PAINEWEBBER MANAGED INVESTMENTS TRUST, 485BPOS, 2000-03-30

PAINEWEBBER MANAGED INVESTMENTS TRUST
485BPOS, 2000-03-30

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<PAGE>

As filed with the Securities and Exchange Commission on March 30, 2000

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

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-lA

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. [ ] -----
---- -----
Post-Effective Amendment No. 67 [ X ]
---- -----

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 60 [ X ] -----
---- -----
(Check appropriate box or boxes.)

PAINEWEBBER MANAGED INVESTMENTS TRUST
(Exact name of registrant as specified in charter)
51 West 52nd Street
New York, New York 10019-6114
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000

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

Copies to:
ELINOR W. GAMMON, ESQ.
ROBERT A. WITTIE, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, D.C. 20036-1800
Telephone: (202)778-9000

Approximate Date of Proposed Public Offering: Effective Date of this
Post-Effective Amendment.

It is proposed that this filing will become effective:
[ ] Immediately upon filing pursuant to Rule 485(b)
[ X ] On March 31, 2000 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(1)
[ ] On ________________ pursuant to Rule 485(a)(1)
[ ] 75 days after filing pursuant to Rule 485(a)(2)
[ ] On ________________ pursuant to Rule 485(a)(2)

Title of Securities Being Registered: Class A, B, C and Y Shares of Beneficial
Interest of PaineWebber High Income Fund, PaineWebber Investment Grade Income
Fund, PaineWebber Low Duration U.S. Government Income Fund and PaineWebber U.S.
Government Income Fund.

<PAGE>
PaineWebber
U.S. Government Income Fund

PaineWebber
Low Duration U.S. Government Income Fund

PaineWebber
Investment Grade Income Fund

PaineWebber
High Income Fund

PaineWebber
Strategic Income Fund

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

PROSPECTUS
MARCH 31, 2000

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

This prospectus offers shares in PaineWebber's five bond funds. Each fund offers
four classes of shares. Each class has different sales charges and ongoing
expenses. You can choose the class that is best for you based on how much you
plan to invest and how long you plan to hold your fund shares. Class Y shares
are available only to certain types of investors.

As with all mutual funds, the Securities and Exchange Commission has not
approved any fund's shares as investments or determined whether this prospectus
is complete or accurate. To state otherwise is a crime.
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber Low Duration U.S. Government Income Fund
U.S. Government Income Fund High Income Fund
Investment Grade Income Fund Strategic Income Fund

Contents
THE FUNDS

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
<S> <C> <C>
PaineWebber U.S. Government Income Fund

What every investor
should know about 4 Investment Objective, Strategies and Risks
the funds 5 Performance
6 Expenses and Fee Tables

PaineWebber Low Duration U.S. Government Income Fund
7 Investment Objective, Strategies and Risks
8 Performance
9 Expenses and Fee Tables

PaineWebber Investment Grade Income Fund
10 Investment Objective, Strategies and Risks
11 Performance
12 Expenses and Fee Tables

PaineWebber High Income Fund
13 Investment Objective, Strategies and Risks
14 Performance
15 Expenses and Fee Tables

PaineWebber Strategic Income Fund
16 Investment Objective, Strategies and Risks
17 Performance
18 Expenses and Fee Tables

19 More About Risks and Investment Strategies

YOUR INVESTMENT

- -----------------------------------------------------------------------------
Managing your fund 21 Managing Your Fund Account
account --Flexible Pricing
--Buying Shares
--Selling Shares
--Exchanging Shares
--Pricing and Valuation
</TABLE>

- --------------------------------------------------------------------------------
Prospectus Page 2
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber Low Duration U.S. Government Income Fund
U.S. Government Income Fund High Income Fund
Investment Grade Income Fund Strategic Income Fund

<TABLE>
<S> <C> <C>
ADDITIONAL INFORMATION

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

Additional important 27 Management
information about 29 Dividends and Taxes
the funds 31 Financial Highlights

- -----------------------------------------------------------------------------
Where to learn more Back Cover
about Paine Webber
mutual funds
</TABLE>

The funds are not complete
or
balanced investment
programs.

- --------------------------------------------------------------------------------
Prospectus Page 3
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber U.S. Government Income Fund

PaineWebber U.S. Government Income Fund
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

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

FUND OBJECTIVE

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

PRINCIPAL INVESTMENT STRATEGIES

The fund invests primarily in U.S. government bonds, including bonds that are
backed by mortgages. The fund also invests, to a lesser extent, in
non-government bonds that have the highest credit ratings and that are backed by
mortgages or other assets. Normally, the fund concentrates its investments in
U.S. government and privately issued bonds that are backed by mortgages or other
assets. The fund uses interest rate futures contracts and other derivatives to
help manage its portfolio "duration." "Duration" is a measure of the fund's
exposure to interest rate risk. The fund invests in when-issued or delayed
delivery bonds as a leveraging technique in order to increase its return.

The fund's investment adviser, Mitchell Hutchins Asset Management Inc., uses a
three-step investment process to find the best relative values for the fund:
management of the fund's portfolio duration; allocation of the fund's assets
among its investment sectors; and selection of specific securities.

Mitchell Hutchins adjusts the fund's portfolio duration based on its assessment
of fundamental economic and technical market conditions. A longer duration means
that changes in market interest rates are likely to have a larger effect on the
value of the fund's assets. Therefore, when Mitchell Hutchins believes that
interest rates are likely to fall, thereby increasing bond values, it may
lengthen the fund's portfolio duration.

Mitchell Hutchins allocates the fund's assets among the various sectors of the
U.S. government and mortgage-backed bond markets by deciding which sectors
provide the best relative values under prevailing conditions. For example,
mortgage-backed bonds normally provide a higher yield than comparable Treasury
bonds. If the difference in yields between those two types of bonds is higher
than normal, Mitchell Hutchins may increase the fund's investments in
mortgage-backed bonds.

Mitchell Hutchins selects securities to buy or sell for the fund by analyzing
bond fundamentals. It chooses securities that it believes provide the best
combination of income, liquidity and potential for gain relative to risk of
loss.

PRINCIPAL RISKS

An investment in the fund is not guaranteed; you may lose money by investing in
the fund. The principal risks presented by the fund are:

- - INTEREST RATE RISK -- The value of the fund's investments generally will fall
when interest rates rise.

- - PREPAYMENT RISK -- The fund's mortgage- and asset-backed securities may be
prepaid more rapidly than expected, especially when interest rates are
falling, and the fund may have to reinvest those prepayments at lower interest
rates. When interest rates are rising, slower prepayments may extend the
duration of the securities and may reduce their value.

- - CONCENTRATION RISK -- Because the fund concentrates its investments in
mortgage- and asset-backed securities, it is more subject to the risks related
to that industry group than it otherwise would be.

- - LEVERAGE RISK -- Leverage magnifies the effect of changes in market values.
While leverage can increase the fund's income and potential for gain, it also
can increase expenses and the risk of loss. The fund attempts to limit the
magnifying effect of its leverage by managing its portfolio duration.

- - CREDIT RISK -- Bond issuers may fail to make payments when due, or they may
become less willing or less able to do so.

- - DERIVATIVES RISK -- The fund's investments in derivatives may rise or fall
more rapidly than other investments.

More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."

INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THOSE REPORTS).

- --------------------------------------------------------------------------------
Prospectus Page 4
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber U.S. Government Income Fund

PERFORMANCE

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

RISK/RETURN BAR CHART AND TABLE

The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.

The bar chart shows how the fund's performance has varied from year to year. The
chart shows Class A shares because they have the longest performance history of
any class of fund shares. The chart does not reflect the effect of sales
charges; if it did, the total returns shown would be lower.

The table that follows the chart shows the average annual returns over several
time periods for each class of the fund's shares. That table does reflect fund
sales charges. The table compares fund returns to returns on a broad-based
market index that is unmanaged and that, therefore, does not include any sales
charges or expenses.

The fund's past performance does not necessarily indicate how the fund will
perform in the future.

TOTAL RETURN ON CLASS A SHARES

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
CALENDAR YEAR PERCENTAGES
<S> <C>
1990 9.67%
1991 14.89%
1992 6.37%
1993 6.48%
1994 -10.51%
1995 17.04%
1996 0.98%
1997 9.44%
1998 7.91%
1999 -2.91%
</TABLE>

Best quarter during years shown: 2nd quarter, 1995 -- 5.91%
Worst quarter during years shown: 2nd quarter, 1994 -- (4.69)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999

<TABLE>
<CAPTION>
LEHMAN
BROTHERS
CLASS CLASS A CLASS B* CLASS C CLASS Y GOVERNMENT
(INCEPTION DATE) (8/31/84) (7/1/91) (7/2/92) (9/11/91) BOND INDEX
- ---------------- --------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
One Year.......................................... (2.91)% (3.69)% (3.42)% (2.62)% (2.23)%
Five Years........................................ 6.26% 5.44% 5.73% 6.58% 7.44%
Ten Years......................................... 5.64% N/A N/A N/A 7.48%
Life of Class..................................... 7.38% 4.43% 3.26% 4.85% **
</TABLE>

- ---------

*Assumes conversion of Class B shares to Class A shares after six years.

**Average annual total returns for the Lehman Brothers Government Bond Index for
the life of each class were as follows: Class A--9.29%; Class B--7.35%;
Class C--6.53%; Class Y--7.06%.

- --------------------------------------------------------------------------------
Prospectus Page 5
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber U.S. Government Income Fund

EXPENSES AND FEE TABLES

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

FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.

SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investments)

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a % of offering price)................................ 4% None None None
Maximum Contingent Deferred Sales Charge (Load) (CDSC)
(as a % of offering price)................................ None 5% 0.75% None
Exchange Fee................................................ None None None None
</TABLE>

ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Management Fees............................................. 0.50% 0.50% 0.50% 0.50%
Distribution and/or Service (12b-1) Fees.................... 0.25 1.00 0.75 0.00
Other Expenses.............................................. 0.26 0.32 0.28 0.19
---- ---- ---- ----
Total Annual Fund Operating Expenses........................ 1.01% 1.82% 1.53% 0.69%
==== ==== ==== ====
</TABLE>

EXAMPLE

This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.

This example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Class A..................................................... $499 $ 709 $ 936 $1,587
Class B (assuming sales of all shares at end of period)..... 685 873 1,185 1,729
Class B (assuming no sales of shares)....................... 185 573 985 1,729
Class C (assuming sales of all shares at end of period)..... 231 483 834 1,824
Class C (assuming no sales of shares)....................... 156 483 834 1,824
Class Y..................................................... 70 221 384 859
</TABLE>

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Prospectus Page 6
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber Low Duration U.S. Government Income Fund

PaineWebber Low Duration U.S. Government Income Fund
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

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

FUND OBJECTIVE

The highest level of income that is consistent with the preservation of capital
and low volatility of net asset value.

PRINCIPAL INVESTMENT STRATEGIES

The fund normally limits its portfolio "duration" to between one and three
years. "Duration" is a measure of the fund's exposure to interest rate risk. A
longer duration means that changes in market interest rates are likely to have a
larger effect on the value of the assets in a portfolio. Because the fund's
normal, one-to-three year portfolio duration is relatively short, the effect of
interest rate changes on the fund's value is expected to be relatively limited.
The fund may (but is not required to) use derivatives to help manage its
portfolio duration.

The fund invests primarily in U.S. government bonds, including those backed by
mortgages. The fund also invests, to a lesser extent, in non-government bonds
that have the highest credit rating and that are backed by mortgages or other
assets. The fund normally concentrates its investments in U.S. government and
privately issued bonds that are backed by mortgages or other assets. The fund
invests in when-issued or delayed delivery bonds as a leveraging technique in
order to increase its return.

Mitchell Hutchins Asset Management Inc. has appointed Pacific Investment
Management Company ("PIMCO") as the fund's sub-adviser. PIMCO analyzes U.S.
economic and market conditions, as well as other factors, to decide on a
portfolio duration and to allocate fund assets to bonds of different maturities,
types and coupon interest rates. PIMCO decides which bonds to buy or sell based
on various factors, including economic forecasts, anticipated interest rate
levels and expected prepayment rates on the mortgages supporting mortgage-backed
bonds. PIMCO selects specific bonds by analyzing their relative value and risk
characteristics.

PRINCIPAL RISKS

An investment in the fund is not guaranteed; you may lose money by investing in
the fund. The principal risks presented by the fund are:

- - INTEREST RATE RISK -- The value of the fund's investments generally will fall
when interest rates rise.

- - CREDIT RISK -- Bond issuers may fail to make payments when due, or they may
become less willing or less able to do so.

- - DERIVATIVES RISK -- The fund's investments in derivatives may rise or fall
more rapidly than other investments.

More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."

INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THOSE REPORTS).

- --------------------------------------------------------------------------------
Prospectus Page 7
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber Low Duration U.S. Government Income Fund

PERFORMANCE

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

RISK/RETURN BAR CHART AND TABLE

The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.

The bar chart shows how the fund's performance has varied from year to year. The
chart shows Class A shares because they have as long a performance history as
any class of fund shares. The chart does not reflect the effect of sales
charges; if it did, the total returns shown would be lower.

The fund's past performance does not necessarily indicate how the fund will
perform in the future. This may be particularly true of the period prior to
October 24, 1994, when PIMCO became the fund's sub-adviser.

TOTAL RETURN ON CLASS A SHARES (1994 IS THE FUND'S FIRST FULL CALENDAR YEAR
OF OPERATIONS)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
CALENDAR YEAR PERCENTAGES
<S> <C>
1990
1991
1992
1993
1994 -4.39%
1995 10.75%
1996 5.57%
1997 7.05%
1998 6.36%
1999 1.19%
</TABLE>

Best quarter during years shown: 4th quarter, 1996 -- 3.10%
Worst quarter during years shown: 2nd quarter, 1994 -- (7.33)%

AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999

<TABLE>
<CAPTION>
MERRILL
LYNCH
1-3 YEAR
U.S.
CLASS CLASS A CLASS B* CLASS C CLASS Y TREASURY
(INCEPTION DATE) (5/3/93) (5/3/93) (5/3/93) (10/20/95) INDEX
- ---------------- -------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
One Year.......................................... (1.69)% (2.51)% (0.20)% 1.01% 3.06%
Five Years........................................ 5.49% 5.18% 5.40% N/A 6.51%
Life of Class..................................... 3.76% 3.49% 3.57% 5.39% **
</TABLE>

- ---------

*Assumes conversion of Class B shares to Class A shares after six years.

**Average annual total returns for the Merrill Lynch 1-3 Year U.S. Treasury
Index for the life of each class were as follows: Class A--5.43%;
Class B--5.43%; Class C--5.43%; Class Y--5.60%.

- --------------------------------------------------------------------------------
Prospectus Page 8
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber Low Duration U.S. Government Income Fund

EXPENSES AND FEE TABLES

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

FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.

SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investments)

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a % of offering price)................................ 3% None None None
Maximum Contingent Deferred Sales Charge (Load) (CDSC)
(as a % of offering price)................................ None 3% 0.75% None
Exchange Fee................................................ None None None None
</TABLE>

ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Management Fees............................................. 0.50% 0.50% 0.50% 0.50%
Distribution and/or Service (12b-1) Fees.................... 0.25 1.00 0.75 0.00
Other Expenses.............................................. 0.21 0.28 0.35 0.20
---- ---- ---- ----
Total Annual Fund Operating Expenses........................ 0.96% 1.78% 1.60% 0.70%
==== ==== ==== ====
</TABLE>

EXAMPLE

This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.

The example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Class A..................................................... $395 $597 $815 $1,443
Class B (assuming sales of all shares at end of period)..... 481 760 964 1,680
Class B (assuming no sales of shares)....................... 181 560 964 1,680
Class C (assuming sales of all shares at end of period)..... 238 505 871 1,900
Class C (assuming no sales of shares)....................... 163 505 871 1,900
Class Y..................................................... 72 224 390 871
</TABLE>

- --------------------------------------------------------------------------------
Prospectus Page 9
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber Investment Grade Income Fund

PaineWebber Investment Grade Income Fund
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

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

FUND OBJECTIVE

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

PRINCIPAL INVESTMENT STRATEGIES

The fund invests primarily in a diversified range of investment grade bonds,
including U.S. government bonds, U.S. and foreign corporate bonds and bonds that
are backed by mortgages. The fund also invests, to a lesser extent, in corporate
bonds that are below investment grade, preferred stocks and bonds that are
convertible into common stocks. The fund uses interest rate futures contracts
and other derivatives to help manage its portfolio "duration." "Duration" is a
measure of the fund's exposure to interest rate risk.

The fund's investment adviser, Mitchell Hutchins Asset Management Inc., tries to
find the best relative values in the markets in which the fund invests. It does
this primarily through sector and industry allocation and bond selection.

Mitchell Hutchins allocates the fund's assets among bond market sectors and
industries by deciding which sectors and industries provide the best relative
values under prevailing conditions. For example, investment grade corporate
bonds normally provide a higher yield than comparable Treasury bonds. If the
difference in yields between those two types of bonds is higher than normal,
Mitchell Hutchins may increase the fund's investments in investment grade
corporate bonds.

Mitchell Hutchins selects industries and companies within the corporate bond
sector by performing fundamental credit analysis based on cash flows and the
ability of the issuer to make required payments on its debt. Mitchell Hutchins
decides which securities to buy or sell by choosing specific securities that it
believes provide the best combination of income, liquidity and potential for
gain relative to risk of loss.

PRINCIPAL RISKS

An investment in the fund is not guaranteed; you may lose money by investing in
the fund. The principal risks presented by the fund are:

- - INTEREST RATE RISK -- The value of the fund's investments generally will fall
when interest rates rise.

- - CREDIT RISK -- Bond issuers may fail to make payments when due, or they may
become less willing or less able to do so. This risk is greater for high
yield, lower quality bonds than for bonds that are investment grade.

- - FOREIGN INVESTING RISK -- The value of the fund's investments in foreign
securities may fall due to adverse political, social and economic developments
abroad. However, because the fund's foreign investments must be denominated in
U.S. dollars, it generally is not subject to the risk of changes in currency
valuations.

- - DERIVATIVES RISK -- The fund's investments in derivatives may rise or fall
more rapidly than other investments.

More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."

INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THOSE REPORTS).

- --------------------------------------------------------------------------------
Prospectus Page 10
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber Investment Grade Income Fund

PERFORMANCE

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

RISK/RETURN BAR CHART AND TABLE

The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.

The fund's past performance does not necessarily indicate how the fund will
perform in the future.

TOTAL RETURN ON CLASS A SHARES

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
CALENDAR YEAR PERCENTAGES
<S> <C>
1990 6.47%
1991 18.56%
1992 8.87%
1993 13.35%
1994 -5.59%
1995 19.61%
1996 3.98%
1997 11.93%
1998 4.77%
1999 -1.66%
</TABLE>

Best quarter during years shown: 2nd quarter, 1995 -- 6.88%

Worst quarter during years shown: 1st quarter, 1994 -- (4.26)%

AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999

<TABLE>
<CAPTION>
LEHMAN
BROTHERS
CLASS CLASS A CLASS B* CLASS C CLASS Y CORPORATE
(INCEPTION DATE) (8/31/84) (7/1/91) (7/2/92) (2/20/98) BOND INDEX
- ---------------- --------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
One Year.......................................... (5.63)% (7.02)% (2.84)% (1.58)% (1.95)%
Five Years........................................ 6.61% 6.35% 6.95% N/A 8.18%
Ten Years......................................... 7.31% N/A N/A N/A 8.21%
Life of Class..................................... 8.74% 6.94% 5.88% 1.00% **
</TABLE>

- ---------

*Assumes conversion of Class B shares to Class A shares after six years.

**Average annual total returns for the Lehman Brothers Corporate Bond Index for
the life of each class were as follows: Class A--10.36%; Class B--8.07%;
Class C--7.12%; and Class Y--2.82%.

- --------------------------------------------------------------------------------
Prospectus Page 11
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber Investment Grade Income Fund

EXPENSES AND FEE TABLES

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

FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.

SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investments)

ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Management Fees............................................. 0.50% 0.50% 0.50% 0.50%
Distribution and/or Service (12b-1) Fees.................... 0.25 1.00 0.75 0.00
Other Expenses.............................................. 0.20 0.20 0.19 0.16
---- ---- ---- ----
Total Annual Fund Operating Expenses........................ 0.95% 1.70% 1.44% 0.66%
==== ==== ==== ====
</TABLE>

EXAMPLE

The following example is intended to help you compare the cost of investing in
the fund with the cost of investing in other mutual funds.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Class A..................................................... $493 $691 $ 904 $1,520
Class B (assuming sales of all shares at end of period)..... 673 836 1,123 1,627
Class B (assuming no sales of shares)....................... 173 536 923 1,627
Class C (assuming sales of all shares at end of period)..... 222 456 787 1,724
Class C (assuming no sales of shares)....................... 147 456 787 1,724
Class Y..................................................... 67 211 368 822
</TABLE>

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Prospectus Page 12
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber High Income Fund

PaineWebber High Income Fund
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

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

FUND OBJECTIVE

High income.

PRINCIPAL INVESTMENT STRATEGIES

The fund invests primarily in a diversified range of high yield U.S. and foreign
corporate bonds (sometimes called "junk bonds"). The fund also invests, to a
lesser extent, in other types of bonds, preferred stocks and bonds that are
convertible into common stock. The fund may (but is not required to) use
derivatives as part of its investment strategy or to help manage portfolio
risks.

The fund's investment adviser, Mitchell Hutchins Asset Management Inc., uses a
three-step investment process to find the best relative values in the bond
markets in which the fund invests: industry selection, company selection and
security selection.

Mitchell Hutchins allocates the fund's assets among industry groups by analyzing
economic factors, industry dynamics and yield spreads to determine which
industries provide the most attractive investment opportunities. Mitchell
Hutchins selects companies within these industries by performing fundamental
credit analysis based on cash flow, leverage and other balance sheet and income
statement factors. In deciding which securities to buy or sell for the fund,
Mitchell Hutchins chooses from among the types of securities offered by these
companies to select those that appear to offer the best relative values. All
aspects of this process rely on Mitchell Hutchins' economic, credit,
quantitative and market research.

PRINCIPAL RISKS

An investment in the fund is not guaranteed; you may lose money by investing in
the fund. The principal risks presented by the fund are:

- - INTEREST RATE RISK -- The value of the fund's investments generally will fall
when interest rates rise.

- - FOREIGN INVESTING RISK -- The value of the fund's investments in foreign
securities may fall due to adverse political, social and economic developments
abroad and due to decreases in foreign currency values relative to the U.S.
dollar.

- - EQUITY RISK -- Stocks and other equity securities generally fluctuate in value
more than bonds. The fund could lose all of its investment in a company's
stock.

- - DERIVATIVES RISK -- The fund's investments in derivatives may rise or fall
more rapidly than other investments.

More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."

INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THOSE REPORTS).

- --------------------------------------------------------------------------------
Prospectus Page 13
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber High Income Fund

PERFORMANCE

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

RISK/RETURN BAR CHART AND TABLE

The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.

The fund's past performance does not necessarily indicate how the fund will
perform in the future.

TOTAL RETURN ON CLASS A SHARES

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
CALENDAR YEAR PERCENTAGES
<S> <C>
1990 -8.53%
1991 47.02%
1992 24.06%
1993 22.74%
1994 -11.69%
1995 10.96%
1996 17.73%
1997 12.98%
1998 -6.22%
1999 8.55%
</TABLE>

Best quarter during years shown: 1st quarter, 1991 -- 16.94%

Worst quarter during years shown: 3rd quarter, 1998 -- (12.02)%

AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999

<TABLE>
<CAPTION>
CS FIRST
CLASS CLASS A CLASS B* CLASS C CLASS Y BOSTON
(INCEPTION DATE) (8/31/84) (7/1/91) (7/2/92) (2/20/98) HIGH YIELD BOND INDEX
- ---------------- --------- -------- -------- --------- ---------------------
<S> <C> <C> <C> <C> <C>
One Year................................... 8.55% 7.71% 7.76% 8.74% 3.28%
Five Years................................. 8.48% 6.31% 7.90% N/A 9.06%
Ten Years.................................. 10.51% N/A N/A N/A 11.05%
Life of Class.............................. 9.84% 9.64% 7.16% (0.57)% **
</TABLE>

- ---------

*Assumes conversion of Class B shares to Class A shares after six years.

**Average annual total returns for the CS First Boston High Yield Bond Index for
the life of each class were as follows: Class A--N/A; Class B--11.04%;
Class C--9.06%; Class Y--1.11%.

- --------------------------------------------------------------------------------
Prospectus Page 14
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber High Income Fund

EXPENSES AND FEE TABLES

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

FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.

SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investments)

ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Management Fees............................................. 0.50% 0.50% 0.50% 0.50%
Distribution and/or Service (12b-1) Fees.................... 0.25 1.00 0.75 0.00
Other Expenses.............................................. 0.19 0.20 0.19 0.18
---- ---- ---- ----
Total Annual Fund Operating Expenses........................ 0.94% 1.70% 1.44% 0.68%
==== ==== ==== ====
</TABLE>

EXAMPLE

The following example is intended to help you compare the cost of investing in
the fund with the cost of investing in other mutual funds.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Class A..................................................... $492 $688 $ 899 $1,509
Class B (assuming sales of all shares at end of period)..... 673 836 1,123 1,622
Class B (assuming no sales of shares)....................... 173 536 923 1,622
Class C (assuming sales of all shares at end of period)..... 222 456 787 1,724
Class C (assuming no sales of shares)....................... 147 456 787 1,724
Class Y..................................................... 69 218 379 847
</TABLE>

- --------------------------------------------------------------------------------
Prospectus Page 15
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber Strategic Income Fund

PaineWebber Strategic Income Fund
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

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

FUND OBJECTIVE

High level of current income and, secondarily, capital appreciation.

PRINCIPAL INVESTMENT STRATEGIES

The fund strategically allocates investments among three bond market sectors:

- - U.S. government and investment grade bonds;

- - U.S. high yield bonds (sometimes called "junk bonds"), including preferred
stock and bonds that are convertible into common stock; and

- - Foreign and emerging market bonds.

Each of these sectors generally reacts in different ways or at different times
to changes in interest rates or to particular economic events. This means that,
when one sector underperforms the market as a whole, another sector may
outperform the market.

The fund normally invests in each of these three sectors. However, the fund's
investment adviser, Mitchell Hutchins Asset Management Inc., tries to take
advantage of changes in the relative performance of different sectors by
allocating a larger percentage of the fund's assets to those sectors that it
believes are undervalued. Selections of specific securities to buy and sell for
the fund are based on market outlook, investment research, geographic analysis
and forecasts of interest rates and currency exchange rates. The fund may (but
is not required to) use forward currency contracts to hedge against foreign
currency risk.

PRINCIPAL RISKS

An investment in the fund is not guaranteed; you may lose money by investing in
the fund. The principal risks presented by the fund are:

- - INTEREST RATE RISK -- The value of the fund's investments generally will fall
when interest rates rise.

- - ASSET ALLOCATION RISK -- Mitchell Hutchins may not be successful in choosing
the best allocation of the fund's assets among market sectors.

- - FOREIGN INVESTING AND EMERGING MARKETS RISKS -- The value of the fund's
investments in foreign securities may fall due to adverse political, social
and economic developments abroad and due to decreases in foreign currency
values relative to the U.S. dollar. These risks are greater for investments in
emerging market issuers than for issuers in more developed countries.

- - EQUITY RISK -- Stocks and other equity securities generally fluctuate in value
more than bonds. The fund could lose all of its investment in a company's
stock.

- - NON-DIVERSIFIED STATUS RISK -- Because the fund is non-diversified, it can
invest more of its assets in a single issuer than can a diversified fund. As a
result, changes in the value of a single issuer's securities can have a
greater impact on the fund's performance.

- - DERIVATIVES RISK -- The fund's investments in derivatives may rise or fall
more rapidly than other investments.

More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."

INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THOSE REPORTS).

- --------------------------------------------------------------------------------
Prospectus Page 16
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber Strategic Income Fund

PERFORMANCE

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

RISK/RETURN BAR CHART AND TABLE

The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.

The fund's past performance does not necessarily indicate how the fund will
perform in the future.

TOTAL RETURN ON CLASS A SHARES (1995 IS THE FUND'S FIRST FULL CALENDAR YEAR
OF OPERATIONS)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
CALENDAR YEAR PERCENTAGES
<S> <C>
1990
1991
1992
1993
1994
1995 14.12%
1996 14.00%
1997 10.32%
1998 0.96%
1999 3.98%
</TABLE>

Best quarter during years shown: 1st quarter, 1995 -- 4.73%

Worst quarter during years shown: 3rd quarter, 1998 -- (4.36)%

AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999

<TABLE>
<CAPTION>
LEHMAN
BROTHERS
CLASS CLASS A CLASS B CLASS C CLASS Y AGGREGATE
(INCEPTION DATE) (2/7/94) (2/7/94) (2/7/94) (2/17/98) BOND INDEX
- ---------------- -------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
One Year........................................... (0.15)% (1.68)% 2.71% 4.29% (0.82)%
Five Years......................................... 7.65% 7.44% 7.98% N/A 7.73%
Life of Class...................................... 4.81% 4.63% 5.01% 1.64% *
</TABLE>

- ---------

*Average annual total returns for the Lehman Brothers Aggregate Bond Index for
the life of each class were as follows: Class A--6.12%; Class B--6.12%;
Class C--6.12%; Class Y--3.49%.

- --------------------------------------------------------------------------------
Prospectus Page 17
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber Strategic Income Fund

EXPENSES AND FEE TABLES

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

FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.

SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investments)

ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Management Fees............................................. 0.75% 0.75% 0.75% 0.75%
Distribution and/or Service (12b-1) Fees.................... 0.25 1.00 0.75 0.00
Other Expenses.............................................. 0.30 0.33 0.32 0.30
---- ---- ---- ----
Total Annual Fund Operating Expenses........................ 1.30% 2.08% 1.82% 1.05%
==== ==== ==== ====
</TABLE>

EXAMPLE

This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Class A..................................................... $527 $796 $1,084 $1,905
Class B (assuming sales of all shares at end of period)..... 711 952 1,319 2,028
Class B (assuming no sales of shares)....................... 211 652 1,119 2,028
Class C (assuming sales of all shares at end of period)..... 260 573 985 2,137
Class C (assuming no sales of shares)....................... 185 573 985 2,137
Class Y..................................................... 107 334 579 1,283
</TABLE>

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

MORE ABOUT RISKS AND INVESTMENT
STRATEGIES

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

PRINCIPAL RISKS

The main risks of investing in the funds are described below. Not all of these
risks apply to each fund. You can find a list of the main risks that apply to a
particular fund by looking under the "Investment Objective, Strategies and
Risks" heading for that fund.

Other risks of investing in a fund, along with further detail about some of the
risks described below, are discussed in the funds' Statement of Additional
Information ("SAI"). Information on how you can obtain the SAI is on the back
cover of this prospectus.

ASSET ALLOCATION RISK. Mitchell Hutchins may not be successful in choosing the
best allocation of a fund's assets among the market sectors in which it may
invest. A fund that allocates its assets among market sectors is more dependent
on Mitchell Hutchins' ability to successfully assess the relative values in each
sector than are funds that do not allocate among market sectors.

CONCENTRATION RISK. This means that a fund normally invests at least 25% of its
total assets in a single industry group. U.S. Government Income Fund and Low
Duration Fund each normally concentrates its investments in U.S. government and
privately issued bonds that are backed by mortgages or other assets.
Concentration increases a fund's exposure to that industry group and might cause
the fund's net asset value to change more than it otherwise would.

CREDIT RISK. Credit risk is the risk that the issuer of a bond will not make
principal or interest payments when they are due. Even if an issuer does not
default on a payment, a bond's value may decline if the market believes that the
issuer has become less able, or less willing, to make payments on time. Even
high quality bonds are subject to some credit risk. However, credit risk is
greater for lower quality bonds. Bonds that are not investment grade involve
high credit risk and are considered speculative. High yield, lower quality bonds
may fluctuate in value more than higher quality bonds and, during periods of
market volatility, may be more difficult to sell at the time and price a fund
desires.

DERIVATIVES RISK. The value of "derivatives"--so-called because their value
"derives" from the value of an underlying asset, reference rate or index--may
rise or fall more rapidly than other investments. For some derivatives, it is
possible for a fund to lose more than the amount it invested in the derivative.
Options, futures contracts and forward currency contracts are examples of
derivatives. A fund's use of derivatives may not succeed for various reasons,
including unexpected changes in the values of the derivatives or the assets
underlying them. Also, if a fund uses derivatives as a hedge, the hedge will not
succeed if changes in the values of the derivatives are not matched by opposite
changes in the values of the assets being hedged.

EMERGING MARKETS RISK. Securities of issuers located in emerging market
countries are subject to all of the risks of other foreign securities (see
below). However, the level of those risks often is higher due to the fact that
political, legal and economic systems in emerging market countries may be less
fully developed and less stable than those in developed countries. Emerging
market securities also may be subject to additional risks, such as lower
liquidity and larger or more rapid changes in value.

EQUITY RISK. The prices of stocks and other equity securities generally
fluctuate more than those of other investments. They reflect changes in the
issuing company's financial condition and changes in the overall market. A fund
may lose a substantial part, or even all, of its investment in a company's
stock.

FOREIGN INVESTING RISK. Foreign investing involves risks relating to political,
social and economic developments abroad to a greater extent than investing in
the securities of U.S. issuers. In addition, there are differences between U.S.
and foreign regulatory requirements and market practices. Foreign investments
denominated in foreign currencies are subject to the risk that the value of a
foreign currency will fall in relation to the U.S. dollar. Currency exchange
rates can be volatile and can be affected by, among other factors, the general
economics of a country, the actions of U.S. and foreign governments or central
banks, the imposition of currency controls and speculation.

- --------------------------------------------------------------------------------
Prospectus Page 19
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber U.S. Government Income Fund Low Duration U.S. Government Income
Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund

INTEREST RATE RISK. The value of bonds generally can be expected to fall when
interest rates rise and to rise when interest rates fall. Interest rate risk is
the risk that interest rates will rise, so that the value of a fund's
investments in bonds will fall. Because interest rate risk is the primary risk
presented by U.S. government and other very high quality bonds, changes in
interest rates may actually have a larger effect on the value of those bonds
than on lower quality bonds.

LEVERAGE RISK. Leverage involves increasing the total assets in which a fund
can invest beyond the level of the fund's net assets. Because leverage increases
the amount of a fund's assets, it can magnify the effect on the fund of changes
in market values. As a result, while leverage can increase a fund's income and
potential for gain, it also can increase expenses and the risk of loss. U.S.
Government Income Fund and Low Duration Fund, each of which uses leverage by
investing in when-issued and delayed delivery bonds, attempt to limit the
potential magnifying effect of the leverage by managing portfolio duration.

NON-DIVERSIFIED STATUS RISK. Strategic Income Fund is non-diversified. A
non-diversified fund may invest more than 5% of its total assets in securities
of a single issuer to a greater extent than a diversified fund. When a fund
holds a large position in the securities of one issuer, changes in the financial
condition or in the market's assessment of that issuer may cause larger changes
in the fund's total return and in the price of its shares than if the fund held
only a smaller position.

PREPAYMENT RISK. Payments on bonds that are backed by mortgage loans or similar
assets may be received earlier or later than expected due to changes in the rate
at which the underlying loans are prepaid. Faster prepayments often happen when
market interest rates are falling. As a result, a fund may need to reinvest
these early payments at those lower interest rates, thus reducing its income.
Conversely, when interest rates rise, prepayments may happen more slowly,
causing the underlying loans to be outstanding for a longer time. This can cause
the market value of the security to fall because the market may view its
interest rate as too low for a longer term investment.

ADDITIONAL INVESTMENT STRATEGIES

DEFENSIVE POSITIONS; CASH RESERVES. To protect itself from adverse market
conditions, a fund may take a temporary defensive position that is different
from its normal investment strategy. This means that the fund may temporarily
invest a larger-than-normal part, or even all, of its assets in cash or money
market instruments. Since these investments provide relatively low income, a
defensive position may not be consistent with achieving a fund's investment
objective. However, with the exception of High Income Fund, each fund also may
invest in money market instruments on an unlimited basis as part of its ordinary
investment strategy. High Income Fund may invest up to 35% of its total assets
in cash or money market instruments as a cash reserve for liquidity.

PORTFOLIO TURNOVER. Each fund may engage in frequent trading in order to
achieve its investment objective. Frequent trading may result in portfolio
turnover over 100% or more (high portfolio turnover).

Frequent trading may increase the portion of a fund's capital gains that are
realized for tax purposes in any given year. This may increase the fund's
taxable dividends in that year. Frequent trading also may increase the portion
of a fund's realized capital gains that are considered "short-term" for tax
purposes. Shareholders will pay higher taxes on dividends that represent
short-term capital gains than they would pay on dividends that represent
long-term capital gains. Frequent trading also may result in higher fund
expenses due to transaction costs.

The funds do not restrict the frequency of trading in order to limit expenses or
the tax effect that the fund's dividends may have on shareholders.

- --------------------------------------------------------------------------------
Prospectus Page 20
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber U.S. Government Income Fund Low Duration U.S. Government Income
Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund

MANAGING YOUR FUND ACCOUNT

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

FLEXIBLE PRICING

The funds offer four classes of shares--Class A, Class B, Class C and Class Y.
Each class has different sales charges and ongoing expenses. You can choose the
class that is best for you, based on how much you plan to invest and how long
you plan to hold your fund investment. Class Y shares are available only to
certain types of investors.

Each fund has adopted a plan under rule 12b-1 for its Class A, Class B and Class
C shares that allows it to pay service fees for providing services to
shareholders and (for Class B and Class C shares) distribution fees for the sale
of its shares. Because the 12b-1 distribution fees for Class B and Class C
shares are paid out of a fund's assets on an ongoing basis, over time they will
increase the cost of your investment and may cost you more than if you paid a
front-end sales charge.

CLASS A SHARES

Class A shares have a front-end sales charge that is included in the offering
price of the Class A shares. This sales charge is not invested in the fund.
Class A shares pay an annual 12b-1 service fee of 0.25% of average net assets,
but they pay no 12b-1 distribution fees. The ongoing expenses for Class A shares
are lower than for Class B and Class C shares.

The Class A sales charges for each fund are described in the following tables.

<TABLE>
CLASS A SALES CHARGES FOR: U.S. GOVERNMENT INCOME FUND
INVESTMENT GRADE INCOME FUND
HIGH INCOME FUND
STRATEGIC INCOME FUND

SALES CHARGE AS A PERCENTAGE DISCOUNT TO SELECTED
OF: DEALERS AS
OFFERING NET AMOUNT PERCENTAGE OF OFFERING
AMOUNT OF INVESTMENT PRICE INVESTED PRICE
- ------------------------------------------ ---- ---- ----
Less than $100,000........................ 4.00% 4.17% 3.75%
<S> <C> <C> <C>
$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)

CLASS A SALES CHARGES FOR: LOW DURATION
FUND
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 dividends are not subject
to this 1% charge. Withdrawals in the first year after purchase of up to 12%
of the value of the fund account under the funds' Systematic Withdrawal Plan
are not subject to this charge.

(2) Mitchell Hutchins pays 1% to PaineWebber.

- --------------------------------------------------------------------------------
Prospectus Page 21
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber U.S. Government Income Fund Low Duration U.S. Government Income
Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund

SALES CHARGE REDUCTIONS AND WAIVERS. You may qualify for a lower sales charge
if you already own Class A shares of a PaineWebber mutual fund. You can combine
the value of Class A shares that you own in other PaineWebber funds and the
purchase amount of the Class A shares of the PaineWebber fund that you are
buying.

You may also qualify for a lower sales charge if you combine your purchases with
those of:

- - your spouse, parents or children under age 21;

- - your Individual Retirement Accounts (IRAs);

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

- - a company that you control;

- - a trust that you created;

- - Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts created
by you or by a group of investors for your children; or

- - accounts with the same adviser.

You may qualify for a complete waiver of the sales charge if you:

- - Are an employee of PaineWebber or its affiliates or the spouse, parent or
child under age 21 of a PaineWebber employee;

- - Buy these shares through a PaineWebber Financial Advisor who was formerly
employed as an investment executive with a competing brokerage firm that was
registered as a broker-dealer with the SEC, and

-- you were the Financial Advisor's client at the competing brokerage firm;

-- within 90 days of buying shares in a fund, you sell shares of one or more
mutual funds that were principally underwritten by the competing brokerage
firm or its affiliates, and you either paid a sales charge to buy those
shares, pay a contingent deferred sales charge when selling them or held
those shares until the contingent deferred sales charge was waived; and

-- you purchase an amount that does not exceed the total amount of money you
received from the sale of the other mutual fund;

- - Acquire these shares through the reinvestment of dividends of a PaineWebber
unit investment trust;

- - Are a 401(k) or 403(b) qualified employee benefit plan with 50 or more
eligible employees in the plan or at least $1 million in assets;

- - Are a participant in the PaineWebber Members Only-SM- Program. 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; or

- - Acquire these shares through a PaineWebber InsightOne-SM- Program brokerage
account.

NOTE: See the funds' SAI for some other sales charge waivers. If you think you
qualify for any sales charge reductions or waivers, you will need to provide
documentation to PaineWebber or the fund. For more information, you should
contact your PaineWebber Financial Advisor or correspondent firm or call
1-800-647-1568. If you want information on the funds' Systematic Withdrawal
Plan, see the SAI or contact your PaineWebber Financial Advisor or correspondent
firm.

CLASS B SHARES

Class B shares have a contingent deferred sales charge. When you purchase Class
B shares, we invest 100% of your purchase in fund shares. However, you may have
to pay the deferred sales charge when you sell your fund shares, depending on
how long you own the shares.

Class B shares pay an annual 12b-1 distribution fee of 0.75% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
If you hold your Class B shares for six years, they will automatically convert
to Class A shares, which have lower ongoing expenses.

If you sell Class B shares before the end of six years, you will pay a deferred
sales charge. We calculate the deferred sales charge by multiplying the lesser
of the net asset value of the Class B shares at the time of purchase or the net
asset value at the time of sale by the percentage shown below:

- --------------------------------------------------------------------------------
Prospectus Page 22
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber U.S. Government Income Fund Low Duration U.S. Government Income
Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund

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

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

LOW DURATION FUND

<TABLE>
<S> <C>
1st year since purchase...... 3%
2nd year since purchase...... 2
3rd year since purchase...... 2
4th year since purchase...... 1
5th year since purchase...... None
</TABLE>

We will not impose the deferred sales charge on Class B shares representing
reinvestment of dividends or on withdrawals in any year of up to 12% of the
value of your Class B shares under the Systematic Withdrawal Plan.

If you exchange Class B shares of Low Duration Fund for shares of other
PaineWebber mutual funds, you will be subject to the contingent deferred sales
charges of the Class B shares that you acquire in the exchange. Usually, these
are higher and are imposed over a longer period. If you exchange Class B shares
of another fund for Class B shares of Low Duration Fund, you will continue to be
subject to the contingent deferred sales charge of the original fund.

To minimize your deferred sales charge, we will assume that you are selling:

- - First, Class B shares representing reinvested dividends, and

- - Second, Class B shares that you have owned the longest.

SALES CHARGE WAIVERS. You may qualify for a waiver of the deferred sales charge
on a sale of shares if:

- - You participate in the Systematic Withdrawal Plan;

- - You are older than 59 1/2 and are selling shares to take a distribution from
certain types of retirement plans;

- - You receive a tax-free return of an excess IRA contribution;

- - You receive a tax-qualified retirement plan distribution following retirement;
or

- - The shares are sold within one year of your death and you owned the shares
either (1) as the sole shareholder or (2) with your spouse as a joint tenant
with the right of survivorship.

NOTE: If you think you qualify for any of these sales charge waivers, you will
need to provide documentation to PaineWebber or the fund. For more information,
you should contact your PaineWebber Financial Advisor or correspondent firm or
call 1-800-647-1568. If you want information on the Systematic Withdrawal Plan,
see the SAI or contact your PaineWebber Financial Advisor or correspondent firm.

CLASS C SHARES

Class C shares have a level load sales charge in the form of ongoing 12b-1
distribution fees. When you purchase Class C shares, we will invest 100% of your
purchase in fund shares.

Class C shares pay an annual 12b-1 distribution fee of 0.50% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
Class C shares do not convert to another class of shares. This means that you
will pay the 12b-1 fees for as long as you own your shares.

Class C shares also have a contingent deferred sales charge. You may have to pay
the deferred sales charge if you sell your shares within one year of the date
you purchased them. We calculate the deferred sales charge on sales of Class C
shares by multiplying 0.75% by the lesser of the net asset value of the Class C
shares at the time of purchase or the net asset value at the time of sale. We
will not impose the deferred sales charge on Class C shares representing
reinvestment of dividends or on withdrawals in the first year after purchase of
up to 12% of the value of your Class C shares under the Systematic Withdrawal
Plan.

You may be eligible to sell your shares without paying a contingent deferred
sales charge if you are a 401(k) or 403(b) qualified employee benefit plan with
fewer than 100 employees or less than $1 million in assets.

NOTE: If you think you qualify for this sales charge waiver, you may need to
provide documentation to PaineWebber or the funds. For more information, you
should contact your PaineWebber Financial Advisor or

- --------------------------------------------------------------------------------
Prospectus Page 23
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber U.S. Government Income Fund Low Duration U.S. Government Income
Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund

correspondent firm or call 1-800-647-1568. If you want information on the funds'
Systematic Withdrawal Plan, see the SAI or contact your PaineWebber Financial
Advisor or correspondent firm.

CLASS Y SHARES

Class Y shares have no sales charge. Only specific types of investors can
purchase Class Y shares. You may be eligible to purchase Class Y shares if you:

- - Buy shares through PaineWebber's PACE-SM- Multi-Advisor Program;

- - Buy $10 million or more of PaineWebber fund shares at any one time;

- - Are a qualified retirement plan with 5,000 or more eligible employees or $50
million in assets; or

- - Are an investment company advised by PaineWebber or an affiliate of
PaineWebber.

The trustee of PaineWebber's 401(k) Plus Plan for its employees is also eligible
to purchase Class Y shares.

Class Y shares do not pay ongoing sales or distribution fees or sales charges.
The ongoing expenses for Class Y shares are the lowest of all the classes.

BUYING SHARES

If you are a PaineWebber client, or a client of a PaineWebber correspondent
firm, you can purchase fund shares through your Financial Advisor. Otherwise,
you can invest in the funds through the funds' transfer agent, PFPC Inc. You can
obtain an application by calling 1-800-647-1568. You must completed and sign the
application and mail it, along with a check, to:

PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.

If you wish to invest in other PaineWebber Funds, you can do so by:

- - Contacting your Financial Advisor (if you have an account at PaineWebber or at
a PaineWebber correspondent firm);

- - Mailing an application with a check; or

- - Opening an account by exchanging shares from another PaineWebber fund.

You do not have to complete an application when you make additional investments
in the same fund.

The funds and Mitchell Hutchins reserve the right to reject a purchase order or
suspend the offering of shares.

<TABLE>
<CAPTION>
MINIMUM INVESTMENTS:
<S> <C>
To open an account......... $1,000
($100 for Low Duration Fund)
To add to an account....... $ 100
</TABLE>

Each fund may waive or reduce these amounts for:

- - Employees of PaineWebber or its affiliates; or

- - Participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the funds' automatic investment plans.

FREQUENT TRADING. The interests of a fund's long-term shareholders and its
ability to manage its investments may be adversely affected when its shares are
repeatedly bought and sold in response to short-term market fluctuations -- also
known as "market timing." When large dollar amounts are involved, the fund may
have difficulty implementing long-term investment strategies because it cannot
predict how much cash it will have to invest. Market timing also may force the
fund to sell portfolio securities at disadvantageous times to raise the cash
needed to buy a market timer's fund shares. These factors may hurt the fund's
performance and its shareholders. When Mitchell Hutchins believes frequent
trading would have a disruptive effect on a fund's ability to manage its
investments, Mitchell Hutchins and the fund may reject purchase orders and
exchanges into the fund by any person, group or account that Mitchell Hutchins
believes to be a market timer. A fund may notify the market timer that a
purchase order or an exchange has been rejected after the day on which the order
is placed.

SELLING SHARES

You can sell your fund shares at any time. If you own more than one class of
shares, you should specify which class you want to sell. If you do not, the fund
will assume that you want to sell shares in the following order: Class A, then
Class C, then Class B and last, Class Y.

If you want to sell shares that you purchased recently, the fund may delay
payment until it verifies that it has received good payment. If you purchased
shares by check, this can take up to 15 days.

If you have an account with PaineWebber or a PaineWebber correspondent firm, you
can sell shares by contacting your Financial Advisor.

- --------------------------------------------------------------------------------
Prospectus Page 24
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber U.S. Government Income Fund Low Duration U.S. Government Income
Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund

If you do not have an account at PaineWebber or a correspondent firm, and you
bought your shares through the transfer agent, you can sell your shares by
writing to the fund's transfer agent. Your letter must include:

- - Your name and address;

- - The fund's name;

- - The fund account number;

- - The dollar amount or number of shares you want to sell; and

- - A guarantee of each registered owner's signature. A signature guarantee may be
obtained from a financial institution, broker, dealer or clearing agency that
is a participant in one of the medallion programs recognized by the Securities
Transfer Agents Association. These are: Securities Transfer Agents Medallion
Program (STAMP), Stock Exchanges Medallion Program (SEMP) and the New York
Stock Exchange Medallion Signature Program (MSP). The funds will not accept
signature guarantees that are not a part of these programs.

Mail the letter to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.

If you sell Class A shares and then repurchase Class A shares of the same fund
within 365 days of the sale, you can reinstate your account without paying a
sales charge.

It costs each fund money to maintain shareholder accounts. Therefore, the funds
reserve the right to repurchase all shares in any account that has a net asset
value of less than $500. If a fund elects to do this with your account, it will
notify you that you can increase the amount invested to $500 or more within 60
days. A fund will not repurchase shares in accounts that fall below $500 solely
because of a decrease in the fund's net asset value.

EXCHANGING SHARES

You may exchange Class A, Class B or Class C shares of each fund for shares of
the same class of most other PaineWebber funds. You may not exchange Class Y
shares.

You will not pay either a front-end sales charge or a deferred sales charge when
you exchange shares. However, you may have to pay a deferred sales charge if you
later sell the shares you acquired in the exchange. Each fund will use the date
that you purchased the shares in the first fund to determine whether you must
pay a deferred sales charge when you sell the shares in the acquired fund.

Other PaineWebber funds may have different minimum investment amounts. You may
not be able to exchange your shares if your exchange is not as large as the
minimum investment amount in that other fund.

You may exchange shares of one fund for shares of another fund only after the
first purchase has settled and the first fund has received your payment.

PAINEWEBBER AND CORRESPONDENT FIRM CLIENTS. If you bought your shares through
PaineWebber or a correspondent firm, you may exchange your shares by placing an
order with your Financial Advisor.

OTHER INVESTORS. If you are not a PaineWebber client, you may exchange your
shares by writing to the fund's transfer agent. You must include:

- - Your name and address;

- - The name of the fund whose shares you are selling and the name of the fund
whose shares you want to buy;

- - Your account number;

- - How much you are exchanging (by dollar amount or by number of shares to be
sold); and

- - A guarantee of your signature. (See "Selling Shares" for information on
obtaining a signature guarantee.)

Mail the letter to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.

A fund may modify or terminate the exchange privilege at any time.

PRICING AND VALUATION

The price at which you may buy, sell or exchange fund shares is based on net
asset value per share. Each fund calculates net asset value on days that the New
York Stock Exchange is open. Each fund calculates net asset value separately for
each class as of the close of regular trading on the NYSE (generally,
4:00 p.m., Eastern time). The NYSE normally is not open, and the funds do not
price their shares, on most national holidays and on Good Friday. If trading on
the NYSE is halted

- --------------------------------------------------------------------------------
Prospectus Page 25
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber U.S. Government Income Fund Low Duration U.S. Government Income
Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund

for the day before 4:00 p.m., Eastern time, the fund's net asset value per share
will be calculated as of the time trading was halted.

Your price for buying, selling or exchanging shares will be based on the net
asset value that is next calculated after the fund accepts your order. If you
place your order through PaineWebber, your PaineWebber Financial Advisor is
responsible for making sure that your order is promptly sent to the fund.

You should keep in mind that a front-end sales charge may be applied to your
purchase if you buy Class A shares. A deferred sales charge may be applied when
you sell Class B or Class C shares.

Each fund calculates its net asset value based on the current market value for
its portfolio securities. The funds normally obtain market values for their
securities from independent pricing services that use reported last sales
prices, current market quotations or valuations from computerized "matrix"
systems that derive values based on comparable securities. If a market value is
not available from an independent pricing source for a particular security, that
security is valued at a fair value determined by or under the direction of the
fund's board. The funds normally use the amortized cost method to value bonds
that will mature in 60 days or less.

Judgment plays a greater role in valuing thinly traded securities, including
many lower-rated bonds, because there is less reliable, objective data
available.

The funds calculate the U.S. dollar value of investments that are denominated in
foreign currencies daily, based on current exchange rates. A fund may own
securities, including some securities that trade primarily in foreign markets,
that trade on weekends or other days on which a fund does not calculate net
asset value. As a result, a fund's net asset value may change on days when you
will not be able to buy and sell fund shares. If a fund concludes that a
material change in the value of a foreign security has occurred after the close
of trading in its principal foreign market but before the close of regular
trading on the NYSE, the fund may use fair value methods to reflect those
changes. This policy is intended to assure that the fund's net asset value
fairly reflects security values as of the time of pricing.

- --------------------------------------------------------------------------------
Prospectus Page 26
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber U.S. Government Income Fund Low Duration U.S. Government Income
Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund

MANAGEMENT

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

INVESTMENT ADVISERS

Mitchell Hutchins Asset Management Inc. is the investment adviser and
administrator of the funds. Mitchell Hutchins is located at 51 West 52nd Street,
New York, New York 10019-6114, and 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 29, 2000,
Mitchell Hutchins was adviser or sub-adviser of 31 investment companies with 76
separate portfolios and aggregate assets of approximately $54.4 billion.

Pacific Investment Management Company ("PIMCO") is the sub-adviser for Low
Duration Fund. PIMCO is located at 840 Newport Center Drive, Suite 300, Newport
Beach, California 92660. As of December 31, 1999, PIMCO had approximately
$186 billion in assets under management and was adviser or sub-adviser of
18 investment companies with 65 portfolios and aggregate assets of approximately
$53 billion.

The funds have received an exemptive order from the SEC that permits their
boards to appoint and replace sub-advisers and to amend sub-advisory contracts
without obtaining shareholder approval. A fund's shareholders must approve this
policy before its board may implement it. As of the date of this prospectus, the
shareholders of none of the funds have done so.

PORTFOLIO MANAGERS

U.S. GOVERNMENT INCOME FUND. Nirmal Singh and Dennis L. McCauley are
responsible for the day-to-day management of U.S. Government Income Fund's
portfolio. Mr. Singh is a senior vice president of Mitchell Hutchins and has
served as a portfolio manager with Mitchell Hutchins since 1993. He has been a
portfolio manager for the fund since December 1994. Mr. McCauley is managing
director and chief investment officer of fixed income investments of Mitchell
Hutchins and has been a portfolio manager for the fund since March 1999. Further
information about Mr. McCauley's background may be found below under "Strategic
Income Fund."

LOW DURATION FUND. Scott Mather, an executive vice president of PIMCO, has been
primarily responsible for the day-to-day management of Low Duration Fund's
portfolio since January 2000. Prior to joining PIMCO in 1998, he was associated
with Goldman Sachs where he was a trader in the fixed income division and
specialized in structuring and trading a broad range of mortgage-backed
securities as well as managing proprietary derivatives positions.

INVESTMENT GRADE INCOME FUND. Julieanna Berry is responsible for the day-to-day
management of the fund's portfolio. Ms. Berry is a first vice president of
Mitchell Hutchins, where she has been employed as a portfolio manager since
1989. Ms. Berry shared portfolio management responsibilities for the fund from
June 1995 until February 2000, when she assumed full responsibility.

HIGH INCOME FUND. James F. Keegan has been responsible for the day-to-day
management of the Fund's portfolio since February 2000. Mr. Keegan is a senior
vice president of Mitchell Hutchins and is in charge of the Taxable Credit
Group. Prior to joining Mitchell Hutchins in March 1996, Mr. Keegan was a
director with Merrion Group, L.P.

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

- --------------------------------------------------------------------------------
Prospectus Page 27
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber U.S. Government Income Fund Low Duration U.S. Government Income
Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund

investments. He was 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 also served as vice president of IBM
Credit Corporation's mutual funds and as a member of its retirement fund
investment committee.

James F. Keegan is responsible for the day-to-day management of the fund's U.S.
high yield securities sector. Nirmal Singh and Julieanna Berry share
responsibility for the day-to-day management of the U.S. government and
investment grade securities sector of the fund. Mr. Singh has held his
responsibilities for the fund since December 1994; information on his background
may be found under "U.S. Government Income Fund." Ms. Berry and Mr. Keegan have
held their current responsibilities for the fund since February 2000;
information on their backgrounds may be found under "Investment Grade Income
Fund" and "High Income Fund," respectively. Stuart Waugh, a managing director of
Mitchell Hutchins responsible for global fixed income and currency trading, is
the sector manager responsible for the day-to-day management of Strategic Income
Fund's foreign and emerging market bonds. Mr. Waugh has been employed by
Mitchell Hutchins since 1984.

Other members of Mitchell Hutchins' fixed income and equity investments groups
provide input on market outlook, interest rate forecasts, investment research
and other considerations pertaining to each fund's investments.

ADVISORY FEES

The funds paid fees to Mitchell Hutchins for advisory and administration
services during the most recent fiscal year at the following annual contract
rates expressed as a percentage of a fund's average daily net assets:

<TABLE>
<S> <C>
U.S Government Income Fund............. 0.50%
Low Duration U.S Government Income
Fund................................. 0.50%
Investment Grade Income Fund........... 0.50%
High Income Fund....................... 0.50%
Strategic Income Fund.................. 0.75%
</TABLE>

OTHER INFORMATION

The funds have received an exemptive order from the SEC that permits their
boards to appoint and replace sub-advisers and to amend sub-advisory contracts
without shareholder approval. A fund's shareholders must approve this policy
before its board may implement it. The shareholders of Low Duration Fund have
approved this policy. As of the date of this prospectus, the shareholders of
other funds have not been asked to do so.

- --------------------------------------------------------------------------------
Prospectus Page 28
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber U.S. Government Income Fund Low Duration U.S. Government Income
Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund

DIVIDENDS AND TAXES

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

DIVIDENDS

Strategic Income Fund normally declares and pays dividends monthly. The other
funds normally declare dividends daily and pay them monthly. Each fund
distributes substantially all of its gains, if any, annually.

Classes with higher expenses are expected to have lower dividends. For example,
Class B shares are expected to have the lowest dividends of any class of a
fund's shares, while Class Y shares are expected to have the highest.

You will receive dividends in additional shares of the same class unless you
elect to receive them in cash. Contact your Financial Advisor at PaineWebber or
one of its corresponding firms if you prefer to receive dividends in cash.

TAXES

The dividends that you receive from a fund generally are subject to federal
income tax regardless of whether you receive them in additional fund shares or
in cash. If you hold fund shares through a tax-exempt account or plan, such as
an IRA or 401(k) plan, dividends on your shares generally will not be subject to
tax.

When you sell fund shares, you generally will be subject to federal income tax
on any gain you realize. If you exchange any fund's shares for shares of another
PaineWebber mutual fund, the transaction will be treated as a sale of the first
fund's shares, and any gain will be subject to federal income tax.

Each fund expects that its dividends will be taxed primarily as ordinary income.
The distribution of capital gains may be taxed at a lower rate than ordinary
income, depending on whether the fund held the assets that generated the gains
for more than 12 months. Your fund will tell you how you should treat its
dividends for tax purposes.

FINANCIAL HIGHLIGHTS

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

The following financial highlights tables are intended to help you understand
the funds' financial performance for the past 5 years. Shorter periods are shown
for funds or classes of fund shares that have existed for less than 5 years.
Certain information reflects financial results for a single fund share. In the
tables, "total investment return" represents the rate that an investor would
have earned (or lost) on an investment in a fund (assuming reinvestment of all
dividends).

The information in the financial highlights has been audited by Ernst & Young
LLP, independent auditors (or, for Strategic Income Fund, PricewaterhouseCoopers
LLP, independent accountants), whose reports, along with the funds' financial
statements, are included in the funds' Annual Reports to Shareholders. Annual
Reports may be obtained without charge by calling 1-800-647-1568.

- --------------------------------------------------------------------------------
Prospectus Page 29
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber U.S. Government Income Fund

FINANCIAL HIGHLIGHTS
(Continued)

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

<TABLE>
<CAPTION>
U.S. GOVERNMENT INCOME FUND
---------------------------------------------------------
CLASS A
---------------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
---------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year...... $ 9.20 $ 8.94 $ 8.86 $ 9.12 $ 8.50
-------- -------- -------- -------- --------
Net investment income................... 0.50 0.51 0.54 0.55 0.58
Net realized and unrealized gains
(losses) from investments, futures and
options............................... (0.69) 0.26 0.08 (0.26) 0.62
-------- -------- -------- -------- --------
Net increase (decrease) from investment
operations............................ (0.19) 0.77 0.62 0.29 1.20
-------- -------- -------- -------- --------
Dividends from net investment income.... (0.50) (0.51) (0.54) (0.55) (0.58)
-------- -------- -------- -------- --------
Net asset value, end of year............ $ 8.51 $ 9.20 $ 8.94 $ 8.86 $ 9.12
======== ======== ======== ======== ========
Total investment return(1).............. (2.14)% 9.06% 7.27% 3.39% 14.70%
======== ======== ======== ======== ========
Ratios/Supplemental data:
Net assets, end of year (000's)......... $231,569 $278,483 $291,470 $343,836 $430,285
Expenses to average net assets net of
waivers from advisers (3)............. 1.01% 1.03% 0.94% 0.94% 1.03%(2)
Net investment income to average net
assets net of waivers from advisers
(3)................................... 5.65% 5.69% 6.15% 6.24% 6.65%(2)
Portfolio turnover rate................. 375% 370% 322% 359% 206%
</TABLE>

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

(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each year 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 year reported. The figures do not include any applicable sales charges
or program fees; results would be lower if they were included.
(2) These ratios include non-recurring acquisition expenses of 0.03%.
(3) During the year ended November 30, 1999 Mitchell Hutchins waived a portion
of its advisory and administration fees. The ratios excluding the waiver
are the same since the waiver represents less than 0.005%.

- --------------------------------------------------------------------------------
Prospectus Page 30
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber U.S. Government Income Fund

FINANCIAL HIGHLIGHTS
(Continued)

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

<TABLE>
<CAPTION>
U.S. GOVERNMENT INCOME FUND
-----------------------------------------------------
CLASS B
-----------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
-----------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year...... $ 9.20 $ 8.94 $ 8.87 $ 9.12 $ 8.50
------- ------- ------- ------- --------
Net investment income................... 0.43 0.44 0.47 0.48 0.51
Net realized and unrealized gains
(losses) from investments, futures and
options............................... (0.69) 0.26 0.07 (0.25) 0.63
------- ------- ------- ------- --------
Net increase (decrease) from investment
operations............................ (0.26) 0.70 0.54 0.23 1.14
------- ------- ------- ------- --------
Dividends from net investment income.... (0.43) (0.44) (0.47) (0.48) (0.52)
------- ------- ------- ------- --------
Net asset value, end of year............ $ 8.51 $ 9.20 $ 8.94 $ 8.87 $ 9.12
======= ======= ======= ======= ========
Total investment return(1).............. (2.93)% 8.16% 6.34% 2.72% 13.81%
======= ======= ======= ======= ========
Ratios/Supplemental data:
Net assets, end of year (000's)......... $13,278 $23,318 $42,097 $61,873 $ 82,469
Expenses to average net assets net of
waivers from advisers (3)............. 1.82% 1.83% 1.69% 1.70% 1.81%(2)
Net investment income to average net
assets net of waivers from advisers
(3)................................... 4.81% 4.87% 5.40% 5.47% 5.88%(2)
Portfolio turnover rate................. 375% 370% 322% 359% 206%

<CAPTION>
U.S. GOVERNMENT INCOME FUND
---------------------------------------------------
CLASS C
---------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
---------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year...... $ 9.19 $ 8.93 $ 8.86 $ 9.11 $ 8.49
------- ------- ------- ------- -------
Net investment income................... 0.45 0.47 0.49 0.50 0.53
Net realized and unrealized gains
(losses) from investments, futures and
options............................... (0.69) 0.26 0.07 (0.25) 0.63
------- ------- ------- ------- -------
Net increase (decrease) from investment
operations............................ (0.24) 0.73 0.56 0.25 1.16
------- ------- ------- ------- -------
Dividends from net investment income.... (0.45) (0.47) (0.49) (0.50) (0.54)
------- ------- ------- ------- -------
Net asset value, end of year............ $ 8.50 $ 9.19 $ 8.93 $ 8.86 $ 9.11
======= ======= ======= ======= =======
Total investment return(1).............. (2.65)% 8.50% 6.62% 2.98% 14.12%
======= ======= ======= ======= =======
Ratios/Supplemental data:
Net assets, end of year (000's)......... $20,021 $25,076 $28,132 $37,754 $53,832
Expenses to average net assets net of
waivers from advisers (3)............. 1.53% 1.54% 1.44% 1.45% 1.55%(2)
Net investment income to average net
assets net of waivers from advisers
(3)................................... 5.13% 5.17% 5.66% 5.74% 6.17%(2)
Portfolio turnover rate................. 375% 370% 322% 359% 206%

<CAPTION>
U.S. GOVERNMENT INCOME FUND
------------------------------------------------
CLASS Y
------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year...... $ 9.19 $ 8.93 $ 8.86 $ 9.11 $ 8.49
------- ------- ------ ------ ------
Net investment income................... 0.52 0.54 0.56 0.57 0.61
Net realized and unrealized gains
(losses) from investments, futures and
options............................... (0.69) 0.26 0.07 (0.25) 0.62
------- ------- ------ ------ ------
Net increase (decrease) from investment
operations............................ (0.17) 0.80 0.63 0.32 1.23
------- ------- ------ ------ ------
Dividends from net investment income.... (0.52) (0.54) (0.56) (0.57) (0.61)
------- ------- ------ ------ ------
Net asset value, end of year............ $ 8.50 $ 9.19 $ 8.93 $ 8.86 $ 9.11
======= ======= ====== ====== ======
Total investment return(1).............. (1.84)% 9.41% 7.43% 3.81% 15.06%
======= ======= ====== ====== ======
Ratios/Supplemental data:
Net assets, end of year (000's)......... $11,450 $11,547 $6,816 $6,495 $7,957
Expenses to average net assets net of
waivers from advisers (3)............. 0.69% 0.71% 0.67% 0.64% 0.71%(2)
Net investment income to average net
assets net of waivers from advisers
(3)................................... 5.97% 5.99% 6.41% 6.53% 6.96%(2)
Portfolio turnover rate................. 375% 370% 322% 359% 206%
</TABLE>

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

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Prospectus Page 31
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber Low Duration U.S. Government Income Fund

FINANCIAL HIGHLIGHTS

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

<TABLE>
<CAPTION>
LOW DURATION U.S. GOVERNMENT INCOME FUND
-----------------------------------------------------
CLASS A
-----------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
-----------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 2.38 $ 2.37 $ 2.35 $ 2.34 $ 2.25
------- ------- ------- ------- --------
Net investment income................... 0.12 0.13 0.13 0.14 0.13
Net realized and unrealized gains
(losses) from
investments, futures and options...... (0.07) 0.01 0.02 0.01 0.09
------- ------- ------- ------- --------
Net increase (decrease) from
operations............................ 0.05 0.14 0.15 0.15 0.22
------- ------- ------- ------- --------
Dividends from net investment income.... (0.12) (0.13) (0.13) (0.14) (0.13)
------- ------- ------- ------- --------
Net asset value, end of year............ $ 2.31 $ 2.38 $ 2.37 $ 2.35 $ 2.34
======= ======= ======= ======= ========
Total investment return(1).............. 1.99% 6.11% 6.67% 6.46% 10.25%
======= ======= ======= ======= ========
Ratios/Supplemental data:
Net assets, end of period (000's)....... $87,142 $63,606 $33,648 $71,216 $127,961
Expenses to average net assets.......... 0.96% 1.07%+ 1.04% 1.21% 1.15%
Net investment income to average net
assets................................ 4.95% 5.37%+ 5.72% 5.84% 5.89%
Portfolio turnover rate................. 270% 411% 359% 210% 242%
</TABLE>

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

# Commencement of issuance of shares
* Annualized
+ Includes 0.13% of interest expense related to the reverse repurchase
agreement transaction entered into during the period.
(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 any applicable
sales charges or program fees; results would be lower if they were
included. Total investment return for periods less than on year has not
been annualized.

- --------------------------------------------------------------------------------
Prospectus Page 32
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber Low Duration U.S. Government Income Fund

FINANCIAL HIGHLIGHTS
(Continued)

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

<TABLE>
<CAPTION>
LOW DURATION U.S. GOVERNMENT INCOME FUND
-------------------------------------------------
CLASS B
-------------------------------------------------

FOR THE YEARS ENDED NOVEMBER 30,
-------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 2.38 $ 2.37 $ 2.35 $ 2.34 $ 2.25
------ ------ ------ ------ --------
Net investment income................... 0.10 0.11 0.11 0.12 0.11
Net realized and unrealized gains
(losses) from
investments, futures and options...... (0.08) 0.01 0.02 0.01 0.09
------ ------ ------ ------ --------
Net increase (decrease) from
operations............................ 0.02 0.12 0.13 0.13 0.20
------ ------ ------ ------ --------
Dividends from net investment income.... (0.10) (0.11) (0.11) (0.12) (0.11)
------ ------ ------ ------ --------
Net asset value, end of year............ $ 2.30 $ 2.38 $ 2.37 $ 2.35 $ 2.34
====== ====== ====== ====== ========
Total investment return(1).............. 0.71% 5.24% 5.81% 5.60% 9.30%
====== ====== ====== ====== ========
Ratios/Supplemental data:
Net assets, end of period (000's)....... $5,589 $7,670 $6,949 $7,716 $ 9,147
Expenses to average net assets.......... 1.78% 1.91%+ 1.87% 2.03% 2.02%
Net investment income to average net
assets................................ 4.14% 4.58%+ 4.80% 4.99% 5.03%
Portfolio turnover rate................. 270% 411% 359% 210% 242%

<CAPTION>
LOW DURATION U.S. GOVERNMENT INCOME FUND
-----------------------------------------------------
CLASS C
-----------------------------------------------------

FOR THE YEARS ENDED NOVEMBER 30,
-----------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 2.38 $ 2.37 $ 2.35 $ 2.34 $ 2.25
------- ------- ------- -------- --------
Net investment income................... 0.10 0.12 0.12 0.12 0.12
Net realized and unrealized gains
(losses) from
investments, futures and options...... (0.08) 0.01 0.02 0.01 0.09
------- ------- ------- -------- --------
Net increase (decrease) from
operations............................ 0.02 0.13 0.14 0.13 0.21
------- ------- ------- -------- --------
Dividends from net investment income.... (0.10) (0.12) (0.12) (0.12) (0.12)
------- ------- ------- -------- --------
Net asset value, end of year............ $ 2.30 $ 2.38 $ 2.37 $ 2.35 $ 2.34
======= ======= ======= ======== ========
Total investment return(1).............. 0.90% 5.46% 6.05% 5.82% 9.60%
======= ======= ======= ======== ========
Ratios/Supplemental data:
Net assets, end of period (000's)....... $63,083 $78,923 $91,700 $123,203 $180,169
Expenses to average net assets.......... 1.60% 1.72%+ 1.64% 1.80% 1.75%
Net investment income to average net
assets................................ 4.33% 4.78%+ 5.05% 5.22% 5.31%
Portfolio turnover rate................. 270% 411% 359% 210% 242%

<CAPTION>
LOW DURATION U.S. GOVERNMENT INCOME FUND
----------------------------------------------------
CLASS Y
----------------------------------------------------
FOR THE PERIOD
FOR THE YEARS OCTOBER 20,
ENDED NOVEMBER 30, 1995# TO
---------------------------------- NOVEMBER 30,
1999 1998 1997 1996 1995
------ ------ ----- ----- --------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 2.38 $ 2.37 $2.35 $2.34 $ 2.33
------ ------ ----- ----- --------
Net investment income................... 0.12 0.14 0.14 0.14 0.01
Net realized and unrealized gains
(losses) from
investments, futures and options...... (0.08) 0.01 0.02 0.01 0.01
------ ------ ----- ----- --------
Net increase (decrease) from
operations............................ 0.04 0.15 0.16 0.15 0.02
------ ------ ----- ----- --------
Dividends from net investment income.... (0.12) (0.14) (0.14) (0.14) (0.01)
------ ------ ----- ----- --------
Net asset value, end of year............ $ 2.30 $ 2.38 $2.37 $2.35 $ 2.34
====== ====== ===== ===== ========
Total investment return(1).............. 1.81% 6.37% 6.87% 6.64% 0.83%
====== ====== ===== ===== ========
Ratios/Supplemental data:
Net assets, end of period (000's)....... $3,059 $1,810 $ 352 $ 333 $ 321
Expenses to average net assets.......... 0.70% 0.79%+ 0.86% 0.99% 0.99%*
Net investment income to average net
assets................................ 5.24% 5.60%+ 5.82% 6.00% 5.87%*
Portfolio turnover rate................. 270% 411% 359% 210% 242%
</TABLE>

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

- --------------------------------------------------------------------------------
Prospectus Page 33
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber Investment Grade Income Fund

FINANCIAL HIGHLIGHTS

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

<TABLE>
<CAPTION>
INVESTMENT GRADE INCOME FUND
---------------------------------------------------------
CLASS A
---------------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
---------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 10.79 $ 10.85 $ 10.59 $ 10.68 $ 9.67
-------- -------- -------- -------- --------
Net investment income......... 0.67 0.74 0.74 0.73 0.76
Net realized and unrealized
gains (losses) from
investments, futures and
options..................... (0.84) (0.06) 0.26 (0.09) 1.01
-------- -------- -------- -------- --------
Net increase (decrease) from
investment operations....... (0.17) 0.68 1.00 0.64 1.77
-------- -------- -------- -------- --------
Dividends from net investment
income...................... (0.67) (0.74) (0.74) (0.73) (0.76)
-------- -------- -------- -------- --------
Net asset value, end of
period...................... $ 9.95 $ 10.79 $ 10.85 $ 10.59 $ 10.68
======== ======== ======== ======== ========
Total investment return(1).... (1.62)% 6.37% 9.88% 6.33% 18.95%
======== ======== ======== ======== ========
Ratios/Supplemental data:
Net assets, end of period
(000's)..................... $201,465 $216,402 $212,472 $229,117 $258,898
Expenses to average net assets
net of waivers from
adviser(2).................. 0.95% 0.93% 1.03% 0.94% 0.95%
Net investment income to
average net assets net of
waivers from adviser(2)..... 6.48% 6.56% 7.07% 7.02% 7.42%
Portfolio turnover rate....... 195% 173% 109% 115% 149%
</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, 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 any applicable sales charges or
program fees; results would be lower if they were included. Total
investment return for periods of less than one year has not been
annualized.
(2) During the year ended November 30, 1999 Mitchell Hutchins waived a portion
of its advisory and administration fees. The ratios excluding the waiver
are the same since the waiver represents less than 0.005%.

- --------------------------------------------------------------------------------
Prospectus Page 34
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber Investment Grade Income Fund

FINANCIAL HIGHLIGHTS
(Continued)

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

<TABLE>
<CAPTION>
INVESTMENT GRADE INCOME FUND
---------------------------------------------------
CLASS B
---------------------------------------------------

FOR THE YEARS ENDED NOVEMBER 30,
---------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 10.79 $ 10.85 $ 10.58 $ 10.67 $ 9.67
------- ------- ------- ------- -------
Net investment income......... 0.58 0.65 0.66 0.65 0.68
Net realized and unrealized
gains (losses) from
investments, futures and
options..................... (0.84) (0.06) 0.27 (0.09) 1.00
------- ------- ------- ------- -------
Net increase (decrease) from
investment operations....... (0.26) 0.59 0.93 0.56 1.68
------- ------- ------- ------- -------
Dividends from net investment
income...................... (0.59) (0.65) (0.66) (0.65) (0.68)
------- ------- ------- ------- -------
Net asset value, end of
period...................... $ 9.94 $ 10.79 $ 10.85 $ 10.58 $ 10.67
======= ======= ======= ======= =======
Total investment return(1).... (2.46)% 5.56% 9.17% 5.54% 17.97%
======= ======= ======= ======= =======
Ratios/Supplemental data:
Net assets, end of period
(000's)..................... $26,415 $41,124 $44,829 $58,364 $71,372
Expenses to average net assets
net of waivers from
adviser(2).................. 1.70% 1.69% 1.78% 1.68% 1.70%
Net investment income to
average net assets net of
waivers from adviser(2)..... 5.67% 5.79% 6.31% 6.27% 6.67%
Portfolio turnover rate....... 195% 173% 109% 115% 149%

<CAPTION>
INVESTMENT GRADE INCOME FUND
----------------------------------------------------------------------------------------
CLASS C CLASS Y
--------------------------------------------------- -----------------------------------
FOR THE
PERIOD
FOR THE YEAR FEBRUARY 18,
FOR THE YEARS ENDED NOVEMBER 30, ENDED 1998+ THROUGH
--------------------------------------------------- NOVEMBER 30, NOVEMBER 30,
1999 1998 1997 1996 1995 1999 1998
------- ------- ------- ------- ------- ------------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 10.79 $ 10.85 $ 10.59 $ 10.68 $ 9.67 $ 10.80 $ 10.99
------- ------- ------- ------- ------- ------- --------
Net investment income......... 0.61 0.68 0.69 0.68 0.70 0.69 0.57
Net realized and unrealized
gains (losses) from
investments, futures and
options..................... (0.84) (0.06) 0.26 (0.09) 1.01 (0.84) (0.19)
------- ------- ------- ------- ------- ------- --------
Net increase (decrease) from
investment operations....... (0.23) 0.62 0.95 0.59 1.71 (0.15) 0.38
------- ------- ------- ------- ------- ------- --------
Dividends from net investment
income...................... (0.62) (0.68) (0.69) (0.68) (0.70) (0.70) (0.57)
------- ------- ------- ------- ------- ------- --------
Net asset value, end of
period...................... $ 9.94 $ 10.79 $ 10.85 $ 10.59 $ 10.68 $ 9.95 $ 10.80
======= ======= ======= ======= ======= ======= ========
Total investment return(1).... (2.20)% 5.84% 9.34% 5.80% 18.37% (1.43)% 3.51%
======= ======= ======= ======= ======= ======= ========
Ratios/Supplemental data:
Net assets, end of period
(000's)..................... $29,560 $34,457 $29,204 $32,337 $39,150 $ 4,613 $ 2,682
Expenses to average net assets
net of waivers from
adviser(2).................. 1.44% 1.42% 1.53% 1.44% 1.45% 0.66% 0.62%*
Net investment income to
average net assets net of
waivers from adviser(2)..... 5.97% 6.04% 6.57% 6.51% 6.95% 6.84% 6.71%*
Portfolio turnover rate....... 195% 173% 109% 115% 149% 195% 173%
</TABLE>

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

- --------------------------------------------------------------------------------
Prospectus Page 35
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber High Income Fund

FINANCIAL HIGHLIGHTS

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

<TABLE>
<CAPTION>
HIGH INCOME FUND
--------------------------------------------------------
CLASS A
--------------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 6.66 $ 7.63 $ 7.35 $ 6.96 $ 7.14
-------- -------- -------- -------- --------
Net investment income......... 0.71** 0.67 0.69 0.72 0.79
Net realized and unrealized
gains (losses) from
investments................. (0.55)** (0.99) 0.27 0.37 (0.17)
-------- -------- -------- -------- --------
Net increase (decrease) from
investment operations....... 0.16 (0.32) 0.96 1.09 0.62
-------- -------- -------- -------- --------
Dividends from net investment
income...................... (0.70) (0.65) (0.68) (0.70) (0.80)
-------- -------- -------- -------- --------
Net asset value, end of
period...................... $ 6.12 $ 6.66 $ 7.63 $ 7.35 $ 6.96
======== ======== ======== ======== ========
Total investment return(1).... 2.42% (4.46)% 13.59% 16.55% 9.01%
======== ======== ======== ======== ========
Ratios/Supplemental data:
Net assets, end of period
(000's)..................... $232,825 $258,559 $272,325 $243,564 $248,619
Expenses to average net
assets...................... 0.94% 0.91% 0.98% 0.96% 0.93%
Net investment income to
average net assets.......... 10.83% 9.10% 9.21% 10.10% 11.17%
Portfolio turnover rate....... 62% 161% 160% 142% 94%
</TABLE>

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

* Annualized
** Calculated using average daily shares outstanding for the period.
+ Commencement of issuance of shares
(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 any applicable
sales charges or program fees; results would be lower if they were
included. Total investment return for periods of less than one year has not
been annualized.

- --------------------------------------------------------------------------------
Prospectus Page 36
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber High Income Fund

FINANCIAL HIGHLIGHTS
(Continued)

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

<TABLE>
<CAPTION>
HIGH INCOME FUND
-------------------------------------------------------
CLASS B
-------------------------------------------------------

FOR THE YEARS ENDED NOVEMBER 30,
-------------------------------------------------------
1999 1998 1997 1996 1995
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 6.65 $ 7.63 $ 7.35 $ 6.95 $ 7.14
------- -------- -------- -------- --------
Net investment income......... 0.66** 0.63 0.63 0.66 0.74
Net realized and unrealized
gains (losses) from
investments................. (0.55)** (1.01) 0.27 0.39 (0.18)
------- -------- -------- -------- --------
Net increase (decrease) from
investment operations....... 0.11 (0.38) 0.90 1.05 0.56
------- -------- -------- -------- --------
Dividends from net investment
income...................... (0.65) (0.60) (0.62) (0.65) (0.75)
------- -------- -------- -------- --------
Net asset value, end of
period...................... $ 6.11 $ 6.65 $ 7.63 $ 7.35 $ 6.95
======= ======== ======== ======== ========
Total investment return(1).... 1.63% (5.32)% 12.76% 15.86% 8.05%
======= ======== ======== ======== ========
Ratios/Supplemental data:
Net assets, end of period
(000's)..................... $93,390 $176,997 $236,656 $215,492 $212,946
Expenses to average net
assets...................... 1.70% 1.66% 1.73% 1.71% 1.68%
Net investment income to
average net assets.......... 10.03% 8.30% 8.45% 9.34% 10.42%
Portfolio turnover rate....... 62% 161% 160% 142% 94%

<CAPTION>
HIGH INCOME FUND
---------------------------------------------------------------------------------------
CLASS C CLASS Y
------------------------------------------------------ -----------------------------
FOR THE
PERIOD
FOR THE FEBRUARY 20,
YEAR 1998+
FOR THE YEARS ENDED NOVEMBER 30, ENDED THROUGH
------------------------------------------------------ NOVEMBER 30, NOVEMBER 30,
1999 1998 1997 1996 1995 1999 1998
------- ------- -------- ------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 6.67 $ 7.64 $ 7.36 $ 6.97 $ 7.15 $ 6.65 $ 7.79
------- ------- -------- ------- -------- -------- --------
Net investment income......... 0.67** 0.64 0.65 0.68 0.76 0.72** 0.53
Net realized and unrealized
gains (losses) from
investments................. (0.55)** (0.99) 0.27 0.38 (0.18) (0.54)** (1.14)
------- ------- -------- ------- -------- -------- --------
Net increase (decrease) from
investment operations....... 0.12 (0.35) 0.92 1.06 0.58 0.18 (0.61)
------- ------- -------- ------- -------- -------- --------
Dividends from net investment
income...................... (0.67) (0.62) (0.64) (0.67) (0.76) (0.72) (0.53)
------- ------- -------- ------- -------- -------- --------
Net asset value, end of
period...................... $ 6.12 $ 6.67 $ 7.64 $ 7.36 $ 6.97 $ 6.11 $ 6.65
======= ======= ======== ======= ======== ======== ========
Total investment return(1).... 1.75% (4.92)% 13.03% 15.96% 8.45% 2.68% (8.43)%
======= ======= ======== ======= ======== ======== ========
Ratios/Supplemental data:
Net assets, end of period
(000's)..................... $80,961 $98,982 $115,757 $94,445 $103,911 $ 2,142 $ 2,633
Expenses to average net
assets...................... 1.44% 1.41% 1.48% 1.47% 1.44% 0.68% 0.63%*
Net investment income to
average net assets.......... 10.34% 8.58% 8.66% 9.60% 10.63% 11.16% 9.78%*
Portfolio turnover rate....... 62% 161% 160% 142% 94% 62% 161%
</TABLE>

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

- --------------------------------------------------------------------------------
Prospectus Page 37
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber Strategic Income Fund

FINANCIAL HIGHLIGHTS

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

<TABLE>
<CAPTION>
STRATEGIC INCOME FUND
--------------------------------------------------------------------------------
CLASS A
--------------------------------------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE FEBRUARY 1, FEBRUARY 7,
YEARS ENDED 1996 FOR THE 1994+
NOVEMBER 30, THROUGH YEAR ENDED THROUGH
----------------------------- NOVEMBER 30, JANUARY 31, JANUARY 31,
1999 1998 1997 1996 1996 1995
------- ------- ------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 9.06 $ 9.60 $ 9.37 $ 8.99 $ 8.60 $ 10.00
------- ------- ------- ------ -------- --------
Net investment income......... 0.61 0.64 0.74 0.57 0.67 0.74
Net realized and unrealized
gains (losses) from
investments, foreign
currency, futures contracts
and written options......... (0.48) (0.48) 0.17 0.39 0.59 (1.49)
------- ------- ------- ------ -------- --------
Net increase (decrease) from
investment operations....... 0.13 0.16 0.91 0.96 1.26 (0.75)
------- ------- ------- ------ -------- --------
Dividends from net investment
income...................... (0.57) (0.70) (0.68) (0.58) (0.77) (0.65)
Distributions from paid in
capital..................... (0.05) -- -- -- -- --
Distributions from foreign
currency transactions....... (0.04) -- -- -- (0.10) --
------- ------- ------- ------ -------- --------
Total dividends and
distributions to
shareholders................ (0.66) (0.70) (0.68) (0.58) (0.87) (0.65)
------- ------- ------- ------ -------- --------
Net asset value, end of
period...................... $ 8.53 $ 9.06 $ 9.60 $ 9.37 $ 8.99 $ 8.60
======= ======= ======= ====== ======== ========
Total investment return(1).... 1.56% 1.65% 10.04% 11.14% 15.27% (7.61)%
======= ======= ======= ====== ======== ========
Ratios/Supplemental data:
Net assets, end of period
(000's)..................... $40,688 $35,778 $20,909 $9,944 $ 9,841 $ 11,148
Expenses to average net assets
after waivers from
adviser(2).................. 1.30% 1.34% 1.65% 1.89%* 1.74% 1.49%*
Net investment income to
average net assets after
waivers from adviser(2)..... 7.45% 6.97% 7.35% 7.69%* 8.52% 8.06%*
Portfolio turnover rate....... 226% 192% 140% 101% 91% 117%
</TABLE>

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

+ Commencement of operations
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each year reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates and a sale
at net asset value on the last day of each year reported. The figures do
not include any applicable sales charges or program fees; results would be
lower if they 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, and 2.45% for Class B. During the year ended
November 30, 1999, Mitchell Hutchins waived a portion of its advisory and
administration fees. The ratios excluding the waivers are the same since
the waiver represents less than 0.005%.

- --------------------------------------------------------------------------------
Prospectus Page 38
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber Strategic Income Fund

FINANCIAL HIGHLIGHTS
(Continued)

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

<TABLE>
<CAPTION>
STRATEGIC INCOME FUND
--------------------------------------------------------------------------------
CLASS B
--------------------------------------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE FEBRUARY 1, FEBRUARY 7,
YEARS ENDED 1996 FOR THE 1994+
NOVEMBER 30, THROUGH YEAR ENDED THROUGH
----------------------------- NOVEMBER 30, JANUARY 31, JANUARY 31,
1999 1998 1997 1996 1996 1995
------- ------- ------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 9.05 $ 9.59 $ 9.36 $ 8.98 $ 8.60 $ 10.00
------- ------- ------- ------- -------- --------
Net investment income......... 0.54 0.56 0.67 0.51 0.60 0.66
Net realized and unrealized
gains (losses) from
investments, foreign
currency, futures contracts
and written options......... (0.47) (0.47) 0.16 0.39 0.59 (1.47)
------- ------- ------- ------- -------- --------
Net increase (decrease) from
investment operations....... 0.07 0.09 0.83 0.90 1.19 (0.81)
------- ------- ------- ------- -------- --------
Dividends from net investment
income...................... (0.51) (0.63) (0.60) (0.52) (0.71) (0.59)
Distributions from paid in
capital..................... (0.05) -- -- -- -- --
Distributions from foreign
currency transactions....... (0.04) -- -- -- (0.10) --
------- ------- ------- ------- -------- --------
Total dividends and
distributions to
shareholders................ (0.60) (0.63) (0.60) (0.52) (0.81) (0.59)
------- ------- ------- ------- -------- --------
Net asset value, end of
period...................... $ 8.52 $ 9.05 $ 9.59 $ 9.36 $ 8.98 $ 8.60
======= ======= ======= ======= ======== ========
Total investment return(1).... 0.76% 0.87% 9.20% 10.46% 14.37% (8.22)%
======= ======= ======= ======= ======== ========
Ratios/Supplemental data:
Net assets, end of period
(000's)..................... $38,062 $45,217 $41,650 $37,249 $ 40,653 $ 40,710
Expenses to average net assets
after waivers from
adviser(2).................. 2.08% 2.12% 2.43% 2.63%* 2.49% 2.24%*
Net investment income to
average net assets after
waivers from adviser(2)..... 6.66% 5.98% 6.56% 6.93%* 7.77% 7.46%*
Portfolio turnover rate....... 226% 192% 140% 101% 91% 117%

<CAPTION>
STRATEGIC INCOME FUND
--------------------------------------------------------------------------------
CLASS C
--------------------------------------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE FEBRUARY 1, FEBRUARY 7,
YEARS ENDED 1996 FOR THE 1994+
NOVEMBER 30, THROUGH YEAR ENDED THROUGH
----------------------------- NOVEMBER 30, JANUARY 31, JANUARY 31,
1999 1998 1997 1996 1996 1995
------- ------- ------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 9.05 $ 9.59 $ 9.37 $ 8.98 $ 8.60 $ 10.00
------- ------- ------- ------- -------- --------
Net investment income......... 0.57 0.59 0.70 0.53 0.62 0.69
Net realized and unrealized
gains (losses) from
investments, foreign
currency, futures contracts
and written options......... (0.48) (0.48) 0.15 0.40 0.59 (1.48)
------- ------- ------- ------- -------- --------
Net increase (decrease) from
investment operations....... 0.09 0.11 0.85 0.93 1.21 (0.79)
------- ------- ------- ------- -------- --------
Dividends from net investment
income...................... (0.53) (0.65) (0.63) (0.54) (0.73) (0.61)
Distributions from paid in
capital..................... (0.05) -- -- -- -- --
Distributions from foreign
currency transactions....... (0.04) -- -- -- (0.10) --
------- ------- ------- ------- -------- --------
Total dividends and
distributions to
shareholders................ (0.62) (0.65) (0.63) (0.54) (0.83) (0.61)
------- ------- ------- ------- -------- --------
Net asset value, end of
period...................... $ 8.52 $ 9.05 $ 9.59 $ 9.37 $ 8.98 $ 8.60
======= ======= ======= ======= ======== ========
Total investment return(1).... 1.03% 1.14% 9.37% 10.80% 14.63% (8.02)%
======= ======= ======= ======= ======== ========
Ratios/Supplemental data:
Net assets, end of period
(000's)..................... $27,237 $30,133 $23,117 $17,101 $ 19,232 $ 21,208
Expenses to average net assets
after waivers from
adviser(2).................. 1.82% 1.86% 2.17% 2.38%* 2.24% 1.98%*
Net investment income to
average net assets after
waivers from adviser(2)..... 6.92% 6.24% 6.82% 7.19%* 8.03% 7.62%*
Portfolio turnover rate....... 226% 192% 140% 101% 91% 117%

<CAPTION>
STRATEGIC INCOME FUND
-------------------------------
CLASS Y
-------------------------------
FOR THE PERIOD
FEBRUARY 17,
FOR THE 1998+
YEAR ENDED THROUGH
NOVEMBER 30, NOVEMBER 30,
1999 1998
------------- --------------
<S> <C> <C>
Net asset value, beginning of
period...................... $ 9.05 $ 9.72
------- --------
Net investment income......... 0.63 0.56
Net realized and unrealized
gains (losses) from
investments, foreign
currency, futures contracts
and written options......... (0.46) (0.66)
------- --------
Net increase (decrease) from
investment operations....... 0.17 (0.10)
------- --------
Dividends from net investment
income...................... (0.59) (0.57)
Distributions from paid in
capital..................... (0.06) --
Distributions from foreign
currency transactions....... (0.04) --
------- --------
Total dividends and
distributions to
shareholders................ (0.69) (0.57)
------- --------
Net asset value, end of
period...................... $ 8.53 $ 9.05
======= ========
Total investment return(1).... 1.91% (1.04)%
======= ========
Ratios/Supplemental data:
Net assets, end of period
(000's)..................... $ 1,128 $ 779
Expenses to average net assets
after waivers from
adviser(2).................. 1.05% 1.07%*
Net investment income to
average net assets after
waivers from adviser(2)..... 7.67% 7.26%*
Portfolio turnover rate....... 226% 192%
</TABLE>

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

- --------------------------------------------------------------------------------
Prospectus Page 39
<PAGE>
- --------------------------------------------------------------------------------
------------------------
PaineWebber U.S. Government Income Fund Low Duration U.S. Government Income
Fund
Investment Grade Income Fund High Income Fund Strategic Income Fund

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
TICKER SYMBOL: U.S. Government Income Class: A: PUGAX.Q High Income Class: A: PHIAX.Q
B: PUGBX.Q B: PHIBX.Q
C: PWGDX.Q C: PWHDX.Q
Y: None Y: None

Low Duration Income Class: A: PSUAX.Q Strategic Income Class: A: PWSAX.Q
B: PSGBX.Q B: PWSBX.Q
C: PSGDX.Q C: PWSDX.Q
Y: None Y: None

Investment Grade Income Class: A: PIGAX.Q
B: PIGBX.Q
C: PIVDX.Q
Y: None
</TABLE>

If you want more information about the funds, the following documents are
available free upon request:

ANNUAL/SEMI-ANNUAL REPORTS

Additional information about the funds' investments is available in the funds'
annual and semi-annual reports to shareholders. In the funds' annual reports,
you will find a discussion of the market conditions and investment strategies
that significantly affected the funds' performance during the last fiscal year.

STATEMENT OF ADDITIONAL INFORMATION (SAI):

The SAI provides more detailed information about the funds and is incorporated
by reference into this prospectus.

You may discuss your questions about the funds by contacting your PaineWebber
Financial Advisor. You may obtain free copies of annual and semi-annual reports
and the SAI by contacting the funds directly at 1-800-647-1568.

You may review and copy information about the funds, including shareholder
reports and the SAI, at the Public Reference Room of the Securities and Exchange
Commission. You may obtain information about the operations of the SEC's Public
Reference Room by calling the SEC at 1-202-942-8090. You can get text-only
copies of reports and other information about the funds:

- - For a fee, by electronic request or by writing the SEC's Public Reference
Room, Washington, D.C. 20549-0102; or

- - Free, from the EDGAR Database on the SEC's Internet website at:
http://www.sec.gov

PaineWebber Managed Investments Trust
- - PaineWebber U.S. Government Income Fund
- - PaineWebber Low Duration U.S. Government Income Fund
- - PaineWebber Investment Grade Income Fund
- - PaineWebber High Income Fund
Investment Company Act File No. 811-4040

PaineWebber Securities Trust
- - PaineWebber Strategic Income Fund
Investment Company Act File No. 811-7374

- --------------------------------------------------------------------------------
_______________
<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

51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114

STATEMENT OF ADDITIONAL INFORMATION

The five funds named above are series of professionally managed
open-end management investment companies (each a "Trust"). PaineWebber U.S.
Government Income Fund, PaineWebber Low Duration U.S. Government Income Fund
("Low Duration Fund"), PaineWebber Investment Grade Income Fund and PaineWebber
High Income Fund are diversified series of PaineWebber Managed Investments Trust
("Managed Trust"). PaineWebber Strategic Income Fund is a non-diversified series
of PaineWebber Securities Trust ("Securities Trust").

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 for the funds, Mitchell Hutchins has appointed PaineWebber to serve
as the exclusive dealer for the sale of fund shares. Pacific Investment
Management Company ("PIMCO" or "sub-adviser") serves as sub-adviser for Low
Duration Fund.

Portions of each fund's Annual Report to Shareholders are incorporated
by reference into this Statement of Additional Information ("SAI"). The Annual
Reports accompany this SAI. You may obtain an additional copy of a fund's Annual
Report by calling toll-free 1-800-647-1568.

This SAI is not a prospectus and should be read only in conjunction
with the funds' current Prospectus, dated March 31, 2000. A copy of the
Prospectus may be obtained by calling any PaineWebber Financial Advisor or
correspondent firm or by calling toll-free 1-800-647-1568. This SAI is dated
March 31, 2000.

TABLE OF CONTENTS
-----------------
PAGE
----

The Funds and Their Investment Policies ................................. 2
The Funds' Investments, Related Risks and Limitations ................... 4
Strategies Using Derivative Instruments ................................. 23
Organization; Trustees and Officers; Principal Holders and Management
Ownership of Securities ............................................... 31
Investment Advisory, Administration and Distribution Arrangements ....... 38
Portfolio Transactions .................................................. 45
Reduced Sales Charges, Additional Exchange and Redemption
Information; Other Services ........................................... 47
Conversion of Class B Shares ............................................ 52
Valuation of Shares ..................................................... 52
Performance Information ................................................. 53
Taxes ................................................................... 57
Other Information ....................................................... 60
Financial Statements .................................................... 61
Appendix ................................................................ A-1

<PAGE>

THE FUNDS AND THEIR INVESTMENT POLICIES

No fund's investment objective may be changed without shareholder
approval. Except where noted, the other investment policies of each fund may be
changed by its board without shareholder approval. As with other mutual funds,
there is no assurance that a fund will achieve its investment objective.

U.S. GOVERNMENT INCOME FUND AND LOW DURATION FUND. U.S. Government
Income Fund's investment objective is high current income consistent with the
preservation of capital and liquidity. Low Duration 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 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 and thus is a measure of interest rate risk.

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 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 Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), Moody's Investors
Service, Inc. ("Moody's") or another nationally or internationally recognized
statistical rating organization ("rating agency") or, if unrated, are considered
to be of comparable quality by Mitchell Hutchins (or for Low Duration Fund the
sub-adviser).

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 a fund's net asset
value to fluctuate more than otherwise would be the case. Some types of
mortgage-backed securities, including "interest only," "principal only" and
inverse floating classes of these securities, can be extremely volatile and may
become illiquid. Low Duration Fund does not invest in these classes of
mortgage-backed securities.

Each fund normally invests at least 65% of its total assets in
income-producing securities, which may include zero coupon bonds, other original
issue discount securities and (for U.S. Government Income Fund) principal-only
mortgage-backed securities.

U.S. Government Income Fund may invest up to 10% of its net assets in
illiquid securities. Low Duration Fund may invest up to 15% of its net assets in
illiquid securities. Each fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of its
total assets. Each fund may purchase securities on a when-issued or delayed
delivery basis. Each fund may engage in dollar rolls and reverse repurchase
agreements, which are considered borrowings and may not exceed 33 1/3% of its
total assets. Each fund may also borrow for temporary or emergency purposes, but
not in excess of an additional 5% of its total assets. Each fund may invest in
the securities of other investment companies and may sell short "against the
box."

INVESTMENT GRADE INCOME FUND'S investment 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 and money
market instruments. The fund's investments in money market instruments may
include repurchase agreements and 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. The fund also may invest up to 35% of its total assets in (1) corporate
bonds that are below investment grade, (2) preferred stocks, (3) convertible
securities and (4) asset-backed securities other than mortgage-backed
securities.

Investment Grade Income 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.

2
<PAGE>

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

Investment Grade Income Fund normally invests at least 65% of its total
assets in income-producing securities, which may include zero coupon bonds,
other original issue discount securities, payment-in-kind securities and
principal only mortgage-backed securities. The fund also may invest up to 5% of
its net assets in fixed and floating rate loans through either participations in
or assignments of all or a portion of loans made by banks.

Investment Grade Income Fund may invest up to 10% of its net assets in
illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of its
total assets. The fund may borrow money from banks or through reverse repurchase
agreements for temporary or emergency purposes but not in excess of 10% of its
total assets. The fund may invest in the securities of other investment
companies and may sell short "against the box."

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, 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 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 35% of High Income Fund's net assets may be invested in
securities of foreign issuers, including securities that are U.S.
dollar-denominated but whose value is linked to the value of foreign currencies.
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.

Up to 25% of High Income 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 they have a potential for capital
appreciation.

High Income Fund normally invests at least 65% of its total assets in
income-producing securities, which may include zero coupon bonds, other original
issue discount securities, payment-in-kind securities and principal only
mortgage backed securities. The fund also may invest up to 5% of its net assets
in fixed and floating rate loans through either participations in or assignments
of all or a portion of loans made by banks.

High Income Fund may invest up to 10% of its net assets in illiquid
securities. The fund may purchase securities on a when-issued or delayed
delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of its
total assets. The fund may borrow money from banks or through reverse repurchase
agreements for temporary or emergency purposes but not in excess of 10% of its
total assets. The fund may invest in the securities of other investment
companies and may sell short "against the box."

STRATEGIC INCOME FUND'S primary investment objective is to achieve a
high level of current income. As a secondary investment objective, the fund
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 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
investments in any one sector.

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

The foreign and emerging market bonds in which Strategic Income 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

3
<PAGE>

participations and assignments, and (4) foreign mortgage-backed securities and
other structured foreign 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 its 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.

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 Brothers Aggregate Bond Index, the Salomon
Smith Barney High Yield Master Index, the Merrill Lynch High Yield Index and the
Salomon Smith Barney World Government Bond Index indicate that these sectors are
not closely correlated. If successful, the fund's strategy should enable it to
achieve a higher level of investment return than if it invested exclusively in
any one investment sector or allocated a fixed proportion of its assets to each
investment sector.

Strategic Income 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.

Strategic Income Fund normally invests at least 65% of its total assets
in income-producing securities, which may include zero coupon bonds, other
original issue discount securities, payment-in-kind securities and principal
only mortgage-backed securities. The fund also may invest in fixed and floating
rate loans through either participations in or assignments of all or a portion
of loans made by banks.

Strategic Income Fund may invest up to 15% of its net assets in
illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of its
total assets. The fund may engage in dollar rolls and reverse repurchase
agreements, which are considered borrowings and may not exceed 33 1/3% of its
total assets. The fund may also borrow for temporary or emergency purposes, but
not in excess of an additional 5% of its total assets. The fund may invest in
the securities of other investment companies and may sell short "against the
box."

THE FUNDS' INVESTMENTS, RELATED RISKS AND LIMITATIONS

The following supplements the information contained in the Prospectus
and above concerning the funds' investments, related risks and limitations.
Except as otherwise indicated in the Prospectus or the SAI, the funds have
established no policy limitations on their ability to use the investments or
techniques discussed in these documents.

BONDS are fixed or variable rate debt obligations, including bills,
notes, debentures, money market instruments and similar instruments and
securities. Mortgage- and asset-backed securities are types of bonds, and
certain types of income-producing, non-convertible preferred stocks may be
treated as bonds for investment purposes. Bonds generally are used by
corporations, governments and other issuers to borrow money from investors. The
issuer pays the investor a fixed or variable rate of interest and normally must
repay the amount borrowed on or before maturity. Many preferred stocks and some
bonds are "perpetual" in that they have no maturity date.

Bonds are subject to interest rate risk 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 a fund's investments in bonds. In
general, bonds having longer durations are more sensitive to interest rate
changes than are bonds with shorter durations. Credit risk is the risk that an
issuer may be unable or unwilling to pay interest and/or principal on the bond.
Credit risk can be affected by many factors, including adverse changes in the
issuer's own financial condition or in economic conditions.

EQUITY SECURITIES. Equity securities 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 depositary 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
actually it is equity that is senior to a company's common stock. Convertible
bonds may be converted into or exchanged for a prescribed amount of common stock
of the

4
<PAGE>

same or a different issuer within a particular period of time at a specified
price or formula. Some preferred stock also may be converted into or exchanged
for common stock. Depositary receipts typically are issued by banks or trust
companies and evidence ownership of underlying equity securities.

While past performance does not guarantee future results, equity
securities historically have provided the greatest long-term growth potential in
a company. However, their prices generally fluctuate more than other securities
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 investment. While this is possible with
bonds, it is less likely.

CREDIT RATINGS; NON-INVESTMENT GRADE BONDS. Moody's, S&P and other
rating agencies are private services that provide ratings of the credit quality
of bonds and certain other securities. A description of the ratings assigned to
corporate bonds by Moody's and S&P is included in the Appendix to this SAI. The
process by which Moody's and S&P determine ratings for mortgage-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 these securities. Not even the highest such rating represents 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 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.

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 a
bond's rating. Subsequent to a bond's purchase by a fund, it may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by the fund. The funds 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,
bonds with the same maturity, interest rate and rating may have different market
prices.

In addition to ratings assigned to individual bond issues, Mitchell
Hutchins (or for Low Duration Fund the sub-adviser) 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 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.

Investment grade bonds are rated in one of the four highest rating
categories by Moody's or S&P, comparably rated by another rating agency or, if
unrated, determined by Mitchell Hutchins (or for Low Duration Fund the
sub-adviser) to be of comparable quality. 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.

Non-investment grade bonds (commonly known as "junk bonds" and
sometimes referred to as "high yield" bonds) are rated Ba or lower by Moody's,
BB or lower by S&P, comparably rated by another rating agency or, if unrated,
determined by Mitchell Hutchins (or for Low Duration Fund the sub-adviser) to be
of comparable quality. A fund's investments in non-investment grade bonds entail
greater risk than its investments in higher rated bonds. Non-investment grade
bonds are considered predominantly speculative with respect to the issuer's
ability to pay interest and repay principal and may involve significant risk
exposure to adverse conditions. Non-investment grade bonds generally offer a
higher current yield than that available for investment grade issues; however,
they involve greater 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

5
<PAGE>

due to default by such issuers is significantly greater because such securities
frequently are unsecured by collateral and will not receive payment until more
senior claims are paid in full.

The market for non-investment grade bonds, especially those of foreign
issuers, has expanded rapidly in recent years, which has been a period of
generally expanding growth and lower inflation. These securities will be
susceptible to greater risk when economic growth slows or reverses and when
inflation increases or deflation occurs. This has been reflected in recent years
by volatility in emerging market securities. In the past, many lower rated bonds
experienced substantial price declines reflecting an expectation that many
issuers of such securities might experience financial difficulties. As a result,
the yields on lower rated bonds rose dramatically. However, those higher yields
did not reflect the value of the income stream that holders of such securities
expected. Rather, they reflected the risk that holders of such securities could
lose a substantial portion of their value due to the issuers' financial
restructurings or defaults by the issuers. There can be no assurance that those
declines will not recur.

The market for non-investment grade bonds generally is thinner and less
active than that for higher quality securities, which may limit a fund's ability
to sell such securities at fair value in response to changes in the economy or
financial markets. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may also decrease the values and liquidity of
non-investment grade bonds, especially in a thinly traded market.

U.S. GOVERNMENT SECURITIES include direct obligations of the U.S.
Treasury (such as Treasury bills, notes or bonds) and obligations issued or
guaranteed as to principal and interest (but not as to market value) by the U.S.
government, its agencies or its instrumentalities. U.S. government securities
include mortgage-backed securities issued or guaranteed by government agencies
or government-sponsored enterprises. Other U.S. government securities 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 or,
in the case of mortgage-backed securities, by pools of assets.

U.S. government securities also include separately traded principal and
interest components of securities issued or guaranteed by the U.S. Treasury,
which are traded independently under the Separate Trading of Registered Interest
and Principal of Securities ("STRIPS") program. Under the STRIPS programs, the
principal and interest components are individually numbered and separately
issued by the U.S. Treasury.

Treasury inflation-protected securities ("TIPS") (also known as
"inflation-indexed securities") 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 semi-annually 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 in the year the increase
occurs, even though holders do not receive cash representing the increase at
that time. See "Taxes -- Other Information," below

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 sales
contracts, other installment sales contracts, home equity loans, leases of
various types of real and personal property and receivables from revolving
credit (credit card) agreements. Such assets are securitized through the use of
trusts or special purpose corporations. Payments or distributions of principal
and interest may be guaranteed up to a certain amount and for a certain time
period by a letter of credit or pool insurance policy issued by a financial
institution unaffiliated with the issuer, or other credit enhancements may be
present.

MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent direct
or indirect 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 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 domestic
mortgage-backed securities are sponsored or issued by private entities,
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. Foreign mortgage-

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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 herein 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 risk and evaluating them requires special knowledge.

A major difference between mortgage-backed securities and traditional
bonds is that interest and principal payments are made more frequently (usually
monthly) and that principal may be repaid at any time because the underlying
mortgage loans may be prepaid at any time. When interest rates go down and
homeowners refinance their mortgages, mortgage-backed securities may be paid off
more quickly than investors expect. When interest rates rise, mortgage-backed
securities 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.

Mortgage-backed securities also may 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.

CMO classes may be specially structured in a manner that provides any
of a wide variety of investment characteristics, such as yield, effective
maturity and interest rate sensitivity. As market conditions change, however,
and particularly during periods of rapid or unanticipated changes in market
interest rates, the attractiveness of the CMO classes and the ability of the
structure to provide the anticipated investment characteristics may be
significantly reduced. These changes can result in volatility in the market
value, and in some instances reduced liquidity, of the CMO class.

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

The market for privately issued mortgage-backed securities is smaller
and less liquid than the market for U.S. government mortgage-backed securities.
Foreign mortgage-backed securities markets are substantially smaller than U.S.
markets, but have been established in several countries, including Germany,
Denmark, Sweden, Canada and Australia, and may be developed elsewhere. Foreign
mortgage-backed securities generally are structured differently than domestic
mortgage-backed securities, but they normally present substantially similar
investment risks as well as the other risks normally associated with foreign
securities.

During 1994, the value and liquidity of many mortgage-backed securities
declined sharply due primarily to increases in interest rates. There can be no
assurance that such declines will not recur. The market value of certain
mortgage-backed securities, including IO and PO classes of mortgage-backed
securities, can be extremely volatile, and these securities may become illiquid.
Mitchell Hutchins (or for Low Duration Fund the sub-adviser) seeks to manage the
funds' investments in mortgage-backed securities so that the volatility of each
fund's portfolio, taken as a whole, is consistent with its investment

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objective. Management of portfolio duration is an important part of this.
However, computing the duration of mortgage-backed securities is complex. See,
"The Funds' Investments, Related Risks and Limitations -- Duration." If Mitchell
Hutchins (or for Low Duration Fund the sub-adviser) does not compute the
duration of mortgage-backed securities correctly, the value of the fund's
portfolio may be either more or less sensitive to changes in market interest
rates than intended. In addition, if market interest rates or other factors that
affect the volatility of securities held by a fund change in ways that Mitchell
Hutchins (or for Low Duration Fund the sub-adviser) does not anticipate, the
fund's ability to meet its investment objective may be reduced.

More information concerning these mortgage-backed securities and the
related risks of investments therein is set forth below. New types of
mortgage-backed securities are developed and marketed from time to time and,
consistent with their investment limitations, the funds expect to invest in
those new types of mortgage-backed securities that Mitchell Hutchins (or for Low
Duration Fund the sub-adviser) believe may assist the funds in achieving their
investment objectives. Similarly, the funds may invest in mortgage-backed
securities issued by new or existing governmental or private issuers other than
those identified herein. The funds that may invest in foreign securities 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. Mortgage pools consist of
whole mortgage loans or participations in loans. The terms and characteristics
of the mortgage instruments are generally uniform within a pool but may vary
among pools. Lending institutions that originate mortgages for the pools are
subject to certain standards, including credit and other underwriting criteria
for individual mortgages included in the pools.

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

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

PRIVATE MORTGAGE-BACKED SECURITIES--Mortgage-backed securities issued
by Private Mortgage Lenders are structured similarly to 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 "The
Funds' Investments, Related Risks and Limitations--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 (collectively "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

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thereon) provide the funds to pay the 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 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 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.

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) loss protection. Loss protection
relates to 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. Loss protection 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

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transfers, unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Similar factors apply to prepayments
on asset-backed securities, but the receivables underlying asset-backed
securities generally are of a shorter maturity and thus are less likely to
experience substantial prepayments. Such securities, however, often provide that
for a specified time period the issuers will replace receivables in the pool
that are repaid with comparable obligations. If the issuer is unable to do so,
repayment of principal on the asset-backed securities may commence at an earlier
date. Mortgage- and asset-backed securities may decrease in value as a result of
increases in interest rates and may benefit less than other fixed-income
securities from declining interest rates because of the risk of prepayment.

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

Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice was 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 a fund's yield.

ADJUSTABLE RATE MORTGAGE AND FLOATING RATE MORTGAGE-BACKED
SECURITIES--Adjustable rate mortgage ("ARM") securities (sometimes referred to
as "ARMs") 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.
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,
ARMs generally do not decrease in value as much as fixed rate securities.
Conversely, during periods of declining rates, ARMs generally do not increase in
value as much as fixed rate securities. ARMs represent a right to receive
interest payments at a rate that is adjusted to reflect the interest earned on a
pool of ARM loans. These mortgage loans 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 ARM
loans specify limitations on the maximum amount by which the mortgage interest
rate may adjust for any single adjustment period. These mortgage loans also may
limit changes in the maximum amount by which the borrower's monthly payment may
adjust for any single adjustment period. If 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 a 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 adjustable rate
mortgage loan. Borrowers under these mortgage loans experiencing negative
amortization may take longer to build up their equity in the underlying property
and may be more likely to default.

ARM loans 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

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a period of rising interest rates, prepayments on adjustable rate
mortgage loans might decrease. The rate of prepayments with respect to ARM loans
has fluctuated in recent years.

The rates of interest payable on certain adjustable rate mortgage
loans, 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 adjustable rate
mortgage loans 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 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.

INVESTING IN FOREIGN SECURITIES. Investing in foreign securities may
involve more risks than investing in U.S. securities. The value of foreign
securities is subject to economic and political developments in the countries
where the issuers operate and to changes in foreign currency values. 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 may include expropriation, confiscatory taxation, withholding taxes on
interest and/or dividends, limitations on the use of or transfer of fund assets
and 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
position. In those European countries that have begun using the Euro as a common
currency unit, individual national economies may be adversely affected by the
inability of national governments to use monetary policy to address their own
economic or political concerns.

Securities of many foreign companies may be less liquid and their
prices more volatile than securities of comparable U.S. companies. From time to
time foreign securities may be difficult to liquidate rapidly without
significantly depressing the price of such securities. Foreign markets 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 temporary periods when some of a fund's
assets 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. Foreign securities trading practices,
including those involving securities settlement where fund assets may be
released prior to receipt of payment, may expose a fund to increased risk in the
event of a failed trade or the insolvency of a foreign broker-dealer. Legal
remedies for defaults and disputes may have to be pursued in foreign courts,
whose procedures differ substantially from those of U.S. courts.

The costs of investing outside the United States frequently are higher
than those attributable to investing in the United States. 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 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.

Securities of foreign issuers may not be registered with the Securities
and Exchange Commission ("SEC"), and the issuers thereof may not be subject to
its 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. 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.

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FOREIGN CURRENCY RISKS. Currency risk is the risk that changes in
foreign exchange rates may reduce the U.S. dollar value of a fund's foreign
investments. If the value of a foreign currency rises against the value of the
U.S. dollar, the value of a fund's investments that are denominated in, or
linked to, that currency will increase. Conversely, if the value of a foreign
currency declines against the value of the U.S. dollar, the value of such fund
investments will decrease. These changes may have a significant impact on the
value of fund shares. In some instances, a fund may use derivative strategies to
hedge against changes in foreign currency value. (See "Strategies Using
Derivative Instruments" below.) However, opportunities to hedge against currency
risk may not exist in certain markets, particularly with respect to emerging
market currencies, and even when appropriate hedging opportunities are
available, a fund may choose not to hedge against currency risk.

Generally, currency exchange rates are determined by supply and demand
in the foreign exchange markets and the relative merits of investments in
different countries. In the case of those European countries that use the Euro
as a common currency unit, the relative merits of investments in the common
market in which they participate, rather than the merits of investments in the
individual country, will be a determinant of currency exchange rates. Currency
exchange rates also can be affected by the intervention of the U.S. and foreign
governments or central banks, the imposition of currency controls, speculation,
devaluation or other political or economic developments inside and outside the
United States.

Each fund values its assets daily in U.S. dollars, and funds that hold
foreign currencies do not intend to convert them to U.S. dollars on a daily
basis. These funds may convert foreign currency to U.S. dollars from time to
time. From time to time a fund's foreign currencies may be held as "foreign
currency call accounts" at foreign branches of foreign or domestic banks. These
accounts bear interest at negotiated rates and are payable upon relatively short
demand periods. If a bank became insolvent, a fund could suffer a loss of some
or all of the amounts deposited.

The U.S. dollar value of fund assets that are denominated in foreign
currencies may be affected favorably or unfavorably by fluctuations in currency
rates and exchange control regulations. Further, a fund may incur costs in
connection with conversions between various currencies. Currency exchange
dealers realize a profit based on the difference between the prices at which
they are buying and selling various currencies. Thus, a dealer normally will
offer to sell a foreign currency to a fund at one rate, while offering a lesser
rate of exchange should a fund desire immediately to resell that currency to the
dealer. Funds that conduct currency exchange transactions do so either on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market, or through entering into forward, futures or options contracts to
purchase or sell foreign currencies.

EMERGING MARKET INVESTMENTS. The special risks of investing in foreign
securities are heightened in emerging markets. For example, many emerging market
currencies have experienced significant devaluations relative to the U.S. dollar
in recent years. Emerging market countries typically have economic and political
systems that are less fully developed and can be expected to be less stable than
those of developed countries. Emerging market countries may have policies that
restrict investment by foreigners, and there is a higher 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
also may 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 more developed markets.

INVESTMENT AND REPATRIATION RESTRICTIONS. Foreign investment in the
securities markets of several emerging market countries is restricted or
controlled to varying degrees. These restrictions may limit a fund's investment
in these countries and may increase its expenses. For example, certain countries
may require governmental approval prior to investments by foreign persons in a
particular company or industry sector or limit investment by foreign persons to
only a specific class of securities of a company, which may have less
advantageous terms (including price) than securities of the company available
for purchase by nationals. Certain countries may restrict or prohibit investment
opportunities in issuers or industries deemed important to national interests.
In addition, the repatriation of both investment income and capital from some
emerging market countries is subject to restrictions, such as the need for
certain government consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of a fund's operations. These restrictions may in the future make it
undesirable to invest in the countries to which they apply. In addition, if
there is a deterioration in a country's balance of payments or for other
reasons, a country may impose restrictions on foreign capital remittances
abroad. A fund could be adversely affected by delays in, or a refusal to grant,
any required governmental approval for repatriation, as well as by the
application to it of other restrictions on investments.

If, because of restrictions on repatriation or conversion, a fund were
unable to distribute substantially all of its net investment income and capital
gains within applicable time periods, the fund could be subject to federal
income and excise taxes that would not otherwise be incurred and could cease to
qualify for the favorable tax treatment afforded to regulated

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investment companies under the Internal Revenue Code. If it did cease to qualify
for that treatment, it would become subject to federal income tax on all of its
income and net gains. See "Taxes -- Qualification as a Regulated Investment
Company," below.

DIFFERENCES BETWEEN THE U.S. AND EMERGING MARKET SECURITIES MARKETS.
Most securities markets in emerging market countries have substantially less
volume than the New York Stock Exchange, and equity securities of most companies
in emerging market countries are less liquid and more volatile than equity
securities of U.S. companies of comparable size. Some of the stock exchanges in
emerging market countries are in the earliest stages of their development. As a
result, security settlements may in some instances be subject to delays and
related administrative uncertainties. Many companies traded on securities
markets in emerging market countries are smaller, newer and less seasoned than
companies whose securities are traded on securities markets in the United
States. Investments in smaller companies involve greater risk than is
customarily associated with investing in larger companies. Smaller companies may
have limited product lines, markets or financial or managerial resources and may
be more susceptible to losses and risks of bankruptcy. Additionally,
market-making and arbitrage activities are generally less extensive in such
markets, which may contribute to increased volatility and reduced liquidity of
such markets. Accordingly, each of these markets may be subject to greater
influence by adverse events generally affecting the market, and by large
investors trading significant blocks of securities, than is usual in the United
States. To the extent that an emerging market country experiences rapid
increases in its money supply and investment in equity securities for
speculative purposes, the equity securities traded in that country may trade at
price-earnings multiples higher than those of comparable companies trading on
securities markets in the United States, which may not be sustainable.

GOVERNMENT SUPERVISION OF EMERGING MARKET SECURITIES MARKETS; LEGAL
SYSTEMS. There is also less government supervision and regulation of securities
exchanges, listed companies and brokers in emerging market countries than exists
in the United States. Therefore, less information may be available to a fund
than with respect to investments in the United States. Further, in certain
countries, less information may be available to a fund than to local market
participants. Brokers in other countries may not be as well capitalized as those
in the United States, so that they are more susceptible to financial failure in
times of market, political or economic stress. In addition, existing laws and
regulations are often inconsistently applied. As legal systems in some of the
emerging market countries develop, foreign investors may be adversely affected
by new laws and regulations, changes to existing laws and regulations and
preemption of local laws and regulations by national laws. In circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law.

SOCIAL, POLITICAL AND ECONOMIC FACTORS. Many emerging market countries
may be subject to a greater degree of social, political and economic instability
than is the case in the United States. Any change in the leadership or policies
of these countries may halt the expansion of or reverse any liberalization of
foreign investment policies now occurring. Such instability may result from,
among other things, the following: (1) authoritarian governments or military
involvement in political and economic decision making, and changes in government
through extra-constitutional means; (2) popular unrest associated with demands
for improved political, economic and social conditions; (3) internal
insurgencies; (4) hostile relations with neighboring countries; and (5) ethnic,
religious and racial disaffection. Such social, political and economic
instability could significantly disrupt the financial markets in those countries
and elsewhere and could adversely affect the value of a fund's assets. In
addition, there may be the possibility of asset expropriations or future
confiscatory levels of taxation affecting a fund.

The economies of many emerging markets are heavily dependent upon
international trade and are accordingly affected by protective trade barriers
and the economic conditions of their trading partners, principally the United
States, Japan, China and the European Union. The enactment by the United States
or other principal trading partners of protectionist trade legislation,
reduction of foreign investment in the local economies and general declines in
the international securities markets could have a significant adverse effect
upon the securities markets of these countries. In addition, the economies of
some countries are vulnerable to weakness in world prices for their commodity
exports, including crude oil. A country whose exports are concentrated in a few
commodities could be vulnerable to a decline in the international price of such
commodities.

FINANCIAL INFORMATION AND LEGAL STANDARDS. Issuers in emerging market
countries generally are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
to U.S. issuers. In particular, the assets and profits appearing on the
financial statements of an emerging market issuer may not reflect its financial
position or results of operations in the way they would be reflected had the
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. In addition, for an issuer that keeps accounting records
in local currency, inflation accounting rules may require, for both tax and
accounting purposes, that certain assets and liabilities be restated on the
issuer's balance sheet in order to express items in terms of currency of
constant purchasing power. Inflation accounting may indirectly generate losses
or profits. Consequently, financial data may be materially affected by
restatements for inflation and may not accurately reflect the real condition of
those issuers and securities markets.

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In addition, existing laws and regulations are often inconsistently
applied. As legal systems in some of the emerging market countries develop,
foreign investors may be adversely affected by new laws and regulations, changes
to existing laws and regulations and preemption of local laws and regulations by
national laws. In circumstances where adequate laws exist, it may not be
possible to obtain swift and equitable enforcement of the law.

FOREIGN SOVEREIGN DEBT. Sovereign debt includes bonds that are issued
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. Investment in
sovereign debt involves special risks. The issuer of the debt or the
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal and/or interest when due in accordance with the
terms of such debt, and the funds may have limited legal recourse in the event
of a default.

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 somewhat diminished. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt obligations, are of considerable significance. Also, there can be no
assurance that the holders of commercial bank debt issued by 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 repay principal and
interest due in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the 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.

The occurrence of political, social or diplomatic changes in one or
more of the countries issuing sovereign debt could adversely affect the funds'
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their sovereign debt. While the funds' portfolios are managed in a manner that
is intended to minimize the exposure to such risks, there can be no assurance
that adverse political changes will not cause a fund to suffer a loss of
interest or principal on any of its sovereign debt holdings.

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

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

BRADY BONDS. Brady Bonds are sovereign debt securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness. In
restructuring its external debt under the Brady Plan framework, a debtor nation
negotiates with its existing bank lenders as well as multilateral institutions
such as the International Monetary Fund, ("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 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 that 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 generally 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 usually involves the
deposit with or purchase by a U.S. or foreign entity, such as a corporation or
trust, of specified instruments (such as commercial bank loans or Brady Bonds)
and the issuance by that entity of one or more classes of securities backed by,
or representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued structured
foreign investments to create securities with different investment
characteristics such as varying maturities, payment priorities and interest rate
provisions, and the extent of the payments made with respect to structured
foreign investments is often dependent on the extent of the cash flow on the
underlying instruments.

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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.

CURRENCY-LINKED INVESTMENTS. The principal amount of securities that
are indexed to specific foreign currency exchange rates 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.

ZERO COUPON AND OTHER OID SECURITIES; PIK SECURITIES. Zero coupon
securities are securities on which no periodic interest payments are made but
instead are sold at a deep discount from their face value. The buyer of these
securities 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 types of zero coupon securities. Some
are issued in zero coupon form, including Treasury bills, notes and bonds that
have been stripped of (separated from) their unmatured interest coupons
(unmatured interest payments) and receipts or certificates representing
interests in such stripped debt obligations and coupons. Others are created by
brokerage firms that strip the coupons from interest-paying debt securities and
sell the principal and the coupons separately.

Other securities that are sold with original issue discount ("OID")
(I.E., the difference between the issue price and the value at maturity) may
provide for some interest to be paid prior to maturity. In addition,
payment-in-kind ("PIK") securities pay interest in additional securities, not in
cash. OID and PIK securities usually trade at a discount from their face value.

Zero coupon securities are generally more sensitive to changes in
interest rates than debt obligations of comparable maturities that make current
interest payments. This means that when interest rates fall, the value of zero
coupon securities rises more rapidly than securities paying interest on a
current basis. However, when interest rates rise, their value falls more
dramatically. Other OID securities and PIK securities also are subject to
greater fluctuations in market value in response to changing interest rates than
debt securities of comparable maturities that make current distributions of
interest in cash.

Federal tax law requires that the holder of a zero coupon or other OID
security include in gross income each year the OID that accrues on the security
for the year, even though the holder receives no interest payment on the
security during the year. Similarly, while PIK securities may pay interest in
the form of additional securities rather than cash, that interest must be
included in a fund's current income. Accordingly, to continue to qualify as a
regulated investment company and avoid imposition of federal income and excise
taxes (see "Taxes," below), a fund may be required to distribute as dividends
amounts that are greater than the total amount of cash it actually receives.
These distributions would have to be made from the fund's cash assets or, if
necessary, from the proceeds of sales of portfolio securities. A fund would not
be able to purchase additional securities with cash used to make these
distributions, and its current income and the value of its shares would
ultimately be reduced as a result.

Certain zero coupon securities are U.S. Treasury notes and bonds that
have been stripped of their unmatured coupons 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 Fund.

CONVERTIBLE SECURITIES. A convertible security is a bond, preferred
stock or other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. A convertible security entitles
the holder to receive interest 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. However,

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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.

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,
the fund will be required to permit the issuer to redeem the security, convert
it into the underlying common stock or sell it to a third party. Investment
Grade Income Fund may convert convertible securities into equity and hold them
as the equity securities that it acquires, but only 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.

LOAN PARTICIPATIONS AND ASSIGNMENTS. Investments in secured or
unsecured fixed or floating rate loans ("Loans") arranged through private
negotiations between a borrowing corporation, government or other entity and one
or more financial institutions ("Lenders") may be in the form of participations
("Participations") in Loans or assignments ("Assignments") of all or a portion
of Loans from third parties. Participations typically result in the 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 a 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 selling Lender, the fund may be treated as a general
creditor of that Lender and may not benefit from any set-off between the Lender
and the borrower. A fund will acquire Participations only if Mitchell Hutchins
determines that the selling Lender is creditworthy.

When a fund purchases Assignments from Lenders, it acquires direct
rights against the borrower on the Loan. In an 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 onto the fund. However, because
Assignments are arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired by the 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
Securities Act of 1933, as amended ("Securities Act"), and thus may be subject
to a fund's limitation on investment in illiquid securities. Because there may
be no liquid market for such securities, such securities may be sold only to a
limited number of institutional investors. The lack of a liquid secondary market
could 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.

TEMPORARY AND DEFENSIVE INVESTMENTS; MONEY MARKET INVESTMENTS. Each
fund may invest in money market investments for temporary or defensive purposes,
to reinvest cash collateral from its securities lending activities or as part of
its normal investment program. Such investments include, among other things, (1)
securities issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities, (2) commercial paper rated at least A-1 by S&P or P-1 by
Moody's (Low Duration Fund, Investment Grade Income Fund and U.S. Government
Income Fund) or without regard to rating (High Income Fund and Strategic Income
Fund), (3) bank certificates of deposit and bankers' acceptances; (4) repurchase
agreements; and (5) securities of other investment companies that invest
exclusively in money market instruments and similar private investment vehicles.

WARRANTS. Warrants are securities permitting, but not obligating,
holders to subscribe for other securities. Warrants do not carry with them the
right to dividends or voting rights with respect to the securities that they
entitle their holder to purchase, and they do not represent any rights in the
assets of the issuer. As a result, warrants may be considered more speculative
than certain other types of investments. In addition, the value of a warrant
does not necessarily change with the value of the underlying securities, and a
warrant ceases to have value if it is not exercised prior to its expiration
date.

ILLIQUID SECURITIES. The term "illiquid securities" for purposes of the
Prospectus and SAI 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 options, repurchase agreements maturing in more than seven days
and restricted securities other than those Mitchell Hutchins (or for Low
Duration Fund the sub-adviser) has determined are liquid pursuant to guidelines
established by each fund's board. The assets used as cover for over-the-

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counter options written by a fund will be considered illiquid unless the
over-the-counter options are sold to qualified dealers that agree that the fund
may repurchase any over-the-counter options it writes at a maximum price to be
calculated by a formula set forth in the option agreements. The cover for an
over-the-counter option written subject to this procedure would be considered
illiquid only to the extent that the maximum repurchase price under the formula
exceeds the intrinsic value of the option. Under current SEC guidelines, IO and
PO classes of mortgage-backed securities generally are considered illiquid.
However, interest only and principal only 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 for
Low Duration Fund the sub-adviser) has determined that they are liquid pursuant
to guidelines established by the applicable board. A fund may not be able to
readily liquidate its investments in illiquid securities and may have to sell
other investments if necessary to raise cash to meet its obligations. 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 valuing its
portfolio and calculating its net asset value.

Restricted securities are not registered under the Securities Act and
may be sold only in privately negotiated or other exempted transactions or after
a Securities 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 a fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, a fund might obtain a less favorable price than
prevailed when it decided to sell.

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 generally are not considered illiquid, even if they are restricted
in the United States. A large institutional market has developed for many U.S.
and foreign securities that are not registered under the Securities 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 Securities Act for resales of certain securities to
qualified institutional buyers. Such markets include automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held by
a fund, however, could affect adversely the marketability of the securities, and
the fund might be unable to dispose of them promptly or at favorable prices.

Each board has delegated the function of making day-to-day
determinations of liquidity to Mitchell Hutchins (or for Low Duration Fund the
sub-adviser) pursuant to guidelines approved by the board. Mitchell Hutchins or
the sub-adviser takes into account a number of factors in reaching liquidity
decisions, including (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 for Low Duration Fund the
sub-adviser) monitors the liquidity of restricted securities in each fund's
portfolio and reports periodically on such decisions to the applicable board.

Mitchell Hutchins (and for Low Duration Fund the sub-adviser) monitor
each fund's overall holdings of illiquid securities. If a fund's holdings of
illiquid securities exceeds its limitation on investments in illiquid securities
for any reason (such as a particular security becoming illiquid, changes in
relative market values of liquid and illiquid portfolio securities or
shareholder redemptions), Mitchell Hutchins (and for Low Duration Fund the
sub-adviser) will consider what action would be in the best interest of the fund
and its shareholders. Such action may include engaging in an orderly disposition
of securities to reduce the fund's holdings of illiquid securities. However, a
fund is not required immediately to dispose of illiquid securities under the
circumstances and Mitchell Hutchins (and for Low Duration Fund the sub-adviser),
with the concurrence of the fund's board, may determine that it is in the best
interests of the fund and its shareholders to continue to hold the illiquid
securities.

REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which
a fund purchases securities or other obligations from a bank or securities
dealer (or its affiliate) and simultaneously commits to resell them to the
counterparty 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

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the purchased obligations. A fund maintains custody of the underlying
obligations prior to their repurchase, either through its regular custodian or
through a special "tri-party" custodian or sub-custodian that maintains separate
accounts for both the fund and its counterparty. Thus, the obligation of the
counterparty to pay the repurchase price on the date agreed to or upon demand
is, in effect, secured by such obligations.

Repurchase agreements carry certain risks not associated with direct
investments in securities, including a possible decline in the market value of
the underlying obligations. If their value becomes less than the repurchase
price, plus any agreed-upon additional amount, the counterparty 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 obligations and
the price that was paid by a fund upon acquisition is accrued as interest and
included in its net investment income. Repurchase agreements involving
obligations other than U.S. government securities (such as commercial paper and
corporate bonds) may be subject to special risks and may not have the benefit of
certain protections in the event of the counterparty's insolvency. If the seller
or guarantor becomes insolvent, the fund may suffer delays, costs and possible
losses in connection with the disposition of collateral. Each fund intends to
enter into repurchase agreements only with counterparties in transactions
believed by Mitchell Hutchins (or for Low Duration Fund the sub-adviser) to
present minimum credit risks.

REVERSE REPURCHASE AGREEMENTS. Reverse repurchase 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. Reverse repurchase agreements are subject
to each fund's limitation on borrowings and may be entered into only with banks
or securities dealers or their affiliates. 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 "The
Funds' Investments, Related Risks and Limitations - 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 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. Each fund may purchase
securities on a "when-issued" basis or may purchase or sell securities for
delayed delivery, I.E., for issuance or delivery to or by the fund later than a
normal settlement date at a stated price and yield. When-issued securities
include TBA ("to be announced") securities. TBA securities are usually
mortgage-backed securities that are purchased on a forward commitment basis with
an approximate principal amount and no defined maturity date. The actual
principal amount and maturity date are determined upon settlement when the
specific mortgage pools are assigned. A fund generally would not pay for such
securities or start earning interest on them until they are received. However,
when a fund undertakes a when-issued or delayed delivery obligation, it
immediately assumes the risks of ownership, including the risks 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 the fund's incurring or
missing an opportunity to make an alternative investment.

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 or delayed delivery basis, its custodian segregates assets to
cover the amount of the commitment. See "The Funds' Investments, Related Risks
and Limitations--Segregated Accounts." A fund's when-issued and delayed delivery
purchase commitments could cause its net asset value per share to be more
volatile. A fund may sell the right to acquire the security prior to delivery if
Mitchell Hutchins (or for Low Duration Fund the sub-adviser) deems it
advantageous to do so, which may result in a gain or loss to the fund.

DOLLAR ROLLS. In a dollar roll, a fund sells TBA 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. Dollar rolls also are
subject to a fund's limitation on borrowings.

DURATION. Duration is a measure of the expected life of a bond on a
present value basis. Duration incorporates the bond's yield, coupon interest
payments, final maturity and call features into one measure and is one of the
fundamental tools

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used by Mitchell Hutchins (and for Low Duration Fund the sub-adviser) in
portfolio selection and yield curve positioning for a fund's bond investments.
Duration was developed as a more precise alternative to the concept "term to
maturity." Traditionally, a bond'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 the scheduled final payment on the bond,
taking no account of the pattern of payments prior to maturity.

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. For example, depending on 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.

Duration allows Mitchell Hutchins (or for Low Duration Fund the
sub-adviser) 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 of bonds.
For example, when the level of interest rates increases by 1%, a bond having a
positive duration of three years generally will decrease by approximately 3%.
Thus, if Mitchell Hutchins (or for Low Duration Fund the sub-adviser) calculates
the duration of a fund's portfolio of bonds 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 of
bonds may vary in relation to interest rates by a greater or lesser percentage
than indicated by the above example.

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.

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
(or for Low Duration Fund the sub-adviser) 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.

LENDING OF PORTFOLIO SECURITIES. Each fund is authorized to lend its
portfolio securities to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified. Lending securities enables a fund to earn additional
income, but could result in a loss or delay in recovering these securities. The
borrower of a fund's portfolio securities must maintain acceptable collateral
with that 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 any cash collateral in money market
investments or other short-term liquid investments including other investment
companies. A fund also may reinvest cash collateral in private investment
vehicles similar to money market funds, including one managed by Mitchell
Hutchins. In determining whether to lend securities to a particular
broker-dealer or institutional investor, Mitchell Hutchins will consider, and
during the period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. Each fund will
retain authority to terminate any of its loans at any time. Each fund may pay
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. Each 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.

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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
PaineWebber for these services. Each board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent.
PaineWebber also has been approved as a borrower under each fund's securities
lending program.

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" to hedge against
market risks when Mitchell Hutchins (or for Low Duration Fund the sub-adviser)
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 the
purchase of securities on a when-issued or delayed delivery basis, and reverse
repurchase agreements, it will maintain with an approved custodian in a
segregated account cash or liquid securities, marked to market daily, in an
amount at least equal to the fund's obligation or commitment under such
transactions. As described below under "Strategies Using Derivative
Instruments," segregated accounts may also be required in connection with
certain transactions involving options, futures, forward currency contracts and
swaps.

INVESTMENTS IN OTHER INVESTMENT COMPANIES. Each fund may invest in
securities of other investment companies, subject to limitations imposed by the
Investment Company Act of 1940, as amended ("Investment Company Act"). Among
other things, these limitations currently restrict a fund's aggregate
investments in other investment companies to no more than 10% of its total
assets. A fund's investment in certain private investment vehicles are not
subject to this restriction. The shares of other investment companies are
subject to the management fees and other expenses of those companies, and the
purchase of shares of some investment companies requires the payment of sales
loads and (in the case of closed-end investment companies) sometimes substantial
premiums above the value of such companies' portfolio securities. At the same
time, a fund would continue to pay its own management fees and expenses with
respect to all its investments, including shares of other investment companies.

INVESTMENT LIMITATIONS OF THE FUNDS

FUNDAMENTAL LIMITATIONS. The following fundamental investment
limitations cannot be changed for a fund without the affirmative vote of the
lesser of (a) more than 50% of the outstanding shares of the fund or (b) 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 amount of total assets will not be considered a
violation of any of the following limitations. With regard to the borrowings
limitation in fundamental limitation (2), each fund will comply with the
applicable restrictions of Section 18 of the Investment Company Act.

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 Fund, under normal
circumstances, each will invest 25% or more

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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 and then not in excess of 33 1/3% of the fund's total
assets (including the amount of the senior securities issued but reduced by any
liabilities not constituting senior securities) at the time of the issuance or
borrowing, except that the fund may borrow up to an additional 5% of its total
assets (not including the amount borrowed) for temporary or emergency purposes.

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

The following interpretation applies to, but is not a part of, this
fundamental restriction: The fund's investments in master notes and 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 Fund, Investment
Grade Income Fund and High Income Fund each will not:

(7) purchase securities of any one issuer if, as a result, more than 5%
of the fund's total assets would be invested in securities of that issuer or the
fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 25% of the fund's total assets may be invested
without regard to this limitation, and except that this limitation 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
non-fundamental and may be changed by the vote of the appropriate board without
shareholder approval. 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 amount of total assets will not be
considered a violation of any of the following limitations.

Each fund will not:

(1) invest more than 10% of its net assets (15% of net assets for Low
Duration Fund and Strategic Income Fund) in illiquid securities.

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

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(3) 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.

(4) 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.

(5) purchase securities of other investment companies, except to the
extent permitted by the Investment Company 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 Investment Company Act).

STRATEGIES USING DERIVATIVE INSTRUMENTS

GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. Mitchell Hutchins (and
for Low Duration Fund, the sub-adviser) 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 each fund's portfolio and also to attempt to enhance income,
realize gains or manage the duration of its portfolio. Each fund also may enter
into interest rate swap transactions. High Income Fund and Strategic Income Fund
also may use forward currency contracts for hedging purposes. A fund may enter
into transactions involving one or more types of Derivative Instruments under
which the full value of its portfolio is at risk. Under normal circumstances,
however, each fund's use of these instruments will place at risk a much smaller
portion of its assets. In particular, each fund may use the Derivative
Instruments described below.

A fund might not use any derivative instruments or strategies, and
there can be no assurance that using any strategy will succeed. If the Mitchell
Hutchins (or for Low Duration Fund the sub-adviser), is incorrect in its
judgment on market values, interest rates or other economic factors in using a
derivative instrument or strategy, a fund may have lower net income and a net
loss on the investment.

OPTIONS ON 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 or at specified
times or at the expiration of the option, depending on the type of option
involved. 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 that gives its purchaser, in return for a premium,
the right to sell the underlying security or currency at a specified price
during the option term or at specified times or at the expiration of the option,
depending on the type of option involved. 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 SECURITIES INDICES--A securities index assigns relative
values to the securities included in the index and fluctuates with changes in
the market values of those securities. A securities index option operates in the
same way as a more traditional securities option, except that exercise of a
securities index option is effected with cash payment and does not involve
delivery of securities. Thus, upon exercise of a securities 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 securities
index.

SECURITIES INDEX FUTURES CONTRACTS--A securities 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 securities 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 AND FOREIGN CURRENCY FUTURES CONTRACTS--Interest rate and
foreign currency futures contracts are bilateral agreements pursuant to which
one party agrees to make, and the other party agrees to accept, delivery of a
specified type of debt security or currency at a specified future time and at a
specified price. Although such futures contracts by their terms call for actual
delivery or acceptance of debt securities or currency, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery.

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OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar
to options on securities or currency, except that an option on a futures
contract gives the purchaser the right, in return for the premium, 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 or currency, at a specified price at any time during the option term or
at specified times or at the expiration of the option, depending on the type of
option involved. 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. A fund
may use Derivative Instruments to attempt to hedge its portfolio and also to
attempt to enhance income or return or realize gains and to manage the duration
of its bond portfolio. A fund may use Derivative Instruments to maintain
exposure to stocks or bonds while maintaining a cash balance for fund management
purposes (such as to provide liquidity to meet anticipated shareholder sales of
fund shares and for fund operating expenses), to facilitate trading or to adjust
its exposure to different asset classes.

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, a fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transaction
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, a 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, a fund could exercise the call and thus limit its acquisition
cost to the exercise price plus the premium paid and transaction costs.
Alternatively, a fund might be able to offset the price increase by closing out
an appreciated call option and realizing a gain.

A fund may purchase and write (sell) straddles on securities or indices
of 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 for Low Duration
Fund the sub-adviser) believes it likely that the prices of the securities 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
for Low Duration Fund the sub-adviser) believes it unlikely that the prices of
the securities 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 stock indices, in
contrast, generally are used to hedge against price movements in broad equity
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.

Income strategies using Derivative Instruments may include the writing
of covered options to obtain the related option premiums. Gain strategies may
include using Derivative Instruments to increase or decrease a fund's exposure
to different asset classes without buying or selling the underlying instruments.
A fund also may use derivatives to simulate full investment

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by the fund while maintaining a cash balance for fund management purposes (such
as to provide liquidity to meet anticipated shareholder sales of fund shares and
for fund operating expenses).

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 may be limited by tax considerations. See
"Taxes."

In addition to the products, strategies and risks described below and
in the Prospectus, Mitchell Hutchins (or for Low Duration Fund the sub-adviser)
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 for Low Duration Fund the sub-adviser) may use these opportunities
for a fund to the extent that they are consistent with the fund's investment
objective and permitted by its investment limitations and applicable regulatory
authorities. The Prospectus or SAI 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 the
ability of Mitchell Hutchins (or for Low Duration Fund the sub-adviser) 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 for Low Duration Fund the
sub-adviser) are experienced in the use of Derivative Instruments, there can be
no assurance that any particular 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 price
movements in the hedged investments. For example, if a fund entered into a short
hedge because Mitchell Hutchins (or for Low Duration Fund the sub-adviser)
projected a decline in the price of a security in that 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 the fund was
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 positions 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 the 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 hedging position can be
closed out at a time and price that is favorable to a fund.

COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose the funds 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 or other options or futures contracts or (2) cash or

25
<PAGE>

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 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 or call options on securities in which they invest and related
indices and (for High Income Fund and Strategic Income Fund) on 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, a fund may also
use options to attempt to realize gains by increasing or reducing its 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. Writing covered
call options serves as a limited short hedge, because declines in the value of
the hedged investment would be offset to the extent of the premium received for
writing the option. However, if the security appreciates to a price higher than
the exercise price of the call option, it can be expected that the option will
be exercised and the affected fund will be obligated to sell the security at
less than its market value. Writing covered put options serves as a limited long
hedge, because increases in the value of the hedged investment would be offset
to the extent of the premium received for writing the option. However, if the
security depreciates to a price lower than the exercise price of the put option,
it can be expected that the put option will be exercised and the fund will be
obligated to purchase the security at more than its market value. The securities
or other assets used as cover for over-the-counter options written by a fund
would be considered illiquid to the extent described under "The Funds'
Investments, Related Risks and Limitations--Illiquid Securities."

The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Generally, the over-the-counter debt options or foreign
currency options used by the funds 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 and write both exchange-traded and
over-the-counter options. Currently, many options on equity securities are
exchange-traded. Exchange markets for options on bonds and foreign currencies
exist but are relatively new, and these instruments are primarily traded on the
over-the-counter 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, over-the-counter options are contracts between a fund
and its counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when a fund purchases or writes an
over-the-counter 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.

The funds' ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The funds
intend 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 over-the-counter options only by negotiating directly with the
counterparty, or by a transaction in the secondary market if any such market
exists. Although the funds will enter into over-the-counter options only with
counterparties that are expected to be capable of entering into closing
transactions with the funds, there is no assurance that a fund will in fact be
able to close out an over-the-counter option position at a favorable price prior
to expiration. In the event of

26
<PAGE>

insolvency of the counterparty, a fund might be unable to close out an
over-the-counter 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 put or call
option written by the fund could cause material losses because the fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.

A fund may purchase and write put and call options on indices 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 a securities
market (or market sector) rather than anticipated increases or decreases in the
value of a particular security.

LIMITATIONS ON THE USE OF OPTIONS. The use of options is governed by
the following guidelines, which can be changed by each fund's 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 held by the fund, does not exceed 5% of its total assets.

(2) The aggregate value of securities underlying put options written by
a 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 securities indices and options on futures
contracts) purchased by a fund that are held at any time will not exceed 20% of
its net assets.

FUTURES. The funds may purchase and sell securities index futures
contracts and interest rate futures contracts. High Income Fund and Strategic
Income Fund also may purchase and sell foreign currency futures contracts. A
fund may purchase put and call options, and write covered put and call options,
on futures in which it is allowed to invest. The purchase of futures or call
options thereon can serve as a long hedge, and the sale of futures or the
purchase of put options thereon can serve as a short hedge. Writing covered call
options on futures contracts can serve as a limited short hedge, and writing
covered put options on futures contracts can serve as a limited long hedge,
using a strategy similar to that used for writing covered options on securities
or indices. In addition, a fund may purchase or sell futures contracts or
purchase options thereon to increase or reduce its exposure to an asset class
without purchasing or selling the underlying securities either as a hedge or to
enhance return or realize gains.

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

A fund may also write put options on 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 a fund than is purchasing the
futures contract.

No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash, 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 a 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.

27
<PAGE>

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 each 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 call option thereon, it is subject to daily
variation margin calls that could be substantial in the event of adverse price
movements. If a fund has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales are
disadvantageous.

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

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

If a fund were unable to liquidate a futures or related options
position due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses. A fund would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, a 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.

LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. The use of
futures and related options is governed by the following guidelines, which can
be changed by a fund's board without shareholder vote:

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

(2) The aggregate premiums paid on all options (including options on
securities, foreign currencies and securities indices 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 and futures 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 the fund's 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.

28
<PAGE>

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 considered expensive. In such cases, the 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. In addition, a fund may use forward
currency contracts to shift exposure to foreign currency fluctuations from one
country to another. For example, if a 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 value of Derivative Instruments on foreign currencies depends on
the value of the underlying currency relative to the U.S. dollar. Because
foreign currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Derivative
Instruments, a fund could be disadvantaged by having to deal in the odd-lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.

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

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 a 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, a 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 foreign
currency

29
<PAGE>

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 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
segregates with its custodian cash or liquid securities 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. Swap transactions include swaps, caps, floors and
collars relating to interest rates, currencies, securities or other instruments.
Interest rate swaps involve an agreement between two parties to exchange
payments that are based, for example, 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 level on
predetermined dates or during a specified time period. Currency swaps, caps,
floors and collars are similar to interest rate swaps, caps, floors and collars
but they are based on currency exchange rates rather than interest rates. Equity
swaps or other swaps relating to securities or other instruments are also
similar, but they are based on changes in the value of the underlying securities
or instruments. For example, an equity swap might involve an exchange of the
value of a particular security or securities index in a certain notional amount
for the value of another security or index or for the value of interest on that
notional amount at a specified fixed or variable rate.

A fund may enter into interest rate 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. A fund may use interest rate swaps, caps, floors and
collars as a hedge on either an asset-based or liability-based basis, depending
on whether it is hedging its assets or liabilities. Interest rate swap
transactions are subject to risks comparable to those described above with
respect to other derivatives strategies.

A fund will usually enter into interest rate swaps on a net basis,
I.E., the two payment streams are netted out, with a fund receiving or paying,
as the case may be, only the net amount of the two payments. Because segregated
accounts will be established with respect to these transactions, Mitchell
Hutchins (and for Low Duration Fund the sub-adviser) believe such obligations do
not constitute senior securities and, accordingly, will not treat them as being
subject to a fund's 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 "The Funds'
Investments, Related Risks and Limitations--Segregated Accounts." A fund also
will establish and maintain such segregated accounts with respect to its total
obligations under any swaps that are not entered into on a net basis and with
respect to any caps, floors and collars that are written by the fund.

A fund will enter into interest rate swap transactions only with banks
or recognized securities dealers or their affiliates believed by Mitchell
Hutchins (or for Low Duration Fund the sub-adviser) to present minimal credit
risk in accordance with guidelines established by the fund's 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.

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<PAGE>

ORGANIZATION; TRUSTEES AND OFFICERS AND PRINCIPAL HOLDERS AND MANAGEMENT
OWNERSHIP OF SECURITIES

Managed Trust was formed on November 21, 1986 as a business trust under
the laws of the Commonwealth of Massachusetts and has eight operating series.
Securities Trust was formed on December 3, 1992 as a business trust under the
laws of the Commonwealth of Massachusetts and has two operating series. Each
Trust is governed by a board of trustees, which is authorized to establish
additional series and to issue an unlimited number of shares of beneficial
interest of each existing or future series, par value $0.001 per share. The
applicable board oversees each fund's operations.

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

NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ ----------------------------------------
<S> <C> <C>
Margo N. Alexander*+; 53 Trustee and President Mrs. Alexander is Chairman (since March 1999), chief
executive officer and a director of Mitchell Hutchins (since
January 1995), and an executive vice president and director
of PaineWebber (since March 1984). Mrs. Alexander is
president and director or trustee of 31 investment
companies for which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.

Richard Q. Armstrong; 64 Trustee Mr. Armstrong is chairman and principal of R.Q.A.
R.Q.A. Enterprises Enterprises (management consulting firm) (since April 1991
One Old Church Road and principal occupation since March 1995). Mr. Armstrong
Unit #6 was chairman of the board, chief executive officer and
Greenwich, CT 06830 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, Louis 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 30 investment companies for
which Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.

E. Garrett Bewkes, Jr.**+; 73 Trustee and Chairman of the Mr. Bewkes is a director of Paine Webber Group Inc.
Board of Trustees ("PW Group") (holding company of 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. Mr.Bewkes is a director or trustee of 34
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as investment
adviser.
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<PAGE>

NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ ----------------------------------------
<S> <C> <C>
Richard R. Burt; 53 Trustee Mr. Burt is chairman of IEP Advisors, LLP (international
1275 Pennsylvania Ave, N.W. investments and consulting firm) (since March 1994), a
Washington, D.C. 20004 partner of McKinsey & Company (management consulting firm)
(since 1991). He is also a director of
Archer-Daniels-Midland Co. (agricultural commodities),
Hollinger International Co. (publishing) and Homestake
Mining Corp. (gold mining), vice chairman of Anchor Gaming
(provides technology to gaming and wagering industry) (since
July 1999) and chairman of Weirton Steel Corp (makes and
finishes steel products) (since April 1996). 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 30 investment companies for which
Mitchell Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.

Mary C. Farrell**+; 50 Trustee Ms. Farrell is a managing director, senior investment
(Securities Trust only) 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 appears 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,
PaineWebber or one of their affiliates serves as investment
adviser.

Meyer Feldberg; 58 Trustee Mr. Feldberg is Dean and Professor of Management of the
Columbia University Graduate School of Business, Columbia University. Prior to
101 Uris Hall 1989, he was president of the Illinois Institute of
New York, NY 10027 Technology. Dean Feldberg is also a director of Primedia
Inc. (publishing), Federated Department Stores, Inc.
(operator of department stores) and Revlon, Inc.
(cosmetics). Dean Feldberg is a director or trustee of 33
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as investment
adviser.

George W. Gowen; 70 Trustee Mr. Gowen is a partner in the law firm of Dunnington,
666 Third Avenue Bartholow & Miller. Prior to May 1994, he was a partner in
New York, NY 10017 the law firm of Fryer, Ross & Gowen. Mr. Gowen is a
director or trustee of 33 investment companies for which
Mitchell Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.

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<PAGE>

NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ ----------------------------------------
<S> <C> <C>
Frederic V. Malek; 63 Trustee Mr. Malek is chairman of Thayer Capital Partners (merchant
1455 Pennsylvania Ave, N.W. bank) and chairman of Thayer Hotel Investors II and Lodging
Suite 350 Opportunities Fund (hotel investment partnerships). From
Washington, DC 20004 January 1992 to November 1992, he was campaign manager of
Bush-Quayle '92. From 1990 to 1992, he was vice chairman
and, from 1989 to 1990, he was president of Northwest
Airlines Inc. and NWA Inc. (holding company of Northwest
Airlines 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 Aegis
Communications, Inc. (tele-services), American Management
Systems, Inc. (management consulting and computer related
services), Automatic Data Processing, Inc., (computing
services), CB Richard Ellis, Inc. (real estate services),
FPL Group, Inc. (electric services), Global Vacation Group
(packaged vacations), HCR/Manor Care, Inc. (health care),
SAGA Systems, Inc. (software company) and Northwest Airlines
Inc. Mr. Malek is a director or trustee of 30 investment
companies for which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.

Carl W. Schafer; 64 Trustee Mr. Schafer is president of the Atlantic Foundation
66 Witherspoon Street, #1100 (charitable foundation supporting mainly oceanographic
Princeton, NJ 08542 exploration and research). He is a director of Labor Ready,
Inc. (temporary employment), Roadway Express, Inc.
(trucking), The Guardian Group of Mutual Funds, the Harding,
Loevner Funds, E.I.I. Realty Trust (investment company),
Evans Systems, Inc. (motor fuels, convenience store and
diversified company), Electronic Clearing House, Inc.
(financial transactions processing), Frontier Oil
Corporation and Nutraceutix, Inc. (biotechnology company).
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 30 investment
companies for which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.

Brian M. Storms*+; 45 Trustee Mr. Storms is president and chief operating officer of
Mitchell Hutchins (since March 1999). Mr. Storms was
president of Prudential Investments (1996-1999). Prior to
joining Prudential he was a managing director at Fidelity
Investments. Mr. Storms is a director or trustee of 30
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as investment
adviser.

T. Kirkham Barneby*; 53 Vice President Mr. Barneby is a managing director and chief investment
(Managed Trust only) office--quantitative investments of Mitchell Hutchins. Mr.
Barneby is a vice president of seven investment companies
for which Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.

33
<PAGE>

NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ ----------------------------------------
<S> <C> <C>
Julieanna Berry*; 36 Vice President Ms. Berry is a first vice president and a portfolio manager
(Managed Trust only) of Mitchell Hutchins. Ms. Berry is a vice president of two
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as investment
adviser.

Tom Disbrow**, 34 Vice President and Assistant Mr. Disbrow is a first vice president and a senior manager
Treasurer of the mutual fund finance department of Mitchell Hutchins.
Prior to November 1999, he was a vice president of
Zweig/Glaser Advisers. Mr. Disbrow is a vice president and
assistant treasurer of 31 investment companies for which
Mitchell Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.

Donald R. Jones*; 39 Vice President Mr. Jones is a senior vice president and a portfolio manager
(Securities Trust only) 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,
PaineWebber or one of their affiliates serves as investment
adviser.

James F. Keegan*; 39 Vice President Mr. Keegan is a senior vice president and a portfolio
(Managed Trust only) manager of Mitchell Hutchins. Prior to March 1996, he was
director of fixed income strategy and research of Merrion
Group, L.P. Mr. Keegan is a vice president of six
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as investment
adviser.

John J. Lee**; 31 Vice President and Mr. Lee is a vice president and a manager of the mutual fund
Assistant Treasurer finance department of Mitchell Hutchins. Prior to September
1997, he was an audit manager in the financial services
practice of Ernst & Young LLP. Mr. Lee is a vice president
and assistant treasurer of 31 investment companies for which
Mitchell Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.

Kevin J. Mahoney**; 34 Vice President and Mr. Mahoney is a first vice president and a senior manager
Assistant Treasurer of the mutual fund finance department of Mitchell Hutchins.
From August 1996 through March 1999, he was the manager of
the mutual fund internal control group of Salomon Smith
Barney. Prior to August 1996, he was an associate and
assistant treasurer for BlackRock Financial Management L.P.
Mr. Mahoney is a vice president and assistant treasurer of
31 investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as investment
adviser.

Dennis McCauley*; 53 Vice President Mr. McCauley is a managing director and chief investment
office--fixed income of Mitchell Hutchins. Mr. McCauley is a
vice president of 22 investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates serves as
investment adviser.

Ann E. Moran**; 42 Vice President and Ms. Moran is a vice president and a manager of the mutual
Assistant Treasurer fund finance department of Mitchell Hutchins. Ms. Moran is a
vice president and assistant treasurer of 31 investment
companies for which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.

34
<PAGE>

NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ ----------------------------------------
<S> <C> <C>
Dianne E. O'Donnell**; 47 Vice President and Secretary Ms. O'Donnell is a senior vice president and deputy general
counsel of Mitchell Hutchins. Ms. O'Donnell is a vice
president and secretary of 30 investment companies and a
vice president and assistant secretary of one investment
company for which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.

Emil Polito*; 39 Vice President Mr. Polito is a senior vice president and director of
operations and control for Mitchell Hutchins. Mr. Polito is
a vice president of 31 investment companies for which
Mitchell Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.

Victoria E. Schonfeld**; 49 Vice President Ms. Schonfeld is a managing director and general counsel of
Mitchell Hutchins and (since July 1995) a senior vice
president of PaineWebber. Ms. Schonfeld is a vice president
of 30 investment companies and a vice president and
secretary of one investment company for which Mitchell
Hutchins, PaineWebber or one of their affiliates serves as
investment adviser.

Paul H. Schubert**; 37 Vice President and Treasurer Mr. Schubert is a senior vice president and director of the
mutual fund finance department of Mitchell Hutchins. Mr.
Schubert is a vice president and treasurer of 31 investment
companies for which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.

Nirmal Singh*; 43 Vice President Mr. Singh is a senior vice president and a portfolio manager
of Mitchell Hutchins. Mr. Singh is a vice president of four
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as investment
adviser.

Barney A. Taglialatela**; 39 Vice President and Mr. Taglialatela is a vice president and a manager of the
Assistant Treasurer mutual fund finance department of Mitchell Hutchins. Mr.
Taglialatela is a vice president and assistant treasurer of
31 investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as investment
adviser.

Mark A. Tincher*; 44 Vice President Mr. Tincher is a managing director and chief investment
office--equities of Mitchell Hutchins. Mr. Tincher is a
vice president of 12 investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates serves as
investment adviser.

Stuart Waugh*; 44 Vice President Mr. Waugh is a managing director and a portfolio manager of
(Securities Trust only) 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, PaineWebber or one of their affiliates serves as
investment adviser.

Keith A. Weller**; 38 Vice President and Mr. Weller is a first vice president and associate general
Assistant Secretary 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 30 investment companies for which
Mitchell Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.
</TABLE>

<PAGE>

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

* This person's business address is 51 West 52nd Street, New York, New York
10019-6114.

** This person's business address is 1285 Avenue of the Americas, New York, New
York 10019.

+ Mrs. Alexander, Mr. Bewkes, Ms. Farrell and Mr. Storms are "interested
persons" of each fund as defined in the Investment Company Act by virtue of
their positions with Mitchell Hutchins, PaineWebber, and/or PW Group.

Board members are compensated as follows:

- MANAGED TRUST has eight operating series and pays each board
member who is not an "interested person" of the Trust $1,000
annually for each series. Therefore, Managed Trust pays each such
board member $8,000 annually, plus any additional amounts due for
board or committee meetings.

- SECURITIES TRUST has two operating series and pays each board
member who is not an "interested person" of the Trust $1,000
annually for Strategic Income Fund and an additional $1,500
annually for its second series. Therefore, Securities Trust pays
each such board member $2,500 annually, plus any additional
amounts due for board or committee meetings.

Each Trust pays up to $150 per series for each board meeting and each
separate meeting of a board committee. 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 board members are reimbursed for any expenses incurred in
attending meetings. Because PaineWebber, Mitchell Hutchins and (for Low Duration
Fund) the sub-adviser) perform substantially all the services necessary for the
operation of the Trusts and each fund, the Trusts require no employees. No
officer, director or employee of Mitchell Hutchins or PaineWebber presently
receives any compensation from a Trust for acting as a board member or officer.

The table below includes certain information relating to the
compensation by each Trust of its current board members and the compensation of
those board members from all PaineWebber funds during the periods indicated.

COMPENSATION TABLE+

<TABLE>
<CAPTION>
AGGREGATE AGGREGATE
COMPENSATION FROM COMPENSATION TOTAL COMPENSATION FROM
MANAGED FROM SECURITIES THE TRUSTS AND THE FUND
NAME OF PERSON, POSITION TRUST* TRUST* COMPLEX**
------------------------ ------ ------ ---------
<S> <C> <C> <C>
Richard Q. Armstrong, $12,030 $1,780 $104,650
Trustee
Richard R. Burt, 11,850 1,750 102,850
Trustee
Meyer Feldberg, 12,030 2,432 119,650
Trustee
George W. Gowen, 14,711 1,780 119,650
Trustee
Frederic V. Malek, 12,030 1,780 104,650
Trustee
Carl W. Schafer, 12,030 1,780 104,650
Trustee
</TABLE>

36
<PAGE>

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

+ Only independent board members are compensated by the PaineWebber funds and
identified above; board members who are "interested persons," as defined by
the Investment Company Act, do not receive compensation from the funds.

* Represents fees paid to each board member from the Trust indicated for the
fiscal year ended November 30, 1999.

** Represents total compensation paid during the calendar year ended December
31, 1999, to each board member by 31 investment companies (34 in the case
of Messrs. Feldberg and Gowen) for which Mitchell Hutchins, PaineWebber or
one of their affiliates served as investment adviser. No fund within the
PaineWebber fund complex has a bonus, pension, profit sharing or retirement
plan.

PRINCIPAL HOLDERS AND MANAGEMENT OWNERSHIP OF SECURITIES

As of March 1, 2000, trustees and officers owned in the aggregate less
than 1% of the outstanding shares of any class of each Trust.

As of March 3, 2000, the following shareholders were shown in the
funds' records as owning 5% or more of any class of a fund's shares:

PERCENTAGE OF SHARES
BENEFICIALLY OWNED AS OF
NAME AND ADDRESS* MARCH 3, 2000
----------------- -------------
<S> <C>

U.S. GOVERNMENT INCOME FUND
Northern Trust Company Trustee 61.33% of
FBO PaineWebber 401k Plan Class Y shares

LOW DURATION FUND
Chestnut III 71.97% of
Attn: Michael W. Kanzler Class A shares
Barry Seeman 5.01% of
Ruth Seeman Class B shares
Village of Caseyville Police 10.46% of
Pension Fund Class B shares
Dr. Alicia C. Faxon 7.24% of
Class Y shares
PaineWebber Cust. 8.29% of
PaineWebber CDN FBO Class Y shares
George M. Edmonds
Gina Gilbert 9.65% of
Class Y shares
Mitchell Hutchins Portfolios 9.92% of
Omnibus Account Class Y shares

INVESTMENT GRADE INCOME FUND
PaineWebber Cust. 5.08% of
PaineWebber CDN FBO Class Y shares
Gertrude A. Tormey

37
<PAGE>

PERCENTAGE OF SHARES
BENEFICIALLY OWNED AS OF
NAME AND ADDRESS* MARCH 3, 2000
----------------- -------------
<S> <C>
HIGH INCOME FUND
PaineWebber Cust. 11.55% of
PaineWebber CDN FBO Class Y shares
Gertrude A. Tormey
PaineWebber Cust. 6.05% of
Jerry M. Zeigler Class Y shares
PaineWebber Cust. 9.68% of
PaineWebber CDN FBO Class Y shares
Charles A. Chard
PaineWebber Cust. 5.37% of
PaineWebber CDN FBO Class Y shares
Char L. Brown

STRATEGIC INCOME FUND
PaineWebber Cust. 5.65% of
PaineWebber CDN FBO Class Y shares
Paula S. Bradnan
Edward Y. Eyraud TTEE FBO 7.04% of
The Joseph A. Eyraud Profit Class Y shares
Sharing Plan
PaineWebber Cust. 8.20% of
Jerry M. Zeigler Class Y shares
PaineWebber Cust. 8.59% of
Charles A. Chard Class Y shares
Anne L. Solnit Trustee of the 9.58% of
Anne L. Solnit Trust Dtd 5/6/97 Class Y shares
</TABLE>

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

* The shareholders listed may be contacted c/o Mitchell Hutchins Asset
Management Inc., 51 West 52nd Street, New York, NY 10019-6114.

INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS

INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS. Mitchell Hutchins
acts as the investment adviser and administrator to each fund pursuant to
separate contracts (each an "Advisory Contract") with each Trust. Under the
applicable Advisory Contract, Strategic Income Fund pays Mitchell Hutchins a fee
(expressed as a percentage of the fund's average daily net assets), computed
daily and paid monthly, at the annual rate of 0.75% of its average daily net
assets, and each of the other four 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.

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
specific series of the Trust are allocated among series by or under the
direction of the Trust's board in such manner as the board deems fair and
equitable. Expenses borne by each fund include 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 and officers who are not interested persons (as defined
in the Investment Company Act) of the applicable 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)

38
<PAGE>

costs of any liability, uncollectible items of deposit and 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 applicable Trust or
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,
statements of additional information and supplements thereto, reports and proxy
materials for existing shareholders, and costs of mailing such materials to
shareholders; (14) any extraordinary expenses (including fees and disbursements
of counsel) incurred by the fund; (15) fees, voluntary assessments and other
expenses incurred in connection with membership in investment company
organizations; (16) costs of mailing and tabulating proxies and costs of
meetings of shareholders, the board and any committees thereof; (17) the cost of
investment company literature and other publications provided to 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
a fund in connection with the performance of the Advisory 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. Each Advisory Contract
terminates automatically 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.

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

FISCAL YEARS ENDED NOVEMBER 30,
-------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
U.S. Government Income Fund $1,537,271 $1,751,719 $ 1,979,329
Low Duration Fund 683,166 708,240 819,616
Investment Grade Income Fund 1,402,342 1,456,093 1,464,164
High Income Fund 2,408,964 3,036,812 2,918,855
Strategic Income Fund 840,960 779,494 520,540*
</TABLE>

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

* Prior to fee waiver of $13,206. Net fees paid by Strategic Income Fund were
$507,334.

For the fiscal year ended November 30, 1999, Mitchell Hutchins
voluntarily waived a portion of its fee under certain Advisory Contracts in
connection with certain funds' investment of cash collateral from securities
lending in a private investment vehicle managed by Mitchell Hutchins.

AMOUNT
FUND WAIVED
---- ------
<S> <C>
U.S. Government Income Fund ................ $13,511
Low Duration Fund .......................... 0
Investment Grade Income Fund ............... 2,056
High Income Fund ........................... 0
Strategic Income Fund ...................... 31

</TABLE>

The Advisory Contracts authorize Mitchell Hutchins to retain one or
more sub-advisers but do not require Mitchell Hutchins to do so. Mitchell
Hutchins has entered into a separate sub-investment advisory contract with PIMCO
("Sub-Advisory Contract") pursuant to which PIMCO serves as sub-adviser for Low
Duration 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. For the fiscal years ended November 30, 1999, November 30, 1998 and
November 30, 1997, Mitchell Hutchins paid or accrued sub-advisory fees to PIMCO
of $341,583, $354,120, and $409,808, respectively. 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 Holding L.P. ("PAH"), a publicly traded company listed on the

39
<PAGE>

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.
PIMCO is one of the largest fixed income management firms in the nation.
Included among PIMCO's institutional clients are many "Fortune 500" companies.
On October 31 1999, PIMCO Advisors, PAH and Allianz AG ("Allianz") announced
that they had reached a definitive agreement pursuant to which Allianz will
acquire majority ownership of PIMCO Advisors and its subsidiaries, including
PIMCO (the "Allianz Transaction"). Under the terms of the transaction, Allianz
will acquire all of PAH, the publicly traded general partner of PIMCO Advisors.
Pacific Life Insurance Company will retain an approximate 30% interest in PIMCO
Advisors. The Allianz Transaction is currently expected to be completed in the
second quarter of 2000.

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 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 or
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.
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 Managed Trust's board or by vote of the holders of a majority of Low
Duration 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 also may 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) upon 120 days' notice to PIMCO.

TRANSFER AGENCY-RELATED SERVICES. PFPC (not the funds) pays PaineWebber
for certain transfer agency-related services that PFPC has delegated to
PaineWebber. Prior to August 1, 1997, under an agreement between the applicable
Trust and PaineWebber, PaineWebber provided those services to each fund not
otherwise provided by its transfer agent. Under these agreements, PaineWebber
earned (or accrued) the amounts set forth below during 1997:

EIGHT MONTHS ENDED
JULY 31, 1997
-------------
<S> <C>
U.S. Government Income Fund $73,833
Low Duration Fund 36,963
Investment Grade Income Fund 48,036
High Income Fund 81,517
Strategic Income Fund 10,503
</TABLE>

SECURITIES LENDING. During the fiscal years ended November 30, 1999,
November 30, 1998 and November 30, 1997, the funds paid (or accrued) the
following fees to PaineWebber for its services as securities lending agent:

FUND FISCAL YEAR ENDED NOVEMBER 30,
---- ------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
U.S. Government Income Fund $37,641 $ 2,938 $672
Low Duration Fund 0 0 0
Investment Grade Income Fund 8,655 24,433 0
High Income Fund 0 0 0
Strategic Income Fund 338 8,573 4,254
</TABLE>

NET ASSETS. The following table shows the approximate net assets as of
February 29, 2000, 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.

40
<PAGE>

NET ASSETS
INVESTMENT CATEGORY ($MIL)
------------------- ------
<S> <C>
Domestic (excluding Money Market) ............ $ 9,931.5
Global ....................................... 4,757.8
Equity/Balanced .............................. 10,115.9
Fixed Income (excluding Money Market) ........ 3,146.1
Taxable Fixed Income ..................... 1,427.3
Tax-Free Fixed Income .................... 39,977.1
Money Market Funds ...........................
</TABLE>

PERSONAL TRADING POLICIES. The funds, their investment adviser and
their principal underwriter each have adopted a code of ethics under rule 17j-1
of the Investment Company Act, which permits personnel covered by the rule to
invest in securities that may be purchased or held by a fund but prohibits
fraudulent, deceptive or manipulative conduct in connection with that personal
investing. PIMCO also has adopted a code of ethics under rule 17j-1.

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 each fund 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. Mitchell Hutchins is located at 51 West 52nd
Street, New York, New York 10019-6114 and PaineWebber is located at 1285 Avenue
of the Americas, New York, New York 10019.

Under separate plans of distribution pertaining to the Class A, Class B
and Class C shares of each fund adopted by each Trust in the manner prescribed
under Rule 12b-1 under the Investment Company Act (each, respectively, a "Class
A Plan," "Class B Plan" and "Class C Plan," and 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 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 and the funds pay no service or distribution fees with respect to their
Class Y shares.

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 Financial
Advisors 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 Financial Advisors 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.

41
<PAGE>

The Plans and the related Distribution Contracts for Class A, Class B
and Class C shares specify that each fund must pay service and distribution fees
to Mitchell Hutchins for its service- and distribution-related 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 the Plans and Mitchell Hutchins' corresponding expenses for
each class separately from the Plans and expenses of the other classes.

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 of the
fund 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 allocates expenses attributable to the sale of each class of
each fund's shares to such class based on the ratio of sales of shares of such
class to the sales of all three classes of shares. The fees paid by one class of
a fund's shares will not be used to subsidize the sale of any other class of
fund shares.

The funds paid (or accrued) the following service and/or distribution
fees to Mitchell Hutchins under the Class A, Class B and Class C Plans during
the fiscal year ended November 30, 1999:

U.S. GOVERNMENT LOW DURATION INVESTMENT GRADE HIGH INCOME STRATEGIC INCOME
INCOME FUND FUND INCOME FUND FUND FUND
----------- ---- ----------- ---- ----
<S> <C> <C> <C> <C> <C>
Class A ...... $ 637,848 $ 135,190 $ 524,546 $ 610,271 $ 97,242
Class B ...... 172,005 72,407 336,809 1,425,449 429,035
Class C ...... 170,768 538,438 248,190 693,522 220,329
</TABLE>

Mitchell Hutchins estimates that it and its parent corporation,
PaineWebber, incurred the following shareholder service-related and
distribution-related expenses with respect to each fund during the fiscal year
ended November 30, 1999:

U.S. INVESTMENT STRATEGIC
GOVERNMENT LOW DURATION GRADE INCOME HIGH INCOME INCOME
INCOME FUND FUND FUND FUND FUND
----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CLASS A
Marketing and advertising .................... $ 248,373 $ 198,635 $ 330,555 $ 479,274 135,638
Amortization of commissions .................. -- -- -- 0 0
Printing of prospectuses and SAIs ............ 4,975 1,568 3,439 12,801 541
Branch network costs allocated and
interest expense ............................. 957,635 184,663 682,751 939,991 104,321
Service fees paid to PaineWebber Financial
Advisors ..................................... 247,066 52,362 203,239 234,882 37,705
</TABLE>

42
<PAGE>

U.S. INVESTMENT STRATEGIC
GOVERNMENT LOW DURATION GRADE INCOME HIGH INCOME INCOME
INCOME FUND FUND FUND FUND FUND
----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CLASS B
Marketing and advertising 16,466 26,703 51,945 280,995 148,307
Amortization of commissions 61,070 26,029 119,255 487,776 153,378
Printing of prospectuses and SAIs 347 101 435 5,129 587
Branch network costs allocated and
interest expense 72,022 27,102 125,349 544,766 134,203
Service fees paid to PaineWebber Financial
Advisors 16,639 7,011 32,594 136,931 41,552

CLASS C
Marketing and advertising 22,126 264,608 51,897 181,847 101,760
Amortization of commissions 44,096 139,035 64,529 177,909 56,915
Printing of prospectuses and SAIs 463 1,135 479 4,454 417
Branch network costs allocated and
interest expense 86,167 247,298 108,706 355,743 79,207
Service fees paid to PaineWebber Financial
Advisors 22,049 69,517 32,048 88,954 28,458
</TABLE>

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

In approving each fund's overall Flexible PricingSM 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 Financial Advisors 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, the board of each fund 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 Financial Advisors 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
Financial Advisors 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'

43
<PAGE>

willingness to compensate PaineWebber and its Financial Advisors, 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 Financial Advisors 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 Financial Advisors and
correspondent firms, resulting in greater growth to the fund than might
otherwise be the case, (4) the advantages to the shareholders of economies of
scale resulting from growth in the fund's assets and potential continued growth,
(5) the services provided to the fund and its shareholders by Mitchell Hutchins,
(6) the services provided by PaineWebber pursuant to its Exclusive Dealer
Agreement with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder service-
and distribution-related expenses and costs. The board members also recognized
that Mitchell Hutchins' willingness to compensate PaineWebber and its Financial
Advisors, without the concomitant receipt by Mitchell Hutchins of initial sales
charges or contingent deferred sales charges upon redemption after one year
following purchase was conditioned upon its expectation of being compensated
under the Class C Plan.

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 fund attained and
maintained significant asset levels.

Under the Distribution Contract between each Trust and Mitchell
Hutchins for the Class A shares for the fiscal years 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.

FISCAL YEAR ENDED NOVEMBER 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
U.S. GOVERNMENT INCOME FUND
Earned ......................... $ 24,995 $ 32,953 $ 13,156
Retained ....................... 1,726 5,284 1,562
LOW DURATION FUND
Earned ......................... 126,998 84,972 14,824
Retained ....................... 1,800 1,664 261
INVESTMENT GRADE INCOME FUND
Earned ......................... 70,668 151,513 51,469
Retained ....................... 4,388 7,946 4,100
HIGH INCOME FUND
Earned ......................... 303,464 419,260 506,732
Retained ....................... 22,045 33,441 36,405
STRATEGIC INCOME FUND
Earned ......................... 48,955 163,983 157,647
Retained ....................... 6,139 12,827 11,028
</TABLE>

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<PAGE>

Mitchell Hutchins earned and retained the following contingent deferred
sales charges paid upon certain redemptions of Class A, Class B and Class C
shares for the fiscal year ended November 30, 1999:

U.S. GOVERNMENT LOW DURATION INVESTMENT GRADE HIGH INCOME STRATEGIC
INCOME FUND FUND INCOME FUND FUND INCOME FUND
----------- ---- ----------- ---- -----------
<S> <C> <C> <C> <C> <C>
Class A .......... $ 0 $ 0 $ 0 $ 0 $ 0
Class B .......... 47,957 19,192 120,424 442,931 146,545
Class C .......... 2,829 9,891 6,884 18,779 5,483
</TABLE>

PORTFOLIO TRANSACTIONS

Subject to policies established by each board, Mitchell Hutchins (or
for Low Duration Fund the sub-adviser) is responsible for the execution of each
fund's portfolio transactions and the allocation of brokerage transactions. In
executing portfolio transactions, Mitchell Hutchins (or for Low Duration Fund
the sub-adviser) seeks 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
over-the-counter market on a "net" basis without a stated commission through
dealers acting for their own accounts and not through 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 the time. While Mitchell Hutchins (and for Low
Duration Fund the sub-adviser) generally seek reasonably competitive commission
rates, payment of the lowest commission is not necessarily consistent with
obtaining the best net results.

During the fiscal years indicated, the funds paid the brokerage
commissions set forth below:

FISCAL YEARS ENDED NOVEMBER 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
U.S. GOVERNMENT INCOME FUND .......... $ 70,714 $ 121,482 $ 105,150
LOW DURATION FUND .................... 640 0 0
INVESTMENT GRADE INCOME FUND ......... 0 5,412 2,400
HIGH INCOME FUND ..................... 291,405 8,104 2,939
STRATEGIC INCOME FUND ................ 5,593 10,079 0
</TABLE>

The funds have no 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, (or for Low Duration Fund brokerage affiliates of the
sub-adviser). Each board has adopted procedures in conformity with Rule 17e-1
under the Investment Company Act to ensure that all brokerage commissions paid
to PaineWebber or brokerage affiliates of the sub-adviser are reasonable and
fair. Specific provisions in the Advisory Contracts and the Sub-Advisory
Contract authorize Mitchell Hutchins and the sub-adviser, respectively, and any
of their affiliates that is a member of a national securities exchange to effect
portfolio transactions for the applicable fund on such exchange and to retain
compensation in connection with such transactions. Any such transactions will be
effected and related compensation paid only in accordance with applicable SEC
regulations. None of the funds paid brokerage commissions to PaineWebber or, in
the case of Low Duration Fund, brokerage affiliates of the sub-adviser during
the fiscal years or periods ended November 30, 1999, November 30, 1998 or
November 30, 1997.

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

In selecting brokers, Mitchell Hutchins (or for Low Duration Fund the
sub-adviser) will consider the full range and quality of a broker's services.
Consistent with the interests of the funds and subject to the review of each
board, Mitchell

45
<PAGE>

Hutchins (or for Low Duration Fund the sub-adviser) may cause a fund to purchase
and sell portfolio securities through brokers who provide Mitchell Hutchins (or
for Low Duration Fund the sub-adviser) with brokerage or research services. The
funds may pay those brokers a higher commission than may be charged by other
brokers, provided that Mitchell Hutchins or (or for Low Duration Fund the
sub-adviser) 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 for Low Duration Fund the sub-adviser), to that fund and
its other clients.

Research services obtained from brokers may include written reports,
pricing and appraisal services, analysis of issues raised in proxy statements,
educational seminars, subscriptions, portfolio attribution and monitoring
services, and computer hardware, software and access charges which are directly
related to investment research. Research services may be received in the form of
written reports, online services, telephone contacts and personal meetings with
securities analysts, economists, corporate and industry spokespersons and
government representatives.

For the fiscal year ended November 30, 1999, the funds directed the
portfolio transactions indicated below to brokers chosen because they provide
research, analysis, advice and similar services, for which the funds paid the
brokerage commissions indicated below:

TOTAL AMOUNT OF BROKERAGE COMMISSIONS
FUND PORTFOLIO TRANSACTIONS PAID
---- ---------------------- ----
<S> <C> <C>
U.S. Government Income Fund $ 2,471,626,621 $ 0
Low Duration Fund 0 0
Investment Grade Income Fund 1,559,877,021 0
High Income Fund 654,345,108 0
Strategic Income Fund 624,753,827 0
</TABLE>

For purchases or sales with broker-dealer firms that act as principal,
Mitchell Hutchins (or for Low Duration Fund the sub-adviser) seeks best
execution. Although Mitchell Hutchins or (or for Low Duration Fund the
sub-adviser) may receive certain research or execution services in connection
with these transactions, Mitchell Hutchins (and for Low Duration Fund the
sub-adviser) will not purchase securities at a higher price or sell securities
at a lower price than would otherwise be paid if no weight was attributed to the
services provided by the executing dealer. Mitchell Hutchins (or for Low
Duration Fund the sub-adviser) may engage in agency transactions in
over-the-counter equity and debt securities in return for research and execution
services. These transactions are entered into only in compliance with procedures
ensuring that the transaction (including commissions) is at least as favorable
as it would have been if effected directly with a market-maker that did not
provide research or execution services.

Research services and information received from brokers or dealers are
supplemental to Mitchell Hutchins' (or for Low Duration Fund the sub-adviser's)
own research efforts and, when utilized, are subject to internal analysis before
being incorporated into their investment processes. Information and research
services furnished by brokers or dealers through which or with which the funds
effect securities transactions may be used by Mitchell Hutchins (or for Low
Duration Fund the sub-adviser) in advising other funds or accounts and,
conversely, research services furnished to Mitchell Hutchins or the sub-adviser
by brokers or dealers in connection with other funds or accounts that either of
them advises may be used in advising the funds.

Investment decisions for a fund and for other investment accounts
managed by Mitchell Hutchins (or for Low Duration Fund by the sub-adviser) 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 a fund and one or more of such accounts. In such cases, simultaneous
transactions are inevitable. Purchases or sales are then averaged as to price
and allocated between that 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 PaineWebber (or for Low Duration Fund an affiliate of the
sub-adviser) is a member of the underwriting or selling group, except pursuant
to procedures adopted by each board pursuant to Rule 10f-3 under the Investment
Company Act. Among other things, these procedures require that the spread or
commission paid in connection with such a purchase be reasonable and fair, the
purchase be at not more than the

46
<PAGE>

public offering price prior to the end of the first business day after the date
of the public offering and that PaineWebber or any affiliate thereof or an
affiliate of the sub-adviser not participate in or benefit from the sale to the
funds.

As of November 30, 1999, the funds owned securities issued by their
regular broker-dealers as follows:

Low Duration Fund: collateralized mortgage obligation of Prudential
Securities CMO Trust, Series 18, Class E ($3,165,782); repurchase
agreement with State Street Bank & Trust Co. ($6,134,000).

Investment Grade Income Fund: collateralized mortgage obligation of CS
First Boston Mortgage Securities Corp. Series 1998-C2, Class A2
($4,708,200); corporate bond issued by Lehman Brothers Holdings
Incorporated ($6,857,760); repurchase agreements with State Street Bank
& Trust Co. ($10,000,000) and SG Warburg ($10,910,000).

PORTFOLIO TURNOVER. The funds' annual portfolio turnover rates may vary
greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate is
calculated by dividing the lesser of a fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of securities in the portfolio during the year.

The funds' respective portfolio turnover rates for the fiscal years
shown were:

<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30,

1999 1998
---- ----
<S> <C> <C>
U.S. GOVERNMENT INCOME FUND 375% 370%
LOW DURATION FUND 270% 411%
INVESTMENT GRADE INCOME FUND 195% 173%
HIGH INCOME FUND 62% 161%
STRATEGIC INCOME FUND 226% 192%
</TABLE>

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

WAIVERS OF SALES CHARGES/CONTINGENT DEFERRED SALES CHARGES -- CLASS A
SHARES. The following additional sales charge waivers are available for Class A
shares if you:

- Purchase shares through 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 l% of the amount
invested;

- - Acquire 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 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 implement a rebalancing feature of such an investment
program, the minimum subsequent investment requirement is also
waived;

- Acquire shares in connection with a reorganization pursuant to
which a fund acquires substantially all of the assets and
liabilities of another fund in exchange solely for shares of the
acquiring fund; or

- Acquire shares in connection with the disposition of proceeds from
the sale of shares of Managed High Yield Plus Fund Inc. that were
acquired during that fund's initial public offering of shares and
that meet certain other conditions described in its prospectus.

47
<PAGE>

In addition, reduced sales charges on Class A shares are available
through the combined purchase plan or through rights of accumulation described
below. Class A share 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.

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 indicated in
the tables of sales charges for Class A shares 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;

(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); or

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

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

REINSTATEMENT PRIVILEGE -- CLASS A SHARES. Shareholders who have
redeemed Class A shares of a fund may reinstate their account without a sales
charge 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, although a loss arising out of a
redemption will not be deductible to the extent the reinstatement privilege is
exercised within 30 days after redemption, in which event an adjustment will be
made to the shareholder's tax basis for shares acquired pursuant to the
reinstatement privilege. Gain or loss on a redemption also will be readjusted
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 "Taxes --
Special Rule for Class A Shareholders," below.

48
<PAGE>

WAIVERS OF CONTINGENT DEFERRED SALES CHARGES -- CLASS B SHARES. The
maximum 5% contingent deferred sales charge (3% for Low Duration 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 Fund). 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.

PURCHASES OF CLASS Y SHARES THROUGH THE PACESM MULTI ADVISOR PROGRAM.
An investor who participates in the PACE-SM- Multi Advisor Program is eligible
to purchase Class Y shares. The PACE-SM- 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-SM- Multi Advisor Program is
subject to payment of an advisory fee at the effective 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 Financial Advisor or
PaineWebber's correspondent firms for more information concerning mutual
funds that are available through the PACE-SM- Multi Advisor Program.

PURCHASES OF CLASS A SHARES THROUGH THE PAINEWEBBER INSIGHTONE-SM-
PROGRAM. Investors who purchase shares through the PaineWebber InsightOne-SM-
Program are eligible to purchase Class A shares without a sales load. The
PaineWebber InsightOne-SM- Program offers a nondiscretionary brokerage account
to investors for an asset-based fee at an annual rate of up to 1.50% of the
assets in the account. Account holders may purchase or sell certain investment
products without paying commissions or other markups/markdowns.

PURCHASES AND SALES OF CLASS Y SHARES FOR PARTICIPANTS IN PW 401(k)
PLUS PLAN. The trustee of the PW 401(k) Plus Plan, a defined contribution plan
sponsored by PW Group, buys and sells Class Y shares of the funds that are
included as investment options under the Plan to implement the investment
choices of individual plan participants with respect to their PW 401(k) Plus
Plan contributions. Individual plan participants should consult the Summary Plan
Description and other plan material of the PW 401(k) Plus Plan (collectively,
"Plan Documents") for a description of the procedures and limitations applicable
to making and changing investment choices. Copies of the Plan Documents are
available from the 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 price at which Class Y shares are bought and sold by the trustee
of PW 401(k) Plus Plan might be more or less than the price per share at the
time the participants made their investment choices.

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. Class Y shares are
not eligible for exchange. Shareholders will receive at least 60 days' notice of
any termination or material modification of the exchange offer, except 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 that 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 fund has
elected, however, to be governed by Rule 18f-1 under the Investment Company Act,
under which it is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of its net asset value during any 90-day period for one
shareholder. This election is irrevocable unless the SEC permits its withdrawal.

The funds may suspend redemption privileges or postpone the date of
payment during any period (1) when the New York Stock Exchange is closed or
trading on the New York Stock Exchange 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.

SERVICE ORGANIZATIONS. A fund may authorize service organizations, and
their agents, to accept on its behalf purchase and redemption orders that are in
"good form" in accordance with the policies of those service organizations. A
fund will be deemed to have received these purchase and redemption orders when a
service organization or its agent accepts them. Like

49
<PAGE>

all customer orders, these orders will be priced based on the fund's net asset
value next computed after receipt of the order by the service organizations or
their agents. Service organizations may include retirement plan service
providers who aggregate purchase and redemption instructions received from
numerous retirement plans or plan participants.

AUTOMATIC INVESTMENT PLAN. PaineWebber offers an automatic investment
plan with a minimum initial investment of $1,000 through which a fund will
deduct $50 or more on a monthly, quarterly, semi-annual or annual basis from the
investor's bank account to invest directly in the fund. Participation in the
automatic investment plan enables an investor to use the technique of "dollar
cost averaging." When an 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. The systematic withdrawal plan allows
investors to set up monthly, quarterly (March, June, September and December),
semi-annual (June and December) or annual (December) withdrawals from their
PaineWebber mutual fund accounts. Minimum balances and withdrawals vary
according to the class of shares:

- Class A and Class C shares. Minimum value of fund shares is
$5,000; minimum withdrawals of $100.

- Class B shares. Minimum value of fund shares is $10,000; minimum
monthly, quarterly, and semi-annual and annual withdrawals of
$100, $200, $300 and $400, respectively.

Withdrawals under the systematic withdrawal plan will not be subject to
a contingent deferred sales charge if the investor withdraws 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.

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 the minimum values specified
above. Purchases of additional shares of a fund 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, semi-annual and annual plans, PaineWebber will arrange for
redemption by the funds of sufficient fund shares to provide the withdrawal
payments specified by participants in the funds' systematic withdrawal plan. The
payments generally are mailed approximately five Business Days (defined under
"Valuation of Shares") after the redemption date. Withdrawal payments should not
be considered dividends, but redemption proceeds. 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. 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 PFPC. Shareholders may request the
forms needed to establish a systematic withdrawal plan from their PaineWebber
Financial Advisors, correspondent firms or PFPC at 1-800-647-1568.

INDIVIDUAL RETIREMENT ACCOUNTS. Self-directed IRAs are available
through PaineWebber in which purchases of shares of PaineWebber mutual 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 PFPC. 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.

PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN-SM-;
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT-Registered Trademark- (RMA)-Registered
Trademark-

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<PAGE>

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

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

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

PERIODIC INVESTING AND DOLLAR COST AVERAGING. Periodic investing in the
PW Funds or other mutual funds, whether through the Plan or otherwise, helps
investors establish and maintain a disciplined approach to accumulating assets
over time, de-emphasizing the importance of timing the market's highs and lows.
Periodic investing also permits an investor to take advantage of "dollar cost
averaging." By investing a fixed amount in mutual fund shares at established
intervals, an investor purchases more shares when the price is lower and fewer
shares when the price is higher, thereby increasing his or her earning
potential. Of course, dollar cost averaging does not guarantee a profit or
protect against a loss in a declining market, and an investor should consider
his or her financial ability to continue investing through periods of 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
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(Registered) transactions during the period, and
provide unrealized and realized gain and loss estimates for most
securities held in the account;

- comprehensive 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 RMA accountholder's
choice of one 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. AN INVESTMENT IN A
MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
ALTHOUGH A MONEY MARKET FUND SEEKS TO PRESERVE THE VALUE OF YOUR
INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY
INVESTING IN A MONEY MARKET FUND.

- 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;

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<PAGE>

- unlimited electronic funds transfers and a bill payment service
for an additional fee;

- 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 for the net equity securities balance
in the event of the liquidation of PaineWebber. This protection
does not apply to shares of funds that are held at PFPC and not
through PaineWebber; and

- automatic direct deposit of checks into your 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 a fund will 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 (as defined under
"Valuation of Shares") of the month in which the sixth anniversary of the
initial issuance of such Class B shares occurs. For the purpose of calculating
the holding period required for conversion of Class B shares, the date of
initial issuance shall mean (1) the date on which such Class B shares were
issued or (2) for Class B shares obtained through an exchange, or a series of
exchanges, the date on which the original Class B shares were issued. For
purposes of conversion to Class A shares, Class B shares purchased through the
reinvestment of dividends and other distributions paid in respect of Class B
shares will be 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
will 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 conversion feature is subject to the continuing availability of an
opinion of counsel to the effect that the dividends and other distributions paid
on Class A and Class B shares will not result in "preferential dividends" under
the Internal Revenue Code and 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 their higher
ongoing expenses beyond six years from the date of purchase. Mitchell Hutchins
has no reason to believe that this condition will not continue to be met.

VALUATION OF SHARES

Each fund determines its net asset value per share separately for each
class of shares, normally as of the close of regular trading (usually 4:00 p.m.,
Eastern time) on the New York Stock Exchange on each Business Day, which is
defined as each Monday through Friday when the New York Stock Exchange is open.
Prices will be calculated earlier when the New York Stock Exchange closes early
because trading has been halted for the day. Currently the New York Stock
Exchange 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 U.S. and foreign stock exchanges normally
are valued at the last sale price on the day the securities are 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 (or for Low Duration Fund
the sub-adviser) as the primary market. Securities traded in the
over-the-counter market and listed on The Nasdaq Stock Market ("Nasdaq")
normally are valued at the last available sale price on Nasdaq prior to
valuation; other over-the-counter securities are valued at the last bid price
available prior to valuation. Where market quotations are readily available,
portfolio securities are valued based upon market quotations, provided those
quotations adequately reflect, in the judgment of Mitchell Hutchins (or for Low
Duration Fund the sub-adviser), the fair value of the security. Where those
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 and other assets are 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,
including many 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

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<PAGE>

debt obligations with 60 days or less remaining until maturity, unless the
applicable board determines that this does not represent fair value.

All investments quoted in foreign currency will be valued daily in U.S.
dollars on the basis of the current foreign currency exchange rate. Foreign
currency exchange rates are generally determined prior to the close of regular
trading on the New York Stock Exchange. 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 New York Stock Exchange,
which events would not be reflected in the computation of a 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 as determined in good faith by or under the
direction of the applicable board. The foreign currency exchange transactions of
the funds conducted on a spot (I.E., cash) basis are valued at the spot rate for
purchasing or selling currency prevailing on the foreign exchange market. Under
normal market 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:

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

Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value, for Class A shares, the
maximum 4.0% sales charge (3.0% for Low Duration 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 or Class C
shares held for the period is deducted. All dividends and other distributions
are assumed to have been reinvested at net asset value.

The funds also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The funds calculate 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 those charges would reduce
the return.

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

The following tables show performance information for each class of the
funds' shares outstanding for the periods indicated. All returns for periods of
more than one year are expressed as an average annual return.

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<PAGE>

U.S. GOVERNMENT INCOME FUND

CLASS CLASS A CLASS B CLASS C CLASS Y
(INCEPTION DATE) (08/31/84) (07/01/91) (07/02/92) (09/11/91)
---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended November 30, 1999:
Standardized Return* .............. (6.02)% (7.55)% (3.34)% (1.87)%
Non-Standardized Return ........... (2.14)% (2.93)% (2.65)% (1.87)%
Five Years ended November 30, 1999:
Standardized Return* .............. 5.45% 5.15% 5.76% 6.62%
Non-Standardized Return ........... 6.30% 5.47% 5.76% 6.62%
Ten Years ended November 30, 1999
Standardized Return ............... 5.34% N/A N/A N/A
Non-Standardized Return ........... 5.78% N/A N/A N/A
Inception to November 30, 1999:
Standardized Return* .............. 7.16% 4.53% 3.36% 4.95%
Non-Standardized Return ........... 7.45% 4.53% 3.36% 4.95%

LOW DURATION FUND

CLASS CLASS A CLASS B CLASS C CLASS Y
(INCEPTION DATE) (05/03/93) (05/03/93) (05/03/93) (10/20/95)
---------------- ---------- ---------- ---------- ----------
Year ended November 30, 1999:
Standardized Return* .............. (0.92)% (2.18)% 0.18% 1.81%
Non-Standardized Return ........... 1.99% 0.71% 0.90% 1.81%
Five Years ended November 30, 1999:
Standardized Return* .............. 5.62% 5.30% 5.53% N/A
Non-Standardized Return ........... 6.26% 5.30% 5.53% N/A
Inception to November 30, 1999:
Standardized Return* .............. 3.79% 3.38% 3.62% 5.47%
Non-Standardized Return ........... 4.29% 3.38% 3.62% 5.47%

INVESTMENT GRADE INCOME FUND

CLASS CLASS A CLASS B CLASS C CLASS Y
(INCEPTION DATE) (08/31/84) (07/01/91) (07/02/92) (02/20/98)
---------------- ---------- ---------- ---------- ----------
Year ended November 30, 1999:
Standardized Return* .............. (5.56)% (7.07)% (2.89)% (1.43)%
Non-Standardized Return ........... (1.62)% (2.46)% (2.20)% (1.43)%
Five Years ended November 30, 1999:
Standardized Return* .............. 6.91% 6.64% 7.23% N/A
Non-Standardized Return ........... 7.78% 6.95% 7.23% N/A
Ten Years ended November 30, 1999
Standardized Return ............... 7.38% N/A N/A N/A
Non-Standardized Return ........... 7.82% N/A N/A N/A
Inception to November 30, 1999:
Standardized Return* .............. 8.80% 7.02% 5.95% 1.14%
Non-Standardized Return. .......... 9.09% 7.02% 5.95% 1.14%

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<PAGE>

HIGH INCOME FUND

CLASS CLASS A CLASS B CLASS C CLASS Y
(INCEPTION DATE) (08/31/84) (07/01/91) (07/02/92) (02/20/98)
---------------- ---------- ---------- ---------- ----------
Year ended November 30, 1999:
Standardized Return* .............. (1.71)% (2.97)% 1.06% 2.68%
Non-Standardized Return ........... 2.42% 1.63% 1.75% 2.68%
Five Years ended November 30, 1999:
Standardized Return* .............. 6.27% 6.04% 6.58% N/A
Non-Standardized Return ........... 7.15% 6.31% 6.58% N/A
Ten Years ended November 30, 1999:
Standardized Return ............... 9.37% N/A N/A N/A
Non-Standardized Return ........... 9.81% N/A N/A N/A
Inception to November 30, 1999:
Standardized Return* .............. 9.24% 9.07% 6.52% (3.41)%
Non-Standardized Return ........... 9.53% 9.07% 6.52% (3.41)%

STRATEGIC INCOME FUND

CLASS CLASS A CLASS B CLASS C CLASS Y
(INCEPTION DATE) (02/07/94) (02/07/94) (02/07/94) (02/17/98)
---------------- ---------- ---------- ---------- ----------
Year ended November 30, 1999:
Standardized Return* .............. (2.52)% (3.94)% 0.32% 1.91%
Non-Standardized Return ........... 1.56% 0.76% 1.03% 1.91%
Five Years ended November 30, 1999:
Standardized Return* .............. 7.08% 6.85% 7.42% N/A
Non-Standardized Return ........... 7.96% 7.15% 7.42% N/A
Inception to November 30, 1999:
Standardized Return* .............. 4.48% 4.31% 4.69% 0.48%
Non-Standardized Return ........... 5.22% 4.43% 4.69% 0.48%
</TABLE>

- --------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.0% (3.0% for Low Duration 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
contingent deferred sales charge; therefore, the performance information is
the same for both standardized return and non-standardized return for the
periods indicated.

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 semi-annual compounding) of the maximum offering price per
share (in the case of Class A shares) or the net asset value per share (in the
case of Class B and Class C shares) at the end of the Period. Yield quotations
are calculated according to the following formula:

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

where: a = interest earned during the Period attributable to a class of
shares
b = expenses accrued for the Period attributable to a class of
shares (net of reimbursements)
c = the average daily number of shares of a class outstanding
during the Period that were

55
<PAGE>

entitled to
receive dividends
d = the maximum offering price per share (in the case of Class A
shares) or the net asset value per share (in the case of
Class B and Class C shares) on the last day of the Period.

Except as noted below, in determining interest 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 totaling 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 fund's current maximum 4.0% (3.0% for Low Duration 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, 1999:

<TABLE>
<CAPTION>
U.S. GOVERNMENT LOW DURATION INVESTMENT GRADE HIGH INCOME STRATEGIC INCOME
INCOME FUND FUND INCOME FUND FUND FUND
---------- ---- ---------- ---- ----
<S> <C> <C> <C> <C> <C>
Class A ............... 5.60% 4.75% 6.79% 12.11% 7.17%
Class B ............... 5.03% 4.05% 6.30% 11.85% 6.65%
Class C ............... 5.30% 4.26% 6.58% 12.13% 6.91%
Class Y ............... 6.16% 5.17% 7.38% 12.93% 7.73%
</TABLE>

OTHER INFORMATION. In Performance Advertisements, the funds may compare
their Standardized Return and/or their Non-Standardized Return with data
published by Lipper Inc. ("Lipper") for U.S. government funds (U.S. Government
Income Fund and Low Duration 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, CS First Boston High Yield Bond
Index, Merrill Lynch High Yield Indices, Lehman Bond Index, Lehman
Government/Corporate Bond Index, the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), the Dow Jones Industrial Average, and changes in the Consumer
Price Index as published by the U.S. Department of Commerce. These comparisons
also may include economic data and statistics published by the U.S. 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 these 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 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.

The funds 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 in
additional fund shares, any future income or capital appreciation of a 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 a fund investment would increase more quickly than if dividends or other
distributions had been paid in cash.

The funds may also compare their performance with the performance of
bank certificates of deposit (CDs) as measured by the CDA Certificate of Deposit
Index, the Bank Rate Monitor National Index and the averages of yields of CDs of

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<PAGE>

major banks published by Banxquote-Registered Trademark- Money Markets. In
comparing the funds' performance to CD performance, investors should keep in
mind that bank CDs are insured in whole or in part by an agency of the U.S.
government and offer fixed principal and fixed or variable rates of interest,
and that bank CD yields may vary depending on the financial institution offering
the CD and prevailing interest rates. Shares of the funds are not insured or
guaranteed by the U.S. government and returns and net asset values will
fluctuate. The debt securities held by the funds generally have longer
maturities than most CDs and may reflect interest rate fluctuations for longer
term debt securities. An investment in any fund involves greater risks than an
investment in either a money market fund or a CD.

TAXES

BACKUP WITHHOLDING. Each fund is required to 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 or PaineWebber 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.

SALE OR EXCHANGE OF FUND SHARES. A shareholder's sale (redemption) of
fund shares may result in a taxable gain or loss, depending 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 any fund's shares for shares of another PaineWebber mutual fund
generally will have similar tax consequences. In addition, if a fund's shares
are bought within 30 days before or after selling other shares of the fund
(regardless of class) at a loss, all or a portion of that loss will not be
deductible and will increase the basis of the newly purchased shares.

SPECIAL RULE FOR CLASS A SHAREHOLDERS. A special tax rule applies when
a shareholder sells or exchanges Class A shares of a fund within 90 days of
purchase and subsequently acquires Class A shares of the same or another
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.

CONVERSON OF CLASS B SHARES. A shareholder will recognize no gain or
loss as a result of a conversion from Class B shares to Class A shares.

QUALIFICATION AS A REGULATED INVESTMENT COMPANY. Each fund intends to
continue to qualify for treatment as a regulated investment company ("RIC")
under the Internal Revenue Code. To so qualify, a 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 gains and 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 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, with these
other securities 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 that does not
represent more than 10% of the issuer's outstanding voting securities; 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.

By qualifying for treatment as a RIC, a fund (but not its shareholders)
will be relieved of federal income tax on the part of its investment company
taxable income and net capital gain (I.E., the excess of net long-term capital
gain over net short-term capital loss) that it distributes to its shareholders.
If any fund failed to qualify for treatment as a RIC for any taxable year, (1)
it would be taxed as an ordinary corporation on the full amount of its taxable
income for that year without being able to deduct the distributions it makes to
its shareholders and (2) the shareholders would treat all those distributions,
including distributions of net capital gain, as dividends (that is, ordinary
income) to the extent of the fund's earnings and profits. In addition, the fund
could be required to recognize unrealized gains, pay substantial taxes and
interest and make substantial distributions before requalifying for RIC
treatment.

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

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

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.

Dividends and interest received, and gains realized, by a fund on
foreign securities may be subject to income, withholding or other taxes imposed
by foreign countries and U.S. possessions (collectively "foreign taxes") that
would reduce the return on its securities. Tax conventions between certain
countries and the United States, however, may reduce or eliminate foreign taxes,
and many foreign countries do not impose taxes on capital gains in respect of
investments by foreign investors. If more than 50% of the value of Strategic
Income Fund's total assets at the close of its taxable year consists of
securities of foreign corporations, it will be eligible to, and may, file an
election with the Internal Revenue Service that would enable its shareholders,
in effect, to receive the benefit of the foreign tax credit with respect to any
foreign taxes it paid. Pursuant to the election, the fund would treat those
taxes as dividends paid to its shareholders and each shareholder (1) would be
required to include in gross income, and treat as paid by him or her, his or her
proportionate share of those taxes, (2) would be required to treat his or her
share of those taxes and of any dividend paid by the fund that represents income
from foreign or U.S. possessions sources as his or her own income from those
sources, and (3) could either deduct the foreign taxes deemed paid by him or her
in computing his or her taxable income or, alternatively, use the foregoing
information in calculating the foreign tax credit against his or her federal
income tax. If Strategic Income Fund makes this election, it will report to its
shareholders shortly after each taxable year their respective shares of foreign
taxes paid and the income from sources within, and taxes paid to, foreign
countries and U.S. possessions. Individuals who have no more than $300 ($600 for
married persons filing jointly) of creditable foreign taxes included on Forms
1099 and all of whose foreign source income is "qualified passive income" may
elect each year to be exempt from the extremely complicated foreign tax credit
limitation, in which event they would be able to claim a foreign tax credit
without having to file the detailed Form 1116 that otherwise is required.

Each fund may invest in the stock of "passive foreign investment
companies" ("PFICs") if that stock is a permissible investment. A PFIC is any
foreign corporation (with certain exceptions) that, in general, meets either of
the following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, a fund will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock of a PFIC or of any gain from disposition of that stock (collectively
"PFIC income"), plus interest thereon, even if the fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in the fund's investment company taxable income and,
accordingly, will not be taxable to it to the extent it distributes that income
to its shareholders.

If a fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the fund will be required to include in income each year
its pro rata share of the QEF's annual ordinary earnings and net capital
gain--which it may have to distribute to satisfy the Distribution Requirement
and avoid imposition of the Excise Tax--even if the QEF does not distribute
those earnings and gain to the fund. In most instances it will be very
difficult, if not impossible, to make this election because of certain of its
requirements.

Each fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
a fund's adjusted basis therein as of the end of that year. Pursuant to the
election, a fund also would be allowed to deduct (as an

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ordinary, not capital, loss) the excess, if any, of its adjusted basis in PFIC
stock over the fair market value thereof as of the taxable year-end, but only to
the extent of any net mark-to-market gains with respect to that stock included
by the fund for prior taxable years under the election (and under regulations
proposed in 1992 that provided a similar election with respect to the stock of
certain PFICs). A fund's adjusted basis in each PFIC's stock with respect to
which it has made this election will be adjusted to reflect the amounts of
income included and deductions taken thereunder.

The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts 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 be
treated as qualifying income under the Income Requirement.

Certain futures, foreign currency contracts and listed nonequity
options (such as those on a securities index) in which a fund may invest may be
subject to section 1256 of the Internal Revenue Code ("section 1256 contracts").
Any section 1256 contracts a fund holds at the end of each taxable year
generally must be "marked-to-market" (that is, treated as having been sold at
that time for their fair market value) for federal income tax purposes, which
the result that unrealized gains or losses will be treated as though they were
realized. Sixty percent of any net gain or loss recognized on these deemed
sales, and 60% of any net realized gain or loss from any actual sales of section
1256 contracts, will be treated as long-term capital gain or loss, and the
balance will be treated as short-term capital gain or loss. These rules may
operate to increase the amount that a fund must distribute to satisfy the
Distribution Requirement (I.E., with respect to the portion treated as
short-term capital gain), which will be taxable to its shareholders as ordinary
income, and to increase the net capital gain a fund recognizes, without in
either case increasing the cash available to the fund. A fund may elect not to
have the foregoing rules apply to any "mixed straddle" (that is, a straddle,
clearly identified by the fund in accordance with applicable regulations, at
least one (but not all) the positions of which are section 1256 contracts),
although doing so may have the effect of increasing the relative proportion of
net short-term capital gain (taxable as ordinary income) and thus increasing the
amount of dividends that must be distributed.

Offsetting positions in any actively traded security, option, futures
or forward currency contract entered into or held by a fund may constitute a
"straddle" for federal income tax purposes. Straddles are subject to certain
rules that may affect the amount, character and timing of a fund's gains and
losses with respect to positions of the straddle by requiring, among other
things, that (1) loss realized on disposition of one position of a straddle be
deferred to the extent of any unrealized gain in an offsetting position until
the latter position is disposed of, (2) the fund's holding period in certain
straddle positions not begin until the straddle is terminated (possibly
resulting in gain being treated as short-term rather than long-term capital
gain) and (3) losses recognized with respect to certain straddle positions, that
otherwise would constitute short-term capital losses, be treated as long-term
capital losses. Applicable regulations also provide certain "wash sale" rules,
which apply to transactions where a position is sold at a loss and a new
offsetting position is acquired within a prescribed period, and "short sale"
rules applicable to straddles. Different elections are available to the funds,
which may mitigate the effects of the straddle rules, particularly with respect
to mixed straddles.

When a covered call option written (sold) by a fund expires, it will
realize a short-term capital gain equal to the amount of the premium it received
for writing the option. When a fund terminates its obligations under such an
option by entering into a closing transaction, it will realize a short-term
capital gain (or loss), depending on whether the cost of the closing transaction
is less (or more) than the premium it received when it wrote the option. When a
covered call option written by a fund is exercised, the fund will be treated as
having sold the underlying security, producing long-term or short-term capital
gain or loss, depending on the holding period of the underlying security and
whether the sum of the option price received on the exercise plus the premium it
received when it wrote the option is more or less than the basis of the
underlying security.

If a fund has an "appreciated financial position"--generally, an
interest (including an interest through an option, futures or forward currency
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 position, 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 a futures or forward
currency contract entered into by a fund or a related person with respect to the
same or substantially identical property. In addition, if the appreciated
financial position is itself a short sale or such a contract, acquisition of the
underlying property or substantially identical property will be deemed a
constructive sale. The foregoing will not apply, however, to a fund's
transaction during any taxable year that otherwise would be treated as a
constructive sale if the transaction is closed within 30 days after the end

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of that year and the fund holds the appreciated financial position unhedged for
60 days after that closing (I.E., at no time during that 60-day period is the
fund's risk of loss regarding that position reduced by reason of certain
specified transactions with respect to substantially identical or related
property, such as having an option to sell, being contractually obligated to
sell, making a short sale or granting an option to buy substantially identical
stock or securities).

A fund may acquire (1) zero coupon or other securities issued with OID
or (2) 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 that
accrues on those securities, and the amount of any principal increases on TIPS,
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, it might 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 would have to be made from the fund's
cash assets or from the proceeds of sales of portfolio securities, if necessary.
A fund might realize capital gains or losses from those sales, which would
increase or decrease its investment company taxable income and/or net capital
gain.

The foregoing is only a general summary of some of the important
federal tax considerations generally affecting the funds and their shareholders.
No attempt is made to present a complete explanation of the federal tax
treatment of the funds' activities, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors are urged
to consult their own tax advisers for more detailed information and for
information regarding any state, local or foreign taxes applicable to the funds
and to dividends and other distributions therefrom.

OTHER INFORMATION

MASSACHUSETTS BUSINESS TRUSTS. Each Trust is an entity of the type
commonly known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of a fund could, under certain circumstances, be held personally
liable for the obligations of the fund or its Trust. However, each Trust's
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Trust or the fund and requires that notice of such disclaimer be given in
each note, bond, contract, instrument, certificate or undertaking made or issued
by the board members or by any officers or officer by or on behalf of the Trust
or the 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 the fund itself would be unable to meet its obligations, a possibility
that Mitchell Hutchins believes is remote and not material. Upon payment of any
liability incurred by a shareholder solely by reason of being or having been a
shareholder, the shareholder paying such liability would be entitled to
reimbursement from the general assets of the relevant 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.

CLASSES OF SHARES. A share of each class of a fund represents an
identical interest in that 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 Class A, B, C and Y shares
will differ.

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 the board members of that Trust. 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 Rule 12b-1 Plan as it relates to the class. The shares of each
series of Managed Trust and Securities Trust will be voted separately, except
when an aggregate vote of all the series is required by law.

The funds do not hold annual meetings. Shareholders of record of no
less than two-thirds of the outstanding shares of a Trust may remove a board
member through a declaration in writing or by vote cast in person or by proxy at
a meeting called

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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 the outstanding shares of a
Trust.

CLASS-SPECIFIC EXPENSES. Each fund may determine to allocate certain of
its 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.

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

CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT. State
Street Bank and Trust Company, located at One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian and recordkeeping agent for each fund
and employs foreign sub-custodians approved by the respective boards in
accordance with applicable requirements under the Investment Company Act to
provide custody of the funds' foreign assets. PFPC Inc., a subsidiary of PNC
Bank, N.A., serves as each fund's transfer and dividend disbursing agent. It is
located at 400 Bellevue Parkway, Wilmington, DE 19809.

COMBINED PROSPECTUS. Although each fund is offering only its own
shares, it is possible that a fund might become liable for a misstatement in the
Prospectus about another fund. The board of each fund has considered this factor
in approving the use of a single, combined Prospectus.

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

AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York
10019, serves as independent auditors for U.S. Government Income Fund, Low
Duration Fund, Investment Grade Income Fund and High Income Fund.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as independent accountants for Strategic Income Fund.

FINANCIAL STATEMENTS

Each fund's Annual Report to Shareholders for its last fiscal year ended
November 30, 1999 is a separate document supplied with this SAI, and the
financial statements, accompanying notes and report of independent auditors or
independent accountants appearing therein are incorporated herein by this
reference.

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APPENDIX

RATINGS INFORMATION

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 risk 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 payment 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. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category, the modifier
2 indicates a mid-range ranking, and the modifier 3 indicates a ranking in the
lower end of that generic rating category.

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
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong; A. An obligation rated A is
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than obligations in higher rated categories. However, the
obligor's capacity to meet its financial commitment on the obligation is still
strong; BBB. An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation; 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 exposures to adverse conditions; BB. An
obligation rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation; B. An
obligation rated B is more vulnerable to nonpayment than obligations rated BB,
but the obligor currently has the capacity to meet its financial commitment on
the obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation; CCC. An obligation rated CCC is currently vulnerable to
nonpayment and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation; CC. An obligation rated CC is currently highly vulnerable to
nonpayment; C. 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 obligation are jeopardized.

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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.

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
commitments 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-2

<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

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

Statement of Additional Information

March 31, 2000

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

PAINEWEBBER

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERRED TO IN THE
PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION. THE FUND AND ITS
DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS
DIFFERENT. THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION ARE NOT
AN OFFER TO SELL SHARES OF THE FUND IN ANY JURISDICTION WHERE THE FUND OR ITS
DISTRIBUTOR MAY NOT LAWFULLY SELL THOSE SHARES.

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

<PAGE>

PART C. OTHER INFORMATION

Item 23. EXHIBITS

(1) (a) Amended and Restated Declaration of Trust (1)
(b) Amendment to Declaration of Trust effective April 8,
1998 (2)
(c) Amendment to Declaration of Trust effective July 9,
1998 (2)
(d) Amendment to Declaration of Trust effective August 19,
1998 (3)
(e) Amendment to Declaration of Trust effective June 22,
1999 (4)
(f) Amendment to Declaration of Trust effective July 28,
1999 (5)

(2) Restated By-Laws (1)

(3) Instruments defining the rights of holders of the Registrant's
shares of beneficial interest (6)

(4) (a) Investment Advisory and Administration Contract (1)
(b) Investment Advisory and Administration Contract with
respect to PaineWebber Tax-Managed Equity Fund and
PaineWebber Strategy Fund (3)
(c) Investment Advisory Fee Agreement with respect to
PaineWebber Utility Income Fund (1)
(d) Investment Advisory Fee Agreement with respect to
PaineWebber Low Duration U.S. Government Income Fund (1)
(e) Investment Advisory Fee Agreement with respect to
PaineWebber Asia Pacific Growth Fund (7)
(f) Investment Advisory Fee Agreement with respect to
PaineWebber Strategy Fund (5)
(g) Sub-Investment Advisory Contract with respect to
PaineWebber Low Duration U.S. Government Income Fund (8)
(h) Sub-Advisory Contract with respect to PaineWebber Asia
Pacific Growth Fund (6)

(5) (a) Distribution Contract with respect to Class A Shares (1)
(b) Distribution Contract with respect to Class B Shares (1)
(c) Distribution Contract with respect to Class C Shares (9)
(d) Distribution Contract with respect to Class Y Shares (9)
(e) Exclusive Dealer Agreement with respect to Class A
Shares (1)
(f) Exclusive Dealer Agreement with respect to Class B
Shares (1)
(g) Exclusive Dealer Agreement with respect to Class C
Shares (9)
(h) Exclusive Dealer Agreement with respect to Class Y
Shares (9)

(6) Bonus, profit sharing or pension plans - none

(7) Custodian Agreement (1)

(8) Transfer Agency Agreement (10)

(9) Opinion and consent of counsel (filed herewith)

(10) Other opinions, appraisals, rulings and consents: Auditor's
consent (filed herewith)

(11) Financial statements omitted from prospectus - none

C-1
<PAGE>

(12) Letter of investment intent (1)

(13) (a) Plan of Distribution pursuant to Rule 12b-1 with respect
to Class A Shares (3)
(b) Plan of Distribution pursuant to Rule 12b-1 with respect
to Class B Shares (3)
(c) Plan of Distribution pursuant to Rule 12b-1 with respect
to Class C Shares (3)
(d) Addendum to Class C Plan for PaineWebber Strategy
Fund (5)

(14) and

(27) Financial Data Schedule (not applicable)

(15) Plan pursuant to Rule 18f-3 (11)

(16) (a) Code of Ethics for Registrant, its investment adviser and
its principal distributor (filed herewith)
(b) Code of Ethics for Pacific Investment Management Company
(filed herewith)

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

(1) Incorporated by reference from Post-Effective Amendment No. 52 to the
registration statement, SEC File No. 2-91362, filed February 27, 1998.

(2) Incorporated by reference from Post-Effective Amendment No. 54 to the
registration statement, SEC File No. 2-91362, filed July 21, 1998.

(3) Incorporated by reference from Post-Effective Amendment No. 59 to the
registration statement, SEC File No. 2-91362, filed February 26, 1999.

(4) Incorporated by reference from Post-Effective Amendment No. 63 to the
registration statement, SEC File No. 2-91362, filed July 29, 1999.

(5) Incorporated by reference from Post-Effective Amendment No. 65 to the
registration statement, SEC File No. 2-91362, filed December 3, 1999.

(6) Incorporated by reference from Articles III, VIII, IX, X and XI of
Registrant's Amended and Restated Declaration of Trust and from
Articles II, VII and X of Registrant's Restated By-Laws.

(7) Incorporated by reference from Post Effective Amendment No. 50 to the
registration statement, SEC File No. 2-91362, filed July 7, 1997.

(8) Incorporated by reference from Post-Effective Amendment No. 37 to the
registration statement, SEC File No. 2-91362, filed March 31, 1995.

(9) Incorporated by reference from Post-Effective Amendment No. 39 to the
registration statement, SEC File No. 2-91362, filed February 14, 1996.

(10) Incorporated by reference from Post-Effective Amendment No. 53 to the
registration statement, SEC File No. 2-91362, filed March 31, 1998.

(11) Incorporated by reference from Post-Effective Amendment No. 43 to the
registration statement, SEC File No. 2-91362, filed July 31, 1996.

C-2
<PAGE>

Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

None.

Item 25. INDEMNIFICATION

Section 2 of "Indemnification" in Article X of the Declaration of Trust
provides that the Registrant will indemnify its trustees and officers to the
fullest extent permitted by law against claims and expenses asserted against or
incurred by them by virtue of being or having been a trustee or officer;
provided that no such person shall be indemnified where there has been an
adjudication or other determination, as described in Article X, that such person
is liable to the Registrant or its shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office or did not act in good faith in the
reasonable belief that his or her action was in the best interest of the
Registrant. Section 2 of "Indemnification" in Article X also provides that the
Registrant may maintain insurance policies covering such rights of
indemnification.

Additionally, "Limitation of Liability" in Article X of the Declaration
of Trust provides that the trustees or officers of the Registrant shall not be
personally liable to any person extending credit to, contracting with, or having
a claim against, the Trust; and that, provided they have exercised reasonable
care and have acted under the reasonable belief that their actions are in the
best interest of the Registrant, the trustees and officers shall not be liable
for neglect or wrongdoing by them or any officer, agent, employee or investment
adviser of the Registrant.

Section 2 of Article XI of the Declaration of Trust additionally
provides that, subject to the provisions of Section 1 of Article XI and to
Article X, the trustees shall not be liable for errors of judgment or mistakes
of fact or law, or for any act or omission in accordance with advice of counsel
or other experts, or failing to follow such advice, with respect to the meaning
and operation of the Declaration of Trust.

Article XI of the By-Laws provides that the Registrant may purchase and
maintain insurance on behalf of any person who is or was a trustee, officer or
employee of the Trust, or is or was serving at the request of the Trust as a
trustee, officer or employee of a corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against him or her and
incurred by him or her in any such capacity or arising out of his or her status
as such, whether or not the Registrant would have the power to indemnify him or
her against such liability, provided that the Registrant may not acquire
insurance protecting any trustee or officer against liability to the Registrant
or its shareholders to which he or she would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his or her office.

Section 9 of each Investment Advisory and Administration Contract
("Advisory Contract") between Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins") and the Trust provides that Mitchell Hutchins shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Registrant in connection with the matters to which the Advisory Contract
relates, except for a loss resulting from willful misfeasance, bad faith, or
gross negligence of Mitchell Hutchins in the performance of its duties or from
its reckless disregard of its obligations and duties under the Advisory
Contract. The sub-advisory contracts with respect to PaineWebber Low Duration
U.S. Government Income Fund and PaineWebber Asia Pacific Growth Fund contain
similar provisions with respect to those sub-advisers. Section 10 of each
Advisory Contract provides that the trustees shall not be liable for any
obligations of the Trust under the Advisory Contract and that Mitchell Hutchins
shall look only to the assets and property of the Trust in settlement of such
right or claim and not to the assets and property of the trustees.

Section 9 of each Distribution Contract provides that the Trust will
indemnify Mitchell Hutchins and its officers, directors or controlling persons
against all liabilities arising from any alleged untrue statement of material
fact in the Registration Statement or from any alleged omission to state in the
Registration Statement a material fact required to be stated in it or necessary
to make the statements in it, in light of the circumstances under which they
were made, not misleading, except insofar as liability arises from untrue
statements or omissions made in reliance upon and in conformity with information
furnished by Mitchell Hutchins to the Trust for use in the Registration
Statement; and provided that this indemnity agreement shall not protect any such
persons against liabilities arising by reason of their bad faith, gross
negligence or willful misfeasance; and shall not inure to the benefit of any
such

C-3
<PAGE>

persons unless a court of competent jurisdiction or controlling precedent
determines that such result is not against public policy as expressed in the
Securities Act of 1933. Section 9 of each Distribution Contract also provides
that Mitchell Hutchins agrees to indemnify, defend and hold the Trust, its
officers and trustees free and harmless of any claims arising out of any alleged
untrue statement or any alleged omission of material fact contained in
information furnished by Mitchell Hutchins for use in the Registration Statement
or arising out of an agreement between Mitchell Hutchins and any retail dealer,
or arising out of supplementary literature or advertising used by Mitchell
Hutchins in connection with each Distribution Contract.

Section 9 of each Exclusive Dealer Agreement contains provisions
similar to Section 9 of each Distribution Contract, with respect to PaineWebber
Incorporated ("PaineWebber").

Section 10 of each Distribution Contract contains provisions similar to
that of the section of the Investment Advisory and Administration Contracts
limiting the liability of the Trust's trustees.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be provided to trustees, officers and controlling
persons of the Trust, pursuant to the foregoing provisions or otherwise, the
Trust has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Trust of expenses
incurred or paid by a trustee, officer or controlling person of the Trust in
connection with the successful defense of any action, suit or proceeding or
payment pursuant to any insurance policy) is asserted against the Trust by such
trustee, officer or controlling person in connection with the securities being
registered, the Trust will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

Mitchell Hutchins, a Delaware corporation, is a registered investment
advisor and is a wholly owned subsidiary of PaineWebber which is, in turn, a
wholly owned subsidiary of Paine Webber Group Inc. Mitchell Hutchins is
primarily engaged in the investment advisory business. Information as to the
officers and directors of Mitchell Hutchins is included in its Form ADV, as
filed with the Securities and Exchange Commission (registration number
801-13219), and is incorporated herein by reference.

Pacific Investment Management Company ("PIMCO") serves as sub-adviser
for PaineWebber Low Duration U.S. Government Income Fund. PIMCO is primarily
engaged in the investment advisory business. Information as to the officers and
managing directors and partners of PIMCO is included in its Form ADV, as filed
with the Securities and Exchange Commission (registration number 801-48187) and
is incorporated herein by reference.

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 Holding L.P., a
publicly traded company listed on the New York Stock Exchange under the symbol
"PA" and PIMCO Partners, G.P., a a general partnership between Pacific Life
Insurance Company and PIMCO Partners, LLC., a limited liability company
controlled by the PIMCO managing directors. On October 31, 1999, PIMCO Advisors,
PAH and Allianz AG ("Allianz") announced that they had reached a definitive
agreement pursuant to which Allianz will acquire majority ownership of PIMCO
Advisors and its subsidiaries, including PIMCO (the "Allianz Transaction").
Under the terms of the transaction, Allianz will acquire all of PAH, the
publicly traded general partner of PIMCO Advisors. Pacific Life Insurance
Company will retain an approximate 30% interest in PIMCO Advisors. The Allianz
Transaction is currently expected to be completed by the end of the second
quarter of 2000.

Schroder Investment Management North America Inc., a New York
corporation, is the investment sub-adviser for PaineWebber Asia Pacific Growth
Fund. Schroder Investment Management is a registered investment adviser and is

C-4
<PAGE>

primarily engaged in the investment advisory business. Schroder Investment
Management is a wholly owned indirect subsidiary of Schroders plc, the London
Stock Exchange listed holding company parent of a large worldwide group of banks
and financial services companies (referred to as the "Schroder Group") with
associated companies and branch and representative offices located worldwide.
Information regarding the officers and directors of Schroder Investment
Management is included in its Form ADV, as filed with the Securities and
Exchange Commission (registration number 801-15834) and is incorporated herein
by reference.

Item 27. PRINCIPAL UNDERWRITERS

(a) Mitchell Hutchins serves as principal underwriter and/or investment
adviser for the following other investment companies:

ALL-AMERICAN TERM TRUST INC.
GLOBAL HIGH INCOME DOLLAR FUND INC.
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
MANAGED HIGH YIELD FUND INC.
MANAGED HIGH YIELD PLUS FUND INC.
MITCHELL HUTCHINS LIR MONEY SERIES
MITCHELL HUTCHINS PORTFOLIOS
MITCHELL HUTCHINS SECURITIES TRUST
MITCHELL HUTCHINS SERIES TRUST
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INDEX TRUST
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER MASTER SERIES, INC.
PAINEWEBBER MUNICIPAL SERIES
PAINEWEBBER MUTUAL FUND TRUST
PAINEWEBBER OLYMPUS FUND
PAINEWEBBER SECURITIES TRUST
STRATEGIC GLOBAL INCOME FUND, INC.
2002 TARGET TERM TRUST INC.

(b) Mitchell Hutchins is the principal underwriter for the Registrant.
PaineWebber acts as exclusive dealer for the shares of the Registrant. The
directors and officers of Mitchell Hutchins, their principal business addresses
and their positions and offices with Mitchell Hutchins are identified in its
Form ADV, as filed with the Securities and Exchange Commission (registration
number 801-13219). The directors and officers of PaineWebber, their principal
business addresses and their positions and offices with PaineWebber are
identified in its Form ADV, as filed with the Securities and Exchange Commission
(registration number 801-7163). The foregoing information is hereby incorporated
by reference. The information set forth below is furnished for those directors
and officers of Mitchell Hutchins or PaineWebber who also serve as trustees or
officers of the Registrant.

C-5
<PAGE>

<TABLE>
<CAPTION>
Position and Offices with
Name Position With Registrant Underwriter or Exclusive Dealer
- ---- ------------------------ -------------------------------
<S> <C> <C>
Margo N. Alexander* Trustee and President Chairman, Chief Executive Officer and a Director
of Mitchell Hutchins and an Executive Vice
President and Director of PaineWebber

Brian M. Storms* Trustee President and Chief Operating Officer of Mitchell
Hutchins

T. Kirkham Barneby* Vice President Managing Director and Chief Investment Officer
- Quantitative Investments of Mitchell Hutchins

Julieanna Berry* Vice President First Vice President and a Portfolio Manager of
Mitchell Hutchins

Tom Disbrow** Vice President and Assistant First Vice President and a Senior Manager of the
Treasurer Mutual Fund Finance Department of Mitchell Hutchins

James F. Keegan* Vice President Senior Vice President and a Portfolio Manager of
Mitchell Hutchins

John J. Lee** Vice President and Assistant Vice President and a Manager of the Mutual Fund
Treasurer Finance Department of Mitchell Hutchins

Kevin J. Mahoney** Vice President and Assistant First Vice President and a Senior Manager of the
Treasurer Mutual Fund Finance Department of Mitchell
Hutchins

Dennis McCauley* Vice President Managing Director and Chief Investment Officer
- Fixed Income of Mitchell Hutchins

Ann E. Moran** Vice President and Assistant Vice President and a Manager of the Mutual Fund
Treasurer Finance Department of Mitchell Hutchins

Dianne E. O'Donnell** Vice President and Secretary Senior Vice President and Deputy General
Counsel of Mitchell Hutchins

Emil Polito* Vice President Senior Vice President and Director of Operations
and Control for Mitchell Hutchins

Victoria E. Schonfeld** Vice President Managing Director and General Counsel of
Mitchell Hutchins and a Senior Vice President of
PaineWebber

Paul H. Schubert** Vice President and Treasurer Senior Vice President and Director of the Mutual
Fund Finance Department of Mitchell Hutchins

Nirmal Singh* Vice President Senior Vice President and a Portfolio Manager of
Mitchell Hutchins

Barney A. Taglialatela** Vice President and Assistant Vice President and a Manager of the Mutual Fund
Treasurer Finance Department of Mitchell Hutchins

Mark A. Tincher* Vice President Managing Director and Chief Investment Officer
- Equities of Mitchell Hutchins

Keith A. Weller** Vice President and Assistant First Vice President and Associate General
Secretary Counsel of Mitchell Hutchins
</TABLE>

- ---------

* The business address of this person is 51 West 52nd Street, New York,
New York 10019-6114.
** The business address of this person is 1285 Avenue of the Americas, New
York, New York 10019.

C-6
<PAGE>

Item 28. LOCATION OF ACCOUNTS AND RECORDS

The books and other documents required by paragraphs (b)(4), (c) and
(d) of Rule 31a-1 under the Investment Company Act of 1940 are maintained in the
physical possession of Mitchell Hutchins, 1285 Avenue of the Americas, New York,
New York 10019 and Mitchell Hutchins, 51 West 52nd Street, New York, New York
10019-6114. All other accounts, books and documents required by Rule 31a-1 are
maintained in the physical possession of Registrant's transfer agent and
custodian.

Item 29. MANAGEMENT SERVICES

Not applicable.

Item 30. UNDERTAKINGS

None.

C-7
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all the requirements
for effectiveness of this Post-Effective Amendment to its Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Post-Effective Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York and State of New York, on the
30th day of March, 2000.

PAINEWEBBER MANAGED INVESTMENTS TRUST

By: /s/ Dianne E. O'Donnell
------------------------------
Dianne E. O'Donnell
Vice President and Secretary

Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment has been signed below by the following persons in the capacities and
on the dates indicated:

<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Margo N. Alexander President and Trustee March 30, 2000
- -----------------------------
Margo N. Alexander * (Chief Executive Officer)

/s/ E. Garrett Bewkes, Jr. Trustee and Chairman March 30, 2000
- -----------------------------
E. Garrett Bewkes, Jr. * of the Board of Trustees

/s/ Richard Q. Armstrong Trustee March 30, 2000
- -----------------------------
Richard Q. Armstrong *

/s/ Richard R. Burt Trustee March 30, 2000
- -----------------------------
Richard R. Burt *

/s/ Meyer Feldberg Trustee March 30, 2000
- -----------------------------
Meyer Feldberg *

/s/ George W. Gowen Trustee March 30, 2000
- -----------------------------
George W. Gowen *

/s/ Frederic V. Malek Trustee March 30, 2000
- -----------------------------
Frederic V. Malek *

/s/ Carl W. Schafer Trustee March 30, 2000
- -----------------------------
Carl W. Schafer *

/s/ Brian M. Storms Trustee March 30, 2000
- -----------------------------
Brian M. Storms **

/s/ Paul H. Schubert Vice President and Treasurer (Chief March 30, 2000
- ----------------------------- Financial and Accounting Officer)
Paul H. Schubert
</TABLE>

<PAGE>

SIGNATURES (CONTINUED)

* Signature affixed by Elinor W. Gammon pursuant to powers of attorney
dated May 21, 1996 and incorporated by reference from Post-Effective
Amendment No. 30 to the registration statement of PaineWebber Managed
Municipal Trust, SEC File 2-89016, filed June 27, 1996.

** Signature affixed by Elinor W. Gammon pursuant to power of attorney dated
May 14, 1999 and incorporated by reference from Post-Effective Amendment
No. 61 to the registration statement of PaineWebber Managed Investments
Trust, SEC File 2-91362, filed June 1, 1999.

<PAGE>

PAINEWEBBER MANAGED INVESTMENTS TRUST

EXHIBIT INDEX

Exhibit
Number
- ------

(2) Restated By-Laws (1)

(3) Instruments defining the rights of holders of the Registrant's
shares of beneficial interest (6)

(6) Bonus, profit sharing or pension plans - none

(7) Custodian Agreement (1)

(8) Transfer Agency Agreement (10)

<PAGE>

(9) Opinion and consent of counsel (filed herewith)

(10) Other opinions, appraisals, rulings and consents: Auditor's
consent (filed herewith)

(11) Financial statements omitted from prospectus - none

(12) Letter of investment intent (1)

(13) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class A Shares (3)
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class B Shares (3)
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class C Shares (3)
(d) Addendum to Class C Plan for PaineWebber Strategy Fund (5)

(14) and

(27) Financial Data Schedule (not applicable)

(15) Plan pursuant to Rule 18f-3 (11)

(16) (a) Code of Ethics for Registrant, its investment adviser and
its principal distributor (filed herewith)

(b) Code of Ethics for Pacific Investment Management Company
(filed herewith)

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