PAINEWEBBER MANAGED INVESTMENTS TRUST, 497, 1998-04-09

PAINEWEBBER MANAGED INVESTMENTS TRUST
497, 1998-04-09

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PaineWebber U.S. Government Income Fund
PaineWebber Low Duration U.S. Government Income Fund
PaineWebber Investment Grade Income Fund
PaineWebber High Income Fund
PaineWebber Strategic Income Fund
1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
PROSPECTUS -- APRIL 1, 1998
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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 order to
achieve their investment goals.

PaineWebber U.S. Government Income Fund invests primarily in U.S. government
bonds, including those backed by mortgages. PaineWebber Low Duration U.S.
Government Income Fund also invests primarily in U.S. government bonds,
including those backed by mortgages, but it limits the duration of its portfolio
to between one to three 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 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.

This Prospectus concisely sets forth information that a prospective investor
should know about the Funds before investing. Please read this Prospectus
carefully and retain a copy for future reference.

A Statement of Additional Information dated April 1, 1998 has been filed with
the Securities and Exchange Commission ('SEC' or '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. In addition, the Commission maintains a
website (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference, and other information regarding
registrants that file electronically with the Commission.
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THE PAINEWEBBER FAMILY OF MUTUAL FUNDS
The PaineWebber Family of Mutual Funds consists of seven broad categories, which
are presented here. Generally, investors seeking to maximize return must assume
greater risk. The Funds offered by this Prospectus are in the BOND category.

[*] ASSET ALLOCATION FUNDS for high total return by investing in stocks and
bonds.
[*] STOCK FUNDS for long-term growth by investing mainly in stocks.
[*] BOND FUNDS for income by investing mainly in bonds.
[*] TAX-FREE BOND FUNDS for income exempt from federal income tax and, in some
cases, state and local income taxes, by investing in municipal bonds.
[*] GLOBAL FUNDS for long-term growth by investing mainly in foreign stocks or
high current income by investing mainly in global debt instruments.
[*] MONEY MARKET FUND for income and stability by investing in high-quality,
short-term investments.
[*] FUNDS OF FUNDS for either long-term growth of capital, total return or
income (and, secondarily, growth of capital) by investing in other
PaineWebber mutual funds.

A complete listing of the PaineWebber Family of Mutual Funds is found on the
back cover of this Prospectus.

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INVESTORS SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERRED TO IN THIS
PROSPECTUS. THE FUNDS AND THEIR DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE TO
PROVIDE 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 SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
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.

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Prospectus Page 1

Expense Table..................................................................... 6

Financial Highlights.............................................................. 10

Investment Objectives & Policies.................................................. 22

Investment Philosophy & Process................................................... 24

Performance....................................................................... 25

The Funds' Investments............................................................ 30

Flexible Pricing'sm'.............................................................. 38

How to Buy Shares................................................................. 42

How to Sell Shares................................................................ 44

Other Services.................................................................... 44

Management........................................................................ 45

Determining the Shares' Net Asset Value........................................... 47

Dividends & Taxes................................................................. 48

General Information............................................................... 50

Appendix.......................................................................... A-1
</TABLE>

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Prospectus Page 2

<PAGE>

MANAGEMENT

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 the 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.

Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), a wholly owned
asset management subsidiary of PaineWebber Incorporated ('PaineWebber'), is the
investment adviser and administrator of each Fund. Pacific Investment Management
Company ('PIMCO') serves as subadviser for Low Duration U.S. Government Income
Fund ('Low Duration Income Fund').

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 $360.5 million in assets on February 28, 1998.

WHO SHOULD INVEST: Investors seeking high current income from investment in U.S.
government bonds.

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 between one to three years.

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

SIZE: Over $131.7 million in assets on February 28, 1998.

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 $290.6 million in assets on February 28, 1998.

WHO SHOULD INVEST: Investors seeking high current income from investment in a
diversified portfolio of investment grade bonds.

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 $654.2 million in assets on February 28, 1998.

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 $97.4 million in assets on February 28, 1998.

WHO SHOULD INVEST: Investors seeking current high income and, secondarily,
capital appreciation, who can

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Prospectus Page 3

<PAGE>

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
between one to three 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 Income 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 swaps, each of which involve
special risks.

MINIMUM INVESTMENT

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

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

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Prospectus Page 4

<PAGE>

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.

CLASS Y SHARES

Class Y shares are offered only to limited groups of investors. The price is the
net asset value. 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 contingent differed sales charge when they sell
Class Y shares. Class Y shares have lower ongoing expenses than any other class
of shares.

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Prospectus Page 5

<PAGE>

The following tables are intended to assist investors in understanding the
expenses associated with investing in each class of shares of the Funds.
Expenses shown below are based on those incurred for the most recent fiscal year
except that 'Other Expenses' for Class Y shares of Investment Grade Income, High
Income Fund and Strategic Income Fund have been estimated because no Class Y
shares were outstanding.

SHAREHOLDER TRANSACTION EXPENSES

<TABLE>
<CAPTION>
ALL FUNDS CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge on Purchases of Shares (as a % of offering price)......... 4%(1) None None None
Sales Charge on Reinvested Dividends (as a % of offering price)................ None 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% None
Exchange Fees.................................................................. None None None None
</TABLE>

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(1) 3% for Low Duration Income Fund

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

<TABLE>
<CAPTION>
U.S. GOVERNMENT INCOME FUND CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Management Fees................................................................ 0.50% 0.50% 0.50% 0.50%
12b-1 Fees..................................................................... 0.25 1.00 0.75 0.00
Other Expenses................................................................. 0.19 0.19 0.19 0.17
------- ------- ------- -------
Total Operating Expenses....................................................... 0.94% 1.69% 1.44% 0.67%
------- ------- ------- -------
------- ------- ------- -------
LOW DURATION INCOME FUND
Management Fees................................................................ 0.50% 0.50% 0.50% 0.50%
12b-1 Fees..................................................................... 0.25 1.00 0.75 0.00
Other Expenses................................................................. 0.29 0.37 0.39 0.36
------- ------- ------- -------
Total Operating Expenses....................................................... 1.04% 1.87% 1.64% 0.86%
------- ------- ------- -------
------- ------- ------- -------
INVESTMENT GRADE INCOME FUND
Management Fees................................................................ 0.50% 0.50% 0.50% 0.50%
12b-1 Fees..................................................................... 0.25 1.00 0.75 0.00
Other Expenses................................................................. 0.28 0.28 0.28 0.28
------- ------- ------- -------
Total Operating Expenses....................................................... 1.03% 1.78% 1.53% 0.78%
------- ------- ------- -------
------- ------- ------- -------
HIGH INCOME FUND
Management Fees................................................................ 0.50% 0.50% 0.50% 0.50%
12b-1 Fees..................................................................... 0.25 1.00 0.75 0.00
Other Expenses................................................................. 0.23 0.23 0.23 0.23
------- ------- ------- -------
Total Operating Expenses....................................................... 0.98% 1.73% 1.48% 0.73%
------- ------- ------- -------
------- ------- ------- -------
STRATEGIC INCOME FUND*
Management Fees (after fee waivers)............................................ 0.67% 0.67% 0.67% 0.67%
12b-1 Fees (after fee waivers)................................................. 0.25 0.96 0.73 0.00
Other Expenses................................................................. 0.66 0.70 0.68 0.66
------- ------- ------- -------
Total Operating Expenses....................................................... 1.58% 2.33% 2.08% 1.33%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>

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* 'Total Operating Expenses' reflect a voluntary expense cap that was adopted by
Mitchell Hutchins commencing June 1, 1997 and is expected to remain in place
for the entire current fiscal year. 'Management Fees' and '12b-1 Fees' will be
waived only to the extent necessary to avoid exceeding the expense cap and
will be paid at the contract rate of 0.75% for 'Management Fees,' 1.00% for
Class B '12b-1 Fees' and 0.75% for Class C '12b-1 Fees' if waivers are not
required to meet the expense cap. For the fiscal year ended November 30, 1997,
'Total Operating Expenses' would have been 1.66%, 2.45% and 2.18%,
respectively, for Class A, Class B and Class C shares absent fee waivers.
'Total Operating Expenses' for Class Y shares are estimated and reflect a
voluntary expense cap of 1.33%. Without this expense cap, estimated 'Total
Operating Expenses' for Class Y shares would be 1.41%.

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Prospectus Page 6

<PAGE>

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 a shareholder 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 by the shareholder, 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 a shareholder sells these shares within one year after
purchase, a contingent deferred sales charge of 0.75% of the offering price or
the net asset value of the shares at the time of sale by the shareholder,
whichever is less, is imposed.

CLASS Y SHARES: No initial or contingent deferred sales charge is imposed, nor
are Class Y shares subject to 12b-1 distribution or service fees. Class Y shares
may be purchased by PaineWebber employees and participants in certain investment
programs that are sponsored by PaineWebber and that may invest in PaineWebber
mutual funds ('PW Programs'), when Class Y shares are purchased through that
program. Participation in a PW Program is subject to an advisory fee at
an annual rate of no more than 1.5% of assets held through that PW Program.
This account charge is not included in the table because investors who are not
PW Program participants also are permitted to purchase Class Y shares.

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 CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
12b-1 service fees.................................................................. 0.25% 0.25% 0.25% None
12b-1 distribution fees............................................................. 0.00 0.75 0.50 None
</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 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.............................................................................. $ 49 $69 $ 90 $151
Class B (Assuming sale of all shares at end of period)............................... $ 67 $83 $ 112 $162
Class B (Assuming no sale of shares)................................................. $ 17 $53 $ 92 $162
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
Class Y.............................................................................. $ 7 $21 $ 37 $ 83
</TABLE>

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Prospectus Page 7

<PAGE>

LOW DURATION INCOME FUND

<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------------- ------ ------- ------- --------

<S> <C> <C> <C> <C>
Class A.............................................................................. $ 40 $62 $ 86 $153
Class B (Assuming sale of all shares at end of period)............................... $ 49 $79 $ 101 $177
Class B (Assuming no sale of shares)................................................. $ 19 $59 $ 101 $177
Class C (Assuming sale of all shares at end of period)............................... $ 24 $52 $ 89 $194
Class C (Assuming no sale of shares)................................................. $ 17 $52 $ 89 $194
Class Y.............................................................................. $ 9 $27 $ 48 $106
</TABLE>

INVESTMENT GRADE INCOME FUND

<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A.............................................................................. $ 50 $ 71 $ 95 $161
Class B (Assuming sale of all shares at end of period)............................... $ 68 $ 86 $ 116 $172
Class B (Assuming no sale of shares)................................................. $ 18 $ 56 $ 96 $172
Class C (Assuming sale of all shares at end of period)............................... $ 23 $ 48 $ 83 $182
Class C (Assuming no sale of shares)................................................. $ 16 $ 48 $ 83 $182
Class Y.............................................................................. $ 8 $ 25 $ 43 $ 97
</TABLE>

HIGH INCOME FUND

<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A.............................................................................. $ 50 $ 70 $ 92 $155
Class B (Assuming sale of all shares at end of period)............................... $ 68 $ 84 $ 114 $166
Class B (Assuming no sale of shares)................................................. $ 18 $ 54 $ 94 $166
Class C (Assuming sale of all shares at end of period)............................... $ 23 $ 47 $ 81 $177
Class C (Assuming no sale of shares)................................................. $ 15 $ 47 $ 81 $177
Class Y.............................................................................. $ 7 $ 23 $ 41 $ 91
</TABLE>

STRAGEGIC INCOME FUND

<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A.............................................................................. $ 55 $ 88 $ 123 $220
Class B (Assuming sale of all shares at end of period)............................... $ 74 $ 103 $ 145 $231
Class B (Assuming no sale of shares)................................................. $ 24 $ 73 $ 125 $231
Class C (Assuming sale of all shares at end of period)............................... $ 29 $ 65 $ 112 $241
Class C (Assuming no sale of shares)................................................. $ 21 $ 65 $ 112 $241
Class Y.............................................................................. $ 14 $ 42 $ 73 $160
</TABLE>

<TABLE>
<S> <C>
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.
</TABLE>

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Prospectus Page 8

<PAGE>

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Prospectus Page 9

<PAGE>

U.S. GOVERNMENT INCOME FUND

The following tables provide investors with data and ratios for one Class A,
Class B, Class C and Class Y 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,
1997, and are incorporated by reference into the Statement of Additional
Information. The financial statements and notes, as well as the information in
the table below relating to each of the five years in the period ended November
30, 1997, 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>
U.S. GOVERNMENT INCOME FUND
----------------------------------------------------
CLASS A
----------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 8.86 $ 9.12 $ 8.50 $ 10.03 $ 9.98
-------- -------- -------- -------- --------
Net investment income.... 0.54 0.55 0.58 0.60 0.67
Net realized and
unrealized gains
(losses) from
investments, futures
and options............ 0.08 (0.26) 0.62 (1.53) 0.05
-------- -------- -------- -------- --------
Net increase (decrease)
from investment
operations............. 0.62 0.29 1.20 (0.93) 0.72
-------- -------- -------- -------- --------
Dividends from net
investment income...... (0.54) (0.55) (0.58) (0.60) (0.67)
Return of capital........ -- -- -- -- --
-------- -------- -------- -------- --------
Total dividends and
distributions to
shareholders........... (0.54) (0.55) (0.58) (0.60) (0.67)
-------- -------- -------- -------- --------
Net asset value, end of
period................. $ 8.94 $ 8.86 $ 9.12 $ 8.50 $ 10.03
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total investment
return(1).............. 7.27% 3.39% 14.70% (9.62)% 7.38%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratios/Supplemental Data:
Net assets, end of period
(000's)................ $291,470 $343,836 $430,285 $428,722 $648,923
Expenses to average net
assets................. 0.94% 0.94% 1.03%(2) 0.95% 0.91%
Net investment income to
average net assets..... 6.15% 6.24% 6.65%(2) 6.48% 6.60%
Portfolio turnover
rate................... 322% 359% 206% 358% 83%

1992 1991 1990 1989 1988
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period....$ 9.97 $ 9.47 $ 9.51 $ 9.28 $ 9.31
-------- -------- -------- -------- ----------
Net investment income.... 0.75 0.77 0.76 0.80 0.80
Net realized and
unrealized gains
(losses) from
investments, futures
and options............ 0.01 0.49 (0.05) 0.23 --
-------- -------- -------- -------- ----------
Net increase (decrease)
from investment
operations............. 0.76 1.26 0.71 1.03 0.80
-------- -------- -------- -------- ----------
Dividends from net
investment income...... (0.75) (0.76) (0.75) (0.80) (0.80)
Return of capital........ -- -- -- -- (0.03)
-------- -------- -------- -------- ----------
Total dividends and
distributions to
shareholders........... (0.75) (0.76) (0.75) (0.80) (0.83)
-------- -------- -------- -------- ----------
Net asset value, end of
period.................$ 9.98 $ 9.97 $ 9.47 $ 9.51 $ 9.28
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
Total investment
return(1).............. 7.92% 13.80% 8.36% 11.66% 8.93%
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
Ratios/Supplemental Data:
Net assets, end of period
(000's)................$703,198 $737,189 $795,240 $963,226 $1,279,535
Expenses to average net
assets................. 0.93% 0.87% 0.66% 0.72% 0.67%
Net investment income to
average net assets..... 7.42% 7.94% 8.57% 8.82% 8.83%
Portfolio turnover
rate................... 28% 71% 34% 125% 302%
</TABLE>

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

# Commencement of issuance of shares

* Annualized

(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends at net
asset value on the payable dates and a sale at net asset value on the last
day of each period reported. The figures do not include sales charges;
results for Class A, Class B and Class C 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
-----------------------------------------------------------------------------------
FOR THE
PERIOD
JULY 1,
1991#
FOR THE YEARS ENDED NOVEMBER 30, TO
------------------------------------------------------------------ NOVEMBER 30,
1997 1996 1995 1994 1993 1992 1991
------- ------- ------- ------- -------- -------- ------------
<C> <C> <C> <C> <C> <C> <C>
$ 8.87 $ 9.12 $ 8.50 $ 10.03 $ 9.98 $ 9.98 $ 9.59
------- ------- ------- ------- -------- -------- ------------
0.47 0.48 0.51 0.53 0.60 0.67 0.29
0.07 (0.25) 0.63 (1.53) 0.05 0.01 0.39
------- ------- ------- ------- -------- -------- ------------
0.54 0.23 1.14 (1.00) 0.65 0.68 0.68
------- ------- ------- ------- -------- -------- ------------
(0.47) (0.48) (0.52) (0.53) (0.60) (0.68) (0.29)
-- -- -- -- -- -- --
------- ------- ------- ------- -------- -------- ------------
(0.47) (0.48) (0.52) (0.53) (0.60) (0.68) (0.29)
------- ------- ------- ------- -------- -------- ------------
$ 8.94 $ 8.87 $ 9.12 $ 8.50 $ 10.03 $ 9.98 $ 9.98
------- ------- ------- ------- -------- -------- ------------
------- ------- ------- ------- -------- -------- ------------
6.34% 2.72% 13.81% (10.31)% 6.57% 6.98% 6.78%
------- ------- ------- ------- -------- -------- ------------
------- ------- ------- ------- -------- -------- ------------
$42,097 $61,873 $82,469 $99,581 $161,158 $132,357 $ 23,532
1.69% 1.70% 1.81%(2) 1.72% 1.66% 1.67% 1.68%*
5.40% 5.47% 5.88%(2) 5.71% 5.79% 6.38% 6.40%*
322% 359% 206% 358% 83% 28% 71%

CLASS C
----------------------------------------------------------------------
FOR THE
PERIOD
JULY 2,
1992#
FOR THE YEARS ENDED NOVEMBER 30, TO
----------------------------------------------------- NOVEMBER 30,
1997 1996 1995 1994 1993 1992
-------- ------- ------- ------- -------- ------------
<C<C> <C> <C> <C> <C> <C>
$ 8.86 $ 9.11 $ 8.49 $ 10.02 $ 9.98 $ 10.13
-------- ------- ------- ------- -------- ------------
0.49 0.50 0.53 0.55 0.62 0.25
0.07 (0.25) 0.63 (1.53) 0.04 (0.15)
-------- ------- ------- ------- -------- ------------
0.56 0.25 1.16 (0.98) 0.66 0.10
-------- ------- ------- ------- -------- ------------
(0.49) (0.50) (0.54) (0.55) (0.62) (0.25)
-- -- -- -- -- --
-------- ------- ------- ------- -------- ------------
(0.49) (0.50) (0.54) (0.55) (0.62) (0.25)
-------- ------- ------- ------- -------- ------------
$ 8.93 $ 8.86 $ 9.11 $ 8.49 $ 10.02 $ 9.98
-------- ------- ------- ------- -------- ------------
-------- ------- ------- ------- -------- ------------
6.62% 2.98% 14.12% (10.08)% 6.75% 0.62%
-------- ------- ------- ------- -------- ------------
-------- ------- ------- ------- -------- ------------
$ 28,132 $37,754 $53,832 $68,400 $143,473 $127,026
1.44% 1.45% 1.55%(2) 1.45% 1.40% 1.44%*
5.66% 5.74% 6.17%(2) 5.99% 6.06% 6.13%*
322% 359% 206% 358% 83% 28%
</TABLE>

---------------
- --------------------------------------------------------------------------------
Prospectus Page 11

<PAGE>

<TABLE>
<CAPTION>
U.S. GOVERNMENT INCOME FUND
--------------------------------------------------------------------------------
CLASS Y
--------------------------------------------------------------------------------
FOR THE
PERIOD
SEPTEMBER 11, 1991#
FOR THE YEARS ENDED NOVEMBER, 30, TO
----------------------------------------------------------- NOVEMBER 30,
1997 1996 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------ -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 8.86 $ 9.11 $ 8.49 $10.02 $ 9.97 $ 9.97 $ 9.88
------ ------ ------ ------ ------ ------ ------
Net investment income.... 0.56 0.57 0.61 0.62 0.70 0.77 0.18
Net realized and
unrealized gains
(losses) from
investments, futures
and options............ 0.07 (0.25) 0.62 (1.53) 0.05 0.01 0.09
------ ------ ------ ------ ------ ------ ------
Net increase (decrease)
from investment
operations............. 0.63 0.32 1.23 (0.91) 0.75 0.78 0.27
------ ------ ------ ------ ------ ------ ------
Dividends from net
investment income...... (0.56) (0.57) (0.61) (0.62) (0.70) (0.78) (0.18)
Return of capital........ -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Total dividends and
distributions to
shareholders........... (0.56) (0.57) (0.61) (0.62) (0.70) (0.78) (0.18)
------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period................. $ 8.93 $ 8.86 $ 9.11 $ 8.49 $10.02 $ 9.97 $ 9.97
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
Total investment
return(1).............. 7.43% 3.81% 15.06% (9.37)% 7.69% 8.13% 2.37%
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
Ratios/Supplemental Data:
Net assets, end of period
(000's)................ $6,816 $6,495 $7,957 $4,955 $6,232 $5,517 $ 4,514
Expenses to average net
assets................. 0.67% 0.64% 0.71%(2) 0.65% 0.62% 0.63% 0.72%*
Net investment income to
average net assets..... 6.41% 6.53% 6.96%(2) 6.76% 6.87% 7.70% 8.36%*
Portfolio turnover
rate................... 322% 359% 206% 358% 83% 28% 71%
</TABLE>

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

# Commencement of issuance of shares

* Annualized

(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. 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 12

<PAGE>

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

[THIS PAGE INTENTIONALLY LEFT BLANK]

---------------
- --------------------------------------------------------------------------------
Prospectus Page 13

<PAGE>

LOW DURATION INCOME FUND

The following tables provide investors with data and ratios for one Class A,
Class B, Class C and Class Y 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,
1997, 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
----------------------------------------------------------
FOR THE
PERIOD
FOR THE YEARS ENDED MAY 3, 1993#
NOVEMBER 30, TO
------------------------------------------ NOVEMBER 30,
1997 1996 1995 1994 1993
------- ------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 2.35 $ 2.34 $ 2.25 $ 2.48 $ 2.50
------- ------- -------- -------- ------------
Net investment income.... 0.13 0.14 0.13 0.12 0.07
Net realized and
unrealized gains
(losses) from
investments, futures and
options................. 0.02 0.01 0.09 (0.29) (0.02)
------- ------- -------- -------- ------------
Net increase (decrease)
from investment
operations.............. 0.15 0.15 0.22 (0.17) 0.05
------- ------- -------- -------- ------------
Dividends from net
investment income....... (0.13) (0.14) (0.13) (0.12) (0.07)
------- ------- -------- -------- ------------
Contribution to capital
from adviser............ -- -- -- 0.06 --
------- ------- -------- -------- ------------
Net asset value, end of
period.................. $ 2.37 $ 2.35 $ 2.34 $ 2.25 $ 2.48
------- ------- -------- -------- ------------
------- ------- -------- -------- ------------
Total investment
return(1)............... 6.67% 6.46% 10.25% (4.50)%** 1.88%
------- ------- -------- -------- ------------
------- ------- -------- -------- ------------
Ratios/Supplemental data:
Net assets, end of
period (000's).......... $33,648 $71,216 $127,961 $158,712 $551,243
Expenses to average net
assets(2)............... 1.04% 1.21% 1.15% 0.84% 0.81%*
Net investment income to
average net assets(2)... 5.72% 5.84% 5.89% 5.16% 4.85%*
Portfolio turnover
rate.................... 359% 210% 242% 246% 97%

CLASS B
------------------------------------------------------
FOR THE
PERIOD
FOR THE YEARS ENDED MAY 3, 1993#
NOVEMBER 30, TO
-------------------------------------- NOVEMBER 30,
1997 1996 1995 1994 1993
-------- ------ ------ ------- ------------
<S> <<C> <C> <C> <C> <C>
Net asset value,
beginning of period.....$ 2.35 $ 2.34 $ 2.25 $ 2.48 $ 2.50
-------- ------ ------ ------- ------------
Net investment income.... 0.11 0.12 0.11 0.10 0.06
Net realized and
unrealized gains
(losses) from
investments, futures and
options................. 0.02 0.01 0.09 (0.29) (0.02)
-------- ------ ------ ------- ------------
Net increase (decrease)
from investment
operations.............. 0.13 0.13 0.20 (0.19) 0.04
-------- ------ ------ ------- ------------
Dividends from net
investment income....... (0.11) (0.12) (0.11) (0.10) (0.06)
-------- ------ ------ ------- ------------
Contribution to capital
from adviser............ -- -- -- 0.06 --
-------- ------ ------ ------- ------------
Net asset value, end of
period..................$ 2.37 $ 2.35 $ 2.34 $ 2.25 $ 2.48
-------- ------ ------ ------- ------------
-------- ------ ------ ------- ------------
Total investment
return(1)............... 5.81% 5.60% 9.30% (5.24)%** 1.47%
-------- ------ ------ ------- ------------
-------- ------ ------ ------- ------------
Ratios/Supplemental data:
Net assets, end of
period (000's)..........$ 6,949 $7,716 $9,147 $13,382 $ 31,706
Expenses to average net
assets(2)............... 1.87% 2.03% 2.02% 1.62% 1.62%*
Net investment income to
average net assets(2)... 4.80% 4.99% 5.03% 4.40% 4.31%*
Portfolio turnover
rate.................... 359% 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.

(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends at net
asset value on the payable dates and a sale at net asset value on the last
day of each period reported. The figures do not include sales charges;
results for Class A, Class B, and Class C 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.

---------------
- --------------------------------------------------------------------------------
Prospectus Page 14

<PAGE>

<TABLE>
<CAPTION>
LOW DURATION INCOME FUND
------------------------------------------------------------------------------------------------------
CLASS C CLASS Y
--------------------------------------------------------------- ----------------------------------
FOR THE FOR THE
PERIOD FOR THE YEARS PERIOD
FOR THE YEARS ENDED MAY 3, 1993# ENDED OCTOBER 20,
NOVEMBER 30, TO NOVEMBER 30, 1995# TO
---------------------------------------------- NOVEMBER 30, ----------------- NOVEMBER 30,
1997 1996 1995 1994 1993 1997 1996 1995
------- -------- -------- -------- ------------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 2.35 $ 2.34 $ 2.25 $ 2.47 $ 2.50 $ 2.35 $ 2.34 $ 2.33
------- -------- -------- -------- ------------ ------ ------ -----
0.12 0.12 0.12 0.11 0.06 0.14 0.14 0.01

0.02 0.01 0.09 (0.28) (0.03) 0.02 0.01 0.01
------- -------- -------- -------- ------------ ------ ------ -----

0.14 0.13 0.21 (0.17) 0.03 0.16 0.15 0.02
------- -------- -------- -------- ------------ ------ ------ -----
(0.12) (0.12) (0.12) (0.11) (0.06) (0.14) (0.14) (0.01)
------- -------- -------- -------- ------------ ------ ------ -----
-- -- -- 0.06 -- -- -- --
------- -------- -------- -------- ------------ ------ ------ -----
$ 2.37 $ 2.35 $ 2.34 $ 2.25 $ 2.47 $ 2.37 $ 2.35 $ 2.34
------- -------- -------- -------- ------------ ------ ------ -----
------- -------- -------- -------- ------------ ------ ------ -----
6.05% 5.82% 9.60% (4.99)%** 1.20% 6.87% 6.64% 0.83%
------- -------- -------- -------- ------------ ------ ------ -----
------- -------- -------- -------- ------------ ------ ------ -----

$91,700 $123,203 $180,169 $296,182 $1,186,181 $ 352 $ 333 $ 321
1.64% 1.80% 1.75% 1.36% 1.35%* 0.86% 0.99% 0.99%*

5.05% 5.22% 5.31% 4.65% 4.52%* 5.82% 6.00% 5.87%*
359% 210% 242% 246% 97% 359% 210% 242%
</TABLE>

---------------
- --------------------------------------------------------------------------------
Prospectus Page 15

<PAGE>

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. The Fund had no Class Y
shares outstanding for 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, 1997, 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, 1997,
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>
INVESTMENT GRADE INCOME FUND
----------------------------------------------------
CLASS A
----------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
----------------------------------------------------
1997 1996 1995 1994 1993
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 10.59 $ 10.68 $ 9.67 $ 11.08 $ 10.38
-------- -------- -------- -------- --------
Net investment income.... 0.74 0.73 0.76 0.77 0.79
Net realized and
unrealized gains
(losses) from
investments, futures and
options................. 0.26 (0.09) 1.01 (1.41) 0.70
-------- -------- -------- -------- --------
Net increase (decrease)
from investment
operations.............. 1.00 0.64 1.77 (0.64) 1.49
-------- -------- -------- -------- --------
Dividends from net
investment income....... (0.74) (0.73) (0.76) (0.77) (0.79)
Return of capital........ -- -- -- -- --
-------- -------- -------- -------- --------
Total dividends and
return of capital....... (0.74) (0.73) (0.76) (0.77) (0.79)
-------- -------- -------- -------- --------
Net asset value, end of
period.................. $ 10.85 $ 10.59 $ 10.68 $ 9.67 $ 11.08
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total investment return
(1)..................... 9.88% 6.33% 18.95% (5.99)% 14.77%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratios/Supplemental Data:
Net assets, end of period
(000's)................. $212,472 $229,117 $258,898 $271,553 $204,418
Expenses to average net
assets.................. 1.03% 0.94% 0.95% 0.97% 0.96%
Net investment income to
average net assets...... 7.07% 7.02% 7.42% 7.50% 7.24%
Portfolio turnover
rate.................... 109% 115% 149% 142% 27%

1992 1991 1990 1989 1988
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.....$ 10.17 $ 9.50 $ 9.82 $ 9.53 $ 9.42
-------- -------- -------- -------- --------
Net investment income.... 0.81 0.82 0.84 0.86 0.83
Net realized and
unrealized gains
(losses) from
investments, futures and
options................. 0.22 0.66 (0.33) 0.27 0.10
-------- -------- -------- -------- --------
Net increase (decrease)
from investment
operations.............. 1.03 1.48 0.51 1.13 0.93
-------- -------- -------- -------- --------
Dividends from net
investment income....... (0.82) (0.81) (0.83) (0.84) (0.81)
Return of capital........ -- -- -- -- (0.01)
-------- -------- -------- -------- --------
Total dividends and
return of capital....... (0.82) (0.81) (0.83) (0.84) (0.82)
-------- -------- -------- -------- --------
Net asset value, end of
period..................$ 10.38 $ 10.17 $ 9.50 $ 9.82 $ 9.53
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total investment return
(1)..................... 10.39% 16.17% 5.55% 12.28% 10.24%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratios/Supplemental Data:
Net assets, end of period
(000's).................$197,795 $220,216 $225,424 $269,381 $334,106
Expenses to average net
assets.................. 1.01% 0.91% 0.66% 0.65% 0.70%
Net investment income to
average net assets...... 7.81% 8.32% 8.76% 8.96% 8.83%
Portfolio turnover
rate.................... 44% 46% 31% 47% 35%
</TABLE>

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

# Commencement of issuance of shares

* Annualized

(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.

---------------
- --------------------------------------------------------------------------------
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>
INVESTMENT GRADE INCOME FUND
------------------------------------------------------------------------------
CLASS B
------------------------------------------------------------------------------
FOR THE
PERIOD
JULY 1,
1991#
FOR THE YEARS ENDED NOVEMBER 30, TO
-------------------------------------------------------------- NOVEMBER 30,
1997 1996 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 10.58 $ 10.67 $ 9.67 $ 11.07 $ 10.38 $ 10.17 $ 9.79
------- ------- ------- ------- ------- ------- ------
0.66 0.65 0.68 0.69 0.71 0.73 0.31
0.27 (0.09) 1.00 (1.40) 0.69 0.22 0.38
------- ------- ------- ------- ------- ------- ------
0.93 0.56 1.68 (0.71) 1.40 0.95 0.69
------- ------- ------- ------- ------- ------- ------
(0.66) (0.65) (0.68) (0.69) (0.71) (0.74) (0.31)
-- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------
(0.66) (0.65) (0.68) (0.69) (0.71) (0.74) (0.31)
------- ------- ------- ------- ------- ------- ------
$ 10.85 $ 10.58 $ 10.67 $ 9.67 $ 11.07 $ 10.38 $10.17
------- ------- ------- ------- ------- ------- ------
------- ------- ------- ------- ------- ------- ------
9.17% 5.54% 17.97% (6.60)% 13.81% 9.56% 6.76%
------- ------- ------- ------- ------- ------- ------
------- ------- ------- ------- ------- ------- ------
$44,829 $58,364 $71,372 $69,359 $52,301 $20,862 $5,368
1.78% 1.68% 1.70% 1.72% 1.70% 1.74% 1.67%*
6.31% 6.27% 6.67% 6.73% 6.40% 6.88% 6.87%*
109% 115% 149% 142% 27% 44% 46%

CLASS C
--------------------------------------------------------------------
FOR THE
PERIOD
JULY 2,
1992#
FOR THE YEARS ENDED NOVEMBER 30, TO
---------------------------------------------------- NOVEMBER 30,
1997 1996 1995 1994 1993 1992
-------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
$ 10.59 $ 10.68 $ 9.67 $ 11.08 $ 10.38 $ 10.48
-------- ------- ------- ------- ------- ------------
0.69 0.68 0.70 0.72 0.74 0.28
0.26 (0.09) 1.01 (1.41) 0.70 (0.10)
-------- ------- ------- ------- ------- ------------
0.95 0.59 1.71 (0.69) 1.44 0.18
-------- ------- ------- ------- ------- ------------
(0.69) (0.68) (0.70) (0.72) (0.74) (0.28)
-- -- -- -- -- --
-------- ------- ------- ------- ------- ------------
(0.69) (0.68) (0.70) (0.72) (0.74) (0.28)
-------- ------- ------- ------- ------- ------------
$ 10.85 $ 10.59 $ 10.68 $ 9.67 $ 11.08 $ 10.38
-------- ------- ------- ------- ------- ------------
-------- ------- ------- ------- ------- ------------
9.34% 5.80% 18.37% (6.40)% 14.21% 1.32%
-------- ------- ------- ------- ------- ------------
-------- ------- ------- ------- ------- ------------
$ 29,204 $32,337 $39,150 $45,473 $47,527 $ 16,067
1.53% 1.44% 1.45% 1.45% 1.44% 1.49%*
6.57% 6.51% 6.95% 6.99% 6.61% 6.83%*
109% 115% 149% 142% 27% 44%
</TABLE>

---------------
- --------------------------------------------------------------------------------
Prospectus Page 17

<PAGE>

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. The Fund had no Class Y
shares outstanding for 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, 1997, 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, 1997,
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,
------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 7.35 $ 6.96 $ 7.14 $ 8.73 $ 7.92
-------- -------- -------- -------- --------
Net investment income.... 0.69 0.72 0.79 0.86 0.89
Net realized and
unrealized gains
(losses) from
investments............. 0.27 0.37 (0.17) (1.59) 0.83
-------- -------- -------- -------- --------
Net increase (decrease)
from investment
operations.............. 0.96 1.09 0.62 (0.73) 1.72
-------- -------- -------- -------- --------
Dividends from net
investment income....... (0.68) (0.70) (0.80) (0.86) (0.91)
-------- -------- -------- -------- --------
Net asset value, end of
period.................. $ 7.63 $ 7.35 $ 6.96 $ 7.14 $ 8.73
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total investment
return(1)............... 13.59% 16.55% 9.01% (9.20)% 22.89%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratios/Supplemental data:
Net assets, end of period
(000's)................. $272,325 $243,564 $248,619 $268,397 $360,281
Expenses to average net
assets.................. 0.98% 0.96% 0.93% 0.91% 0.93%
Net investment income to
average net assets...... 9.21% 10.10% 11.17% 10.43% 10.61%
Portfolio turnover
rate.................... 160% 142% 94% 156% 182%

1992 1991 1990 1989 1988
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.....$ 7.30 $ 5.61 $ 7.47 $ 8.60 $ 8.94
-------- -------- -------- -------- --------
Net investment income.... 0.98 0.98 0.99 1.10 1.18
Net realized and
unrealized gains
(losses) from
investments............. 0.61 1.69 (1.88) (1.15) (0.33)
-------- -------- -------- -------- --------
Net increase (decrease)
from investment
operations.............. 1.59 2.67 (0.89) (0.05) 0.85
-------- -------- -------- -------- --------
Dividends from net
investment income....... (0.97) (0.98) (0.97) (1.08) (1.19)
-------- -------- -------- -------- --------
Net asset value, end of
period..................$ 7.92 $ 7.30 $ 5.61 $ 7.47 $ 8.60
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total investment
return(1)............... 22.99% 51.11% (12.95)% (0.76)% 9.81%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratios/Supplemental data:
Net assets, end of period
(000's).................$279,685 $243,210 $184,990 $322,426 $532,450
Expenses to average net
assets.................. 0.98% 1.05% 0.85% 0.71% 0.70%
Net investment income to
average net assets...... 12.68% 15.12% 15.20% 13.50% 13.55%
Portfolio turnover
rate.................... 185% 117% 110% 132% 111%
</TABLE>

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

'D' 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 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.

---------------
- --------------------------------------------------------------------------------
Prospectus Page 18

<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
-----------------------------------------------------------------------------------------
FOR THE
PERIOD JULY
1, 1991#
FOR THE YEARS ENDED NOVEMBER 30, TO
------------------------------------------------------------------------ NOVEMBER 30,
1997 1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 7.35 $ 6.95 $ 7.14 $ 8.72 $ 7.91 $ 7.29 $ 6.85
-------- -------- -------- -------- -------- ------- ------
0.63 0.66 0.74 0.80 0.83 0.92 0.41
0.27 0.39 (0.18) (1.58) 0.82 0.61 0.44
-------- -------- -------- -------- -------- ------- ------
0.90 1.05 0.56 (0.78) 1.65 1.53 0.85
-------- -------- -------- -------- -------- ------- ------
(0.62) (0.65) (0.75) (0.80) (0.84) (0.91) (0.41)
-------- -------- -------- -------- -------- ------- ------
$ 7.63 $ 7.35 $ 6.95 $ 7.14 $ 8.72 $ 7.91 $ 7.29
-------- -------- -------- -------- -------- ------- ------
-------- -------- -------- -------- -------- ------- ------
12.76% 15.86% 8.05% (9.77)% 21.89% 22.07% 11.93%
-------- -------- -------- -------- -------- ------- ------
-------- -------- -------- -------- -------- ------- ------
$236,656 $215,492 $212,946 $235,480 $286,525 $99,645 $ 18,274
1.73% 1.71% 1.68% 1.64% 1.66% 1.70% 1.73%*
8.45% 9.34% 10.42% 9.66% 9.69% 11.42% 12.43%*
160% 142% 94% 156% 182% 185% 117%

CLASS C
-------------------------------------------------------------------------
FOR THE
PERIOD JULY
2, 1992#
FOR THE YEARS ENDED NOVEMBER 30, TO
-------------------------------------------------------- NOVEMBER 30,
1997 1996 1995 1994 1993 1992
-------- ------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
$ 7.36 $ 6.97 $ 7.15 $ 8.74 $ 7.92 $ 7.80
-------- ------- -------- -------- -------- ------
0.65 0.68 0.76 0.82 0.85 0.33
0.27 0.38 (0.18) (1.59) 0.82 0.11
-------- ------- -------- -------- -------- ------
0.92 1.06 0.58 (0.77) 1.67 0.44
-------- ------- -------- -------- -------- ------
(0.64) (0.67) (0.76) (0.82) (0.85) (0.32)
-------- ------- -------- -------- -------- ------
$ 7.64 $ 7.36 $ 6.97 $ 7.15 $ 8.74 $ 7.92
-------- ------- -------- -------- -------- ------
-------- ------- -------- -------- -------- ------
13.03% 15.96% 8.45% (9.62)% 22.19% 5.21%
-------- ------- -------- -------- -------- ------
-------- ------- -------- -------- -------- ------
$115,757 $94,445 $103,911 $115,196 $176,161 $ 35,992
1.48% 1.47% 1.44% 1.38% 1.39% 1.45%*
8.66% 9.60% 10.63% 9.91% 9.81% 10.67%*
160% 142% 94% 156% 182% 185%
</TABLE>

---------------
- --------------------------------------------------------------------------------
Prospectus Page 19

<PAGE>

STRATEGIC INCOME FUND

The table below provides selected per share data and ratios for one Class A,
Class B and Class C share for each of the periods shown. The Fund had no Class Y
shares outstanding for 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, 1997, 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 PERIOD PERIOD
PERIOD FEBRUARY 7, FEBRUARY 1,
FOR THE FEBRUARY 1, FOR THE YEAR 1994'D' FOR THE 1996
YEAR ENDED 1996 THROUGH ENDED THROUGH YEAR ENDED THROUGH
NOVEMBER 30, NOVEMBER 30, JANUARY 31, JANUARY 31, NOVEMBER 30, NOVEMBER 30,
1997 1996 1996 1995 1997 1996
------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................ $ 9.37 $ 8.99 $ 8.60 $ 10.00 $ 9.36 $ 8.98
------------ ------ ------ ------------ ------------- ------------
Net investment income...... 0.74 0.57 0.67 0.74 0.67 0.51
Net realized and unrealized
gains (losses) from
investments, foreign
currency and futures..... 0.17 0.39 0.59 (1.49) 0.16 0.39
------------ ------ ------ ------------ ------------- ------------
Net increase (decrease)
from investment
operations............... 0.91 0.96 1.26 (0.75) 0.83 0.90
------------ ------ ------ ------------ ------------- ------------
Dividends from net
investment income........ (0.68) (0.58) (0.77) (0.65) (0.60) (0.52)
Distributions from net
realized gains from
foreign currency
transactions............. -- -- (0.10) -- -- --
------------ ------ ------ ------------ ------------- ------------
Total dividends and
distributions to
shareholders............. (0.68) (0.58) (0.87) (0.65) (0.60) (0.52)
------------ ------ ------ ------------ ------------- ------------
Net asset value, end of
period................... $ 9.60 $ 9.37 $ 8.99 $ 8.60 $ 9.59 $ 9.36
------------ ------ ------ ------------ ------------- ------------
------------ ------ ------ ------------ ------------- ------------
Total investment
return(1)................ 10.04% 11.14% 15.27% (7.61)% 9.20% 10.46%
------------ ------ ------ ------------ ------------- ------------
------------ ------ ------ ------------ ------------- ------------
Ratios/Supplemental Data:
Net assets, end of period
(000's).................. $ 20,909 $9,944 $9,841 $ 11,148 $41,650 $ 37,249
Expenses to average net
assets(2)................ 1.65% 1.89%* 1.74% 1.49%* 2.43% 2.63%*
Net investment income to
average net assets....... 7.35% 7.69%* 8.52% 8.06%* 6.56% 6.93%*
Portfolio turnover rate.... 140% 101% 91% 117% 140% 101%

FOR THE
PERIOD
FOR THE FEBRUARY 7,
YEAR 1994'D'
ENDED THROUGH
JANUARY 31, JANUARY 31,
1996 1995
----------- ------------
<S> <C> <C>
Net asset value, beginning
of period................ $ 8.60 $ 10.00
----------- ------------
Net investment income...... 0.60 0.66
Net realized and unrealized
gains (losses) from
investments, foreign
currency and futures..... 0.59 (1.47)
----------- ------------
Net increase (decrease)
from investment
operations............... 1.19 (0.81)
----------- ------------
Dividends from net
investment income........ (0.71) (0.59)
Distributions from net
realized gains from
foreign currency
transactions............. (0.10) --
----------- ------------
Total dividends and
distributions to
shareholders............. (0.81) (0.59)
----------- ------------
Net asset value, end of
period................... $ 8.98 $ 8.60
----------- ------------
----------- ------------
Total investment
return(1)................ 14.37% (8.22)%
----------- ------------
----------- ------------
Ratios/Supplemental Data:
Net assets, end of period
(000's).................. $40,653 $ 40,710
Expenses to average net
assets(2)................ 2.49% 2.24%*
Net investment income to
average net assets....... 7.77% 7.46%*
Portfolio turnover rate.... 91% 117%
</TABLE>

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

'D' 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.

(2) During the year ended November 30, 1997 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 would have been
1.66% for Class A, 2.45% for Class B and 2.18% for Class C shares.

---------------
- --------------------------------------------------------------------------------
Prospectus Page 20

<PAGE>

FINANCIAL HIGHLIGHTS
(Concluded)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CLASS C
---------------------------------------------------------------------
FOR THE FOR THE
PERIOD PERIOD
FEBRUARY 1, FEBRUARY 7,
FOR THE 1996 FOR THE 1994'D'
YEAR ENDED THROUGH YEAR ENDED THROUGH
NOVEMBER 30, NOVEMBER 30, JANUARY 31, JANUARY 31,
1997 1996 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
$ 9.37 $ 8.98 $ 8.60 $ 10.00
------------ ------------ ------------ ------------
0.70 0.53 0.62 0.69
0.15 0.40 0.59 (1.48)
------------ ------------ ------------ ------------
0.85 0.93 1.21 (0.79)
------------ ------------ ------------ ------------
(0.63) (0.54) (0.73) (0.61)
-- -- (0.10) --
------------ ------------ ------------ ------------
(0.63) (0.54) (0.83) (0.61)
------------ ------------ ------------ ------------
$ 9.59 $ 9.37 $ 8.98 $ 8.60
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
9.37% 10.80% 14.63% (8.02)%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
$ 23,117 $ 17,101 $ 19,232 $ 21,208
2.17% 2.38%* 2.24% 1.98%*
6.82% 7.19%* 8.03% 7.62%*
140% 101% 91% 117%
</TABLE>

---------------
- --------------------------------------------------------------------------------
Prospectus Page 21

<PAGE>

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.

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

U.S. Government Income Fund's investment objective is to provide high current
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 between
one to three years. U.S. Government Income Fund has no fixed portfolio duration
policy. 'Duration' is a measure of the expected life of a fixed income security
on a present value basis.

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 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.

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.

---------------
- --------------------------------------------------------------------------------
Prospectus Page 22

<PAGE>

- --------------------------------------------------------------------------------
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 (and rated as low as D by S&P or C by Moody's) or comparable
unrated bonds; (2) U.S. government bonds; (3) equity securities; 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; (3) interests in
foreign loan participations and assignments; and (4) foreign mortgage-backed
securities and other securitized fixed-income investments. 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 foreign
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 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 bankers' acceptances.

---------------
- --------------------------------------------------------------------------------
Prospectus Page 23

<PAGE>

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 between one to three 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

Mitchell Hutchins believes that fixed income markets offer opportunities for
active management to increase portfolio value. In selecting investments for High
Income Fund, Mitchell Hutchins relies on the expertise of the portfolio manager,
as well as his team of credit analysts. The investment process incorporates
three key steps to achieve portfolio selection. They are industry selection,
company selection and security selection. Industry selection consists of an
analysis of economic factors, industry dynamics and yield spreads to determine
which sectors of the market are the most attractive for investment. Company
selection combines Mitchell Hutchins' proprietary financial forecasting model
with fundamental credit analysis to determine which companies are the most
attractive investment candidates. Consulting third party research and conducting
company visits are also key components in this selection process. Finally, a
security selection process is done to determine the appropriate type of security
(such as high yield bond, common stock, etc.). Unlike equity research, which
often relies on earnings or stock price evaluations to make buy and sell
decisions, the credit analysis for the Fund focuses on cash flow. A company's
strong cash flow is a key contributing factor to the creditworthiness of a
security. Once this has been determined, a formalized risk management oversight
ensures that the Fund's investment risk remains within defined parameters. All
aspects of the Mitchell Hutchins investment process rely on solid economic,
credit, quantitative and market research.

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

---------------
- --------------------------------------------------------------------------------
Prospectus Page 24

<PAGE>

- --------------------------------------------------------------------------------
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 it 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.

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

PERFORMANCE
- --------------------------------------------------------------------------------

These charts show the total returns for each calendar year for the Funds. Sales
charges have not been deducted from total returns for Class A, B and C shares.
Returns would be lower if sales charges were deducted. Investment Grade Income
Fund, High Income Fund and Strategic Income Fund had no Class Y shares
outstanding during the periods shown. Average annual total returns, both before
and after deducting the maximum sales charges, are shown below in the tables
that follow the performance charts. Past results are not a guarantee of future
results.

U.S. GOVERNMENT INCOME FUND
[GRAPH]

<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A 7.83% 12.58% 9.67% 14.89% 6.37% 6.48% -10.51% 17.04% 0.98% 9.44%
Class B 0% 0% 0% 10.09% 5.31% 5.78% -11.28% 16.14% 0.22% 8.61%
Class C 0% 0% 0% 0% 2.16% 5.85% -10.97% 16.46% 0.47% 8.9 %
Class Y 0% 0% 0% 5.7% 6.44% 6.89% -10.53% 17.41% 1.27% 9.74%
</TABLE>

The 1991 return for Class B shares represents the period from inception on July
1, 1991 through December 31, 1991. The 1992 return for Class C shares represents
the period from inception on July 2, 1992 through December 31, 1992. The 1991
return for Class Y shares represents the period from inception on September 11,
1991 through December 31, 1991.

---------------
- --------------------------------------------------------------------------------
Prospectus Page 25

<PAGE>

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

<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
As of November 30, 1997 CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Y SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Inception Date.............................................. 8/31/84 7/1/91 7/2/92 9/11/91
ONE YEAR
Before deducting maximum sales charges.................... 7.27% 6.34% 6.62% 7.43%
After deducting maximum sales charges..................... 2.97% 1.34% 5.87% 7.43%
FIVE YEARS
Before deducting maximum sales charges.................... 4.30% 3.51% 3.76% 4.60%
After deducting maximum sales charges..................... 3.45% 3.16% 3.76% 4.60%
TEN YEARS (OR LIFE)
Before deducting maximum sales charges.................... 7.16% 4.91% 3.58% 5.39%
After deducting maximum sales charges..................... 6.72% 4.91% 3.58% 5.39%
</TABLE>

LOW DURATION INCOME FUND

[GRAPH]

<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Class A 2.48% -4.39% 10.75% 5.57% 7.05%
Class B 1.97% -5.14% 9.79% 4.72% 6.19%
Class C 2.14% -4.89% 10.09% 4.94% 6.43%
Class Y 0% 0% 2.01% 5.75% 7.62%
</TABLE>

The 1993 returns for Class A, B and C shares represent the period from inception
on 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. The 1995 return for Class Y shares represents the period from
inception on October 20, 1995 through December 31, 1995.

<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS CLASS A CLASS B CLASS C
As of November 30, 1997 SHARES SHARES SHARES CLASS Y SHARES
------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Inception Date..................................... 5/3/93 5/3/93 5/3/93 10/20/95
ONE YEAR
Before deducting maximum sales charges........... 6.67% 5.81% 6.05% 6.87%
After deducting maximum sales charges............ 3.59% 2.81% 5.30% 6.87%
LIFE
Before deducting maximum sales charges........... 4.40% 3.57% 3.82% 6.79%
After deducting maximum sales charges............ 3.69% 3.57% 3.82% 6.79%
</TABLE>

---------------
- --------------------------------------------------------------------------------
Prospectus Page 26

<PAGE>

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

INVESTMENT GRADE INCOME FUND

[GRAPH]

<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A 8.88% 11.98% 6.47% 18.56% 8.87% 13.35% -5.59% 19.61% 3.98% 11 %
Class B 0% 0% 0% 10.39% 8.05% 12.63% -6.3 % 18.74% 3.12% 11.2 %
Class C 0% 0% 0% 0% 3.44% 12.8 % -6.07% 19.03% 3.46% 11.37%
</TABLE>

<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
As of November 30, 1997 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................................... 9.88% 9.17% 9.34%
After deducting maximum sales charges.................................... 5.50% 4.17% 8.59%
FIVE YEARS
Before deducting maximum sales charges................................... 8.43% 7.63% 7.92%
After deducting maximum sales charges.................................... 7.56% 7.33% 7.92%
TEN YEARS (OR LIFE)
Before deducting maximum sales charges................................... 9.64% 8.54% 7.55%
After deducting maximum sales charges.................................... 9.20% 8.54% 7.55%
</TABLE>

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Prospectus Page 27

<PAGE>

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HIGH INCOME FUND

[GRAPH]

<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A 9.13% -1.83% -9.25% 45.92% 24.06% 22.74% -11.69% 10.96% 17.73% 12.98%
Class B 0% 0% 0% 12.92% 23.07% 21.97% -12.34% 10.15% 16.7 % 12.31%
Class C 0% 0% 0% 0% 7.07% 22.2% -12.2 % 10.4 % 17.13% 12.42%
</TABLE>

<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
As of November 30, 1997 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................................... 13.59% 12.76% 13.03%
After deducting maximum sales charges.................................... 8.99% 7.76% 12.28%
FIVE YEARS
Before deducting maximum sales charges................................... 9.99% 9.19% 9.43%
After deducting maximum sales charges.................................... 9.10% 8.91% 9.43%
TEN YEARS (OR LIFE)
Before deducting maximum sales charges................................... 10.99% 12.44% 9.70%
After deducting maximum sales charges.................................... 10.54% 12.44% 9.70%
</TABLE>

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Prospectus Page 28

<PAGE>

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STRATEGIC INCOME FUND

[GRAPH]

<TABLE>
<CAPTION>
1994 1995 1996 1997
<S> <C> <C> <C> <C>
Class A -8.76% 14.12% 14 % 10.32%
Class B -9.41% 13.29% 13.23% 9.48%
Class C -9.13% 13.56% 13.36% 9.89%
</TABLE>

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

<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
As of November 30, 1997 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................................... 10.04% 9.20% 9.37%
After deducting maximum sales charges.................................... 5.64% 4.20% 8.62%
LIFE
Before deducting maximum sales charges................................... 7.17% 6.38% 6.64%
After deducting maximum sales charges.................................... 6.02% 5.94% 6.64%
</TABLE>

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, known as 'Life.' 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.

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

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Prospectus Page 29

<PAGE>

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Total return and yield 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 instruments and securities. Mortgage- and asset-backed securities
are types of bonds, and income-producing, non-convertible preferred stocks may
be treated as bonds for investment purposes. 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 normally 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 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 Ginnie Mae (also known as the
Government National Mortgage Association), Fannie Mae (also known as the Federal
National Mortgage Association), Freddie Mac (also known as the Federal Home Loan
Mortgage Corporation) or other government-sponsored enterprises. Other
mortgage-backed securities are sponsored or issued by private entities,
including investment banking firms and mortgage originators. Foreign
mortgage-backed securities may be issued by mortgage banks and other private or
governmental entities outside the United States and are supported by interests
in foreign real estate.

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.

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.

---------------
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Prospectus Page 30

<PAGE>

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

ZERO COUPON BONDS, OID AND PIK SECURITIES. Zero coupon bonds 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 paid 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.

The Funds may invest in other securities with original issue discount ('OID'), a
term that means the securities are issued at a price lower than their value at
maturity even though the securities also may pay cash dividends. In addition,
Investment Grade Income Fund, High Income Fund and Strategic Income Fund may
invest in payment-in-kind ('PIK') securities, a term that means interest is paid
in additional securities and not in cash. OID and PIK securities also are more
sensitive to changes in interest rates than securities that pay interest in
cash.

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 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, including
foreign mortgage-backed securities. 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, most 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. Common stocks generally represent the riskiest
investment in a company. 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 or dividends 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

---------------
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Prospectus Page 31

<PAGE>

- --------------------------------------------------------------------------------
are participations in or assignments of all or a portion of loans made by banks.
Participations typically will result in a Fund 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.

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 or
unwilling 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.

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, 1997, Investment Grade
Income Fund, High Income

---------------
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Prospectus Page 32

<PAGE>

- --------------------------------------------------------------------------------
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 94.98% 82.41% 89.41%
Debt securities not so rated 1.45% 12.90% 8.19%
Securities rated AAA/Aaa
(including cash items) 15.81% 3.34% 39.49%
Securities rated AA/Aa 3.12% -- 3.62%
Securities rated A/A 22.15% -- 0.95%
Securities rated BBB/Baa 28.51% -- 4.11%
Securities rated BB/Ba 24.48% 33.45% 15.63%
Securities rated B/B 0.90% 43.48% 25.61%
Securities rated CCC/Caa -- 2.14% --
</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, 1997 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 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. Prepayments at a slower rate than expected may
lengthen the effective life of a mortgage-backed security. The value of
securities with longer effective lives generally fluctuates more widely in
response to changes in interest rates than the value of securities with shorter
effective lives.

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,

---------------
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Prospectus Page 33

<PAGE>

- --------------------------------------------------------------------------------
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.

RISKS OF ZERO COUPON BONDS, OID AND PIK SECURITIES. Zero coupon bonds pay no
interest to holders prior to maturity. Accordingly, they are generally more
sensitive to changes in interest rates than other 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. A portion of the OID on the zero coupon
securities must be included in a Fund's income each year. This also is true for
other OID securities. In addition, a Fund must include in its income the value
of any securities received as interest payments on PIK securities. Accordingly,
to continue to qualify for tax treatment as a regulated investment company and
to avoid a federal excise tax (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.

Like zero coupon bonds, OID and PIK securities usually trade at a discount from
their face or par value. 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.

TREASURY INFLATION-PROTECTION SECURITIES. The Funds may invest in Treasury
Inflation-Protection Securities ('TIPS'), which are Treasury bonds on which the
principal value is adjusted daily in accordance with changes in the Consumer
Price Index. Interest on TIPS is payable semiannually on the adjusted principal
value. The principal value of TIPS would decline during periods of deflation,
but the principal amount payable at maturity would not be less than the original
par amount. If inflation is lower than expected while a Fund holds TIPS, the
Fund may earn less on the TIPS than it would on conventional Treasury bonds. Any
increase in the principal value of TIPS is taxable

---------------
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Prospectus Page 34

<PAGE>

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in the year the increase occurs, even though holders do not receive cash
representing the increase at that time.

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.

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.

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, swap agreements and similar instruments.
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 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 the counterparties with which the Funds do business.

YEAR 2000 RISK. Like other mutual funds and other financial and business
organizations around the world, each of the Funds could be adversely affected if
the computer systems used by Mitchell Hutchins, other service providers and
entities with computer systems that are linked to Fund records do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the 'Year 2000 Issue.' Mitchell Hutchins is
taking steps that it believes are reasonably designed to address the Year 2000
Issue with respect to the computer systems that it uses and to obtain
satisfactory

---------------
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Prospectus Page 35

<PAGE>

- --------------------------------------------------------------------------------
assurances that comparable steps are being taken by each of the Fund's other
major service providers. However, there can be no assurance that these steps
will be sufficient to avoid any adverse impact on the Funds.

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 evaluate successfully 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 Investment Company Act of 1940 ('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 and no more than
25% 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.

OTHER INVESTMENT TECHNIQUES AND STRATEGIES

HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS. Each Fund may use
certain instruments and strategies designed to adjust the overall risk of its
investment portfolio ('hedge') or to enhance income or realize gains. Use of
these derivative instruments solely to enhance income or realize gains may be
considered a form of speculation. These strategies involve derivative
instruments, including options (both exchange traded and over-the-counter) and
future contracts. 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 Funds' ability to use these strategies may be
limited by market conditions, regulatory limits and tax considerations. In
addition, in some countries there may not be a market for derivative
instruments, or it may be too small to permit effective hedging. The Statement
of Additional Information contains further information on these derivative
instruments and related strategies.

The Funds might not use any derivative instruments or strategies, and there can
be no assurance that any 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 derivative instrument or 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 use derivative instruments 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 instruments 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.

---------------
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Prospectus Page 36

<PAGE>

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

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
disposition is restricted under the federal securities laws, other than those
Mitchell Hutchins (or PIMCO for Low Duration Income Fund) has determined to be
liquid pursuant to guidelines established by a Fund's board. A Fund does 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, in accordance with procedures approved by the
Fund's boards. The lack of a liquid secondary market for illiquid securities may
make it more difficult for a Fund to assign a value to those securities for
purposes of calculating its net asset value.

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. Failure of the
issuer to deliver a security purchased by a Fund on a when-issued or
delayed-delivery basis may result in that Fund's incurring or missing an
opportunity to make an alternative investment. Depending on market conditions, a
Fund's when-issued and delayed-delivery purchase commitments could cause its net
asset value per share to be more volatile because such securities may increase
the amount by which the Fund's total assets, including the value of when-issued
and delayed-delivery securities held by that Fund, exceeds its net assets.

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 to cash or money market instruments for
liquidity purposes, pending investment in other securities or to reinvest cash
collateral from securities lending. U.S. Government Income Fund, Low Duration
Income Fund and Strategic Income Fund may invest in money market instruments on
an unlimited basis as part of their ordinary investment activities.

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 on 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.

Investment 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. Strategic Income Fund may not invest more than 35%
of its total assets in zero coupon securities.

Each Fund may sell securities that it already owns short ('short sales against
the box').

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

---------------
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Prospectus Page 37

<PAGE>

Each Fund offers through this Prospectus four classes of shares that differ in
terms of sales charges and expenses. An eligible 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.......................................... 3.00 3.09 2.75
$250,000 to $499,999.......................................... 2.25 2.30 2.00
$500,000 to $999,999.......................................... 1.75 1.78 1.50
$1,000,000 and over (1)....................................... None None 1.00(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 withdraw no 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.

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

---------------
- --------------------------------------------------------------------------------
Prospectus Page 38

<PAGE>

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 investors 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;

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')(each a 'qualified plan').
(This waiver is subject to minimum requirements, with respect to the number of
employees and amount of plan assets, established by Mitchell Hutchins.
Currently, a plan must have 50 or more eligible employees and at least $1
million in plan assets.) 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;

is a participant in the PaineWebber Members Only Program'tm'. For investments
made pursuant to this waiver, Mitchell Hutchins may make payments out of its
own resources to PaineWebber and to participating membership organizations in a
total amount not to exceed 1% of the amount invested;

is a variable annuity offered only to qualified plans. For investments made
pursuant to this waiver, Mitchell Hutchins may make payments out of its own
resources to PaineWebber and to the variable annuity's sponsor, adviser or
distributor in a total amount not to exceed 1% of the amount invested;

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

---------------
- --------------------------------------------------------------------------------
Prospectus Page 39

<PAGE>

they seek any of these sales charge reductions or 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 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>
PERCENTAGE BY WHICH
THE SHARES' NET
ASSET
IF THE INVESTOR SELLS SHARES WITHIN: VALUE IS MULTIPLIED:
- ------------------------------------- --------------------
<S> <C>
1st year of purchase................. 3%
2nd year of purchase................. 2
3rd year of purchase................. 2
4th year of purchase................. 1
5th year of 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
withdraw annually no 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 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

---------------
- --------------------------------------------------------------------------------
Prospectus Page 40

<PAGE>

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 to
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 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 withdraw no more than 12% of the value of
the Fund account under the Plan in the first year after purchase.

CLASS Y SHARES

HOW PRICE IS CALCULATED: Eligible investors may purchase Class Y shares at the
net asset value next calculated after PaineWebber's New York City headquarters
or the Transfer Agent receives the purchase order. Because investors do not pay
an initial sales charge when they buy Class Y shares, 100% of their purchase is
immediately invested. No contingent deferred sales charge is imposed on Class Y
shares, and the ongoing expenses for Class Y shares are lower than for the other
classes because Class Y shares are not subject to Rule 12b-1 distribution or
service fees.

LIMITED GROUPS OF INVESTORS: Only the following investors are eligible to buy
Class Y shares:

a participant in one of the PW Programs listed below when Class Y shares are
purchased through that PW Program;

an investor who buys $10 million or more at any one time in any combination of
PaineWebber mutual funds in the Flexible Pricing System'sm';

a qualified plan that has either
5,000 or more eligible employees or
$50 million or more in assets;

an investment company advised by PaineWebber or an affiliate of PaineWebber;
and

for U.S. Government Income Fund, the trustee of the PaineWebber Savings
Investment Plan ('PW SIP')

PACE MULTI-ADVISOR PROGRAM: An investor who participates in the PACE
Multi-Advisor Program is eligible to purchase Class Y shares. The PACE Multi-
Advisor Program is an advisory program sponsored by PaineWebber that provides
comprehensive investment services, including investor profiling, a personalized
asset allocation strategy using an appropriate combination of funds, and a
quarterly investment performance review. Participation in the PACE Multi-Advisor
Program is subject to payment of an advisory fee at the maximum annual rate of
1.5% of assets. Employees of PaineWebber and its affiliates are entitled to a
waiver of this fee.

Please contact your PaineWebber investment executive or PaineWebber's
correspondent firms for more information concerning mutual funds that are
available through the PACE Multi-Advisor Program.

INSIGHT: An investor who participates in the INSIGHT Advisory Program
('INSIGHT'), a total portfolio asset allocation program sponsored by
PaineWebber, is eligible to purchase Class Y shares. Participation in INSIGHT is
subject to payment of an advisory fee to PaineWebber at the maximum annual rate
of 1.5% of assets held through the program. Employees of PaineWebber and its
affiliates are entitled to a 50% reduction in the fee otherwise payable for
participation in INSIGHT.

---------------
- --------------------------------------------------------------------------------
Prospectus Page 41

<PAGE>

PURCHASES BY THE TRUSTEE OF THE PW SIP: The 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 and redeems these 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 Summary Plan
Description and other plan material of the PW SIP (collectively the '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 Benefits Connection, 100
Halfday Road, Lincolnshire, IL 60069 or by calling 1-888-PWebber (1-888-793-
2237).

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 or redeemed 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.

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

HOW TO BUY SHARES
- --------------------------------------------------------------------------------

Prices are calculated for each class of a Fund's 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. 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.
Investors in Class Y shares must provide satisfactory information to PaineWebber
or an individual Fund that they are eligible to purchase Class Y shares.

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.

OTHER INVESTORS

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

Investors who are new to PaineWebber may complete and sign an account
application and mail it along with a check. Investors also may open an account
in person.

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.

---------------
- --------------------------------------------------------------------------------
Prospectus Page 42

<PAGE>

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; or

transactions in Class A and Class Y shares made in certain investment programs.

HOW TO EXCHANGE SHARES

As shareholders, investors have the privilege of exchanging Class A, B and C
shares for the same class of most other PaineWebber mutual funds. Class Y shares
are not exchangeable. 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.

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 Class A, B or C 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 list of other PaineWebber mutual funds. PaineWebber S&P 500
Index Fund does not participate in the Flexible Pricing System'sm' and is not
available for exchanges.

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Prospectus Page 43

<PAGE>

Investors can sell (redeem) shares at any time. Shares will be sold at the share
price for that class as next calculated (less any applicable contingent deferred
sales charge) after the order is received by PaineWebber's New York City
headquarters or the transfer agent. 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, then Class B and last, Class Y.

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 a 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. A 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 Income 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.

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.

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OTHER SERVICES
- --------------------------------------------------------------------------------

Investors should consult their investment executive at PaineWebber or one of its
correspondent firms to learn more about the following services available with
respect to the Funds' Class A, B and C shares:

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 on a
monthly, quarterly, semiannual or annual basis 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), semiannual (June and December) or annual
(December) withdrawals from their PaineWebber Mutual Fund accounts. Minimum
balances and withdrawals vary according to the class of shares:

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Prospectus Page 44

<PAGE>

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, semiannual and annual withdrawals of $200, $400, $600 and $800,
respectively.

Withdrawals under the Systematic Withdrawal Plan are not subject to a contingent
deferred sales charge. An investor may withdraw no 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 this 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.

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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
the board). Mitchell
Hutchins has appointed PIMCO as investment sub-adviser for Low Duration Income
Fund.

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.

ABOUT THE INVESTMENT ADVISER

Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, is a wholly owned 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, 1998, Mitchell Hutchins was
adviser or sub-adviser of 31 investment companies with 68 separate portfolios
and aggregate assets of approximately $39.1 billion.

ABOUT THE SUB-ADVISER

PIMCO is located at 840 Newport Center Drive, Suite 360, Newport Beach,
California 92660. PIMCO, a Delaware general partnership, is a registered
investment adviser and a subsidiary partnership of PIMCO Advisors L.P. ('PIMCO
Advisors'). The general partners of PIMCO Advisors are PIMCO Advisors Holdings
L.P., a publicly traded company listed on the New York Stock Exchange under the
symbol 'PA', and PIMCO Partners, G.P., a general partnership between Pacific
Life Insurance Company and PIMCO Partners, LLC, a limited liability company
controlled by the PIMCO managing directors. As of February 28, 1998, PIMCO had
approximately $124.1 billion in assets under management and was adviser or
sub-adviser of 14 investment companies with 47 portfolios and aggregate assets
of approximately $30 billion.

In accordance with procedures adopted by each Fund's board, brokerage
transactions for each Fund may be conducted through PaineWebber or its
affiliates, and each Fund may pay fees to PaineWebber for its services as
leading agent in its portfolio securities leading program. Mitchell Hutchins and
PIMCO personnel may engage in securities transactions for

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Prospectus Page 45

<PAGE>

their own accounts pursuant to a code of ethics that establishes procedures for
personal investing and restricts certain transactions.

U.S GOVERNMENT INCOME 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 since December
1994. Mr. Singh and Mr. Varrelman are both senior 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.

LOW DURATION INCOME FUND

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.

INVESTMENT GRADE INCOME FUND

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

HIGH INCOME FUND

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. 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.

STRATEGIC INCOME FUND

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. Mr. Singh and
Mr. Varrelman have been responsible for the U.S. government and investment grade
securities sector of Strategic Income Fund since December 1994. Mr. Keegan also
shares responsibility for the day-to-day management of the U.S. government and
investment grade securities sector of Strategic Income Fund. Mr. Libassi 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 May 1994.

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, invest rate forecasts, investment research and
other considerations pertaining to each Fund's investments.

MANAGEMENT FEES & OTHER EXPENSES

Each Fund pays Mitchell Hutchins a monthly fee for its services. Strategic
Income Fund is obligated to pay Mitchell Hutchins at the annual rate of 0.75% of
its average daily net assets. However, after giving effect to fee waivers, the
effective annual rate actually paid by

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<PAGE>

Strategic Income Fund during the fiscal year ended November 30, 1997 was 0.73%.
Each other Fund paid Mitchell Hutchins for these services at the annual rate of
0.50% of its average daily net assets.

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. There is no
distribution plan with respect to the Funds' Class Y 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.

Mitchell Hutchins uses the service fees under the Plans for Class A, B and C
shares primarily to pay PaineWebber for shareholder servicing, currently at the
annual rate of 0.25% of the aggregate investment amounts maintained in each Fund
by PaineWebber clients. PaineWebber 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 bought by investors, as well as on an ongoing basis. Mitchell Hutchins
receives no special compensation from any of the Funds or investors at the time
Class B or C shares are bought.

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 Class A, Class B and Class
C 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.

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DETERMINING THE SHARES' NET ASSET VALUE
- --------------------------------------------------------------------------------

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

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<PAGE>

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.

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DIVIDENDS & TAXES
- --------------------------------------------------------------------------------

DIVIDENDS

Dividends from Strategic Income Fund's net investment income are declared and
paid monthly. Dividends from each of the other four Funds' 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 (the excess of net long-term
capital gain over net short-term capital loss), 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 A, Class
B and Class C shares of a Fund are expected to be lower than those on its Class
Y shares because shares of the first three classes have higher expenses
resulting from their service fees, and, in the case of Class B and Class C
shares, their distribution fees. Dividends on Class B and Class C shares of a
Fund are expected to be lower than those on its Class A shares, and dividends on
Class B shares of a Fund are expected to be lower than those on its Class C
shares, because those classes bear different distribution fees. Dividends on
each class might also 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 dividends and other distributions are paid in additional Fund shares of
the same class at net asset value, unless the shareholder has requested cash
payments. Shareholders who wish to receive dividends and other distributions in
cash, either mailed to them by check or credited to their PaineWebber account,
should contact their investment executives at PaineWebber or one of its
correspondent firms or complete the appropriate section of the account
application. For PW SIP participants, U.S. Government Income Fund's Class Y
dividends and other distributions are paid in additional Class Y shares at net
asset value unless the Transfer Agent is instructed otherwise.

TAXES

Each Fund intends to continue to qualify for treatment as a regulated investment
company under the Code so that it will not have to pay federal income tax on
that part of its investment company taxable income (generally consisting of net
investment income, net short-term capital gain and certain net foreign currency
gains) and net capital gain that it distributes

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<PAGE>

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 investment company taxable income (whether paid in cash
or additional shares) are generally taxable to its shareholders as ordinary
income. Distributions of a Fund's net capital gain (whether paid in cash or
additional shares) are taxable to its shareholders as long-term capital gain,
regardless of how long they have held their Fund shares. Under the Taxpayer
Relief Act of 1997, different maximum tax rates apply to a non-corporate
taxpayer's net capital gain depending on the taxpayer's holding period and
marginal rate of federal income tax -- generally, 28% for gains recognized on
securities held for more than one year but not more than 18 months and 20% (10%
for taxpayers in the 15% marginal tax bracket) for gains recognized on
securities held for more than 18 months. Each Fund may divide each net capital
gain distribution into a 28% rate gain distribution and a 20% rate gain
distribution (in accordance with the Fund's holding periods for the securities
it sold that generated the distributed gain) in which event its shareholders
must treat those portions accordingly. 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. The information regarding capital gain distributions designates the
portions thereof subject to the different maximum rates of tax applicable to
non-corporate taxpayers' net capital gain indicated above.

BACKUP WITHHOLDING

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 those shareholders who otherwise are subject to
backup withholding.

TAXES ON THE SALE OR EXCHANGE OF FUND SHARES

A shareholder's sale (redemption) of Fund shares may result in a taxable gain or
loss. This depends on whether the shareholder receives more or less than his or
her 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 an investor buys a Fund's shares 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 acquires Class A shares of a
PaineWebber mutual fund without paying a sales charge due to the 365-day
reinstatement privilege or the exchange privilege. In these cases, any gain on
the 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 by a shareholder as a result of conversion of
Class B shares to Class A shares.

* * * *

The foregoing only summarizes some of the important federal income tax
considerations affecting the Funds and their shareholders; see the Statement of
Additional Information for a further discussion. Prospective shareholders are
urged to consult their tax advisers.

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Prospectus Page 49

<PAGE>

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.

The shares of each Fund are divided into four classes, designated Class A, Class
B, Class C and Class Y shares. A share of 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, if any. 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 and liquidation proceeds on
each Fund's Class A, B, C and Y shares will differ.

Although each Fund is offering only its own shares, it is possible that a Fund
could become liable for misstatements in the Prospectus about another 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 a Trust may
elect all of that Trust's 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 that 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 Funds' 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 and employs foreign sub-custodians approved by the Trusts' respective
boards in accordance with applicable requirements under the 1940 Act to provide
custody of the Funds' foreign assets. 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.

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Prospectus Page 50

<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 applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through Caa in its corporate bond rating system.
The modifier 1 indicates that the company 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 company ranks in the lower end of its generic rating
category.

A-1

<PAGE>

DESCRIPTION OF S&P CORPORATE DEBT RATINGS

AAA. An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the highest rated
issues only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong. A. An obligation rated A is
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than obligations in higher rated categories. However, the
obligor's capacity to meet its financial commitment on the obligation is still
strong.

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

BB, B, CCC, CC, C, D. Obligations rated BB, B, CCC, CC and C are regarded
as having significant speculative characteristics; BB indicates the least degree
of speculation and C the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major risk exposures to adverse conditions. BB. An obligation
rated BB is less vulnerable to nonpayment than other speculative issues.
However, it faces major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation; B. An obligation
rated B is more vulnerable to nonpayment than obligations rated BB, but the
obligor currently has the capacity to meet it financial commitment on the
obligations. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation; CCC. An obligation rated CCC is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation; CC. An obligation rated CC is currently highly vulnerable to
nonpayment; C. The C rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued; D. An obligation rated D is
in payment default. The D rating category is used when payments on an obligation
are not made on the date due even if the applicable grace period has not
expired, unless S&P believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy petition
or the taking of a similar action if payments on an obigation are jeopardized.

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

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.

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

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.

A-2

<PAGE>

DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS

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

PRIME-2. Issuers assigned this rating have a strong ability for repayment
of senior short-term debt obligations. This will normally be evidenced by many
of the characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.

PRIME-3. Issuers assigned this rating have an acceptable capacity for
repayment of senior short-term 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 may require 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-1. A short-term obligation rated A-1 is rated in the highest category by
S&P. The obligor's capacity to meet its financial commitment on the obligation
is strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong. A-2. A short-term
obligation rated A-2 is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory. A-3. A short-term obligation
rated A-3 exhibits adequate protection parameters. However, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on the
obligation. B. A short-term obligation rated B is regarded as having
significant speculative characteristics. The obligor currently has the capacity
to meet its financial commitment on the obligation; however, it faces major
ongoing uncertainties which could lead to the obligor's inadequate capacity to
meet its financial commitment on the obligation. C. A short-term obligation
rated C is currently vulnerable to nonpayment and is dependent upon favorable
business, financial, and economic conditions for the obligor to meet its
financial commitment on the obligation. D. A short-term obligation rated D is
in payment default. The D rating category is used when payments on an obligation
are not made on the date due even if the applicable grace period has not
expired, unless S&P believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy petition
or the taking of a similar action if payments on an obligation are jeopardized.

A-3

<PAGE>

<TABLE>
<S> <C>
[*] PAINEWEBBER FUNDS OF FUNDS [*] PAINEWEBBER BOND FUNDS
Mitchell Hutchins Aggressive Portfolio High Income Fund
Mitchell Hutchins Moderate Portfolio Investment Grade Income Fund
Mitchell Hutchins Conservative Portfolio Low Duration U.S. Government
[*] PAINEWEBBER ASSET Income Fund
ALLOCATION FUNDS Strategic Income Fund
Balanced Fund U.S. Government Income Fund
Tactical Allocation Fund [*] PAINEWEBBER TAX-FREE
[*] PAINEWEBBER STOCK FUNDS BOND FUNDS
Capital Appreciation Fund California Tax-Free Income Fund
Financial Services Growth Fund Municipal High Income Fund
Growth Fund National Tax-Free Income Fund
Growth and Income Fund New York Tax-Free Income Fund
Small Cap Fund [*] PAINEWEBBER GLOBAL FUNDS
S&P 500 Index Fund Asia Pacific Growth Fund
Utility Income Fund Emerging Markets Equity Fund
Global Equity Fund
Global Income Fund
[*] PAINEWEBBER MONEY MARKET FUND
</TABLE>

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.

'c'1998 PaineWebber Incorporated

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

<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 are series of professionally managed, open-end
management investment companies, each organized as a Massachusetts business
trust (each a 'Trust'). Each Fund seeks generally to obtain the highest level of
income that is consistent with its investment strategy. Strategic Income Fund, a
non-diversified series of PaineWebber Securities Trust, 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 remaining four Funds are diversified
series of PaineWebber Managed Investments Trust. U.S. Government Income Fund
invests primarily in U.S. government bonds, including those backed by mortgages.
PaineWebber Low Duration U.S. Government Income Fund ('Low Duration 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
between one to three years. 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. High Income Fund invests primarily in a diversified
range of high yield, high risk, U.S. and foreign corporate bonds.

The investment adviser, administrator and distributor for each Fund is
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), a wholly owned
asset management subsidiary of PaineWebber Incorporated ('PaineWebber'). 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 should be
read only in conjunction with the Funds' current Prospectus, dated April 1,
1998. 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, 1998.

INVESTMENT POLICIES AND RESTRICTIONS

The following supplements the information contained in the Prospectus
concerning the Funds' investment policies and limitations. 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
(bonds) and certain other securities. A description of the ratings assigned to
corporate bonds and commercial paper 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 assets, 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 represent an assessment of the likelihood that principal
prepayments will be made by obligors on the underlying assets or the degree to
which such prepayments may differ from that originally anticipated, nor do such
ratings address the

<PAGE>

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 the issuer's capacity to pay
interest and repay principal and may involve significant 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 are especially sensitive 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

<PAGE>

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 mortgage
pass-through securities and collateralized mortgage obligations. 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 Ginnie Mae (also known as the
Government National Mortgage Association), Fannie Mae (also known as the Federal
National Mortgage Association), Freddie Mac (also known as the Federal Home Loan
Mortgage Corporation) or other government-sponsored enterprises. Other
mortgage-backed securities are issued by private issuers, generally originators
of and investors in mortgage loans, including savings associations, mortgage
bankers, commercial banks, investment bankers and special purpose entities
(collectively 'Private Mortgage Lenders'). Payments of principal and interest
(but not the market value) of such private mortgage-backed securities may be
supported by pools of mortgage loans or other mortgage-backed securities that
are guaranteed, directly or indirectly, by the U.S. government or one of its
agencies or instrumentalities, or they may be issued without any government
guarantee of the underlying mortgage assets but with some form of non-government
credit enhancement.

New types of mortgage-backed securities are developed and marketed from
time to time and, consistent with its investment limitations, each Fund expects
to invest in those new types of mortgage-backed securities that Mitchell
Hutchins or PIMCO believes may assist 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.
Strategic Income Fund also may invest in foreign mortgage-backed securities,
which may be structured differently than domestic mortgage-backed securities.

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

<PAGE>

instruments, however, pay interest semiannually and return principal once a year
in guaranteed minimum payments. The Freddie Mac guarantee is not backed by the
full faith and credit of the U.S. government.

Private 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.

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 accrued on all classes of a CMO (other than any
principal-only or 'PO' class) on a monthly, quarterly or semi-annual basis. The
principal and interest on the Mortgage Assets may be allocated among the several
classes of a CMO in many ways. In one structure, payments of principal,
including any principal prepayments, on the Mortgage Assets are applied to the
classes of a CMO in the order of their respective stated maturities or final
distribution dates so that no payment of principal will be made on any class of
the CMO until all other classes having an earlier stated maturity or final
distribution date have been paid in full. In some CMO structures, all or a
portion of the interest attributable to one or more of the CMO classes may be
added to the principal amounts attributable to such classes, rather than passed
through to certificateholders on a current basis, until other classes of the CMO
are paid in full.

Parallel pay CMOs are structured to provide payments of principal on each
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 interest-only ('IO')
class, 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.

<PAGE>

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. A Fund will not pay any
additional fees for such credit enhancement, although the existence of credit
enhancement may increase the price of a security. Credit enhancements do not
provide protection against changes in the market value of the security. Examples
of credit enhancement arising out of the structure of the transaction include
'senior-subordinated securities' (multiple class securities with one or more
classes subordinate to other classes as to the payment of principal thereof and
interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of 'spread
accounts' or 'reserve funds' (where cash or investments, sometimes funded from a
portion of the payments on the underlying assets, are held in reserve against
future losses) and 'over-collateralization' (where the scheduled payments on, or
the principal amount of, the underlying assets exceed that required to make
payment of the securities and pay any servicing or other fees). The degree of
credit enhancement provided for each issue generally is based on historical
information regarding the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated could adversely affect
the return on an investment in such a security.

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
average of 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

<PAGE>

of a particular pool. In the past, a common industry practice has been to assume
that prepayments on pools of fixed rate 30-year mortgages would result in a
12-year average life for the pool. At present, mortgage pools, particularly
those with loans with other maturities or different characteristics, are priced
on an assumption of average life determined for each pool. In periods of
declining interest rates, the rate of prepayment tends to increase, thereby
shortening the actual average life of a pool of mortgage-related securities.
Conversely, in periods of rising interest rates, the rate of prepayment tends to
decrease, thereby lengthening the actual average life of the pool. However,
these effects may not be present, or may differ in degree, if the mortgage loans
in the pools have adjustable interest rates or other special payment terms, such
as a prepayment charge. Actual prepayment experience may cause the yield of
mortgage-backed securities to differ from the assumed average life yield.
Reinvestment of prepayments may occur at lower interest rates than the original
investment, thus adversely affecting the yield of a Fund.

Additional Information on ARM and Floating Rate Mortgage-Backed
Securities. Adjustable rate mortgage ('ARM') 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. As a result, during periods of rising interest rates, ARM
securities generally do not decrease in value as much as fixed rate securities.
Conversely, during periods of declining rates, ARM securities generally do not
increase in value as much as fixed rate securities. ARM 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.

The rates of interest payable on certain ARMs, and therefore on certain ARM
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 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 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
securities, interest rate adjustments on floating rate mortgage-backed
securities may be based on

<PAGE>

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. As stated in the Prospectus, some of the Funds may
invest in convertible securities. 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.

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. Generally
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. In addition, a convertible
security generally will sell at a premium over its 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 will lengthen portfolio 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.

<PAGE>

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.

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 Securities and Exchange
Commission ('SEC') guidelines, IO and 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. To the extent a Fund invests in illiquid securities, it may
not be able to readily liquidate such investments and may have to sell other
investments if necessary to raise cash to meet its obligations.

Restricted securities are not registered under the Securities Act of 1933
('1933 Act') and may be sold only in privately negotiated or other exempted
transactions or after a 1933 Act registration statement has become effective.
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.

However, not all restricted securities are illiquid. To the extent that
foreign securities are freely tradeable in the country in which they are
principally traded, they are not considered illiquid, even if they are
restricted in the United States. In addition, a large institutional market has
developed for many U.S. and foreign securities that are not registered under the
1933 Act. 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.

Institutional markets for restricted securities also have developed as a
result of Rule 144A, which establishes a 'safe harbor' from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers, 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

<PAGE>

of such portfolio securities, and a Fund might be unable to dispose of such
securities promptly or at favorable prices.

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 an
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 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 invest in money market
instruments. Money market instruments may include, among other things,
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 and Strategic Income Fund), bank certificates of
deposit, bankers' acceptances and repurchase agreements 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.

<PAGE>

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. As indicated in the Prospectus, each Fund
may enter into reverse repurchase agreements with banks and securities dealers.
Such agreements involve the sale of securities held by a Fund subject to the
Fund's agreement to repurchase the securities at an agreed-upon date or upon
demand and at a price reflecting a market rate of interest. While a reverse
repurchase agreement is outstanding, a Fund will maintain, in a segregated
account with its custodian, cash or liquid securities, marked to market daily,
in an amount at least equal to its obligations under the reverse repurchase
agreement. See 'Investment Policies and Restrictions -- Segregated Accounts.'

Reverse repurchase agreements involve the risk that the buyer of the
securities sold by a Fund might be unable to deliver them when that Fund seeks
to repurchase. If the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, the buyer or a trustee or receiver
may receive an extension of time to determine whether to enforce that Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision.

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 commits 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.

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. Investors should recognize that
investing in non-U.S. securities involves certain risks and special
considerations, including those set forth below, which are not typically
associated with investing in securities of U.S. companies. Investments in
foreign securities 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

<PAGE>

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 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. In addition, substantial limitations may exist in certain
countries with respect to the Funds' ability to repatriate investment capital or
the proceeds of sales of securities.

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 foreign and emerging market securities
are not registered with the SEC, and the issuers of those securities are not
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 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

<PAGE>

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 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. Some emerging market countries have
from time to time declared moratoria on the payment of principal and interest on
external debt.

Some 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 Funds, 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, therefore, 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 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

<PAGE>

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 Bonds have been issued only in recent years, 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 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 until the
scheduled maturity 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. Interest payments on Brady Bonds may be wholly uncollateralized
or 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.

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

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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.

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. 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. 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. Each Fund may reinvest cash
collateral in money market instruments or other short-term liquid investments.
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 of its loans at any time. A Fund may pay reasonable fees in connection with
a loan and may pay the borrower or placing broker a negotiated portion of the
interest earned on the reinvestment of cash held as collateral. A Fund will
receive 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.

Pursuant to procedures adopted by the boards governing each Fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for each Fund. The boards also have authorized the payment of fees
(including fees calculated as a percentage of invested cash collateral) to

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PaineWebber for these services. Each board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent.

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 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.

SHORT SALES 'AGAINST THE BOX.' Each Fund may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales 'against the
box'). To make delivery to the purchaser in a short sale, the executing broker
borrows the securities being sold short on behalf of a Fund, and that Fund is
obligated to replace the securities borrowed at a date in the future. When a
Fund sells short, it establishes a margin account with the broker effecting the
short sale and deposits collateral with the broker. In addition, the Fund
maintains, in a segregated account with its custodian, the securities that could
be used to cover the short sale. Each Fund incurs transaction costs, including
interest expense, in connection with opening, maintaining and closing short
sales 'against the box.'

A Fund might make a short sale 'against the box' in order to hedge against
market risks when Mitchell Hutchins or PIMCO believes that the price of a
security may decline, thereby causing a decline in the value of a security owned
by the Fund or a security convertible into or exchangeable for a security owned
by the Fund. In such case, any loss in the Fund's long position after the short
sale should be reduced by a corresponding gain in the short position.
Conversely, any gain in the long position after the short sale should be reduced
by a corresponding loss in the short position. The extent to which gains or
losses in the long position are reduced will depend upon the amount of the
securities sold short relative to the amount of the securities a Fund owns,
either directly or indirectly, and in the case where the Fund owns convertible
securities, changes in the investment values or conversion premiums of such
securities.

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

<PAGE>

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 Instruments,' segregated accounts may also be required in
connection with certain transactions involving options or futures contracts,
swaps or forward currency contracts.

INVESTMENT LIMITATIONS OF THE FUNDS

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
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 331/3% 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, bankers' 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:

<PAGE>

(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 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 are not
fundamental and 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;

(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 (and except that a Fund will not purchase
securities of registered open-end investment companies or
registered unit investment trusts in reliance on Sections
12(d)(1)(F) or 12(d)(1)(G) of the 1940 Act); or

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

HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS

GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. 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 swap 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 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,

<PAGE>

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.

GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS. 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

<PAGE>

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 indices, in contrast, generally
are used to hedge against price movements in broad market sectors in which a
Fund has invested or expects to invest. 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
and the Commodity Futures Trading Commission ('CFTC'). In addition, a Fund's
ability to use Derivative Instruments will be limited by tax considerations. See
'Taxes.'

Income strategies that the Funds may use include the writing of covered
options to obtain the related option premiums. Gain strategies that the Funds
may use include the use of Derivative Instruments to increase or reduce a Fund's
exposure to an asset class without buying or selling the underlying instruments.

In addition to the products, strategies and risks described below and in
the Prospectus, Mitchell Hutchins and PIMCO may discover additional
opportunities in connection with Derivative Instruments and with hedging, income
and gain strategies. These new opportunities may become available as regulatory
authorities broaden the range of permitted transactions and as new Derivative
Instruments and 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 STRATEGIES USING DERIVATIVE INSTRUMENTS. The use of
Derivative Instruments 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, interest rate or currency exchange 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 that are 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 affecting
the markets in which Derivative Instruments are traded, rather than the
value of the investments being hedged. The effectiveness of hedges using
Derivative Instruments on indices will depend on the degree of correlation
between price movements in the index and price movements in the securities
being hedged.

(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

<PAGE>

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 counterparty to
enter into a transaction closing out the position. Therefore, there is no
assurance that any position in a Derivative Instrument can be closed out at
a time and price that is favorable to the Fund.

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 or 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 such 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, committing of a large portion of a
Fund's assets to cover positions or to 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 may
serve as a long hedge, and the purchase of put options may serve as a short
hedge. In addition, the Funds may purchase options to realize gains by
increasing exposure to an asset class without purchasing or selling the
underlying securities. 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 may serve 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 may serve 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. If the covered call option is an OTC option, the securities or other
assets used as cover 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

<PAGE>

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. There are also other
types of options exercisable on certain specified dates before expiration.
Options that expire unexercised have no value.

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

The Funds may purchase or write both exchange-traded and OTC options.
Exchange markets for options on debt securities and foreign currencies exist but
are relatively new, and these instruments are primarily traded on the OTC
market. Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction. In
contrast, OTC options are contracts between the Fund and its counterparty
(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
counterparty to make or take delivery of the underlying investment upon exercise
of the option. Failure by the counterparty to do so would result in the loss of
any premium paid by the Fund as well as the loss of any expected benefit of the
transaction. A Fund will enter into OTC option transactions only with
counterparties 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 counterparty, or by a
transaction in the secondary market if any such market exists. Although a Fund
will enter into OTC options only with counterparties 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
counterparty, 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 straddle or
spread, 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 its 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 its net assets.

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

<PAGE>

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
may serve as a long hedge, and the sale of futures or the purchase of put
options thereon may serve as a short hedge. Writing covered call options on
futures contracts may serve as a limited short hedge, and writing covered put
options on futures contracts may serve as a limited long hedge, using a strategy
similar to that used for writing covered call options on securities or indices.
In addition, a Fund may purchase or sell futures contracts or purchase options
thereon to realize gains by increasing or reducing its exposure to an asset
class without purchasing or selling the underlying securities.

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's portfolio, 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's portfolio, 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, a Fund may be
required by an exchange to increase the level of its initial margin payment, and
initial margin requirements might be increased generally in the future by
regulatory action.

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

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

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

<PAGE>

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 and Strategic 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 its net assets.

3. The aggregate margin deposits on all futures contracts and options
thereon held at any time by a Fund will not exceed 5% of its 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.

<PAGE>

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 Derivative Instruments until they reopen.

Settlement of Derivative Instruments 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 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 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
counterparty to make or take delivery of the underlying currency at the maturity
of the contract. Failure by the counterparty to do so would result in the loss
of 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 counterparty. Thus, there can be no assurance
that a Fund will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the counterparty, the Fund might be unable to close out a forward currency
contract 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

<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.

SWAP TRANSACTIONS

The Funds may enter into interest rate swap transactions. Swap transactions
include caps, floors and collars. 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 each may enter into swap transactions to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities it
anticipates purchasing at a later date. The Funds intend to use these
transactions as a hedge and not as a speculative investment. Interest rate swap
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, floors and collars 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 swap 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, floors and collars that are written by the
Fund.

The Funds will enter into swap transactions only with banks and recognized
securities dealers believed by Mitchell Hutchins or PIMCO to present minimal
credit risks in accordance with guidelines established by 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.

<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:

Richard Q. Armstrong; 62 Trustee Mr. Armstrong is chairman and principal of RQA
78 West Brother Drive Enterprises (management consulting firm)
Greenwich, CT 06830 (since April 1991 and principal occupation
since March 1995). Mr. Armstrong is also a
director of Hi Lo Automotive, Inc. He was
chairman of the board, chief executive
officer and co-owner of Adirondack Beverages
(producer and distributor of soft drinks and
sparkling/still waters) (October 1993-March
1995). He was a partner of the New England
Consulting Group (management consulting firm)
(December 1992-September 1993). He was
managing director of LVMH 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. Armstrong
is a director or trustee of 29 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUSTS OTHER DIRECTORSHIPS
- ------------------------------ ------------------------ -----------------------------------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.**; 71 Trustee and Mr. Bewkes is a director of Paine Webber Group
Chairman of the Inc. ('PW Group') (holding company of
Board of Trustees PaineWebber and Mitchell Hutchins). Prior to
December 1995, he was a consultant to PW
Group. Prior to 1988, he was chairman of the
board, president and chief executive officer
of American Bakeries Company. Mr. Bewkes is a
director of Interstate Bakeries Corporation
and NaPro BioTherapeutics, Inc. Mr. Bewkes is
a director or trustee of 30 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.

Richard R. Burt; 51 Trustee Mr. Burt is chairman of IEP Advisors, Inc.
1101 Connecticut Avenue, N.W. (international investments and consulting
Washington, D.C. 20036 firm) (since March 1994) and a partner of
McKinsey & Company (management consulting
firm) (since 1991). He is also a director of
American Publishing Company and Archer-
Daniels-Midland Co. (agricultural
commodities). He was the chief negotiator in
the Strategic Arms Reduction 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 29 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUSTS OTHER DIRECTORSHIPS
- ------------------------------ ------------------------ -----------------------------------------------
<S> <C> <C>
Mary C. Farrell**; 48 Trustee Ms. Farrell is a managing director, senior
investment strategist and member of the
Investment Policy Committee of PaineWebber.
Ms. Farrell joined PaineWebber in 1982. She
is a member of the Financial Women's
Association and Women's Economic Roundtable
and is employed as a regular 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 29
investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.

Meyer Feldberg; 56 Trustee Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of
101 Uris Hall Business, Columbia University. Prior to 1989,
New York, New York 10027 he was president of the Illinois Institute of
Technology. Dean Feldberg is also a director
of K-III Communications Corporation,
Federated Department Stores, Inc., and
Revlon, Inc. Dean Feldberg is a director or
trustee of 29 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.

George W. Gowen; 68 Trustee Mr. Gowen is a partner in the law firm of
666 Third Avenue Dunnington, Bartholow & Miller. Prior to May
New York, New York 10017 1994, he was a partner in the law firm of
Fryer, Ross & Gowen. Mr. Gowen is a director
of Columbia Real Estate Investments, Inc. Mr.
Gowen is a director or trustee of 29
investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUSTS OTHER DIRECTORSHIPS
- ------------------------------ ------------------------ -----------------------------------------------
<S> <C> <C>
Frederic V. Malek; 61 Trustee Mr. Malek is chairman of Thayer Capital
1455 Pennsylvania Avenue, Partners (merchant bank). From January 1992
N.W. to November 1992, he was campaign manager of
Suite 350 Bush-Quayle '92. From 1990 to 1992, he was
Washington, D.C. 20004 vice chairman and, from 1989 to 1990, he was
president of Northwest Airlines Inc., NWA
Inc. (holding company of Northwest Airlines
Inc.) and Wings Holdings Inc. (holding
company of NWA Inc.). Prior to 1989, he was
employed by the Marriott Corporation (hotels,
restaurants, airline catering and contract
feeding), where he most recently was an
executive vice president and president of
Marriott Hotels and Resorts. Mr. Malek is
also a director of American Management
Systems, Inc. (management consulting and
computer related services), Automatic Data
Processing, Inc., CB Commercial Group, Inc.
(real estate services), Choice Hotels
International (hotel and hotel franchising),
FPL Group, Inc. (electrical services),
Integra, Inc. (bio-medical), Manor Care, Inc.
(health care), National Education Corporation
and Northwest Airlines Inc. Mr. Malek is a
director or trustee of 29 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUSTS OTHER DIRECTORSHIPS
- ------------------------------ ------------------------ -----------------------------------------------
<S> <C> <C>
Carl W. Schafer; 62 Trustee Mr. Schafer is president of the Atlantic
P.O. Box 1164 Foundation (charitable foundation supporting
Princeton, NJ 08542 mainly oceanographic exploration and
research). He is a director of Roadway
Express, Inc. (trucking), The Guardian Group
of Mutual Funds, Evans Systems, Inc. (motor
fuels, convenience store and diversified
company), Electronic Clearing House, Inc.
(financial transactions processing), Wainoco
Oil Corporation and Nutraceutix, Inc.
(biotechnology). Prior to January 1993, he
was chairman of the Investment Advisory
Committee of the Howard Hughes Medical
Institute. Mr. Schafer is a director or
trustee of 29 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.

Julieanna Berry; 34 Vice President Ms. Berry is a first vice president and a
(Managed Investments portfolio manager of Mitchell Hutchins. Ms.
Trust only) Berry is a vice president of two investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.

Karen L. Finkel; 40 Vice President (Managed Mrs. Finkel is a senior vice president and a
Investments portfolio manager of Mitchell Hutchins. Mrs.
Trust only) Finkel is a vice president of two investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.

Donald R. Jones; 37 Vice President Mr. Jones is a first vice president and a
(Securities Trust only) portfolio manager of Mitchell Hutchins. Prior
to February 1996, he was a vice president in
the asset management group of First Fidelity
Bancorporation. Mr. Jones is a vice president
of two investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
</TABLE>

<PAGE>

Thomas J. Libassi; 39 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 six investment companies
for which Mitchell Hutchins or PaineWebber
serves as investment adviser.

Dennis McCauley; 51 Vice President Mr. McCauley is a managing director and chief
investment officer -- fixed income of
Mitchell Hutchins. Prior to December 1994, he
was director of fixed income investments of
IBM Corporation. Mr. McCauley is a vice
president of 19 investment companies for
which Mitchell Hutchins or PaineWebber serves
as investment adviser.

Ann E. Moran; 40 Vice President and Ms. Moran is a vice president and a manager of
Assistant Treasurer the mutual fund finance division of Mitchell
Hutchins. Ms. Moran is a vice president and
assistant treasurer of 30 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.

Dianne E. O'Donnell; 45 Vice President and Ms. O'Donnell is a senior vice president and
Secretary deputy general counsel of Mitchell Hutchins.
Ms. O'Donnell is a vice president and
secretary of 29 investment companies and a
vice president and assistant secretary of one
investment company for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
</TABLE>

<PAGE>

Victoria E. Schonfeld; 47 Vice President Ms. Schonfeld is a managing director and
general counsel of Mitchell Hutchins. Prior
to May 1994, she was a partner in the law
firm of Arnold & Porter. Ms. Schonfeld is a
vice president of 29 investment companies and
a vice president and secretary of one
investment company for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.

Paul H. Schubert; 35 Vice President Mr. Schubert is a first vice president and the
and Treasurer director of the mutual fund finance division
of Mitchell Hutchins. From August 1992 to
August 1994, he was a vice president at
BlackRock Financial Management Inc. Mr.
Schubert is a vice president and treasurer of
30 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.

Nirmal Singh; 41 Vice President Mr. Singh is a senior vice president and a
portfolio manager of Mitchell Hutchins. Prior
to September 1993, he was a member of the
portfolio management team at Merrill Lynch
Asset Management, Inc. Mr. Singh is a vice
president of four investment companies for
which Mitchell Hutchins or PaineWebber serves
as investment adviser.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUSTS OTHER DIRECTORSHIPS
- ------------------------------ ------------------------ -----------------------------------------------
<S> <C> <C>
Barney A. Taglialatela; 37 Vice President and Mr. Taglialatela is a vice president and a
Assistant Treasurer manager of the mutual fund finance division
of Mitchell Hutchins. Prior to February 1995,
he was a manager of the mutual fund finance
division of Kidder Peabody Asset Management,
Inc. Mr. Taglialatela is a vice president and
assistant treasurer of 30 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Mark A. Tincher; 42 Vice President Mr. Tincher is a managing director and chief
investment officer -- equities of Mitchell
Hutchins. Prior to March 1995, he was a vice
president and directed the U.S. funds
management and equity research areas of Chase
Manhattan Private Bank. Mr. Tincher is a vice
president of 14 investment companies for
which Mitchell Hutchins or PaineWebber serves
as investment adviser.
Craig M. Varrelman; 39 Vice President Mr. Varrelman is a senior vice president and a
portfolio manager of Mitchell Hutchins. Mr.
Varrelman is a vice president of four
investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
Stuart Waugh; 42 Vice President Mr. Waugh is a managing director and a
(Securities Trust 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; 36 Vice President and Mr. Weller is a first vice president and
Assistant Secretary 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 29
investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
</TABLE>

<PAGE>

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

* 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 each
Fund as defined in the 1940 Act by virtue of their positions with Mitchell
Hutchins, PaineWebber and/or PW Group.

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 with respect
to each series. 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. Each chairman of the audit and contract
review committees of individual funds within the PaineWebber fund complex
receives additional compensation, aggregating $15,000 annually, 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
Trusts and the Funds, the Trusts require no employees. No officer, director or
employee of Mitchell Hutchins or PaineWebber presently receives any compensation
from the Trusts for acting as a board member or officer.

The Table below includes certain information relating to the compensation
of the current trustees who held office with the Trusts or with other
PaineWebber funds during the Funds' fiscal year ended November 30, 1997.

COMPENSATION TABLE'D'

<TABLE>
<CAPTION>
AGGREGATE COMPENSATION TOTAL COMPENSATION FROM
FROM THE MANAGED AGGREGATE COMPENSATION THE TRUSTS AND THE
NAME OF PERSON, POSITION INVESTMENTS TRUST FROM SECURITIES TRUST FUND COMPLEX*
- ----------------------------------- ---------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Richard Q. Armstrong,
Trustee.......................... $ 10,600 $ 4,300 $ 94,885
Richard Burt,
Trustee.......................... $ 9,700 $ 4,000 $ 87,085
Meyer Feldberg,
Trustee.......................... $ 10,600 $ 6,606 $ 117,853
George W. Gowen,
Trustee.......................... $ 11,673 $ 4,300 $ 101,567
Frederic V. Malek,
Trustee.......................... $ 10,600 $ 4,300 $ 95,845
Carl W. Schafer,
Trustee.......................... $ 10,600 $ 4,300 $ 94,885
</TABLE>

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

'D' Only independent board members are compensated by the Trusts and identified
above; board members who are 'interested persons,' as defined by the 1940
Act, do not receive compensation.

* Represents total compensation paid to each board member during the calendar
year ended December 31, 1997; no fund within the fund complex has a bonus,
pension, profit sharing or retirement plan.

PRINCIPAL HOLDERS OF SECURITIES. The Funds' records as of February 28,
1998, indicate that no shareholder owned more than 5% of any Fund's shares.

<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 with Securities Trust, dated January 29, 1993 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 YEARS ENDED NOVEMBER 30,
-------------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
U.S. Government Income Fund......................................... $1,979,329 $2,517,534 $ 2,784,437
Investment Grade Income Fund........................................ $1,464,164 $1,685,067 $ 1,890,394
High Income Fund.................................................... $2,918,855 $2,656,610 $ 3,050,197
Low Duration Income Fund............................................ $ 819,616 $1,272,455 $ 1,839,876
</TABLE>

<TABLE>
<CAPTION>
PERIOD
FROM
FISCAL YEAR TEN MONTHS FISCAL YEAR FEBRUARY 7,
ENDED ENDED ENDED 1994* TO
NOVEMBER 30, NOVEMBER 30, JANUARY 31, JANUARY 31,
1997 1996 1996 1995
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Strategic Income Fund................................ $ 520,540** $ 407,534 $ 546,119 $ 603,881
</TABLE>

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

* Commencement of operations.

** Afer fee waiver of $13,206

The Advisory Contracts authorize Mitchell Hutchins to retain one or more
sub-advisers but do 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 years ended November 30, 1997,
November 30, 1996 and November 30, 1995, Mitchell Hutchins paid (or accrued) to
PIMCO sub-advisory fees of $409,808, $636,228 and $919,938.

Prior to August 1, 1997, PaineWebber provided certain services to each Fund
not otherwise provided by the Funds' transfer agent. Pursuant to agreements
relating to those services, PaineWebber earned (or accrued) the amounts set
forth below during each of the periods indicated.

<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED NOVEMBER
EIGHT MONTHS 30,
ENDED ---------------------------
JULY 31, 1997 1996 1995
-------------- ------------ -----------
<S> <C> <C> <C>
U.S. Government Income Fund........................................... $ 73,833 $133,159 $ 154,428
Investment Grade Income Fund.......................................... $ 48,036 $ 83,120 $ 99,641
High Income Fund...................................................... $ 81,517 $131,762 $ 158,323
Low Duration Income Fund.............................................. $ 36,963 $ 70,807 $ 107,999
</TABLE>

<TABLE>
<CAPTION>
PERIOD
FOR THE TEN MONTHS FISCAL YEAR FEBRUARY 7,
EIGHT MONTHS ENDED ENDED 1994* TO
ENDED NOVEMBER 30, JANUARY 31, JANUARY 31,
JULY 31, 1997 1996 1996 1995
------------ ----------- ------------
<S> <C> <C> <C> <C>
Strategic Income Fund................................... $ 10,503 $ 14,226 $ 19,823 $ 21,998
</TABLE>

Subsequent to July 31, 1997, PFPC (not the Funds) pays PaineWebber for
certain transfer agency related services that PFPC has delegated to PaineWebber.
- ------------

* Commencement of operations

<PAGE>

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 board members who are not interested persons of the Trust or Mitchell
Hutchins; (6) all expenses incurred in connection with the board members'
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 board members; (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 board members 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
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.

<PAGE>

The following table shows the approximate net assets as of February 28,
1998, 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)................................................ $ 7,025.6
Global........................................................................... 3,539.5
Equity/Balanced.................................................................. 5,681.6
Fixed Income (excluding Money Market)............................................ 4,883.5
Taxable Fixed Income........................................................ 3,297.3
Tax-Free Fixed Income....................................................... 1,586.2
Money Market Funds............................................................... 28,587.5
</TABLE>

PERSONNEL TRADING POLICIES. 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.

DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
each class of shares of each Fund under separate distribution contracts with
each Trust (collectively, 'Distribution Contracts'). Each Distribution Contract
requires Mitchell Hutchins to use its best efforts, consistent with its other
businesses, to sell shares of the applicable Fund. Shares of the Funds are
offered continuously. Under separate exclusive dealer agreements between
Mitchell Hutchins and PaineWebber, relating to each class of shares of the Funds
(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. There is no distribution plan with
respect to the Funds' Class Y shares.

Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the applicable board at least quarterly, and the board members 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 applicable board, including those board members 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 board
members who are not 'interested persons' of the Trust shall be committed to the
discretion of the board members who are not 'interested persons' of that Trust.

In reporting amounts expended under the Plans to the board members,
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 the three classes of shares for which there are Plans. The fees paid by
one class of Fund shares will not be used to subsidize the sale of any other
class of Fund shares.

<PAGE>

The Funds paid (or accrued) the following fees to Mitchell Hutchins under
the Class A, Class B and Class C Plans during the fiscal year ended November 30,
1997:

<TABLE>
<CAPTION>
LOW INVESTMENT HIGH STRATEGIC
U.S. GOVERNMENT DURATION GRADE INCOME INCOME
INCOME FUND INCOME FUND INCOME FUND FUND FUND
--------------- ------------ ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
Class A................................... $ 768,384 $128,460 $536,444 $ 637,875 $ 36,175
Class B................................... 507,496 73,444 489,317 2,259,154 366,208
Class C................................... 236,516 786,357 220,481 770,294 137,360
</TABLE>

Mitchell Hutchins estimates that it and its parent corporation,
PaineWebber, incurred the following shareholder service-related and
distribution-related expenses with respect to the Funds during the fiscal year
ended November 30, 1997:

CLASS A

<TABLE>
<CAPTION>
LOW INVESTMENT
U.S. GOVERNMENT DURATION GRADE HIGH STRATEGIC
INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND
--------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Marketing and advertising........ $ 208,881 $ 65,332 $141,856 $111,519 $ 19,696
Printing of prospectuses and
statements of additional
information.................... 10,168 1,701 2,947 7,822 421
Branch network costs allocated
and interest expense........... 1,295,841 255,410 797,241 757,396 45,361
Service fees paid to investment
executives..................... 291,987 48,814 203,849 242,393 13,747
</TABLE>

CLASS B

<TABLE>
<CAPTION>
LOW INVESTMENT
U.S. GOVERNMENT DURATION GRADE HIGH STRATEGIC
INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND
--------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Marketing and advertising......... $ 34,152 $ 9,240 $ 29,127 $ 98,727 $ 49,325
Amortization of commissions....... 147,014 21,314 142,235 658,526 107,441
Printing of prospectuses and
statements of additional
information..................... 1,663 240 3,555 6,923 1,056
Branch network costs allocated and
interest expense................ 224,051 39,649 193,885 775,925 127,026
Service fees paid to investment
executives...................... 48,212 6,978 46,486 214,620 34,790
</TABLE>

CLASS C

<TABLE>
<CAPTION>
LOW INVESTMENT
U.S. GOVERNMENT DURATION GRADE HIGH STRATEGIC
INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND
--------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Marketing and advertising......... $ 21,347 $132,536 $ 16,896 $ 45,097 $ 24,723
Amortization of commissions....... 59,918 199,211 55,855 195,141 34,798
Printing of prospectuses and
statements of additional
information..................... 1,039 3,450 2,869 3,162 529
Branch network costs allocated and
interest expense................ 131,855 537,939 109,617 309,836 56,826
Service fees paid to investment
executives...................... 29,959 99,606 27,928 97,570 17,399
</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

<PAGE>

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 each Fund's overall Flexible Pricing'sm' system of
distribution, the applicable 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 Fund and attracting
new investors and assets to the Fund to the benefit of the Fund and its
shareholders, (2) facilitate distribution of the Fund's shares and (3) maintain
the competitive position of the Fund 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 the amount of such charges, (2) the
advantage to investors in having no initial sales charges deducted from Fund
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 board members 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 Fund 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 each 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 board members 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.

<PAGE>

With respect to each Plan, the boards 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 boards 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 a 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 fiscal
years (or periods) set forth below, Mitchell Hutchins earned the following
approximate amounts of sales charges and retained the following approximate
amounts, net of concessions to PaineWebber as exclusive dealer:

U.S. GOVERNMENT INCOME FUND

<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Earned...................................................................... $ 13,156 $ 28,937 $ 41,959
Retained.................................................................... 1,562 2,595 3,492
</TABLE>

LOW DURATION INCOME FUND

<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Earned.......................................................................... $ 14,824 $ 3,734 $ 5,994
Retained........................................................................ 261 211 3,637
</TABLE>

INVESTMENT GRADE INCOME FUND

<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Earned...................................................................... $ 51,469 $ 36,783 $ 48,610
Retained.................................................................... 4,100 2,873 28,121
</TABLE>

HIGH INCOME FUND

<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Earned...................................................................... $506,732 $220,619 $297,694
Retained.................................................................... 36,405 16,318 18,982
</TABLE>

STRATEGIC INCOME FUND

<TABLE>
<CAPTION>
PERIOD
FEBRUARY 7, 1994
FISCAL YEAR TEN MONTHS FISCAL YEAR (COMMENCEMENT
ENDED ENDED ENDED OF OPERATIONS) TO
NOVEMBER 30, NOVEMBER 30, JANUARY 31, JANUARY 31,
1997 1996 1996 1995
------------ ------------ ----------- -----------------
<S> <C> <C> <C> <C>
Earned............................................. $157,647 $ 16,799 $ 7,392 $ 469,876
Retained........................................... 11,028 1,110 415 32,555
</TABLE>

For the fiscal year ended November 30, 1997, 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>
LOW INVESTMENT
U.S. GOVERNMENT DURATION GRADE HIGH INCOME STRATEGIC
INCOME FUND INCOME FUND INCOME FUND FUND INCOME FUND
--------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Class A........................... $ 0 $ 0 $ 0 $ 0 $ 0
Class B........................... 151,332 8,664 128,953 489,285 101,364
Class C........................... 1,990 15,005 4,263 30,851 1,285
</TABLE>

<PAGE>

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 and PIMCO generally seek
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 YEARS ENDED NOVEMBER 30,
-------------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
U.S. Government Income Fund........................................... $105,150 $ 0 $ 0
Investment Grade Income Fund.......................................... $ 2,400 $ 2,400 $ 0
High Income Fund...................................................... $ 2,939 $ 32,596 $ 0
Low Duration Income Fund.............................................. $ 0 $ 0 $ 0
</TABLE>

<TABLE>
<CAPTION>
PERIOD
FISCAL YEAR TEN MONTHS FISCAL YEAR FEBRUARY 7,
ENDED ENDED ENDED 1994* TO
NOVEMBER 30, NOVEMBER 30, JANUARY 31, JANUARY 31,
1997 1996 1996 1995
------------ ------------ ----------- -----------

<S> <C> <C> <C> <C>
Strategic Income Fund.................................... $0 $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 each Advisory
Contract authorize Mitchell Hutchins and any of its affiliates that are members
of a national securities exchange to effect portfolio transactions for the Funds
on such exchange and to retain compensation in connection with such
transactions. Any such transactions will be effected and related compensation
paid in accordance with applicable SEC regulations. During the fiscal years or
periods indicated above, no Fund paid any brokerage commissions to PaineWebber
or any other affiliate of Mitchell Hutchins.

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

Consistent with the interests of a Fund and subject to the review of the
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,

<PAGE>

1997, the Funds directed no portfolio transactions to brokers chosen because
they provided research services.

For purchases or sales with broker-dealer firms that 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 that 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 Contracts, 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.

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 each 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.

As of November 30, 1997, Investment Grade Income Fund owned fixed income
securities issued by the following regular broker-dealers for the Fund:
Citicorp, an affiliate of Securities Market, Incorporated, ($5,204,520) and
Lehman Brothers Incorporated ($6,405,091).

As of November 30, 1997, U.S. Government Income Fund had entered into
repurchase agreement transactions with Salomon Brothers Inc. ($11,976,000).

As of November 30, 1997, Strategic Income Fund had purchased a CMO from
First Union Lehman Brothers Mortgage Trust ($6,814,256).

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.

<PAGE>

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 1997 1996
- -------------------------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
U.S. Government Income Fund............................................... 322% 359%
Investment Grade Income Fund.............................................. 109% 115%
High Income Fund.......................................................... 160% 142%
Low Duration Income Fund*................................................. 359% 210%
</TABLE>

<TABLE>
<CAPTION>
FISCAL YEAR TEN MONTHS FISCAL YEAR
ENDED ENDED ENDED
NOVEMBER 30, NOVEMBER 30, JANUARY 31,
1997 1996 1996
------------ ------------ -----------------
<S> <C> <C> <C>
Strategic Income Fund........................................... 140% 101% 91%
</TABLE>

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

* Portfolio turnover was significantly higher for the fiscal year ending
November 30, 1997 due to an increased number of transactions in
mortgage-backed securities on a forward commitment basis and in mortgage
dollar rolls and more frequent rebalancing of the Fund's portfolio to meet
higher inflows of cash as well as redemptions.

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 tables 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

<PAGE>

applicable to the total of (1) the dollar amount then being purchased plus (2)
an amount equal to the then-current net asset value of the purchaser's combined
holdings of Class A Fund shares and Class A shares of any other PaineWebber
mutual fund. The purchaser must provide sufficient information to permit
confirmation of his or her holdings, and the acceptance of the purchase order is
subject to such confirmation. The right of accumulation may be amended or
terminated at any time.

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

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 that 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 New York Stock Exchange ('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, 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 both low and high
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 20th of a month for monthly,
quarterly, semiannual or annual plans, PaineWebber will arrange for redemption
by a Fund of sufficient Fund shares to provide the withdrawal payment specified
by participants in the Funds' systematic withdrawal plan. The payment generally
is mailed approximately five Business Days (defined under 'Valuation of Shares')
after the redemption date. Withdrawal payments should not be considered
dividends but

<PAGE>

redemption proceeds, with the tax consequences described under 'Dividends &
Taxes' in the Prospectus. If periodic withdrawals continually exceed reinvested
dividends and other distributions 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 of a Fund 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 PLAN'sm';
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT'r' (RMA'r')

Shares of the PaineWebber mutual funds (each a 'PW Fund' and, collectively,
the 'PW Funds') are available for purchase by customers of PaineWebber and its
correspondent firms who maintain Resource Management Accounts ('RMA
accountholders') through the RMA Resource Accumulation Plan ('Accumulation
Plan'). The Accumulation 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 Accumulation 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 Accumulation 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 Accumulation 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 Accumulation Plan. Information about
mutual fund positions and outstanding instructions under the Accumulation Plan
are noted on the RMA accountholder's account statement. Instructions under the
Accumulation Plan may be changed at any time, but may take up to two weeks to
become effective.

The terms of the Accumulation Plan, or an RMA accountholder's participation
in the Accumulation 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 Accumulation Plan.

<PAGE>

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 both low
and high 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
Accumulation 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;

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 $100 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 values per share 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
the 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 the 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. For purposes of conversion to Class A
shares,

<PAGE>

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

The availability of the conversion feature is subject to 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 ('Code') and that the
conversion of shares does not constitute a taxable event. If the conversion
feature ceased to be available, the Class B shares would not be converted and
would continue to be subject to the higher ongoing expenses of the Class B
shares beyond six years from the date of purchase. Mitchell Hutchins has no
reason to believe that this condition for the availability of the conversion
feature will not continue to be met.

VALUATION OF SHARES

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

Securities that are listed on exchanges normally 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 ('Nasdaq') normally are valued
at the last available sale price on Nasdaq at 4:00 p.m., Eastern time; other OTC
securities normally are valued at the last bid price available prior to
valuation (other than investments that mature in 60 days or less, which are
valued as described below).

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.

It should be recognized that judgment often plays a greater role in valuing
thinly traded securities and lower rated bonds than is the case with respect to
securities for which a broader range of dealer quotations and last-sale
information is available. The amortized cost method of valuation generally is
used to value debt obligations with 60 days or less remaining until maturity,
unless the applicable board determines that this does not represent fair value.

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

<PAGE>

exchange market. Under normal conditions, this rate differs from the prevailing
exchange rate by less than one-tenth of one percent due to the costs of
converting from one currency to another.

PERFORMANCE INFORMATION

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

<TABLE>
<CAPTION>
P(1 + T)'pp'n = ERV

<S> <C> <C>
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.
</TABLE>

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.

<PAGE>

The following tables show performance information for each class of the
Funds' shares outstanding for the periods indicated. No Class Y shares were
outstanding for the periods indicated for Investment Grade Income Fund, High
Income Fund and Strategic Income Fund. All returns for periods of more than one
year are expressed as an average annual return:
<TABLE>
<CAPTION>
U.S. GOVERNMENT LOW DURATION
INCOME FUND INCOME FUND
------------------------------------------- -------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended November
30, 1997:
Standardized
Return*.......... 2.97% 1.34% 5.87% 7.43% 3.59% 2.81% 5.30% 6.87%
Non-Standardized
Return........... 7.27% 6.34% 6.62% 7.43% 6.67% 5.81% 6.05% 6.87%
Five years ended
November 30, 1997:
Standardized
Return*.......... 3.45% 3.16% 3.76% 4.60% NA NA NA NA
Non-Standardized
Return........... 4.30% 3.51% 3.76% 4.60% NA NA NA NA
Ten years ended
November 30, 1997:
Standardized
Return*.......... 6.72% NA NA NA NA NA NA NA
Non-Standardized
Return........... 7.16% NA NA NA NA NA NA NA
Inception** to
November 30, 1997:
Standardized
Return*.......... 7.76% 4.91% 3.58% 5.39% 3.69% 3.57% 3.82% 6.79%
Non-Standardized
Return........... 8.09% 4.91% 3.58% 5.39% 4.40% 3.57% 3.82% 6.79%

<CAPTION>
INVESTMENT GRADE
INCOME FUND HIGH INCOME FUND
------------------------------ -------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Year ended November
30, 1997:
Standardized
Return*.......... 5.50 % 4.17% 8.59% 8.99% 7.76% 12.28%
Non-Standardized
Return........... 9.88 % 9.17% 9.34% 13.59% 12.76% 13.03%
Five years ended
November 30, 1997:
Standardized
Return*.......... 7.56 % 7.33% 7.92% 9.10% 8.91% 9.43%
Non-Standardized
Return........... 8.43 % 7.63% 7.92% 9.99% 9.19% 9.43%
Ten years ended
November 30, 1997:
Standardized
Return*.......... 9.20 % NA NA 10.54% NA NA
Non-Standardized
Return........... 9.64 % NA NA 10.99% NA NA
Inception** to
November 30, 1997:
Standardized
Return*.......... 9.81 % 8.54% 7.55% 10.88% 12.44% 9.70%
Non-Standardized
Return........... 10.15 % 8.54% 7.55% 11.23% 12.44% 9.70%
</TABLE>

<TABLE>
<CAPTION>
STRATEGIC INCOME FUND
-----------------------------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Year ended November 30, 1997:
Standardized Return*............................................................ 5.64% 4.20% 8.62%
Non-Standardized Return*........................................................ 10.04% 9.20% 9.37%
Inception** to November 30, 1997:
Standardized Return*............................................................ 6.02% 5.94% 6.64%
Non-Standardized Return*........................................................ 7.17% 6.38% 6.64%
</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. Class Y shares do not impose an initial or a
contingent deferred sales charge; therefore the performance information is
the same for Standardized Return and Non-Standardized Return for the period
indicated.

** For U.S. Government Income Fund, Investment Grade Income Fund and High Income
Fund, the inception dates for Class A, Class B and Class C shares were as
follows: Class A shares -- August 31, 1984; Class B shares -- July 1, 1991;
Class C shares -- July 2, 1992. For U.S. Government Income Fund, the
inception date for its Class Y shares was September 11, 1991. For Low
Duration Income Fund, the inception date for its Class A, Class B and Class C
shares was May 3, 1993 and the inception date for its Class Y shares was
October 20, 1995. For Strategic Income Fund, the inception date for Class A,
Class B and Class C shares was February 7, 1994.

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

<PAGE>

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+1
YIELD = 2[(---------)'pp'6-1]
cd
<TABLE>
<S> <C> <C>
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
</TABLE>

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 each class of shares of each Fund
for the 30-day period ended November 30, 1997.

<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............ 5.60% 5.46% 5.95% 7.97% 6.06%
Class B............ 5.05% 4.91% 5.43% 7.54% 5.54%
Class C............ 5.33% 5.12% 5.70% 7.80% 5.80%
Class Y............ 6.12% 5.92% NA NA NA
</TABLE>

OTHER INFORMATION. In Performance Advertisements, each Fund may compare
its Standardized Return and/or its Non-Standardized Return with data published
by Lipper Analytical Services, Inc. ('Lipper') for U.S. government funds (U.S.
Government Income Fund 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

<PAGE>

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.

TAXES

In order to continue to qualify for treatment as a regulated investment
company ('RIC') under the 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. For 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) 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 (3) 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. If a Fund failed to qualify for treatment as a RIC for any taxable
year, it would be taxed as an ordinary corporation on its taxable income for
that year (even if that income was distributed to its shareholders) and all
distributions out of its earnings and profits would be taxable to its
shareholders, as dividends (that is, ordinary income).

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 these Funds will be minimal.

<PAGE>

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
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 received and gains realized by High Income Fund and
Strategic Income Fund on foreign securities may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield and/or total return on its securities. However, tax
conventions between certain countries and the United States may reduce or
eliminate those taxes and many foreign countries do not impose taxes on capital
gains in respect of investments by foreign investors.

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

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 amount,
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 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.

If a Fund has an 'appreciated financial position' -- generally, an interest
(including an interest through an option, futures or forward contract or short
sale) with respect to any stock, debt instrument (other than 'straight debt') or
partnership interest the fair market value of which exceeds its adjusted
basis -- and enters into a 'constructive sale' of the same or substantially
similar property, the Fund will be treated as having made an actual sale
thereof, with the result that gain will be recognized at that time. A
constructive sale generally consists of a short sale, an offsetting notional
principal contract or futures or forward contract entered into by a Fund or a
related person with respect to the same or substantially similar property. In
addition, if the appreciated financial position is itself a short sale or such a
contract, acquisition of the underlying property or substantially similar
property will be deemed a constructive sale.

A Fund may acquire zero coupon or other securities issued with OID or
Treasury Inflation-Protection Securities ('TIPS'), on which principal is
adjusted based on changes in the Consumer Price Index. A Fund must include in
its gross income the portion of the OID (including the amount of any principal
increases on TIPS) that accrues on those securities during the taxable year,
even if the Fund receives no corresponding payment on them during the year.
Similarly, Investment Grade Income Fund, High Income Fund and Strategic Income
Fund each must include in its gross income securities it receives as 'interest'
on PIK securities. Each Fund has elected similar treatment with respect to
securities purchased at a discount from their face value ('market discount').
Because a 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. A Fund may realize
capital gains or losses from those sales, which would increase or decrease its
investment company taxable income or net capital gain.

OTHER INFORMATION

PaineWebber Managed Investments Trust and PaineWebber Securities Trust are
entities of the type commonly known as 'Massachusetts business trusts.' Under
Massachusetts law, shareholders could, under certain circumstances, be held
personally liable for the obligations of each Trust or a Fund.

<PAGE>

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 board members or by any officers or officer by
or on behalf of the Trust, a Fund, the board members 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 incurring financial loss on account of shareholder
liability is limited to circumstances in which a Fund itself would be unable to
meet its obligations, a possibility that Mitchell Hutchins believes is remote
and not material. Upon payment of any liability incurred by a shareholder solely
by reason of being or having been a shareholder, the shareholder paying such
liability will be entitled to reimbursement from the general assets of the Fund.
The board members intend to conduct each Fund's operations 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. 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.

CLASS-SPECIFIC EXPENSES. Each Fund might determine to allocate certain
expenses (in addition to service and distribution fees) to the specific classes
of its shares to which those expenses are attributable. For example, Class B and
Class C shares bear higher transfer agency fees per shareholder account than
those borne by Class A or Class Y 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. 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.

FINANCIAL STATEMENTS

The Funds' Annual Reports to Shareholders for the most recent fiscal year
are separate documents supplied with this Statement of Additional Information
and the financial statements, accompanying notes and reports of independent
auditors or independent accountants appearing therein are incorporated by
reference in this Statement of Additional Information.

<PAGE>

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

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----

<S> <C>
Investment Policies and Restrictions......... 1
Hedging and Other Strategies Using Derivative
Instruments................................ 17
Trustees and Officers; Principal Holders of
Securities................................. 26
Investment Advisory and Distribution
Arrangements............................... 35
Portfolio Transactions....................... 41
Reduced Sales Charges, Additional Exchange
and Redemption Information and Other
Services................................... 43
Conversion of Class B Shares................. 46
Valuation of Shares.......................... 47
Performance Information...................... 48
Taxes........................................ 51
Other Information............................ 52
Financial Statements......................... 53
</TABLE>

'c'1998 PaineWebber Incorporated

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, 1998

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

PAINEWEBBER

STATEMENT OF DIFFERENCES
------------------------

The trademark symbol shall be expressed as............................... 'tm'
The copyright symbol shall be expressed as .............................. 'c'
The service mark symbol shall be expressed as............................ 'sm'
The dagger symbol shall be expressed as ................................. 'D'
The registered trademark symbol shall be expressed as.................... 'r'
The Characters normally expressed as superscript shall be preceded by.... 'pp'