PAINEWEBBER MANAGED INVESTMENTS TRUST, 485BPOS, 1997-04-02

PAINEWEBBER MANAGED INVESTMENTS TRUST
485BPOS, 1997-04-02

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<PAGE>

As filed with the Securities and Exchange Commission on April 1, 1997

1933 Act Registration No. 2-91362
1940 Act Registration No. 811-4040

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-lA

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]

Pre-Effective Amendment No._____ [ ]

Post-Effective Amendment No. 49 [ X ]

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]

Amendment No. 42

(Check appropriate box or boxes.)

PAINEWEBBER MANAGED INVESTMENTS TRUST
(Exact name of registrant as specified in charter)

1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)

Registrant's telephone number, including area
code: (212)713-2000

DIANNE E. O'DONNELL, Esq.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)

Copies to:

ELINOR W. GAMMON, Esq.

BENJAMIN J. HASKIN, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, D.C. 20036-1800
Telephone: (202)778-9000

It is proposed that this filing will become effective:

[__] Immediately upon filing pursuant to Rule 485(b)

[X ] On April 1 ,1997 pursuant to Rule 485(b)
-- ---------------
[__] 60 days after filing pursuant to Rule 485(a)(i)

[__] On _______________ pursuant to Rule 485(a)(i)
[__] 75 days after filing pursuant to Rule 485(a)(ii)
[__] On _______________ pursuant to Rule 485(a)(ii)

Registrant has filed a declaration pursuant to Rule 24f-2 under the Investment
Company Act of 1940 and filed the notice required by such Rule for the most
recent fiscal year of the four series that are the subject of this post-
effective amendment on January 28, 1997.
<PAGE>

PaineWebber Managed Investments Trust

Contents of Registration Statement

This registration statement consists of the following papers and documents.

Cover Sheet

Contents of Registration Statement

Cross Reference Sheets

Class A, B and C shares of:
- ---------------------------
PaineWebber U.S. Government Income Fund
PaineWebber Low Duration U.S. Government Income Fund
PaineWebber Investment Grade Income
Fund PaineWebber High Income Fund

Part A - Prospectus
Part B - Statement of Additional Information

Class Y shares of:
- ------------------
PaineWebber U.S. Government Income Fund
PaineWebber Low Duration U.S. Government Income Fund
PaineWebber Investment Grade Income Fund
PaineWebber High Income Fund

Part A - Prospectus
Part B - Statement of Additional Information

Part C- Other Information

Signature Page

Exhibits
<PAGE>

PaineWebber Managed Investments Trust:

Class A, B and C shares of:

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

Form N-1A Cross Reference Sheet

<TABLE>
<CAPTION>
Part A Item No. and Caption Prospectus Caption
--------------------------- ----------------------------------------------
<C> <S> <C>
1. Cover Page Cover Page

2. Synopsis The Funds at a Glance; Expense Table

3. Condensed Financial Financial Highlights; Performance
Information

4. General Description of The Funds at a Glance; Investment Objectives
Registrant & Policies; Investment Philosophy & Process;
The Funds' Investments; General Information
5. Management of the Fund Management; General Information

5A. Management's Discussion of Financial Highlights
Fund Performance

6. Capital Stock and other Cover Page; Flexible Pricing; Dividends &
Securities Taxes; General Information

7. Purchase of Securities Flexible Pricing; How to Buy Shares; Other
Being Offered Services; Determining the Shares' Net Asset
Value

8. Redemption or How to Sell Shares; Other Services
Repurchase

9. Pending Legal Proceedings Not Applicable

Part B Item No. Statement of Additional
And Caption Information Caption
--------------------------- ----------------------------------------------
10. Cover Page Cover Page

11. Table of Contents Table of Contents

12. General Information and Other Information
History

13. Investment Objectives and Investment Policies and Restrictions;
Policies Hedging and Other Strategies Using
Derivative Contracts; Portfolio
Transactions

14. Management of the Fund Trustees and Officers; Principal Holders of
Securities

15. Control Persons and Trustees and Officers; Principal Holders of
Principal Holders of Securities
Securities

16. Investment Advisory and Investment Advisory and Distribution
Other Services Arrangements
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Part B Item No. Statement of Additional
And Caption Information Caption
--------------- -----------------------
<S> <C> <C>
17. Brokerage Allocation Portfolio Transactions

18. Capital Stock and Other Conversion of Class B Shares; Other
Securities Information

19. Purchase, Redemption and Reduced Sales Charges, Additional Exchange
Pricing of Securities and Redemption Information and Other
Being Offered Services; Valuation of Shares

20 Tax Status Taxes

21. Underwriters Investment Advisory and Distribution
Arrangements

22. Calculation of Performance Performance Information
Data

23. Financial Statements Financial Statements
</TABLE>

Part C
- ------

Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>

PaineWebber Managed Investments Trust:

Class Y shares of:

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

Form N-1A Cross Reference Sheet

<TABLE>
<CAPTION>
Part A Item No. And Caption Prospectus Caption
--------------------------- ----------------------------------------------
<C> <S> <C>
1. Cover Page Cover Page

2. Synopsis The Funds at a Glance; Expense Table

3. Condensed Financial Financial Highlights; Performance
Information

4. General Description of The Funds at a Glance; Investment Objectives
Registrant & Policies; Investment Philosophy & Process;
The Funds' Investments; General Information

5. Management of the Fund Management; General Information

5A. Management's Discussion of Financial Highlights
Fund Performance

6. Capital Stock and Other Cover Page; Dividends & Taxes; General
Securities Information

7. Purchase of Securities How to Buy Shares; Determining the Shares'
Being Offered Net Asset Value

8. Redemption or How to Sell Shares
Repurchase

9. Pending Legal Proceedings Not Applicable

Part B Item No. Statement of Additional
and Caption Information Caption
--------------------------- ----------------------------------------------
10. Cover Page Cover Page

11. Table of Contents Table of Contents

12. General Information and Other Information
History

13. Investment Objectives and Investment Policies and Restrictions;
Policies Hedging and Other Strategies Using
Derivative Contracts; Portfolio
Transactions

14. Management of the Fund Trustees and Officers; Principal Holders of
Securities

15. Control Persons and Trustees and Officers; Principal Holders of
Principal Holders of Securities
Securities

16. Investment Advisory and Investment Advisory and Distribution
Other Services Arrangements
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Part B Item No. Statement of Additional
And Caption Information Caption
--------------- -----------------------
<S> <C> <C>
17. Brokerage Allocation Portfolio Transactions

18. Capital Stock and Other Other Information
Securities

19. Purchase, Redemption and Valuation of Shares
Pricing of Securities
Being Offered

20. Tax Status Taxes

21. Underwriters Investment Advisory and Distribution
Arrangements

22. Calculation of Performance Performance Information
Data

23. Financial Statements Financial Statements
</TABLE>

Part C
- ------

Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>

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

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

PaineWebber U.S. Government Income Fund invests primarily in U.S. government
bonds, including those backed by mortgages. PaineWebber Low Duration U.S. Gov-
ernment Income Fund also invests primarily in U.S. government bonds, including
those backed by mortgages, but it limits the expected life (duration) of its
portfolio to from 1 to 3 years. PaineWebber Investment Grade Income Fund in-
vests primarily in a diversified range of investment grade bonds, including
U.S. government and U.S. and foreign corporate bonds. PaineWebber High Income
Fund invests primarily in a diversified range of high yield, high risk, U.S.
and foreign corporate bonds. PaineWebber Strategic Income Fund strategically
allocates its investments among three bond market categories: U.S. government
and investment grade corporate bonds; U.S. high yield, high risk corporate
bonds; and foreign and emerging market bonds.

A Statement of Additional Information dated April 1, 1997 has been filed with
the Securities and Exchange Commission and is legally part of this Prospectus.
The Statement of Additional Information can be obtained without charge, and
further inquiries can be made, by contacting an individual Fund, your invest-
ment executive at PaineWebber or one of its correspondent firms or by calling
toll-free 1-800-647-1568.
- --------------------------------------------------------------------------------
THE PAINEWEBBER FAMILY OF MUTUAL FUNDS
The PaineWebber Family of Mutual Funds consists of six broad categories, which
are presented here. Generally, investors seeking to maximize return must assume
greater risk. The Funds in this Prospectus are in the BOND category.

[ ] Money Market Fund for income and [ ] Asset Allocation Funds for high
stability by investing in high- total return by investing in stocks
quality, short-term investments. and bonds.
[ ] Bond Funds for income by [ ] Stock Funds for long-term growth by
investing mainly in bonds. investing mainly in stocks.
[ ] Tax-Free Bond Funds for income
exempt from federal income tax
and, in some cases, state and [ ] Global Funds for long-term growth by
local income taxes, by investing investing mainly in foreign stocks
in municipal bonds. or high current income by investing
mainly in global debt instruments.

A complete listing of the PaineWebber Family of Mutual Funds is found on the
back cover of this Prospectus.
- --------------------------------------------------------------------------------
INVESTORS SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERRED TO IN THIS
PROSPECTUS. THE FUNDS AND THEIR DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE TO PRO-
VIDE INVESTORS WITH INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS IS NOT AN
OFFER TO SELL SHARES OF THE FUNDS IN ANY JURISDICTION WHERE THE FUNDS OR THEIR
DISTRIBUTOR MAY NOT LAWFULLY SELL THOSE SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURI-
TIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESEN-
TATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

PAINEWEBBER HIGH INCOME FUND AND PAINEWEBBER STRATEGIC INCOME FUND MAY
INVEST WITHOUT LIMIT IN HIGH YIELD, HIGH RISK BONDS, COMMONLY REFERRED TO
AS "JUNK BONDS." BONDS OF THIS TYPE ARE CONSIDERED SPECULATIVE WITH
RESPECT TO THE PAYMENT OF INTEREST AND RETURN OF PRINCIPAL. INVESTORS
SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH INVESTMENTS IN THESE
FUNDS.

Prospectus Page 1
<PAGE>

Table of Contents
- --------------------------------------------------------------------------------
----------

<TABLE>
<CAPTION>
Page
----
<S> <C>
The Funds at a Glance...................................................... 3
Expense Table.............................................................. 6
Financial Highlights....................................................... 10
Investment Objectives & Policies........................................... 19
Investment Philosophy & Process............................................ 21
Performance................................................................ 22
The Funds' Investments..................................................... 27
Flexible PricingSM......................................................... 35
How to Buy Shares.......................................................... 38
How to Sell Shares......................................................... 39
Other Services............................................................. 40
Management................................................................. 40
Determining the Shares' Net Asset Value.................................... 43
Dividends & Taxes.......................................................... 43
General Information........................................................ 44
Appendix................................................................... A-1
</TABLE>

Prospectus Page 2
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebberU.S. Government Income Fund Low Duration U.S. Government Income Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund
The Funds at a Glance
- -------------------------------------------------------------------------------
----------

The Funds offered by this Prospectus are not intended to provide a complete
investment program, but one or all of them may be appropriate as a component
of an investor's overall portfolio. Some common reasons to invest in these
Funds are to finance college educations, plan for retirement or diversify a
portfolio. When selling shares, investors should be aware that they may get
more or less for their shares than they originally paid for them. As with any
mutual fund, there is no assurance that the Funds will achieve their goals.

U.S. GOVERNMENT INCOME FUND

GOAL: To provide you with current income by investing primarily in U.S.
government bonds, including those backed by mortgages.

INVESTMENT OBJECTIVE: High current income consistent with the preservation of
capital and liquidity.

SIZE: Over $412.1 million in assets on February 28, 1997.

WHO SHOULD INVEST: Investors seeking high current income consistent with the
preservation of capital and liquidity.

LOW DURATION U.S. GOVERNMENT INCOME FUND ("LOW DURATION INCOME FUND")

GOAL: To provide you with current income by investing primarily in U.S.
government bonds, including those backed by mortgages, while maintaining a
portfolio duration of from 1 to 3 years.

INVESTMENT OBJECTIVE: Highest level of income consistent with the preservation
of capital and low volatility of net asset value.

SIZE: Over $181.1 million in assets on February 28, 1997.

WHO SHOULD INVEST: Investors seeking current income with less fluctuation in
net asset value than longer-term U.S. government bond funds.

INVESTMENT GRADE INCOME FUND

GOAL: To provide you with current income by investing primarily in a
diversified range of investment grade bonds, including U.S. government and
U.S. and foreign corporate bonds.

INVESTMENT OBJECTIVE: High current income consistent with the preservation of
capital and liquidity.

SIZE: Over $298.5 million in assets on February 28, 1997.

WHO SHOULD INVEST: Investors seeking high current income consistent with the
preservation of capital and liquidity.

HIGH INCOME FUND

GOAL: To provide you with high income by investing primarily in a diversified
range of high yield, high risk, U.S. and foreign corporate bonds.

INVESTMENT OBJECTIVE: High income.

SIZE: Over $573.2 million in assets on February 28, 1997.

WHO SHOULD INVEST: Investors seeking high income, who can assume additional
risks for the potential for higher returns.

STRATEGIC INCOME FUND

GOAL: To provide you with high current income primarily by strategically
allocating investments among three bond market categories: U.S. government and
investment grade corporate bonds; U.S. high yield, high risk corporate bonds;
and foreign and emerging market bonds.

INVESTMENT OBJECTIVE: High level of current income and, secondarily, capital
appreciation.

SIZE: Over $63.7 million in assets on February 28, 1997.

Prospectus Page 3
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebberU.S. Government Income Fund Low Duration U.S. Government Income Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund
The Funds at a Glance
(Continued)
- -------------------------------------------------------------------------------
----------

WHO SHOULD INVEST: Investors seeking current high income and, secondarily,
capital appreciation, who can assume additional risks for the potential for
higher returns.

RISKS

Investors may lose money by investing in the Funds; your investment is not
guaranteed.

INTEREST RATE RISK: The bonds in which each Fund invests are subject to
interest rate risk, which means that their values and, therefore, the net
asset value of the Fund can be expected to fall when interest rates rise. Each
Fund attempts to reduce this risk through diversification, credit analysis and
attention to interest rate trends and other factors. Low Duration Income Fund
seeks to further limit (but not eliminate) this risk by maintaining a
portfolio duration of from 1 to 3 years. However, efforts to limit this risk
may not be successful.

QUALITY RISK: The high yield, high risk bonds in which High Income Fund and
Strategic Income Fund may invest without limit are considered predominantly
speculative and involve major risk exposure to adverse conditions. Investment
Grade Income Fund may invest up to 35% of its assets in these types of bonds.
Some lower-tier investment grade bonds also have speculative characteristics.

MORTGAGE- AND ASSET-BACKED SECURITIES: Mortgage- and asset-backed securities
involve special risks relating to the prepayment of the underlying
obligations. Each Fund may invest in these securities, and U.S. Government
Income Fund and Low Duration Income Fund each concentrates at least 25% of its
total assets in them. Some types of mortgage- and asset-backed securities,
including "interest-only," "principal-only" and inverse floating rate classes
of these securities, can be extremely volatile and may become illiquid. Low
Duration Income Fund does not invest in interest-only, principal-only or
inverse floating rate classes of mortgage-backed securities. Investment Grade
Income Fund may not invest more than 10% of its total assets in interest-only
or principal-only classes.

FOREIGN SECURITIES: Foreign bonds and bonds denominated in foreign currencies
involve special risks, including possible adverse political, social and
economic risks abroad and differing characteristics of foreign markets. These
risks are greater for bonds in emerging markets. Bonds denominated in foreign
currencies are subject to changes in the values of those currencies relative
to the U.S. dollar. Strategic Income Fund may invest in foreign and emerging
market bonds, including bonds denominated in foreign currencies, without
limit. High Income Fund may invest up to 35% of its assets in foreign bonds
(10% of net assets in foreign currency denominated bonds); Investment Grade
Fund may invest up to 20% of its assets in U.S. dollar denominated foreign
bonds.

DERIVATIVES: Each Fund may use derivatives, such as options, futures and, in
the case of High Income Fund and Strategic Income Fund, forward currency
contracts, in its investment activities and use interest rate protection
transactions, each of which involve special risks.

MANAGEMENT

Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), an asset
management subsidiary of PaineWebber Incorporated ("PaineWebber"), is the
investment adviser and administrator of U.S. Government Income Fund, Low
Duration Income Fund, Investment Grade Income Fund, High Income Fund and
Strategic Income Fund (each a "Fund"). Pacific Investment Management Company
("PIMCO") serves as sub-adviser for Low Duration Income Fund.

MINIMUM INVESTMENT

To open an account, investors need $1,000 ($100 for Low Duration U.S.
Government Income Fund); to add to an account, investors need only $100.

Prospectus Page 4
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebberU.S. Government Income Fund Low Duration U.S. Government Income Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund
The Funds at a Glance
(Continued)
- -------------------------------------------------------------------------------
----------

HOW TO PURCHASE SHARES OF THE FUNDS

Investors may select among these classes of shares:

CLASS A SHARES

The price is the net asset value plus the initial sales charge; the maximum
sales charge is 4% of the public offering price (3% for Low Duration Income
Fund). Although investors pay an initial sales charge when they buy Class A
shares, the ongoing expenses for this class are lower than the ongoing
expenses of Class B and Class C shares.

CLASS B SHARES

The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class B shares. As a result, 100% of their purchase is
immediately invested. However, Class B shares have higher ongoing expenses
than Class A shares. Depending upon how long they own the shares, investors
may have to pay a sales charge when they sell Class B shares. This sales
charge is called a "contingent deferred sales charge" and applies when
investors sell their Class B shares within six years after purchase (four
years for Low Duration Fund). After six years, Class B shares convert to Class
A shares, which have lower ongoing expenses and no contingent deferred sales
charge.

CLASS C SHARES

The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class C shares. As a result, 100% of their purchase is
immediately invested. However, Class C shares have higher ongoing expenses
than Class A shares. A contingent deferred sales charge of 0.75% is charged on
shares sold within one year of purchase. Class C shares never convert to any
other class of shares.

Prospectus Page 5
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebberU.S. Government Income Fund Low Duration U.S. Government Income Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund
Expense Table
- -------------------------------------------------------------------------------
----------

The following tables are intended to assist investors in understanding the
expenses associated with investing in Class A, B and C shares of the Funds.
Expenses shown below represent those incurred for the most recent fiscal year,
except that, for Strategic Income Fund, expenses are annualized for the 10
months ended November 30, 1996.

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHAREHOLDER TRANSACTION EXPENSES ------- ------- -------
<S> <C> <C> <C>
ALL FUNDS
Maximum Sales Charge on Purchases of Shares (as a %
of offering price)................................. 4%(/1/) None None
Sales Charge on Reinvested Dividends (as a % of of-
fering price)...................................... None None None
Maximum Contingent Deferred Sales Charge (as a % of
offering price or net asset value at the time of
sale, whichever is less)........................... None 5%(/1/) 0.75%
Exchange Fees....................................... None None None
- -------
(/1/)3% for Low Duration Income Fund

ANNUAL FUND OPERATING EXPENSES (as a % of average
net assets)
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
U.S. GOVERNMENT INCOME FUND
Management Fees..................................... 0.50% 0.50% 0.50%
12b-1 Fees.......................................... 0.25 1.00 0.75
Other Expenses...................................... 0.19 0.20 0.20
------- ------- ----
Total Operating Expenses............................ 0.94% 1.70% 1.45%
======= ======= ====
LOW DURATION INCOME FUND
Management Fees..................................... 0.50% 0.50% 0.50%
12b-1 Fees.......................................... 0.25 1.00 0.75
Other Expenses...................................... 0.46 0.53 0.55
------- ------- ----
Total Operating Expenses............................ 1.21% 2.03% 1.80%
======= ======= ====
INVESTMENT GRADE INCOME FUND
Management Fees..................................... 0.50% 0.50% 0.50%
12b-1 Fees.......................................... 0.25 1.00 0.75
Other Expenses...................................... 0.19 0.18 0.19
------- ------- ----
Total Operating Expenses............................ 0.94% 1.68% 1.44%
======= ======= ====
HIGH INCOME FUND
Management Fees..................................... 0.50% 0.50% 0.50%
12b-1 Fees.......................................... 0.25 1.00 0.75
Other Expenses...................................... 0.21 0.21 0.22
------- ------- ----
Total Operating Expenses............................ 0.96% 1.71% 1.47%
======= ======= ====
STRATEGIC INCOME FUND
Management Fees..................................... 0.75% 0.75% 0.75%
12b-1 Fees.......................................... 0.25 1.00 0.75
Other Expenses...................................... 0.89 0.88 0.88
------- ------- ----
Total Operating Expenses............................ 1.89% 2.63% 2.38%
======= ======= ====
</TABLE>

Prospectus Page 6
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebberU.S. Government Income Fund Low Duration U.S. Government Income Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund
Expense Table
(Continued)
- -------------------------------------------------------------------------------
----------

CLASS A SHARES: Sales charge waivers and a reduced sales charge purchase
plan are available. Purchases of $1 million or more are not subject to an
initial sales charge. However, if an investor sells these shares within one
year after purchase, a contingent deferred sales charge of 1% of the
offering price or the net asset value of the shares at the time of sale,
whichever is less, is imposed.
CLASS B SHARES: Sales charge waivers are available. The maximum 5%
contingent deferred sales charge (3% for Low Duration Income Fund) applies
to sales of shares during the first year after purchase. The charge
generally declines by 1% annually, reaching zero after six years (four years
for Low Duration Income Fund).
CLASS C SHARES: If an investor sells these shares within one year after
purchase, a contingent deferred sales charge of 1% of the offering price or
the net asset value of the shares at the time of sale, whichever is less, is
imposed.

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 12b-1 distribution fees) than the economic equivalent of the
maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc. 12b-1 fees have two components, as follows:

<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>

For more information, see "Management" and "Flexible Pricing SM."

EXAMPLES OF EFFECT OF FUND EXPENSES

The following examples should assist investors in understanding various costs
and expenses they would incur as shareholders of a Fund. The assumed 5% annual
return shown in the examples is required by regulations of the Securities and
Exchange Commission ("SEC") applicable to all mutual funds. THESE EXAMPLES
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES OF A FUND MAY BE MORE OR LESS THAN THOSE SHOWN.

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

U.S. GOVERNMENT INCOME FUND

<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A........................................ $54 $74 $ 95 $155
Class B (Assuming sale of all shares at end of
period)....................................... $67 $84 $112 $162
Class B (Assuming no sale of shares)........... $17 $54 $ 92 $162
Class C (Assuming sale of all shares at end of
period)....................................... $25 $46 $ 79 $174
Class C (Assuming no sale of shares)........... $15 $46 $ 79 $174

LOW DURATION INCOME FUND

<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A........................................ $42 $67 $ 95 $172
Class B (Assuming sale of all shares at end of
period)....................................... $51 $84 $109 $195
Class B (Assuming no sale of shares)........... $21 $64 $109 $195
Class C (Assuming sale of all shares at end of
period)....................................... $26 $57 $ 97 $212
Class C (Assuming no sale of shares)........... $18 $57 $ 97 $212
</TABLE>

Prospectus Page 7
<PAGE>

- --------------------------------------------------------------------------------
-------------------
PaineWebber U.S. Government Income Fund Low Duration U.S. Government Income Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund
Expense Table
(Continued)
- --------------------------------------------------------------------------------
----------

INVESTMENT GRADE INCOME FUND

<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A........................................ $49 $69 $90 $151
Class B (Assuming sale of all shares at end of
period)....................................... $67 $83 $111 $161
Class B (Assuming no sale of shares)........... $17 $53 $91 $161
Class C (Assuming sale of all shares at end of
period)....................................... $22 $46 $79 $172
Class C (Assuming no sale of shares)........... $15 $46 $79 $172
</TABLE>

HIGH INCOME FUND

<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A........................................ $49 $69 $91 $153
Class B (Assuming sale of all shares at end of
period)....................................... $67 $84 $113 $164
Class B (Assuming no sale of shares)........... $17 $54 $93 $164
Class C (Assuming sale of all shares at end of
period)....................................... $22 $46 $80 $176
Class C (Assuming no sale of shares)........... $15 $46 $80 $176
</TABLE>

STRATEGIC INCOME FUND

<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A........................................ $58 $97 $138 $252
Class B (Assuming sale of all shares at end of
period)....................................... $77 $112 $160 $262
Class B (Assuming no sale of shares)........... $27 $82 $140 $262
Class C (Assuming sale of all shares at end of
period)....................................... $32 $74 $127 $272
Class C (Assuming no sale of shares)........... $24 $74 $127 $272
</TABLE>

ASSUMPTIONS MADE IN THE EXAMPLES

. ALL CLASSES: Reinvestment of all dividends and other distributions;
percentage amounts listed under "Annual Fund Operating Expenses" remain
the same for years shown.
. CLASS A SHARES: Deduction of the maximum 4% initial sales charge at the
time of purchase (3% for Low Duration Income Fund).

. CLASS B SHARES: Deduction of the maximum applicable contingent deferred
sales charge at the time of sale, which declines over a period of six
years (four years for Low Duration Income Fund). Ten-year figures assume
that Class B shares convert to Class A shares at the end of the sixth
year.
. CLASS C SHARES: Deduction of a 0.75% contingent deferred sales charge
for sales of shares within one year of purchase.

Prospectus Page 8
<PAGE>

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

[THIS PAGE INTENTIONALLY LEFT BLANK]

Prospectus Page 9
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebberU.S. Government Income Fund Low Duration U.S. Government Income Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund
Financial Highlights
- -------------------------------------------------------------------------------
----------

U.S. GOVERNMENT INCOME FUND

<TABLE>
<CAPTION>
U.S. GOVERNMENT INCOME FUND
------------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 9.12 $ 8.50 $ 10.03 $ 9.98 $ 9.97 $ 9.47 $ 9.51 $ 9.28 $ 9.31 $ 10.27
-------- -------- -------- -------- -------- -------- -------- -------- ----------
Net investment income... 0.55 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
investments............ (0.26) 0.62 (1.53) 0.05 0.01 0.49 (0.05) 0.23 -- (0.85)
-------- -------- -------- -------- -------- -------- -------- -------- ---------- -------
Net increase (decrease)
from investment
operations............. 0.29 1.20 (0.93) 0.72 0.76 1.26 0.71 1.03 0.80 (0.04)
-------- -------- -------- -------- -------- -------- -------- -------- ----------
Dividends from net
investment income...... (0.55) (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........... (0.55) (0.58) (0.60) (0.67) (0.75) (0.76) (0.75) (0.80) (0.83) (0.92)
-------- -------- -------- -------- -------- -------- -------- -------- ----------
Net asset value, end of
period................. $ 8.86 $ 9.12 $ 8.50 $ 10.03 $ 9.98 $ 9.97 $ 9.47 $ 9.51 $ 9.28 $9.31
======== ======== ======== ======== ======== ======== ======== ======== ========== =====
Total investment
return (1)............. 3.39% 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)......... $343,836 $430,285 $428,722 $648,923 $703,198 $737,189 $795,240 $963,226 $1,279,535 $2,018,208
Expenses to average net
assets................. 0.94% 1.03%(2) 0.95% 0.91% 0.93% 0.87% 0.66% 0.72% 0.67% 0.68%
Net investment income to
average net assets..... 6.24% 6.65%(2) 6.48% 6.60% 7.42% 7.94% 8.57% 8.82% 8.83% 8.44%
Portfolio turnover rate. 359% 206% 358% 83% 28% 71% 34% 125% 302% 98%
</TABLE>
- -------

#Commencement of issuance of shares

*Annualized

(1) Total return is calculated assuming a $1,000 investment on the first day
of each period reported, reinvestment of all dividends and other
distributions at net asset value on the payable dates, and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results would be lower if sales charges were
included. Total investment return for periods of less than one year has not
been annualized.

(2) These ratios include non-recurring reorganization expenses of 0.03%.

Prospectus Page 10
<PAGE>

- --------------------------------------------------------------------------------
-------------------
PaineWebber U.S. Government Income Fund Low Duration U.S. Government Income Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund
Financial Highlights
(Continued)
- --------------------------------------------------------------------------------
----------

<TABLE>
<CAPTION>
U.S. GOVERNMENT INCOME FUND
- -------------------------------------------------------------------------------------------------------------------------
CLASS B CLASS C
- ----------------------------------------------------------------- -------------------------------------------------------
FOR THE FOR THE PERIOD FOR THE FOR THE PERIOD
YEARS ENDED JULY 1, 1991# YEARS ENDED JULY 2, 1992#
NOVEMBER 30, TO NOVEMBER 30, TO
- ------------------------------------------------- NOVEMBER 30, --------------------------------------- NOVEMBER 30,
1996 1995 1994 1993 1992 1991 1996 1995 1994 1993 1992
- ------- ------- ------- -------- -------- -------------- ------- ------- ------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 9.12 $ 8.50 $ 10.03 $ 9.98 $ 9.98 $ 9.59 $ 9.11 $ 8.49 $ 10.02 $ 9.98 $ 10.13
- ------- ------- ------- -------- -------- ------- ------- ------- ------- -------- --------
0.48 0.51 0.53 0.60 0.67 0.29 0.50 0.53 0.55 0.62 0.25
(0.25) 0.63 (1.53) 0.05 0.01 0.39 (0.25) 0.63 (1.53) 0.04 (0.15)
- ------- ------- ------- -------- -------- ------- ------- ------- ------- -------- --------
0.23 1.14 (1.00) 0.65 0.68 0.68 0.25 1.16 (0.98) 0.66 0.10
- ------- ------- ------- -------- -------- ------- ------- ------- ------- -------- --------
(0.48) (0.52) (0.53) (0.60) (0.68) (0.29) (0.50) (0.54) (0.55) (0.62) (0.25)
-- -- -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- -- --
- ------- ------- ------- -------- -------- ------- ------- ------- ------- -------- --------
(0.48) (0.52) (0.53) (0.60) (0.68) (0.29) (0.50) (0.54) (0.55) (0.62) (0.25)
- ------- ------- ------- -------- -------- ------- ------- ------- ------- -------- --------
$ 8.87 $ 9.12 $ 8.50 $ 10.03 $ 9.98 $ 9.98 $ 8.86 $ 9.11 $ 8.49 $ 10.02 $ 9.98
======= ======= ======= ======== ======== ======= ======= ======= ======= ======== ========
2.72% 13.81% (10.31)% 6.57% 6.98% 6.78% 2.98% 14.12% (10.08)% 6.75% 0.62%
======= ======= ======= ======== ======== ======= ======= ======= ======= ======== ========
$61,873 $82,469 $99,581 $161,158 $132,357 $23,532 $37,754 $53,832 $68,400 $143,473 $127,026
1.70% 1.81%(2) 1.72% 1.66% 1.67% 1.68%* 1.45% 1.55%(2) 1.45% 1.40% 1.44%*
5.47% 5.88%(2) 5.71% 5.79% 6.38% 6.40%* 5.74% 6.17%(2) 5.99% 6.06% 6.13%*
359% 206% 358% 83% 28% 71% 359% 206% 358% 83% 28%
</TABLE>

Prospectus Page 11
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebberU.S. Government Income Fund Low Duration U.S. Government Income Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund
Financial Highlights
(Continued)
- -------------------------------------------------------------------------------
----------

LOW DURATION INCOME FUND

The following tables provide investors with data and ratios for one Class A,
Class B and Class C share for each of the periods shown. This information is
supplemented by the financial statements, accompanying notes and the report of
Ernst & Young LLP, independent auditors, which appear in the Fund's Annual
Report to Shareholders for the fiscal year ended November 30, 1996, and are
incorporated by reference into the Statement of Additional Information. The
financial statements and notes, as well as the financial information in the
tables below, have been audited by Ernst & Young LLP. Further information
about the Fund's performance is also included in the Annual Report to
Shareholders, which may be obtained without charge by calling 1-800-647-1568.
<TABLE>
<CAPTION>
LOW DURATION INCOME FUND
--------------------------------------------------------------------------------------
CLASS A CLASS B
-------------------------------------------- ----------------------------------------
FOR THE FOR THE
PERIOD PERIOD
FOR THE YEARS ENDED MAY 3, 1993# FOR THE YEARS ENDED MAY 3, 1993#
NOVEMBER 30, TO NOVEMBER 30, TO
--------------------------- NOVEMBER 30, ----------------------- NOVEMBER 30,
1996 1995 1994 1993 1996 1995 1994 1993
------- -------- -------- ------------ ------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period......... $ 2.34 $ 2.25 $ 2.48 $ 2.50 $ 2.34 $ 2.25 $ 2.48 $ 2.50
------- -------- -------- -------- ------ ------ ------- -------
Net investment
income......... 0.14 0.13 0.12 0.07 0.12 0.11 0.10 0.06
Net realized and
unrealized
gains (losses)
from
investments,
futures and
options........ 0.01 0.09 (0.29) (0.02) 0.01 0.09 (0.29) (0.02)
------- -------- -------- -------- ------ ------ ------- -------
Net increase
(decrease) in
net asset value
from
operations..... 0.15 0.22 (0.17) 0.05 0.13 0.20 (0.19) 0.04
------- -------- -------- -------- ------ ------ ------- -------
Dividends from
net investment
income......... (0.14) (0.13) (0.12) (0.07) (0.12) (0.11) (0.10) (0.06)
------- -------- -------- -------- ------ ------ ------- -------
Contribution to
capital from
adviser........ -- -- 0.06 -- -- -- 0.06 --
------- -------- -------- -------- ------ ------ ------- -------
Net asset value,
end of period.. $ 2.35 $ 2.34 $ 2.25 $ 2.48 $ 2.35 $ 2.34 $ 2.25 $ 2.48
======= ======== ======== ======== ====== ====== ======= =======
Total investment
return(1)...... 6.46% 10.25% (4.50)%** 1.88% 5.60% 9.30% (5.24)%** 1.47%
======= ======== ======== ======== ====== ====== ======= =======
Ratios/Supplemental
data:
Net assets, end
of
period (000's). $71,216 $127,961 $158,712 $551,243 $7,716 $9,147 $13,382 $31,706
Expenses to
average
net assets(2).. 1.21% 1.15% 0.84% 0.81%* 2.03% 2.02% 1.62% 1.62%*
Net investment
income to
average
net assets(2).. 5.84% 5.89% 5.16% 4.85%* 4.99% 5.03% 4.40% 4.31%*
Portfolio
turnover rate.. 210% 242% 246% 97% 210% 242% 246% 97%
</TABLE>

<TABLE>
<CAPTION>
----------------------------------------------
CLASS C
---------------------------------------------
FOR THE
PERIOD
FOR THE YEARS ENDED MAY 3, 1993
NOVEMBER 30, TO
---------------------------- NOVEMBER 30,
1996 1995 1994 1993
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of
period......... $ 2.34 $ 2.25 $ 2.47 $ 2.50
-------- -------- -------- ----------
Net investment
income......... 0.12 0.12 0.11 0.06
Net realized and
unrealized
gains (losses)
from
investments,
futures and
options........ 0.01 0.09 (0.28) (0.03)
-------- -------- -------- ----------
Net increase
(decrease) in
net asset value
from
operations..... 0.13 0.21 (0.17) 0.03
-------- -------- -------- ----------
Dividends from
net investment
income......... (0.12) (0.12) (0.11) (0.06)
-------- -------- -------- ----------
Contribution to
capital from
adviser........ -- -- 0.06 --
-------- -------- -------- ----------
Net asset value,
end of period.. $ 2.35 $ 2.34 $ 2.25 $ 2.47
======== ======== ======== ==========
Total investment
return(1)...... 5.82% 9.60% (4.99)%** 1.20%
======== ======== ======== ==========
Ratios/Supplemental
data:
Net assets, end
of
period (000's). $123,203 $180,169 $296,182 $1,186,181
Expenses to
average
net assets(2).. 1.80% 1.75% 1.36% 1.35%*
Net investment
income to
average
net assets(2).. 5.22% 5.31% 4.65% 4.52%*
Portfolio
turnover rate.. 210% 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)

(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 would be lower if sales charges were included. Total
investment return for periods of less than one year has 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>

- -------------------------------------------------------------------------------
-------------------
PaineWebberU.S. Government Income Fund Low Duration U.S. Government Income Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund
- -------------------------------------------------------------------------------
Financial Highlights
(Continued)
- -------------------------------------------------------------------------------
-----------

INVESTMENT GRADE INCOME FUND

The following tables provide investors with data and ratios for one Class A,
Class B and Class C share for each of the periods shown. This information is
supplemented by the financial statements, accompanying notes and the report of
Ernst & Young LLP, independent auditors, which appear in the Fund's Annual
Report to Shareholders for the fiscal year ended November 30, 1996, and are
incorporated by reference into the Statement of Additional Information. The
financial statements and notes, as well as the financial information in the
tables below relating to each of the five fiscal years in the period ended
November 30, 1996 have been audited by Ernst & Young LLP. Further information
about the Fund's performance is also included in the Annual Report to
Shareholders, which may be obtained without charge by calling 1-800-647-1568.
The information appearing below for the periods prior to the year ended
November 30, 1992 also has been audited by Ernst & Young LLP, whose report
thereon was unqualified.
<TABLE>
<CAPTION>
INVESTMENT GRADE INCOME FUND
---------------------------------------------------------------------------------------------------
CLASS A
---------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $10.68 $ 9.67 $ 11.08 $ 10.38 $ 10.17 $ 9.50 $ 9.82 $ 9.53 $ 9.42 $ 10.74
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net investment income... 0.73 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
investments............ (0.09) 1.01 (1.41) 0.70 0.22 0.66 (0.33) 0.27 0.10 (1.15)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net increase (decrease)
from operations........ 0.64 1.77 (0.64) 1.49 1.03 1.48 0.51 1.13 0.93 (0.27)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Dividends from net
investment income...... (0.73) (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........... (0.73) (0.76) (0.77) (0.79) (0.82) (0.81) (0.83) (0.84) (0.82) (1.05)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period................. $10.59 $ 10.68 $ 9.67 $ 11.08 $ 10.38 $ 10.17 $ 9.50 $ 9.82 $ 9.53 $ 9.42
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Total investment
return (1)............. 6.33% 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)......... $229,117 $258,898 $271,553 $204,418 $197,795 $220,216 $225,424 $269,381 $334,106 $543,919
Expenses to average net
assets................. 0.94% 0.95% 0.97% 0.96% 1.01% 0.91% 0.66% 0.65% 0.70% 0.72%
Net investment income to
average net assets..... 7.02% 7.42% 7.50% 7.24% 7.81% 8.32% 8.76% 8.96% 8.83% 8.67%
Portfolio turnover rate. 115% 149% 142% 27% 44% 46% 31% 47% 35% 88%
</TABLE>
- -------

# Commencement of issuance of shares

* Annualized

(1) Total return is calculated assuming a $1,000 investment on the first day
of each period reported, reinvestment of all dividends and other 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 would be lower if sales charges were included. To-
tal investment return for periods of less than one year has 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 Strategic Income Fund
Financial Highlights
(Continued)
- --------------------------------------------------------------------------------
-----------

<TABLE>
<CAPTION>
INVESTMENT GRADE INCOME FUND
- --------------------------------------------------------------------------------------------------------------
CLASS B CLASS C
- ----------------------------------------------------------- --------------------------------------------------
FOR THE FOR THE
FOR THE PERIOD FOR THE PERIOD
YEARS ENDED JULY 1, 1991# YEARS ENDED JULY 2, 1992#
NOVEMBER 30, TO NOVEMBER 30, TO
- -------------------------------------------- NOVEMBER 30, ----------------------------------- NOVEMBER 30,
1996 1995 1994 1993 1992 1991 1996 1995 1994 1993 1992
- ------- ------- ------- ------- ------- ------------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$10.67 $ 9.67 $ 11.07 $ 10.38 $ 10.17 $ 9.79 $10.69 $ 9.67 $ 11.08 $ 10.38 $ 10.48
- ------- ------- ------- ------- ------- ------ ------- ------- ------- ------- -------
0.65 0.68 0.69 0.71 0.73 0.31 0.68 0.70 0.72 0.74 0.28
(0.09) 1.00 (1.40) 0.69 0.22 0.38 (0.09) 1.01 (1.41) 0.70 (0.10)
- ------- ------- ------- ------- ------- ------ ------- ------- ------- ------- -------
0.56 1.68 (0.71) 1.40 0.95 0.69 0.59 1.71 (0.69) 1.44 0.18
- ------- ------- ------- ------- ------- ------ ------- ------- ------- ------- -------
(0.65) (0.68) (0.69) (0.71) (0.74) (0.31) (0.68) (0.70) (0.72) (0.74) (0.28)
-- -- -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- -- --
- ------- ------- ------- ------- ------- ------ ------- ------- ------- ------- -------
(0.65) (0.68) (0.69) (0.71) (0.74) (0.31) (0.68) (0.70) (0.72) (0.74) (0.28)
- ------- ------- ------- ------- ------- ------ ------- ------- ------- ------- -------
$10.58 $ 10.67 $ 9.67 $ 11.07 $ 10.38 $10.17 $10.59 $ 10.68 $ 9.67 $ 11.08 $ 10.38
======= ======= ======= ======= ======= ====== ======= ======= ======= ======= =======
5.54% 17.97% (6.60)% 13.81% 9.56% 6.76% 5.80% 18.37% (6.40)% 14.21% 1.32%
======= ======= ======= ======= ======= ====== ======= ======= ======= ======= =======
$58,364 $71,372 $69,359 $52,301 $20,862 $5,368 $32,337 $39,150 $45,473 $47,527 $16,067
1.68% 1.70% 1.72% 1.70% 1.74% 1.67%* 1.44% 1.45% 1.45% 1.44% 1.49%*
6.27% 6.67% 6.73% 6.40% 6.88% 6.87%* 6.51% 6.95% 6.99% 6.61% 6.83%*
115% 149% 142% 27% 44% 46% 115% 149% 142% 27% 44%
</TABLE>

Prospectus Page 15
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebberU.S. Government Income Fund Low Duration U.S. Government Income Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund
Financial Highlights
(Continued)
- -------------------------------------------------------------------------------
-----------

HIGH INCOME FUND

The following tables provide investors with data and ratios for one Class A,
Class B and Class C share for each of the periods shown. This information is
supplemented by the financial statements, accompanying notes and the report of
Ernst & Young LLP, independent auditors, which appear in the Fund's Annual
Report to Shareholders for the fiscal year ended November 30, 1996, and are
incorporated by reference into the Statement of Additional Information. The
financial statements and notes, as well as the financial information in the
tables below relating to each of the five fiscal years in the period ended
November 30, 1996 have been audited by Ernst & Young LLP. Further information
about the Fund's performance is also included in the Annual Report to
Shareholders, which may be obtained without charge by calling 1-800-647-1568.
The information appearing below for the periods prior to the year ended
November 30, 1992, also has been audited by Ernst & Young LLP, whose reports
thereon were unqualified.
<TABLE>
<CAPTION>
HIGH INCOME FUND
-----------------------------------------------------------------------------------------------------
CLASS A
-----------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
-----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning
of period.............. $ 6.96 $ 7.14 $ 8.73 $ 7.92 $ 7.30 $ 5.61 $ 7.47 $ 8.60 $ 8.94 $ 10.46
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net investment income... 0.72 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
investments............ 0.37 (0.17) (1.59) 0.83 0.61 1.69 (1.88) (1.15) (0.33) (1.39)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net increase (decrease)
from investment
operations............. 1.09 0.62 (0.73) 1.72 1.59 2.67 (0.89) (0.05) 0.85 (0.16)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Dividends from net
investment income...... (0.70) (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........... (0.70) (0.80) (0.86) (0.91) (0.97) (0.98) (0.97) (1.08) (1.19) (1.36)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period................. $ 7.35 $ 6.96 $ 7.14 $ 8.73 $ 7.92 $ 7.30 $ 5.61 $ 7.47 $ 8.60 $ 8.94
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Total investment return
(1).................... 16.55% 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)......... $243,564 $248,619 $268,397 $360,281 $279,685 $243,210 $184,990 $322,426 $532,450 $683,692
Expenses to average net
assets................. 0.96% 0.93% 0.91% 0.93% 0.98% 1.05% 0.85% 0.71% 0.70% 0.67%
Net investment income to
average net assets..... 10.10% 11.17% 10.43% 10.61% 12.68% 15.12% 15.20% 13.50% 13.55% 12.05%
Portfolio turnover rate. 142% 94% 156% 182% 185% 117% 110% 132% 111% 145%
</TABLE>
- -------

# Commencement of issuance of shares

* Annualized

(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 would be lower if sales charges were included. Total investment return
for periods of less than one year has 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 Strategic Income Fund
Financial Highlights
(Continued)
- --------------------------------------------------------------------------------
-----------

<TABLE>
<CAPTION>
HIGH INCOME FUND
- -------------------------------------------------------------------------------------------------------------------
CLASS B CLASS C
- -------------------------------------------------------------- ----------------------------------------------------
FOR THE
PERIOD FOR THE
JULY 1, PERIOD JULY
FOR THE YEARS ENDED NOVEMBER 30, 1991# TO FOR THE YEARS ENDED NOVEMBER 30, 2, 1992# TO
- ------------------------------------------------ NOVEMBER 30, -------------------------------------- NOVEMBER 30,
1996 1995 1994 1993 1992 1991 1996 1995 1994 1993 1992
- -------- -------- -------- -------- ------- ------------ ------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 6.95 $ 7.14 $ 8.72 $ 7.91 $ 7.29 $ 6.85 $ 6.97 $ 7.15 $ 8.74 $ 7.92 $ 7.80
- -------- -------- -------- -------- ------- ------- ------- -------- -------- -------- -------
0.66 0.74 0.80 0.83 0.92 0.41 0.68 0.76 0.82 0.85 0.33
0.39 (0.18) (1.58) 0.82 0.61 0.44 0.38 (0.18) (1.59) 0.82 0.11
- -------- -------- -------- -------- ------- ------- ------- -------- -------- -------- -------
1.05 0.56 (0.78) 1.65 1.53 0.85 1.06 0.58 (0.77) 1.67 0.44
- -------- -------- -------- -------- ------- ------- ------- -------- -------- -------- -------
(0.65) (0.75) (0.80) (0.84) (0.91) (0.41) (0.67) (0.76) (0.82) (0.85) (0.32)
-- -- -- -- -- -- -- -- -- -- --
- -------- -------- -------- -------- ------- ------- ------- -------- -------- -------- -------
(0.65) (0.75) (0.80) (0.84) (0.91) (0.41) (0.67) (0.76) (0.82) (0.85) (0.32)
- -------- -------- -------- -------- ------- ------- ------- -------- -------- -------- -------
$ 7.35 $ 6.95 $ 7.14 $ 8.72 $ 7.91 $ 7.29 $ 7.36 $ 6.97 $ 7.15 $ 8.74 $ 7.92
======== ======== ======== ======== ======= ======= ======= ======== ======== ======== =======
15.86% 8.05% (9.77)% 21.89% 22.07% 11.93% 15.96% 8.45% (9.62)% 22.19% 5.21%
======== ======== ======== ======== ======= ======= ======= ======== ======== ======== =======
$215,492 $212,946 $235,480 $286,525 $99,645 $18,274 $94,445 $103,911 $115,196 $176,161 $35,992
1.71% 1.68% 1.64% 1.66% 1.70% 1.73%* 1.47% 1.44% 1.38% 1.39% 1.45%*
9.34% 10.42% 9.66% 9.69% 11.42% 12.43%* 9.60% 10.63% 9.91% 9.81% 10.67%*
142% 94% 156% 182% 185% 117% 142% 94% 156% 182% 185%
</TABLE>

Prospectus Page 17
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebberU.S. Government Income Fund Low Duration U.S. Government Income Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund
Financial Highlights
(Concluded)
- -------------------------------------------------------------------------------
----------

STRATEGIC INCOME FUND

The table below provides selected per share data and ratios for one Class A
share, one Class B share and one Class C share for each of the periods shown.
This information is supplemented by the financial statements, accompanying
notes and the report of Price Waterhouse LLP, independent accountants, which
appear in the Fund's Annual Report to Shareholders for the fiscal period ended
November 30, 1996, and are incorporated by reference into the Statement of
Additional Information. The financial statements and notes, as well as the
financial information in the table below, have been audited by Price
Waterhouse LLP, independent accountants. Further information about the Fund's
performance also is included in the Annual Report to Shareholders, which may
be obtained without charge by calling 1-800-647-1568.
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------- -------------------------------------
FOR THE FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD PERIOD
FEBRUARY 1, FEBRUARY 7, FEBRUARY 1, FEBRUARY 7,
1996 FOR THE YEAR 1994+ 1996 FOR THE YEAR 1994+
THROUGH ENDED THROUGH THROUGH ENDED THROUGH
NOVEMBER 30, JANUARY 31, JANUARY 31, NOVEMBER 30, JANUARY 31, JANUARY 31,
1996 1996** 1995 1996 1996 1995
------------ ------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period......... $ 8.99 $ 8.60 $ 10.00 $ 8.98 $ 8.60 $ 10.00
------ ------ ------- ------- ------- -------
Net investment
income......... 0.57 0.67 0.74 0.51 0.60 0.66
Net realized and
unrealized
gains (losses)
from
investments and
foreign
currency....... 0.39 0.59 (1.49) 0.39 0.59 (1.47)
------ ------ ------- ------- ------- -------
Net increase
(decrease) from
investment
operations..... 0.96 1.26 (0.75) 0.90 1.19 (0.81)
------ ------ ------- ------- ------- -------
Dividends from
net investment
income......... (0.58) (0.77) (0.65) (0.52) (0.71) (0.59)
Distributions
from net
realized gains
from foreign
currency
transactions... -- (0.10) -- -- (0.10) --
------ ------ ------- ------- ------- -------
Total dividends
and
distributions
to
shareholders... (0.58) (0.87) (0.65) (0.52) (0.81) (0.59)
------ ------ ------- ------- ------- -------
Net asset value,
end of period.. $ 9.37 $ 8.99 $ 8.60 $ 9.36 $ 8.98 $ 8.60
====== ====== ======= ======= ======= =======
Total investment
return(1)...... 11.14% 15.27% (7.61)% 10.46% 14.37% (8.22)%
====== ====== ======= ======= ======= =======
Ratios/Supplemental
Data:
Net assets, end
of period
(000's)........ $9,944 $9,841 $11,148 $37,249 $40,653 $40,710
Expenses to av-
erage net as-
sets........... 1.89%* 1.74% 1.49%* 2.63%* 2.49% 2.24%*
Net investment
income to
average
net assets..... 7.69%* 8.52% 8.06%* 6.93%* 7.77% 7.46%*
Portfolio turn-
over rate...... 101% 91% 117% 101% 91% 117%
<CAPTION>
CLASS C
-------------------------------------
FOR THE FOR THE
PERIOD PERIOD
FEBRUARY 1, FEBRUARY 7,
1996 FOR THE YEAR 1994+
THROUGH ENDED THROUGH
NOVEMBER 30, JANUARY 31, JANUARY 31,
1996 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Net asset value,
beginning of
period......... $ 8.98 $ 8.60 $ 10.00
------------ ------------ -----------
Net investment
income......... 0.53 0.62 0.69
Net realized and
unrealized
gains (losses)
from
investments and
foreign
currency....... 0.40 0.59 (1.48)
------------ ------------ -----------
Net increase
(decrease) from
investment
operations..... 0.93 1.21 (0.79)
------------ ------------ -----------
Dividends from
net investment
income......... (0.54) (0.73) (0.61)
Distributions
from net
realized gains
from foreign
currency
transactions... -- (0.10) --
------------ ------------ -----------
Total dividends
and
distributions
to
shareholders... (0.54) (0.83) (0.61)
------------ ------------ -----------
Net asset value,
end of period.. $ 9.37 $ 8.98 $ 8.60
============ ============ ===========
Total investment
return(1)...... 10.80% 14.63% (8.02)%
============ ============ ===========
Ratios/Supplemental
Data:
Net assets, end
of period
(000's)........ $17,101 $19,232 $21,208
Expenses to av-
erage net as-
sets........... 2.38%* 2.24% 1.98%*
Net investment
income to
average
net assets..... 7.19%* 8.03% 7.62%*
Portfolio turn-
over rate...... 101% 91% 117%
</TABLE>
- -------
+ Commencement of issuance of shares
* Annualized

(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the 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; results would be lower if sales charges were
included. Total investment return for periods of less than one year has
not been annualized.

** Amounts for net investment income and net realized and unrealized gains
(losses) from investments and foreign currency have been restated to
conform to the November 30, 1996, presentation.

Prospectus Page 18
<PAGE>

Investment Objectives & Policies
- -------------------------------------------------------------------------------
----------

The Funds' investment objectives may not be changed without shareholder
approval. Except where noted, their other investment policies are not
fundamental and may be changed by the Funds' boards. See "The Funds'
Investments" for more information about specific investments each Fund may
make.

U.S. GOVERNMENT INCOME FUND AND LOW DURATION INCOME FUND

U.S. Government Income Fund's investment objective is to provide high income
consistent with the preservation of capital and liquidity. Low Duration Income
Fund's investment objective is to achieve the highest level of income
consistent with the preservation of capital and low volatility of net asset
value.

Low Duration Income Fund seeks to limit (but not eliminate) the volatility of
net asset value by normally maintaining an overall portfolio duration of from
1 to 3 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.

Each Fund normally invests at least 65% of its total assets in U.S. government
bonds (including mortgage-backed securities) and repurchase agreements with
respect to them. Each Fund also may invest up to 35% of its total assets in
privately issued mortgage-backed and asset-backed securities that, at the time
of purchase, are rated in the highest rating category by a nationally
recognized rating agency, such as Standard & Poor's, a division of The McGraw-
Hill Companies, Inc. ("S&P"), or Moody's Investors Service, Inc. ("Moody's"),
or if unrated, are considered to be of comparable quality by Mitchell Hutchins
or, for Low Duration Income Fund, PIMCO.

Each Fund has a fundamental policy of normally concentrating at least 25% of
its total assets in U.S. government and privately issued mortgage- and asset-
backed securities. This policy has the effect of increasing each Fund's
exposure to the risks of these securities and might cause the Fund's net asset
value to fluctuate more than otherwise would be the case. Some types of
mortgage- and asset-backed securities, including "interest-only," "principal-
only" and inverse floating rate classes of these securities, can be extremely
volatile and may become illiquid. Low Duration Income Fund does not invest in
these classes of mortgage-backed securities.

INVESTMENT GRADE INCOME FUND

Investment Grade Income Fund's objective is to provide high current income
consistent with the preservation of capital and liquidity. The Fund normally
invests at least 65% of its total assets in U.S. government and investment
grade corporate bonds, including mortgage-backed securities. The Fund also may
invest up to 35% of its total assets in the following: (1) corporate bonds
that are below investment grade; (2) preferred stocks; (3) convertible
securities; (4) asset-backed securities other than mortgage-backed securities;
(5) commercial paper or variable amount master notes whose issuers, at the
time the security is purchased by the Fund, have outstanding either long-term
bonds that are rated investment grade by S&P or Moody's or commercial paper
rated in the highest rating category by S&P or Moody's; and (6) other money
market instruments, including repurchase agreements.

Investment grade bonds are bonds that, at the time of purchase, are rated in
one of the four highest rating categories by a nationally recognized rating
agency, such as S&P or Moody's, or if unrated, are considered to be of
comparable quality by Mitchell Hutchins.

The Fund's ability to invest in mortgage- and asset-backed securities is
limited. The Fund may invest in mortgage-backed securities only if they are
U.S. government issued or guaranteed or if, at the time of purchase, they are
investment grade. The Fund may invest in other asset-backed securities only
if, at the time of purchase, they are rated in one of the two highest rating
categories by S&P or Moody's. Also, the Fund may not invest more than 10% of
its total assets in interest-only and principal-only classes of mortgage-
backed securities.

Prospectus Page 19
<PAGE>

Up to 20% of the Fund's net assets may be invested in certain foreign
securities. These are: (1) U.S. dollar-denominated securities of foreign
issuers or of foreign branches of U.S. banks that are traded in the U.S.
securities markets; and (2) securities that are U.S. dollar-denominated but
whose value is linked to the value of foreign currencies.

HIGH INCOME FUND

High Income Fund's investment objective is to provide high income. The Fund
normally invests at least 65% of its total assets in high yield, high risk,
income producing, corporate bonds that, at the time of purchase, are rated B
or better by S&P or Moody's, are comparably rated by another nationally
recognized rating agency or, if unrated, are considered to be of comparable
quality by Mitchell Hutchins. The Fund may include in this 65% of its total
assets any equity securities (including common stocks and rights and warrants
for equity securities) that are attached to corporate bonds or are part of a
unit including corporate bonds, so long as the corporate bonds meet these
quality requirements. The Fund also may invest up to 35% of its total assets
in (1) bonds that are rated below B or comparable unrated bonds; (2) U.S.
government bonds; (3) equity securities (including common stocks, warrants and
rights); and (4) money market instruments, including repurchase agreements.

Up to 25% of the Fund's total assets may be invested in bonds and equity
securities that are not paying current income. The Fund may purchase these
securities if Mitchell Hutchins believes that they have a potential for
capital appreciation.

Up to 35% of the Fund's net assets may be invested in securities of foreign
issuers. However, no more than 10% of the Fund's net assets may be invested in
securities of foreign issuers that are denominated and traded in currencies
other than the U.S. dollar.

STRATEGIC INCOME FUND

Strategic Income Fund's primary investment objective is to achieve a high
level of current income. As a secondary objective, it seeks capital
appreciation. The Fund strategically allocates its investments among three
distinct bond market categories: (1) U.S. government and investment grade
corporate bonds, including mortgage- and asset-backed securities; (2) U.S.
high yield, high risk corporate bonds, including convertible bonds, and
preferred stock; and (3) foreign and emerging market bonds. A portion of the
Fund's assets normally is invested in each of these investment sectors.
However, the Fund has the flexibility at any time to invest all or
substantially all of its assets in any one sector.

The Fund may invest in high yield, high risk bonds that are rated as low as D
by S&P or C by Moody's.

The foreign and emerging market bonds in which the Fund may invest include:
(1) government bonds, including Brady bonds and other sovereign debt, and
bonds issued by multi-national institutions such as the International Bank for
Reconstruction and Development and the International Monetary Fund; (2)
corporate bonds and preferred stock issued by entities located in foreign
countries, or denominated in or indexed to foreign currencies; and (3)
interests in securitized or restructured foreign loans, bonds or preferred
stock. The Fund may invest without limit in securities of issuers located in
any country in the world, including both industrialized and emerging market
countries. The Fund generally is not restricted in the portion of its assets
that may be invested in a single country or region, but the Fund's assets
normally are invested in issuers located in at least three countries. No more
than 25% of the Fund's total assets are invested in securities issued or
guaranteed by any single government. The Fund may invest in foreign and
emerging market bonds that do not meet any minimum credit rating standard or
that are unrated.

The Fund may invest up to 10% of its total assets in preferred stock of U.S.
and foreign issuers. It also may acquire equity securities (including common
stocks and rights and warrants for equity securities, bonds and commodities)
when attached to bonds or as part of a unit including bonds or in connection
with a conversion or exchange of bonds. The Fund also may invest without limit
in certificates of deposit issued by banks and savings associations and in
banker's acceptances.

The Fund normally invests a least 65% of its total assets in income producing
securities, including zero coupon bonds, other securities that are issued with
original issue discount ("OID") and payment-in-kind ("PIK") securities. The
Fund's investments in zero coupon bonds are limited to 35% of its total
assets. There is no limit on the Fund's investments in other OID securities or
PIK securities.

Prospectus Page 20
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebberU.S. Government Income Fund Low Duration U.S. Government Income Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund
- -------------------------------------------------------------------------------

Investment Philosophy & Process

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

U.S. GOVERNMENT INCOME FUND
INVESTMENT GRADE INCOME FUND

In selecting investments for the these Funds, Mitchell Hutchins relies on the
expertise of its team of analysts and portfolio managers. The Mitchell
Hutchins team uses a "top-down" investment process for each Fund. The process
consists of three fundamental steps: to determine portfolio duration, to
select sectors appropriate for Fund investment, and to analyze and purchase
individual securities. Duration is a measure of the expected life of a
security on a present value basis. Duration incorporates a bond's yield,
coupon interest payments, final maturity and call features into one measure.
Sector selection is determined by analyzing the spreads between various types
of fixed income securities in which the Fund may invest. Finally, security
selection is established by performing an analysis of both credit quality and
structure of individual issues. All aspects of the Mitchell Hutchins
investment process rely on solid economic, credit, quantitative and market
research. Mitchell Hutchins believes that the fixed income markets offer
opportunities for active management to increase portfolio value.

LOW DURATION INCOME FUND

PIMCO structures the portfolio of Low Duration Income Fund to maintain, under
normal circumstances, an overall portfolio duration of from 1 to 3 years.
PIMCO uses economic forecasting, interest rate anticipation, credit and call
risk analysis, and other security selection techniques. The proportion of the
Fund's assets committed to investment in securities with particular
characteristics (such as maturity, type and coupon rate) will vary based on
PIMCO's outlook for the U.S. economy, the financial markets and other factors.

HIGH INCOME FUND

In seeking the Fund's investment objective, to seek high income, Mitchell
Hutchins relies on the expertise of its portfolio manager and its team of
analysts to select investments for the Fund. Security selection is achieved
after an investment process which includes both credit selection and sector
selection as well as overall market analysis. All aspects of this process rely
on solid qualitative and quantitative research. Mitchell Hutchins believes
that the high yield fixed income market offers opportunities for active
management to increase portfolio value.

STRATEGIC INCOME FUND

Mitchell Hutchins believes that investors may be able to achieve superior
returns through a flexible allocation of investments in several different
sectors of the fixed income market. Strategic Income Fund has the flexibility
to allocate its assets strategically among its three investment sectors.

Each of these sectors generally reacts differently to interest rate changes
and reacts in different ways or at different times to different economic
events. This means that when one sector underperforms the market as a whole,
another sector may perform at roughly the same level as the market, while the
third sector may outperform the market. Mitchell Hutchins believes that the
relative investment opportunities and risks presented by securities in these
sectors will vary so that, over time, securities in one or more of Strategic
Income Fund's three sectors will become undervalued relative to the risks
presented. Accordingly, the relative investment performance of these
investments will change over time, and the best performing sector frequently
will change from year to year.

Mitchell Hutchins seeks to take advantage of these changes in relative
performance by allocating a greater proportion of Strategic Income Fund's
assets in those investment sectors that is believes are undervalued.
Allocations among the sectors and investment decisions with respect to each
sector are made by investment management team comprised of a Fund allocation
manager and individual sector managers. The Fund's allocation manager
determines sector percentage allocations based upon advice from each sector
manager as to the market considerations applicable to his sector. Decisions as
to investments within each sector are made by the sector manager based on
market outlook, investment research, geographic analysis and forecasts
regarding currency and interest rates.

Prospectus Page 21
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebberU.S. Government Income Fund Low Duration U.S. Government Income Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund
- -------------------------------------------------------------------------------

Performance

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

These charts show the total returns for each calendar year for the Funds.
Sales charges have not been deducted from total returns shown in the charts.
Returns would be lower if sales charges were deducted. Past results are not a
guarantee of future results.

Total returns, both before and after deducting the maximum sales charges, are
shown below in the tables that follow the performance charts.

U.S. GOVERNMENT INCOME FUND

LOGO

The inception date for Class B shares was July 1, 1991; thus, the 1991 return
for Class B shares represents the period from July 1, 1991 through December
31, 1991. The inception date for Class C shares was July 2, 1992; thus, the
1992 return for Class C shares represents the period from July 2, 1992 through
December 31, 1992.

AVERAGE ANNUAL RETURNS
As of November 30, 1996
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Inception Date.................... 8/31/84 7/1/91 7/2/92
ONE YEAR
Before deducting maximum sales
charges......................... 3.39% 2.72% 2.98%
After deducting maximum sales
charges......................... (0.75)% (2.28)% 2.23%
FIVE YEARS
Before deducting maximum sales
charges......................... 4.43% 3.63% N/A
After deducting maximum sales
charges......................... 3.57% 3.28% N/A
TEN YEARS (OR LIFE)
Before deducting maximum sales
charges......................... 6.39% 4.60% 2.91%
After deducting maximum sales
charges......................... 5.96% 4.45% 2.91%
</TABLE>
----------
Prospectus Page 22
<PAGE>

LOGO

The inception date for Class A, B and C shares was May 3, 1993; thus, 1993
returns represent the period from May 3, 1993 through December 31, 1993. The
Fund's performance in 1994 reflects a capital contribution made by Mitchell
Hutchins that year and waivers by Mitchell Hutchins of a portion of its
advisory and administrative fees. Absent the capital contribution and fee
waivers, the Fund's performance in 1994 would have been lower. PIMCO assumed
sub-advisory responsibilities for the Fund in October 1994.

AVERAGE ANNUAL RETURNS
As of November 30, 1996
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Inception Date.................... May 3, 1993 May 3, 1993 May 3, 1993
ONE YEAR
Before deducting maximum sales
charges......................... 6.46% 5.60% 5.82%
After deducting maximum sales
charges......................... 3.37% 2.60% 5.07%
LIFE
Before deducting maximum sales
charges......................... 3.78% 2.95% 3.21%
After deducting maximum sales
charges......................... 2.87% 2.69% 3.21%
</TABLE>
<PAGE>

LOGO

The inception date for Class B shares was July 1, 1991; thus, the 1991 return
for Class B shares represents the period from July 1, 1991 through December
31, 1991. The inception date for Class C shares was July 2, 1992; thus, the
1992 return for Class C shares was for the period from July 2, 1992 through
December 31, 1992.

AVERAGE ANNUAL RETURNS

As of November 30, 1996
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Inception Date.................... 8/31/84 7/1/91 7/2/92
ONE YEAR
Before deducting maximum sales
charges......................... 6.33% 5.54% 5.80%
After deducting maximum sales
charges......................... 2.03% 0.54% 5.05%
FIVE YEARS
Before deducting maximum sales
charges......................... 8.53% 7.70% N/A
After deducting maximum sales
charges......................... 7.66% 7.41% N/A
TEN YEARS (OR LIFE)
Before deducting maximum sales
charges......................... 8.32% 12.24% 8.96%
After deducting maximum sales
charges......................... 7.88% 12.35% 8.96%
</TABLE>
<PAGE>

LOGO

The inception date for Class B shares was July 1, 1991; thus, the 1991 return
for Class B shares represents the period from July 1, 1991 through December
31, 1991. The inception date for Class C shares was July 2, 1992; thus, the
1992 return for Class C shares was for the period from July 2, 1992 through
December 31, 1992.

AVERAGE ANNUAL RETURNS
As of November 30, 1996
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Inception Date.................... 8/31/84 7/1/91 7/2/92
ONE YEAR
Before deducting maximum sales
charges......................... 16.55% 15.86% 15.96%
After deducting maximum sales
charges......................... 11.89% 10.86% 15.21%
FIVE YEARS
Before deducting maximum sales
charges......................... 11.75% 10.93% N/A
After deducting maximum sales
charges......................... 10.85% 10.66% N/A
TEN YEARS (OR LIFE)
Before deducting maximum sales
charges......................... 9.30% 8.39% 7.12%
After deducting maximum sales
charges......................... 8.85% 8.06% 7.12%
</TABLE>
<PAGE>

STRATEGIC INCOME FUND

[GRAPH APPEARS HERE]

The inception date for Class A, B and C shares was February 7, 1994; thus, the
1994 returns represent the period from February 7, 1994 through December 31,
1994.

AVERAGE ANNUAL RETURNS
As of November 30, 1996
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Inception Date.................... 2/7/94 2/7/94 2/7/94
ONE YEAR
Before deducting maximum sales
charges......................... 15.60% 14.69% 15.07%
After deducting maximum sales
charges......................... 10.96% 9.69% 14.32%
LIFE
Before deducting maximum sales
charges......................... 6.18% 5.40% 5.68%
After deducting maximum sales
charges......................... 4.63% 4.42% 5.68%
</TABLE>

-----------
Prospectus Page 26
<PAGE>

PERFORMANCE INFORMATION

The Funds perform 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 a 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 Class A
shares of the Funds reflects deduction of the Funds' maximum initial sales
charge of 4% (3% for Low Duration Income Fund) at the time of purchase, and
standardized return for Class B and Class C shares of the Funds reflects the
deduction of the applicable contingent deferred sales charge imposed on a sale
of shares held for the period. One-, five- and ten-year periods will be shown,
unless the Fund or class has been in existence for a shorter period. If so,
returns will be shown for the period since inception. Total return
calculations assume reinvestment of dividends and other distributions.

The Funds 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 deducted.

Total return information reflects past performance and does not indicate
future results. The investment return and principal value of shares of the
Funds will fluctuate. The amount investors receive when selling shares may be
more or less than what they paid. Further information about each Fund's
performance is contained in its Annual Report to Shareholders, which may be
obtained without charge by contacting the Fund, your PaineWebber investment
executive or PaineWebber's correspondent firms or by calling toll-free
1-800-647-1568.

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

The Funds' Investments

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

BONDS are fixed or variable rate debt obligations, including notes, debentures
and similar debt instruments and securities. Mortgage- and asset-backed
securities are types of bonds. Corporations, governments and others issuers
use bonds to borrow money from investors. The issuer pays the investor a fixed
or variable rate of interest and must repay the amount borrowed at or before
maturity. Bonds have varying degrees of investment risk and varying levels of
sensitivity to changes in interest rates.

U.S. GOVERNMENT BONDS include direct obligations of the U.S. government (such
as U.S. Treasury bills, notes and bonds) and obligations issued or guaranteed
by the U.S. government, its agencies or its instrumentalities. U.S. government
bonds include mortgage-backed securities issued or guaranteed by government
agencies or government-sponsored enterprises. Other U.S. government bonds may
be backed by the full faith and credit of the U.S. government or supported
primarily or solely by the creditworthiness of the government-related issuer,
such as, the Resolution Funding Corporation, the Student Loan Marketing
Association ("Sallie Mae"), the Federal Home Loan Banks and the Tennessee
Valley Authority.

CORPORATE BONDS are bonds issued by corporations, banks, partnerships, trusts
or other non-governmental entities.

MORTGAGE- AND ASSET-BACKED SECURITIES, in which all of the Funds may invest,
are bonds backed by specific types of assets. Mortgage-backed securities
represent direct or indirect interests in pools of underlying mortgage loans
that are secured by real property. U.S. government mortgage-backed securities
are issued or guaranteed as to principal and interest (but not as to market
value) by the Government National Mortgage Association ("Ginnie Mae"), Fannie
Mae (formerly, the Federal National Mortgage Association), the Federal Home
Loan Mortgage Corporation ("Freddie Mac") or other government-sponsored
enterprises. Other mortgage-backed securities are sponsored or issued by
private entities, including investment banking firms and mortgage originators.
The growth of mortgage-backed securities and the secondary

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Prospectus Page 27
<PAGE>

mortgage market in which they are traded has helped to keep mortgage money
available for home financing.

Mortgage-backed securities may be composed of one or more classes and may be
structured either as pass-through securities or collateralized debt
obligations. Multiple-class mortgage-backed securities are referred to in this
prospectus as "CMOs." Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive payments out
of the interest and principal on the underlying mortgages. The portions of
these payments that investors receive, as well as the priority of their rights
to receive payments, are determined by the specific terms of the CMO class.
CMOs involve special risks, and evaluating them requires special knowledge.

When interest rates go down and homeowners refinance their mortgages,
mortgage-backed bonds may be paid off more quickly than investors expect. When
interest rates rise, mortgage-backed bonds may be paid off more slowly than
originally expected. Changes in the rate or "speed" of these prepayments can
cause the value of mortgage-backed securities to fluctuate rapidly.

Other asset-backed securities are similar to mortgage-backed securities,
except that the underlying assets are different.These underlying assets may be
nearly any type of financial asset or receivable, such as motor vehicle
installment sales contracts, home equity loans, leases of various types of
real and personal property and receivables from credit cards.

ZERO COUPON BONDS, in which each Fund may invest, are securities that make no
periodic interest payments but instead are sold at a deep discount from their
face value. The buyer of these bonds receives a rate of return by the gradual
appreciation of the security, which results from the fact that it will be
redeemed at face value on a specified maturity date. There are many kinds of
zero coupon bonds. Some are issued in zero-coupon form, including stripped
U.S. government securities issued through the U.S. Treasury. Others are
created by brokerage firms that strip (separate) the coupons (unmatured
interest payments) from interest-paying bonds and sell the principal and the
coupons separately.

Because zero coupon bonds bear no interest, they are generally more sensitive
to changes in interest rates than other U.S. government bonds. This means that
when interest rates fall, the value of zero coupon bonds rises more rapidly
than bonds paying interest on a current basis. However, when interest rates
rise, their value falls more dramatically.

SOVEREIGN DEBT, BRADY BONDS AND STRUCTURED FOREIGN INVESTMENTS. Sovereign debt
includes bonds that are issued or guaranteed by foreign governments or their
agencies, instrumentalities or political subdivisions or by foreign central
banks. Sovereign debt also may be issued by quasi-governmental entities that
are owned by foreign governments but are not backed by their full faith and
credit or general taxing powers.

Brady bonds are sovereign debt securities issued under a 1989 plan (named for
former U.S. Treasury Secretary Nicholas F. Brady) that allows emerging market
countries to restructure their outstanding debt to U.S. and other banks.

Strategic Income Fund may invest in structured foreign investments. These are
securities backed by or representing interests in certain underlying
securities or instruments, such as commercial bank loans, Brady bonds or
preferred stock. The cash flow on these underlying instruments may be
reapportioned among several classes of the structured foreign investments so
that the classes may have different maturities, payment priorities and
interest rate provisions. Strategic Income Fund receives interest and
principal payments on structured foreign investments only to the extent that
the underlying instruments produce sufficient cash flow.

EQUITY SECURITIES, in which High Income Fund and Strategic Income Fund may
invest, include common stocks, preferred stocks and securities that are
convertible into them, including common stock purchase warrants and rights,
equity interests in trusts, partnerships, joint ventures or similar
enterprises and depository receipts. Common stocks, the most familiar type,
represent an equity (ownership) interest in a corporation. Preferred stock has
certain fixed-income features, like a bond, but is actually equity in a
company, like common stock. The prices of equity securities generally
fluctuate more than bonds and reflect changes in a company's financial
condition and in overall market and economic conditions. It is possible that a
Fund may experience a substantial or complete loss on an individual equity
security.

CONVERTIBLE SECURITIES, in which Investment Grade Income Fund, High Income
Fund and Strategic

----------
Prospectus Page 28
<PAGE>

Income Fund may invest, include bonds, preferred stock or other securities
that may be converted into or exchanged for a prescribed amount of common
stock of the same or a different issuer within a particular period of time at
a specified price or formula. A convertible security entitles the holder to
receive interest paid or accrued on debt or dividends paid on preferred stock
until the convertible security matures or is redeemed, converted or exchanged.
Convertible securities have unique investment characteristics in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (2) are less subject to fluctuation in
value than the underlying stock because they have fixed income
characteristics, and (3) provide the potential for capital appreciation if the
market price of the underlying common stock increases. While no securities
investment is without some risk, investments in convertible securities
generally entail less risk than the issuer's common stock, although the extent
to which such risk is reduced depends in large measure upon the degree to
which the convertible security sells above its value as a fixed income
security.

LOAN PARTICIPATIONS AND ASSIGNMENTS. Strategic Income Fund, Investment Grade
Income Fund and High Income Fund may invest in fixed and floating rate loans
arranged through private negotiations with a U.S. or foreign borrower. These
investments normally are participations in or assignments of all or a portion
of loans made by banks. Participations typically will result in the Fund's
having a contractual relationship only with the lender, not with the borrower.
In a participation, the Fund is entitled to receive payments of principal,
interest and any loan fees by the lender only when and if these fees are
received. Also, the Fund may not directly benefit from any collateral
supporting the underlying loan. As a result, the Fund assumes the credit risk
of both the borrower and the lender that is selling the participation. If the
lender becomes insolvent, the Fund may be treated as a general creditor of the
lender and may not benefit from any set-off between the lender and the
borrower. In a loan assignment, the Fund is entitled to receive payments
directly from the borrower and, therefore, does not depend on the selling bank
to pass these payments on to the Fund.

CURRENCY-LINKED INVESTMENTS. Investment Grade Income Fund, High Income Fund
and Strategic Income Fund may invest in bonds that are indexed to specific
foreign currency exchange rates. The principal amount of these bonds may be
adjusted up or down (but not below zero) at maturity to reflect changes in the
exchange rate between two currencies. A Fund may experience loss of principal
due to these adjustments.

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, usually no more than seven days after
purchase, at an agreed-upon date or upon demand and at a 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 a possible decline in the
market value of the underlying securities and delays and costs to the Fund if
the other party to the repurchase agreement becomes insolvent. Each Fund
intends to enter into repurchase agreements only with banks and dealers in
transactions believed by Mitchell Hutchins or, for Low Duration Income Fund,
PIMCO, to present minimum credit risks in accordance with guidelines
established by the Fund's board.

RISKS

INTEREST RATE AND CREDIT RISK. Interest rate risk is the risk that interest
rates will rise and that, as a result, bond prices will fall, lowering the
value of the Funds' investments. In general, bonds having longer durations are
more sensitive to interest changes than are bonds with shorter durations. See
"Duration."

Credit risk is the risk that the issuer or a guarantor may be unable to pay
interest or repay principal on the bond. This can be affected by many factors,
including adverse changes in the issuer's own financial condition or in
economic conditions.

CREDIT RATINGS; BONDS RATED BELOW INVESTMENT GRADE. Credit ratings attempt to
evaluate the safety of principal and interest payments, but they do not
evaluate the volatility of a bond's value or its liquidity and do not
guarantee the performance of the issuer. Rating agencies may fail to make
timely changes in credit ratings in response to subsequent events, so that an
issuer's current financial condition may be better or worse than the rating
indicates. There is a risk that rating agencies may downgrade bonds.

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

Investment grade bonds are rated in one of the four highest rating categories
by a nationally recognized rating agency, such as S&P or Moody's, or, if
unrated, are considered to be of comparable quality by Mitchell Hutchins (or
PIMCO for Low Duration Income Fund). Moody's considers bonds rated Baa (its
lowest investment grade rating) to have speculative characteristics. This
means that changes in economic conditions or other circumstances are more
likely to lead to a weakened capacity to make principal and interest payments
than is the case for higher-rated bonds. Investment Grade Income Fund, High
Income Fund and Strategic Income Fund may invest without limit in bonds with
the lowest investment grade rating.

High yield, high risk bonds are rated below investment grade and are commonly
referred to as "junk bonds." High Income Fund and Strategic Income Fund may
invest their entire portfolios in these bonds. Investment Grade Income Fund
may invest up to 35% of its total assets in these bonds. High yield, high risk
bonds are considered to be predominantly speculative with respect to the
issuer's ability to pay interest and repay principal. A Fund's investments in
these lower rated bonds entail greater risk than its investments in higher
rated bonds. Lower rated bonds may be more sensitive to adverse market
conditions. During an economic downturn or period of rising interest rates,
their issuers may experience financial stress that adversely affects their
ability to pay interest and principal and may increase the possibility of
default. Lower rated bonds are frequently unsecured by collateral and will not
receive payment until more senior claims are paid in full. The market for
these bonds is thinner and less active, which may limit the Funds' ability to
sell them at fair value in response to changes in the economy or financial
markets.

During the fiscal year or period ended November 30, 1996, Investment Grade
Income Fund, High Income Fund and Strategic Income Fund invested their average
annual net assets as follows:

<TABLE>
<CAPTION>
INVESTMENT
GRADE HIGH STRATEGIC
% OF AVERAGE ANNUAL NET INCOME INCOME INCOME
ASSETS INVESTED IN FUND FUND FUND
----------------------- ---------- ------ ---------
<S> <C> <C> <C>
Debt securities rated by S&P or Moody's 91.06% 82.94% 91.07%
Debt Securities not so rated 3.78% 11.01% 6.65%
Securities rated AAA/Aaa (including cash items) 7.57% 3.19% 36.69%
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT
GRADE HIGH STRATEGIC
% OF AVERAGE ANNUAL NET INCOME INCOME INCOME
ASSETS INVESTED IN FUND FUND FUND
----------------------- ---------- ------ ---------
<S> <C> <C> <C>
Securities rated AA/Aa 4.84% -- 2.83%
Securities rated A/A 27.06% -- 0.77%
Securities rated BBB/Baa 26.39% -- 4.67%
Securities rated BB/Ba 23.98% 33.12% 14.54%
Securities rated B/B 1.22% 44.02% 31.57%
Securities rated CCC/Caa -- 2.61% --
</TABLE>

It should be noted that this information reflects the average composition of
the assets of each Fund during the fiscal year or period ended November 30,
1996 and is not necessarily representative of that Fund's assets as of the end
of that fiscal year or period, the current fiscal year or at any time in the
future.

DURATION. Duration is a measure of the expected life of a bond on a present
value basis. 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, for Low Duration Income Fund,
PIMCO, in portfolio selection and yield curve positioning for the Funds.

Duration takes the length of the time intervals between the present time and
the time that the interest and principal payments are scheduled or, in the
case of a callable bond, expected to be made, and weights them by the present
values of the cash to be received at each future point in time. For any bond
with interest payments occurring prior to the payment of principal, duration
is always less than maturity.

Duration allows Mitchell Hutchins (or PIMCO for Low Duration Income Fund) 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 interest rates increases by 1%, a fixed income security having a
positive duration of three years generally will decrease by approximately 3%.
Thus, if Mitchell Hutchins or PIMCO calculates the duration of the Fund's
portfolio as 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

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

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.

RISKS OF MORTGAGE- AND ASSET-BACKED SECURITIES. The yield characteristics of
mortgage- and asset-backed securities differ from those of traditional bonds.
Among the major differences are that interest and principal payments are made
more frequently (usually monthly) and that principal may be prepaid at any time
because the underlying mortgage loans or other assets generally may be prepaid
at any time. Generally, prepayments on fixed-rate mortgage loans will increase
during a period of falling interest rates and decrease during a period of
rising interest rates. Mortgage- and asset-backed securities may also decrease
in value as a result of increases in interest rates and, because of
prepayments, may benefit less than other bonds from declining interest rates.
Reinvestments of prepayments may occur at lower interest rates than the
original investment, thus adversely affecting a Fund's yield. Actual prepayment
experience may cause the yield of a mortgage-backed security to differ from
what was assumed when the Fund purchased the security.

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 especially during periods of rapid or unanticipated changes in market
interest rates, the attractiveness of some 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 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 guaranteed or is considered to be of the
highest credit quality. 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.

Inverse floating rate CMO classes also may be extremely volatile. These classes
pay interest at a rate that decreases when a specified index of market rates
increases.

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, can be extremely volatile and these securities may become illiquid.
Mitchell Hutchins or, for Low Duration Income Fund, PIMCO, seeks to manage a
Fund's investments in mortgage-backed securities so that the volatility of a
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.

While Low Duration Income Fund generally may invest in CMO classes that are
structured to sell at a premium or a discount, the Fund may not invest in IO or
PO classes or in inverse floating rate classes. Investment Grade Income Fund
may invest no more than 10% of its total assets in IO or PO classes.

Prospectus Page 31
<PAGE>

RISKS OF ZERO COUPON, OID AND PIK SECURITIES. Zero coupon bonds pay no
interest to holders prior to maturity. However, a portion of the original
issue discount on the zero coupon securities must be included in the Fund's
income. Accordingly, to continue to qualify for tax treatment as a regulated
investment company and to avoid certain excise taxes (see "Taxes" in the
Statement of Additional Information), a Fund may be required to distribute as
dividends amounts that are greater than the total amount of cash it actually
receives. These distributions must be made from the Fund's cash assets or, if
necessary, from the proceeds of sales of portfolio securities. The Fund will
not be able to purchase additional income-producing securities with cash used
to make such distributions, and its current income ultimately may be reduced
as a result.

Zero coupon bonds usually trade at a substantial discount from their face or
par value. PIK securities often trade at a discount. These securities are
subject to greater fluctuations in market value in response to changing
interest rates than bonds of comparable maturities that make current
distributions of interest in cash.

FOREIGN SECURITIES. Strategic Income Fund, Investment Grade Income Fund and
High Income Fund may invest in foreign securities. Investing in foreign
securities, especially in emerging markets, can involve more risks than
investing in securities of U.S. companies. Their value is subject to economic
and political developments in the countries where the companies operate.
Values may also be affected by foreign tax laws, changes in foreign economic
or monetary policies, exchange control regulations and regulations involving
prohibitions on the repatriation of foreign currencies. In general, less
information may be available about foreign companies than about U.S.
companies, and they are generally not subject to the same accounting, auditing
and financial reporting standards as are U.S. companies.

Sovereign debt involves specific risks. Issuers, or the governmental
authorities that control the repayment of the debt, may be unable or unwilling
to pay interest or repay principal when due in accordance with the terms of
the debt. A Fund may have limited recourse in the event of default. Political
conditions, especially a sovereign entity's willingness to meet the terms of
its debt obligations, are of considerable significance.

INVESTING IN EMERGING MARKETS. Emerging market securities involve additional
risks. These countries typically have economic and political systems that are
relatively less mature, and can be expected to be less stable, than those of
developed countries. Emerging market countries may have policies that restrict
investment by foreigners in those countries, and there is a risk of government
expropriation or nationalization of private property. The possibility of low
or nonexistent trading volume in the securities of companies in emerging
markets may also result in a lack of liquidity and in price volatility.
Issuers in emerging markets typically are subject to a greater degree of
change in earnings and business prospects than are companies in developed
markets.

CURRENCY. Currency risk is the risk that changes in foreign exchange rates may
reduce the U.S. dollar value of a Fund's foreign investments. A Fund's share
value may change significantly when investments are denominated in foreign
currencies. Generally, currency exchange rates are determined by supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries. Currency exchange rates can also be affected by the
intervention of the U.S. and foreign governments or central banks, the
imposition of currency controls, speculation or other political or economic
developments inside and outside the United States.

DERIVATIVES. Some of the Funds' investments 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, forward currency contracts, swaps and similar
instruments that may be used in hedging and related strategies. There is only
limited consensus as to what constitutes a "derivative" security. However, in
Mitchell Hutchins' view, derivative securities also include "stripped"
securities, specially structured types of mortgage- and asset-backed
securities, such as IOs, POs or inverse floaters, and dollar-denominated
securities whose value is linked to foreign currencies. The market value of
derivatives sometimes is more volatile than that of other investments, and
each type of derivative may pose its own special risks. Mitchell Hutchins (or
PIMCO for Low Duration Income Fund) takes these risks into account in its
management of the Funds.

COUNTERPARTIES. The Funds may be exposed to the risk of insolvency of another
party with which the

Prospectus Page 32
<PAGE>

Fund enters into a transaction, such as a repurchase agreement or a derivative
contract. Subject to board supervision, Mitchell Hutchins (or PIMCO for Low
Duration Income Fund) monitors and evaluates the creditworthiness of these
counterparties to help minimize those risks.

LIMITS OF SECTOR ALLOCATION STRATEGY. Mitchell Hutchins believes that
Strategic Income Fund's strategy of sector allocation should be less risky
than investing in only one sector of the bond market. Data from the Lehman
Aggregate Bond Index, the Salomon Brothers High Yield Index, the Merrill Lynch
High Yield Index and the Salomon Brothers World Government Bond Index indicate
that these sectors are not closely correlated. If successful, the Fund's
strategy should enable the Fund to achieve a higher level of investment return
than if the Fund invested exclusively in any one investment or allocated a
fixed proportion of its assets to each investment sector. The Fund is,
however, more dependent on the ability of Mitchell Hutchins to successfully
evaluate the relative values of the Fund's three investment sectors than is
the case with a fund that does not seek to adjust market sector allocations
over time.

NON-DIVERSIFIED STATUS. Strategic Income Fund is "non-diversified," as that
term is defined in the 1940 Act. This means, in general, that more than 5% of
the total assets of the Fund may be invested in securities of one issuer
(including a foreign government), but only if, at the close of each quarter of
the Fund's taxable year, the aggregate amount of such holdings does not exceed
50% of the value of its total assets is invested in the securities of a single
issuer. When the Fund's portfolio is comprised of securities of a smaller
number of issuers than if it were "diversified," the Fund will be subject to
greater risk because changes in the financial condition or market assessment
of a single issuer may have a greater effect on the Fund's total return and
the price of Fund shares.

INVESTMENT TECHNIQUES AND STRATEGIES

HEDGING AND OTHER STRATEGIES USING DERIVATIVE CONTRACTS. Each Fund may use
derivative contracts, such as options (both exchange-traded and over-the-
counter) and futures contracts, in strategies intended to enhance income,
realize gains or reduce the overall risk of its investments ("hedge"). Use of
these derivative contracts solely to enhance income or realize gains may be
considered a form of speculation. High Income Fund and Strategic Income Fund
also may use forward currency contracts, but solely for hedging purposes. Each
Fund may use interest rate swaps and similar contracts to preserve a return or
spread on a particular investment or portion of its portfolio or to protect
against an increase in the price of securities that the Fund anticipates
purchasing at a later date. New financial products and risk management
techniques continue to be developed, and they may be used by any Fund if
consistent with its investment objective and policies. The Statement of
Additional Information contains further information on these derivative
contracts and related hedging strategies.

The Funds might not use any derivative contract or hedging strategy, and there
can be no assurance that any hedging strategy will succeed. If Mitchell
Hutchins or PIMCO is incorrect in its judgment on interest rates, market
values or other economic factors in using a hedging strategy, a Fund might
have lower net income and a net loss on the investment. Each strategy involves
certain risks, which include:

. the fact that the skills needed to implement a strategy using derivative
contracts are different from those needed to select securities for the
Funds,

. the possibility of imperfect correlation, or even no correlation, between
price movements of derivative contracts used in hedging strategies and
price movements of the securities being hedged,

. possible constraints on a Fund's ability to purchase or sell portfolio
investments at advantageous times due to the need for the Fund to "cover"
or to segregate securities, and

. the possibility that a Fund is unable to close out or liquidate its
position.

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 for Low Duration Income Fund) deems portfolio changes appropriate. A
higher turnover rate for a 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.

ILLIQUID SECURITIES. U.S. Government Income Fund, Investment Grade Income Fund
and High Income Fund may invest up to 10% of their net assets, and

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

Low Duration Income Fund and Strategic Income Fund up to 15% of their net
assets, in illiquid securities. These include repurchase agreements maturing
in more than seven days, certain cover for over-the-counter options and
securities whose disposition is restricted under the federal securities laws.
The Funds do not consider securities that are eligible for resale under SEC
Rule 144A to be illiquid if Mitchell Hutchins (or PIMCO for Low Duration
Income Fund) has determined them to be liquid, based upon the trading markets
for the securities under procedures approved by the Funds' boards.

WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Each Fund may purchase securities
on a "when-issued" or delayed-delivery basis. In when-issued or delayed-
delivery transactions, delivery of the securities occurs beyond normal
settlement periods, but the Fund 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.

LENDING PORTFOLIO SECURITIES. Each Fund may lend its securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of the
Fund's total assets taken at market value. Lending securities enables the
Funds to earn additional income, but could result in a loss or delay in
recovering these securities.

TEMPORARY AND DEFENSIVE POSITIONS. When Mitchell Hutchins (or PIMCO for Low
Duration Income Fund) believes that unusual circumstances warrant a defensive
posture, a Fund may temporarily commit all or any portion of its assets to
cash or money market instruments, including repurchase agreements. Each Fund
may commit up to 35% of its total assets (100% of Strategic Income Fund's
total assets) to cash or money market instruments for liquidity purposes or
pending investment in other securities.

BORROWINGS, DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS. U.S. Government
Income Fund, Low Duration Income Fund and Strategic Income Fund each may
invest in "arbitraged" dollar roll and reverse repurchase transactions. In a
dollar roll, the Fund sells mortgage-backed or other securities for delivery
on the next regular settlement date for those securities and, simultaneously,
contracts to purchase substantially similar securities for delivery on a later
settlement date. In a reverse repurchase agreement, the Fund sells securities
to a bank or dealer and agrees to repurchase them on demand or on a specified
future date and at a specified price. In "arbitraged" transactions, the Fund
maintains an offsetting position in cash or in U.S. government or investment
grade bonds that mature on or before the settlement date of the related dollar
roll or reverse repurchase agreement. Mitchell Hutchins believes that these
"arbitraged" transactions do not present the risks that are normally
associated with leverage. These Funds may invest up to 5% of their total
assets in dollar rolls that are not arbitraged. These dollar roll and reverse
repurchase transactions are subject to each Fund's limitation of borrowings
and may not exceed 33 1/3% of its total assets. These Funds also may borrow
for temporary or emergency purposes, but not in excess of an additional 5% of
a Fund's total assets.

Investments Grade Income Fund and High Income Fund each may use reverse
repurchase agreements and borrow money for temporary or emergency purposes,
but not in excess of 10% of each Fund's total assets.

OTHER INFORMATION. Each Fund normally invests at least 65% of its total assets
in income producing securities, which include zero coupon bonds and other OID
securities and, for each Fund permitted to invest in them, PIK securities and
PO mortgage-backed securities.

Each Fund may sell securities that it already owns short ("short sales against
the box") to defer realization of gains or losses for tax or other purposes.

New forms of bonds, derivatives and hedging instruments continue to be
developed. Each Fund may invest in such securities to the extent consistent
with its investment objectives.

----------
Prospectus Page 34
<PAGE>

Flexible Pricing/SM/
- -------------------------------------------------------------------------------

Each Fund offers through this Prospectus three classes of shares that differ
in terms of sales charges and expenses. An investor can select the class that
is best suited to his or her investment needs, based upon the holding period
and the amount of investment.

CLASS A SHARES

HOW PRICE IS CALCULATED: The price is the net asset value plus the initial
sales charge (the maximum is 4% of the public offering price--3% for Low
Duration Income Fund) next calculated after PaineWebber's New York City
headquarters or PFPC Inc., the Funds' transfer agent ("Transfer Agent")
receives the purchase order. Although investors pay an initial sales charge
when they buy Class A shares, the ongoing expenses for this class are lower
than the ongoing expenses of Class B and Class C shares. Class A shares sales
charges are calculated as follows:
U.S. GOVERNMENT INCOME FUND
INVESTMENT GRADE INCOME FUND
HIGH INCOME FUND
STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE OF: DISCOUNT TO SELECTED
---------------------------------- DEALERS AS PERCENTAGE OF
AMOUNT OF INVESTMENT OFFERING PRICE NET AMOUNT INVESTED OFFERING PRICE
- -------------------- -------------- ------------------- ------------------------
<S> <C> <C> <C>
Less than $100,000...... 4.00% 4.17% 3.75%
$100,000 to $249,999.... 3.50 3.63 3.25
$250,000 to $499,999.... 2.50 2.56 2.25
$500,000 to $999,999.... 1.75 1.78 1.50
$1,000,000 and over (1). None None 1.00 (2)
</TABLE>

LOW DURATION INCOME FUND
<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE OF: DISCOUNT TO SELECTED
---------------------------------- DEALERS AS PERCENTAGE OF
AMOUNT OF INVESTMENT OFFERING PRICE NET AMOUNT INVESTED OFFERING 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(2)
</TABLE>
- -------
(1) A contingent deferred sales charge of 1% of the shares' offering price or
the net asset value at the time of sale by the shareholder, whichever is
less, is charged on sales of shares made within one year of the purchase
date. Class A shares representing reinvestment of any dividends or other
distributions are not subject to the 1% charge. Withdrawals under the
Systematic Withdrawal Plan are not subject to this charge. However,
investors may not withdraw more than 12% of the value of the Fund account
under the Plan in the first year after purchase.
(2) Mitchell Hutchins pays 1% to PaineWebber.
SALES CHARGE REDUCTIONS & WAIVERS

Investors purchasing Class A shares in more than one PaineWebber mutual fund
may combine those purchases to get a reduced sales charge. Investors who
already own Class A shares in one or more PaineWebber mutual funds may combine
the amount they are currently purchasing with the value of such previously
owned shares to qualify for a reduced sales charge. To determine the sales
charge reduction in either case, please refer to the chart above.

----------
Prospectus Page 35
<PAGE>

Investors may also qualify for a lower sales charge when they combine their
purchases with those of:

. their spouses, parents or children under age 21;

. their Individual Retirement Accounts (IRAs);

. certain employee benefit plans, including 401(k) plans;

. any company controlled by the investor;

. trusts created by the investor;

. Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts created
by the investor or group of individuals for the benefit of the investors'
children; or

. accounts with the same adviser.

Employers who own Class A shares for one or more of their qualified retirement
plans may also qualify for the reduced sales charge.

The sales charge will not apply when the investor:

. is an employee, director, trustee or officer of PaineWebber, its affiliates
or any PaineWebber mutual fund;

. is the spouse, parent or child of any of the above, or advisory clients of
Mitchell Hutchins;

. buys these shares through a PaineWebber investment executive who was
formerly employed as a broker with a competing brokerage firm that was
registered as a broker-dealer with the SEC; and

. was the investment executive's client at the competing brokerage firm;

. within 90 days of buying Class A shares in this Fund, the investor sells
shares of one or more mutual funds that (a) were principally underwritten
by the competing brokerage firm or its affiliates and (b) the investor
either paid a sales charge to buy those shares, paid a contingent
deferred sales charge when selling them or held those shares until the
contingent deferred sales charge was waived; and

. the amount that the investor purchases does not exceed the total amount
of money the investor received from the sale of the other mutual fund;

. is a certificate holder of unit investment trusts sponsored by PaineWebber
and has elected to have dividends and other distributions from that
investment automatically invested in Class A shares;

. is an employer establishing an employee benefit plan qualified under section
401, including a salary reduction plan qualified under section 401(k), or
section 403(b) of the Internal Revenue Code ("Code"). (This waiver is
subject to minimum requirements, with respect to the number of employees and
investment amount, established by Mitchell Hutchins. Currently, the plan
must have 100 or more eligible employees or the amount invested or to be
invested in the Fund or any other PaineWebber mutual fund must total at
least $1 million during the subsequent 13-month period);

. acquires Class A shares through an investment program that is not sponsored
by PaineWebber or its affiliates and that charges participants a fee for
program services, provided that the program sponsor has entered into a
written agreement with PaineWebber permitting the sale of Class A shares at
net asset value to that program. For investments made pursuant to this
waiver, Mitchell Hutchins may make a payment to PaineWebber out of its own
resources in an amount not to exceed 1% of the amount invested. For
subsequent investments or exchanges made to supplement a rebalancing feature
of such an investment program, the minimum subsequent investment requirement
is also waived; or;

. acquires Class A shares in connection with a reorganization pursuant to
which a Fund acquires substantially all of the assets and liabilities of
another investment company in exchange solely for shares of the Fund.

For more information on how to get any reduced sales charge, investors should
contact their investment executive at PaineWebber or one of its correspondent
firms or call 1-800-647-1568. Investors must provide satisfactory information
to PaineWebber or the Fund if they seek any of these waivers.

CLASS B SHARES

HOW PRICE IS CALCULATED: The price is the net asset value next calculated
after PaineWebber's New York City headquarters or the Transfer Agent receives
the purchase order. The ongoing expenses investors pay for Class B shares are
higher than those of Class A shares. Because investors do not pay an initial
sales charge when they buy Class B shares, 100% of their purchase is
immediately invested.

Depending on how long they own their Fund investment, investors may have to
pay a sales charge

Prospectus Page 36
<PAGE>

when they sell their Fund shares. This sales charge is called a "contingent
deferred sales charge." The amount of the charge depends on how long the
investor owned the shares. The sales charge is calculated by multiplying the
offering price (net asset value of the shares at the time of purchase) or the
net asset value of the shares at the time of sale by the shareholder,
whichever is less, by the percentage shown on the following table. Investors
who own shares for more than six years (four years for Low Duration Income
Fund) do not have to pay a sales charge when selling those shares.

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

<TABLE>
<CAPTION>
PERCENTAGE BY WHICH
THE SHARES' NET ASSET
IF THE INVESTOR SELLS SHARES WITHIN: VALUE IS MULTIPLIED:
- ------------------------------------ ---------------------
<S> <C>
1st year of purchase..................................... 5%
2nd year of purchase..................................... 4
3rd year of purchase..................................... 3
4th year of purchase..................................... 2
5th year of purchase..................................... 2
6th year of purchase..................................... 1
7th year of purchase..................................... None
</TABLE>

LOW DURATION INCOME FUND

<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
NET ASSET VALUE
REDEMPTION DURING AT REDEMPTION
----------------- -------------------
<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>

Class B shareholders of Low Duration Income Fund who exchange those shares for
shares of other PaineWebber mutual funds will be subject to the contingent
deferred sales charges of the Class B shares acquired through the exchange,
which in most cases are higher than those applicable to the Class B shares and
are 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.

CONVERSION OF CLASS B SHARES

Class B shares automatically convert to the appropriate number of Class A
shares of equal dollar value after the investor has owned them for six years.
Dividends and other distributions paid to the investor by the Fund in the form
of additional Class B shares will also convert to Class A shares on a pro-rata
basis. This benefits shareholders because Class A shares have lower ongoing
expenses than Class B shares. If the investor has exchanged Class B shares
between PaineWebber funds, the Fund uses the purchase date at which the
initial investment was made to determine the conversion date.

MINIMIZING THE CONTINGENT DEFERRED SALES CHARGE

When investors sell Class B shares they have owned for less than six years
(four years for Low Duration Income Fund), the Fund automatically will
minimize the sales charge by assuming they are selling:

. First, Class B shares owned through reinvested dividends and capital gain
distributions; and

. Second, Class B shares held in the portfolio the longest.

WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGE

The contingent deferred sales charge will not apply to:

. sales of shares under the Fund's "Systematic Withdrawal Plan" (investors may
not withdraw annually more than 12% of the value of the Fund account under
the Plan);

. a distribution from an IRA, a self-employed individual retirement plan
("Keogh Plan") or a custodial account under Section 403(b) of the Internal
Revenue Code (after the investor reaches age 59 1/2);

. a tax-free return of an excess IRA contribution;

. a tax-qualified retirement plan distribution following retirement; or

. Class B shares sold within one year of an investor's death if the investor
owned the shares at the time of death either as the sole shareholder or with
his or her spouse as a joint tenant with the right of survivorship.

Investors must provide satisfactory information to PaineWebber or the Fund if
they seek any of these waivers.

CLASS C SHARES

HOW PRICE IS CALCULATED: The price of Class C shares is the net asset value
next calculated after PaineWebber's New York City headquarters or the Transfer
Agent receives the purchase order. Investors do not pay an initial sales
charge when they buy Class C shares, but the ongoing expenses of Class C
shares are higher than those of Class A shares. Because investors do not pay
an initial sales charge when they buy Class C shares, 100% of their purchase
is immediately invested. Class C shares never convert to any other class of
shares.

A contingent deferred sales charge of 0.75% of the offering price (net asset
value of at the time of

Prospectus Page 37
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebberU.S. Government Income Fund Low Duration U.S. Government Income Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund
- -------------------------------------------------------------------------------

How to Buy Shares
- -------------------------------------------------------------------------------
----------

purchase) or net asset value of the shares at the time of sale by the
shareholder, whichever is less, is charged on sales of shares made within one
year of the purchase date. Other PaineWebber mutual funds may impose a
different contingent deferred sales charge on Class C shares sold within one
year of the purchase date. A sale 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 the Class C shares of
the PaineWebber mutual fund originally purchased. Class C shares representing
reinvestment of any dividends or capital gains are not subject to the 0.75%
charge. Withdrawals under the Systematic Withdrawal Plan also are not subject
to this charge. However, investors may not withdraw annually more than 12% of
the value of the Fund account under the Plan in the first year after purchase.

Prices are calculated for the Fund's Class A, Class B and Class C shares once
each Business Day, at the close of regular trading on the New York Stock
Exchange (currently 4:00 p.m., Eastern time). A "Business Day" is any day,
Monday through Friday, on which the New York Stock Exchange is open for
business. Shares are purchased at the next share price calculated after the
purchase order is received. The Funds 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 an order to buy shares, investors should specify which class of
shares they want to buy. If investors fail to specify the class, they will
automatically receive Class A shares, which include an initial sales charge.

PAINEWEBBER CLIENTS

Investors who are PaineWebber clients may buy shares through PaineWebber
investment executives or its correspondent firms. Investors may buy shares in
person, by mail, by telephone or by wire (the minimum wire purchase is $1
million). PaineWebber investment executives and correspondent firms are
responsible for promptly sending investors' purchase orders to PaineWebber's
New York City headquarters.

Investors may pay for their purchases with checks drawn on U.S. banks or with
funds they have in their brokerage accounts at PaineWebber or its
correspondent firms. Payment is due on the third Business Day after
PaineWebber's New York City headquarters office receives the purchase order.

OTHER INVESTORS

Investors who are not PaineWebber clients may purchase Fund shares and set up
an account through the Transfer Agent by completing an account application,
which can be obtained by calling 1-800-647-1568. The application and check
must be mailed to PFPC Inc., the Funds' Transfer Agent, Attn: PaineWebber
Mutual Funds, P.O. Box 8950, Wilmington, DE 19899.

Investors who already have money invested in a PaineWebber mutual fund, and
want to invest in another PaineWebber mutual fund, can:

. mail an application with a check; or

. open an account by exchanging from another PaineWebber mutual fund.

Investors do not have to send an application when making additional
investments in the Fund.

MINIMUM INVESTMENTS

<TABLE>
<CAPTION>
ALL FUNDS
(EXCEPT LOW
DURATION LOW DURATION
INCOME FUND) INCOME FUND
------------ ------------
<S> <C> <C>
To open an account.................................... $1,000 $100
To add to an account.................................. $ 100 $100
</TABLE>

A Fund may waive or reduce these minimums for:

. employees of PaineWebber or its affiliates; or

. participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the Fund's automatic investment plan.

HOW TO EXCHANGE SHARES

As shareholders, investors have the privilege of exchanging Fund shares for
the same class of other PaineWebber mutual fund shares. For classes of shares
where no initial sales charge is imposed, a contingent deferred sales charge
may apply if the investor sells the shares acquired through the exchange.
Exchanges may be subject to minimum investment requirements of the fund into
which exchanges are made.

Prospectus Page 38
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebberU.S. Government Income Fund Low Duration U.S. Government Income Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund
- -------------------------------------------------------------------------------

How to Sell Shares
- -------------------------------------------------------------------------------
----------

. Investors who purchased their shares through an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
contacting their investment executive in person or by telephone, mail or
wire.

. Investors who do not have an account with an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
writing a "letter of instruction" to the Transfer Agent. The letter of
instruction must include:

. the investor's name and address;

. the Fund's name;

. the Fund account number;

. the dollar amount or number of shares to be sold; and

. a guarantee of each registered owner's signature by an eligible
institution, such as a commercial bank, trust company or stock exchange
member.

The letter must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O.
Box 8950, Wilmington, DE 19899.

No contingent deferred sales charge is imposed when shares are exchanged for
the corresponding class of shares of other PaineWebber mutual funds. A Fund
will use the purchase date of the initial investment to determine any
contingent deferred sales charge due when the acquired shares are sold. Fund
shares may be exchanged only after the settlement date has passed and payment
for the shares has been made. The exchange privilege is available only in
those jurisdictions where the sale of the fund shares to be acquired is
authorized. This exchange privilege may be modified or terminated at any time
and, when required by SEC rules, upon 60 days' notice. See the back cover of
this prospectus for a listing of other PaineWebber mutual funds.
Investors can sell (redeem) shares at any time. Shares will be sold at the
share price for that class as next calculated after the order is received and
accepted (less any applicable contingent deferred sales charge). Share prices
are normally calculated at the close of regular trading on the New York Stock
Exchange (currently 4:00 p.m., Eastern time).

Investors who own more than one class of shares should specify which class
they are selling. If they do not, the Fund will assume they are first selling
their Class A shares, then Class C, and last, Class B.

If a shareholder wants to sell shares which were purchased recently, the Fund
may delay payment until it verifies that good payment was received. In the
case of purchases by check, this can take up to 15 days.

Investors who have an account with PaineWebber or one of PaineWebber's
correspondent firms can sell their shares by contacting their investment
executive. Investors who do not have an account and have
bought their shares through PFPC Inc., the Fund's Transfer Agent, may sell
shares by writing a "letter of instruction," as detailed in "How to Exchange
Shares."

Because the Funds incur certain fixed costs in maintaining shareholder
accounts, each Fund reserves the right to purchase back all Fund shares in any
shareholder account with a net asset value of less than $500. If the Fund
elects to do so, it will notify the shareholder of the opportunity to increase
the amount invested to $500 or more within 60 days of the notice. The Fund
will not purchase back accounts that fall below $500 solely due to a reduction
in net asset value per share.

REINSTATEMENT PRIVILEGE

Shareholders who sell their Class A shares may reinstate their Fund account
without a sales charge up to the dollar amount sold by purchasing the Fund's
Class A shares within 365 days after the sale. To take advantage of this
reinstatement privilege, shareholders must notify their investment executive
at PaineWebber or one of its correspondent firms at the time of purchase.

Prospectus Page 39
<PAGE>

Other Services
- -------------------------------------------------------------------------------
Investors should consult their investment executive at PaineWebber or one of
its correspondent firms to learn more about the following services:

AUTOMATIC INVESTMENT PLAN

Investing on a regular basis helps investors meet their financial goals.
PaineWebber offers an Automatic Investment Plan Service with a minimum initial
investment of $1,000 through which the Fund will deduct $50 or more each month
from the investor's bank account to invest directly in the 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."

SYSTEMATIC WITHDRAWAL PLAN

The Systematic Withdrawal Plan allows investors to set up monthly, quarterly
(March, June, September and December) or semiannual (June and December)
withdrawals from their PaineWebber Mutual Fund accounts. Minimum balances and
withdrawals vary according to the class of shares:

. CLASS A AND CLASS C SHARES. Minimum value of Fund shares is $5,000; minimum
withdrawals of $100.

. CLASS B SHARES. Minimum value of Fund shares is $20,000; minimum monthly,
quarterly and semiannual withdrawals of $200, $400 and $600, respectively.

Withdrawals under the Systematic Withdrawal Plan are not subject to a
contingent deferred sales charge. Investors may not withdraw more than 12% of
the value of the Fund account when the investor signed up for the Plan (for
Class B shares, annually; for Class A and Class C shares, during the first
year under the Plan). Shareholders who elect to receive dividends or other
distributions in cash may not participate in the Plan.

INDIVIDUAL RETIREMENT ACCOUNTS

Self-Directed IRAs are available through PaineWebber in which purchases of
PaineWebber funds and other investments may be made. Investors considering
establishing an IRA should review applicable tax laws and should consult their
tax advisers.

TRANSFER OF ACCOUNTS

If investors holding shares of a Fund in a PaineWebber brokerage account
transfer their brokerage accounts to another firm, the Fund shares will be
moved to an account with the Transfer Agent. However, if the other firm has
entered into a selected dealer agreement with Mitchell Hutchins relating to
the Fund, the shareholder may be able to hold Fund shares in an account with
the other firm.
- -------------------------------------------------------------------------------

Management
- -------------------------------------------------------------------------------
Each Fund is governed by a board of trustees, which oversees the Fund's
operations. Each board has appointed Mitchell Hutchins as investment adviser
and administrator responsible for the Fund's operations (subject to the
authority of its board). Mitchell Hutchins has appointed PIMCO as investment
sub-adviser for Low Duration Income Fund.

Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, is the asset management subsidiary of PaineWebber Incorporated, which
is wholly owned by Paine Webber Group Inc., a publicly owned financial
services holding company. On February 28, 1997, Mitchell Hutchins was adviser
or sub-adviser of 30 investment companies with 65 separate portfolios and
aggregate assets of approximately $33.3 billion.

PIMCO is located at 840 Newport Center Drive, Suite 360, Newport Beach,
California 92660. PIMCO is a subsidiary of PIMCO Advisors L.P., a publicly

Prospectus Page 40
<PAGE>

held investment advisory firm. As of February 28, 1997, PIMCO had
approximately $ billion in assets under management and was adviser or sub-
adviser of investment companies with portfolios and aggregate assets of
approximately $ billion.

The boards have determined that brokerage transactions for the Funds may be
conducted through PaineWebber or its affiliates in accordance with procedures
adopted by each board.

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

As investment adviser and administrator, Mitchell Hutchins supervises all
aspects of each Fund's operations (including the activities of PIMCO, as sub-
adviser for Low Duration Income Fund), and Mitchell Hutchins makes and
implements all investment decisions for each Fund other than Low Duration
Income Fund. PIMCO makes and implements all investment decisions for that
Fund.

Nirmal Singh and Craig M. Varrelman, CFA, have been responsible for the day-
to-day management of U.S. Government Income Fund's portfolio and for the U.S.
government and investment grade securities sector of Strategic Income Fund
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 with an expertise in U.S. government securities.

James F. Keegan and Julieanna Berry are responsible for the day-to-day
management of Investment Grade Income Fund's portfolio, and Mr. Keegan shares
responsibility for the day to day management of the U.S. government and
investment grade securities sector of Strategic Income Fund. 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 has held her fund
responsibilities since June 1995. Mrs. Berry is a vice president of Mitchell
Hutchins, where she has been employed as a portfolio manager since 1989.

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.

Dennis L. McCauley, managing director and chief investment officer of fixed
income investments of Mitchell Hutchins, has been Strategic Income Fund's
allocation manager since March 1995. Mr. McCauley has been employed by
Mitchell Hutchins since December 1994 and is responsible for overseeing all
active fixed income investments, including domestic and global taxable and
tax-exempt mutual funds. Prior to joining Mitchell Hutchins, Mr. McCauley
worked for IBM Corporation, where he was director of fixed income investments
responsible for developing and managing investment strategy for all fixed
income and cash management investments of IBM's pension fund and self-insured
medical funds. Mr. McCauley has also served as vice president of IBM Credit
Corporation's mutual funds and as a member of the retirement fund investment
committee.

Thomas J. Libassi, a senior vice president of Mitchell Hutchins, has been
responsible for the day-to-day management of High Income Fund's portfolio
since May 1994. Mr. Libassi also has been the sector manager responsible for
the day-to-day management of Strategic Income Fund's U.S. high yield, high
risk securities since that date. 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, high risk bonds.

Stuart Waugh, a managing director of Mitchell Hutchins responsible for global
fixed income and currency trading, is the sector manager responsible for the
day-to-day management of Strategic Income Fund's foreign and emerging market
bonds. Mr. Waugh has been employed by Mitchell Hutchins since 1984.

Other members of Mitchell Hutchins' fixed income and equity investments groups
provide input on market outlook, interest rate forecasts, investment research
and

Prospectus Page 41
<PAGE>

other considerations pertaining to each Fund's investments.

MANAGEMENT FEES & OTHER EXPENSES

Each Fund pays Mitchell Hutchins a monthly fee for its services. For the most
recent fiscal year, Mitchell Hutchins received a monthly fee for these
services at an annual rate of 0.75% of the Fund's average daily net assets for
Strategic Income Fund and at an annual rate of 0.50% of average daily net
assets for each other Fund. Mitchell Hutchins (not the Fund) pays PIMCO a
monthly fee for its services as sub-adviser for Low Duration Fund at an annual
rate of 0.25% of that 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.

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
distribution plans for Class A, Class B 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.

. Monthly distribution fees at the annual rate of 0.75% and 0.50% of the
average daily net assets of Class B shares and Class C Shares, respectively.

Under the Plans, Mitchell Hutchins primarily uses the service fees 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 then compensates its investment executives for
shareholder servicing that they perform and offsets its own expenses in
servicing and maintaining shareholder accounts.

Mitchell Hutchins uses the distribution fees under the Class B and Class C
Plans to:

. Offset the commissions it pays to PaineWebber for selling each Fund's Class
B and Class C shares, respectively.

. Offset each Fund's marketing costs attributable to such classes, such as
preparation, printing and distribution of sales literature, advertising and
prospectuses to prospective investors and related overhead expenses, such as
employee salaries and bonuses.

PaineWebber compensates investment executives when Class B and Class C shares
are sold, as well as on an ongoing basis. Mitchell Hutchins receives no
special compensation from either Fund or investors at the time of sale of
Class B or C shares.

Mitchell Hutchins receives the proceeds of the initial sales charge paid when
Class A shares are bought and of the contingent deferred sales charge paid
upon sales of shares. These proceeds may be used to cover distribution
expenses.

The Plans and the related distribution contracts for each class of shares
("Distribution Contracts") specify that each Fund must pay service and
distribution fees to Mitchell Hutchins for its activities, not as
reimbursement for specific expenses incurred. Therefore, even if Mitchell
Hutchins' expenses exceed the service or distribution fees it receives, the
Funds will not be obligated to pay more than those fees. On the other hand, if
Mitchell Hutchins' expenses are less than such fees, it will retain its full
fees and realize a profit. Expenses in excess of service and distribution fees
received or accrued through the termination date of any Plan will be Mitchell
Hutchins' sole responsibility and not that of the Funds. Annually, the board
of each Fund reviews each Plan and Mitchell Hutchins' corresponding expenses
for each class separately from the Plans and expenses of the other classes.

Prospectus Page 42
<PAGE>

Determining the Shares' Net Asset Value
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

Dividends & Taxes
- -------------------------------------------------------------------------------
----------

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 New York
Stock Exchange (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 market quotations are not readily
available, assets are valued at fair value as determined in good faith by or
under the direction of its board. The amortized cost method of valuation
generally is used to value debt obligations with 60 days or less remaining to
maturity, unless the board determines that this does not represent fair value.
Investments 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 high yield, high risk bonds, thinly
traded securities and foreign securities in which High Income Fund, Investment
Grade Income Fund and Strategic Income Fund may invest, because there is less
reliable, objective data available.
DIVIDENDS

Dividends from Strategic Income Fund's net investment income are declared and
paid monthly. Dividends from each of the other four each Fund's net investment
income are declared daily and paid monthly. High Income Fund and Strategic
Income Fund may, but are not required to, distribute with any dividend all or
some of any net realized foreign currency gains.

Substantially all of each Fund's net capital gain, net short-term capital
gain, and, for High Income Fund and Strategic Income Fund, undistributed net
realized foreign currency gains, if any, are distributed at least annually.
Each Fund may make additional distributions if necessary to avoid income or
excise taxes. While a Fund will not declare any distribution in excess of the
amount of its net investment income and net realized foreign currency gains
available at the time of declaration, it is possible that foreign currency
losses sustained after that time could convert a portion of such a
distribution to a non-taxable return of capital.

Dividends and other distributions paid on each class of a Fund's shares 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 Class B and Class C shares have higher expenses resulting from
their distribution fees. For the same reason, dividends on a Fund's Class B
shares are expected to be lower than those on its Class C shares. Dividends on
each class might be affected differently by the allocation of other class-
specific expenses. See "General Information."

With respect to the four Funds that pay daily dividends, shares purchased
through PaineWebber investment executives and correspondent firms begin
earning dividends on the Business Day following the date payment for the
shares is due; shares purchased through the Transfer Agent begin earning
dividends on the Business Day following its receipt of payment for the shares.
Shares acquired through an exchange begin earning dividends on the Business
Day following the day on which the exchange is effected.

A Fund's 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 by check or credited to the shareholder's PaineWebber account, should
contact their investment executive at PaineWebber or one of its correspondent
firms or complete the appropriate section of the account application.

Prospectus Page 43
<PAGE>

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PaineWebberU.S. Government Income Fund Low Duration U.S. Government Income Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund
- -------------------------------------------------------------------------------

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

TAXES

Each Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code so that it will not have to
pay federal income tax on the part of its taxable income (generally consisting
of net investment income, net short-term capital gain and certain net foreign
currency gains) and net long-term capital gain that it distributes to its
shareholders. Under certain circumstances, these requirements may limit
Strategic Income Fund's ability to reallocate its assets among broad markets.

Dividends from a Fund's taxable income (whether paid in cash or shares)
generally are taxable to its shareholders as ordinary income. Distributions of
a Fund's net long-term capital gain (whether paid in cash or 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 distributions from the
Funds.

YEAR-END TAX REPORTING

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 and any portion of those dividends that qualifies for special
treatment.

WITHHOLDING REQUIREMENTS

Each Fund must withhold 31% of all dividends, capital gain distributions and
redemption proceeds payable to individuals and certain other non-corporate
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.

TAXES ON THE SALE OR EXCHANGE OF FUND SHARES

A sale (redemption) of Fund shares may result in a taxable gain or loss. This
depends on whether the shareholders receive more or less than their adjusted
basis for the shares (which normally includes any initial sales charge paid on
Class A shares). An exchange of a Fund's shares for shares of another
PaineWebber mutual fund generally will have similar tax consequences. In
addition, if a Fund's shares are bought within 30 days before or after selling
other shares of the Fund (regardless of class) at a loss, all or part of that
loss will not be deductible and will increase the basis of the newly purchased
shares.

SPECIAL TAX RULES FOR CLASS A SHAREHOLDERS

Special tax rules apply when a shareholder sells or exchanges Class A shares
within 90 days of purchase and subsequently buys 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 sale or exchange of the original Class A shares would be increased, or any
loss would be decreased, by the amount of the sales charge paid when those
shares were bought, and that amount would increase the basis of the
PaineWebber mutual fund shares subsequently acquired.

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

* * * *

Because the foregoing only summarizes some of the important federal income tax
considerations affecting the Funds and their shareholders, please see the
further discussion in the Statement of Additional Information. Prospective
shareholders are urged to consult their tax advisors.
ORGANIZATION

Prospectus Page 44
<PAGE>

December 3, 1992, as a business trust under the laws of the Commonwealth of
Massachusetts. The trustees of PaineWebber Managed Investments Trust and
PaineWebber Securities Trust (each, a "Trust") have authority to issue an
unlimited number of shares of beneficial interest of separate series, with a
par value of $.001 per share.

The shares of each Fund are divided into four classes, designated Class A,
Class B, Class C and Class Y shares. Each class represents an identical
interest in the respective Fund's investment portfolio and has the same
rights, privileges and preferences. However, each class may differ with
respect to sales charges, if any, distribution and/or service fees, if any,
other expenses allocable exclusively to each class, voting rights on matters
exclusively affecting that class, and its exchange privilege. The different
sales charges and other expenses applicable to the different classes of shares
of the Funds will affect the performance of those classes.

Each share of a Fund is entitled to participate equally in dividends, other
distributions and the proceeds of any liquidation of that Fund. However, due
to the differing expenses of the classes, dividends on Class B and Class C
shares are likely to be lower than for Class A shares and are likely to be
higher on Class Y shares than for any other class of shares.

Class Y shares, which are offered only to limited groups of investors, are
subject to neither an initial or contingent deferred sales charge nor ongoing
service or distribution fees. More information concerning Class Y shares may
be obtained from an investment executive at PaineWebber or one of its
correspondent firms or by calling toll-free 1-800-647-1568.

Although each Fund is offering only its own shares, it is possible that a Fund
could become liable for misstatements in the Prospectus about the other Fund.
The boards have considered this factor in approving the use of a single,
combined Prospectus.

VOTING RIGHTS

Shareholders of each Fund are entitled to one vote for each full share held
and fractional votes for fractional shares held. Voting rights are not
cumulative and, as a result, the holders of more than 50% of all the shares of
the Trusts may elect all of their board members. The shares of a Fund will be
voted together except that only the shareholders of a particular class of a
Fund may vote on matters affecting only that class, such as the terms of a
Plan as it relates to a class. The shares of each series of a Trust will be
voted separately, except when an aggregate vote of all the securities is
required by law.

SHAREHOLDER MEETINGS

The Funds do not hold annual meetings.

Shareholders of record of no less than two-thirds of the outstanding shares of
either Trust may remove a board member through a declaration in writing or by
vote cast in person or by proxy at a meeting called for that purpose. A
meeting will be called to vote on the removal of a board member at the written
request of holders of 10% of a Trust's outstanding shares.

REPORTS TO SHAREHOLDERS

Each Fund sends its shareholders audited annual and unaudited semiannual
reports, each of which includes a list of the investment securities held by
the Fund as of the end of the period covered by the report. The Statement of
Additional Information, which is incorporated herein by reference, is
available to shareholders upon request.

CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND AGENT

State Street Bank and Trust Company, located at One Heritage Drive, North
Quincy, Massachusetts 02171, serves as the Funds' custodian and recordkeeping
agent. PFPC Inc., a subsidiary of PNC Bank, N.A., serves as the Funds'
transfer and dividend disbursing agent. It is located at 400 Bellevue Parkway,
Wilmington, DE 19809.

Prospectus Page 45
<PAGE>

APPENDIX
RATINGS

DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS

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

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

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

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

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

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

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

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

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

Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security

A-1
<PAGE>

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 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 nor rate a
particular type of obligation as matter of policy.

DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS

PRIME-1. Issues 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-2
<PAGE>

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

PRIME-3. Issuers assigned this rating have an acceptable capacity for
repayment of short-term promissory obligations. The effect of industry
characteristics and market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt
protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.

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

DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS

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

A-3
<PAGE>

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

.PAINEWEBBER BOND FUNDS .PAINEWEBBER STOCK FUNDS

High Income Fund Capital Appreciation Fund
Investment Grade Income Financial Services Growth Fund
Fund Growth Fund
Low Duration U.S. Growth and Income Fund
Government Income Fund Small Cap Fund
Strategic Income Fund Utility Income Fund
U.S. Government Income
Fund

. PAINEWEBBER TAX-FREE BOND .PAINEWEBBER GLOBAL FUNDS
FUNDS

Asia Pacific Growth Fund
California Tax-Free Emerging Markets Equity Fund
Income Fund Global Equity Fund
Municipal High Income Global Income Fund
Fund

National Tax-Free
Income Fund
New York Tax-Free
Income Fund .PAINEWEBBER MONEY MARKET
FUND

. PAINEWEBBER
ASSETALLOCATION FUNDS

Balanced Fund
Tactical Allocation
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. Please read it carefully before
investing. It is important you have all the information you need to make a
sound investment decision.
<PAGE>

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

STATEMENT OF ADDITIONAL INFORMATION

The five funds named above (each a "Fund" and, collectively, "Funds") are
series of professionally managed, open-end management investment companies,
each organized as a Massachusetts business trust. Each Fund seeks generally to
obtain the highest level of income that is consistent with its investment
strategy. PaineWebber Strategic Income Fund ("Strategic Income Fund"), a non-
diversified series of PaineWebber Securities Trust ("Securities Trust" or
"Trust"), strategically allocates its investments among three bond market
sectors: U.S. government and investment grade corporate bonds; U.S. high
yield, high risk corporate bonds; and foreign and emerging market bonds. The
remaining four Funds are diversified series of PaineWebber Managed Investments
Trust ("Managed Investments Trust" or "Trust"). PaineWebber U.S. Government
Income Fund ("U.S. Government Income Fund") invests primarily in U.S.
government bonds, especially those backed by mortgages or other assets.
PaineWebber Low Duration U.S. Government Income Fund ("Low Duration Income
Fund") also invests primarily in U.S. government bonds, especially those
backed by mortgages or other assets, but it limits the expected life
(duration) of its portfolio to from 1 to 3 years. PaineWebber Investment Grade
Income Fund ("Investment Grade Income Fund") invests primarily in a
diversified range of investment grade bonds, including U.S. government and
U.S. and foreign corporate bonds. PaineWebber High Income Fund ("High Income
Fund") invests primarily in a diversified range of high yield, high risk, U.S.
and foreign corporate bonds.

Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly
owned subsidiary of PaineWebber Incorporated ("PaineWebber"), serves as
investment adviser, administrator and distributor for each Fund. As
distributor, Mitchell Hutchins has appointed PaineWebber as the exclusive
dealer for the sale of Fund shares. Pacific Investment Management Company
("PIMCO") serves as investment sub-adviser for Low Duration Income Fund.

This Statement of Additional Information is not a prospectus and relates
only to the Funds' Class A, B and C shares. It should be read only in
conjunction with the Funds' current Prospectus for those shares, dated April
1, 1997. A copy of the Prospectus may be obtained by calling any PaineWebber
investment executive or correspondent firm, or by calling toll-free 1-800-647-
1568. This Statement of Additional Information is dated April 1, 1997.
<PAGE>

INVESTMENT POLICIES AND RESTRICTIONS

The following supplements the information contained in the Prospectus
concerning the investment policies and limitations of the Funds. Except as
otherwise indicated in the Prospectus or the Statement of Additional
Information, there are no policy limitations on a Fund's ability to use the
investments or techniques discussed in these documents.

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

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

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

Debt securities rated Ba or lower by Moody's, BB or lower by S&P, comparably
rated by another NRSRO or determined by Mitchell Hutchins to be of comparable
quality are below investment grade, are deemed by those agencies to be
predominantly speculative with respect to

2
<PAGE>

the issuer's capacity to pay interest and repay principal and may involve major
risk exposure to adverse conditions. Lower rated debt securities generally
offer a higher current yield than that available for investment grade issues,
but they involve higher risks, in that they 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. During periods
of economic downturn or rising interest rates, highly leveraged issuers may
experience financial stress which could adversely affect their ability to make
payments of interest and principal 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 debt securities has expanded rapidly in recent
years, and its growth generally 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 defaults. There can be
no assurance that such declines will not recur. The market for lower rated debt
issues generally is thinner or 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 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.

ASSET-BACKED SECURITIES. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed in more
detail below. 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 may be guaranteed up to a certain amount and for a certain time
period by a letter of credit or pool insurance policy issued by a financial
institution unaffiliated with the issuer, or other credit enhancements may be
present.

MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent direct or
indirect participations in, or are secured by and payable from, mortgage loans
secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Multi-class pass-through
securities and collateralized mortgage obligations are collectively referred to
herein as CMOs. The U.S. government mortgage-backed securities in which the
Funds may invest include mortgage-backed securities issued or guaranteed as to
the payment of principal and interest (but not as to market value) by the
Government National Mortgage Association ("Ginnie Mae"), Fannie Mae (formerly,
the Federal National Mortgage Association) or the Federal Home Loan Mortgage
Corporation ("Freddie Mac"). Other mortgage-backed securities are issued by
private issuers, generally originators of and investors in mortgage loans,
including savings

3
<PAGE>

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. New types of mortgage-
backed securities are developed and marketed from time to time and, consistent
with its investment limitations, the Fund expects to invest in those new types
of mortgage-backed securities that Mitchell Hutchins or PIMCO believes may
assist a Fund in achieving its investment objective. Similarly, a Fund may
invest in mortgage-backed securities issued by new or existing governmental or
private issuers other than those identified herein.

Ginnie Mae Certificates. Ginnie Mae guarantees certain mortgage pass-through
certificates ("Ginnie Mae certificates") that are issued by Private Mortgage
Lenders and that represent ownership interests in individual pools of
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.

4
<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
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,

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rather than passed through to certificateholders on a current basis, until
other classes of the CMO are paid in full.

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

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. The other Funds are not subject to
any similar limitation.

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

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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.

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

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

Yields on pass-through securities are typically quoted by investment dealers
and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools
of fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of
a pool of mortgage-related securities. Conversely, in periods of rising
interest rates, the rate of prepayment tends to decrease, thereby lengthening
the actual average

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<PAGE>

life of the pool. However, these effects may not be present, or may differ in
degree, if the mortgage loans in the pools have adjustable interest rates or
other special payment terms, such as a prepayment charge. Actual prepayment
experience may cause the yield of mortgage-backed securities to differ from the
assumed average life yield. Reinvestment of prepayments may occur at lower
interest rates than the original investment, thus adversely affecting the yield
of a Fund.

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

ARMs also may be subject to a greater rate of prepayments in a declining
interest rate environment. For example, during a period of declining interest
rates, prepayments on ARMs could increase because the availability of fixed
mortgage loans at competitive interest rates may encourage mortgagors to "lock-
in" at a lower interest rate. Conversely, during a period of rising interest
rates, prepayments on ARMs might decrease. The rate of prepayments with respect
to ARMs has fluctuated in recent years.

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<PAGE>

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

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

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

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

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<PAGE>

approaches maturity. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition,
a convertible security generally will sell at a premium over its conversion
value determined by the extent to which investors place value on the right to
acquire the underlying common stock while holding a fixed income security.

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

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.

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<PAGE>

ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets (15%
for Low Duration Income Fund and Strategic Income Fund) in illiquid securities.
The term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which a Fund has valued the securities and
includes, among other things, purchased over-the-counter ("OTC") options,
repurchase agreements maturing in more than seven days and restricted
securities other than those Mitchell Hutchins or PIMCO has determined are
liquid pursuant to guidelines established by a Trust's board of trustees
(sometimes referred to as a "board"). The assets used as cover for OTC options
written by a Fund will be considered illiquid unless the OTC options are sold
to qualified dealers who agree that the Fund may repurchase any OTC option it
writes at a maximum price to be calculated by a formula set forth in the option
agreement. The cover for an OTC option written subject to this procedure would
be considered illiquid only to the extent that the maximum repurchase price
under the formula exceeds the intrinsic value of the option. Under current SEC
guidelines, interest only ("IO") and principal-only ("PO") classes of mortgage-
backed securities 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 or PIMCO has determined that they are liquid pursuant to guidelines
established by each Trust's board. Illiquid restricted securities may be sold
only in privately negotiated transactions or in public offerings with respect
to which a registration statement is in effect under the Securities Act of 1933
("1933 Act"). Where registration is required, a Fund may be obligated to pay
all or part of the registration expenses and a considerable period may elapse
between the time of the decision to sell and the time the Fund may be permitted
to sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.

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

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

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<PAGE>

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

ZERO COUPON, OID AND PIK SECURITIES. Federal tax law requires that a holder
of a security with original issue discount ("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 payment in kind ("PIK") securities may pay
interest in the form of additional securities rather than cash, that interest
must be included in a Fund's annual income.

To qualify for pass-through federal income tax treatment as regulated
investment companies, the Funds 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."
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.

Certain zero coupon securities 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 staff of the Securities and Exchange
Commission ("SEC") 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. This technique is frequently used with U.S. Treasury
bonds to create CATS (Certificate of Accrual Treasury Securities), TIGRs
(Treasury Income Growth Receipts) and similar securities. As long as the SEC
takes this position, CATS and 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 applicable to U.S. Government Income Fund and Low
Duration Income Fund.

MONEY MARKET INSTRUMENTS. Each Fund may hold up to 35% (100% for the
Strategic Income Fund) 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,
including cash denominated in foreign currencies (Strategic Income Fund), or
money market instruments, including instruments of foreign issuers (Strategic
Income Fund). Money market 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

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<PAGE>

and Strategic Income Fund), bank certificates of deposit, bankers' acceptances
and repurchase agreement secured by any of the foregoing. The money market
instruments 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.

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

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

REVERSE REPURCHASE AGREEMENTS. Each Fund may enter into reverse repurchase
agreements with banks and securities dealers. Such agreements involve the sale
of securities held by the Fund subject to the Fund's agreement to repurchase
the securities at an agreed-upon date and price reflecting a market rate of
interest. Such agreements are considered to be borrowings and may be entered
into only for temporary or emergency purposes. While a reverse repurchase
agreement is outstanding, a Fund's custodian segregates assets to cover the
amount of the Fund's obligations under the reverse repurchase agreement. See
"Investment Policies and Restrictions--Segregated Accounts."

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

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FOREIGN SECURITIES. Strategic Income Fund may invest without limit in
securities denominated in 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. 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. An investment in these Funds may
involve risks relating to political, social and economic developments abroad as
well as risks resulting from the differences between the regulations to which
U.S. and foreign issuers and markets are subject. These risks include
expropriation, confiscatory taxation, withholding taxes, political or social
instability or diplomatic developments. Moreover, individual foreign economies
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments positions. To the extent
these Funds invest in foreign securities, the securities may not be registered
with the SEC, nor the issuers thereof subject to its reporting requirements.
Accordingly, there may be less publicly available information concerning
foreign issuers of securities held by these Funds than is available concerning
U.S. companies. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards or to other regulatory
requirements comparable to those applicable to U.S. companies. Securities of
many foreign companies may be less liquid and their prices more volatile than
those of securities of comparable U.S. companies. Transactions in foreign
securities may be subject to less efficient settlement practices. Legal
remedies for defaults and disputes may have to be pursued in foreign courts,
whose procedures differ substantially from those of U.S. courts. Foreign
securities trading practices, including those involving securities settlement
where a Fund's assets may be released prior to receipt of payment, may expose
that Fund to increased risk in the event of a failed trade or the insolvency of
a foreign broker-dealer.

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

The costs attributable to foreign investing borne by High Income Fund or
Strategic Income Fund frequently are higher than those attributable to domestic
investing; this is particularly true with respect to emerging capital markets.
For example, the cost of maintaining custody of foreign securities exceeds
custodian costs for domestic securities, and transaction and settlement costs
of foreign investing also frequently are higher than those attributable to
domestic investing. Costs associated with the exchange of currencies also make
foreign investing more expensive than domestic investing. Investment income on
certain foreign securities may be subject to foreign withholding or other
government taxes that could reduce the return of these securities. Tax treaties
between the United States and foreign countries, however, may reduce or
eliminate the amount of foreign tax to which the Funds would be subject.

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<PAGE>

All or a substantial portion of High Income Fund's or Strategic Income Fund's
investments in foreign and emerging market securities may be rated below
investment grade or may be unrated securities with credit characteristics that
are comparable to securities that are rated below investment grade. Strategic
Income Fund may invest without limit in securities of issuers in emerging
market countries and in non-U.S. dollar-denominated fixed income securities,
including securities denominated in the local currencies of emerging market
countries.

SPECIAL CHARACTERISTICS OF FOREIGN AND EMERGING MARKET SECURITIES

EMERGING MARKET SECURITIES. Many of the foreign and emerging market
securities are not registered with the SEC, nor are the issuers thereof subject
to SEC reporting requirements. Accordingly, there may be less publicly
available information concerning foreign issuers of securities held by a Fund
than is available concerning U.S. companies. Disclosure and regulatory
standards in many respects are less stringent in emerging market countries than
in the U.S. and other major markets. There also may be a lower level of
monitoring and regulation of emerging markets and the activities of investors
in such markets, and enforcement of existing regulations may be extremely
limited. Foreign companies and, in particular, companies in smaller and
emerging capital markets are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory requirements
comparable to those applicable to U.S. companies. A Fund's net investment
income and capital gains from its foreign investment activities may be subject
to non-U.S. withholding taxes.

Foreign markets also have different clearance and settlement procedures, and
in certain markets there have been times when settlements have failed to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Delays in settlement could result in the temporary periods
when assets of a Fund are uninvested and no return is earned thereon. The
inability of a Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result either in losses to the Fund due to subsequent declines in the value of
such portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.

SOVEREIGN DEBT. Sovereign debt differs from debt obligations issued by
private entities in that, generally, remedies for defaults must be pursued in
the courts of the defaulting party. Legal recourse is therefore limited.
Political conditions, especially a sovereign entity's willingness to meet the
terms of its debt obligations, are of considerable significance. Also, there
can be no assurance that the holders of commercial bank loans to the same
sovereign entity may not contest payments to the holders of sovereign debt in
the event of default under commercial bank loan agreements.

A sovereign debtor's willingness or ability to pay interest and repay
principal in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's
policy toward principal international lenders and the political constraints to
which a sovereign debtor may be subject. A country whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international price of such commodities. Increased protectionism on the part of
a

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<PAGE>

country's trading partners, or political changes in those countries, could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local
government or agency. Another factor bearing on the ability of a country to
repay sovereign debt is the level of the country's international reserves.
Fluctuations in the level of these reserves can affect the amount of foreign
exchange readily available for external debt payments and, thus, could have a
bearing on the capacity of the country to make payments on its sovereign debt.

To the extent that a country has a current account deficit (generally when
exports of merchandise and services are less than the country's imports of
merchandise and services plus net transfers (e.g., gifts of currency and goods)
to foreigners), it will need to depend on loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and inflows of foreign investment. The access of a country
to these forms of external funding may not be certain, and a withdrawal of
external funding could adversely affect the capacity of a government to make
payments on its obligations. In addition, the cost of servicing debt
obligations can be affected by a change in international interest rates since
the majority of these obligations carry interest rates that are adjusted
periodically based upon international rates.

With respect to sovereign debt of emerging market issuers, investors should
be aware that certain emerging market countries are among the largest debtors
to commercial banks and foreign governments. At times certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt; such moratoria are currently in effect in certain Latin American
countries.

Certain emerging market countries have experienced difficulty in servicing
their sovereign debt on a timely basis which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit agreements
or converting outstanding principal and unpaid interest to Brady Bonds
(discussed below), and obtaining new credit to finance interest payments.
Holders of sovereign debt, including the Fund, may be requested to participate
in the rescheduling of such debt and to extend further loans to sovereign
debtors. The interests of holders of sovereign debt could be adversely affected
in the course of restructuring arrangements or by certain other factors
referred to below. Furthermore, some of the participants in the secondary
market for sovereign debt may also be directly involved in negotiating the
terms of these arrangements and may therefor have access to information not
available to other market participants. Obligations arising from past
restructuring agreements may affect the economic performance and political and
social stability of certain issuers of sovereign debt. There is no bankruptcy
proceeding by which sovereign debt on which a sovereign has defaulted may be
collected in whole or in part.

Foreign investment in certain sovereign debt is restricted or controlled to
varying degrees. These restrictions or controls may at times limit or preclude
foreign investment in such sovereign debt and increase the costs and expenses
of a Fund. Certain countries in which a Fund may invest require governmental
approval prior to investments by foreign persons, limit the amount of
investment by foreign persons in a particular issuer, limit the investment by
foreign persons only to a specific class of securities of an issuer that may
have less advantageous rights than the classes

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<PAGE>

available for purchase by domiciliaries of the countries or impose additional
taxes on foreign investors. Certain issuers may require governmental approval
for the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in a
country's balance of payments the country could impose temporary restrictions
on foreign capital remittances. A Fund could be adversely affected by delays
in, or a refusal to grant, any required governmental approval for repatriation
of capital, as well as by the application to the Fund of any restrictions on
investments. Investing in local markets may require a Fund to adopt special
procedures, seek local government approvals or take other actions, each of
which may involve additional costs to the Fund.

BRADY BONDS. Brady Bonds are sovereign debt securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness. In
restructuring its external debt under the Brady Plan framework, a debtor nation
negotiates with its existing bank lenders as well as multilateral institutions
such as the IMF. The Brady Plan framework, as it has developed, contemplates
the exchange of commercial bank debt for newly issued Brady Bonds. Brady Bonds
may also be issued in respect of new money being advanced by existing lenders
in connection with the debt restructuring. The World Bank and the IMF support
the restructuring by providing funds pursuant to loan agreements or other
arrangements which enable the debtor nation to collateralize the new Brady
Bonds or to repurchase outstanding bank debt at a discount.

Brady Plan debt restructurings totalling more than $80 billion have been
implemented to date in Mexico, Costa Rica, Venezuela, Uruguay, Nigeria,
Argentina and the Philippines and, in addition, Brazil has announced intentions
to issue Brady Bonds. There can be no assurance that the circumstances
regarding the issuance of Brady Bonds by these countries will not change.
Investors should recognize that Brady Bonds have been issued only recently, and
accordingly do not have a long payment history. Agreements implemented under
the Brady Plan to date are designed to achieve debt and debt-service reduction
through specific options negotiated by a debtor nation with its creditors. As a
result, the financial packages offered by each country differ. The types of
options have included the exchange of outstanding commercial bank debt for
bonds issued at 100% of face value of such debt, which carry a below-market
stated rate of interest (generally known as par bonds), bonds issued at a
discount from the face value of such debt (generally known as discount bonds),
bonds bearing an interest rate which increases over time and bonds issued in
exchange for the advancement of new money by existing lenders. Regardless of
the stated face amount and stated interest rate of the various types of Brady
Bonds, a Fund will purchase Brady Bonds in secondary markets, as described
below, in which the price and yield to the investor reflect market conditions
at the time of purchase.

Certain Brady Bonds have been collateralized as to principal due at maturity
by U.S. Treasury zero coupon bonds with maturities equal to the final maturity
of such Brady Bonds. Collateral purchases are financed by the IMF, the World
Bank and the debtor nations' reserves. In the event of a default with respect
to collateralized Brady Bonds as a result of which the payment obligations of
the issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity

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<PAGE>

of the defaulted Brady Bonds, which will continue to be outstanding, at which
time the face amount of the collateral will equal the principal payments which
would have then been due on the Brady Bonds in the normal course. In addition,
interest payments on certain types of Brady Bonds may be collateralized by cash
or high grade securities in amounts that typically represent between 12 and 18
months of interest accruals on these instruments with the balance of the
interest accruals being uncollateralized. Brady Bonds are often viewed as
having several valuation components: (1) the collateralized repayment of
principal, if any, at final maturity, (2) the collateralized interest payments,
if any, (3) the uncollateralized interest payments and (4) any uncollateralized
repayment of principal at maturity (these uncollateralized amounts constitute
the "residual risk"). In light of the residual risk of Brady Bonds and, among
other factors, the history of defaults with respect to commercial bank loans by
public and private entities of countries issuing Brady Bonds, investments in
Brady Bonds are to be viewed as speculative. A Fund may purchase Brady Bonds
with no or limited collateralization, and will be relying for payment of
interest and (except in the case of principal collateralized Brady Bonds)
repayment of principal primarily on the willingness and ability of the foreign
government to make payment in accordance with the terms of the Brady Bonds.
Brady Bonds issued to date are purchased and sold in secondary markets through
U.S. securities dealers and other financial institutions and are generally
maintained through European transnational securities depositories.

STRUCTURED FOREIGN INVESTMENTS. This term refers to interests in U.S. and
foreign entities organized and operated solely for the purpose of securitizing
or restructuring the investment characteristics of foreign securities. This
type of securitization or restructuring involves the deposit with or purchase
by a U.S. or foreign entity, such as a corporation or trust, of specified
instruments (such as commercial bank loans or Brady Bonds) and the issuance by
that entity of one or more classes of securities backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued structured foreign
investments to create securities with different investment characteristics such
as varying maturities, payment priorities and interest rate provisions, and the
extent of the payments made with respect to structured foreign investments is
dependent on the extent of the cash flow on the underlying instruments.

Structured foreign investments frequently involve no credit enhancement.
Accordingly, their credit risk generally will be equivalent to that of the
underlying instruments. In addition, classes of structured foreign investments
may be subordinated to the right of payment of another class. Subordinated
structured foreign investments typically have higher yields and present greater
risks that unsubordinated structured foreign investments. Structured foreign
investments are typically sold in private placement transactions, and there
currently is no active trading market for structured foreign investments.

SELECTION OF SECURITIES--STRATEGIC INCOME FUND. In selecting U.S. government
and investment grade securities for Strategic Income Fund's portfolio, Mitchell
Hutchins will consider factors such as the general level of interest rates,
changes in the perceived creditworthiness of the issuers, the prepayment
outlook for the mortgage market and changes in general economic conditions and
business conditions affecting the issuers and their respective industries.

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<PAGE>

In selecting U.S. high yield securities for Strategic Income Fund's
portfolio, Mitchell Hutchins seeks to identify issuers and industries that
Mitchell Hutchins believes are more likely to experience stable or improving
financial conditions. Many corporations are in the process of strengthening, or
have recently improved, their financial positions through cost-cutting,
restructuring or refinancing with lower cost debt. Mitchell Hutchins expects
that, at times when the U.S. economy is improving, these factors and others may
lead many issuers to experience financial improvement and possible credit
upgrades. Mitchell Hutchins seeks to identify these issuers through detailed
credit research. Mitchell Hutchins' analysis may include consideration of
general industry trends, the issuer's experience and managerial strength,
changing financial conditions, borrowing requirements or debt maturity
schedules, the issuer's responsiveness to changes in business conditions and
interest rates, and other terms and conditions. Mitchell Hutchins may also
consider relative values based on anticipated cash flow, interest or dividend
coverage, asset coverage and earnings prospects.

Mitchell Hutchins selectively invests Strategic Income Fund's assets
allocated to foreign and emerging market securities in securities of issuers in
countries where the combination of income market yields, the price appreciation
potential of fixed income securities and, with respect to non-U.S. dollar-
denominated securities, currency exchange rate movements present opportunities
for high current income and, secondarily, capital appreciation. Determinations
as to the foreign markets in which the Fund invests are based on an evaluation
of total debt levels, currency reserve levels, net exports/imports, overall
economic growth, level of inflation, currency fluctuation, political and social
climate and payment history of the country in which the issuer is located.
Particular securities are selected based upon credit risk analysis of potential
issuers, the characteristics of the security and interest rate sensitivity of
the various issues by a single issuer, analysis of volatility and liquidity of
these particular instruments and the tax implications to the Fund of various
instruments.

LENDING OF PORTFOLIO SECURITIES. As indicated in the Prospectus, each Fund is
authorized to lend up to 33 1/3% of its total assets to broker-dealers or
institutional investors that Mitchell Hutchins deems qualified, but only when
the borrower maintains acceptable collateral with the Fund's custodian in an
amount, marked to market daily, at least equal to the market value of the
securities loaned, plus accrued interest and dividends. Acceptable collateral
is limited to cash, U.S. government securities and irrevocable letters of
credit that meet certain guidelines established by Mitchell Hutchins. In
determining whether to lend securities to a particular broker-dealer or
institutional investor, Mitchell Hutchins will consider, and during the period
of the loan will monitor, all relevant facts and circumstances, including the
creditworthiness of the borrower. Each Fund will retain authority to terminate
any loan at any time. A Fund may pay reasonable administrative and custodial
fees in connection with a loan and may pay a negotiated portion of the interest
earned on the cash held as collateral to the borrower or placing broker. A Fund
will receive reasonable interest on the loan or a flat fee from the borrower
and amounts equivalent to any dividends, interest or other distributions on the
securities loaned. A Fund will regain record ownership of loaned securities to
exercise beneficial rights, such as voting and subscription rights, when
regaining such rights is considered to be in the Fund's interest.

LOAN PARTICIPATIONS AND ASSIGNMENTS. Investment Grade Income Fund and High
Income Fund each may invest up to 5% of its net assets and Strategic Income
Fund may invest without

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<PAGE>

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

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

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

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

FUNDAMENTAL INVESTMENT LIMITATIONS. The following fundamental investment
limitations cannot be changed for a Fund without the affirmative vote of the
lesser of (1) more than 50% of the outstanding shares of the Fund or (2) 67% or
more of the shares of the Fund present at a shareholders' meeting if more than
50% of the outstanding shares are represented at the meeting in person or by
proxy. If a percentage restriction is adhered to at the time of an investment
or

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<PAGE>

transaction, later changes in percentage resulting from a change in values of
portfolio securities or the amount of total assets will not be considered a
violation of any of the following limitations:

Each Fund will not:

(1) purchase any security if, as a result of that purchase, 25% or more of
the Fund's total assets would be invested in securities of issuers
having their principal business activities in the same industry, except
that this limitation does not apply to securities issued or guaranteed
by the U.S. government, its agencies or instrumentalities or to
municipal securities, and except that U.S. Government Income Fund and
Low Duration Income Fund, under normal circumstances, each will invest
25% or more of its total assets in mortgage- and asset-backed
securities, which (whether or not issued or guaranteed by an agency or
instrumentality of the U.S. government) shall be considered a single
industry for purposes of this limitation.

(2) issue senior securities or borrow money, except as permitted under the
Investment Company Act of 1940 ("1940 Act") and then not in excess of
33 1/3% of the Fund's total assets (including the amount of the senior
securities issued but reduced by any liabilities not constituting
senior securities) at the time of the issuance or borrowing, except
that the Fund may borrow up to an additional 5% of its total assets
(not including the amount borrowed) for temporary or emergency
purposes.

(3) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction,
the acquisition of bonds, debentures, other debt securities or
instruments, or participations or other interests therein and
investments in government obligations, commercial paper, certificates
of deposit, banker's acceptances or similar instruments will not be
considered the making of a loan.

(4) engage in the business of underwriting securities of other issuers,
except to the extent that the Fund might be considered an underwriter
under the federal securities laws in connection with its disposition of
portfolio securities.

(5) purchase or sell real estate, except that investments in securities of
issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by
interests in real estate are not subject to this limitation, and except
that the Fund may exercise rights under agreements relating to such
securities, including the right to enforce security interests and to
hold real estate acquired by reason of such enforcement until that real
estate can be liquidated in an orderly manner.

(6) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the Fund may purchase, sell
or enter into financial options and futures, forward and spot currency
contracts, swap transactions and other financial contracts or
derivative instruments.

In addition, U.S. Government Income Fund, Low Duration Income Fund,
Investment Grade Income Fund and High Income Fund will not:

(7) purchase securities of any one issuer if, as a result, more than 5% of
the Fund's total assets would be invested in securities of that issuer
or the Fund would own or hold more than 10% of the outstanding voting
securities of that issuer, except that up to 25% of the Fund's total
assets may be invested without regard to this limitation, and except
that this limitation

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<PAGE>

does not apply to securities issued or guaranteed by the U.S.
government, its agencies and instrumentalities or to securities issued
by other investment companies.

The following interpretation applies to, but is not a part of, this
fundamental restriction: Mortgage- and asset-backed securities will not
be considered to have been issued by the same issuer by reason of the
securities having the same sponsor, and mortgage- and asset-backed
securities issued by a finance or other special purpose subsidiary that
are not guaranteed by the parent company will be considered to be issued
by a separate issuer from the parent company.

NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions may be
changed by each board without shareholder approval.

Each Fund will not:

(1) invest more than 10% (15% for Low Duration Income Fund and Strategic
Income Fund) of its net assets in illiquid securities, a term that
means securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which the
Fund has valued the securities and includes, among other things,
repurchase agreements maturing in more than seven days.

(2) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the Fund may
make margin deposits in connection with its use of financial options
and futures, forward and spot currency contracts, swap transactions and
other financial contracts or derivative instruments.

(3) engage in short sales of securities or maintain a short position,
except that the Fund may (a) sell short "against the box" and (b)
maintain short positions in connection with its use of financial
options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative instruments.

(4) purchase securities of other investment companies, except to the extent
permitted by the 1940 Act and except that this limitation does not
apply to securities received or acquired as dividends, through offers
of exchange, or as a result of reorganization, consolidation, or
merger.

(5) purchase portfolio securities while borrowings in excess of 5% of its
total assets are outstanding.

HEDGING AND OTHER STRATEGIES USING DERIVATIVE CONTRACTS

GENERAL DESCRIPTION OF HEDGING STRATEGIES. As discussed in the Prospectus,
Mitchell Hutchins or PIMCO may use a variety of financial instruments
("Derivative Instruments"), including certain options, futures contracts
(sometimes referred to as "futures") and options on futures contracts to
attempt to hedge a Fund's portfolio and to enhance income or realize gains.
Mitchell Hutchins or PIMCO also may attempt to hedge a Fund's portfolio through
the use of interest rate protection transactions, and High Income Fund and
Strategic Income Fund may use forward currency contracts for hedging purposes.
A Fund may enter into transactions using one or more types of Derivative
Instruments under which the full value of its portfolio is at risk. Under
normal

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<PAGE>

circumstances, however, a Fund's use of these instruments will place at risk a
much smaller portion of its assets. The particular Derivative Instruments used
by the Funds are described below.

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 option
term. The writer of the put option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to buy the
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 a put, the exercise price of the
option on the future. The writer of an option, upon exercise, will assume a
short position in the case of a call and a long position in the case of a put.

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>

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

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

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

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

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

In addition to the products, strategies and risks described below and in the
Prospectus, Mitchell Hutchins and PIMCO expect to discover additional
opportunities in connection with options, futures contracts and other hedging
techniques. These new opportunities may become available as

24
<PAGE>

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

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

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

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

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

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

25
<PAGE>

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

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

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

The value of an option position will reflect, among other things, the current
market value of the underlying investment, the time remaining until expiration,
the relationship of the exercise price to the market price of the underlying
investment, the historical price volatility of the underlying investment and
general market conditions. Options normally have expiration dates of up to nine
months. Generally, OTC options on debt securities are European-style options.
This means that the option is only exercisable immediately prior to its
expiration. This is in contrast to American-style options, which are
exercisable at any time prior to the expiration date of the option. Options
that expire unexercised have no value.

A Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option it had
purchased

26
<PAGE>

by writing an identical put or call option; this is known as a closing sale
transaction. Closing transactions permit a Fund to realize profits or limit
losses on an option position prior to its exercise or expiration.

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

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

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

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

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

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

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

27
<PAGE>

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

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

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

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

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

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

28
<PAGE>

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

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

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

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

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

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

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

29
<PAGE>

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

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

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

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

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

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

FORWARD CURRENCY CONTRACTS. High Income Fund and Strategic Income Fund may
enter into forward currency contracts to purchase or sell foreign currencies
for a fixed amount of U.S. dollars or another foreign currency. Such
transactions may serve as long hedges--for example, a Fund may

30
<PAGE>

purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the Fund intends to acquire.
Forward currency transactions may also serve as short hedges--for example, a
Fund may sell a forward currency contract to lock in the U.S. dollar equivalent
of the proceeds from the anticipated sale of a security denominated in a
foreign currency.

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

The cost to a Fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and
the market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When the Fund enters into a forward currency contract, it relies on the contra
party to make or take delivery of the underlying currency at the maturity of
the contract. Failure by the contra party to do so would result in the loss of
any expected benefit of the transaction.

As is the case with futures contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the contra party. Thus, there can be no assurance
that the Fund will in fact be able to close out a forward currency contract at
a favorable price prior to maturity. In addition, in the event of insolvency of
the contra party, the Fund might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Fund would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in the securities or currencies
that are the subject of the hedge or to maintain cash or securities in a
segregated account.

The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the
forward currency contract has been established. Thus, a Fund might need to
purchase or sell foreign currencies in the spot (cash) market to the extent
such foreign currencies are not covered by forward contracts. The projection of
short-term currency market

31
<PAGE>

movements is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain.

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

INTEREST RATE PROTECTION TRANSACTIONS

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

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

The Funds 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

32
<PAGE>

accordance with guidelines established by each board. If there is a default by
the other party to such a transaction, a Fund will have to rely on its
contractual remedies (which may be limited by bankruptcy, insolvency or similar
laws) pursuant to the agreements related to the transaction.

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

33
<PAGE>

TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES

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

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUSTS OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<C> <C> <S>
Margo N. Alexander**; 49 Trustee and President Mrs. Alexander is presi-
dent, chief executive
officer and a director
of Mitchell Hutchins
(since January 1995)
and also an executive
vice president and a
director of
PaineWebber. Mrs. Alex-
ander is president and
a director or trustee
of 29 investment compa-
nies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Richard Q. Armstrong; 61 Trustee Mr. Armstrong is chair-
78 West Brother Drive man and principal of
Greenwich, CT 06830 RQA Enterprises (man-
agement consulting
firm) (since April 1991
and principal occupa-
tion since March 1995).
Mr. Armstrong is also a
director of Hi Lo Auto-
motive, Inc. He was
chairman of the board,
chief executive officer
and co-owner of Adiron-
dack Beverages (pro-
ducer and distributor
of soft drinks and
sparkling/still waters)
(October 1993-March
1995). He was a partner
of the New England Con-
sulting Group (manage-
ment consulting firm)
(December 1992-Septem-
ber 1993). He was man-
aging director of LMVH
U.S. Corporation (U.S.
subsidiary of the
French luxury goods
conglomerate, Luis
Vuitton Moet Hennessey
Corporation) (1987-
1991) and chairman of
its wine and spirits
subsidiary, Schieffelin
& Somerset Company
(1987-1991). Mr. Arm-
strong is a
director or trustee of
28 investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
</TABLE>

34
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUSTS OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<C> <C> <S>
E. Garrett Bewkes, Jr.**; 70 Trustee and Mr. Bewkes is a director
Chairman of the of Paine Webber Group
Board of Trustees Inc. ("PW Group")
(holding company of
PaineWebber and Mitch-
ell Hutchins). Prior to
December 1995, he was a
consultant to PW Group.
Prior to 1988, he was
chairman of the board,
president and chief ex-
ecutive officer of
American Bakeries Com-
pany. Mr. Bewkes is
also a director of In-
terstate Bakeries Cor-
poration, NaPro
BioTherapeutics, Inc.
and a director or
trustee of 29 invest-
ment companies for
which Mitchell Hutchins
or PaineWebber serves
as investment adviser.
Richard R. Burt; 50 Trustee Mr. Burt is chairman of
1101 Connecticut Avenue, N.W. International Equity
Washington, D.C. 20036 Partners (international
investments and con-
sulting firm) (since
March 1994) and a part-
ner of McKinsey & Com-
pany (management con-
sulting firm) (since
1991). He is also a di-
rector of American Pub-
lishing Company and Ar-
cher-Daniels-Midland
Co. (agricultural com-
modities). He was the
chief negotiator in the
Strategic Arms Reduc-
tion Talks with the
former Soviet Union
(1989-1991) and the
U.S. Ambassador to the
Federal Republic of
Germany (1985-1989).
Mr. Burt is a director
or trustee of 28 in-
vestment companies for
which Mitchell Hutchins
or PaineWebber serves
as investment adviser.
Mary C. Farrell**; 47 Trustee Ms. Farrell is a manag-
ing director, senior
investment strategist
and member of the In-
vestment Policy Commit-
tee of PaineWebber. Ms.
Farrell joined
PaineWebber in 1982.
She is a member of the
Financial Women's Asso-
ciation and Women's
Economic Roundtable and
is employed as a regu-
lar panelist on Wall
$treet Week with Louis
Rukeyser. She also
serves on the Board of
Overseers of New York
University's Stern
School of Business. Ms.
Farrell is a director
or trustee of 28 in-
vestment companies for
which Mitchell Hutchins
or PaineWebber serves
as investment adviser.
</TABLE>

35
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUSTS OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<C> <C> <S>
Meyer Feldberg; 55 Trustee Mr. Feldberg is Dean and
Columbia University Professor of Management
101 Uris Hall of the Graduate School
New York, New York 10027 of Business, Columbia
University. Prior to
1989, he was president
of the Illinois Insti-
tute of Technology.
Dean Feldberg is also a
director of K-III Com-
munications Corpora-
tion, Federated Depart-
ment Stores, Inc., and
Revlon, Inc. and a di-
rector or trustee of 28
investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
George W. Gowen; 67 Trustee Mr. Gowen is a partner
666 Third Avenue in the law firm of Dun-
New York, New York 10017 nington, Bartholow &
Miller. Prior to May
1994, he was a partner
in the law firm of Fry-
er, Ross & Gowen. Mr.
Gowen is also a direc-
tor of Columbia Real
Estate Investments,
Inc. and a director or
trustee of 28 invest-
ment companies for
which Mitchell Hutchins
or PaineWebber serves
as investment adviser.
Frederic V. Malek; 60 Trustee Mr. Malek is chairman of
1455 Pennsylvania Avenue, Thayer Capital Partners
N.W. (investment bank) and a
Suite 350 co-chairman and direc-
Washington, D.C. 20004 tor of CB Commercial
Group Inc. (real es-
tate). From January
1992 to November 1992,
he was campaign manager
of Bush-Quayle '92.
From 1990 to 1992, he
was vice chairman and,
from 1989 to 1990, he
was president of North-
west Airlines Inc., NWA
Inc. (holding company
of Northwest Airlines
Inc.) and Wings Hold-
ings Inc. (holding com-
pany of NWA Inc.).
Prior to 1989, he was
employed by the
Marriott Corporation
(hotels, restaurants,
airline catering and
contract feeding),
where he most recently
was an executive vice
president and president
of Marriott Hotels and
Resorts. Mr. Malek is
also a director of
American Management
Systems, Inc. (manage
</TABLE>

36
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUSTS OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<C> <C> <S>
ment consulting and
computer related serv-
ices), Automatic Data
Processing, Inc., CB
Commercial Group, Inc.
(real estate services),
Choice Hotels Interna-
tional (hotel and hotel
franchising), FPL
Group, Inc. (electrical
services), Integra,
Inc. (bio-medical),
Manor Care, Inc., Na-
tional Education Corpo-
ration and Northwest
Airlines Inc. Mr. Malek
is a director or
trustee of 28 other in-
vestment companies for
which Mitchell Hutchins
or PaineWebber serves
as investment adviser.
Carl W. Schafer; 61 Trustee Mr. Schafer is president
P.O. Box 1164 of the Atlantic Founda-
Princeton, NJ 08542 tion, (charitable foun-
dation supporting
mainly oceanographic
exploration and re-
search). He also is a
director of Roadway Ex-
press, Inc. (trucking),
The Guardian Group of
Mutual Funds, Evans
Systems, Inc. (a motor
fuels, convenience
store and diversified
company), Electronic
Clearing House, Inc.
(financial transactions
processing), Wainoco
Oil Corporation and
Nutraceutix, Inc. (bio-
technology). Prior to
January 1993, he was
chairman of the Invest-
ment Advisory Committee
of the Howard Hughes
Medical Institute. Mr.
Schafer is a director
or trustee of 28 in-
vestment companies for
which Mitchell Hutchins
or PaineWebber serves
as investment adviser.
Julieanna Berry; 33 Vice President Ms. Berry is a vice
(Managed Investments president and a portfo-
Trust only) lio manager of Mitchell
Hutchins. Ms. Berry is
a vice president of two
investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Karen L. Finkel; 39 Vice President Mrs. Finkel is a first
(Managed Investments vice president and a
Trust only) portfolio manager of
Mitchell Hutchins. Mrs.
Finkel is a vice presi-
dent of two investment
companies for which
Mitchell Hutchins
serves as investment
adviser.
</TABLE>

37
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUSTS OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<C> <C> <S>
Donald R. Jones; 36 Vice President Mr. Jones is a first
(Securities Trust vice president and a
only) portfolio manager of
Mitchell Hutchins.
Prior to February
1996, he was a vice
president in the asset
management group of
First Fidelity Bancor-
poration. Mr. Jones is
a vice president of
one investment company
for which Mitchell
Hutchins or
PaineWebber serves as
investment adviser.
James F. Keegan; 36 Vice President Mr. Keegan is a senior
(Managed Investments vice president and a
Trust only) portfolio manager of
Mitchell Hutchins.
Prior to March 1996,
he was director of
fixed income strategy
and research of
Merrion Group, L.P.
From 1987 to 1994, he
was a vice president
of Bankers Trust Com-
pany where he was the
director of credit re-
search for the global
investment management
group. Mr. Keegan is a
vice president of
three investment com-
panies for which
Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Thomas J. Libassi; 38 Vice President Mr. Libassi is a senior
vice president and a
portfolio manager of
Mitchell Hutchins.
Prior to May 1994, he
was a vice president
of Keystone Custodian
Funds Inc. with port-
folio management re-
sponsibility. Mr.
Libassi is a vice
president of four in-
vestment companies for
which Mitchell
Hutchins serves as in-
vestment adviser.
C. William Maher; 35 Vice President and Mr. Maher is a first
Assistant Treasurer vice president and a
senior manager of the
mutual fund finance
division of Mitchell
Hutchins. Mr. Maher is
a vice president and
assistant treasurer of
29 investment compa-
nies for which Mitch-
ell Hutchins or
PaineWebber serves as
investment adviser.
</TABLE>

38
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUSTS OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<C> <C> <S>
Dennis McCauley; 50 Vice President Mr. McCauley is a manag-
ing director and chief
investment officer--
fixed income of Mitch-
ell Hutchins. Prior to
December 1994, he was
director of fixed in-
come investments of IBM
Corporation.
Mr. McCauley is a vice
president of 19 invest-
ment companies for
which Mitchell Hutchins
or PaineWebber serves
as investment adviser.
Ann E. Moran; 39 Vice President and Ms. Moran is a vice
Assistant Treasurer president of Mitchell
Hutchins. Ms. Moran is
a vice president and
assistant treasurer of
29 investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Dianne E. O'Donnell; 44 Vice President Ms. O'Donnell is a se-
and Secretary nior vice president and
deputy general counsel
of Mitchell Hutchins.
Ms. O'Donnell is a vice
president and secretary
of 28 investment compa-
nies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Emil Polito; 36 Vice President Mr. Polito is a senior
vice president and di-
rector of operations
and control for Mitch-
ell Hutchins. From
March 1991 to September
1993 he was director of
the Mutual Funds Sales
Support and Service
Center for Mitchell
Hutchins and
PaineWebber. Mr. Polito
is also vice president
of 29 investment compa-
nies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Victoria E. Schonfeld; 46 Vice President Ms. Schonfeld is a man-
aging director and gen-
eral counsel of Mitch-
ell Hutchins. Prior to
May 1994, she was a
partner in the law firm
of Arnold & Porter.
Ms. Schonfeld is a vice
president of 29 invest-
ment companies for
which Mitchell Hutchins
or PaineWebber serves
as investment adviser.
</TABLE>

39
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUSTS OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<C> <C> <S>
Paul H. Schubert; 33 Vice President Mr. Schubert is a first
and Assistant vice president and a
Treasurer senior manager of the
mutual fund finance di-
vision of Mitchell
Hutchins. From August
1992 to August 1994, he
was a vice president at
BlackRock Financial
Management L.P. Prior
to August 1992, he was
an audit manager with
Ernst & Young LLP. Mr.
Schubert is a vice
president and assistant
treasurer of 29 invest-
ment companies for
which Mitchell Hutchins
or PaineWebber serves
as investment adviser.
Nirmal Singh; 40 Vice President Mr. Singh is a first
vice president of
Mitchell Hutchins.
Prior to September
1993, he was a member
of the portfolio man-
agement team at Merrill
Lynch Asset Management,
Inc. Mr. Singh is a
vice president of five
investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.

Julian F. Sluyters; 36 Vice President and Mr. Sluyters is a senior
Treasurer vice president and the
director of the mutual
fund finance division
of Mitchell Hutchins.
Mr. Sluyters is a vice
president and treasurer
of 29 investment compa-
nies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Mark A. Tincher; 41 Vice President Mr. Tincher is a manag-
ing director and chief
investment officer--
U.S. equity investments
of Mitchell Hutchins.
Prior to March 1995, he
was a vice president
and directed the U.S.
funds management and
equity research areas
of Chase Manhattan Pri-
vate Bank. Mr. Tincher
is a vice president of
13 investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
</TABLE>

40
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUSTS OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<C> <C> <S>
Craig M. Varrelman; 38 Vice President Mr. Varrelman is a first
vice president and a
portfolio manager of
Mitchell Hutchins. Mr.
Varrelman is a vice
president of five
investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Stuart Waugh; 41 Vice President Mr. Waugh is a managing
(Securities Trust director and a
only) portfolio manager of
Mitchell Hutchins
responsible for global
fixed income
investments and
currency trading. Mr.
Waugh is a vice
president of five
investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Keith A. Weller; 35 Vice President and Mr. Weller is a first
Assistant Secretary vice president and
associate general
counsel of Mitchell
Hutchins. Prior to May
1995, he was an
attorney in private
practice. Mr. Weller is
a vice president and
assistant secretary of
28 investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Teresa M. West; 38 Vice President Ms. West is a first vice
president of Mitchell
Hutchins. Prior to No-
vember 1993, she was
compliance manager of
Hyperion Capital Man-
agement, Inc., an in-
vestment advisory firm.
Prior to April 1993,
Ms. West was a vice
president and manager--
legal administration of
Mitchell Hutchins. Ms.
West is a vice presi-
dent of 29 investment
companies for which
Mitchell Hutchins or
PaineWebber serves as
investment adviser.
</TABLE>
- ----------------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of the
Trust as defined in the 1940 Act by virtue of their positions with Mitchell
Hutchins, PaineWebber and/or PW Group.

1285*AvenueUofnthelAmericas,eNewsYork,sNewoYorkt10019.herwise indicated, the
business address of each listed person is
Hutchins,TPaineWebberrand/oruPWsGroup.t*as*de
nedMinrthes1940.ActAbylvirtueeofxtheirapositionsnwithdMitcheller, Mr. Bewkes and
Ms. Farrell are "interested persons" of the

41
<PAGE>

Managed Investments Trust pays trustees who are not "interested persons" of
the Trust $1,000 annually for each series of the Trust. Securities Trust pays
trustees who are not "interested persons" of the Trust $1,000 for Strategic
Income Fund and $1,500 for the Trust's second series. Each Trust pays $150 for
each board meeting and each separate meeting of a board committee. Therefore,
Managed Investments Trust pays each such trustee $6,000 annually for its six
series, Securities Trust pays each such trustee $2,500 annually for its two
series and each Trust pays any additional amounts due for board or committee
meetings. Mr. Feldberg and another independent trustee to be elected by the
board serve as chairmen of the audit and contract review committees of
individual funds within the PaineWebber fund complex and receive additional
compensation, aggregating $15,000 each from the relevant funds. All trustees
are reimbursed for any expenses incurred in attending meetings. Trustees and
officers of the Trust own in the aggregate less than 1% of the shares of each
Fund. Because PaineWebber and Mitchell Hutchins perform substantially all of
the services necessary for the operation of the Trust and the Funds, the Trust
requires no employees. No officer, director or employee of Mitchell Hutchins or
PaineWebber presently receives any compensation from the Trust for acting as a
trustee or officer.

The Table below includes certain information relating to the compensation of
each Trust's current trustees who held office with the Trust or other
PaineWebber funds during the fiscal year indicated.

COMPENSATION TABLE+

<TABLE>
<CAPTION>
TOTAL
AGGREGATE COMPENSATION
COMPENSATION FROM AGGREGATE FROM THE TRUSTS
THE MANAGED COMPENSATION FROM AND THE
NAME OF PERSON, POSITION INVESTMENTS TRUST* SECURITIES TRUST** TRUST COMPLEX***
- ------------------------ ------------------ ------------------ ----------------
<S> <C> <C> <C>
Richard Q. Armstrong, $4,139 $3,081 $59,873
Trustee ...............
Richard Burt, Trustee... $3,389 $2,781 $51,173
Meyer Feldberg, Trust- $8,750 $1,664 $96,181
ee.....................
George W. Gowen, Trust- $8,750 $1,664 $92,431
ee.....................
Frederic V. Malek, $8,750 $1,664 $92,431
Trustee................
Carl W. Schafer, Trust- $4,139 $1,664 $62,307
ee.....................
</TABLE>
- --------

+ Only independent members of the board are compensated by a Trust and
identified above; trustees who are "interested persons," as defined by the
1940 Act, do not receive compensation.
* Represents fees paid to each trustee during the fiscal year ended November
30, 1996.
** Represents fees paid to each trustee during the ten months ended November
30, 1996.

*** Represents total compensation paid to each trustee during the calendar year
ended December 31, 1996; no fund within the fund complex has a pension or
retirement plan.

PRINCIPAL HOLDERS OF SECURITIES. The Funds' records as of February 28, 1997,
did not indicate that any shareholder owned more than 5% of any class of a
Fund's shares.

42
<PAGE>

INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS

INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of each Fund pursuant to a contract with Managed
Investments Trust dated April 21, 1988, as supplemented by a separate fee
agreement dated March 26, 1993 with respect to Low Duration Income Fund, and a
contract dated January 29, 1993 with Securities Trust, as supplemented by a Fee
Agreement dated January 28, 1994 (each an "Advisory Contract"). Under the
Advisory Contracts, Strategic Income Fund pays Mitchell Hutchins an annual fee
of 0.75% of its average daily net assets and each of the four other Funds pays
Mitchell Hutchins an annual fee of 0.50% of its average daily net assets. All
fees paid under the Advisory Contracts are computed daily and paid monthly.

During each of the periods indicated, Mitchell Hutchins earned (or accrued)
advisory fees in the amounts set forth below:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
U.S. Government Income Fund............. $2,517,534 $2,784,437 $3,958,127
Investment Grade Income Fund............ $1,685,067 $1,890,394 $1,897,899
High Income Fund........................ $2,656,610 $3,050,197 $4,047,201
Low Duration Income Fund................ $1,272,455 $1,839,876 $5,598,491
(of which
$400,611
was waived)
<CAPTION>
PERIOD
TEN MONTHS FISCAL YEAR FEBRUARY 7,
ENDED ENDED 1994* TO
NOVEMBER 30, JANUARY 31, JANUARY 31,
1996 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Strategic Income Fund................... $ 407,534 $ 546,119 $ 603,881
</TABLE>
- --------
* Commencement of operations.

The Advisory Contract authorizes Mitchell Hutchins to retain one or more sub-
advisers but does not require Mitchell Hutchins to do so. Under a sub-
investment advisory contract ("Sub-Advisory Contract") dated November 14, 1994
with Mitchell Hutchins, PIMCO serves as sub-adviser for Low Duration Income
Fund. Under the Sub-Advisory Contract, Mitchell Hutchins (not the Fund) pays
PIMCO a fee in the annual amount of 0.25% of the Fund's average daily net
assets. PIMCO bears all expenses incurred by it in connection with its services
under the Sub-Advisory Contract. For the fiscal year ended November 30, 1996
and November 30, 1995 and the period October 20, 1994 to November 30, 1994,
Mitchell Hutchins paid (or accrued) to PIMCO sub-advisory fees of $636,228,
$919,938 and $147,540, pursuant to the Sub-Advisory Contract and a
substantially similar prior contract.

Under a service agreement pursuant to which PaineWebber provides certain
services to each Fund not otherwise provided by the Funds' transfer agent,
which agreement is reviewed by each Trust's board annually, PaineWebber earned
(or accrued) the amounts set forth below during each of the periods indicated.

43
<PAGE>

<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
U.S. Government Income Fund............. $133,159 $154,428 $196,490
Investment Grade Income Fund............ $ 83,120 $ 99,641 $ 97,475
High Income Fund........................ $131,762 $158,323 $181,748
Low Duration Income Fund................ $ 70,807 $107,999 $139,291
<CAPTION>
PERIOD
TEN MONTHS FISCAL YEAR FEBRUARY 7,
ENDED ENDED 1994* TO
NOVEMBER 30, JANUARY 31, JANUARY 31,
1996 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Strategic Income Fund................... $ 14,226 $ 19,823 $ 21,998
</TABLE>
- --------
* Commencement of operations

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

Under each Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Trust or
any Fund in connection with the performance of the Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. Under the Sub-Advisory
Contract, PIMCO will

44
<PAGE>

not be liable for any error of judgment or mistake of law or for any loss
suffered by Managed Investments Trust, Low Duration Income Fund, its
shareholders or Mitchell Hutchins in connection with the Sub-Advisory Contract,
except any liability to any of them to which PIMCO would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence on its part in
the performance of its duties or from reckless disregard by it of its
obligations and duties under the Sub-Advisory Contract. Each Advisory Contract
terminates automatically with respect to each Fund upon assignment and is
terminable at any time without penalty by the applicable board or by vote of
the holders of a majority of the Fund's outstanding voting securities on 60
days' written notice to Mitchell Hutchins or by Mitchell Hutchins on 60 days'
written notice to the Trust. The Sub-Advisory Contract terminates automatically
upon its assignment or the termination of the Advisory Contract and is
terminable at any time without penalty by the board or by vote of the holders
of a majority of Low Duration Income Fund's outstanding voting securities on 60
days' notice to PIMCO, or by PIMCO on 120 days' written notice to Mitchell
Hutchins. The Sub-Advisory Contract may also be terminated by Mitchell Hutchins
(1) upon material breach by PIMCO of its representations and warranties, which
breach shall not have been cured within a 20 day period after notice of such
breach; (2) if PIMCO becomes unable to discharge its duties and obligations
under the Sub-Advisory Contract; or (3) on 120 days' notice to PIMCO.

The following table shows the approximate net assets as of February 28, 1997,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment company
may fall into more than one of the categories below.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($ MIL)
------------------- ----------
<C> <S> <C>
Domestic (excluding
Money Market)......... $ 5,710.4
Global................. 2,938.1
Equity/Balanced........ 3,579.3
Fixed Income (excluding
Money Market)......... 5,069.2
Taxable Fixed In-
come............... 3,478.8
Tax-Free Fixed In-
come............... 1,590.4
Money Market Funds..... 24,668.5
</TABLE>

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

PIMCO personnel also may invest in securities for their own accounts pursuant
to PIMCO's code of ethics, which establishes procedures for personal investing
and restricts certain transactions.

45
<PAGE>

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

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

Among other things, each Plan provides that (1) Mitchell Hutchins will submit
to the board at least quarterly, and the trustees will review, reports
regarding all amounts expended under the Plan and the purposes for which such
expenditures were made, (2) the Plan will continue in effect only so long as it
is approved at least annually, and any material amendment thereto is approved,
by the board, including those trustees who are not "interested persons" of the
Trust and who have no direct or indirect financial interest in the operation of
the Plan or any agreement related to the Plan, acting in person at a meeting
called for that purpose, (3) payments by a Fund under the Plan shall not be
materially increased without the affirmative vote of the holders of a majority
of the outstanding shares of the relevant Class and (4) while the Plan remains
in effect, the selection and nomination of trustees who are not "interested
persons" of the Trust shall be committed to the discretion of the trustees who
are not "interested persons" of the Trust.

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

The Funds paid (or accrued) the following fees to Mitchell Hutchins under the
Class A, Class B and Class C Plans during the fiscal periods shown:

<TABLE>
<CAPTION>
INVESTMENT STRATEGIC
U.S. GOVERNMENT LOW DURATION GRADE HIGH INCOME INCOME
INCOME FUND INCOME FUND INCOME FUND FUND FUND
--------------- ------------ ------------ ------------ ------------------------
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR TEN MONTHS FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, JANUARY 31,
1996 1996 1996 1996 1996 1996
--------------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Class A................. $948,991 $ 244,189 $597,257 $ 583,168 $ 19,708 $ 25,887
Class B................. 714,894 88,618 636,961 2,043,792 317,852 415,659
Class C................. 336,391 1,107,463 258,103 702,569 110,029 156,716
</TABLE>

46
<PAGE>

Mitchell Hutchins estimates that it and its parent corporation, PaineWebber,
incurred the following shareholder service-related and distribution-related
expenses with respect to the Funds during the fiscal periods shown:

CLASS A

<TABLE>
<CAPTION>
INVESTMENT STRATEGIC
U.S. GOVERNMENT LOW DURATION GRADE HIGH INCOME INCOME
INCOME FUND INCOME FUND INCOME FUND FUND FUND
--------------- ------------ ------------ ------------ ------------------------
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR TEN MONTHS FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, JANUARY 31,
1996 1996 1996 1996 1996 1996
--------------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Marketing and
advertising............ $ 73,288 $211,531 $ 52,608 $ 48,020 $ 8,925 $ 57,841
Printing of prospectuses
and statements of
additional information. 941 744 1,257 809 558 347
Branch network costs
allocated and interest
expense................ 349,595 350,745 256,083 287,703 13,682 25,190
Service fees paid to
investment executives.. 372,057 96,410 233,362 229,098 7,312 11,649

CLASS B

<CAPTION>
INVESTMENT STRATEGIC
U.S. GOVERNMENT LOW DURATION GRADE HIGH INCOME INCOME
INCOME FUND INCOME FUND INCOME FUND FUND FUND
--------------- ------------ ------------ ------------ ------------------------
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR TEN MONTHS FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, JANUARY 31,
1996 1996 1996 1996 1996 1996
--------------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Marketing and
advertising............ $100,349 $ 72,394 $ 59,915 $ 76,864 $29,679 $271,864
Amortization of
commissions............ 291,401 31,790 240,872 1,026,367 145,870 147,793
Printing of prospectuses
and statements of
additional information. 1,289 248 1,434 1,295 1,854 1,629
Branch network costs
allocated and interest
expense................ 590,351 272,135 328,338 494,823 58,622 149,592
Service fees paid to
investment executives.. 70,123 8,670 62,224 209,650 29,451 46,762
</TABLE>

47
<PAGE>

CLASS C

<TABLE>
<CAPTION>
INVESTMENT STRATEGIC
U.S. GOVERNMENT LOW DURATION GRADE HIGH INCOME INCOME
INCOME FUND INCOME FUND INCOME FUND FUND FUND
--------------- ------------ ------------ ------------ ------------------------
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR TEN MONTHS FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, JANUARY 31,
1996 1996 1996 1996 1996 1996
--------------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Marketing and
advertising............ $ 53,523 $155,582 $ 27,798 $ 32,508 $7,671 $129,542
Amortization of
commissions............ 85,591 286,383 60,044 165,732 29,568 41,673
Printing of prospectuses
and statements of
additional information. 687 558 737 547 479 777
Branch network costs
allocated and interest
expense................ 281,663 550,340 136,385 171,221 11,907 56,752
Service fees paid to
investment executives.. 44,069 145,132 32,481 96,212 11,166 17,631
</TABLE>

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

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

In approving the Class A Plan, each board considered all the features of the
distribution system, including (1) the conditions under which initial sales
charges would be imposed and the amount of such charges, (2) Mitchell Hutchins'
belief that the initial sales charge combined with a service fee would be
attractive to PaineWebber investment executives and correspondent firms,
resulting in greater growth of the Fund than might otherwise be the case, (3)
the advantages to the shareholders of economies of scale resulting from growth
in the Fund's assets and potential continued growth, (4) the services provided
to the Fund and its shareholders by Mitchell Hutchins, (5) the services
provided by PaineWebber pursuant to its Exclusive Dealer Agreement with
Mitchell Hutchins and (6) Mitchell Hutchins' shareholder service-related
expenses and costs.

In approving the Class B Plan, each board considered all the features of the
distribution system, including (1) the conditions under which contingent
deferred sales charges would be imposed and

48
<PAGE>

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

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

With respect to each Plan, the trustees considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The trustees also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that
Mitchell Hutchins would receive service, distribution and advisory fees that
are calculated based upon a percentage of the average net assets of each Fund,
which fees would increase if the Plan were successful and the Funds attained
and maintained significant asset levels.

Under the Distribution Contract between each Trust and Mitchell Hutchins for
the Class A shares and similar prior distribution contracts, for the periods
set forth below, Mitchell Hutchins

49
<PAGE>

earned the following approximate amounts of sales charges and retained the
following approximate amounts, net of concessions to PaineWebber as exclusive
dealer:

<TABLE>
<CAPTION>
FISCAL YEARS ENDED
NOVEMBER 30,
--------------------------
1996 1995 1994
-------- -------- --------
U.S. GOVERNMENT INCOME FUND
<S> <C> <C> <C>
Earned......................................... $ 28,937 $ 41,959 $121,124
Retained....................................... 18,469 3,492 10,336

LOW DURATION INCOME FUND
Earned......................................... $ 3,734 $ 5,994 $892,216
Retained....................................... 211 3,637 494,591

INVESTMENT GRADE INCOME FUND
Earned......................................... $ 36,783 $ 48,610 $137,013
Retained....................................... 2,873 28,121 79,808

HIGH INCOME FUND
Earned......................................... $220,619 $297,694 $793,898
Retained....................................... 16,318 18,982 55,058
</TABLE>

<TABLE>
<CAPTION>
PERIOD
TEN MONTHS FISCAL YEAR FEBRUARY 7, 1994
ENDED ENDED (COMMENCEMENT
NOVEMBER 30, JANUARY 31, OF OPERATIONS) TO
1996 1996 JANUARY 31, 1995
------------ ----------- -----------------
<S> <C> <C> <C>
STRATEGIC INCOME FUND
Earned......................... $16,799 $7,392 $469,876
Retained....................... $ 1,110 $ 415 32,555
</TABLE>

For the fiscal periods shown, Mitchell Hutchins earned and retained the
following contingent deferred sales charges paid upon certain redemptions of
Class A, Class B and Class C shares:

<TABLE>
<CAPTION>
INVESTMENT
U.S. GOVERNMENT LOW DURATION GRADE HIGH STRATEGIC
INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND
--------------- ------------ ----------- ----------- ------------------------
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR TEN MONTHS FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, JANUARY 31,
1996 1996 1996 1996 1996 1996
--------------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Class A................. $ -- $ -- $ -- $ -- $ -- $ --
Class B................. 224,806 27,383 151,713 899,719 121,018 44,380
Class C................. 2,034 18,847 2,431 17,717 1,122 --
</TABLE>

PORTFOLIO TRANSACTIONS

50
<PAGE>

best net results for a Fund, taking into account such factors as the price
(including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm involved.
Generally, bonds are traded on the OTC market on a "net" basis without a stated
commission through dealers acting for their own account and not as brokers.
Prices paid to dealers in principal transactions generally include a "spread,"
which is the difference between the prices at which the dealer is willing to
purchase and sell a specific security at that time. While Mitchell Hutchins or
PIMCO generally seeks reasonably competitive commission rates, payment of the
lowest commission is not necessarily consistent with obtaining the best net
results.

During the fiscal periods indicated, the Funds paid the brokerage commissions
set forth below:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
U.S. Government Income Fund................ $ 0 $ 0 $ 0
Investment Grade Income Fund............... $ 2,400 $ 0 $21,500
High Income Fund........................... $32,596 $ 0 $74,838
Low Duration Income Fund................... $ 0 $ 0 $88,421
<CAPTION>
PERIOD
TEN MONTHS FISCAL YEAR FEBRUARY 7,
ENDED ENDED 1994* TO
NOVEMBER 30, JANUARY 31, JANUARY 31,
1996 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Strategic Income Fund...................... $ 0 $ 0 $ 0
</TABLE>
- --------
* Commencement of operations

No Fund has any obligation to deal with any broker or group of brokers in the
execution of portfolio transactions. The Funds contemplate that, consistent
with the policy of obtaining the best net results, brokerage transactions may
be conducted through Mitchell Hutchins or its affiliates, including
PaineWebber. Each board has adopted procedures in conformity with Rule 17e-1
under the 1940 Act to ensure that all brokerage commissions paid to Mitchell
Hutchins or its affiliates are reasonable and fair. Specific provisions in the
Advisory Contract authorize Mitchell Hutchins and any of its affiliates that
are members of a national securities exchange to effect portfolio transactions
for the Funds on such exchange and to retain compensation in connection with
such transactions. Any such transactions will be effected and related
compensation paid in accordance with applicable SEC regulations. During the
last three fiscal years or periods indicated above, no Fund paid any brokerage
commissions to PaineWebber or any other affiliate of Mitchell Hutchins, except
that, during the fiscal year ended November 30, 1994, High Income Fund paid
approximately $30,915 in brokerage commissions to PaineWebber.

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

51
<PAGE>

Consistent with the interests of a Fund and subject to the review of the
applicable board, Mitchell Hutchins or PIMCO may cause a Fund to purchase and
sell portfolio securities through brokers which provide the Fund with research,
analysis, advice and similar services. In return for such services, the Fund
may pay to those brokers a higher commission than may be charged by other
brokers, provided that Mitchell Hutchins or PIMCO determines in good faith that
such commission is reasonable in terms either of that particular transaction or
of the overall responsibility of Mitchell Hutchins or PIMCO to that Fund and
its other clients and that the total commissions paid by the Fund will be
reasonable in relation to the benefits to the Fund over the long term. During
the fiscal year ended November 30, 1996, the Funds directed no portfolio
transactions to brokers chosen because they provided research services.

For purchases or sales with broker-dealer firms which act as principal,
Mitchell Hutchins and PIMCO seek best execution. Although Mitchell Hutchins or
PIMCO may receive certain research or execution services in connection with
these transactions, neither will purchase securities at a higher price or sell
securities at a lower price than would otherwise be paid if no weight was
attributed to the services provided by the executing dealer. Moreover, neither
Mitchell Hutchins nor PIMCO will enter into any explicit soft dollar
arrangements relating to principal transactions or receive in principal
transactions the types of services which could be purchased for hard dollars.
Mitchell Hutchins and PIMCO may engage in agency transactions in OTC debt
securities in return for research and execution services. These transactions
are entered into only in compliance with procedures ensuring that the
transaction (including commissions) is at least as favorable as it would have
been if effected directly with a market-maker that did not provide research or
execution services. These procedures include Mitchell Hutchins or PIMCO
receiving multiple quotes from dealers before executing the transaction on an
agency basis.

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

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

52
<PAGE>

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

PORTFOLIO TURNOVER. The turnover rate may vary greatly from year to year for
any Fund and will not be a limiting factor when Mitchell Hutchins or PIMCO
deems portfolio changes appropriate. The portfolio turnover rate is calculated
by dividing the lesser of a Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year.

During the fiscal period indicated, the portfolio turnover rates were as set
forth below:

<TABLE>
<CAPTION>
PORTFOLIO TURNOVER RATES
FOR THE YEARS
ENDED NOVEMBER 30,
---------------------------
FUND 1996 1995
---- ------------ ------------
<S> <C> <C>
U.S. Government Income Fund.................... 359% 206%
Investment Grade Income Fund................... 115% 149%
High Income Fund............................... 142% 94%
Low Duration Income Fund....................... 210% 242%
</TABLE>

<TABLE>
<CAPTION>
PERIOD
TEN MONTHS ENDED FISCAL YEAR ENDED FEBRUARY 7, 1994*
NOVEMBER 30, 1996 JANUARY 31, 1996 TO JANUARY 31, 1995
----------------- ----------------- -------------------
<S> <C> <C> <C>
Strategic Income Fund... 101% 91% 117%
</TABLE>
- --------
* Commencement of Operations

53
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

WAIVERS OF SALES CHARGES--CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within

54
<PAGE>

one year following the death of the shareholder. The contingent deferred sales
charge waiver is available where the decedent is either the sole shareholder or
owns the shares with his or her spouse as a joint tenant with right of
survivorship. This waiver applies only to redemption of shares held at the time
of death.

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

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

If conditions exist which make cash payments undesirable, each Fund reserves
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Fund and valued in the same way as they would
be valued for purposes of computing the Fund's net asset value. Any such
redemption in kind will be made with readily marketable securities, to the
extent available. If payment is made in securities, a shareholder may incur
brokerage expenses in converting these securities into cash. Each Trust has
elected, however, to be governed by Rule 18f-1 under the 1940 Act, under which
a Fund is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund during any 90-day period for
one shareholder. This election is irrevocable unless the SEC permits its
withdrawal. A Fund may suspend redemption privileges or postpone the date of
payment during any period (1) when the NYSE is closed or trading on the NYSE is
restricted as determined by the SEC, (2) when an emergency exists, as defined
by the SEC, that makes it not reasonably practicable for a Fund to dispose of
securities owned by it or fairly to determine the value of its assets or (3) as
the SEC may otherwise permit. The redemption price may be more or less than the
shareholder's cost, depending on the market value of a Fund's portfolio at the
time.

AUTOMATIC INVESTMENT PLAN. Participation in the Automatic Investment Plan
enables an investor to use the technique of "dollar cost averaging." When the
investor invests the same dollar amount each month under the plan, the investor
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,
an investor's average purchase price per share over any given period will be
lower than if the investor purchased a fixed number of shares on a monthly
basis during the period. Of course,

55
<PAGE>

investing through the automatic investment plan does not assure a profit or
protect against loss in declining markets. Additionally, because 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. An investor's participation in the systematic
withdrawal plan will terminate automatically if the "Initial Account Balance"
(a term that means the value of the Fund account at the time the investor
elects 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 Fund shares concurrent with withdrawals
are ordinarily disadvantageous to shareholders because of tax liabilities and,
for Class A shares, initial sales charges. On or about the 15th of each month
for monthly plans and on or about the 15th of the months selected for quarterly
or semi-annual plans, PaineWebber will arrange for redemption by a Fund of
sufficient Fund shares to provide the withdrawal payment specified by
participants in the Funds' systematic withdrawal plan. The payment generally is
mailed approximately three Business Days (defined under "Valuation of Shares")
after the redemption date. Withdrawal payments should not be considered
dividends but redemption proceeds, with the tax consequences described under
"Dividends & Taxes" in the Prospectus. If periodic withdrawals continually
exceed reinvested dividends, a shareholder's investment may be correspondingly
reduced. A shareholder may change the amount of the systematic withdrawal or
terminate participation in the systematic withdrawal plan at any time without
charge or penalty by written instructions with signatures guaranteed to
PaineWebber or PFPC Inc. ("Transfer Agent"). Instructions to participate in the
plan, change the withdrawal amount or terminate participation in the plan will
not be effective until five days after written instructions with signatures
guaranteed are received by the Transfer Agent. Shareholders may request the
forms needed to establish a systematic withdrawal plan from their PaineWebber
investment executives, correspondent firms or the Transfer Agent at 1-800-647-
1568.

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

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

Shares of the PaineWebber mutual funds (each a "PW Fund" and, collectively,
the "PW Funds") are available for purchase by customers of PaineWebber and its
correspondent firms who

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<PAGE>

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

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

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

PERIODIC INVESTING AND DOLLAR COST AVERAGING.

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

PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT.

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

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

57
<PAGE>

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

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

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

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

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

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

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

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

CONVERSION OF CLASS B SHARES

Class B shares of each Fund automatically convert to Class A shares of that
Fund, based on the relative net asset value per share of each of the two
Classes, as of the close of business on the first Business Day (defined under
"Valuation of Shares") of the month in which the sixth anniversary of the
initial issuance of such Class B shares occurs. For the purpose of calculating
the holding period required for conversion of Class B shares, the date of
initial issuance shall mean (1) the date on which such Class B shares were
issued, or (2) for Class B shares obtained through an exchange, or a series of
exchanges, the date on which the original Class B shares were issued. If a
shareholder acquired Class B shares of a Fund through an exchange of Class B
shares of a CDSC Fund that were acquired prior to July 1, 1991, the
shareholder's holding period for purposes of conversion is determined based on
the date the CDSC Fund shares were initially issued. For purposes of conversion
to Class A shares, Class B shares purchased through the reinvestment of
dividends and other distributions paid in respect of Class B shares are held in
a separate sub-account. Each time any Class B shares in the shareholder's
regular account (other than those in the sub-account) convert to Class A
shares, a pro rata portion of the Class B shares in the sub-account also
convert to Class A shares. The portion is determined by the ratio that the
shareholder's Class B shares converting to Class A bears to the shareholder's
total Class B shares not acquired through dividends and other distributions.

58
<PAGE>

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

VALUATION OF SHARES

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

Securities that are listed on exchanges are valued at the last sale price on
the day the securities are being valued or, lacking any sales on such day, at
the last available bid price. In cases where securities are traded on more than
one exchange, the securities are generally valued on the exchange considered by
Mitchell Hutchins as the primary market. Securities traded in the OTC market
and listed on The Nasdaq Stock Market are valued at the last available sale
price on The Nasdaq Stock Market at 4:00 p.m., Eastern time; other OTC
securities are valued at the last bid price available prior to valuation.

Where market quotations are readily available, portfolio securities are
valued based upon market quotations, provided such quotations adequately
reflect, in the judgment of Mitchell Hutchins or PIMCO, the fair value of the
security. Where such market quotations are not readily available, securities
are valued based upon appraisals received from a pricing service using a
computerized matrix system or based upon appraisals derived from information
concerning the security or similar securities received from recognized dealers
in those securities. All other securities or assets will be valued at fair
value as determined in good faith by or under the direction of the applicable
board. All investments of High Income Fund and Strategic Income Fund that are
quoted in foreign currency are valued daily in U.S. dollars on the basis of the
foreign currency exchange rate prevailing at the time such valuation is
determined by the Fund's custodian.

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

59
<PAGE>

PERFORMANCE INFORMATION

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

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

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

Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value for Class A shares, the
maximum 4% sales charge (3% for Low Duration Income Fund) is deducted from the
initial $1,000 payment and, for Class B and Class C shares, the applicable
contingent deferred sales charge imposed on a redemption of Class B and Class C
shares held for the period is deducted. All dividends and other distributions
are assumed to have been reinvested at net asset value.

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

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

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<PAGE>

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

<TABLE>
<CAPTION>
U.S. GOVERNMENT LOW DURATION INVESTMENT GRADE
INCOME FUND INCOME FUND INCOME FUND HIGH INCOME FUND
------------------------- ----------------------- ----------------------- -----------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended November
30, 1996:
Standardized
Return*.......... (0.75)% (2.28)% 2.23% 3.37% 2.60% 5.07% 2.03% 0.54% 5.05% 11.89% 10.86% 15.21%
Non-Standardized
Return........... 3.39% 2.72% 2.98% 6.46% 5.60% 5.82% 6.33% 5.54% 5.80% 16.55% 15.86% 15.96%
Inception** to
November 30, 1996:
Standardized
Return*.......... 7.80% 4.45% 2.91% 2.87% 2.69% 3.21% 9.81% 8.26% 7.12% 10.67% 12.24% 8.96%
Non-Standardized
Return........... 8.16% 4.60% 2.91% 3.78% 2.95% 3.21% 10.18% 8.34% 7.12% 11.04% 12.35% 8.96%
Five years ended
November 30, 1996:
Standardized
Return*.......... 3.57% 3.28% NA NA NA NA 7.66% 7.41% NA 10.85% 10.66% NA
Non-Standardized
Return........... 4.43% 3.63% NA NA NA NA 8.53% 7.20% NA 11.75% 10.93% NA
Ten years ended
November 30, 1996:
Standardized
Return*.......... 5.96% NA NA NA NA NA 7.77% NA NA 8.85% NA NA
Non-Standardized
Return........... 6.39% NA NA NA NA NA 8.32% NA NA 9.30% NA NA
</TABLE>

<TABLE>
<CAPTION>
STRATEGIC INCOME FUND
-----------------------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Year ended November 30, 1996:
Standardized Return*.................................. 10.96% 9.69% 14.32%
Non-Standardized Return*.............................. 15.60% 14.69% 15.07%
Inception** to November 30, 1996:
Standardized Return*.................................. 4.63% 4.42% 5.68%
Non-Standardized Return*.............................. 6.18% 5.40% 5.68%
</TABLE>
- --------
*All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4% (3% for Low Duration Income Fund). All
Standardized Return figures for Class B and Class C shares reflect deduction
of the applicable contingent deferred sales charges imposed on a redemption
of shares held for the period.
**For U.S. Government Income Fund, Investment Grade Income Fund and High Income
Fund, the inception dates for each Class were as follows: Class A shares--
August 31, 1984; Class B shares--July 1, 1991; and Class C shares--July 2,
1992. For Low Duration Income Fund, the inception date for its Class A,
Class B and Class C shares was May 3, 1993. For Strategic Income Fund, the
inception date for Class A, Class B and Class C shares is February 7, 1994.

61
<PAGE>

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

a-b
YIELD = 2[( -- + 1)/6/ - 1]
cd
where: a
= interest earned during the Period attributable to a Class of
shares
b = expenses accrued for the Period attributable to a Class of shares
(net of reimbursements)
c = the average daily number of shares of the Class outstanding
during the Period that were entitled to receive dividends
d = the maximum offering price per share (in the case of Class A
shares) or the net asset value per share (in the case of Class B
and Class C shares) on the last day of the Period

Except as noted below, in determining net investment income earned during the
Period (variable "a" in the above formula), each Fund calculates interest
earned on each debt obligation held by it during the Period by (1) computing
the obligation's yield to maturity, based on the market value of the obligation
(including actual accrued interest) on the last business day of the Period or,
if the obligation was purchased during the Period, the purchase price plus
accrued interest and (2) dividing the yield to maturity by 360, and multiplying
the resulting quotient by the market value of the obligation (including actual
accrued interest) to determine the interest income on the obligation for each
day of the period that the obligation is in the portfolio. Once interest earned
is calculated in this fashion for each debt obligation held by the Fund,
interest earned during the Period is then determined by totalling the interest
earned on all debt obligations. For purposes of these calculations, the
maturity of an obligation with one or more call provisions is assumed to be the
next date on which the obligation reasonably can be expected to be called or,
if none, the maturity date. With respect to Class A shares, in calculating the
maximum offering price per share at the end of the period (variable "d" in the
above formula), the Funds' current maximum 4% (3% for Low Duration Income Fund)
initial sales charge on Class A shares is included.

The following table shows the yield for the Class A, Class B and Class C
shares of each Fund for the 30-day period ended November 30, 1996.

<TABLE>
<CAPTION>
U.S. GOVERNMENT LOW DURATION INVESTMENT GRADE HIGH INCOME STRATEGIC INCOME
INCOME FUND INCOME FUND INCOME FUND FUND FUND
--------------- ------------ ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Class A................. 5.61% 5.78% 6.91% 9.06% 7.17%
Class B................. 5.09% 5.16% 6.43% 8.68% 6.72%
Class C................. 5.35% 5.37% 6.69% 8.94% 6.97%
</TABLE>

OTHER INFORMATION. In Performance Advertisements, each Fund may compare its
Standardized Return and/or its Non-Standardized Return with data published by
Lipper Analytical

62
<PAGE>

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

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

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

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<PAGE>

TAXES

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

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

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

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

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

64
<PAGE>

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

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

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

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

65
<PAGE>

OTHER INFORMATION

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

Prior to October 20, 1995, Low Duration Income Fund was known as "PaineWebber
Short-Term U.S. Government Income Fund." Prior to November 10, 1995, the Class
C shares of all five Funds were called "Class D" shares.

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

COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, NW, Washington, DC 20036-1800, serves as counsel to the Funds.
Kirkpatrick & Lockhart LLP also acts as counsel to Mitchell Hutchins and
PaineWebber in connection with other matters.

INDEPENDENT AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New
York 10019, serves as independent auditors for PaineWebber Managed Investments
Trust. Price Waterhouse, LLP, 1177 Avenue of the Americas, New York, NY 10036,
serves as independent accountants for Strategic Income Fund.

66
<PAGE>

FINANCIAL STATEMENTS

The Funds' Annual Reports to Shareholders for the fiscal periods ended
November 30, 1996 are separate documents supplied with this Statement of
Additional Information and the financial statements, accompanying notes and
reports of independent auditors appearing therein are incorporated by reference
in this Statement of Additional Information.

67
<PAGE>

[This page intentionally left blank]
<PAGE>

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

-----------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions...................................... 2
Hedging and Other Strategies Using Derivative Contracts................... 22
Trustees and Officers; Principal Holders of Securities.................... 34
Investment Advisory and Distribution Arrangements......................... 43
Portfolio Transactions.................................................... 51
Reduced Sales Charges, Additional Exchange and Redemption Information and
Other Services........................................................... 54
Conversion of Class B Shares.............................................. 58
Valuation of Shares....................................................... 59
Performance Information................................................... 60
Taxes..................................................................... 64
Other Information......................................................... 66
Financial Statements...................................................... 67
</TABLE>

PAINEWEBBER

U.S. GOVERNMENT
INCOME FUND

LOW DURATION
U.S. GOVERNMENT INCOME FUND

INVESTMENT GRADE
INCOME FUND

HIGH INCOME FUND

STRATEGIC INCOME FUND

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

April 1, 1997
- --------------------------------------------------------------------------------
PAINEWEBBER

<PAGE>

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

PaineWebber U.S. Government Income Fund
PaineWebber Low Duration U.S. Government Income Fund
PaineWebber Investment Grade Income Fund
PaineWebber High Income Fund
PaineWebber Strategic Income Fund
Class Y Shares
1285 Avenue of the Americas, New York, New York 10019
Prospectus -- April 1, 1997
- --------------------------------------------------------------------------------
PaineWebber Bond Funds are designed for investors seeking income by investing
in debt and similar securities, which are commonly called "bonds." Each Fund
seeks generally to obtain the highest level of income that is consistent with
its investment strategy. The Funds differ in terms of the types of bonds in
which they invest and the type and degree of risks that they will accept in or-
der to achieve their investment goals. PaineWebber U.S. Government Income Fund
invests primarily in U.S. government bonds, including those backed by mort-
gages. PaineWebber Low Duration U.S. Government Income Fund also invests pri-
marily in U.S. government bonds, including those backed by mortgages, but it
limits the expected life (duration) of its portfolio to from 1 to 3 years.
PaineWebber Investment Grade Income Fund invests primarily in a diversified
range of investment grade bonds, including U.S. government and U.S. and foreign
corporate bonds. PaineWebber High Income Fund invests primarily in a diversi-
fied range of high yield, high risk, U.S. and foreign corporate bonds.
PaineWebber Strategic Income Fund strategically allocates its investments among
three bond market categories: U.S. government and investment grade corporate
bonds; U.S. high yield, high risk corporate bonds; and foreign and emerging
market bonds.

The Class Y shares described in this Prospectus are currently offered for sale
only to a limited group of investors, which include, for the Class Y shares of
PaineWebber U.S. Government Income Fund, the trustee of the PaineWebber Savings
Plan ("PW SIP"). See "How to Buy Shares." Participants in the PW SIP can make
further inquiries by contacting the PaineWebber Incorporated Benefits Depart-
ment, 10th Floor, 1000 Harbor Boulevard, Weehawken, New Jersey 10197 or by
calling 1-201-902-4444.

This Prospectus concisely sets forth information that a prospective investor
should know about the Funds before investing. Please read it carefully and re-
tain a copy of this Prospectus for future reference. A Statement of Additional
Information dated April 1, 1997 has been filed with the Securities and Exchange
Commission and is legally part of this Prospectus. The Statement of Additional
Information can be obtained without charge, and further inquiries can be made,
by contacting an individual Fund, your investment executive at PaineWebber or
one of its correspondent firms or by calling toll-free 1-800-647-1568.

INVESTORS SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERRED TO IN THIS
PROSPECTUS. THE FUNDS AND THEIR DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE TO PRO-
VIDE INVESTORS WITH INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS IS NOT AN
OFFER TO SELL SHARES OF THE FUNDS IN ANY JURISDICTION WHERE THE FUNDS OR THEIR
DISTRIBUTOR MAY NOT LAWFULLY SELL THOSE SHARES.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURI-TIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESEN-TATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

PAINEWEBBER HIGH INCOME FUND AND PAINEWEBBER STRATEGIC INCOME FUND MAY INVEST
WITHOUT LIMIT IN HIGH YIELD, HIGH RISK BONDS, COMMONLY REFERRED TO AS "JUNK
BONDS." BONDS OF THIS TYPE ARE CONSIDERED SPECULATIVE WITH RESPECT TO THE
PAYMENT OF INTEREST AND RETURN OF PRINCIPAL. INVESTORS SHOULD CAREFULLY ASSESS
THE RISKS ASSOCIATED WITH INVESTMENTS IN THESE FUNDS.

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

Table of Contents
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Page
----
<S> <C>
The Funds at a Glance...................................................... 3
Expense Table.............................................................. 6
Financial Highlights....................................................... 8
Investment Objectives & Policies........................................... 9
Investment Philosophy & Process............................................ 11
Performance................................................................ 12
The Funds' Investments..................................................... 14
How to Buy Shares.......................................................... 21
How to Sell Shares......................................................... 22
Management................................................................. 23
Determining the Shares' Net Asset Value.................................... 24
Dividends & Taxes.......................................................... 25
General Information........................................................ 26
Appendix................................................................... A-1
</TABLE>

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

The Funds at a Glance

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

U.S. GOVERNMENT INCOME FUND

GOAL: To provide you with current income by investing primarily in U.S.
government bonds, including those backed by mortgages.

INVESTMENT OBJECTIVE: High current income consistent with the preservation of
capital and liquidity.

SIZE: Over $412.1 million in assets on February 28, 1997.

WHO SHOULD INVEST: Investors seeking high current income consistent with the
preservation of capital and liquidity.

LOW DURATION U.S. GOVERNMENT INCOME FUND ("LOW DURATION INCOME FUND")

GOAL: To provide you with current income by investing primarily in U.S.
government bonds, including those backed by mortgages, while maintaining a
portfolio duration of from 1 to 3 years.

INVESTMENT OBJECTIVE: Highest level of income consistent with the preservation
of capital and low volatility of net asset value.

SIZE: Over $181.1 million in assets on February 28, 1997.

WHO SHOULD INVEST: Investors seeking current income with less fluctuation in
net asset value than longer-term U.S. government bond funds.

INVESTMENT GRADE INCOME FUND

GOAL: To provide you with current income by investing primarily in a
diversified range of investment grade bonds, including U.S. government and
U.S. and foreign corporate bonds.

INVESTMENT OBJECTIVE: High current income consistent with the preservation of
capital and liquidity.

SIZE: Over $298.5 million in assets on February 28, 1997.

WHO SHOULD INVEST: Investors seeking high current income consistent with the
preservation of capital and liquidity.

HIGH INCOME FUND

GOAL: To provide you with high income by investing primarily in a diversified
range of high yield, high risk, U.S. and foreign corporate bonds.

INVESTMENT OBJECTIVE: High income.

SIZE: Over $573.2 million in assets on February 28, 1997.

WHO SHOULD INVEST: Investors seeking current high income, who can assume
additional risks for the potential for higher returns.

STRATEGIC INCOME FUND

INVESTMENT OBJECTIVE: High level of current income and, secondarily, capital
appreciation.

SIZE: Over $63.7 million in assets on February 28, 1997.

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

The Funds at a Glance
(Continued)

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

WHO SHOULD INVEST: Investors seeking current high income and, secondarily,
capital appreciation, who can assume additional risks for the potential for
higher returns.

RISKS

Investors may lose money by investing in the Funds; your investment is not
guaranteed.

MANAGEMENT

----------
- --------------------------------------------------------------------------------
Prospectus Page 4
<PAGE>

The Funds at a Glance
(Continued)

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

HOW TO PURCHASE CLASS Y SHARES

Eligible investors may purchase Class Y shares of the Funds as follows:

The price is the net asset value next calculated after PaineWebber's New York
City headquarters or the Transfer Agent receives the purchase order.

Investors do not pay an initial sales charge when they buy Class Y shares. As
a result, 100% of their purchase is immediately invested. Investors also do
not pay a redemption fee or contingent deferred sales charge when they sell
Class Y shares.

----------
- --------------------------------------------------------------------------------
Prospectus Page 5
<PAGE>

Expense Table

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

The following tables are intended to assist investors in understanding the
expenses associated with investing in Class Y shares of the Funds. Expenses
shown below represent those incurred for the fiscal year ended November 30,
1996, except that "Other Expenses" for Investment Grade Income Fund, High
Income Fund and Strategic Income Fund are estimated based on the expenses
incurred for each Fund's Class A shares for that fiscal year. All expenses for
Strategic Income Fund are annualized from the 10 months ended November 30,
1996.

<TABLE>
<CAPTION>
CLASS Y
SHAREHOLDER TRANSACTION EXPENSES -------
<S> <C>
ALL FUNDS
Maximum Sales Charge on Purchases of Shares (as a % of offering price). None
Sales Charge on Reinvested Dividends (as a % of offering price)........ None
Exchange Fees.......................................................... None

ANNUAL FUND OPERATING EXPENSES (as a % of average net assets) (1)

U.S. GOVERNMENT INCOME FUND
Management Fees........................................................ 0.50%
12b-1 Fees............................................................. 0.00
Other Expenses......................................................... 0.14
----
Total Operating Expenses............................................... 0.64%
====
LOW DURATION INCOME FUND
Management Fees........................................................ 0.50%
12b-1 Fees............................................................. 0.00
Other Expenses......................................................... 0.49
----
Total Operating Expenses............................................... 0.99%
====
INVESTMENT GRADE INCOME FUND
Management Fees........................................................ 0.50%
12b-1 Fees............................................................. 0.00
Other Expenses (estimated)............................................. 0.19
----
Total Operating Expenses (estimated)................................... 0.69%
====
HIGH INCOME FUND
Management Fees........................................................ 0.50%
12b-1 Fees............................................................. 0.00
Other Expenses (estimated)............................................. 0.22
----
Total Operating Expenses (estimated)................................... 0.72%
====
STRATEGIC INCOME FUND
Management Fees........................................................ 0.75%
12b-1 Fees............................................................. 0.00
Other Expenses (estimated)............................................. 0.89
----
Total Operating Expenses (estimated)................................... 1.64%
====
</TABLE>
- -------

(1) Class Y shares may be purchased by participants in the INSIGHT Investment
Advisory Program ("INSIGHT") sponsored by PaineWebber, when purchased
through that program. Participation in INSIGHT is subject to payment of an
advisory fee at the maximum annual rate of 1.50% of assets held through
INSIGHT (generally charged quarterly in advance), which may be charged to
the INSIGHT participant's PaineWebber account. This account charge is not
included in the table because non-INSIGHT participants are permitted to
purchase Class Y shares of the Funds.

----------
- --------------------------------------------------------------------------------
Prospectus Page 6
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebberU.S. Government Income Fund Low Duration U.S. Government Income Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund
Expense Table
(Continued)
- -------------------------------------------------------------------------------
----------
Prospectus Page 7
EXAMPLES OF EFFECT OF FUND EXPENSES

An investor would pay the following expenses, directly or indirectly, on a
$1,000 investment in a Fund (including the 1.50% annual INSIGHT fee), assuming
a 5% annual return reinvestment of all dividends and distributions and
percentage amounts listed under "Annual Fund Operating Expenses" remain the
same for the years shown:

<TABLE>
<CAPTION>
EXAMPLE FOR CLASS Y SHARES OF 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
U.S. Government Income Fund..................... $22 $67 $115 $247
Low Duration Income Fund........................ $25 $78 $133 $283
Investment Grade Income Fund.................... $22 $69 $117 $252
High Income Fund................................ $23 $69 $119 $255
Strategic Income Fund........................... $32 $97 $164 $345
</TABLE>
<PAGE>

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

The table below provides selected per share data and ratios for one Class Y
share of U.S. Government Income Fund and Low Duration Income Fund for each of
the periods shown. This information is supplemented by the financial
statements, accompanying notes and the report of Ernst & Young, LLP,
independent auditors, which appear in each Fund's Annual Report to
Shareholders for the fiscal year ended November 30, 1996, and are incorporated
by reference into the Statement of Additional Information. The financial
statements and notes, as well as the information in the table appearing below
relating to each of the five years in the period ended November 30, 1996 have
been audited by Ernst & Young LLP. Further information about each Fund's
performance, including the performance of other classes of shares, is also
included in the Annual Reports to Shareholders, which may be obtained without
charge. The information appearing below for the period prior to the fiscal
year ended November 30, 1992 also has been audited by Ernst & Young LLP, whose
reports thereon were unqualified. No information is presented for Class Y
shares of Investment Grade Income Fund, High Income Fund and Strategic Income
Fund because no such shares were outstanding as of November 30, 1996.

<TABLE>
<CAPTION>
CLASS Y SHARES
----------------------------------------------------------------------------------
LOW DURATION
U.S. GOVERNMENT INCOME FUND INCOME FUND
-------------------------------------------------------- -------------------------
FOR THE FOR THE
PERIOD FOR THE PERIOD
SEPTEMBER 11, YEAR OCTOBER 20,
FOR THE YEARS ENDED NOVEMBER 30, 1991# TO ENDED 1995# TO
----------------------------------------- NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1996 1995 1994 1993 1992 1991 1996 1995
------ ------ ------ ------ ------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................. $9.11 $ 8.49 $10.02 $ 9.97 $ 9.97 $ 9.88 $2.34 $2.33
------ ------ ------ ------ ------ ------ ----- -----
Net investment income...... 0.57 0.61 0.62 0.70 0.77 0.18 0.14 0.01
Net realized and unrealized
gains (losses) from
investments, futures and
options................... (0.25) 0.62 (1.53) 0.05 0.01 0.09 0.01 0.01
------ ------ ------ ------ ------ ------ ----- -----
Net increase (decrease)
from operations........... 0.32 1.23 (0.91) 0.75 0.78 0.27 0.15 0.02
------ ------ ------ ------ ------ ------ ----- -----
Dividends from net
investment income......... (0.57) (0.61) (0.62) (0.70) (0.78) (0.18) (0.14) (0.01)
------ ------ ------ ------ ------ ------ ----- -----
Net asset value, end of
period.................... $8.86 $ 9.11 $ 8.49 $10.02 $ 9.97 $ 9.97 $2.35 $2.34
====== ====== ====== ====== ====== ====== ===== =====
Total investment
return (1)................ 3.81% 15.06% (9.37)% 7.69% 8.13% 2.37% 6.64% 0.83%
====== ====== ====== ====== ====== ====== ===== =====
Ratios/Supplemental data:
Net assets, end of period
(000's omitted)........... $6,495 $7,957 $4,955 $6,232 $5,517 $4,514 $333 $ 321
Expenses to average net
assets.................... 0.64% 0.71(2) 0.65% 0.62% 0.63% 0.72%* 0.99% 0.99%*
Net investment income to
average net assets........ 6.53% 6.96(2) 6.76% 6.87% 7.70% 8.36%* 6.00% 5.87%*
Portfolio turnover rate.... 359% 206% 358% 83% 28% 71% 210% 242%(3)
</TABLE>
- -------

#Commencement of issuance of shares
*Annualized

(1) Total return is calculated assuming a $1,000 investment on the first day
of each period reported, reinvestment of all dividends and distributions at
net asset value on the payable date and a sale at net asset value on the
last day of each period reported. Total investment returns for periods of
less than one year have not been annualized.
(2) These ratios include non-recurring reorganization expenses of 0.03%.
(3) Portfolio turnover rate is for Low Duration Income Fund's fiscal year
ended November 30, 1995.

----------
Prospectus Page 8
<PAGE>

Investment Objectives & Policies
- -------------------------------------------------------------------------------

U.S. GOVERNMENT INCOME FUND AND LOW DURATION INCOME FUND

INVESTMENT GRADE INCOME FUND

Investment Grade Income Fund's objective is to provide high current income
consistent with the preservation of capital and liquidity. The Fund normally
invests at least 65% of its total assets in U.S. government and investment
grade corporate bonds, including mortgage-backed securities. The Fund also may
invest up to 35% of its total assets in the following: (1) corporate bonds
that are below investment grade; (2) preferred stocks; (3) convertible
securities; (4) asset-backed securities other than mortgage-backed securities
(5) commercial paper or variable amount master notes whose issuers, at the
time the security is purchased by the Fund, have outstanding either long-term
bonds that are rated investment grade by S&P or Moody's or commercial paper
rated in the highest rating category by S&P or Moody's; and (6) other money
market instruments, including repurchase agreements.

----------
- --------------------------------------------------------------------------------
Prospectus Page 9
<PAGE>

HIGH INCOME FUND

STRATEGIC INCOME FUND

Strategic Income Fund's primary investment objective is to achieve a high
level of current income. As a secondary objective, it seeks capital
appreciation. The Fund strategically allocates its investments among three
distinct bond market sectors: (1) U.S. government and investment grade
corporate bonds, including mortgage-and asset-backed securities; (2) U.S. high
yield, high risk corporate bonds, including convertible bonds, and preferred
stock; and (3) foreign and emerging market bonds. A portion of the Fund's
assets normally is invested in each of these investment sectors. However, the
Fund has the flexibility at any time to invest all or substantially all of its
assets in any one sector.

The Fund may invest in high yield, high risk bonds that are rated as low as D
by S&P or C by Moody's.

The Fund may invest up to 100% of its total assets in preferred stock of U.S.
and foreign issuers. It also may acquire equity securities (including common
stocks, rights and warrants for equity securities, bonds and commodities) when
attached to bonds or as part of a unit including bonds, or in connection with
a conversion or exchange of bonds. The Fund also may invest without limit in
certificates of deposit issued by banks and savings associations and in
banker's acceptances.

The Fund normally invests at least 65% of its total assets in income producing
securities, including zero coupon bonds, other securities that are issued with
original issue discount ("OID") and payment-in-kind ("PIK") securities. The
Fund's investments in zero coupon bonds are limited to 35% of its total
assets. There is no limit on the Fund's investments in other OID securities or
PIK securities.

----------
- --------------------------------------------------------------------------------
Prospectus Page 10
<PAGE>

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

Investment Philosophy & Process

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

U.S. GOVERNMENT INCOME FUND
INVESTMENT GRADE INCOME FUND

LOW DURATION INCOME FUND

PIMCO structures the portfolio of Low Duration Income Fund to maintain, under
normal circumstances, an overall portfolio duration of from 1-3 years. PIMCO
uses economic forecasting, interest rate anticipation, credit and call risk
analysis, and other security selection techniques. The proportion of the
Fund's assets committed to investment in securities with particular
characteristics (such as maturity, type and coupon rate) will vary based on
PIMCO's outlook for the U.S., the financial markets and other factors.

HIGH INCOME FUND

STRATEGIC INCOME FUND

----------
Prospectus Page 11
<PAGE>

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

Performance

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

These charts show the total returns for U.S. Government Income Fund and Low
Duration U.S. Government Income Fund for each calendar year since Class Y
shares were first offered. Sales charges have not been deducted from total
returns shown in the charts. Returns would be lower if sales charges were
deducted. No information is presented for Class Y shares of Investment Grade
Income Fund, High Income Fund and Strategic Income Fund because there were no
shares outstanding in 1996 or earlier. Past results are not a guarantee of
future results.

Total returns, both before and after deducting the maximum sales charges, are
shown below in the tables that follow the performance charts.

U.S. GOVERNMENT INCOME FUND

[BAR GRAPH APPEARS HERE]

The inception date for Class Y shares was September 11, 1991; thus, the 1991
return represents the period September 11, 1991 through December 31, 1991.

AVERAGE ANNUAL RETURNS
As of November 30, 1996
<TABLE>
<CAPTION>
CLASS Y SHARES
--------------
<S> <C>
Inception Date........................................... 9/11/91
ONE YEAR
Before deducting maximum sales charges.................. 3.81%
After deducting maximum sales charges................... 3.81%
FIVE YEARS
Before deducting maximum sales charges.................. 4.71%
After deducting maximum sales charges................... 4.71%
LIFE
Before deducting maximum sales charges.................. 5.00%
After deducting maximum sales charges................... 5.00%
</TABLE>
----------
- --------------------------------------------------------------------------------
Prospectus Page 12
<PAGE>

LOW DURATION INCOME FUND

[BAR GRAPH APPEARS HERE]

The inception date of the Class Y shares was October 20, 1995; thus, the 1995
return represents the period October 20, 1995 through December 31, 1995.

AVERAGE ANNUAL RETURNS

As of November 30, 1996
<TABLE>
<CAPTION>
CLASS Y SHARES
--------------
<S> <C>
Inception Date........................................... 10/20/95
ONE YEAR
Before deducting maximum sales charges.................. 6.64%
After deducting maximum sales charges................... 6.64%
LIFE
Before deducting maximum sales charges.................. 6.77%
After deducting maximum sales charges................... 6.77%
</TABLE>

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

PERFORMANCE INFORMATION

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

The Funds' Investments

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

CORPORATE BONDS are bonds issued by corporations, banks, partnerships, trusts
or other non-governmental entities.

----------
- --------------------------------------------------------------------------------
Prospectus Page 14
<PAGE>

rights to receive payments, are determined by the specific terms of the CMO
class. CMOs involve special risks, and evaluating them requires special
knowledge.

When interest rates go down and homeowners refinance their mortgages, mortgage-
backed bonds may be paid off more quickly than investors expect. When interest
rates rise, mortgage-backed bonds may be paid off more slowly than originally
expected. Changes in the rate or "speed" of these prepayments can cause the
value of mortgage-backed securities to fluctuate rapidly.

Other asset-backed securities are similar to mortgage-backed securities, except
that the underlying assets are different.These underlying assets may be nearly
any type of financial asset or receivable, such as motor vehicle installment
sales contracts, home equity loans, leases of various types of real and
personal property and receivables from credit cards.

ZERO COUPON BONDS, in which each Fund may invest, are securities that make no
periodic interest payments but instead are sold at a deep discount from their
face value. The buyer of these bonds receives a rate of return by the gradual
appreciation of the security, which results from the fact that it will be
redeemed at face value on a specified maturity date. There are many kinds of
zero coupon bonds. Some are issued in zero-coupon form including stripped U.S.
government securities issued through the U.S. Treasury. Others are created by
brokerage firms that strip (separate) the coupons (unmatured interest payments)
from interest-paying bonds and sell the principal and the coupons separately.

SOVEREIGN DEBT AND BRADY BONDS AND STRUCTURED FOREIGN INVESTMENTS. Sovereign
debt includes bonds that are issued or guaranteed by foreign governments or
their agencies, instrumentalities or political sub divisions or by foreign
central banks. Sovereign debt also may be issued by quasi-governmental entities
that are owned by foreign governments but are not backed by their full faith
and credit or general taxing powers.

Strategic Income Fund may invest in structured foreign investments. These are
securities backed by or representing interests in certain underlying securities
or instruments, such as commercial bank loans, Brady bonds or preferred stock.
The cash flow on these underlying instruments may be reapportioned among
several classes of the structured foreign investments so that the classes may
have different maturities, payment priorities and interest rate provisions.
Strategic Income Fund receives interest and principal payments on structured
foreign investments only to the extent that the underlying instruments produce
sufficient cash flow.

EQUITY SECURITIES, in which High Income Fund and Strategic Income Fund may
invest, include common stocks, preferred stocks and securities that are
convertible into them, including common stock purchase warrants and rights,
equity interests in trusts, partnerships, joint ventures or similar enterprises
and depository receipts. Common stocks, the most familiar type, represent an
equity (ownership) interest in a corporation. Preferred stock has certain
fixed-income features, like a bond, but is actually equity in a company, like
common stock. The prices of equity securities generally fluctuate more than
bonds and reflect changes in a company's financial condition and in overall
market and economic conditions. It is possible that a Fund may experience a
substantial or complete loss on an individual equity security.

CONVERTIBLE SECURITIES, in which Investment Grade Income Fund, High Income Fund
and Strategic Income Fund may invest, include bonds, preferred stock or other
securities that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the
holder to receive interest paid or accrued on debt or dividends paid on
preferred stock until the convertible security matures or is redeemed,
converted or exchanged. Convertible securities have unique investment
characteristics in that they generally (1) have higher yields than common
stocks, but lower yields than comparable non-convertible securities, (2) are
less subject to fluctuation

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Prospectus Page 15
<PAGE>

in value than the underlying stock because they have fixed income
characteristics, and (3) provide the potential for capital appreciation if the
market price of the underlying common stock increases. While no securities
investment is without some risk, investments in convertible securities
generally entail less risk than the issuer's common stock, although the extent
to which such risk is reduced depends in large measure upon the degree to
which the convertible security sells above its value as a fixed income
security.

RISKS

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Prospectus Page 16
<PAGE>

Fund and Strategic Income Fund may invest without limit in bonds with the
lowest investment grade rating.

High yield, high risk bonds are rated below investment grade and are commonly
referred to as "junk bonds." High Income Fund and Strategic Income Fund may
invest their entire portfolios in these bonds. Investment Grade Income Fund may
invest up to 35% of its total assets in these bonds. High yield, high risk
bonds are considered to be predominantly speculative with respect to the
issuer's ability to pay interest and repay principal. A Fund's investments in
these lower rated bonds entail greater risk than its investments in higher
rated bonds. Lower rated bonds may be more sensitive to adverse market
conditions. During an economic downturn or period of rising interest rates,
their issuers may experience financial stress that adversely affects their
ability to pay interest and principal and may increase the possibility of
default. Lower rated bonds are frequently unsecured by collateral and will not
receive payment until more senior claims are paid in full. The market for these
bonds is thinner and less active, which may limit the Funds' ability to sell
them at fair value in response to changes in the economy or financial markets.

During the fiscal year or period ended November 30, 1996, Investment Grade
Income Fund, High Income Fund and Strategic Income Fund invested their average
annual net assets as follows:

<TABLE>
<CAPTION>
INVESTMENT
GRADE HIGH STRATEGIC
% OF AVERAGE ANNUAL NET INCOME INCOME INCOME
ASSETS INVESTED IN FUND FUND FUND
----------------------- ---------- ------ ---------
<S> <C> <C> <C>
Debt securities rated by S&P or Moody's 91.06% 82.94% 91.07%
Debt Securities not so rated 3.78% 11.01% 6.65%
Securities rated AAA/Aaa (including cash items) 7.57% 3.19% 36.69%
Securities rated AA/Aa 4.84% -- 2.83%
Securities rated A/A 27.06% -- 0.77%
Securities rated BBB/Baa 26.39% -- 4.67%
Securities rated BB/Ba 23.98% 33.12% 14.54%
Securities rated B/B 1.22% 44.02% 31.57%
Securities rated CCC/Caa -- 2.61% --
</TABLE>

Credit ratings attempt to evaluate the safety of principal and interest
payment, do not evaluate the volatility of the bond's value or its liquidity
and do not guarantee the performance of the issuer. Rating agencies may fail to
make timely changes in credit ratings in response to subsequent events, so that
an issuer's current financial condition may be better or worse than the rating
indicates. There is a risk that rating agencies will downgrade bonds.

DURATION. Duration is a measure of the expected life of a bond on a present
value basis. 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 for Low Duration Income Fund, PIMCO, in
portfolio selection and yield curve positioning for the Funds.

Duration takes the length of the time intervals between the present time and
the time that the interest and principal payments are scheduled or, in the case
of a callable bond, expected to be made, and weights them by the present values
of the cash to be received at each future point in time. For any bond with
interest payments occurring prior to the payment of principal, duration is
always less than maturity.

Duration allows Mitchell Hutchins (or PIMCO for Low Duration Income Fund) 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 interest rates increases by 1%, a fixed income security having a positive
duration of three years generally will decrease by approximately 3%. Thus, if
Mitchell Hutchins or PIMCO calculates the duration of the Fund's portfolio as
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
<PAGE>

portfolio may vary in relation to interest rates by a greater or lesser
percentage than indicated by the above example.

RISKS OF MORTGAGE- AND ASSET-BACKED SECURITIES. The yield characteristics of
mortgage- and asset-backed securities differ from those of traditional bonds.
Among the major differences are that interest and principal payments are made
more frequently (usually monthly) and that principal may be prepaid at any
time because the underlying mortgage loans or other assets generally may be
prepaid at any time. Generally, prepayments on fixed-rate mortgage loans will
increase during a period of falling interest rates and decrease during a
period of rising interest rates. Mortgage- and asset-backed securities may
also decrease in value as a result of increases in interest rates and, because
of prepayments, may benefit less than other bonds from declining interest
rates. Reinvestments of prepayments may occur at lower interest rates than the
original investment, thus adversely affecting a Fund's yield. Actual
prepayment experience may cause the yield of a mortgage-backed security to
differ from what was assumed when the Fund purchased the security.

Certain classes of CMOs 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 guaranteed or considered to be
of the highest quality, 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.

Inverse floating rate CMO classes also may be extremely volatile. These
classes pay interest at a rate that decreases when a specified index of market
rates increases.

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, can be extremely volatile and these securities may become
illiquid. Mitchell Hutchins or, for Low Duration Income Fund, PIMCO, seeks to
manage a Fund's investments in mortgage-backed securities so that the
volatility of a 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.

While Low Duration Income Fund generally may invest in CMO classes that are
structured to sell at a premium or a discount, the Fund may not invest in IO
or PO classes or in inverse floating rate classes. Investment Grade Income
Fund may invest no more than 10% of its total assets in IO or PO classes.

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Prospectus Page 18
<PAGE>

in the Fund's income. Accordingly, to continue to qualify for tax treatment as
a regulated investment company and to avoid certain excise taxes (see "Taxes"
in the Statement of Additional Information), a Fund may be required to
distribute as dividends amounts that are greater than the total amount of cash
it actually receives. These distributions must be made from the Fund's cash
assets or, if necessary, from the proceeds of sales of portfolio securities.
The Fund will not be able to purchase additional income-producing securities
with cash used to make such distributions, and its current income ultimately
may be reduced as a result.

COUNTERPARTIES. The Funds may be exposed to the risk of insolvency of another
party with which the Fund enters into a transaction, such as a repurchase
agreement or a derivative contract. Subject to board supervision, Mitchell
Hutchins (or PIMCO for Low Duration Income Fund) monitors and evaluates the
creditworthiness of these counterparties to help minimize those risks.

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Prospectus Page 19
<PAGE>

NON-DIVERSIFIED STATUS. Strategic Income Fund is "non-diversified," as that
term is defined in the 1940 Act. See "Dividends & Taxes." This means, in
general, that more than 5% of the total assets of the Fund may be invested in
securities of one issuer (including a foreign government), but only if, at the
close of each quarter of the Fund's taxable year, the aggregate amount of such
holdings does not exceed 50% of the value of its total assets is invested in
the securities of a single issuer. When the Fund's portfolio is comprised of
securities of a smaller number of issuers than if it were "diversified," the
Fund will be subject to greater risk because changes in the financial
condition or market assessment of a single issuer may have a greater effect on
the Fund's total return and the price of Fund shares.

INVESTMENT TECHNIQUES AND STRATEGIES

. the fact that the skills needed to implement a strategy using derivative
contracts are different from those needed to select securities for the
Funds,

. the possibility of imperfect correlation, or even no correlation, between
price movements of derivative contracts used in hedging strategies and
price movements of the securities being hedged,

. possible constraints on a Fund's ability to purchase or sell portfolio
investments at advantageous times due to the need for the Fund to "cover"
or to segregate securities, and

. the possibility that a Fund is unable to close out or liquidate its
position.

ILLIQUID SECURITIES. U.S. Government Income Fund, Investment Grade Income Fund
and High Income Fund may invest up to 10% of their net assets, and Low
Duration Income Fund and Strategic Income Fund up to 15% of their net assets,
in illiquid securities. These include repurchase agreements maturing in more
than seven days, certain cover for over-the-counter options and securities
whose

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Prospectus Page 20
<PAGE>

disposition is restricted under the federal securities laws. The Funds do not
consider securities that are eligible for resale under SEC Rule 144A to be
illiquid if Mitchell Hutchins (or PIMCO for Low Duration Income Fund) has
determined them to be liquid, based upon the trading markets for the
securities under procedures approved by the Funds' boards.

BORROWINGS, DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS. U.S. Government
Income Fund, Low Duration Income Fund and Strategic Income Fund may invest in
each "arbitraged" dollar roll and reverse repurchase transactions. In a dollar
roll, the Fund sells mortgage-backed or other securities for delivery on the
next regular settlement date for those securities and, simultaneously,
contracts to purchase substantially similar securities for delivery on a later
settlement date. In a reverse repurchase agreement, the Fund sells securities
to a bank or dealer and agrees to repurchase them on demand or on a specified
future date and at a specified price. In "arbitraged" transactions, the Fund
maintains an offsetting position in cash or in U.S. government or investment
grade bonds that mature on or before the settlement date of the related dollar
roll or reverse repurchase agreement. Mitchell Hutchins believes that these
"arbitraged" transactions do not present the risks that are normally
associated with leverage. These Funds may invest up to 5% of their total
assets in dollar rolls that are not arbitraged. These dollar roll and reverse
repurchase transactions are subject to each Fund's limitation of borrowings
and may not exceed 33 1/3% of its total assets. These Funds also may borrow
for temporary or emergency purposes, but not in excess of an additional 5% of
a Fund's total assets.

Each Fund may sell securities that it already owns short ("short sales against
the box") to defer realization of gains or losses for tax or other purposes.

New forms of bonds, derivatives and hedging instruments continue to be
developed. Each Fund may invest in such securities to the extent consistent
with its investment objectives.

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How to Buy Shares

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

Class Y shares are sold to eligible investors at the net asset value next
determined (see "Valuation of Shares") after the purchase order is received at
the New York City offices of PaineWebber Incorporated ("PaineWebber") or, with
respect to U.S. Government Income Fund, for purchases by the trustee of the
PW SIP, by the Fund's transfer agent ("Transfer Agent"). No initial or
contingent deferred sales charge

----------
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Prospectus Page 21
<PAGE>

is imposed, nor are Class Y shares subject to rule 12b-1 distribution or
service fees. The Funds and Mitchell Hutchins reserve the right to reject any
purchase order and to suspend the offering of Class Y shares for a period of
time. Mitchell Hutchins, the distributor of the Fund's Class Y shares, has
appointed PaineWebber to serve as the exclusive dealer for the sale of those
shares.

The following investors are eligible to buy Class Y shares:

. a participant in INSIGHT when Class Y shares are purchased through that
program;

. an investor who buys $10 million or more at any one time in any combination
of PaineWebber mutual funds in the Flexible PricingSM System;

. an employee benefit plan qualified under section 401 (including a salary
reduction plan qualified under section 401(k)) or 403(b) of the Internal
Revenue Code that has either

5,000 or more eligible employees or

$50 million or more in assets; and

. an investment company advised by PaineWebber or an affiliate of PaineWebber.

INSIGHT

An investor who purchases $50,000 or more of shares of the mutual funds that
are available to INSIGHT participants (which include the PaineWebber mutual
funds in the Flexible Pricing SystemSM and certain other specified mutual
funds) may take part in INSIGHT, a total portfolio asset allocation program
sponsored by PaineWebber, and thus become eligible to purchase Class Y shares.
INSIGHT offers comprehensive investment services, including a personalized
asset allocation investment strategy using an appropriate combination of
funds, monitoring of investment performance and comprehensive quarterly
reports that cover market trends, portfolio summaries and personalized account
information.

Participation in INSIGHT is subject to payment of an advisory fee to
PaineWebber at the maximum annual rate of 1.50% of assets held through the
program (generally charged quarterly in advance), which covers all INSIGHT
investment advisory services and program administration fees. Employees of
PaineWebber and its affiliates are entitled to a 50% reduction in the fee
otherwise payable for participation in INSIGHT. INSIGHT clients may elect to
have their INSIGHT fees charged to their PaineWebber accounts (by the
automatic redemption of money market fund shares) or, if a qualified plan,
invoiced.

Please contact your PaineWebber investment executive or PaineWebber's
correspondent firms for more information concerning mutual funds that are
available to INSIGHT participants or for other INSIGHT information.

PURCHASES BY THE TRUSTEE OF THE PW SIP

Class Y shares of U.S. Government Income Fund also are offered for sale to the
trustee of the PW SIP, a defined contribution plan sponsored by Paine Webber
Group Inc. ("PW Group"). The trustee of the PW SIP purchases Class Y shares to
implement the investment choices of individual plan participants with respect
to their PW SIP contributions. Individual plan participants should consult the
Plan Information Statement and Summary Plan Description of the PW SIP
(collectively, "Plan Documents") for a description of the procedures and
limitations applicable to making and changing investment choices.

Copies of the Plan Documents are available from the PaineWebber Incorporated
Benefits Department, 10th Floor, 1000 Harbor Boulevard, Weehawken, New Jersey
07087 (telephone 1-201-902-4444).

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

ACQUISITION OF CLASS Y SHARES BY OTHERS

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

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Prospectus Page 22
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebberU.S. Government Income Fund Low Duration U.S. Government Income Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund
- -------------------------------------------------------------------------------

How to Sell Shares
- -------------------------------------------------------------------------------
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Prospectus Page 23
Investors can sell (redeem) shares at any time. Shares will be sold at the
share price as next calculated after the order is received and accepted. Share
prices are normally calculated at the close of regular trading on the New York
Stock Exchange (currently 4:00 p.m., Eastern time).
Investors who have an account with PaineWebber or one of PaineWebber's
correspondent firms can sell their shares by contacting their investment
executive. Investors who do not have an account and have bought their shares
through PFPC Inc., the Funds' Transfer Agent, may sell shares by writing a
"letter of instruction." The letter of instruction must include:

. the investor's name and address;

. the Fund's name;

. the Fund account number;

. the dollar amount or number of shares to be sold; and

. a guarantee of each registered owner's signature by an eligible institution,
such as a commercial bank, trust company or stock exchange member.

The letter of instruction must be mailed to PFPC Inc., Attn: PaineWebber
Mutual Funds, P.O. Box 8950, Wilmington, DE 19899.

If a shareholder wants to sell shares that were purchased recently, the Fund
may delay payment until it verifies that good payment was received. In the
case of purchases by check, this can take up to 15 days.

Because each Fund incurs fixed costs in maintaining shareholder accounts, each
Fund reserves the right to purchase back all Fund shares in any shareholder
account having a net asset value of less than $500. If the Fund elects to do
so, it will notify the shareholder of the opportunity to increase the amount
invested to $500 or more within 60 days of the notice. The Fund will not
purchase back accounts that fall below $500 solely due to a reduction in net
asset value per share.

SALES BY PARTICIPANTS IN PW SIP

The trustee of the PW SIP sells Class Y shares of U.S. Government Fund to
implement the investment choices of individual plan participants with respect
to their PW SIP contributions, as described in the Plan Documents referenced
under "How to Buy Shares" above. The price at which Class Y shares are sold by
the trustee of the PW SIP might be more or less than the price per share at
the time the participants made their investment choices.
- -------------------------------------------------------------------------------

Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, is the asset management subsidiary of PaineWebber Incorporated, which
is wholly owned by PW Group, a publicly owned financial services holding
company. On February 28, 1997, Mitchell Hutchins was adviser or sub-adviser of
30 investment companies with 65 separate portfolios and aggregate assets of
approximately $33.3 billion.

PIMCO is located at 840 Newport Center Drive, Suite 360, Newport Beach,
California 92660. PIMCO is a subsidiary of PIMCO Advisors L.P., a publicly
held investment advisory firm. As of February 28, 1997, PIMCO had
approximately $92.3 billion in assets under management and was adviser or sub-
adviser of investment companies with 57 portfolios and aggregate assets of
approximately $26.2 billion.

The boards have determined that brokerage transactions for the Funds may be
conducted through PaineWebber or its affiliates in accordance with procedures
adopted by each board.

James F. Keegan and Julieanna Berry are responsible for the day-to-day
management of Investment Grade Income Fund's portfolio, and Mr. Keegan shares
responsibility for the day-to-day management of the U.S. government and
investment grade securities sector of Strategic Income Fund. 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 has held her fund
responsibilities since June 1995. Mrs. Berry is a vice president of Mitchell
Hutchins, where she has been employed as a portfolio manager since 1989.

Dennis L. McCauley, managing director and chief investment officer of fixed
income investments of Mitchell Hutchins, has been Strategic Income Fund's
allocation manager since March 1995. Mr. McCauley has been employed by
Mitchell Hutchins since December 1994 and is responsible for overseeing all
active fixed income investments, including domestic and global taxable and
tax-exempt mutual funds. Mr. McCauley worked for IBM Corporation, where he was
director of fixed income investments responsible for developing and managing
investment strategy for all fixed income and cash management investments of
IBM's pension fund and self-insured medical funds. Mr. McCauley has also
served as vice president of IBM Credit Corporation's mutual funds and as a
member of the retirement fund investment committee.

Other members of Mitchell Hutchins' fixed income and equity investments groups
provide input on market outlook, interest rate forecasts, investment research
and other considerations pertaining to each Fund's investments.

MANAGEMENT FEES & OTHER EXPENSES

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.

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Prospectus Page 24
<PAGE>

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Determining the Shares' Net Asset Value

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

Each Fund values its assets based on their current market value when market
quotations are readily available. If market quotations are not readily
available, assets are valued at fair value as determined in good faith by or
under the direction of its board. The amortized cost method of valuation
generally is used to value debt obligations with 60 days or less remaining to
maturity, unless its board determines that this does not represent fair value.
Investments 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 high yield, high risk bonds, thinly
traded securities and foreign securities in which High Income Fund, Investment
Grade Income Fund and Strategic Income Fund may invest, because there is less
reliable, objective data available.

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

Dividends & Taxes

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

DIVIDENDS

Dividends from Strategic Income Fund's net investment income are declared and
paid monthly. Dividends from each of the other four Fund's net investment
income are declared daily and paid monthly. High Income Fund and Strategic
Income Fund may, but are not required to, distribute with any dividend all or
some of any net realized foreign currency gains.

Dividends and other distributions paid on each class of a Fund's shares are
calculated at the same time and in the same manner as dividends and other
distributions on other classes of the Fund's shares.

With respect to the four Funds that declare daily dividends, shares purchased
through PaineWebber investment executives and correspondent firms begin
earning dividends on the Business Day following the date payment for the
shares is due; shares purchased through the Transfer Agent begin earning
dividends on the Business Day following its receipt of payment for the shares.
Shares acquired through an exchange begin earning dividends on the Business
Day following the day on which the exchange is effected.

TAXES

Each Fund intends to continue to qualify for treatment as a regulated
investment company under

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Prospectus Page 25
<PAGE>

the Internal Revenue Code so that it will not have to pay federal income tax
on the part of its taxable income (generally consisting of net investment
income, net short-term capital gain and certain net foreign currency gains)
and net long-term capital gain that it distributes to its shareholders. Under
certain circumstances, these requirements may limit Strategic Income Fund's
ability to reallocate its assets among broad markets.

YEAR-END TAX REPORTING

WITHHOLDING REQUIREMENTS

TAXES ON THE SALE OF FUND SHARES

A sale (redemption) of Fund shares may result in a taxable gain or loss. This
depends on whether the shareholder receives more or less than their adjusted
basis for the shares. In addition, if a Fund's shares are bought within 30
days before or after selling other shares of the Fund (regardless of class) at
a loss, all or part of that loss will not be deductible and will increase the
basis of the newly purchased shares.

Qualified profit-sharing plans such as the PW SIP generally pay no federal
income tax. Individual participants in the PW SIP should consult the plan
documents and their own advisers for information on the tax consequences
associated with participants in the PW SIP.

* * * *

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

General Information

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

ORGANIZATION

U.S. Government Income Fund, Low Duration Income Fund, Investment Grade Income
Fund and High Income Fund are diversified series of PaineWebber Managed
Investments Trust, an open-end management investment company formed on
November 21, 1986 as a business trust under the laws of the Commonwealth of
Massachusetts. Strategic Income Fund is a non-diversified series of
PaineWebber Securities Trust, an open-end management investment company formed
on December 3, 1992, as a business trust under the laws of the Commonwealth of
Massachusetts. The trustees of PaineWebber Managed Investments Trust and
PaineWebber Securities Trust (each, a "Trust") have authority to issue an
unlimited number of shares of beneficial interest of separate series, with a
par value of $.001 per share.

----------
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Prospectus Page 26
<PAGE>

matters exclusively affecting that class, and its exchange privilege. The
different sales charges and other expenses applicable to the different classes
of shares of the Funds will affect the performance of those classes.

Each share of a Fund is entitled to participate equally in dividends, other
distributions and the proceeds of any liquidation of that Fund. However, due
to the differing expenses of the classes, dividends on the other classes are
likely to be lower than for Class Y shares, which bear the lowest expenses.

More information concerning Class A, Class B and Class C Shares of the Funds
may be obtained from an investment executive at PaineWebber or one of
its correspondent firms or by calling toll-free 1-800-647-1568.

VOTING RIGHTS

SHAREHOLDER MEETINGS

The Funds do not hold annual meetings.

REPORTS TO SHAREHOLDERS

CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND AGENT

- --------------------------------------------------------------------------------
-------------------
Prospectus Page 27

<PAGE>

APPENDIX
RATINGS

DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS

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

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

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.

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

A-1
<PAGE>

DESCRIPTION OF S&P CORPORATE DEBT RATINGS

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.

DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS

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-2
<PAGE>

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

DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS

A-3
<PAGE>

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

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

. PAINEWEBBER BOND FUNDS . PAINEWEBBER STOCK FUNDS

High Income Fund Capital Appreciation Fund
Investment Grade Income Fund Financial Services Growth Fund
Low Duration U.S. Government Growth Fund
Income Fund Growth and Income Fund
Strategic Income Fund Small Cap Fund
U.S. Government Income Fund Utility Income Fund

. PAINEWEBBER TAX-FREE BOND FUNDS . PAINEWEBBER GLOBAL FUNDS

California Tax-Free Income Fund Asia Pacific Growth Fund
Municipal High Income Fund Emerging Markets Equity Fund
National Tax-Free Income Fund Global Equity Fund
New York Tax-Free Income Fund Global Income Fund

. PAINEWEBBER MONEY MARKET FUND

. PAINEWEBBER ASSETALLOCATION FUNDS

Balanced Fund
Tactical Allocation Fund

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

PAINEWEBBER U.S. GOVERNMENT INCOME FUND
PAINEWEBBER LOW DURATION
U.S. GOVERNMENT INCOME FUND
PAINEWEBBER INVESTMENT GRADE INCOME FUND
PAINEWEBBER HIGH INCOME FUND
PAINEWEBBER STRATEGIC INCOME FUND
CLASS Y SHARES
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information is not a prospectus and relates
only to the Funds' Class Y shares. It should be read only in conjunction with
the Funds' current Prospectus, dated April 1, 1997. A copy of the Prospectus
may be obtained by calling any PaineWebber investment executive or
correspondent firm, or by calling toll-free 1-800-647-1568. This Statement of
Additional Information is dated April 1, 1997.
<PAGE>

INVESTMENT POLICIES AND RESTRICTIONS

2
<PAGE>

MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent direct or
indirect participations in, or are secured by and payable from, mortgage loans
secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Multi-class pass-through
securities and collateralized mortgage obligations are collectively referred to
herein as CMOs. The U.S. government mortgage-backed securities in which the
Funds may invest include mortgage-backed securities issued or guaranteed as to
the payment of principal and interest (but not as to market value) by the
Government National Mortgage Association ("Ginnie Mae"), Fannie Mae (formerly,
the Federal National Mortgage Association), or the Federal Home Loan Mortgage
Corporation ("Freddie Mac"). Other mortgage-backed securities are issued by
private issuers, generally originators of and investors in mortgage loans,
including savings

3
<PAGE>

4
<PAGE>

5
<PAGE>

rather than passed through to certificateholders on a current basis, until
other classes of the CMO are paid in full.

6
<PAGE>

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.

7
<PAGE>

securities to differ from the assumed average life yield. Reinvestment of
prepayments may occur at lower interest rates than the original investment,
thus adversely affecting the yield of a Fund.

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

8
<PAGE>

lagging indices tend to be somewhat more sensitive to interest rate
fluctuations than those reflecting current interest rate levels, although the
values of such ARM mortgage-backed securities still tend to be less sensitive
to interest rate fluctuations than fixed-rate securities.

9
<PAGE>

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

10
<PAGE>

11
<PAGE>

ZERO COUPON, OID AND PIK SECURITIES. Federal tax law requires that a holder
of a security with original issue discount ("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 payment in kind (" PIK") securities may pay
interest in the form of additional securities rather than cash, that interest
must be included in a Fund's annual income.

Certain zero coupon securities 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 staff of the Securities and Exchange
Commission ("SEC") 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. This technique is frequently used with U.S. Treasury
bonds to create CATS (Certificates of Accrual Treasury Securities), TIGRs
(Treasury Income Growth Receipts) and similar securities. As long as the SEC
takes this position, "CATS" and "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 applicable to U.S. Government Income Fund and Low
Duration Income Fund.

12
<PAGE>

13
<PAGE>

14
<PAGE>

SPECIAL CHARACTERISTICS OF FOREIGN AND EMERGING MARKET SECURITIES

15
<PAGE>

16
<PAGE>

17
<PAGE>

18
<PAGE>

LOAN PARTICIPATIONS AND ASSIGNMENTS. Investment Grade Income Fund and High
Income Fund each may invest up to 5% of its net assets and Strategic Income
Fund may invest without

19
<PAGE>

20
<PAGE>

Each Fund will not:

In addition, U.S. Government Income Fund, Low Duration Income Fund,
Investment Grade Income Fund and High Income Fund will not:

21
<PAGE>

does not apply to securities issued or guaranteed by the U.S.
government, its agencies and instrumentalities or to securities issued
by other investment companies.

NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions may be
changed by each board without shareholder approval.

Each Fund will not:

(5) purchase portfolio securities while borrowings in excess of 5% of its
total assets are outstanding.

HEDGING AND OTHER STRATEGIES USING DERIVATIVE CONTRACTS

22
<PAGE>

circumstances, however, a Fund's use of these instruments will place at risk a
much smaller portion of its assets. The particular Derivative Instruments used
by the Funds are described below.

23
<PAGE>

24
<PAGE>

25
<PAGE>

26
<PAGE>

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

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

27
<PAGE>

28
<PAGE>

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

29
<PAGE>

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

30
<PAGE>

31
<PAGE>

movements is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain.

INTEREST RATE PROTECTION TRANSACTIONS

The Funds 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

32
<PAGE>

33
<PAGE>

TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES

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

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUSTS OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<C> <C> <S>
Margo N. Alexander**; 50 Trustee and President Mrs. Alexander is presi-
dent, chief executive
officer and a director
of Mitchell Hutchins
(since January 1995)
and also an executive
vice president and a
director of
PaineWebber. Mrs. Alex-
ander is president and
a director or trustee
of 29 investment compa-
nies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Richard Q. Armstrong; 61 Trustee Mr. Armstrong is chair-
78 West Brother Drive man and principal of
Greenwich, CT 06830 RQA Enterprises (man-
agement consulting
firm) (since April 1991
and principal occupa-
tion since March 1995).
Mr. Armstrong is also a
director of Hi Lo Auto-
motive, Inc. He was
chairman of the board,
chief executive officer
and co-owner of Adiron-
dack Beverages (pro-
ducer and distributor
of soft drinks and
sparkling/still waters)
(October 1993-March
1995). He was a partner
of the New England Con-
sulting Group (manage-
ment consulting firm)
(December 1992-Septem-
ber 1993). He was man-
aging director of LMVH
U.S. Corporation (U.S.
subsidiary of the
French luxury goods
conglomerate, Luis
Vuitton Moet Hennessey
Corporation) (1987-
1991) and chairman of
its wine and spirits
subsidiary, Schieffelin
& Somerset Company
(1987-1991). Mr. Arm-
strong is a
director or trustee of
28 investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
</TABLE>

34
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUSTS OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<C> <C> <S>
E. Garrett Bewkes, Jr.**; 70 Trustee and Mr. Bewkes is a director
Chairman of the of Paine Webber Group
Board of Trustees Inc. ("PW Group")
(holding company of
PaineWebber and Mitch-
ell Hutchins). Prior to
December 1995, he was a
consultant to PW Group.
Prior to 1988, he was
chairman of the board,
president and chief ex-
ecutive officer of
American Bakeries Com-
pany. Mr. Bewkes is
also a director of In-
terstate Bakeries Cor-
poration, NaPro
BioTherapeutics, Inc.
and a director or
trustee of 29 invest-
ment companies for
which Mitchell Hutchins
or PaineWebber serves
as investment adviser.
Richard R. Burt; 50 Trustee Mr. Burt is chairman of
1101 Connecticut Avenue, N.W. International Equity
Washington, D.C. 20036 Partners (international
investments and con-
sulting firm) (since
March 1994) and a part-
ner of McKinsey & Com-
pany (management con-
sulting firm) (since
1991). He is also a di-
rector of American Pub-
lishing Company and Ar-
cher-Daniels-Midland
Co. (agricultural com-
modities). He was the
chief negotiator in the
Strategic Arms Reduc-
tion Talks with the
former Soviet Union
(1989-1991) and the
U.S. Ambassador to the
Federal Republic of
Germany (1985-1989).
Mr. Burt is a director
or trustee of 28 in-
vestment companies for
which Mitchell Hutchins
or PaineWebber serves
as investment adviser.
Mary C. Farrell**; 47 Trustee Ms. Farrell is a manag-
ing director, senior
investment strategist
and member of the In-
vestment Policy Commit-
tee of PaineWebber. Ms.
Farrell joined
PaineWebber in 1982.
She is a member of the
Financial Women's Asso-
ciation and Women's
Economic Roundtable and
is employed as a regu-
lar panelist on Wall
$treet Week with Louis
Rukeyser. She also
serves on the Board of
Overseers of New York
University's Stern
School of Business. Ms.
Farrell is a director
or trustee of 28 in-
vestment companies for
which Mitchell Hutchins
or PaineWebber serves
as investment adviser.
</TABLE>

35
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUSTS OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<C> <C> <S>
Meyer Feldberg; 55 Trustee Mr. Feldberg is Dean and
Columbia University Professor of Management
101 Uris Hall of the Graduate School
New York, New York 10027 of Business, Columbia
University. Prior to
1989, he was president
of the Illinois Insti-
tute of Technology.
Dean Feldberg is also a
director of K-III Com-
munications Corpora-
tion, Federated Depart-
ment Stores, Inc., and
Revlon, Inc. and a di-
rector or trustee of 28
investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
George W. Gowen; 67 Trustee Mr. Gowen is a partner
666 Third Avenue in the law firm of Dun-
New York, New York 10017 nington, Bartholow &
Miller. Prior to May
1994, he was a partner
in the law firm of Fry-
er, Ross & Gowen. Mr.
Gowen is also a direc-
tor of Columbia Real
Estate Investments,
Inc. and a director or
trustee of 28 invest-
ment companies for
which Mitchell Hutchins
or PaineWebber serves
as investment adviser.
Frederic V. Malek; 60 Trustee Mr. Malek is chairman of
1455 Pennsylvania Avenue, Thayer Capital Partners
N.W. (investment bank) and a
Suite 350 co-chairman and direc-
Washington, D.C. 20004 tor of CB Commercial
Group Inc. (real es-
tate). From January
1992 to November 1992,
he was campaign manager
of Bush-Quayle '92.
From 1990 to 1992, he
was vice chairman and,
from 1989 to 1990, he
was president of North-
west Airlines Inc., NWA
Inc. (holding company
of Northwest Airlines
Inc.) and Wings Hold-
ings Inc. (holding com-
pany of NWA Inc.).
Prior to 1989, he was
employed by the
Marriott Corporation
(hotels, restaurants,
airline catering and
contract feeding),
where he most recently
was an executive vice
president and president
of Marriott Hotels and
Resorts. Mr. Malek is
also a director of
American Management
Systems, Inc. (manage-
ment consulting and
computer related
</TABLE>

36
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUSTS OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<C> <C> <S>
services), Automatic
Data Processing, Inc.,
CB Commercial Group,
Inc. (real estate serv-
ices), Choice Hotels
International (hotel
and hotel franchising),
FPL Group, Inc. (elec-
trical services),
Integra, Inc. (bio-med-
ical), Manor Care,
Inc., National Educa-
tion Corporation and
Northwest Airlines Inc.
Mr. Malek is a director
or trustee of 28 other
investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Carl W. Schafer; 61 Trustee Mr. Schafer is president
P.O. Box 1164 of the Atlantic Founda-
Princeton, NJ 08542 tion, (charitable foun-
dation supporting
mainly oceanographic
exploration and re-
search). He also is a
director of Roadway Ex-
press, Inc. (trucking),
The Guardian Group of
Mutual Funds, Evans
Systems, Inc. (a motor
fuels, convenience
store and diversified
company), Electronic
Clearing House, Inc.
(financial transactions
processing), Wainoco
Oil Corporation and
Nutraceutix, Inc. (bio-
technology). Prior to
January 1993, he was
chairman of the Invest-
ment Advisory Committee
of the Howard Hughes
Medical Institute. Mr.
Schafer is a director
or trustee of 28 in-
vestment companies for
which Mitchell Hutchins
or PaineWebber serves
as investment adviser.
Julieanna Berry; 33 Vice President Ms. Berry is a vice
(Managed Investments president and a portfo-
Trust only) lio manager of Mitchell
Hutchins. Ms. Berry is
a vice president of two
investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Karen L. Finkel; 39 Vice President Mrs. Finkel is a first
(Managed Investments vice president and a
Trust only) portfolio manager of
Mitchell Hutchins. Mrs.
Finkel is a vice presi-
dent of two investment
companies for which
Mitchell Hutchins
serves as investment
adviser.
</TABLE>

37
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUSTS OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<C> <C> <S>
Donald R. Jones; 36 Vice President Mr. Jones is a first
(Securities Trust vice president and a
only) portfolio manager of
Mitchell Hutchins.
Prior to February
1996, he was a vice
president in the asset
management group of
First Fidelity Bancor-
poration. Mr. Jones is
a vice president of
one investment company
for which Mitchell
Hutchins or
PaineWebber serves as
investment adviser.
James F. Keegan; 36 Vice President Mr. Keegan is a senior
(Managed Investments vice president and a
Trust only) portfolio manager of
Mitchell Hutchins.
Prior to March 1996,
he was
director of fixed in-
come strategy and re-
search of Merrion
Group, L.P. From 1987
to 1994, he was a vice
president of Bankers
Trust Company where he
was the director of
credit research for
the global investment
management group. Mr.
Keegan is a vice pres-
ident of three invest-
ment companies for
which Mitchell
Hutchins or
PaineWebber serves as
investment adviser.
Thomas J. Libassi; 38 Vice President Mr. Libassi is a senior
vice president and a
portfolio manager of
Mitchell Hutchins.
Prior to May 1994, he
was a vice president
of Keystone Custodian
Funds Inc. with
portfolio management
responsibility. Mr.
Libassi is a vice
president of four
investment com-panies
for which Mitchell
Hutchins or
PaineWebber serves as
investment adviser.
C. William Maher; 35 Vice President and Mr. Maher is a first
Assistant Treasurer vice president and a
senior manager of the
mutual fund finance
division of Mitchell
Hutchins. Mr. Maher is
a vice president and
assistant treasurer of
29 investment compa-
nies for which Mitch-
ell Hutchins or
PaineWebber serves as
investment adviser.
</TABLE>

38
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUSTS OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<C> <C> <S>
Dennis McCauley; 50 Vice President Mr. McCauley is a manag-
ing director and chief
investment officer--
fixed income of Mitch-
ell Hutchins. Prior to
December 1994, he was
director of fixed in-
come investments of IBM
Corporation.
Mr. McCauley is a vice
president of 19 invest-
ment companies for
which Mitchell Hutchins
or PaineWebber serves
as investment adviser.
Ann E. Moran; 39 Vice President and Ms. Moran is a vice
Assistant Treasurer president of Mitchell
Hutchins. Ms. Moran is
a vice president and
assistant treasurer of
29 investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Dianne E. O'Donnell; 44 Vice President Ms. O'Donnell is a se-
and Secretary nior vice president and
deputy general counsel
of Mitchell Hutchins.
Ms. O'Donnell is a vice
president and secretary
of 28 investment compa-
nies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Emil Polito; 36 Vice President Mr. Polito is a senior
vice president and di-
rector of operations
and control for Mitch-
ell Hutchins. From
March 1991 to September
1993 he was director of
the Mutual Funds Sales
Support and Service
Center for Mitchell
Hutchins and
PaineWebber. Mr. Polito
is also vice president
of 29 investment compa-
nies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Victoria E. Schonfeld; 46 Vice President Ms. Schonfeld is a man-
aging director and gen-
eral counsel of Mitch-
ell Hutchins. Prior to
May 1994, she was a
partner in the law firm
of Arnold & Porter. Ms.
Schonfeld is a vice
president of 29 invest-
ment companies for
which Mitchell Hutchins
or PaineWebber serves
as investment adviser.
</TABLE>

39
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUSTS OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<C> <C> <S>
Paul H. Schubert; 33 Vice President Mr. Schubert is a first
and Assistant vice president and a
Treasurer senior manager of the
mutual fund finance di-
vision of Mitchell
Hutchins. From August
1992 to August 1994, he
was a vice president at
BlackRock Financial
Management L.P. Prior
to August 1992, he was
an audit manager with
Ernst & Young LLP. Mr.
Schubert is a vice
president and assistant
treasurer of 29 invest-
ment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Nirmal Singh; 40 Vice President Mr. Singh is a first
vice president of
Mitchell Hutchins.
Prior to September
1993, he was a member
of the portfolio man-
agement team at Merrill
Lynch Asset Management,
Inc. Mr. Singh is a
vice president of five
investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Julian F. Sluyters; 36 Vice President and Mr. Sluyters is a senior
Treasurer vice president and the
director of the mutual
fund finance division
of Mitchell Hutchins.
Mr. Sluyters is a vice
president and treasurer
of 29 investment compa-
nies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Mark A. Tincher; 41 Vice President Mr. Tincher is a manag-
ing director and chief
investment officer--
U.S. equity investments
of Mitchell Hutchins.
Prior to March 1995, he
was a vice president
and directed the U.S.
funds management and
equity research areas
of Chase Manhattan Pri-
vate Bank. Mr. Tincher
is a vice president of
13 investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
</TABLE>

40
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUSTS OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<C> <C> <S>
Craig M. Varrelman; 38 Vice President Mr. Varrelman is a first
vice president and a
portfolio manager of
Mitchell Hutchins. Mr.
Varrelman is a vice
president of five
investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Stuart Waugh; 41 Vice President Mr. Waugh is a managing
(Securities Trust director and a
only) portfolio manager of
Mitchell Hutchins
responsible for global
fixed income
investments and
currency trading. Mr.
Waugh is a vice
president of five
investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Keith A. Weller; 35 Vice President and Mr. Weller is a first
Assistant Secretary vice president and
associate general
counsel of Mitchell
Hutchins. Prior to May
1995, he was an
attorney in private
practice. Mr. Weller is
a vice president and
assistant secretary of
28 investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Teresa M. West; 38 Vice President Ms. West is a first vice
president of Mitchell
Hutchins. Prior to No-
vember 1993, she was
compliance manager of
Hyperion Capital Man-
agement, Inc., an in-
vestment advisory firm.
Prior to April 1993,
Ms. West was a vice
president and manager--
legal administration of
Mitchell Hutchins. Ms.
West is a vice presi-
dent of 29 investment
companies for which
Mitchell Hutchins or
PaineWebber serves as
investment adviser.
</TABLE>
- --------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of the
Trust as defined in the 1940 Act by virtue of their positions with Mitchell
Hutchins, PaineWebber and/or PW Group.

41
<PAGE>

The Table below includes certain information relating to the compensation of
each Trust's current trustees who held office with the Trust or other
PaineWebber funds during the fiscal year indicated.

COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL
AGGREGATE COMPENSATION
COMPENSATION FROM AGGREGATE FROM THE
THE MANAGED COMPENSATION FROM TRUSTS AND THE
NAME OF PERSON, POSITION INVESTMENTS TRUST* SECURITIES TRUST** TRUST COMPLEX+
- ------------------------ ------------------ ------------------ --------------
<S> <C> <C> <C>
Richard Q. Armstrong, Trustee ................. $4,139 $3,081 $59,873
Richard Burt, Trustee.......................... $3,389 $2,781 $51,173
Meyer Feldberg, Trustee........................ $8,750 $1,664 $96,181
George W. Gowen, Trustee....................... $8,750 $1,664 $92,431
Frederic V. Malek, Trustee..................... $8,750 $1,664 $92,431
Carl W. Schafer, Trustee....................... $4,139 $1,664 $62,307
</TABLE>
- --------
Only independent members of the board are compensated by a Trust and identified
above; trustees who are "interested persons," as defined by the 1940 Act, do
not receive compensation.
* Represents fees paid to each trustee during the fiscal year ended November
30, 1996.
** Represents fees paid to each trustee during the ten months ended November
30, 1996.
+ Represents total compensation paid to each trustee during the calendar year
ended December 31, 1996; no fund within the fund complex has a pension or
retirement plan.

PRINCIPAL HOLDERS OF SECURITIES

The Funds' records as of February 28, 1997 did not indicate that any
shareholder owned more than 5% of any class of a Fund's shares.

42
<PAGE>

INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS

During each of the periods indicated, Mitchell Hutchins earned (or accrued)
advisory fees in the amounts set forth below:

Under a service agreement pursuant to which PaineWebber provides certain
services to each Fund not otherwise provided by the Funds' transfer agent,
which agreement is reviewed by each

43
<PAGE>

Trust's board annually, PaineWebber earned (or accrued) the amounts set forth
below during each of the periods indicated.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
U.S. Government Income Fund............. $133,159 $154,428 $196,490
Investment Grade Income Fund............ $ 83,120 $ 99,641 $ 97,475
High Income Fund........................ $131,762 $158,323 $181,748
Low Duration Income Fund................ $ 70,807 $107,999 $139,291
<CAPTION>
PERIOD
TEN MONTHS FISCAL YEAR FEBRUARY 7,
ENDED ENDED 1994* TO
NOVEMBER 30, JANUARY 31, JANUARY 31,
1996 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Strategic Income Fund................... $ 14,226 $ 19,823 $ 21,998
</TABLE>
- --------
* Commencement of operations

Under each Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Trust or
any Fund in connection with the

44
<PAGE>

performance of the Contract, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of Mitchell Hutchins in the
performance of its duties or from reckless disregard of its duties and
obligations thereunder. Under the Sub-Advisory Contract, PIMCO will not be
liable for any error of judgment or mistake of law or for any loss suffered by
Managed Investments Trust, Low Duration Income Fund, its shareholders or
Mitchell Hutchins in connection with the Sub-Advisory Contract, except any
liability to any of them to which PIMCO would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence on its part in the performance
of its duties or from reckless disregard by it of its obligations and duties
under the Sub-Advisory Contract. Each Advisory Contract terminates
automatically with respect to each Fund upon assignment and is terminable at
any time without penalty by the applicable board or by vote of the holders of a
majority of the Fund's outstanding voting securities on 60 days' written notice
to Mitchell Hutchins or by Mitchell Hutchins on 60 days' written notice to the
Trust. The Sub-Advisory Contract terminates automatically upon its assignment
or the termination of the Advisory Contract and is terminable at any time
without penalty by the board of trustees or by vote of the holders of a
majority of Low Duration Income Fund's outstanding voting securities on 60
days' notice to PIMCO, or by PIMCO on 120 days' written notice to Mitchell
Hutchins. The Sub-Advisory Contract may also be terminated by Mitchell Hutchins
(1) upon material breach by PIMCO of its representations and warranties, which
breach shall not have been cured within a 20 day period after notice of such
breach; (2) if PIMCO becomes unable to discharge its duties and obligations
under the Sub-Advisory Contract; or (3) on 120 days' notice to PIMCO.

The following table shows the approximate net assets as of February 28, 1997,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment company
may fall into more than one of the categories below.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($ MIL)
------------------- ----------
<S> <C>
Domestic (excluding Money Market)............. $5,710.4
Global........................................ 2,938.1
Equity/Balanced............................... 3,579.3
Fixed Income (excluding Money Market)......... 5,069.2
Taxable Fixed Income....................... 3,478.8
Tax-Free Fixed Income...................... 1,590.4
Money Market Funds............................ 24,668.5
</TABLE>

PIMCO personnel also may invest in securities for their own accounts pursuant
to PIMCO's code of ethics, which establishes procedures for personal investing
and restricts certain transactions.

45
<PAGE>

DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
Class Y shares of each Fund under separate distribution contracts with each
Trust (collectively, "Distribution Contracts") that require Mitchell Hutchins
to use its best efforts, consistent with its other businesses, to sell shares
of the Funds. Class Y shares are offered continuously. Under separate exclusive
dealer contracts (collectively, "Exclusive Dealer Contracts"), PaineWebber
sells each Fund's Class Y shares.

PORTFOLIO TRANSACTIONS

Subject to policies established by each board, Mitchell Hutchins or PIMCO, as
applicable, is responsible for the execution of each Fund's portfolio
transactions and the allocation of brokerage transactions. In executing
portfolio transactions, Mitchell Hutchins and PIMCO seek to obtain the best net
results for a Fund, taking into account such factors as the price (including
the applicable brokerage commission or dealer spread), size of order,
difficulty of execution and operational facilities of the firm involved.
Generally, bonds are traded on the OTC market on a "net" basis without a stated
commission through dealers acting for their own account and not as brokers.
Prices paid to dealers in principal transactions generally include a "spread,"
which is the difference between the prices at which the dealer is willing to
purchase and sell a specific security at that time. While Mitchell Hutchins or
PIMCO generally seeks reasonably competitive commission rates, payment of the
lowest commission is not necessarily consistent with obtaining the best net
results.

During the fiscal periods indicated, the Funds paid the brokerage commissions
set forth below:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
U.S. Government Income Fund................ $ 0 $ 0 $ 0
Investment Grade Income Fund............... $ 2,400 $ 0 $21,500
High Income Fund........................... $32,596 $ 0 $74,838
Low Duration Income Fund................... $ 0 $ 0 $88,421
<CAPTION>
PERIOD
TEN MONTHS FISCAL YEAR FEBRUARY 7,
ENDED ENDED 1994* TO
NOVEMBER 30, JANUARY 31, JANUARY 31,
1996 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Strategic Income Fund...................... $ 0 $ 0 $ 0
</TABLE>
- --------
* Commencement of operations

46
<PAGE>

Any such transactions will be effected and related compensation paid in
accordance with applicable SEC regulations. During the last three fiscal years
or periods indicated above, no Fund paid any brokerage commissions to
PaineWebber or any other affiliate of Mitchell Hutchins, except that, during
the fiscal year ended November 30, 1994, High Income Fund paid approximately
$30,915 in brokerage commissions to PaineWebber.

47
<PAGE>

During the fiscal period indicated, the portfolio turnover rates were as set
forth below:

VALUATION OF SHARES

48
<PAGE>

PERFORMANCE INFORMATION

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

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

49
<PAGE>

The following table shows performance information for Class Y shares
(formerly Class C shares) of U.S. Government Income Fund and Low Duration
Income Fund for the periods indicated. Investment Grade Income Fund, High
Income Fund and Strategic Income Fund had no Class Y shares outstanding during
these periods. All returns for periods of more than one year are expressed as
an annualized average return:

<TABLE>
<CAPTION>
U.S. GOVERNMENT LOW DURATION
INCOME FUND INCOME FUND
--------------- ------------
<S> <C> <C>
Fiscal Year Ended November 30, 1996:
Standardized Return*.......................... 3.81% 6.64%
Inception to November 30, 1996:**
Standardized Return*.......................... 5.00% 6.77%
</TABLE>
- --------
* For U.S. Government Income Fund, the inception date for its Class Y shares is
September 11, 1991; for Low Duration Income Fund, the inception date for its
Class Y shares is October 20, 1995.

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

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

50
<PAGE>

obligation for each day of the period that the obligation is in the portfolio.
Once interest earned is calculated in this fashion for each debt obligation
held by the Fund, interest earned during the Period is then determined by
totalling the interest earned on all debt obligations. For purposes of these
calculations, the maturity of an obligation with one or more call provisions is
assumed to be the next date on which the obligation reasonably can be expected
to be called or, if none, the maturity date.

The following table shows the yield for the Class Y shares of the indicated
Funds for the 30-day period ended November 30, 1996.

<TABLE>
<CAPTION>
U.S. GOVERNMENT LOW DURATION
INCOME FUND INCOME FUND
--------------- ------------
<S> <C> <C>
Class Y............................................ 6.13% 6.13%
</TABLE>

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

51
<PAGE>

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

TAXES

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

52
<PAGE>

corporations. Although High Income Fund, Investment Grade Income Fund and
Strategic Income Fund are authorized to hold equity securities, it is expected
that any dividend income received by the Funds will be minimal.

53
<PAGE>

OTHER INFORMATION

Prior to October 20, 1995, Low Duration Income Fund was known as "PaineWebber
Short-Term U.S. Government Income Fund." Prior to November 10, 1995, the Class
Y shares of U.S. Government Income Fund and Low Duration Income Fund were
called "Class C" shares.

54
<PAGE>

ADDITIONAL REDEMPTION INFORMATION. If conditions exist that make cash
payments undesirable, the Funds reserve the right to honor any request for
redemption by making payment in whole or in part in securities chosen by the
Funds and valued in the same way as they would be valued for purposes of
computing the Fund's net asset value. If payment is made in securities, a
shareholder may incur brokerage expenses in converting these securities into
cash. Each Fund has elected, however, to be governed by Rule 18f-1 under the
1940 Act, under which the Funds are obligated to redeem shares solely in cash
up to the lesser of $250,000 or 1% of the net asset value of the Funds during
any 90-day period for one shareholder. This election is irrevocable unless the
SEC permits its withdrawal.

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

CLASS-SPECIFIC EXPENSES. Each Fund may determine to allocate certain of its
expenses to the specific classes of the Fund's shares to which those expenses
are attributable.

FINANCIAL STATEMENTS

55
<PAGE>

[This page intentionally left blank]
<PAGE>

-----------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions....................................... 2
Hedging and Other Strategies Using Derivative Contracts.................... 22
Trustees and Officers; Principal Holders of Securities..................... 34
Investment Advisory and Distribution Arrangements.......................... 43
Portfolio Transactions..................................................... 46
Valuation of Shares........................................................ 49
Performance Information.................................................... 50
Taxes...................................................................... 53
Other Information.......................................................... 55
Financial Statements....................................................... 56
</TABLE>

PAINEWEBBER

U.S. GOVERNMENT
INCOME FUND

LOW DURATION
U.S. GOVERNMENT
INCOME FUND

INVESTMENT GRADE
INCOME FUND

HIGH INCOME FUND

STRATEGIC INCOME FUND

CLASS Y SHARES

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

April 1, 1997
- --------------------------------------------------------------------------------
PAINEWEBBER

<PAGE>

PART C. OTHER INFORMATION
-------------------------

Item 24. Financial Statements and Exhibits
---------------------------------

(a) Financial Statements: (filed herewith)

Included in Part A of this Registration Statement for PaineWebber U.S.
Government Income Fund, PaineWebber Investment Grade Income Fund and PaineWebber
High Income Fund:

Financial Highlights for one Class A share of each Fund for each of the ten
years in the period ended November 30, 1996.

Financial Highlights for one Class B share of each Fund for each of the
five years in the period ended November 30, 1996 and the period July 1,
1991 (commencement of issuance of shares) to November 30, 1991.

Financial Highlights for one Class C share of each Fund for each of the
four years in the period ended November 30, 1996 and the period July 2,
1992 (commencement of issuance of shares) to November 30, 1992.

Financial Highlights for one Class Y share of PaineWebber U.S. Government
Income Fund for each of the five years in the period ended November 30,
1996 and the period September 11, 1991 (commencement of issuance of shares)
to November 30, 1991.

Included in Part A of this Registration Statement for PaineWebber Low Duration
U.S. Government Income Fund:

Financial Highlights for one Class A share, one Class B share and one Class
C share of the Fund for each of the three years in the period ended
November 30, 1996 and for the period May 3, 1993 (commencement of
operations) to November 30, 1993.

Financial Highlights for one Class Y share of the Fund for the year ended
November 30, 1996 and the period October 20, 1995 (commencement of issuance
of shares) to November 30, 1995.

Included in Part B of this Registration Statement for PaineWebber U.S.
Government Income Fund, PaineWebber Investment Grade Income Fund and PaineWebber
High Income Fund through incorporation by reference from the annual report to
shareholders previously filed with the Securities and Exchange Commission
through EDGAR on February 6, 1997 (Accession No. 0000950130-97-000450):

Portfolio of Investments at November 30, 1996.

Statement of Assets and Liabilities at November 30, 1996.

Statement of Operations for the year ended November 30, 1996.

Statement of Changes in Net Assets for each of the two years in the period
ended November 30, 1996.

Notes to Financial Statements.

Financial Highlights for one Class A share and one Class B share of each
Fund for each of the five years in the period ended November 30, 1996.

C-1
<PAGE>

Financial Highlights for one Class Y share of PaineWebber U.S. Government
Income Fund for each of the five years in the period ended November 30,
1996.

Report of Ernst & Young LLP, Independent Auditors, dated January 22,
1997.

Included in Part B of this Registration Statement for PaineWebber Low Duration
U.S. Government Income Fund through incorporation by reference from the annual
report to shareholders previously filed with the Securities and Exchange
Commission through EDGAR on February 6, 1997 (Accession No. 0000950130-97-
000449):

Portfolio of Investments at November 30, 1996.

Statement of Assets and Liabilities at November 30, 1996.

Statement of Operations for the year ended November 30, 1996.

Statement of Changes in Net Assets for each of the two years in the period
ended November 30, 1996

Notes to Financial Statements.

Financial Highlights for one Class A share, one Class B share and one Class
C share of the Fund for each of the three years in the period ended
November 30, 1996 and the period May 3, 1993 (commencement of operations)
to November 30, 1993.

Financial Highlights for one Class Y share of the Fund for the year ended
November 30, 1996 and the period October 20, 1995 (commencement of issuance
of shares) to November 30, 1995.

Report of Ernst & Young LLP, Independent Auditors, dated January 22 ,
1997.

(b) Exhibits:

(1) (a) Declaration of Trust 1/
-

(b) Amendment to Declaration of Trust effective January 28, 1988 2/
-

(d) Amendment to Declaration of Trust effective March 21, 1991 7/
-

(e) Amendment to Declaration of Trust effective April 1, 1991 8/
-

(f) Amendment to Declaration of Trust effective July 1, 1991 11/
--

(g) Amendment to Declaration of Trust effective February 26, 1992 10/
--

(h) Amendment to Declaration of Trust effective January 25, 1993 12/
--

(i) Amendment to Declaration of Trust effective May 25, 1993 14/
--

(j) Amendment to Declaration of Trust effective July 30, 1993 14/
--

(k) Amendment to Declaration of Trust effective November 13, 1993 18/
--

C-2
<PAGE>

(l) Amendment to Declaration of Trust effective July 20, 1995 20/
--

(m) Amendments to Declaration of Trust effective October 20, 1995,
November 10, 1995 and November 29, 1995 21/
--

(n) Amendment to Declaration of Trust effective September 19, 1996

23/
--

(2) (a) By-Laws 1/

(b) Amendment to By-Laws effective March 19, 1991 7/
-
(c) Amendment to By-Laws effective September 28, 1994 18/
--
(3) Voting trust agreement - none

(4) Instruments defining the rights of holders of the Registrant's shares
of beneficial interest 19/
--
(5) (a) Investment Advisory and Administration Contract 4/

(b) Investment Advisory Fee Agreement with respect to PaineWebber
Utility Income Fund 15/

(d) Form of Investment Advisory Fee Agreement with respect to
PaineWebber Asia Pacific Growth Fund 23/

(e) Form of Sub-Advisory Contract with respect to PaineWebber Asia
Pacific Growth Fund 23/
--

(6) (a) Distribution Contract with respect to Class A Shares 15/

(b) Distribution Contract with respect to Class B Shares 15/
--

(d) Distribution Contract with respect to Class Y Shares 21/
--

(e) Exclusive Dealer Agreement with respect to Class A Shares 15/
--

(f) Exclusive Dealer Agreement with respect to Class B Shares 15/
--

(g) Exclusive Dealer Agreement with respect to Class C Shares 21/
--

(h) Exclusive Dealer Agreement with respect to Class Y Shares 21/
--

(7) Bonus, profit sharing or pension plans - none

(8) Custodian Agreement 2/
-

(9) (a) Transfer Agency and Service Contract 6/
-

(b) Service Contract 5/
-

(10) Opinion of Counsel

(a) Opinion and consent of Kirkpatrick & Lockhart LLP , counsel to
the Registrant, with respect to Class A and Class B shares of
U.S. Government Income Fund, Investment Grade Income Fund, and
High Income Fund 8/
-

(b) Opinion and consent of Kirkpatrick & Lockhart LLP , counsel to
the Registrant, with respect to Class A and Class B shares of
PaineWebber Utility Income Fund 9/
-

C-3
<PAGE>

(c) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, with respect to Class C Shares of the above-
referenced Funds 11/
--

(d) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, with respect to Class A, B and C shares of
PaineWebber Low Duration U.S. Government Income Fund 12/
--

(e) Opinion and Consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, with respect to Class Y shares of PaineWebber Low
Duration U.S. Government Income Fund 20/
--

(f) Opinion and Consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, with respect to Class Y shares of PaineWebber
Investment Grade Income Fund and PaineWebber High Income Fund 24/
--

(g) Opinion and Consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, with respect to Class A, B and C shares of
PaineWebber Asia Pacific Growth Fund 23/
--

(h) Opinion and Consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, with respect to Class Y shares of PaineWebber Asia
Pacific Growth Fund 25/
--

(11) Auditor's Consent (filed herewith)

(12) Financial statements omitted from prospectus - none

(13) Letter of investment intent 3/
-

(14) Prototype Retirement Plan 10/
--

(15) (a) Plan pursuant to Rule 12b-1 with respect to Class A Shares 9/
-

(b) Plan pursuant to Rule 12b-1 with respect to Class B Shares 9/
-

(d) Distribution Fee Addendum with respect to Class C shares of
PaineWebber Low Duration U.S. Government Income Fund 15/
--

(e) Distribution Fee Addendum with respect to Class C shares of
PaineWebber Asia Pacific Growth Fund 23/
--

(16) Schedule for Computation of Performance Quotations 8/
-

(a) Schedule for Computation of Performance Quotations for Class A
shares of U.S. Government Income Fund, Investment Grade Income
Fund, and High Income Fund 7/
-

(b) Schedule for Computation of Performance Quotations for Class B
shares of U.S. Government Income Fund, Investment Grade Income
Fund, and High Income Fund 10/
--

(d) Schedule for Computation of Performance Quotations For Class C
shares of U.S. Government Income Fund, Investment Grade Income
Fund, and High Income Fund 13
--

(e) Schedule for Computation of Performance Quotations for Class A,
Class B and Class C shares of PaineWebber Utility Income Fund 16/
--

C-4
<PAGE>

(f) Schedule for Computation of Performance Quotations for Class A,
Class B, and Class C shares of PaineWebber Low Duration U.S.
Government Income Fund 16/
--

(g) Schedule for Computation of Performance Quotations for Class Y
shares of PaineWebber Low Duration U.S. Government Income Fund
(to be filed)

(17) and

(27) Financial Data Schedule (filed herewith)

(18) Plan pursuant to Rule 18f-3 26/
--

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

1/ Incorporated by reference from Post-Effective Amendment No. 5 to the
- -
registration statement, SEC File No. 2-91362, filed January 30, 1987.

2/ Incorporated by reference from Post-Effective Amendment No. 8 to the
- -
registration statement, SEC File No. 2-91362, filed March 31, 1988.

3/ Incorporated by reference from Pre-Effective Amendment No. 1 to the
- -
registration statement, SEC File No. 2-91362, filed July 18, 1984.

4/ Incorporated by reference from Post-Effective Amendment No. 10 to the
- -
registration statement, SEC File No. 2-91362, filed March 6, 1989.

5/ Incorporated by reference from Post-Effective Amendment No. 12 to the
- -
registration statement, SEC File No. 2-91362, filed January 31, 1990.

6/ Incorporated by reference from Post-Effective Amendment No. 15 to the
- -
registration statement, SEC File No. 2-91362, filed January 31, 1991.

7/ Incorporated by reference from Post-Effective Amendment No. 16 to the
- -
registration statement, SEC File No. 2-91362, filed March 28, 1991.

8/ Incorporated by reference from Post-Effective Amendment No. 18 to the
- -
registration statement, SEC File No. 2-91362, filed May 2, 1991.

9/ Incorporated by reference from Post-Effective Amendment No. 19 to the
- -
registration statement, SEC File No. 2-91362, filed March 2, 1992.

10/ Incorporated by reference from Post-Effective Amendment No. 20 to the
- --
registration statement, SEC File No. 2-91362, filed April 1, 1992.

11/ Incorporated by reference from Post-Effective Amendment No. 21 to the
- --
registration statement, SEC File No. 2-91362, filed May 1, 1992.

12/ Incorporated by reference from Post-Effective Amendment No. 23 to the
- --
registration statement, SEC File No. 2-91362, filed January 26, 1993.

13/ Incorporated by reference from Post-Effective Amendment No. 24 to the
- --
registration statement, SEC File No. 2-91362, filed April 1, 1993.

14/ Incorporated by reference from Post-Effective Amendment No. 25 to the
- --
registration statement, SEC File No. 2-91362, filed August 10, 1993.

15/ Incorporated by reference from Post-Effective Amendment No. 26 to the
- --
registration statement, SEC File No. 2-91362, filed October 4, 1993.

C-5
<PAGE>

16/ Incorporated by reference from Post-Effective Amendment No. 28 to the
- --
registration statement, SEC File No. 2-91362, filed April 1, 1994.

17/ Incorporated by reference from Post-Effective Amendment No. 30 to the
- --
registration statement, SEC File No. 2-91362, filed July 1, 1994.

18/ Incorporated by reference form Post-Effective Amendment No. 34 to the
- --
registration statement, SEC File No. 2-91362, filed January 27, 1995.

19/ Incorporated by reference from Articles III, VIII, IX, X and XI of
- --
Registrant's Declaration of Trust, as amended effective January 28, 1988,
July 1, 1990, March 21, 1991, April 1, 1991, July 1, 1991, February 26,
1992, January 25, 1993, July 30, 1993, November 13, 1993, July 20, 1995,
October 20, 1995, November 10, 1995, November 29, 1995 and September 19,
1996 and from Articles II, VII and X of Registrant's By-Laws, as amended
March 19, 1993 and September 28, 1994.

20/ Incorporated by reference from Post-Effective Amendment No. 38 to the
- --
registration statement, SEC File No. 2-91362, filed September 5, 1995.

21/ Incorporated by reference from Post-Effective Amendment No. 39 to the
- --
registration statement, SEC File No. 2-91362, filed February 14, 1996.

22/ Incorporated by reference from Post-Effective Amendment No. 40 to the
- --
registration statement, SEC File No. 2-91362, filed March 29, 1996.

23/ Incorporated by reference from Post-Effective Amendment No. 46 to the
- --
registration statement, SEC File No. 2-91362, filed October 4, 1996.

24/ Incorporated by reference from Post-Effective Amendment No. 42 to the
- --
registration statement, SEC File No. 2-91362, filed June 3, 1996.

25/ Incorporated by reference from Post-Effective Amendment No. 47 to the
- --
registration statement, SEC File No. 2-91362, filed October 11, 1996.

26/ Incorporated by reference from Post-Effective Amendment No. 43 to the
- --
registration statement, SEC File No. 2-91362, filed July 31, 1996.

Item 25. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------

None.

Item 26. Number of Holders of Securities
-------------------------------

<TABLE>
<CAPTION>
Number of Record
Title of Class Shareholders as of
--------------
January 27, 1997
----------------
<S> <C>
Shares of beneficial interest, par value $0.001 per share, in

U.S. Government Income Fund

Class A Shares 23,535

Class B Shares 4,573

Class C Shares 2,665

Class Y Shares 145
</TABLE>

C-6
<PAGE>

<TABLE>
<CAPTION>
Number of Record
Title of Class Shareholders as of
--------------
January 27, 1997
----------------
<S> <C>
Investment Grade Income Fund

Class A Shares 14,749

Class B Shares 3,061

Class C Shares 1,760

Class Y Shares 0

High Income Fund

Class A Shares 14,988

Class B Shares 11,179

Class C Shares 5,657

Class Y Shares 0

PaineWebber Utility Income Fund

Class A Shares 735

Class B Shares 2,331

Class C Shares 834

Class Y Shares 0

PaineWebber Low Duration U.S. Government Income Fund

Class A Shares 911

Class B Shares 710

Class C Shares 13,477

Class Y Shares 34
</TABLE>

Item 27. Indemnification
---------------

Section 2 of "Indemnification" in Article X of the Declaration of Trust
provides that the Registrant will indemnify its trustees and officers to the
fullest extent permitted by law against claims and expenses asserted against or
incurred by them by virtue of being or having been a trustee or officer;
provided that no such person shall be indemnified where there has been an
adjudication or other determination, as described in Article X, that such person
is liable to the Registrant or its shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office or did not act in good faith in the
reasonable belief that his or her action was in the best interest of the
Registrant. Section 2 of "Indemnification" in Article X also provides that the
Registrant may maintain insurance policies covering such rights of
indemnification.

Additionally, "Limitation of Liability" in Article X of the Declaration of
Trust provides that the trustees or officers of the Registrant shall not be
personally liable to any person extending credit to, contracting with, or having
a claim against, the Trust; and that, provided they have exercised reasonable
care and have acted under the reasonable belief that their actions

C-7
<PAGE>

are in the best interest of the Registrant, the trustees and officers shall not
be liable for neglect or wrongdoing by them or any officer, agent, employee or
investment adviser of the Registrant.

Section 2 of Article XI of the Declaration of Trust additionally provides
that, subject to the provisions of Section 1 of Article XI and to Article X, the
trustees shall not be liable for errors of judgment or mistakes of fact or law,
or for any act or omission in accordance with advice of counsel or other
experts, or failing to follow such advice, with respect to the meaning and
operation of the Declaration of Trust.

Article XI of the By-Laws provides that the Registrant may purchase and
maintain insurance on behalf of any person who is or was a trustee, officer or
employee of the Trust, or is or was serving at the request of the Trust as a
trustee, officer or employee of a corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against him or her and
incurred by him or her in any such capacity or arising out of his or her status
as such, whether or not the Registrant would have the power to indemnify him or
her against such liability, provided that the Registrant may not acquire
insurance protecting any trustee or officer against liability to the Registrant
or its shareholders to which he or she would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his or her office.

Section 9 of the Investment Advisory and Administration Contract ("Advisory
Contract") between Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins")
and the Trust provides that Mitchell Hutchins shall not be liable for any error
of judgment or mistake of law or for any loss suffered by the Registrant in
connection with the matters to which the Advisory Contract relates, except for a
loss resulting from willful misfeasance, bad faith, or gross negligence of
Mitchell Hutchins in the performance of its duties or from its reckless
disregard of its obligations and duties under the Advisory Contract. The sub-
advisory contracts with respect to PaineWebber Low Duration U.S. Government
Income Fund and PaineWebber Asia Pacific Growth Fund contain similar provisions
with respect to those sub-advisers. Section 10 of the Advisory Contract
provides that the trustees shall not be liable for any obligations of the Trust
under the Advisory Contract and that Mitchell Hutchins shall look only to the
assets and property of the Trust in settlement of such right or claim and not to
the assets and property of the trustees.

Section 9 of each Distribution Contract provides that the Trust will
indemnify Mitchell Hutchins and its officers, directors or controlling persons
against all liabilities arising from any alleged untrue statement of material
fact in the Registration Statement or from any alleged omission to state in the
Registration Statement a material fact required to be stated in it or necessary
to make the statements in it, in light of the circumstances under which they
were made, not misleading, except insofar as liability arises from untrue
statements or omissions made in reliance upon and in conformity with information
furnished by Mitchell Hutchins to the Trust for use in the Registration
Statement; and provided that this indemnity agreement shall not protect any such
persons against liabilities arising by reason of their bad faith, gross
negligence or willful misfeasance; and shall not inure to the benefit of any
such persons unless a court of competent jurisdiction or controlling precedent
determines that such result is not against public policy as expressed in the
Securities Act of 1933. Section 9 of each Distribution Contract also provides
that Mitchell Hutchins agrees to indemnify, defend and hold the Trust, its
officers and trustees free and harmless of any claims arising out of any alleged
untrue statement or any alleged omission of material fact contained in
information furnished by Mitchell Hutchins for use in the Registration Statement
or arising out of an agreement between Mitchell Hutchins and any retail dealer,
or arising out of supplementary literature or advertising used by Mitchell
Hutchins in connection with each Distribution

C-8
<PAGE>

Contract.

Section 9 of each Exclusive Dealer Agreement contains provisions similar to
Section 9 of each Distribution Contract, with respect to PaineWebber
Incorporated ("PaineWebber").

Section 6 of the Service Contract provides that PaineWebber shall be
indemnified and held harmless by the Trust against all liabilities, except those
arising out of bad faith, gross negligence, willful misfeasance or reckless
disregard of its duties under the Service Contract.

Section 10 of each Distribution Contract and Section 7 of the Service
Contract contain provisions similar to that of Section 10 of the Investment
Advisory and Administration Contract, with respect to Mitchell Hutchins and
PaineWebber, as appropriate.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be provided to trustees, officers and controlling
persons of the Trust, pursuant to the foregoing provisions or otherwise, the
Trust has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Trust of expenses
incurred or paid by a trustee, officer or controlling person of the Trust in
connection with the successful defense of any action, suit or proceeding or
payment pursuant to any insurance policy) is asserted against the Trust by such
trustee, officer or controlling person in connection with the securities being
registered, the Trust will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------

Mitchell Hutchins, a Delaware corporation, is a registered investment
advisor and is a wholly owned subsidiary of PaineWebber which is, in turn, a
wholly owned subsidiary of Paine Webber Group Inc. Mitchell Hutchins is
primarily engaged in the investment advisory business. Information as to the
officers and directors of Mitchell Hutchins is included in its Form ADV, as
filed with the Securities and Exchange Commission (registration number 801-
13219), and is incorporated herein by reference.

Pacific Investment Management Company ("PIMCO") serves as sub-adviser for
PaineWebber Low Duration U.S. Government Income Fund. PIMCO, a Delaware
partnership, is a registered investment adviser and a subsidiary general
partnership of PIMCO Advisors L.P. ("PIMCO Advisors"). A majority interest in
PIMCO Advisors is held by PIMCO Partners, G.P., a general partnership between
Pacific Financial Asset Management Corporation, an indirect wholly owned
subsidiary of Pacific Mutual Life Insurance Company ("Pacific Mutual") and PIMCO
Partners, L.L.C., a limited liability company controlled by the PIMCO Managing
Directors. PIMCO is primarily engaged in the investment advisory business.
Information as to the officers and Managing Directors and partners of PIMCO is
included in its Form ADV, as filed with the Securities and Exchange Commission
(registration number 801-48187), and is incorporated herein by reference.

Schroder Capital Management International Inc. ("Schroder Capital") serves
as investment sub-adviser for PaineWebber Asia Pacific Growth Fund. Schroder
Capital, a New York corporation, is a registered investment adviser and a wholly
owned subsidiary of Schroders Incorporated, the wholly owned U.S. holding
company subsidiary of Schroders plc. Schroder Capital is primarily

C-9
<PAGE>

engaged in the investment advisory business. Information as to the officers and
directors of Schroder Capital is included on its Form ADV, as filed with the
Securities and Exchange Commission (registration number 801-15834), and is
incorporated herein by reference.

Item 29. Principal Underwriters
----------------------

(a) Mitchell Hutchins serves as principal underwriter and/or investment adviser
for the following other investment companies:

. ALL-AMERICAN TERM TRUST INC.
. GLOBAL HIGH INCOME DOLLAR FUND INC.
. GLOBAL SMALL CAP FUND INC.
. INSURED MUNICIPAL INCOME FUND INC.
. INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
. MANAGED HIGH YIELD FUND INC.
. PAINEWEBBER AMERICA FUND
. PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
. PAINEWEBBER INVESTMENT SERIES
. PAINEWEBBER INVESTMENT TRUST
. PAINEWEBBER INVESTMENT TRUST II
. PAINEWEBBER MANAGED ASSETS TRUST
. PAINEWEBBER MANAGED INVESTMENTS TRUST
. PAINEWEBBER MASTER SERIES, INC.
. PAINEWEBBER MUNICIPAL SERIES
. PAINEWEBBER MUTUAL FUND TRUST
. PAINEWEBBER OLYMPUS FUND
. PAINEWEBBER SECURITIES TRUST
. PAINEWEBBER SERIES TRUST
. STRATEGIC GLOBAL INCOME FUND, INC.
. TRIPLE A AND GOVERNMENT SERIES - 1997, INC.
. 2002 TARGET TERM TRUST INC.

(b) Mitchell Hutchins is the principal underwriter for the Registrant.
PaineWebber acts as exclusive dealer for the shares of the Registrant. The
directors and officers of Mitchell Hutchins, their principal business addresses
and their positions and offices with Mitchell Hutchins are identified in its
Form ADV, as filed with the Securities and Exchange Commission (registration
number 801-13219). The directors and officers of PaineWebber, their principal
business addresses and their positions and offices with PaineWebber are
identified in its Form ADV, as filed with the Securities and Exchange Commission
(registration number 801-7163). The foregoing information is hereby incorporated
by reference. The information set forth below is furnished for those directors
and officers of Mitchell Hutchins or PaineWebber who also serve as trustees or
officers of the Registrant. Unless otherwise indicated, the principal business
address of each person named is 1285 Avenue of the Americas, New York, NY 10019.

C-10
<PAGE>

<TABLE>
<CAPTION>
Position and Offices
Position With with Underwriter or
Name Registrant Exclusive Dealer
- ---- ------------- --------------------
<S> <C> <C>
Margo N. Alexander President and Trustee Director, President and
Chief Executive Officer
of Mitchell Hutchins and
Director and Executive
Vice President of
PaineWebber

Mary C. Farrell Trustee Managing Director,
Senior Investment
Strategist and member of
Investment Policy
Committee of PaineWebber

Julianna Berry Vice President Vice President and a
Portfolio Manager of
Mitchell Hutchins

Karen L. Finkel Vice President First Vice President and
a Portfolio Manager of
Mitchell Hutchins

James F. Keegan Vice President Senior Vice President
and a Portfolio Manager
of Mitchell Hutchins

Thomas J. Libassi Vice President Senior Vice President
and a Portfolio Manager
of Mitchell Hutchins

C. William Maher Vice President and First Vice President and
Assistant a Senior Manger of the
Treasurer Mutual Fund Finance
Division of Mitchell
Hutchins

Dennis McCauley Vice President Managing Director and
Chief Investment Officer
- Fixed Income of
Mitchell Hutchins

Ann E. Moran Vice President Vice President of
and Assistant Treasurer Mitchell Hutchins

Dianne E. O'Donnell Vice President Senior Vice President
and Secretary and Deputy General
Counsel of Mitchell
Hutchins

Emil Polito Vice President Senior Vice President
and Director of
Operations and Control
of Mitchell Hutchins
</TABLE>

C-11
<PAGE>

<TABLE>
<CAPTION>
Position and Offices
Position With with Underwriter or
Name Registrant Exclusive Dealer
- ---- ------------- --------------------
<S> <C> <C>
Victoria E. Schonfeld Vice President Managing Director and
General Counsel of
Mitchell Hutchins

Paul H. Schubert Vice President First Vice President and
and Assistant Treasurer a Senior Manager of the
Mutual Fund Finance
Division of Mitchell
Hutchins

Nirmal Singh Vice President First Vice President and
a Portfolio Manager of
Mitchell Hutchins

Julian F. Sluyters Vice President Senior Vice President
and Treasurer and Director of Mutual
Fund Finance Division of
Mitchell Hutchins

Mark A. Tincher Vice President Managing Director and
Chief Investment Officer
- U.S. Equity
Investments of Mitchell
Hutchins

Craig M. Varrelman Vice President First Vice President and
a Portfolio Manager of
Mitchell Hutchins

Keith A. Weller Vice President First Vice President and
and Assistant Associate General
Secretary Counsel of Mitchell
Hutchins

Teresa M. West Vice President First Vice President and
Manager of Mitchell
Hutchins
</TABLE>

Item 30. Location of Accounts and Records
--------------------------------

The books and other documents required by paragraphs (b)(4), (c) and (d) of
Rule 31a-1 under the Investment Company Act of 1940 are maintained in the
physical possession of Mitchell Hutchins, 1285 Avenue of the Americas, New York,
New York 10019. All other accounts, books and documents required by Rule 31a-1
are maintained in the physical possession of Registrant's transfer agent and
custodian.

Item 31. Management Services
-------------------

Not applicable.

C-12
<PAGE>

Item 32. Undertakings
------------

Registrant hereby undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders
upon request and without charge.

C-13
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1993 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Post-Effective the Securities Act of 1993
and has duly caused this Post-Effective Amendment to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York and State of
New York, on the 24th day of March, 1997.

PAINEWEBBER MANAGED INVESTMENTS TRUST

By: /s/ Dianne E. O'Donnell
---------------------------------
Dianne E. O' Donnell
Vice President and Secretary

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:

Signature Title Date
- --------- ----- ----

/s/ Margo N. Alexander President and Trustee March 24, 1997
- ------------------------- (Chief Executive
Margo N. Alexander * Officer)

/s/ E. Garrett Bewkes, Jr Trustee and Chairman March 24, 1997
- ------------------------- of the Board of
E. Garrett Bewkes, Jr. * Trustees

/s/ Richard Q. Armstrong Trustee March 24, 1997
- -------------------------
Richard Q. Armstrong *

/s/ Richard R. Burt Trustee March 24, 1997
- -------------------------
Richard R. Burt *

/s/ Mary C. Farrell Trustee March 24, 1997
- -------------------------
Mary C. Farrell *

/s/ Meyer Feldberg Trustee March 24, 1997
- -------------------------
Meyer Feldberg *

/s/ George W. Gowen Trustee March 24, 1997
- -------------------------
George W. Gowen *

/s/ Frederic V. Malek Trustee March 24, 1997
- -------------------------
Frederic V. Malek *

/s/ Carl W. Schafer Trustee March 24, 1997
- -------------------------
Carl W. Schafer *

/s/ John R. Torell III Trustee March 24, 1997
- -------------------------
John R. Torell III *

/s/ Julian F. Sluyters Vice President and March 24, 1997
- ------------------------- Treasurer (Chief
Julian F. Sluyters Financial and
Accounting Officer)
<PAGE>

SIGNATURES (Continued)

* Signature affixed by Elinor W. Gammon pursuant to power of attorney dated
May 21, 1996 and incorporated by reference from Post-Effective Amendment
No. 30 to the registration statement of PaineWebber Managed Municipal
Trust, SEC File No. 2-89016, filed June 27, 1996.
<PAGE>

PAINEWEBBER MANAGED INVESTMENTS TRUST

EXHIBIT INDEX
-------------

EXHIBIT
NUMBER
-------