares of the following PaineWebber
Mutual Funds:

[_] INCOME FUNDS [_] GROWTH FUNDS

Global Income Fund Capital Appreciation Fund
Strategic Income Fund Emerging Markets Equity Fund
Global Equity Fund
Growth Fund
[_] TAX-FREE INCOME FUNDS Financial Services Growth Fund
Small Cap Growth Fund
California Tax-Free Income Fund Small Cap Value Fund
Municipal High Income Fund
National Tax-Free Income Fund
New York Tax-Free Income Fund [_] GROWTH AND INCOME FUNDS

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

[_] 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.

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.
(C) 1996 PaineWebber Incorporated

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