PAINEWEBBER MUTUAL FUND TRUST, 485APOS, 1996-04-25

PAINEWEBBER MUTUAL FUND TRUST
485APOS, 1996-04-25

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<PAGE>

As filed with the Securities and Exchange Commission on April 25, 1996
1933 Act Registration No. 2-98149
1940 Act Registration No. 811-4312

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/

Pre-Effective Amendment No.____ / /
Post-Effective Amendment No. 20 /X/

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/

Amendment No. 21

PAINEWEBBER MUTUAL FUND TRUST
(Exact name of registrant as specified in charter)

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

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

GREGORY K. TODD, 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.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Second Floor
Washington, D.C. 20036-1800
Telephone: (202) 778-9000

It is proposed that this filing will become effective:

/ / Immediately upon filing pursuant to Rule 485(b)
/ / On pursuant to Rule 485(b)

/ / 60 days after filing pursuant to Rule 485(a) (i)
/X/ On July 1, 1996 pursuant to Rule 485(a) (i)
/ / 75 days after filing pursuant to Rule 485(a)(ii)
/ / On pursuant to Rule 485(a)(ii)

Registrant has filed a declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940 and has filed the notice required by such Rule
for its most recent fiscal year on April 25, 1996.

<PAGE>

PaineWebber Mutual Fund Trust

Contents of Registration Statement

This registration statement consists of the following papers and documents:

Cover Sheet

Table of Contents

Cross Reference Sheet

Class A, B and C Shares of:

PaineWebber California Tax-Free Income Fund
PaineWebber National Tax-Free Income Fund
Part A - Prospectus
Part B - Statement of Additional Information

Class Y Shares of:

PaineWebber California Tax-Free Income Fund
PaineWebber National Tax-Free Income Fund
Part A - Prospectus
Part B - Statement of Additional Information

Part C - Other Information

Signature Page

Exhibits

<PAGE>
PaineWebber California Tax-Free Income Fund
PaineWebber National Tax-Free Income Fund

Class A, B, and C Shares

Form N-1A Cross Reference Sheet

Part A Item No.
and Caption Prospectus Caption
----------- ------------------
<S> <C>
1. Cover Page..................................... Cover Page
2. Synopsis....................................... The Funds at a Glance; Expense
Table
3. Condensed Financial Information................ Financial Highlights;
Performance
4. General Description of Registrant.............. The Funds at a Glance; Investment
Objective & Policies; Investment
Philosophy & Process; The Funds'
Investments; General Information
5. Management of the Fund......................... Management; General Information
6. Capital Stock and Other Securities............. Cover Page; Flexible Pricing; Dividends and
Taxes; General Information
7. Purchase of Securities Being Offered........... Flexible Pricing; How to Buy Shares; Other
Services; Determining the Shares' Net Asset
Value
8. Redemption or Repurchase....................... How to Sell Shares; Other Services
9. Pending Legal
Proceedings.................................... Not Applicable

<CAPTION>
Part B Item No. Statement of Additional
and Caption Information Caption
----------- -------------------
<S> <C>
10. Cover Page..................................... Cover Page
11. Table of Contents.............................. Table of Contents
12. General Information and History................ Other Information
13. Investment Objective and Policies.............. Investment Policies and Restrictions; Hedging
and Related Income Strategies; Portfolio Transactions
14. Management of the Fund......................... Trustees and Officers;
15. Control Persons and Principal Holders of
Securities..................................... Trustees and Officers;
16. Investment Advisory and Other Services......... Investment Advisory and Distribution Arrangements;
Other Information
17. Brokerage Allocation........................... Portfolio Transactions
18. Capital Stock and Other Securities............. Conversion of Class B Shares; Other Information
19. Purchase, Redemption and Pricing of Securities Reduced Sales Charges, Additional Exchange and
Being Offered.................................. Redemption Information and Other Services;
Valuation of Shares

20. Tax Status..................................... Taxes
21. Underwriters................................... Investment Advisory and Distribution Arrangements
22. Calculation of Performance Data................ Performance Information

<PAGE>

23. Financial Statements........................... Financial Statements
</TABLE>

<PAGE>

PaineWebber California Tax-Free Income Fund
PaineWebber National Tax-Free Income Fund

Class Y Shares

Form N-1A Cross Reference Sheet

<TABLE>
<CAPTION>
Part A Item No. And Caption Prospectus Caption
--------------------------- ------------------
<S> <C>
1. Cover page ............................................. Cover page
2. Synopsis ............................................... The Funds at a Glance; Expense Table
3. Condensed Financial Information ........................ Financial Highlights; Performance
4. General Description of Registrant ...................... The Funds at a Glance; Investment Objective and
Policies; Investment Philosophy & Process; The
Funds' Investments; General Information
5. Management of the Fund ................................. Management; General Information
6. Capital Stock and Other Securities ..................... Cover Page; Flexible Pricing; Dividends and
Taxes; General Information
7. Purchase of Securities Being Offered ................... Flexible Pricing; How to Buy Shares; Other
Services; Determining the Shares' Net Asset Value
8. Redemption or Repurchase ............................... How to Sell Shares; Other Services
9. Pending Legal Proceedings .............................. Not Applicable

13. Investment Objectives and Policies .................... Investment Policies and Restrictions; Hedging
and Related Income Strategies; Portfolio Transactions
14. Management of the Fund ..... Trustees and Officers
15. Control Persons and Principal Holders of Securities ... Trustees and Officers
16. Investment Advisory and Other Services ................ Investment Advisory and Distribution
Arrangements; Other Information
17. Brokerage Allocation .................................. Portfolio Transactions
18. Capital Stock and Other Securities .................... Other Information

19. Purchase, Redemption and Pricing of Securities Being
Offered ............................................... Valuation of Shares
20. Tax Status ............................................ Taxes

<PAGE>
21. Underwriters .......................................... Investment Advisory and Distribution Arrangements
22. Calculation of Performance Data ....................... Performance Information

23. Financial Statements .................................. Financial Statements
</TABLE>

Part C

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

<PAGE>

1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
PROSPECTUS -- JULY 1, 1996

The PaineWebber Tax-Free Bond Funds covered in this prospectus are designed
for investors seeking high current income exempt from federal income tax and,
in some cases, certain state income taxes. PaineWebber California Tax-Free
Income Fund invests primarily in investment grade securities issued by the
State of California, its municipalities and public authorities. PaineWebber
National Tax-Free Income Fund invests primarily in investment grade securities
issued by various states, municipalities and public authorities. PaineWebber
Municipal High Income Fund invests primarily in high yield, high risk medium
and lower grade securities issued by various states, municipalities and public
authorities. PaineWebber New York Tax-Free Income Fund invests primarily in
investment grade securities issued by the State of New York, its
municipalities and public authorities.

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

A Statement of Additional Information dated July 1, 1996 has been filed with
the Securities and Exchange Commission and is legally part of this Prospectus.
The Statement of Additional Information can be obtained without charge, and
further inquiries can be made, by contacting an individual Fund, your
investment executive at PaineWebber or one of its correspondent firms or by
calling toll-free 1-800-647-1568.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY
SUCH COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

PaineWebber Municipal High Income Fund invests predominantly in lower
rated municipal obligations, commonly referred to as municipal 'junk
bonds.' Municipal obligations of this type are considered to be
speculative with respect to the payment of interest and return of
principal. Purchasers should carefully assess the risks
associated with an investment in this Fund.

--------------------
Prospectus Page 1

<PAGE>

- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
THE FUNDS AT A GLANCE
- --------------------------------------------------------------------------------

CALIFORNIA TAX-FREE INCOME FUND

GOAL: To provide you with superior current income on your investment that is
exempt from federal income tax and California personal income tax, consistent
with the Fund's quality standards for preservation of capital and liquidity.

INVESTMENT OBJECTIVE: High current income exempt from federal income tax and
California personal income tax.

RISKS: The Fund's net asset value fluctuates with movements in interest rates
and, during periods of market uncertainty, the values of municipal securities
can become volatile. Certain investment grade municipal securities in which the
Fund may invest have speculative characteristics. The Fund's ability to invest
more than 25% of its total assets in municipal securities, the interest on which
is paid from similar types of projects, may increase the risk of investing in
the Fund. The concentration of the Fund's investments in securities issued by
the State of California, its municipalities and public authorities may subject
the Fund to greater risk than a fund that has a broader range of investments.
The State of California and many of its agencies and local governments have been
experiencing, and continue to experience, significant financial difficulties,
and the credit standings of California and of certain local governments have
been, and could be further, reduced.

SIZE: On , 1996, the Fund had over $ million in assets.

NATIONAL TAX-FREE INCOME FUND

GOAL: To provide you with superior current income on your investment that is

exempt from federal income tax, consistent with the Fund's quality standards for
preservation of capital and liquidity.

INVESTMENT OBJECTIVE: High current income exempt from federal income tax.

SIZE: On , 1996, the Fund had over $ million in assets.

MUNICIPAL HIGH INCOME FUND

GOAL: To provide you with superior current income on your investment that is
exempt from federal income tax by investing primarily in high yield, high risk
medium and lower grade securities.

INVESTMENT OBJECTIVE: High current income exempt from federal income tax.

RISKS: The Fund's net asset value fluctuates with movements in interest rates
and, during periods of market uncertainty, the value of municipal securities can
become volatile. The lower rated municipal securities in which the Fund may
invest are subject to greater risks of default and greater volatility than
higher rated securities. In addition, the market for lower rated municipal
securities may be thinner and less active than for higher rated securities. The
Fund's ability to invest more than 25% of its total assets in municipal
securities, the interest on which is paid from similar types of projects, may
increase the risk of investing in the Fund.

SIZE: On , 1996, the Fund had over $ million in assets.

NEW YORK TAX-FREE INCOME FUND

GOAL: To provide you with superior current income on your investment that is
exempt from federal income tax and New York personal income tax, consistent with
the Fund's quality standards for preservation of capital and liquidity.

INVESTMENT OBJECTIVE: High current income exempt from federal income tax and New
York personal income tax.

--------------------
Prospectus Page 2

<PAGE>

- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
ability to invest more than 25% of its total assets in municipal securities, the
interest on which is paid from similar types of projects, may increase the risk
of investing in the Fund. The concentration of the Fund's investments in
securities issued by the State of New York, its municipalities and public
authorities may subject the Fund to greater risk than a fund that has a broader
range of investments. The State of New York and many of its agencies and local
governments have been experiencing, and continue to experience, significant
financial difficulties, and the credit standings of New York and of certain
local governments have been, and could be further, reduced.

SIZE: On , 1996, the Fund had over $ million in assets.

MANAGEMENT

National Tax-Free Income Fund, the Municipal High Income Fund, and the New York
Tax-Free Income Fund (each a 'Fund' and, collectively, the 'Funds').

MINIMUM INVESTMENT

To open an account, investors need $1,000; to add to an account, investors need
only $100.

WHO SHOULD INVEST

CALIFORNIA TAX-FREE INCOME FUND is for investors who want high current income
through investment primarily in investment grade securities of varying
maturities issued by the State of California, its municipalities and public
authorities or by other issuers if such obligations pay interest that is exempt
from federal income tax and California personal income tax (collectively,
'California Obligations'). Accordingly, the Fund is designed for investors
seeking income that is exempt from those taxes.

NATIONAL TAX-FREE INCOME FUND is for investors who want high current income
through investment primarily in investment grade securities of varying
maturities issued by states, municipalities and public authorities or by other
issuers if such obligations pay interest that is exempt from federal income tax.
Accordingly, the Fund is designed for investors seeking income that is exempt
from federal income tax.

MUNICIPAL HIGH INCOME FUND is for investors who want high current income through
investment primarily in high yield, high risk medium and lower grade municipal
securities that pay interest that is exempt from federal income tax.
Accordingly, the Fund is designed for investors seeking high current income that
is exempt from federal income tax and who can assume the risks associated with
the types of securities in which the Fund invests.

NEW YORK TAX-FREE INCOME FUND is for investors who want high current income
through investment primarily in investment grade securities of varying
maturities issued by the State of New York, its municipalities and public
authorities or by other issuers if such obligations pay interest that is exempt
from federal income tax and New York State and City personal income taxes
(collectively, 'New York Obligations'). Accordingly, the Fund is designed for
investors seeking income that is exempt from those taxes.

These Funds are not intended to provide a complete or balanced investment
program, but one or more of them may be appropriate as a component of an
investor's overall portfolio. Some common reasons to invest in these Funds are
to finance a child's education, plan for retirement or diversify a portfolio.
The Funds are not suitable for tax-exempt institutions or qualified retirement
plans, because those investors cannot take advantage of the tax-exempt character
of the Funds' dividends. When selling shares, investors should be aware that
they may get more or less for their shares than they originally paid for them.

HOW TO PURCHASE SHARES OF THE FUNDS

Investors may select among these classes of shares:

CLASS A SHARES

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

CLASS B SHARES

The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class B shares. As a result, 100% of their purchase is immediately
invested. Class B shares have higher ongoing expenses than Class A shares.
Depending upon how long they own the shares, investors may have to pay a sales
charge when they sell Class B

--------------------
Prospectus Page 3

<PAGE>

- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND

MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
shares. This sales charge is called a 'contingent deferred sales charge' and
applies when investors sell their Class B shares within six years. After six
years, Class B shares convert to Class A shares, which have lower ongoing
expenses and no contingent deferred sales charge.

CLASS C SHARES

The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class C shares, but the ongoing expenses they pay for Class C
shares are higher than for Class A shares. A contingent deferred sales charge of
1% is charged on shares sold within one year of the purchase date. Class C
shares never convert to any other class of shares.

THE PAINEWEBBER FAMILY OF FUNDS

The PaineWebber Family of Funds consists of six broad categories, which are
presented here. Generally, investors seeking to maximize return must assume
greater risk. California Tax-Free Income Fund, National Tax-Free Income Fund,
Municipal High Income Fund and New York Tax-Free Income Fund are all in the
Tax-Free Bond category.

o Money Market Funds for income and stability by investing in high-quality,
short-term investments.

o Bond Funds for income by investing mainly in bonds.

o Tax-Free Bond Funds for income exempt from federal income taxes and, in some
cases, state and local income taxes, by investing in municipal bonds.

o Asset Allocation Funds for long-term growth and income by investing in stocks
and bonds.

o Growth Funds for long-term growth by investing mainly in stocks.

o Global Funds for long-term growth by investing mainly in foreign stocks or
high current income by investing mainly in global debt instruments.

--------------------
Prospectus Page 4

<PAGE>

- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
EXPENSE TABLE
- --------------------------------------------------------------------------------

The following tables are intended to assist investors in understanding the
expenses associated with investing in the Funds. Expenses shown below represent
those incurred for the most recent fiscal year.

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge on Purchases of Shares (as a % of offering price)..................... 4% None None
Sales Charge on Reinvested Dividends (as a % of offering price)............................ None None None
Maximum Contingent Deferred Sales Charge (as a % of redemption proceeds)................... None 5% 0.75%
Exchange Fee............................................................................... $5.00 $5.00 $5.00

ANNUAL FUND OPERATING EXPENSES (as a % of average net assets)
CALIFORNIA TAX-FREE INCOME FUND
Management Fees..........................................................................
12b-1 Fees...............................................................................
Other Expenses...........................................................................
Total Operating Expenses..............................................................
NATIONAL TAX-FREE INCOME FUND
Management Fees..........................................................................
12b-1 Fees...............................................................................
Other Expenses...........................................................................
Total Operating Expenses..............................................................
MUNICIPAL HIGH INCOME FUND
Management Fees..........................................................................
12b-1 Fees...............................................................................

Other Expenses...........................................................................
Total Operating Expenses..............................................................
NEW YORK TAX-FREE INCOME FUND
Management Fees..........................................................................
12b-1 Fees...............................................................................
Other Expenses...........................................................................
Total Operating Expenses..............................................................
</TABLE>

CLASS A SHARES: Sales charge waivers and a reduced sales charge purchase plan
are available. Purchases of $1 million or more are not subject to a sales
charge. However, if such shares are sold within one year after purchase, a
contingent deferred sales charge of 1% is imposed on the net asset value of the
shares at the time of purchase or sale, whichever is less.
CLASS B SHARES: Sales charge waivers are available. The maximum 5% contingent
deferred sales charge applies to sales of shares during the first year after
purchase. The charge generally declines by 1% annually, reaching zero after six
years.
CLASS C SHARES: If shares are sold within one year after purchase, a contingent
deferred sales charge of 0.75% is imposed on the net asset value of the shares
at the time of purchase or sale, whichever is less.

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

For more information, see 'Management' and 'Flexible Pricing(Service Mark).'

--------------------
Prospectus Page 5

<PAGE>

- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
EXPENSE TABLE
(Continued)
- --------------------------------------------------------------------------------

EXAMPLE OF EFFECT OF FUND EXPENSES

The following example should assist investors in understanding various costs and
expenses they would incur as shareholders of a Fund. The assumed 5% annual
return shown in the example is required by regulations of the Securities and
Exchange Commission ('SEC') applicable to all mutual funds. This example should
not be considered a representation of past or future expenses. Actual expenses
of a Fund may be more or less than those shown.

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

<TABLE>
<CAPTION>
EXAMPLE ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- --------------------------------- -------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
CALIFORNIA TAX-FREE INCOME FUND
Class A..........................
Class B (Assuming sale of all
shares at end of period).......
Class B (Assuming no sale of
shares)........................
Class C (Assuming sale of all
shares at end of period).......
Class C (Assuming no sale of
shares)........................
NATIONAL TAX-FREE INCOME FUND
Class A..........................
Class B (Assuming sale of all
shares at end of period).......
Class B (Assuming no sale of
shares)........................
Class C (Assuming sale of all
shares at end of period).......

Class C (Assuming no sale of
shares)........................
MUNICIPAL HIGH INCOME FUND
Class A..........................
Class B (Assuming sale of all
shares at end of period).......
Class B (Assuming no sale of
shares)........................
Class C (Assuming sale of all
shares at end of period).......
Class C (Assuming no sale of
shares)........................
NEW YORK TAX-FREE INCOME FUND
Class A..........................
Class B (Assuming sale of all
shares at end of period).......
Class B (Assuming no sale of
shares)........................
Class C (Assuming sale of all
shares at end of period).......
Class C (Assuming no sale of
shares)........................
</TABLE>

ASSUMPTIONS MADE IN THE EXAMPLE
o CLASS A SHARES: Deduction of the maximum 4% initial sales charge at the time
of purchase.
o CLASS B SHARES: Deduction of the maximum applicable contingent deferred
sales charge at the time of sale, which declines over a period of six years.
Ten-year figures assume that Class B shares convert to Class A shares at the
end of the sixth year.
o CLASS C SHARES: Deduction of a 0.75% contingent deferred sales charge for
sales of shares within one year of purchase.

--------------------
Prospectus Page 6

<PAGE>

- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

The following tables provide investors with data and ratios for one Class A,
Class B and Class C share of each Fund for each of the periods shown. This
information is supplemented by the financial statements and accompanying notes
appearing in the Funds' Annual Report to Shareholders for the fiscal year ended
February 29, 1996, which is incorporated by reference into the Statement of
Additional Information. The financial statements and notes, as well as the
financial information in the table below relating to each of the three fiscal
years in the period ended February 29, 1996, the fiscal period ended February
28, 1993 and each of the two fiscal years in the period ended November 30, 1992
(in the case of California Tax-Free Income Fund and National Tax-Free Income
Fund) and each of the five fiscal years in the period ended February 29, 1996
(in the case of Municipal High Income Fund and New York Tax-Free Income Fund)
have been audited by Ernst & Young LLP, independent auditors. Their report is
included in the Funds' Annual Report to Shareholders, which may be obtained
without charge. Further information about the Funds' performance is also
included in the Annual Report to Shareholders. The information appearing below
for periods prior to the years ended November 30, 1991 and February 29, 1992
also have been audited by Ernst & Young LLP, whose reports thereon were
unqualified.

<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
---------------------------------------------
CLASS A
---------------------------------------------
FOR THE FOR THE
YEARS THREE
ENDED MONTHS
, ENDED
---------------------
1996 1995 199 , 199
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period...........................................
--------- --------- --------- ----------
Net investment income.............................
Net realized and unrealized gains
(losses)from investment

transactions.....................................
--------- --------- --------- ----------
Total from investment operations..................
--------- --------- --------- ----------
Dividends from net investment
income...........................................
Distributions from net realized
gains from investment
transactions.....................................
--------- --------- --------- ----------
Total dividends and distributions to
shareholders.....................................
--------- --------- --------- ----------
Net asset value, end of period....................
--------- --------- --------- ----------
--------- --------- --------- ----------
Total investment return (1).......................
--------- --------- --------- ----------
--------- --------- --------- ----------
Ratios and Supplemental Data:
Net assets, end of period (000's)................
Ratios of expenses to average
net assets.....................................
Ratios of net investment income
to average net assets..........................
Portfolio turnover rate...........................

<CAPTION>
FOR THE YEARS ENDED ,
----------------------------------------------------------------------------
199 199 199 198 198 198 198
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...........................................
--------- --------- --------- --------- --------- --------- ---------
Net investment income.............................
Net realized and unrealized gains
(losses)from investment
transactions.....................................
--------- --------- --------- --------- --------- --------- ---------
Total from investment operations..................
--------- --------- --------- --------- --------- --------- ---------
Dividends from net investment
income...........................................
Distributions from net realized
gains from investment
transactions.....................................
--------- --------- --------- --------- --------- --------- ---------
Total dividends and distributions to
shareholders.....................................
--------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period....................
--------- --------- --------- --------- --------- --------- ---------

--------- --------- --------- --------- --------- --------- ---------
Total investment return (1).......................
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Ratios and Supplemental Data:
Net assets, end of period (000's)................
Ratios of expenses to average
net assets.....................................
Ratios of net investment income
to average net assets..........................
Portfolio turnover rate...........................
</TABLE>

- ------------------
* Annualized.

+ Commencement of offering of shares.

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

(2) Formerly Class D shares.

--------------------
Prospectus Page 7

<PAGE>

- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
--------------------------------------------------------------------------
CLASS B
--------------------------------------------------------------------------
FOR THE FOR THE
YEARS THREE FOR THE FOR THE PERIOD
ENDED MONTHS YEAR , 199 +
, ENDED ENDED TO
------------------- , , ,
1996 1995 199 199 199 199
-------- -------- -------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...........................................
-------- -------- -------- ------ ------ ------
Net investment income.............................
Net realized and unrealized gains
(losses) from investment
transactions.....................................
-------- -------- -------- ------ ------ ------
Total from investment operations..................
-------- -------- -------- ------ ------ ------
Dividends from net investment
income...........................................
Distributions from net realized
gains from investment
transactions.....................................
-------- -------- -------- ------ ------ ------
Total dividends and distributions to
shareholders.....................................
-------- -------- -------- ------ ------ ------
Net asset value, end of period....................
-------- -------- -------- ------ ------ ------
-------- -------- -------- ------ ------ ------
Total investment return (1).......................
-------- -------- -------- ------ ------ ------
-------- -------- -------- ------ ------ ------
Ratios and Supplemental Data:

Net assets, end of period (000's)................
Ratios of expenses to average
net assets.....................................
Ratios of net investment income
to average net assets..........................
Portfolio turnover rate...........................

<CAPTION>
CLASS
C(2)
----------------------------------------------------------------
FOR THE
YEARS FOR THE THREE FOR THE PERIOD
ENDED MONTHS , 199 +
, ENDED TO
------------------- , ,
1996 199 199 199 199
-------- -------- -------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...........................................
-------- -------- -------- ------ ------
Net investment income.............................
Net realized and unrealized gains
(losses) from investment
transactions.....................................
-------- -------- -------- ------ ------
Total from investment operations..................
-------- -------- -------- ------ ------
Dividends from net investment
income...........................................
Distributions from net realized
gains from investment
transactions.....................................
-------- -------- -------- ------ ------
Total dividends and distributions to
shareholders.....................................
-------- -------- -------- ------ ------
Net asset value, end of period....................
-------- -------- -------- ------ ------
-------- -------- -------- ------ ------
Total investment return (1).......................
-------- -------- -------- ------ ------
-------- -------- -------- ------ ------
Ratios and Supplemental Data:
Net assets, end of period (000's)................
Ratios of expenses to average
net assets.....................................
Ratios of net investment income
to average net assets..........................
Portfolio turnover rate...........................
</TABLE>

- ------------------
* Annualized.

+ Commencement of offering of shares.

(2) Formerly Class D shares.

--------------------
Prospectus Page 8

<PAGE>

- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
NATIONAL TAX-FREE INCOME FUND
--------------------------------------------------------------------------
CLASS A
--------------------------------------------------------------------------
FOR THE
THREE
FOR THE YEARS ENDED MONTHS
, ENDED FOR THE YEARS ENDED ,
------------------- ------------------------------
1996 199 199 , 199 199 199 199
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period..............
-------- -------- -------- -------- -------- -------- --------
Net investment income.............................
Net realized and unrealized gains
(losses) from investment
transactions.....................................
-------- -------- -------- -------- -------- -------- --------
Total from investment operations..................
-------- -------- -------- -------- -------- -------- --------
Dividends from net investment income..............
Distributions from net realized gains
from investment transactions.....................
-------- -------- -------- -------- -------- -------- --------
Total dividends and distributions to
shareholders.....................................
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of period....................
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Total investment return (1).......................
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Ratios and Supplemental Data:
Net assets, end of period (000's)................
Ratios of expenses to average
net assets.....................................
Ratios of net investment income

to average net assets..........................
Portfolio turnover rate...........................

<CAPTION>
198 198 198 198
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period..............
-------- -------- -------- --------
Net investment income.............................
Net realized and unrealized gains
(losses) from investment
transactions.....................................
-------- -------- -------- --------
Total from investment operations..................
-------- -------- -------- --------
Dividends from net investment income..............
Distributions from net realized gains
from investment transactions.....................
-------- -------- -------- --------
Total dividends and distributions to
shareholders.....................................
-------- -------- -------- --------
Net asset value, end of period....................
-------- -------- -------- --------
-------- -------- -------- --------
Total investment return (1).......................
-------- -------- -------- --------
-------- -------- -------- --------
Ratios and Supplemental Data:
Net assets, end of period (000's)................
Ratios of expenses to average
net assets.....................................
Ratios of net investment income
to average net assets..........................
Portfolio turnover rate...........................
</TABLE>

<TABLE>
<CAPTION>
NATIONAL TAX-FREE INCOME FUND
---------------------------------------------------------------------------
CLASS
CLASS B C(2)
----------------------------------------------------------------- -------
FOR THE
THREE FOR THE
FOR THE YEARS MONTHS YEAR FOR THE PERIOD
ENDED , ENDED ENDED , 1991+
---------------- TO ,
1996 199 199 , 199 , 199 199 1996
------- ------- ------- -------- -------- --------------- -------

<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period..............
------- ------- ------- -------- -------- ----- -------
Net investment income.............................
Net realized and unrealized gains
(losses) from investment
transactions.....................................
------- ------- ------- -------- -------- ----- -------
Total from investment operations..................
------- ------- ------- -------- -------- ----- -------
Dividends from net investment income..............
Distributions from net realized gains
from investment transactions.....................
------- ------- ------- -------- -------- ----- -------
Total dividends and distributions to
shareholders.....................................
------- ------- ------- -------- -------- ----- -------
Net asset value, end of period....................
------- ------- ------- -------- -------- ----- -------
------- ------- ------- -------- -------- ----- -------
Total investment return (1).......................
------- ------- ------- -------- -------- ----- -------
------- ------- ------- -------- -------- ----- -------
Ratios and Supplemental Data:
Net assets, end of period (000's)................
Ratios of expenses to average
net assets.....................................
Ratios of net investment income
to average net assets..........................
Portfolio turnover rate...........................

<CAPTION>
FOR THE
THREE FOR THE PERIOD
FOR THE YEARS MONTHS , 199 +
ENDED , ENDED TO
------------------ , ,
199 199 199 199
-------- -------- ------------ --------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period..............
-------- -------- ------------ -------
Net investment income.............................
Net realized and unrealized gains
(losses) from investment
transactions.....................................
-------- -------- ------------ -------
Total from investment operations..................
-------- -------- ------------ -------
Dividends from net investment income..............
Distributions from net realized gains
from investment transactions.....................
-------- -------- ------------ -------
Total dividends and distributions to

shareholders.....................................
-------- -------- ------------ -------
Net asset value, end of period....................
-------- -------- ------------ -------
-------- -------- ------------ -------
Total investment return (1).......................
-------- -------- ------------ -------
-------- -------- ------------ -------
Ratios and Supplemental Data:
Net assets, end of period (000's)................
Ratios of expenses to average
net assets.....................................
Ratios of net investment income
to average net assets..........................
Portfolio turnover rate...........................
</TABLE>

- ------------------
* Annualized.

+ Commencement of offering of shares.

(2) Formerly Class D shares.

--------------------
Prospectus Page 9

<PAGE>

- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------

FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
MUNICIPAL HIGH INCOME FUND
------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED
------------------------------------------------------------------------------------
, , ,
------------------------------- ------------ -------------------------------
1996 199 199 199 199 199 199 198
------- ------- ------- ------- ------------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................
------- ------- ------- ------- ------ ------- ------- -------
Net investment income..........
Net realized and unrealized
gains (losses) from investment
transactions..................
------- ------- ------- ------- ------ ------- ------- -------

Total from investment
operations....................
------- ------- ------- ------- ------ ------- ------- -------
Dividends from net investment
income........................
Distributions from net realized
gains from investment
transactions..................
------- ------- ------- ------- ------ ------- ------- -------

Total dividends and
distributions to
shareholders..................
------- ------- ------- ------- ------ ------- ------- -------
Net asset value, end of
period........................
------- ------- ------- ------- ------ ------- ------- -------
------- ------- ------- ------- ------ ------- ------- -------
Total investment return (1)....
------- ------- ------- ------- ------ ------- ------- -------
------- ------- ------- ------- ------ ------- ------- -------
Ratios and Supplemental Data:
Net assets, end of period
(000's).....................
Ratios of expenses to average
net assets..................

Ratios of net investment
income
to average net assets.......
Portfolio turnover rate........

<CAPTION>
FOR THE
PERIOD
,
+ TO
, 198
--------
<S> <C>
Net asset value, beginning of
period........................
Net investment income..........
Net realized and unrealized
gains (losses) from investment
transactions..................
--------
Total from investment
operations....................
--------
Dividends from net investment
income........................
Distributions from net realized
gains from investment
transactions..................
--------
Total dividends and
distributions to
shareholders..................
--------
Net asset value, end of
period........................
--------
--------
Total investment return (1)....
--------
--------
Ratios and Supplemental Data:
Net assets, end of period
(000's).....................
Ratios of expenses to average
net assets..................
Ratios of net investment
income
to average net assets.......
Portfolio turnover rate........
</TABLE>

<TABLE>

<CAPTION>
MUNICIPAL HIGH INCOME FUND
-------------------------------------------------------------------------------------------------
CLASS B CLASS C(2)
------------------------------------------------------------- -------------------------------
FOR THE
FOR THE PERIOD FOR THE
YEARS ENDED + YEARS ENDED
, TO ,
------------------------------- , -------------------
1996 199 199 199 199 1996 199 199
------- ------- ------- ------- ------------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................
------- ------- ------- ------- ------------- ------- ------- -------
Net investment income..........
Net realized and unrealized
gains
(losses) from investment
transactions..................
------- ------- ------- ------- ------------- ------- ------- -------
Total from investment
operations....................
------- ------- ------- ------- ------------- ------- ------- -------
Dividends from net investment
income........................
Distributions from net realized
gains from investment
transactions..................
------- ------- ------- ------- ------------- ------- ------- -------
Total dividends and
distributions to
shareholders..................
------- ------- ------- ------- ------------- ------- ------- -------
Net asset value, end of
period........................
------- ------- ------- ------- ------------- ------- ------- -------
------- ------- ------- ------- ------------- ------- ------- -------
Total investment return (1)....
------- ------- ------- ------- ------------- ------- ------- -------
------- ------- ------- ------- ------------- ------- ------- -------
Ratios and Supplemental Data:
Net assets, end of period
(000's).....................
Ratios of expenses to average
net assets..................
Ratios of net investment
income to average net assets.......
Portfolio turnover rate........

<CAPTION>
FOR THE
PERIOD

+
TO
,
199
-------------
<S> <C>
Net asset value, beginning of
period........................
-------------
Net investment income..........
Net realized and unrealized
gains
(losses) from investment
transactions..................
-------------
Total from investment
operations....................
-------------
Dividends from net investment
income........................
Distributions from net realized
gains from investment
transactions..................
-------------
Total dividends and
distributions to
shareholders..................
-------------
Net asset value, end of
period........................
-------------
-------------
Total investment return (1)....
-------------
-------------
Ratios and Supplemental Data:
Net assets, end of period
(000's).....................
Ratios of expenses to average
net assets..................
Ratios of net investment
income to average net
assets......................
Portfolio turnover rate........
</TABLE>

- ------------------
* Annualized.

+ Commencement of offering of shares.

(2) Formerly Class D shares.

--------------------
Prospectus Page 10

<PAGE>

- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
NEW YORK TAX-FREE INCOME FUND
-----------------------------------------------------------------------------------------------
CLASS A
-----------------------------------------------------------------------------------------------
FOR THE YEARS ENDED
----------------------------------------------------------------
, , , FOR THE PERIOD
----------------------------- ------------ ----------------- , 198 +
1996 199 199 199 199 199 199 TO , 198
------- ------- ------- ------- ------------ ------- ------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................
------- ------- ------- ------- ------ ------- ------- ------
Net investment income..........
Net realized and unrealized
gains (losses) from investment
transactions..................
------- ------- ------- ------- ------ ------- ------- ------
Total from investment
operations....................
------- ------- ------- ------- ------ ------- ------- ------
Dividends from net investment
income........................
Distributions from net realized
gains from investment
transactions..................
------- ------- ------- ------- ------ ------- ------- ------
Total dividends and
distributions to
shareholders..................
------- ------- ------- ------- ------ ------- ------- ------
Net asset value, end of
period........................
------- ------- ------- ------- ------ ------- ------- ------
------- ------- ------- ------- ------ ------- ------- ------
Total investment return (1)....
------- ------- ------- ------- ------ ------- ------- ------
------- ------- ------- ------- ------ ------- ------- ------

Ratios and Supplemental Data:
Net assets, end of period
(000's).....................
Ratios of expenses to average
net assets..................
Ratios of net investment
income to average
net assets..................
Portfolio turnover rate........
</TABLE>

<TABLE>
<CAPTION>
NEW YORK TAX-FREE INCOME FUND
-----------------------------------------------------------------------------------------------
CLASS B CLASS C(2)
------------------------------------------------------------ --------------------------------
FOR THE FOR THE
YEARS ENDED FOR THE PERIOD YEARS ENDED
, , 199 + ,
-------------------------------- TO , ----------------------
1996 199 199 199 199 1996 199 199
------- ------- ------- ------------ --------------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................
------- ------- ------- ------------ ------- ------- ------- ------------
Net investment income..........
Net realized and unrealized
gains (losses) from investment
transactions..................
------- ------- ------- ------------ ------- ------- ------- ------------
Total from investment
operations....................
------- ------- ------- ------------ ------- ------- ------- ------------
Dividends from net investment
income........................
Distributions from net realized
gains from investment
transactions..................
------- ------- ------- ------------ ------- ------- ------- ------------
Total dividends and
distributions to
shareholders..................
------- ------- ------- ------------ ------- ------- ------- ------------
Net asset value, end of
period........................
------- ------- -------
------- ------- ------- ------------ ------- ------- ------- ------------
------- ------------ ------- ------- ------------
Total investment return (1).... -------
------- ------- ------- ------------ ------- ------- ------- ------------

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

<CAPTION>
FOR THE PERIOD
, 199 +
TO ,
199
---------------
<S> <C>
Net asset value, beginning of
period........................
Net investment income..........
Net realized and unrealized
gains (losses) from investment
transactions..................
Total from investment
operations....................
Dividends from net investment
income........................
Distributions from net realized
gains from investment
transactions..................
Total dividends and
distributions to
shareholders..................
Net asset value, end of
period........................
Total investment return (1)....
Ratios and Supplemental Data:
Net assets, end of period
(000's).....................
Ratios of expenses to average
net assets..................
Ratios of net investment
income to average
net assets..................
Portfolio turnover rate........
</TABLE>

- ------------------
* Annualized.

+ Commencement of offering of shares.

(2) Formerly Class D shares.

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

<PAGE>

- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------

CALIFORNIA TAX-FREE INCOME FUND

The investment objective of California Tax-Free Income Fund is to provide high
current income exempt from federal income tax and California personal income
tax, consistent with the preservation of capital and liquidity within the Fund's
quality standards. The Fund seeks to invest 100% of its net assets in California
Obligations and, except under unusual market conditions, the Fund invests at
least 80% of its net assets in California Obligations that pay interest that is
not an item of tax preference for purposes of the federal alternative minimum
tax ('AMT exempt interest').

NATIONAL TAX-FREE INCOME FUND

The investment objective of National Tax-Free Income Fund is to provide high
current income exempt from federal income tax, consistent with the preservation
of capital and liquidity within the Fund's quality standards. The Fund seeks to
invest 100% of its net assets in municipal securities with varying maturities.
Except under unusual market conditions, the Fund invests at least 80% of its net
assets in municipal securities that pay AMT exempt interest.

MUNICIPAL HIGH INCOME FUND

The investment objective of Municipal High Income Fund is to provide high
current income exempt from federal income tax. Except under unusual market
conditions, the Fund invests at least 80% of its assets in municipal securities.
The Fund may invest without limit in municipal securities that pay interest that
is not AMT exempt interest and does so when Mitchell Hutchins believes that such
securities currently offer attractive yields relative to AMT exempt municipal
obligations with similar credit and market characteristics and risks.

NEW YORK TAX-FREE INCOME FUND

The investment objective of New York Tax-Free Income Fund is to provide high
current income exempt from federal income tax and from New York State and New
York City personal income taxes. The Fund seeks to invest 100% of its net assets
in New York Obligations and, except under unusual market conditions, invests at
least 80% of its net assets in New York Obligations that pay AMT exempt
interest.

* * * *

As with any mutual fund, there is no assurance that any of these Funds will
achieve its investment objective. Each Fund's net asset value fluctuates based
upon changes in the value of its portfolio securities.

--------------------
Prospectus Page 12

<PAGE>

- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY & PROCESS
- --------------------------------------------------------------------------------

In selecting municipal securities for the Funds that will provide investors with
high current income exempt from federal and/or state income tax, Mitchell
Hutchins relies on the expertise of its team of analysts and portfolio managers.
The Municipal Investment Team employs a 'top-down' approach to securities
selection, meaning emphasis is first placed on broad economic or technical
market analysis, then on individual security selection.

municipal and treasury securities, investment opportunities within the municipal
market, and state tax exemption. Finally, security selection is established by
performing an analysis of both credit quality and structure of individual
issues.

All aspects of the Team's investment process rely on solid research, which is
broken down into four types: economic, credit, quantitative and market. At
Mitchell Hutchins, there is a group of analysts that monitors these components
on a daily basis. This research provides the Municipal Investment Team with
increased information to assist it in effectively managing municipal portfolios.
The municipal bond market is a fragmented, inefficient market that offers
opportunities for active management. With the information garnered by extensive
research, active management may capitalize on these inefficiencies and
potentially increase portfolio value.

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

<PAGE>

- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
PERFORMANCE
- --------------------------------------------------------------------------------

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

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

<TABLE>
<S> <C>
CALIFORNIA TAX-FREE INCOME FUND As Class A shares commenced operations on September 16,
1985, the 1985 return represents the period from
September 16, 1985 through December 31, 1985. The
inception date of Class B shares was July 1, 1991; thus,
the 1991 return for Class B shares represents the period

(CHART) from July 1, 1991 through December 31, 1991. The
inception date of Class C shares was July 2, 1992; thus,
the 1992 return for Class C shares represents the period
from July 2, 1992 through December 31, 1992.
NATIONAL TAX-FREE INCOME FUND
As Class A shares commenced operations on December 3,
1984, the 1984 return represents the period from December
3, 1984 through December 31, 1984. The inception date of
Class B shares is July 1, 1991; thus, the 1991 return for
Class B shares represents the period from July 1, 1991
(CHART) through December 31, 1991. The inception date of Class C
shares was July 2, 1992; thus, the 1992 return for Class
C shares represents the period from July 2, 1992 through
December 31, 1992.
</TABLE>

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

<PAGE>

<TABLE>
<S> <C>
MUNICIPAL HIGH INCOME FUND
As Class A shares commenced operations on June 23, 1987,
the 1987 return represents the period from June 23, 1987
through December 31, 1987. The inception date of Class B
shares is July 1, 1991; thus, the 1991 return for Class B
shares represents the period from July 1, 1991 through
(CHART) December 31, 1991. The inception date of Class C shares
was July 2, 1992; thus, the 1992 return for Class C
shares represents the period from July 2, 1992 through
December 31, 1992.
NEW YORK TAX-FREE INCOME FUND
As Class A shares commenced operations on September 30,
1988, the 1988 return represents the period from
September 30, 1988 through December 31, 1988. The
inception date of Class B shares is July 1, 1991; thus,
the 1991 return for Class B shares represents the period
(CHART) from July 1, 1991 through December 31, 1991. The
inception date of Class C shares was July 2, 1992; thus,
the 1992 return for Class C shares represents the period
from July 2, 1992 through December 31, 1992.
</TABLE>

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

<PAGE>

<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
AVERAGE ANNUAL RETURNS
As of February 29, 1996
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
Inception Date........................................................ 9/16/85 7/1/91 7/2/92
<S> <C> <C> <C>
ONE YEAR
Without deducting maximum sales charges............................. % % %
After deducting maximum sales charges............................... % % %
FIVE YEARS
Without deducting maximum sales charges............................. % % %
After deducting maximum sales charges............................... % % %
TEN YEARS
Without deducting maximum sales charges............................. % % %
After deducting maximum sales charges............................... % % %

NATIONAL TAX-FREE INCOME FUND
AVERAGE ANNUAL RETURNS
As of February 29, 1996

<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Inception Date........................................................ 12/3/84 7/1/91 7/2/92
ONE YEAR
Without deducting maximum sales charges............................. % % %
After deducting maximum sales charges............................... % % %
FIVE YEARS
Without deducting maximum sales charges............................. % % %
After deducting maximum sales charges............................... % % %
TEN YEARS
Without deducting maximum sales charges............................. % % %
After deducting maximum sales charges............................... % % %

MUNICIPAL HIGH INCOME FUND
AVERAGE ANNUAL RETURNS
As of February 29, 1996
<CAPTION>

CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Inception Date........................................................ 6/23/87 7/2/91 7/2/92
ONE YEAR
Without deducting maximum sales charges............................. % % %
After deducting maximum sales charges............................... % % %
FIVE YEARS
Without deducting maximum sales charges............................. % % %
After deducting maximum sales charges............................... % % %
LIFE
Without deducting maximum sales charges............................. % % %
After deducting maximum sales charges............................... % % %

NEW YORK TAX-FREE INCOME FUND
AVERAGE ANNUAL RETURNS
As of February 29, 1996
<CAPTION>

CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Inception Date........................................................ 9/30/88 7/2/91 7/2/92
ONE YEAR
Without deducting maximum sales charges............................. % % %
After deducting maximum sales charges............................... % % %
FIVE YEARS
Without deducting maximum sales charges............................. % % %
After deducting maximum sales charges............................... % % %
LIFE
Without deducting maximum sales charges............................. % % %
After deducting maximum sales charges............................... % % %
</TABLE>

--------------------
Prospectus Page 16

<PAGE>

PERFORMANCE INFORMATION

The Funds perform a standardized computation of annualized total return and may
show this return in advertisements or promotional materials. Standardized return
shows the change in value of an investment in the Funds at a steady compound
annual rate of return. Actual year-by-year returns fluctuate and may be higher
or lower than standardized return. Standardized return for Class A shares of the
Funds reflects deduction of the Funds' maximum initial sales charge of 4% at the
time of purchase, and standardized return for the Class B and Class C shares of
the Funds reflects deduction of the applicable contingent deferred sales charge
imposed on the sale of shares held for the period. One-, five- and ten-year
periods will be shown, unless the Fund or class has been in existence for a
shorter period. If so, returns will be shown for the period since inception.
Total return calculations assume reinvestment of dividends and other
distributions.

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

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

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

<PAGE>

- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
THE FUNDS' INVESTMENTS
- --------------------------------------------------------------------------------

MUNICIPAL SECURITIES include, but are not limited to, municipal bonds, floating
rate and variable rate municipal obligations, inverse floaters (no more than 10%
of any Fund's total assets), participation interests in municipal bonds,
tax-exempt commercial paper, tender option bonds, short-term municipal notes,
industrial development bonds, municipal lease obligations and certificates of
participation therein, put bonds, stand-by commitments, and private activity
bonds ('PABs') (no more than 20% of any Fund's net assets, except for Municipal
High Income Fund's, may be invested in PABs). The principal municipal securities
in which the Funds invest are described in more detail in the Statement of
Additional Information.

RISKS

Under normal circumstances, each Fund invests primarily in municipal securities.
Following is a discussion of certain risks that may affect each Fund:

CREDIT QUALITY. Each Fund invests only in municipal securities that present
acceptable credit risks in the judgment of Mitchell Hutchins and, with the
exception of Municipal High Income Fund, that at the time of purchase are rated
at least Baa or MIG-2 by Moody's Investors Service, Inc. ('Moody's'), BBB or
SP-2 by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
('S&P'), have been assigned an equivalent rating by another nationally
recognized statistical rating organization ('NRSRO') or, if unrated, are
determined by Mitchell Hutchins to be of comparable quality. Moody's fourth
highest category (Baa) includes securities which, in its opinion, have
speculative features. 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 debt instruments.

Credit ratings attempt to evaluate the safety of principal and interest payments
and do not evaluate the volatility of the municipal security's value or its
liquidity and do not guarantee the performance of the issuer. The rating
agencies also may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial condition may be better
or worse than the rating indicates. There is a risk that rating agencies will
downgrade municipal securities. The Statement of Additional Information contains
further information about the Moody's and S&P ratings.

YIELD AND INTEREST RATES. The yield of a municipal security depends on a
variety of factors, including general municipal and fixed-income security market

conditions, the financial condition of the issuer, the size of the particular
offering, the maturity, credit quality and rating of the issue and expectations
regarding changes in tax rates. Generally, the longer the maturity of a
municipal security, the higher the rate of interest paid and the greater the
volatility. Further, if general market interest rates are increasing, the prices
of municipal obligations ordinarily will decrease and, if rates decrease, the
opposite generally will be true. During periods of market uncertainty, the
market values of municipal securities can become volatile. Each Fund may invest
in municipal securities with a broad range of maturities, based on Mitchell
Hutchins' judgment of current and future market conditions as well as other
factors, such as the Fund's liquidity needs. Accordingly, the average weighted
maturity of each Fund's portfolio may vary.

CHANGE IN LAWS. New federal, state and local laws, or changes in existing laws,
may adversely affect the tax-exempt status of interest on a Fund's portfolio
securities or of the exempt-interest dividends paid by a Fund, extend the time
for payment of principal or interest or otherwise constrain enforcement of such
obligations.

RELATED SECURITIES. Each Fund may invest more than 25% of its total assets in
municipal securities that are related in such a way that an economic, business
or political development or change affecting one such security also might affect
the other securities, such as securities the interest on which is paid from
revenues of similar types of projects. The Funds may be subject to greater risk
than other funds that do not follow this practice.

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

<PAGE>

In addition to these general risks, investments in each of the Funds are subject
to special risk considerations:

CALIFORNIA TAX-FREE INCOME FUND

RISKS OF CALIFORNIA OBLIGATIONS. California
Tax-Free Income Fund's investment concentration in California Obligations
involves greater risks than if it invested in the securities of a broader range
of issuers. The Fund's yield and net asset value per share can be affected by
political and economic developments within California, and by the financial
condition of California, its public authorities and political subdivisions.
California suffered a severe recession between 1990-1993, resulting in
significant revenue shortfalls for both the State and local government, and
increased social service expenses. Further, in the past California voters have
passed amendments to the California Constitution and other measures that limit
the taxing and spending authority of California governmental entities, and
future voter initiatives could result in adverse consequences affecting
California Obligations. A more detailed discussion of the risks of investing in
California Obligations is included in the Statement of Additional Information.

NEW YORK TAX-FREE INCOME FUND

RISKS OF NEW YORK OBLIGATIONS. New York
Tax-Free Income Fund's investment concentration in New York Obligations involves
greater risks than if it invested in the securities of a broader range of
issuers. The Fund's yield and net asset value per share can be affected by
political and economic developments within the State of New York, its public
authorities and political subdivisions, particularly New York City. Although New
York State reduced its accumulated general fund deficits and experienced
operating surpluses in fiscal years 1991-92 through 1993-94, it continues to
experience substantial financial difficulties related to the recent recession,
and an estimated budget gap of approximately $4.7 billion is projected for
fiscal year 1995-96 unless numerous and substantial corrective measures are
successfully implemented. New York City and most suburban county governments are
also experiencing serious fiscal problems related to the recessionary
performance of the regional economy, which has caused substantial, broad-based
and recurring revenue shortfalls. The credit standings of New York State and New
York City have been, and could be further, reduced; and their ability to provide
assistance to its public authorities and political subdivisions has been, and
could be further, impaired. A more detailed discussion of the risks of investing
in New York Obligations is included in the Statement of Additional Information.

NON-DIVERSIFIED STATUS. New York Tax-Free Income Fund is a 'non-diversified,'
'regulated investment company' for purposes of the federal securities laws and
federal income tax laws. This means, in general, that more than 5% of the Fund's
total assets may be invested in the securities of one issuer, but only if, at
the close of each quarter of the Fund's taxable year, the aggregate amount of
such holdings does not exceed 50% of the value of its total assets and no more
than 25% of the value of its total assets is invested in the securities of a
single issuer. Although Mitchell Hutchins anticipates that normally the Fund's
portfolio will include the securities of a number of different issuers, the Fund
may be subject to greater risk with respect to its portfolio securities than a
'diversified' investment company, because changes in the financial condition or

market assessment of a single issuer may cause greater fluctuation in the Fund's
yield and the net asset value of Fund shares.

MUNICIPAL HIGH INCOME FUND

LOWER RATED SECURITIES. Municipal High Income Fund invests at least 65%, and
seeks to invest 100%, of its net assets in medium and lower grade municipal
securities. Medium grade municipal securities are of investment grade quality
and are rated A, Baa or MIG-2 by Moody's, A, BBB or SP-2 by S&P, have been
assigned an equivalent rating from another NRSRO or, if unrated, are determined
by Mitchell Hutchins to be of comparable quality. Lower grade municipal
securities are those rated Ba, B, MIG-3 or MIG-4 by Moody's, BB, B or SP-3 by
S&P, have an equivalent rating from another NRSRO or, if unrated, are determined
by Mitchell Hutchins to be of comparable quality. Municipal securities rated
below investment grade are deemed by Moody's and S&P to be predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal and may involve major risk exposure to adverse conditions. The Fund's
policy of investing a portion of its assets in lower rated securities thus
entails greater risks than those associated with investment in higher rated
securities.

Lower rated municipal securities generally offer a higher current yield than
higher grade issues, but they involve higher risks since they are especially
subject to adverse changes in general economic conditions, in economic
conditions of the issuer's

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

<PAGE>

geographic area and in the industries or activities in which the issuer is
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, municipal issuers may experience
financial stress which could adversely affect their ability to make payments of
principal and interest and increase the possibility of default.

In addition, medium and lower grade municipal securities are frequently traded
only in markets where the number of potential purchasers and sellers, if any, is
limited. This factor may limit the Municipal High Income Fund's ability to
acquire such securities and also may limit the Fund's ability to sell such
securities at their fair value in response to changes in the economy or the
financial markets. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may also decrease the values and liquidity of
lower rated securities, especially in thinly traded markets.

During the 1996 fiscal year, Municipal High Income Fund had [100%] of its
average annual net assets in municipal securities that received a rating from
Moody's or S&P. Municipal High Income Fund had the following percentages of its
average annual net assets invested in rated securities: AAA/Aaa (including cash
items and repurchase agreements)-- %, AA/Aa-- %, A/A-- %, BBB/Baa-- %,
BB/Ba-- %, B/B-- %, CCC/Caa-- %, CC/Ca-- %, C/C-- % and D-- %. Municipal
securities that received different ratings from Moody's and S&P were assigned to
the lower rating category. It should be noted that this information reflects the
average composition of the Fund's assets during the fiscal year ended February
28, 1995, and is not necessarily representative of the Fund's assets at the end
of that fiscal year, in the current fiscal year or at any time in the future.

Although Mitchell Hutchins will attempt to minimize the speculative risks
associated with investments in lower rated securities through credit analysis
and monitoring and attention to current trends in interest rates and other
factors, investors should carefully review the Fund's investment objective and
policies and consider their ability to assume the investment risks involved
before making an investment.

NON-DIVERSIFIED STATUS. Municipal High Income Fund is a 'non-diversified,'
'regulated investment company' for purposes of the federal securities and income
tax laws. This means, in general, that more than 5% of the Fund's total assets
may be invested in the securities of one issuer, but only if, at the close of
each quarter of the Fund's taxable year, the aggregate amount of such holdings
does not exceed 50% of the value of its total assets and no more than 25% of the
value of its total assets is invested in the securities of a single issuer.
Although Mitchell Hutchins anticipates that normally the Fund's portfolio will
include the securities of a number of different issuers, the Fund may be subject
to greater risk with respect to its portfolio securities than a 'diversified'
investment company, because changes in the financial condition or market
assessment of a single issuer may cause greater fluctuation in the Fund's yield
and the net asset value of Fund shares.

INVESTMENT TECHNIQUES AND STRATEGIES

HEDGING AND RELATED INCOME STRATEGIES. Each Fund may use options (both
exchange-traded and over-the-counter) and futures contracts to attempt to
enhance income and to reduce the overall risk of its investments (hedge). These
strategies may generate taxable income. In addition, new financial products and
risk management techniques continue to be developed and may be used if
consistent with a Fund's investment objective and policies. A Fund's ability to
use these strategies may be limited by market conditions, regulatory limits and
tax considerations. The use of options and futures solely to enhance income may
be considered a form of speculation. The Statement of Additional Information for
the Funds contains further information on these strategies.

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

o the fact that the skills needed to use hedging instruments are different from
those needed to select securities for the Funds,

o the possibility of imperfect correlation, or even no correlation, between
price movements of hedging instruments and price movements of the securities
being hedged,

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

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

<PAGE>

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

TEMPORARY OR DEFENSIVE POSITIONS. During unusual market conditions, including
when in the opinion of Mitchell Hutchins there are insufficient suitable
municipal obligations available, each of California Tax-Free Income Fund,
National Tax-Free Income Fund and New York Tax-Free Income Fund, for defensive
purposes, temporarily may invest more than 20% of its net assets in other
municipal obligations. For this purpose, 'suitable municipal obligations' means,
in the case of California Tax-Free Income Fund, California Obligations that pay
AMT exempt interest, in the case of National Tax-Free, municipal obligations
that pay AMT exempt interest and, in the case of New York Tax-Free Income Fund,
New York Obligations that pay AMT exempt interest. 'Other municipal obligations'
means municipal obligations that pay interest that is exempt from federal income
tax but is subject to California personal income tax (in the case of California
Tax-Free Income Fund), New York personal income tax (in the case of New York
Tax-Free Income Fund) or is not AMT exempt interest.

Each Fund expects that under normal circumstances it will maintain needed
liquidity through the purchase of short-term municipal securities, including
tender option bonds. However, when Mitchell Hutchins believes unusual
circumstances warrant a defensive position, including when in the opinion of
Mitchell Hutchins no suitable municipal obligations are available, each Fund
temporarily and without percentage limit may hold cash and invest in taxable
money market instruments, including repurchase agreements. Interest earned from
such taxable investments will be taxable to investors as ordinary income when
distributed. If a Fund holds cash, the cash would not earn income and would
reduce the Fund's yield.

OTHER INFORMATION. Each Fund may invest up to 10% of its net assets in illiquid
securities, including certain cover for OTC options and securities whose
disposition is restricted under the federal securities laws. The Funds do not
consider securities that are eligible for resale pursuant to Securities and
Exchange Commission ('SEC') Rule 144A to be illiquid securities if the
applicable board of trustees ('Board') has determined such securities to be
liquid based upon the trading markets for the securities.

Each Fund may also purchase bonds on a when-issued basis or may purchase or sell
securities for delayed delivery; a Fund generally would not pay for such
securities or start earning interest on them until they are delivered, but it
would immediately assume the risks of ownership, including the risk of price
fluctuation. Each Fund may borrow money for temporary or emergency purposes, but
not in excess of 10% of its total assets.

Each Fund is authorized to lend up to 33 1/3% of the total value of its
portfolio securities to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified. Lending securities enables a Fund to earn additional

income, but could result in a loss or delay in recovering securities. Because
the income generated by securities lending activities is taxable, the Funds do
not expect to engage in securities lending except under unusual circumstances.

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

<PAGE>

- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FLEXIBLE PRICING (Service Mark)
- --------------------------------------------------------------------------------

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

CLASS A SHARES

HOW PRICE IS CALCULATED: The price is the net asset value plus the initial
sales charge (the maximum sales charge is 4% of the public offering price) next
calculated after PaineWebber's New York City headquarters or the Transfer Agent
receives the purchase order. Although investors pay an initial sales charge when
they buy Class A shares, the ongoing expenses for this Class are lower than the
ongoing expenses of Class B and Class C shares. Class A shares sales charges are
calculated as follows:

<TABLE>
<CAPTION>
SALES CHARGE AS A
PERCENTAGE OF
----------------------- DISCOUNT TO
NET SELECTED DEALERS
OFFERING AMOUNT AS PERCENTAGE
AMOUNT OF INVESTMENT PRICE INVESTED OF OFFERING PRICE
- ---------------------------------------- -------- -------- -----------------
<S> <C> <C> <C>
Less than $100,000 4.00% 4.17% 3.75%
$100,000 to $249,999 3.00 3.09 2.75
$250,000 to $499,999 2.25 2.30 2.00

$500,000 to $999,999 1.75 1.78 1.50
$1,000,000 and over(1) None None 1.00(2)
</TABLE>

- ------------------
(1) A contingent deferred sales charge of 1% of the shares' net asset value at
the time of their purchase or their sale, whichever is less, is charged on
sales of shares made within one year of the purchase date. However, Class A
shares representing reinvestment of any dividends or capital gain
distributions will not be subject to the 1% charge. Withdrawals under the
Systematic Withdrawal Plan will not be subject to this charge. However,
investors may not withdraw annually more than 12% of the value of the Fund
account under the Plan in the first year after purchase. This charge does
not apply to Class A shares bought before November 10, 1995.

(2) Mitchell Hutchins pays 1% to PaineWebber.

SALES CHARGE REDUCTIONS & WAIVERS

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

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

o their spouses, parents or children under age 21;

o their Individual Retirement Accounts (IRAs);

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

o any company controlled by the investor;

o trusts created by the investor;

o Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts created
by the investor or group of investors for the benefit of the investors, their
spouses, parents or children; or

o accounts with the same adviser

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

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

<PAGE>

The sales charge will not apply when the investor:

o is an employee, director, trustee or officer of PaineWebber or its affiliates;

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

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

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

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

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

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

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

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

For more information on how to get any reduced sales charge, investors should
contact their investment executive at PaineWebber or one of its correspondent
firms or call 1-800-647-1568.

CLASS B SHARES

HOW PRICE IS CALCULATED: The price is the net asset value next calculated after

PaineWebber's New York City headquarters or the Transfer Agent receives the
purchase order. The ongoing expenses investors pay for Class B shares are higher
than those of Class A shares. Because investors do not pay an initial sales
charge when they buy Class B shares, 100% of their purchase is immediately
invested.

Depending on how long they own their Fund investment, investors may have to pay
a contingent deferred sales charge when they sell their Fund shares. The amount
of the charge depends on how long the investor owned the shares. The sales
charge is calculated by multiplying the net asset value of the shares at the
time of sale or purchase, whichever is less, by the percentage shown on the
table below. Investors who own shares for more than six years do not have to pay
a sales charge when selling those shares.

<TABLE>
<CAPTION>
PERCENTAGE BY WHICH
THE SHARES' NET
IF THE INVESTOR ASSET
SELLS 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>

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

<PAGE>

CONVERSION OF CLASS B SHARES

Class B shares automatically convert to the appropriate number of Class A shares

of equal dollar value after the investor has owned them for six years. Dividends
and other distributions paid to the investor by the Fund in the form of
additional Class B shares will also convert to Class A shares on a pro-rata
basis. This benefits shareholders because Class A shares have lower ongoing
expenses than Class B shares.

o If the investor has exchanged Class B shares between PaineWebber funds, the
Fund uses the purchase date at which the initial investment was made to
determine the conversion date.

o Investors who sell shares before owning them for six years do not have to pay
the sales charge if the shares sold represent reinvested dividends and/or
capital gain distributions.

MINIMIZING THE CONTINGENT DEFERRED SALES CHARGE

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

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

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

If the investor has exchanged Class B shares between PaineWebber funds, the Fund
uses the purchase date at which the initial investment was made to calculate the
six-year period.

WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGE

The contingent deferred sales charge will not apply to:

o redemptions under the Fund's 'Systematic Withdrawal Plan' (investors may not

withdraw annually more than 12% of the value of the Fund account);

o a distribution from a self-employed individual retirement plan ('Keogh Plan');

o a custodial account under Section 403(b) of the Internal Revenue Code (after
the investor reaches age 59 1/2);

o an IRA distribution or a tax-free return of an excess IRA contribution;

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

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

An investor must provide satisfactory information to PaineWebber or the Fund if
the investor seeks any of these waivers.

CLASS C SHARES

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

A contingent deferred sales charge of 1% of the net asset value of the shares at
the time of purchase or sale, whichever is less, is charged on sales of shares
made within one year of the purchase date. Redemptions of Class C shares
acquired through an exchange and held less than one year will be subject to the
same contingent deferred sales charge that would have been imposed on Class C
shares of the PaineWebber mutual fund originally purchased that were
subsequently exchanged into Class C shares of the Fund. Class C shares
representing reinvestment of any dividends or capital gain distributions will
not be subject to the 1% charge. Withdrawals under the Systematic Withdrawal

Plan also will not be subject to this charge. However, investors may not
withdraw annually more than 12% of the value of the Fund account during the
first year under the Plan. This charge does not apply to Class C shares bought
before November 10, 1995.

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

<PAGE>

- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
- --------------------------------------------------------------------------------

Prices are calculated for the Fund's Class A, Class B and Class C shares once
each Business Day, at the close of regular trading on the New York Stock
Exchange (currently 4:00 p.m., Eastern time). A 'Business Day' is any day,
Monday through Friday, on which the New York Stock Exchange is open for
business. Shares are purchased at the next share price calculated after the
purchase order is received.

When placing an order to buy shares, investors should specify which class of
shares they want to buy. If investors fail to specify the class, they will
automatically receive Class A shares, which include an initial sales charge.

PAINEWEBBER CLIENTS

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

Investors may pay for their purchases with checks drawn on U.S. banks or with
funds they have in their brokerage accounts at PaineWebber or its correspondent

firms. Payment is due on the third Business Day after PaineWebber's New York
City headquarters office receives the purchase order.

OTHER INVESTORS

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

New investors to PaineWebber may complete an account application and mail it
along with a check. Investors may also open an account in person.
Investors who already have money invested in a PaineWebber mutual fund, and want
to invest in another PaineWebber mutual fund, can:

o mail an application with a check; or

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

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

MINIMUM INVESTMENTS

<TABLE>
<S> <C>
To open an account............................. $1,000
To add to an account........................... $ 100
</TABLE>

A Fund may waive or reduce these minimums for:

o employees of PaineWebber or its affiliates; or

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

HOW TO EXCHANGE SHARES

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

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

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

o name and address;

o the Fund's name;

o the Fund account number;

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

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

<PAGE>

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

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

Fund shares may be exchanged only after the settlement date has passed and
payment for the shares has been made. The exchange privilege is available only
in those jurisdictions where the sale of the fund shares to be acquired are
authorized. This exchange privilege may be modified or terminated at any time
and, when required by SEC rules, upon 60-day notice. See the back cover of this
prospectus for a listing of other PaineWebber funds.

- --------------------------------------------------------------------------------
HOW TO SELL SHARES
- --------------------------------------------------------------------------------

Investors can arrange to sell (redeem) shares at any time. Shares will be sold
at the share price for that class as next calculated after the order is received
and accepted. Share prices are normally calculated at the close of regular
trading on the New York Stock Exchange (currently 4:00 p.m., Eastern time).

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

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

Investors who have an account with PaineWebber or one of PaineWebber's

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

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

REINSTATEMENT PRIVILEGE

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

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

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

AUTOMATIC INVESTMENT PLAN

Investing on a regular basis helps investors meet their financial goals.
PaineWebber offers an Automatic Investment Plan Service through which the Fund
will deduct $50 or more each month from the investor's bank account to invest
directly in the Fund. In addition to providing a convenient and disciplined
manner of investing, participation in the Automatic Investment Plan enables the
investor to use the technique of 'dollar cost averaging.'

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

Prospectus Page 26

<PAGE>

SYSTEMATIC WITHDRAWAL PLAN

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

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

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

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

TRANSFER OF ACCOUNTS

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

- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------

The board of trustees for each Trust, as part of its overall management
responsibility, oversees various organizations responsible for the day-to-day
management of each Fund in that Trust. Mitchell Hutchins, investment adviser and
administrator of each Fund, makes and implements all investment decisions and
supervises all aspects of each Fund's operations.

Elbridge (Ebby) T. Gerry III, a senior vice president of Mitchell Hutchins, is
the co-portfolio manager and has day-to-day responsibility for New York Tax-Free
Income Fund, California Tax-Free Income Fund and National Tax-Free Income Fund.
Mr. Gerry is also a portfolio manager for Municipal High Income Fund. In the
case of California Tax-Free Income Fund, Cynthia N. Bow, a vice president of
Mitchell Hutchins, is the co-portfolio manager and also has day-to-day
responsibility for the Fund. In the case of New York Tax-Free Income Fund and
National Tax-Free Income Fund, Richard S. Murphy, a senior vice president of
Mitchell Hutchins, is the co-portfolio manager and also has day-to-day
responsibility for the Funds. In the case of Municipal High Income Fund, William
W. Veronda, a senior vice president of Mitchell Hutchins, is a portfolio manager
and has day-to-day responsibility for the Fund. Mr. Gerry has held his Fund
responsibilities since January 22, 1996. Ms. Bow and Mr. Veronda have held their
Fund responsibilities since April 1993 and September 1995, respectively. Mr.
Murphy has held his Fund responsibility since July 1994 and January 1996 for
National Tax-Free Income Fund and New York Tax-Free Income Fund, respectively.

Mr. Gerry has portfolio management responsibility for over $4 billion in
municipal assets at Mitchell Hutchins, including municipal bond and money funds
and private accounts. Mr. Gerry has been with Mitchell Hutchins since January
1996. Prior to January 1996, Mr. Gerry had been associated with J.P. Morgan
Private Banking since 1981, where he was responsible for managing municipal
assets, including several municipal bond funds. Ms. Bow has been with Mitchell
Hutchins since 1982. Mr. Murphy has been with Mitchell Hutchins since April
1994. From 1990 to March 1994, he was a vice president at American International
Group, where he managed the municipal bond portfolio. Mr. Veronda has been with
Mitchell Hutchins since September 1995. From 1984 to August 1995, he was a
senior vice president and general manager at Invesco Funds Group, where he
managed municipal bond and high yield corporate bond portfolios.

--------------------
Prospectus Page 27

<PAGE>

the strategy for the management of PaineWebber municipal bond funds. The
Municipal Investment Team is complemented by a team of research analysts
specializing in economic, credit, quantitative and market research.

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

ABOUT THE INVESTMENT ADVISER

Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, is the asset management subsidiary of PaineWebber, which is wholly owned
by PaineWebber Group Inc., a publicly owned financial services holding company.
On , 1996, Mitchell Hutchins was adviser or sub-adviser of
investment companies with separate portfolios and aggregate assets of
approximately $ billion.

MANAGEMENT FEES & OTHER EXPENSES

Each of the Funds pays Mitchell Hutchins a monthly fee for its services. For the
fiscal year ended February 29, 1996, Mitchell Hutchins received a monthly fee
from each of California Tax-Free Income Fund and National Tax-Free Income Fund
for these services at the annual rate of 0.50% of that Fund's average daily net
assets and from each of Municipal High Income Fund and New York Tax-Free Income
Fund at the annual rate of 0.60% of that Fund's average daily net assets.
Annually, the trustees review each Fund's contract with Mitchell Hutchins.

Each Fund also pays PaineWebber an annual fee of $4.00 per active shareholder

account held at PaineWebber for certain services not provided by the Transfer
Agent.

Among the other expenses incurred by the Funds are 12b-1 fees which have two
components:

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

DISTRIBUTION ARRANGEMENTS

Mitchell Hutchins is the distributor of each of each Fund's shares and has
appointed PaineWebber as the exclusive dealer for the sale of those shares.
Under distribution plans for Class A, Class B and Class C shares ('Class A
Plan,' 'Class B Plan' and 'Class C Plan,' collectively, 'Plans'), each Fund pays
Mitchell Hutchins:

o Monthly service fees at the annual rate of 0.25% of the average daily net
assets of each class of shares.

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

Under all three Plans, Mitchell Hutchins primarily uses the service fees to pay
PaineWebber for shareholder servicing, currently at the annual rate of 0.25% of
the aggregate investment amounts maintained in each Fund by PaineWebber clients.
PaineWebber then compensates its investment executives for shareholder servicing
that they perform and offsets its own expenses in servicing and maintaining
shareholder accounts.

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

to:

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

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

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

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

The Plans and the related distribution contracts for each class of shares
('Distribution Contracts') specify that each Fund must pay service and
distribution fees to Mitchell Hutchins for its activities, not as reimbursement
for specific expenses incurred. Therefore, even if Mitchell Hutchins' expenses
exceed the service or distribution fees it receives, the Funds will not be
obligated to pay more than those fees. On the other hand, if Mitchell Hutchins'
expenses are less than such fees, it will

--------------------
Prospectus Page 28

<PAGE>

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 trustees of each Fund reviews the Plans and Mitchell
Hutchins' corresponding expenses for each class separately from the Plans and
expenses of the other classes.

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

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

Each Fund values its assets based on their current market value when market
quotations are readily available. If that value is not readily available, assets
are valued at fair value as determined in good faith by or under the direction
of the Fund's board of trustees. The amortized cost method of valuation
generally is used to value debt obligations with 60 days or less remaining to
maturity, unless the board determines that this does not represent fair value.

- --------------------------------------------------------------------------------
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------

DIVIDENDS

Dividends from each Fund's net investment income are declared daily and paid
monthly. California
Tax-Free Income Fund pays dividends about the fifth day of each month, and
National Tax-Free Income Fund pays dividends about the fifteenth day of each
month. Municipal High Income Fund and New York Tax-Free Income Fund pay
dividends on or about the first Wednesday of each month. Net investment income
includes accrued interest and discount, less amortization of premium and accrued
expenses, with respect to municipal securities. Each Fund distributes
substantially all of its net capital gain (the excess of net long-term capital
gain over net short-term capital loss), if any, together with any other taxable
income (including any net short-term capital gain) at least annually. A Fund may
make more frequent distributions of any net capital gain and other taxable

income if necessary to avoid a 4% excise tax on undistributed income and capital
gain.

Dividends and other distributions paid on each class of shares of each Fund are
calculated at the same time and in the same manner. Dividends on Class B and
Class C shares of a Fund are expected to be lower than those for its Class A
shares because Class B and Class C shares have higher expenses resulting from
their distribution fees. Dividends on each class might be affected differently
by the allocation of other class-specific expenses. See 'General Information.'

Each Fund's dividends and capital gain distributions are paid in additional Fund
shares of the same class at net asset value, unless the shareholder has
requested cash payments. Shareholders who wish to receive dividends and/or
capital gain distributions in cash, either mailed to the shareholder by check or
credited to the shareholder's PaineWebber account, should contact their
investment executive at PaineWebber or one of its correspondent firms or
complete the appropriate section of the account application.

TAXES

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

--------------------
Prospectus Page 29

<PAGE>

Distributions by a Fund that it designates as 'exempt-interest dividends'
generally may be excluded from gross income by a shareholder. In order to pay
exempt-interest dividends to its shareholders, a Fund must (and each Fund
intends to continue to) satisfy the requirement that, at the close of each

quarter of its taxable year, at least 50% of the value of its total assets
consists of municipal securities.

Interest on indebtedness incurred or continued by a shareholder to purchase or
carry Fund shares is not deductible. If a Fund invests in certain PABs,
shareholders must include a portion of their exempt-interest dividends from that
Fund in calculating their liability for the federal alternative minimum tax.
Corporate shareholders must include all of their exempt-interest dividends in
calculating their liability for that tax.

If a Fund realizes capital gains as a result of market transactions, any
distribution of those gains is taxable to its shareholders.

YEAR-END TAX REPORTING

Each Fund notifies its shareholders following the end of each calendar year of
the amounts of exempt-interest dividends (and any portion thereof that is not
AMT exempt interest), taxable dividends and capital gain distributions paid (or
deemed paid) that year.

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 with a correct taxpayer
identification number. Withholding at that rate is also required from dividends
and capital gain distributions payable to such shareholders who otherwise are
subject to backup withholding.

TAXES ON THE SALE OR EXCHANGE OF FUND SHARES

A shareholder's sale (redemption) of Fund shares may result in a taxable gain or
loss. This depends upon whether the shareholder receives more or less than his
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 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 TAX RULES FOR CLASS A SHAREHOLDERS

Special tax rules apply when a shareholder sells (redeems) or exchanges Class A
shares within 90 days of purchase, and subsequently acquires Class A shares of a
PaineWebber 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 will increase the basis of the PaineWebber fund shares
subsequently acquired.

CALIFORNIA TAXES

If California Tax-Free Income Fund continues to qualify as a RIC under the
Internal Revenue Code and at the end of each quarter of such Fund's taxable year
at least 50% of the value of its total assets consists of California
Obligations, exempt-interest dividends paid by the California Tax-Free Income
Fund that are derived from interest on qualifying California Obligations will be
exempt from California personal income tax ('California exempt-interest
dividends'), but not California franchise tax. Dividends and other distributions
derived from interest on other municipal securities, taxable income and capital
gains are taxable under California law at ordinary income rates. Interest on
indebtedness incurred by a shareholder to purchase or carry shares of the Fund
is not deductible for California personal income tax purposes. California
exempt-interest dividends may affect the calculation of certain adjustments to
alternative minimum taxable income for shareholders that are corporations. The
Fund itself will not be subject to California franchise or corporate income tax
on interest income or net capital gain distributed to its shareholders.

NEW YORK STATE AND
NEW YORK CITY TAXES

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

Prospectus Page 30

<PAGE>

Free Income Fund that are derived from interest on qualifying New York
Obligations will be exempt from New York State and New York City personal income
taxes, but not corporate franchise taxes. Dividends and other distributions
derived from taxable income and capital gains are not exempt from New York State
and New York City taxes. Interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares of the Fund is not deductible for New
York State or New York City personal income tax purposes. Shareholders receive
notification annually stating the portion of the Fund's tax-exempt income
attributable to issuers in New York State, New York City and other states.
Interest income of New York Tax-Free Income Fund which is distributed to
shareholders will generally not be taxable to the Fund for purposes of the New
York State corporation franchise tax or the New York City general corporation
tax.

ADDITIONAL INFORMATION

The foregoing is only a summary of some of the important federal income tax and
California, New York State and New York City personal income tax considerations
generally affecting each Fund and its shareholders; see the Statement of
Additional Information for a further discussion. There may be other federal,
state or local tax considerations applicable to a particular investor. Therefore
prospective investors are urged to consult their tax advisors.

- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------

ORGANIZATION

California Tax-Free Income Fund and National Tax-Free Income Fund are series of
PaineWebber Mutual Fund Trust and PaineWebber Municipal High Income Fund and

PaineWebber New York Tax-Free Income Fund are series of PaineWebber Municipal
Series (each a 'Trust').

Both PaineWebber Municipal Series and PaineWebber Mutual Fund Trust are
Massachusetts business trusts which are registered with the SEC as open-end
management investment companies. PaineWebber Municipal Series was organized
under a Declaration of Trust dated January 28, 1987 and PaineWebber Mutual Fund
Trust was organized under a Declaration of Trust dated November 21, 1986. The
trustees of each Trust have authority to issue an unlimited number of shares of
beneficial interest of separate series, par value $.001 per share. Although each
Trust is offering only the shares of its Funds, it is possible that a Trust
could become liable for misstatement in this Prospectus about a Fund of the
other Trust. The trustees of each Trust have considered this factor in approving
the use of a combined Prospectus.

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

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

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

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

<PAGE>

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 any Fund (or
Trust if there is more than one series) may elect all of the trustees of that
Fund. The shares of the Funds will be voted separately except when an aggregate
vote of all series in a Trust is required by the Investment Company Act of 1940
and except that only the shareholders of a particular class of a Fund are
required to vote on matters affecting only that class, such as the terms of a
Plan as it relates to a class.

SHAREHOLDER MEETINGS

The Funds do not intend to hold annual meetings.

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

REPORTS TO SHAREHOLDERS

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

CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND AGENT

State Street Bank and Trust Company, located at One Monarch Drive, North Quincy,
Massachusetts 02171, serves as the Funds' custodian and recordkeeping agent and
employs foreign sub-custodians to provide custody of its foreign assets. PFPC
Inc., a subsidiary of PNC Bank, N.A., serves as the Funds' transfer and dividend
disbursing agent. It is located at 400 Bellevue Parkway, Wilmington, DE 19809.

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

<PAGE>

- ------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- ------------------------------------------------------------------------------
PAINEWEBBER FAMILY OF FUNDS
- ------------------------------------------------------------------------------

A prospectus containing more complete information for any of the above funds,
including charges and expenses, can be obtained from a PaineWebber investment
executive or correspondent firm. Please read it carefully before investing. It
is important you have all the information you need to make a sound investment
decision.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
The Funds at a Glance...................... 2
Expense Table.............................. 5
Financial Highlights....................... 7
Investment Objective & Policies............ 12
Investment Philosophy & Process............ 13
Performance................................ 14
The Funds' Investments..................... 18
Flexible Pricing (Service Mark)............ 22
How to Buy Shares.......................... 25
How to Sell Shares......................... 26
Other Services............................. 26
Management................................. 27
Determining the Shares' Net Asset
Value.................................... 28
Dividends and Taxes........................ 28
General Information........................ 31
</TABLE>

PAINEWEBBER MONEY MARKET FUND

PAINEWEBBER BOND FUNDS
High Income Fund
Investment Grade Income Fund
Low Duration U.S. Government Income Fund
Strategic Income Fund
U.S. Government Income Fund

PAINEWEBBER TAX-FREE BOND FUNDS

California Tax-Free Income Fund
Municipal High Income Fund
National Tax-Free Income Fund
New York Tax-Free Income Fund

PAINEWEBBER ASSET ALLOCATION FUNDS
Balanced Fund
Tactical Allocation Fund

PAINEWEBBER GROWTH FUNDS
Capital Appreciation Fund
Growth Fund
Growth and Income Fund
Financial Services Growth Fund
Small Cap Value Fund
Utility Income Fund

PAINEWEBBER GLOBAL FUNDS
Emerging Markets Equity Fund
Global Equity Fund
Global Income Fund

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

No person has been authorized to give any information or make any
representations not contained in this Prospectus in connection with the offering
made by this Prospectus. If given or made, such information or representations
must not be relied upon as having been authorized by the Funds or their
distributor. This Prospectus does not constitute an offering by the Funds or
their distributor in any jurisdiction in which such offering may not lawfully be
made.

(Copyright) 1996 PaineWebber Incorporated
Recycled
Paper

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

<PAGE>

PAINEWEBBER CALIFORNIA TAX-FREE INCOME FUND
PAINEWEBBER NATIONAL TAX-FREE INCOME FUND
PAINEWEBBER MUNICIPAL HIGH INCOME FUND
PAINEWEBBER NEW YORK TAX-FREE INCOME FUND

1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019

STATEMENT OF ADDITIONAL INFORMATION

The four funds named above (each a 'Fund' and, collectively, 'Funds') are
series of either PaineWebber Mutual Fund Trust or PaineWebber Municipal Series
(each a 'Trust'), professionally managed mutual funds. PaineWebber California
Tax-Free Income Fund ('California Tax-Free Income Fund') seeks high current
income exempt from federal income tax and California personal income tax,
consistent with the preservation of capital and liquidity within the Fund's
quality standards. PaineWebber National Tax-Free Income Fund ('National Tax-Free
Income Fund') seeks high current income exempt from federal income tax,
consistent with the preservation of capital and liquidity within the Fund's
quality standards. PaineWebber Municipal High Income Fund ('Municipal High
Income Fund') seeks high current income exempt from federal income tax.
PaineWebber New York Tax-Free Income Fund ('New York Tax-Free Income Fund')
seeks high current income exempt from federal income tax and from New York State
and New York City personal income taxes. The Funds' investment adviser,
administrator and distributor is Mitchell Hutchins Asset Management Inc.
('Mitchell Hutchins'), a wholly owned subsidiary of PaineWebber Incorporated
('PaineWebber'). As distributor for the Funds, Mitchell Hutchins has appointed
PaineWebber to serve as the exclusive dealer for the sale of Fund shares. This
Statement of Additional Information ('SAI') is not a prospectus and should be
read only in conjunction with the Funds' current Prospectus, dated July 1, 1996.
A copy of the Prospectus may be obtained by calling any PaineWebber investment
executive or correspondent firm or by calling toll-free 1-800-647-1568. This
Statement of Additional Information is dated July 1, 1996.

INVESTMENT POLICIES AND RESTRICTIONS

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

YIELD FACTORS AND RATINGS. Moody's Investors Service, Inc. ('Moody's') and
Standard & Poor's, a division of The McGraw Hill Companies, Inc. ('S&P') and
other nationally recognized statistical rating organizations ('NRSROs') are

private services that provide ratings of the credit quality of debt obligations,
including issues of municipal securities. A description of the range of ratings
assigned to municipal securities by Moody's and S&P is included in Appendix B to
the SAI. 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, municipal
securities with the same maturity, interest rate and rating may have different
market prices. Credit ratings attempt to evaluate the safety of principal and
interest payments and do not evaluate the risks of fluctuations in market value.
Also, rating agencies may fail to make timely changes in credit ratings in
response to subsequent events, so that an issuer's current financial condition
may be better or worse than the rating indicates. Subsequent to its purchase by
a Fund, an issue of municipal securities may cease to be rated or its rating may
be reduced below the minimum rating required for purchase by the Fund.

<PAGE>

Opinions relating to the validity of municipal securities and to the
exemption of interest thereon from federal income tax (and also, when available,
from the federal alternative minimum tax) and (where applicable) California
personal income tax and New York State and New York City personal income taxes
are rendered by bond counsel to the respective issuing authorities at the time
of issuance. Neither the Funds nor Mitchell Hutchins will review the proceedings
relating to the issuance of municipal securities or the basis for such opinions.
An issuer's obligations under its municipal securities are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors (such as the federal bankruptcy laws) and federal, state
and local laws that may be enacted that adversely affect the tax-exempt status
of interest on the municipal securities held by a Fund or of the exempt-interest
dividends received by a Fund's shareholders, extend the time for payment of
principal or interest, or both, or impose other constraints upon enforcement of
such obligations. There is also the possibility that, as a result of litigation
or other conditions, the power or ability of issuers to meet their obligations
for the payment of principal of and interest on their municipal securities may
be materially and adversely affected.

TYPES OF MUNICIPAL SECURITIES. The types of municipal securities
identified in the Prospectus may include obligations of issuers whose revenues
are primarily derived from mortgage loans on housing projects for moderate to
low income families. The Funds also may purchase mortgage subsidy bonds that are
normally issued by special purpose public authorities. In some cases the
repayment of such bonds depends upon annual legislative appropriations; in other
cases repayment is a legal obligation of the issuer and, if the issuer is unable
to meet its obligations, repayment becomes a moral commitment of a related
government unit (subject, however, to such appropriations).

generally based upon changes in the level of interest rates. Thus, fluctuation
in the value of the security from the time of the commitment date will affect
the Fund's net asset value. When 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 'Investment Policies and
Restrictions--Segregated Accounts.' The Funds purchase when-issued securities
only with the intention of taking delivery, but may sell the right to acquire
the security prior to delivery if Mitchell Hutchins deems it advantageous to do
so, which may result in capital gain or loss to a Fund.

STAND-BY COMMITMENTS. Each Fund may acquire stand-by commitments pursuant
to which a bank or other municipal bond dealer agrees to purchase securities
that are held in the Fund's portfolio or that are being purchased by the Fund,
at a price equal to (1) the acquisition cost (excluding any accrued interest
paid on acquisition), less any amortized market premium or plus any accrued
market or original issue discount, plus (2) all interest accrued on the
securities since the last interest payment date or the date the securities were
purchased by the Fund, whichever is later. Although the Funds do not currently
intend to acquire stand-by commitments with respect to municipal securities held
in their portfolios, each Fund may acquire such commitments under unusual market
conditions to facilitate portfolio liquidity.

A Fund would enter into stand-by commitments only with those banks or other
dealers that, in the opinion of Mitchell Hutchins, present minimal credit risk.
A Fund's right to exercise stand-by commitments would be unconditional and
unqualified. A stand-by commitment would not be transferable by a Fund, although
the Fund could sell the underlying securities to a third party at any time. A
Fund may pay for stand-by commitments either separately in cash or by paying a
higher price for the securities that are acquired subject to such a commitment
(thus reducing the yield to maturity otherwise available for the same
securities).

2
<PAGE>

The acquisition of a stand-by commitment would not ordinarily affect the
valuation or maturity of the underlying municipal securities. Stand-by
commitments acquired by a Fund would be valued at zero in determining net asset
value. Whether the Fund paid directly or indirectly for a stand-by commitment,
its cost would be treated as unrealized depreciation and would be amortized over
the period the commitment is held by the Fund.

There is no assurance that the issuer of a put bond acquired by a Fund will be
able to repurchase the bond upon the exercise date, if the Fund chooses to
exercise its right to put the bond back to the issuer.

MUNICIPAL LEASE OBLIGATIONS. Although municipal lease obligations do not
constitute general obligations of the municipality for which the municipality's
taxing power is pledged, they ordinarily are backed by the municipality's
covenant to budget for, appropriate and make the payments due under the lease
obligation. The leases underlying certain municipal lease obligations, however,
provide that lease payments are subject to partial or full abatement if, because
of material damage or destruction of the leased property, there is substantial
interference with the lessee's use or occupancy of such property. This
'abatement risk' may be reduced by the existence of insurance covering the
leased property, the maintenance by the lessee of reserve funds or the provision
of credit enhancements such as letters of credit.

Certain municipal lease obligations contain 'non-appropriation' clauses
which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Some municipal lease obligations of this type
are insured as to timely payment of principal and interest, even in the event of
a failure by the municipality to appropriate sufficient funds to make payments
under the lease. However, in the case of an uninsured municipal lease
obligation, a Fund's ability to recover under the lease in the event of a
non-appropriation or default will be limited solely to the repossession of
leased property without recourse to the general credit of the lessee, and
disposition of the property in the event of foreclosure might prove difficult.
No Fund intends to invest more than 5% of its total assets in such uninsured
'non-appropriation' municipal lease obligations. There is no limitation on the
Funds' ability to invest in other municipal lease obligations.

PARTICIPATION INTERESTS. Each Fund also may invest in participation
interests in municipal bonds, including industrial development bonds ('IDBs'),
private activity bonds ('PABs') and floating and variable rate securities. A
participation interest gives a Fund an undivided interest in a municipal bond
owned by a bank. The Fund has the right to sell the instrument back to the bank.
Such right generally is backed by the bank's irrevocable letter of credit or
guarantee and permits the Fund to draw on the letter of credit on demand, after
specified notice, for all or any part of the principal amount of the Fund's
participation interest plus accrued interest. Generally, each Fund intends to
exercise the demand under the letters of credit or other guarantees only (1)
upon a default under the terms of the underlying bond, (2) to maintain the
Fund's portfolio in accordance with its investment objective and policies or (3)
as needed to provide liquidity to the Fund in order to meet redemption requests.
The ability of a bank to fulfill its obligations under a letter of credit or
guarantee might be affected by possible financial difficulties of its borrowers,
adverse interest rate or economic conditions, regulatory limitations or other
factors. Mitchell Hutchins will monitor the pricing, quality and liquidity of

the participation interests held by a Fund, and the credit standing of banks
issuing
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letters of credit or guarantees supporting such participation interests on the
basis of published financial information reports of rating services and bank
analytical services.

REPURCHASE AGREEMENTS. The Funds do not intend to enter into repurchase
agreements except as a temporary measure and under unusual circumstances,
because repurchase agreements are transactions that generate taxable income.
Each Fund is, however, authorized to enter into repurchase agreements with U.S.
banks and dealers with respect to any obligation issued or guaranteed by the
U.S. government, its agencies or instrumentalities and also with respect to
commercial paper, bank certificates of deposit and bankers' acceptances.
Repurchase agreements are transactions in which a Fund purchases securities from
a bank or recognized securities dealer and simultaneously commits to resell the
securities to the bank or dealer at an agreed-upon date and price reflecting a
market rate of interest unrelated to the coupon rate or maturity of the
purchased securities. The Fund maintains custody of the underlying securities
prior to their repurchase; thus, the obligation of the bank or dealer to pay the
repurchase price on the date agreed to is, in effect, secured by such
securities. If the value of these securities is less than the repurchase price,
plus any agreed-upon additional amount, the other party to the agreement must
provide additional collateral so that at all times the collateral is at least
equal to the repurchase price, plus any agreed-upon additional amount. The
difference between the total amount to be received upon repurchase of the
securities and the price which was paid by the Fund upon acquisition is accrued
as interest and included in the Fund's net investment income.

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

commitment. The interest rate on floating rate or variable rate securities
ordinarily is readjusted on the basis of the prime rate of the bank that
originated the financing or some other index or published rate, such as the
90-day U.S. Treasury Bill rate. Generally, these interest rate adjustments cause
the market value of floating rate and variable rate municipal securities to
fluctuate less than the market value of fixed rate obligations. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation or
capital depreciation is less than for fixed rate obligations.

ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities. The term 'illiquid securities' for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, repurchase agreements maturing in
more than seven days and municipal lease obligations (including certificates of
participation) other than those Mitchell Hutchins has determined are liquid
pursuant to guidelines established by the appropriate Trust's board of trustees.

Each Trust's board of trustees has delegated the function of making
day-to-day determinations of liquidity to Mitchell Hutchins, pursuant to
guidelines approved by the board. Mitchell Hutchins takes into account a number
of factors in reaching liquidity decisions, including (1) the frequency of
trades for the

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security, (2) the number of dealers that make quotes for the security, (3) the
number of dealers that have undertaken to make a market in the security, (4) the
number of other potential purchasers and (5) the nature of the security and how
trading is effected (e.g., the time needed to sell the security, how offers are
solicited and the mechanics of transfer). Mitchell Hutchins monitors the
liquidity of securities in each Fund's portfolio and reports periodically on
liquidity decisions to each Trust's board of trustees.

In making determinations as to the liquidity of municipal lease
obligations, Mitchell Hutchins will distinguish between direct investments in
municipal lease obligations (or participations therein) and investments in
securities that may be supported by municipal lease obligations or certificates
of participation therein. Since these municipal lease obligation-backed
securities are based on a well-established means of securitization, Mitchell
Hutchins does not believe that investing in such securities presents the same
liquidity issues as direct investments in municipal lease obligations. The
assets used as cover for any over-the-counter ('OTC') options written by a Fund
would be considered illiquid unless the OTC options are sold to qualified
dealers who agree that the Fund may repurchase any OTC option it writes at a
maximum price to be calculated by a formula set forth in the option agreement.
The cover for an OTC option written subject to this procedure will be considered
illiquid only to the extent that the maximum repurchase price under the formula

exceeds the intrinsic value of the option.

LENDING OF PORTFOLIO SECURITIES. The Funds do not intend to lend their
portfolio securities, except under unusual circumstances, because securities
loans are transactions that generate taxable income. As indicated in the
Prospectus, however, each Fund is authorized to lend up to 33 1/3% of its
portfolio securities to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified, but only when the borrower maintains acceptable
collateral with the Fund's custodian, marked to market daily, in an amount at
least equal to the market value of the securities loaned, plus accrued interest
and dividends. Acceptable collateral is limited to cash, U.S. government
securities and irrevocable letters of credit that meet certain guidelines
established by Mitchell Hutchins. In determining whether to lend securities to a
particular broker-dealer or institutional investor, Mitchell Hutchins will
consider, and during the period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. Each will retain
authority to terminate any loan at any time. A Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. A Fund will
receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest or other distributions on the
securities loaned. A Fund will retain record ownership of loaned securities to
exercise beneficial rights, such as voting and subscription rights and rights to
dividends, interest or other distributions, when regaining such rights is
considered to be in the Fund's interest.

SEGREGATED ACCOUNTS. When 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, the Fund will
maintain with an approved custodian in a segregated account cash, U.S.
government securities or other liquid high-grade debt securities, marked to
market daily, in an amount at least equal to the Fund's obligation or commitment
under such transactions. As described below under 'Hedging and Related Income
Strategies,' segregated accounts may also be required in connection with certain
transactions involving options or futures contracts.

SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES

The financial condition of the State of California, its public authorities
and local governments could affect the market values and marketability of, and
therefore the net asset value per share and the interest income of, the Fund, or
result in the default of existing obligations, including obligations which may
be held by the Fund.

<PAGE>

The following section provides only a brief summary of the complex factors
affecting the financial condition of California, and is based on information
obtained from the State of California, as publicly available on the date of this
Statement of Additional Information. The information contained in such publicly
available documents has not been independently verified. It should be noted that
the creditworthiness of obligations issued by local issuers may be unrelated to
the creditworthiness of California, and that there is no obligation on the part
of California to make payment on such local obligations in the event of default
in the absence of a specific guarantee or pledge provided by the State of
California.

The State of California has experienced significant financial difficulties
because of the 1990-93 recession, which have reduced its credit standing. The
ratings of certain related debt of other issuers for which California has an
outstanding lease purchase, guarantee or other contractual obligation (such as
for State-insured hospital bonds) are generally linked directly to California's
rating. Should the financial condition of California deteriorate further, its
credit ratings could be further reduced, and the market value and marketability
of all outstanding notes and bonds issued by California, its public authorities
or local governments could be adversely affected.

ECONOMIC FACTORS. California's economy is the largest among the 50 states
and one of the largest in the world. The State's population of over 32 million
represents over 12% of the total United States population. While the State's
substantial population growth during the 1980s stimulated local economic growth
and diversification, it also increased demands on State services. Total personal
income in the State, at an estimated $703 billion in 1994, accounts for more
than 12% of all personal income in the nation.

From mid-1990 to late 1993, the State suffered a recession with the worst
economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among others, were
all severely affected, particularly in Southern California. Job losses were the
worst of any post-war recession. Employment levels stabilized by late 1993 and
steady growth occurred in 1994 and 1995, but pre-recession job levels are not
expected to be reached for another year. Unemployment, while remaining higher
than the national average, has come down significantly from the January 1994
peak of 10%. Economic indicators show a steady recovery underway in California
since the start of 1994, although the residential housing sector is weaker than
in past recoveries. However, any delay or reversal of the recovery will
exacerbate shortfalls in State revenue.

STATE DEBT. Under the California Constitution, debt service on outstanding
general obligation bonds is the second charge to the General Fund after support

of the public school system and public institutions of higher education. Total
outstanding general obligation bonds and lease purchase debt of the State
increased from $9.4 billion at June 30, 1988 to $24.6 billion at June 30, 1995.
State agencies and authorities had approximately $19.0 billion of revenue bonds
and notes outstanding at June 30, 1995 for which the State General Fund has no
liability.

STATE FINANCES. Throughout the 1980's, State spending increased rapidly as
the State population and economy also grew rapidly, including increased spending
for many assistance programs to local governments, which were constrained by
Article XIIIA of the California Constitution (commonly known as 'Proposition
13') and other laws. The largest State program is assistance to local public
school districts. In 1988, an initiative (commonly known as Proposition 98) was
enacted which (subject to suspension by a two-thirds vote of the Legislature and
the Governor) guarantees local school districts and community college districts
a minimum share of State General Fund revenues (currently about 35%).

Since the start of the fiscal year ('FY') 1990-91, the State has faced
adverse economic, fiscal, and budget conditions. The economic recession
seriously affected State tax revenues. It also caused increased expenditures for
health and welfare programs. The State is also facing a structural imbalance in
its budget with

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the largest programs supported by the General Fund (education, health, welfare
and corrections) growing at rates significantly higher than the growth rates for
the principal revenue sources of the General Fund.

These structural concerns will continue in future years with the expected
need to increase capital and operating costs of the correctional system in
response to a 'Three Strikes' law enacted in 1994 which mandates life
imprisonment for certain felony offenders.

Recent Budgets. As a result of these factors, among others, from the late
1980's until 1992-93, the State had a period of nearly chronic budget imbalance,
with expenditures exceeding revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the budget reserve, the Special
Fund for Economic Uncertainties ('SFEU') approaching $2.8 billion at its peak at
June 30, 1993. Starting in the 1990-91 Fiscal Year and for each year thereafter,
each budget required multibillion dollar actions to bring projected revenues and
expenditures into balance and to close large 'budget gaps' which were
identified. The Legislature and Governor eventually agreed on a number of
different steps to produce Budget Acts in the years 1991-92 to 1994-95,
including:

o significant cuts in health and welfare program expenditures;

o transfers of program responsibilities and funding from the State to local
governments, coupled with some reduction in mandates on local government;

o transfer of about $3.6 billion in annual local property tax revenues from
cities, counties, redevelopment agencies and some other districts to local
school districts, thereby reducing state funding for schools;

o reduction in growth of support for higher education programs, coupled
with increases in student fees;

o revenue increases (particularly in the 1991-92 Fiscal Year budget), most
of which were for a short duration;

o increased reliance on aid from the federal government to offset the costs
of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less federal aid
than the State Administration has requested); and

o various one-time adjustments and accounting changes.

Despite these budget actions, the effects of the recession led to large,
unanticipated deficits in the SFEU, as compared to projected positive balances.
By the start of the 1993-94 Fiscal Year, the accumulated deficit was so large
(almost $2.8 billion) that it was impractical to budget to retire it in one
year, so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, to carry the final retirement
of the deficit into 1995-96.

The combination of stringent budget actions cutting State expenditures, and
the turnaround of the economy by late 1993, finally led to the restoration of
positive financial results. While General Fund revenues and expenditures were
essentially equal in FY 1992-93 (following two years of excess expenditures over
revenues), the General Fund had positive operating results in FY 1993-94 and

1994-95, which have reduced the accumulated budget deficit to around $600
million as of June 30, 1995.

A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts 'borrowed' from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. When the Legislature and the Governor failed to adopt a
budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the
State to carry out its normal annual cash flow borrowing to replenish its cash
reserves, the State Controller was forced to issue registered warrants ('IOUs')
to pay a variety of obligations
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representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4, 1992
the State Controller issued a total of approximately $3.8 billion of registered
warrants. After that date, all remaining outstanding registered warrants (about
$2.9 billion) were called for redemption from proceeds of the issuance of 1992
Interim Notes after the budget was adopted.

The State's cash condition became so serious in late spring of 1992 that
the State Controller was required to issue revenue anticipation warrants
maturing in the following fiscal year in order to pay the State's continuing
obligations. The State was forced to rely increasingly on external debt markets
to meet its cash needs, as a succession of notes and warrants (both forms of
short-term cash flow financing) were issued in the period from June 1992 to July
1994, often needed to pay previously-maturing notes or warrants. These
borrowings were used also in part to spread out the repayment of the accumulated
budget deficit over the end of a fiscal year.

The State issued $7.0 billion of short-term debt in July 1994 to meet its
cash flow needs and to finance the deferral of part of its accumulated deficit
to the 1995-96 fiscal year. In order to assure repayment of $4.0 billion of this
borrowing which matures on April 25, 1996, the State enacted legislation (the
'Trigger Law') which can lead to automatic, across-the-board budget cuts in
General Fund expenditures if cash flow projections made at certain times
deteriorate from estimates made in July 1994 when the borrowings were made. The
State's cash position remained favorable enough during the 1994-95 fiscal year
that the State Controller determined that no automatic budget cuts were needed
in that year.

Current Budget. For the first time in four years, the State entered the
1995-96 fiscal year with strengthening revenues based on an improving economy.
The major feature of the Governor's proposed Budget, a 15% phased cut in

personal income and business taxes, was rejected by the Legislature.

The 1995-96 Budget Act was signed by the Governor on August 3, 1995, 34
days after the start of the fiscal year. The Budget Act projected General Fund
revenues and transfers of $44.1 billion, a 3.5 percent increase from the prior
year. Expenditures are budgeted at $43.4 billion, a 4 percent increase. The
Department of Finance projected that, after repaying the last of the carryover
budget deficit, there would be a positive balance of less than $30 million in
the budget reserve, the Special Fund for Economic Uncertainties, at June 30,
1996, providing no margin for adverse results during the year.

The Department of Finance projected cash flow borrowings in the 1995-96
Fiscal Year would be the smallest in many years, comprising about $2 billion of
notes to be issued in April, 1996, and maturing by June 30, 1996. With full
payment of $4 billion of revenue anticipation warrants on April 25, 1996, the
Department saw no further need for borrowing over the end of the fiscal year.
The Department projected that available internal cash resources to pay State
obligations would be about $1.9 billion at June 30, 1996. On October 15, 1995,
the State Controller, in the last step in the Trigger Law process, reported that
projected cash resources in the General Fund during fiscal year 1995-96 would be
large enough to again avoid the need for any automatic budget cuts. However, the
Controller estimated that the State's cash position on June 30, 1996 would be
about $500 million less than estimated by the Department of Finance. General
Fund revenues during the first five months of FY 1995-96 have been reported
about 4% higher than projected when the Budget Act was adopted, reflecting
improved economic conditions.

The principal features of the 1995-96 Budget Act, in addition to those
noted above, were additional cuts in health and welfare expenditures (some of
which are subject to approvals or waivers by the federal government); assumed
further federal aid for illegal immigrant costs; and an increase in per-pupil
funding for public schools and community colleges, the first such significant
increase in four years.

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There can be no assurance that the State will not face budget gaps in
future years, resulting from a disparity between tax revenues projected from a
lower revenue base and the spending required to maintain State programs at
current levels. To achieve a balanced budget, the enactment of legislation may
be required to enlarge the State's revenue base or to curtail current program
expenditures. Certain major budgetary considerations affecting the State are
outlined below.

REVENUE BASE. The recession seriously affected the State's tax revenue,
which basically mirrors general economic conditions. The principal sources of
General Fund revenues are economically sensitive, and include the California
personal income tax (44% of total FY1993-94 revenues), the sales tax (35%), bank
and corporation taxes (12%), and the gross premium tax on insurance (3%).
Personal income tax receipts are generated disproportionately by relatively few
taxpayers (the top 4% of taxpayers paid 49% of the total tax in 1990), and
capital gains are a significant component of such collections. Auto sales and
building materials are significant components of retail sales tax collections.
Tax rates, increased in 1991, are relatively high, and may impose political and
economic constraints on the ability of the State to further increase its taxes.
By statute, certain recent increases in the rates of income taxes will expire on
December 31, 1995. In November 1993, the voters approved a constitutional
amendment to permanently extend 0.5 percent of the sales tax for local law
enforcement and thus not available as General Fund revenues.

Orange County. On December 6, 1994, Orange County, California (the
'County'), together with its pooled investment funds (the 'Pools'), filed for
protection under Chapter 9 of the federal Bankruptcy Code, after reports that
the Pools had suffered significant market losses in their investments causing a
liquidity crisis for the Pools and the County. More than 200 other public
entities, most but not all located in the County, were also depositors in the
Pools. The County has estimated the Pools' loss at about $1.7 billion, or 23% of
its initial deposits of around $7.5 billion. Some of the entities which kept
monies in the Pools, including the County, are facing financial difficulties
because of the bankruptcy filing and may be required to reduce programs or
capital projects. The County and some of these entities have, and others may in
the future, default in payment of their obligations. Moody's and S&P have
suspended, reduced to below investment grade levels, or placed on 'Credit Watch'
various securities of the County and the entities participating in the Pools. On
May 2, 1995, the Bankruptcy Court approved a settlement agreement by which the
non-County participants in the Pools received immediate cash payments equal to
77% of their investment. Certain County obligations, which have since been
converted to cash, were issued to most participants in the amount of 3% of their
investment (except that school districts received additional distributions equal
to 13% of their investment) in return for waiving any further claims against the
County. The remaining amounts will be payable by the County from future sources
of revenue or legal claims. A few agencies (representing less than 10% of the
participations) declined to receive the additional payments above the 77% cash
payout, and have retained their rights to pursue claims against the County.
County voters on June 27, 1995 rejected a proposition to impose an additional
0.5% sales tax to help pay the County's obligations. Subsequently, holders of
about $800 million of the County's short-term notes coming due during the summer
of 1995 agreed to a one-year extension of the maturity of these notes, avoiding
an immediate default. Moody's and S&P have, however, indicated they will
consider these notes in default since they were not paid when originally due.
The County has implemented a new financial plan based in part on new revenue
sources transferred to the County from other local governments, as a result of
special legislation adopted in September 1995.

The State of California has no present obligation with respect to any
obligations or securities of the County or any of the other participating
entities. However, the State may be obligated to intervene to ensure that school
districts have sufficient funds to operate, or to maintain certain
county-administered State

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programs. As of December 1995, no school districts became insolvent as a result
of the bankruptcy of the County, and no other State obligation has been
asserted.

BUDGETARY FLEXIBILITY. Article XIIIB of the California Constitution,
adopted by voter initiative, established an 'Appropriations Limit' for the State
and local governments; excess state revenues are to be divided equally between
transfers to K-14 districts and refunds to taxpayers. A taxpayer refund has not
been required since FY1986-87.

Proposition 98 established a minimum expenditure base for State aid to K-14
districts, currently requiring allocation of over 34% of General Fund revenues
to such districts.

For many years starting in the early 1980s, the State maintained the SFEU
as a budget reserve in case of unexpected changes in revenues or expenditures
during a fiscal year. Since the start of the recession in 1990, the SFEU has
been in a negative balance, as the State accumulated sizable budget deficits.
The Budget Act for FY1995-96 projects elimination of the accumulated budget
deficits with a small positive balance (about $28 million) in the SFEU on June
30, 1996.

LABOR COSTS. The State government workforce is mostly unionized, subject
to the law which authorizes collective bargaining and prohibits strikes and work
slowdowns. All of the State's collective bargaining agreements expired June 30,
1995. The State has a substantial unfunded liability for future pension
benefits, and has utilized changes in its pension fund policies to reduce
current contribution requirements. If the investment assumptions used in
determining required State contributions are not sustained by actual results,
additional State contributions would be required in future years.

significantly during economic downturns, but are also significantly affected by
changing demographic and social trends which may impede the reduction of
caseloads during an economic recovery. The State has reduced AFDC payments to
meet budget pressures in recent years.

MEDI-CAL. California participates in the federal Medicaid program under a
state plan approved by the Health Care Financing Administration. The federal
government provides certain of the eligible program costs, with the remainder
shared by the State and its counties. Basic program eligibility and benefits are
determined by federal guidelines, but the State currently provides a number of
optional benefits and expanded eligibility. Program costs have increased
substantially in recent years, and account for a large share of the State
budget. The State has cut optional Medi-Cal services in recent years to reduce
expenditures. Proposed changes in the federal Medicare/Medicaid program may lead
to major restructuring of these programs in California. Federal law requires the
State to adopt reimbursement rates for hospitals and nursing homes that are
reasonable and adequate to meet the costs that must be incurred by efficiently
and economically operated facilities in providing patient care.

LITIGATION. The State is involved in certain legal proceedings (described
in the State's recent financial statements) that, if decided against the State,
may require the State to make significant future expenditures or may
substantially impair revenues.

STATE ASSISTANCE TO LOCALITIES. Property tax revenues received by local
governments declined more than 50% following voter approval of Proposition 13 in
1978. Subsequently, the California Legislature enacted measures to provide for
the redistribution of the State's General Fund surplus to local agencies, the
reallocation of certain State revenues to local agencies and the assumption of
certain governmental functions

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by the State to assist municipal issuers to raise revenues. In response to the
State's current fiscal difficulties, the State has reduced its financial
assistance to counties and cities, and adopted measures to transfer certain
governmental functions to its counties, accompanied by new funding sources. The
FY1993-94 Budget Act eliminated the remaining Proposition 13 assistance to all
local government entities other than K-14 education districts. Such actions have
compounded the serious fiscal constraints already experienced by many local
governments, several of which have been compelled to seek special assistance
from the State.

CONSTITUTIONAL, LEGISLATIVE AND OTHER FACTORS. Certain California
constitutional amendments, legislative measures, executive orders,
administrative regulations and voter initiatives are introduced and/or

implemented from time to time which may result in adverse fiscal or economic
effects.

The fiscal condition of local governments in California (58 counties, 480
cities and thousands of education, utility and other special districts) has been
constrained since the enactment of 'Proposition 13' in 1978, which reduced and
limited the future growth of property taxes, and limited the ability of local
governments to impose other taxes. Counties, in particular, have had fewer
options to raise revenues than many other local government entities, and have
been required to maintain many basic public services. A 1986 initiative statute,
called 'Proposition 62,' imposed additional limits on local governments,
essentially requiring either majority or 2/3 voter approval for any tax increase
(other than property taxes). Later court decisions had struck down most of
Proposition 62, and many local governments, particularly cities, had enacted or
raised local taxes without voter approval. In September 1995, the California
Supreme Court overruled the prior cases, and upheld the constitutionality of
Proposition 62. Many aspects of this decision remain unclear (such as its impact
on charter cities, and whether it will have retroactive effect), but its future
effect will be to further limit the fiscal flexibility of many local
governments.

In the aftermath of Proposition 13, the State provided aid from the General
Fund to make up some of the loss of property tax moneys, including taking over
the principal responsibility for funding local K-12 schools and community
colleges. Under the pressure of the recent recession, the Legislature has
eliminated the remnants of this post-Proposition 13 aid, although it has also
provided additional funding sources (such as sales taxes) and reduced mandates
for local services. Nonetheless, many counties, in particular, continue to be
under severe fiscal stress. While such stress has in recent years most often
been experienced by smaller, rural counties, larger urban counties have also
been affected.

Los Angeles County, the largest in the State, has reported severe fiscal
problems, leading to a nominal $1.2 billion deficit in its $12 billion budget
for the 1995-96 Fiscal Year. To balance the budget, the county has imposed
severe cuts in services, particularly for health care. Both Moody's and S&P have
reduced Los Angeles County's debt ratings in August 1995 (to 'A' and 'A-'),
respectively, and it remains on S&P Credit Watch with negative implications.
Orange County, which is presently operating under protection of the federal
Bankruptcy Court (see above), has substantially reduced services and personnel
in order to live within much reduced means.

SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL SECURITIES

The financial condition of the State of New York ('New York State' or the
'State'), its public authorities and public benefit corporations (the
'Authorities') and its local governments, particularly The City of New York (the
'City'), could affect the market values and marketability of, and therefore the
net asset value per share and the interest income of the Fund, or result in the
default of existing obligations, including obligations which may be held by the
Fund. The following section provides only a brief summary of the complex factors
affecting the financial situation in New York and is based on information
obtained from New York State,

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certain of its Authorities, the City and certain other localities, as publicly
available on the date of this Statement of Additional Information. The
information contained in such publicly available documents has not been
independently verified. It should be noted that the creditworthiness of
obligations issued by local issuers may be unrelated to the creditworthiness of
New York State, and that there is no obligation on the part of New York State to
make payment on such local obligations in the event of default in the absence of
a specific guarantee or pledge provided by New York State.

New York State and the City are each facing serious financial difficulties
and have each experienced recent declines in their credit standings. S&P and
Moody's have each assigned ratings for New York State's general obligation bonds
that are among the three lowest of those states with rated general obligation
bonds. The ratings of certain related debt of other issuers for which New York
State has an outstanding moral obligation, lease purchase, guarantee or other
contractual obligation are generally linked directly to the State's rating. S&P
and Moody's have each assigned ratings for the City's obligations that are among
the four lowest of those cities with rated general obligation bonds. Should the
financial condition of New York State, its Authorities or its local governments
deteriorate, their respective credit ratings could be further reduced, and the
market value and marketability of their outstanding notes and bonds could be
adversely affected, and their respective access to the public credit markets
jeopardized.

ECONOMIC FACTORS. New York is the third most populous state, and has a
relatively high level of personal wealth; however, the State economy has grown
more slowly than that of the nation as a whole, resulting in the gradual erosion
of its relative economic affluence (due to such factors such as relative costs
for taxes, labor and energy). The State's economy is diverse, with a
comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a very small share of the nation's
farming and mining activity. New York has a declining proportion of its
workforce engaged in manufacturing and increasing proportion engaged in service
industries. The State, therefore, is likely to be less affected than the nation
as a whole during an economic recession concentrated in construction and
manufacturing sectors of the economy, but likely to be more affected during a
recession concentrated in the service-producing sector. The State's
manufacturing and maritime base have been seriously eroded, as illustrated by

the decline of the steel industry in the Buffalo area and of the apparel and
textile industries in the City. In addition, the City experienced substantial
socio-economic changes, as a large segment of its population and a significant
share of corporate headquarters and other businesses relocated (many
out-of-state).

Both the State and the City experienced substantial revenue increases in
the mid-1980s attributable directly (corporate income and financial corporations
taxes) and indirectly (personal income and a variety of other taxes) to growth
in new jobs, rising profits and capital appreciation derived from the finance
sector of the City's economy. From 1977 to its 1988 peak, the finance, insurance
and real estate sectors rose 55%, to account in 1988 for 23% of total earnings
in the City and 14% statewide (compared to 7% nationwide). The finance sector's
growth was a catalyst for the New York metropolitan region's related business
and professional services, retail trade and residential and commercial real
estate markets. The then rising real estate market contributed to City revenues,
as higher property values and new construction added to collections from
property taxes, mortgage recording and transfer taxes and sales taxes on
building materials. The boom on Wall Street more than compensated for the
continued erosion of the State's (and the City's) manufacturing and maritime
base, since average wages in the finance, insurance and real estate sector and
related business and professional services were substantially higher (thereby
providing a net increase of higher incomes, taxed at even higher marginal
rates).

During the calendar years 1984 through 1991, the State's rate of economic
expansion was somewhat slower than that of the nation as a whole. In the
1990-1991 national recession, the economy of the Northeast

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region in general and the State in particular was more heavily damaged than that
of the rest of the nation and has been slower to recover.

Although the national economy began to expand in 1991, the State economy
remained in recession until 1993, when employment growth resumed. Employment
growth has been hindered during recent years by significant cutbacks in the
computer and instrument manufacturing, utility and defense industries. Personal
income increased substantially in 1992 and 1993. The State's economy entered
into the third year of a slow recovery in 1995. Most of the growth occurred in
the trade, construction and service industries, with buisiness, social services
and health sectors accounting for most of the service industry growth. According
to assumptions contained in the State financial plan for FY1995-96 issued on
June 20, 1995 (the '1995-96 State Financial Plan'), employment is currently
projected to grow slightly during 1995, although the rate of increase is
expected to be below the rate experienced in 1994, due to cutbacks in
governmental spending and employment at all levels, as well as continued
corporate downsizing. The Mid-Year Update to the 1995-96 State Financial Plan

issued on October 26, 1995 (the 'Mid-Year Update') contains a marginally weaker
economic forecast than that contained in the initial 1995-96 State Financial
Plan, and predicts a significant slowing of state employment growth during
calendar year 1996, due to the forecasted, slackening pace of national economic
growth, industry consolidation and shrinking governmental employment.

Notwithstanding the State budget for FY1995-96 which enacts significant tax
and program reductions, the State can expect to confront structural deficits in
future years. The 1995-96 State Financial Plan includes actions that will have
an effect on the budget outlook for FY1996-97 and beyond. In part, the 1995-96
State Financial Plan reflects actions which provide nonrecurring measures
(sometimes referred to as 'one-shots') variously estimated to provide $900
million to $1.0 billion of savings. Additionally, the three-year plan to reduce
State personal income taxes, as discussed below briefly, will decrease State tax
receipts by an estimated $1.7 billion in FY1996-97. Similarly, other actions
taken to reduce disbursements in the State's FY1995-96, such as reductions in
the State workforce and Medicaid and welfare expenditures, are expected to
provide greater reductions in future fiscal years. The net impact of these and
other factors is expected to produce a potential imbalance in receipts and
disbursements for State's FY1996-97 and future fiscal years.

Further, there can be no assurance that the State economy will not
experience worse-than-predicted results in FY1995-96 with corresponding material
and adverse effects on the State's projections of receipts and disbursements.
Although the Mid-Year Update projects a continued balance in the 1995-96 State
Financial Plan, downward revisions have been made to estimates of both receipts
and disbursements. As the 1995-96 State Financial Plan and the Mid-Year Update
are each based upon forecasts of national and State economic activity it should
be noted that many uncertainties exist in such forecasts, including federal
financial and monetary policies, the availability of credit and the condition of
the world economy. In addition, the economic and financial condition of the
State may be affected by various financial, social, economic and political
factors. These factors can be complex, may vary from year to year and are
frequently the results of actions taken not only by the State and its agencies
and instrumentalities, but also by other entities, such as the federal
government, that are not under the control of the State.

The fiscal health of the State may also be impacted by the fiscal health of
the City. Although the City has had a balanced budget since 1981, estimates of
the City's future revenues and expenditures are subject to various
uncertainties. For example, the effects of the October 1987 stock market crash
and the 1990-92 national recession have had a disproportionately adverse impact
on the New York City metropolitan region, as private sector job losses since
1989 have offset all the prior employment gains of the 1980s. Declines in both
employment and earnings in the finance sector contributed to declines in retail
sales and real estate values. In addition, a number of widely publicized
bankruptcies among highly leveraged retailing and brokerage
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companies occurred. The effects of the recession have extended to banking,
insurance, business services (such as law, accounting and advertising),
publishing and communications. Factors which may inhibit the City's economic
recovery include (i) credit restraints imposed by the weak financial condition
of several major money center banks located in the City; (ii) increases in
combined State and local tax burdens, if uncompetitive tax rates are imposed;
(iii) perceived declines in the quality of life attributable to service
reductions and the deterioration of the City's infrastructure; (iv) additional
employment losses in the City's banking sector or corporate headquarters complex
due to further corporate relocations or restructurings; or (v) increased
expenditures for public assistance and health care. The City's future economic
condition will also likely be affected by its competitive position as a world
financial center (compared to London, Tokyo, Frankfurt and competing regional
U.S. centers). Investors should note that the budget for the City FY1995-96
addresses a projected $2.7 billion budget gap. Most of the budget-gap closing
initiatives may be implemented only with the cooperation of the City's municipal
unions, or the State or Federal governments. No assurance can be given that such
initiatives will be successfully undertaken.

While the State's economy is broader-based than that of the City,
particular industries are concentrated in and have a disproportionate impact on
certain areas, such as heavy industry in Buffalo, photographic and optical
equipment in Rochester, machinery and transportation equipment in Syracuse and
Utica-Rome, computers in Binghamton and in the Mid-Hudson Valley and electrical
equipment in the Albany-Troy-Schenectady area. Constraints on economic growth,
taxpayer resistance to proposed substantial increases in local tax rates, and
reductions in State aid in regions apart from the City have contributed to
financial difficulties for several county and other local governments.

THE STATE. As noted above, the financial condition of the State is
affected by several factors, including the strength of the State and its
regional economies, actions of the federal government, and State actions
affecting the level of receipts and disbursements. Owing to these and other
factors, the State may, in future years, face substantial potential budget gaps
resulting from a significant disparity between tax revenues projected from a
lower recurring receipts base and the future costs of maintaining State programs
at current levels.

resulting in higher-than-expected receipts from personal income tax and various
business taxes and the relative success of the New York Local Government
Assistance Corporation ('LGAC'). The General Fund showed an operating surplus of
$914 million (on a GAAP basis). The State's budget for FY1994-95 was adopted on
June 8, 1994, more than two months after the beginning of the State's fiscal
year and has made all of the required quarterly revisions thereto as of the date
hereof. The State ended its FY1994-95 reporting a General Fund operating deficit
of $1.426 billion, primarily due to change in accounting methodologies used by
the State Comptroller and the use of $1.026 billion of the FY1993-94
cash-surplus to fund operating expenses in FY1994-95. These factors were offset
by net proceeds of $315 million of bonds issued by LGAC. Actual receipts
reported fell short of original projections, primarily in the categories of
business taxes. These shortfalls were offset by better than expected performance
in the remaining taxes, principally the user taxes and fees. Total expenditures
for FY1994-95 increased $2.083 billion, or 6.7% over the prior fiscal year.

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On June 7, 1995, the New York State legislature passed the final
legislation regarding the State's FY1995-96 budget. Both the enacted budget
bills and the State Financial Plan for FY1995-96 include the reductions in the
actual level of spending from that which occurred in FY1994-95 and project
reductions in Medicaid and State Authority operating costs. The FY1995-96 budget
also projects an approximate increase of 3% in all governmental funds over the
amounts received in FY1994-95 and includes the phase-in of a three-year
reduction in the State's personal income tax. The Governor released his proposed
budget for FY1996-97 on December 15, 1995 (the '1996-97 Executive Budget') 30
days in advance of the constitutionally-mandated release date. The 1996-97
Executive Budget projects a $3.9 billion budget gap, which it proposes to close
largely by Medicaid cost containment measures (approximately $1.0 billion),
welfare reform (approximately $240 million) and restructuring of the state
healthcare delivery system (approximately $470 million). The phased reduction of
the State's personal income tax is continued in the 1996-97 Executive Budget.
There are risks and uncertainties concerning whether or not certain tax and
spending cuts included in the FY1995-96 budget as adopted will be upheld if
challenged in the courts. For example, the State Comptroller is challenging the
proposed use of certain pension reserves. If such suit is successful,
approximately $110 million would become unavailable as a source of contribution
to the balanced State budget. Finally an additional $110 million in reductions
or from other sources may prove difficult. Additionally, even if all such tax
and spending cuts are successfully implemented, resulting in a balanced budget
for FY1995-96, there can be no assurance that the State will not face budget
gaps in future years, resulting from a disparity between tax revenues projected
from a lower recurring-receipts base and the spending required to maintain State
programs at current levels. Furthermore, the State is a party to numerous
lawsuits in which an adverse decision could require extraordinary expenditures.
Certain major budgetary considerations affecting the State are outlined below.

respectively), user taxes and fees (20% of FY1994-95 and nearly 21% of estimated
FY1995-96 General Fund tax receipts) and business taxes (15% of both FY1994-95
and estimated FY1995-96 General Fund tax receipts, respectively). Uncertainties
in taxpayer behavior as a result of actual and proposed changes in Federal tax
law also may have an adverse impact on State tax receipts. One-fourth of the 4%
State sales tax has been dedicated to pay debt service of LGAC, and has
correspondingly reduced General Fund receipts. To the extent those moneys are
not necessary for payment to LGAC, they are transferred from the LGAC Tax Fund
to the General Fund and reported as a transfer from other funds rather than as a
sales and use tax receipts. During FY1991-1992, 1992-93, 1993-94 and 1994-95,
moneys were so transferred. Capital gains are a significant component of income
tax collections. Auto sales and building materials are significant components of
retail sales tax collections. Tax rates are relatively high and may impose
political and economic constraints on the ability of the State to further
increase its taxes. In 1995, the State enacted a tax-reduction program designed
to reduce, by 20 percent over three years, receipts from the personal income
tax. The tax had remained unchanged since 1989 as a result of annual deferrals
of tax reductions originally enacted in 1987. The tax-reduction program is
estimated to reduce receipts by $515 million in FY1995-96, $2.2 billion in
FY1996-97 and to produce further significant reductions in FY1997-98. In
addition to such reductions in overall tax rates, the tax-reduction program also
includes other modifications to the tax laws which will have the effect of
lowering the amount of tax revenues to be received by the State. In the absence
of countervailing economic growth or expenditure cuts the tax cuts could make
the achievement of a balanced State budget more difficult in future years. A
significant risk to the 1995-96 State Financial Plan arises from tax legislation
pending in the U.S. Congress. Changes to the federal tax treatment of capital
gains, if made, are likely to flow automatically to the State personal income
tax. Such changes, depending upon their precise character and

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timing, as well as taxpayer response, could produce either revenue gain or loss
during the remainder of the State's 1995-96 fiscal year.

STATE DEBT. New York has the heaviest debt burden of any state (with
approximately $5.2 billion of general obligation, $4.7 billion of LGAC debt and
$18 billion of lease-purchase or other contractual debt outstanding as of March
31, 1995), and debt service costs absorb a large share of the State's budget. As
of March 31, 1995, the State is also obligated with respect to approximately
$7.0 billion for statutory moral obligations for nine of its Authorities and for
guarantees of $358 million of other Authority debt. Historically, the State has
had one of the largest seasonal financing requirements of any municipal issuer,
and was required each spring to borrow substantial sums in the credit markets to
finance its accumulated general fund deficit and its scheduled payments of aid
to local governments and school districts. In an effort to reduce such seasonal
borrowings, the State created LGAC as a financing vehicle to finance the State's
local assistance payments by issuing long-term debt, payable over 30 years from
a portion of the State sales tax (as discussed above). The State budget for
FY1995-96 and the 1995-96 State Financial Plan each proposed to utilize the
remainder of authorized but yet unissued LGAC bonds. As of June 1995, LGAC had
issued bonds and notes to provide net proceeds of $4.7 billion, thus completing

the LGAC program. The impact of LGAC's borrowing is that the State was able to
meet its cash flow needs in the first quarter of FY1995-96 without relying on
short-term seasonal borrowings. Neither the 1995-96 State Financial plan nor the
1994-95 State Financial Plan included a spring borrowing, the first time in 35
years that there was no short-term borrowing. Investors should note that the
enabling legislation for LGAC contains a covenant restricting the amount of the
State's spring borrowing, which may reduce the State's fiscal flexibility in
future years.

BUDGETARY FLEXIBILITY. A significant portion of the State's General Fund
budget is accounted for by contractually required expenses (such as pension and
debt service costs) and by federally mandated programs (such as AFDC and
Medicaid). In addition, State aid for school districts comprises a major share
of the budget, and total appropriations and distribution of such aid is
especially contentious politically. Furthermore, the State's ability to respond
to unanticipated developments in the future may have been impaired since the
State has utilized a substantial range of actions of a non-recurring nature in
recent years to finance its General Fund operations, including tapping excess
monies in special funds, refinancing outstanding debt to reduce reserve fund
requirements and current (but not long-term) debt service costs, recalculating
pension fund contributions, selling State assets, reimbursing past General Fund
expenditures by the issuance of authority debt and deferring payment for
expenditures to future fiscal years. The 1995-96 State Financial Plan contains
actions of a non-recurring nature including mergers of certain authorities,
payments from the sale of certain State assets and payments associated with the
resolution of certain court cases, totalling approximately $900 million to $1
billion. The 1996-97 Executive Budget, however, contains actions of a
non-recurring nature only to the extent of approximately $123 million.

LABOR COSTS. The State government workforce is mostly unionized, subject
to the Taylor Law which authorizes collective bargaining and prohibits (but has
not, historically, prevented) strikes and work slowdowns. Costs for employee
health benefits have increased substantially, and can be expected to further
increase. The State has a substantial unfunded liability for future pension
benefits, and has utilized changes in its pension fund investment return
assumptions to reduce current contribution requirements. If such investment
earnings assumptions are not sustained by actual results, additional State
contributions will be required in future years to meet the State's contractual
obligations. The State's change in actuarial method from the aggregate cost
method to a modified projected unit credit in FY1990-91 created a substantial
surplus that was amortized and applied to offset the State's contribution
through FY1993-94. This change in actuarial method was ruled unconstitutional by
the State's highest court and the State has returned to the aggregate

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cost method in FY1994-95 using a four-year phase-in. Employer contributions,
including the State's, are expected to increase over the next five to ten years.

PUBLIC ASSISTANCE. New York has the second largest number of persons
receiving public assistance (AFDC and Home Relief) of any state. AFDC costs are
shared among the federal government, the State and its counties (including the
City) by statutory formula. Caseloads tend to rise significantly during economic
downturns, but have fallen only in the later stages of past economic recoveries.

MEDICAID. New York participates in the federal Medicaid program under a
state plan approved by the Health Care Financing Administration. The federal
government provides a substantial portion of eligible program costs, with the
remainder shared by the State and its counties (including the City). Basic
program eligibility and benefits are determined by federal guidelines, but the
State provides a number of optional benefits and expanded eligibility. Program
costs have increased substantially in recent years, and account for a rising
share of the State budget. Federal law requires that the State adopt
reimbursement rates for hospitals and nursing homes that are reasonable and
adequate to meet the costs that must be incurred by efficiently and economically
operated facilities in providing patient care, a standard that has led to past
litigation by hospitals and nursing homes seeking higher reimbursement from the
State. The budget adopted for FY1995-96 and, in particular, the 1996-97
Executive Budget includes reductions in spending for Medicaid. Cutbacks in State
spending for Medicaid may adversely affect the financial condition of hospitals
and health care institutions that are the obligors of bonds that may be held by
the Fund.

THE STATE AUTHORITIES. The State's Authorities are not subject to the
constitutional restrictions on the incurrence of debt which apply to the State
itself, and may issue bonds and notes within the amounts of, and as otherwise
restricted by, their legislative authorization. The New York State Public
Authorities Control Board approves the issuance of debt and major contracts by
10 of the Authorities. As of September 30, 1994 (the date of the latest data
available), there were 18 Authorities that had outstanding debt of $100 million
or more, the aggregate debt of which (including refunding bonds and moral
obligation, lease-purchase, contractual obligation or State-guaranteed debt)
then totaled approximately $70.3 billion. As of March 31, 1995, aggregate public
authority debt outstanding as State-supported debt was $27.9 billion and
State-related debt was $36.1 billion. In recent years, the State has provided
financial assistance through appropriations, in some cases of a recurring
nature, to certain Authorities for operating and other expenses and (from 1976
to 1987) in fulfillment of its commitments on moral obligation indebtedness or
otherwise, for debt service. The State budgeted operating assistance of
approximately $1.3 billion for the Metropolitan Transportation Authority ('MTA')
during FY1994-95 and estimates total State assistance in FY1995-96 to be
approximately $1.1 billion. This assistance is expected to continue to be
required (and may increase) in future years. Failure by the State to appropriate
necessary amounts or to take other action to permit the Authorities to meet
their obligations could adversely affect the ability of the State and the
Authorities to obtain financing in the public credit markets and the market

price of the State's outstanding bonds and notes.

The MTA, whose credit rating was recently reduced, oversees the operation
of the City's subway and bus lines by its affiliates, the New York City Transit
Authority and the Manhattan and Bronx Surface Transit Operating Authority
(collectively, the 'TA'). MTA subsidiaries operate certain commuter rail and bus
lines in the New York metropolitan area. An affiliated agency, the Triborough
Bridge and Tunnel Authority ('TBTA'), operates certain intrastate toll bridges
and tunnels. To maintain its facilities and equipment, which deteriorated
significantly in the late 1970s due to deferred maintenance, the MTA prepares a
five year capital program subject to approval by the MTA Capital Program Review
Board. In April 1993, the State Legislature authorized the funding of a portion
of a five year $9.56 billion capital plan for the MTA for 1992 through 1996.
MTA's five year capital program for 1992-96 was approved by the State Capital
Program Review Board in

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December 1993. There can be no assurance that all governmental actions for the
1992-96 Capital Program will be taken, that funding sources currently identified
will not be decreased or eliminated, or that the Capital Program will not be
delayed or reduced. If the Capital Program is delayed or reduced, ridership and
fare revenues may decline, which could impair the MTA's ability to meet its
operating expenses without additional State assistance. In addition, because
fares are not sufficient to finance its mass transit operations, the MTA has
depended and will continue to depend for operating support upon a system of
State, local government and TBTA support, and, to the extent available, Federal
assistance (including loans, grants and operating subsidies). There can be no
assurance that any such assistance will continue at any particular level or in
any fixed relationship to the operating costs and capital needs of the MTA.

THE CITY. The City has required, and continues to require significant
financial assistance from the State. The City depends on the State to enable the
City to balance its budget and meet its cash requirements. In the early 1970s,
the City incurred substantial operating deficits, and its financial controls,
accounting practices and disclosure policies were widely criticized. In 1975,
the City encountered severe financial difficulties and lost access to the public
credit markets. The State Legislature responded in 1975 by creating the
Municipal Assistance Corporation For The City of New York ('MAC') to provide
financing assistance for the City and the Financial Control Board to exercise
certain oversight and review functions with respect to the City's finances. The
Financial Control Board's powers over the City were suspended in June 1986, but
would be reinstated (under current law) if the City experiences certain adverse
financial circumstances. At the time of the fiscal crisis the State provided
substantial financial assistance to the City, the Federal government provided

the City with direct seasonal loans and guarantees on the City's long-term debt
and the City's labor unions accepted deferrals of wage increases and approved
purchases of City bonds by the pension funds. No assurance can be given that
similar assistance would again be made available if needed, particularly given
the current budgetary constraints faced by both the Federal and State
governments.

The City provides services usually undertaken by counties, school districts
or special districts in other large urban areas, including the provision of
social services such as day care, foster care, health care, family planning,
services for the elderly and special employment services for needy individuals
and families who qualify for such assistance. State law requires the City to
allocate a large portion of its total budget to Board of Education operations,
and mandates that the City assume the local share of public assistance and
Medicaid costs. While the City has had GAAP operating surpluses in recent fiscal
years, the City has experienced growing financial difficulties, primarily
related to the impact of the recession on the local economy (reducing revenues
from most major taxes and increasing public assistance and Medicaid caseloads),
rising health care costs for City employees and for Medicaid and rising
inflation and interest rates. In response, the City implemented gap-closing
programs, which initially relied primarily on actions of a non-recurring nature,
but included substantial property tax rate increases and a personal income tax
surcharge imposed in FY1991 and selected service cutbacks. Reductions in State
aid, larger than budgeted labor settlements and increased police expenditures
added to the adverse budgetary impact of the local recession, confronting the
City with a potential $3.5 billion imbalance during FY1992 budget negotiations.
This initial budget gap was closed by adoption of a budget providing for various
tax increases and significant service reductions. Aid to nonprofit cultural
institutions in the City was significantly reduced (as was State aid to such
institutions), including certain institutions that are obligors of bonds that
may be held by the Fund.

The City's budget for FY1993-94 identified measures to close a $300 million
budget gap, which was the result of shortfalls in federal and State aid from
previously projected levels. The City achieved balanced operating results as
reported in accordance with GAAP for FY1993-94. For FY1994-95, the City adopted
a budget which halted the trend in recent years of substantial increases in
City-funded spending from one year

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to the next. The City budget adopted for FY1995-96 reduces City-funded spending
for the second consecutive year. Pursuant to State law, the City prepares a
four-year annual financial plan, which is reviewed and revised on a quarterly
basis and includes the City's capital, revenue and expense projections and
outlines proposed budget gap-closing programs for those years with projected
budget gaps. The mayor is responsible for preparing the City's four-year

financial plan including the City's current financial plan for the 1996 through
1999 fiscal years (the '1996-1999 Financial Plan'). The City's projections set
forth in the 1996-1999 Financial Plan are based on various assumptions and
contingencies which are uncertain and which may not materialize. Changes in
major assumptions could significantly effect the City's ability to balance its
budget and to meet its annual cash flow and financing requirements. Such
assumptions and contingencies include the timing and pace of a regional and
local economic recovery, increases in interest rates, the impact on real estate
tax revenues of the real estate market, wage increases for city employees
consistent with those assumed in the 1996-99 Financial Plan, employment growth,
the ability to implement proposed reductions in City personnel and other cost
reduction initiatives which may require in certain cases the cooperation of the
City's municipal unions, the ability of New York City Health and Hospitals
Corporation and the Board of Education to take actions to offset reduced
revenues, the ability to complete revenue generating transactions, provision of
State and federal aid and mandate relief, and the impact on City revenues of
proposals for federal and State welfare reform. No assurance can be given that
the assumptions used by the City in the 1996-1999 Financial Plan will be
realized. Furthermore, actions taken in recent fiscal years to avert deficits
may have reduced the City's flexibility in responding to future budgetary
imbalances, and have deferred certain expenditures to later fiscal years.

The City's original budget for FY1994-95 reflected proposed actions to
eliminate a $2.3 billion budget gap. The City submitted on July 21, 1995 a
fourth quarter modification to the City's financial plan for FY1994-95 which
projects a balanced budget in accordance with GAAP for the City's FY1994-95. On
July 11, 1995, the City submitted the 1996-1999 Financial Plan, which is based
on the City's expense and capital budgets for the City's FY1995-96 adopted on
June 14, 1995 (the '1996 City Budget'). The 1996 City Budget sets forth proposed
actions by the City for FY1995-96 to close a substantial projected budget gap
(approximately $3.1 billion) resulting from lower than projected tax receipts
and other revenues and greater then projected expenditures. Proposed actions in
the 1996-1999 Financial Plan for the City's FY1995-96 include a reduction of
approximately $400 million primarily affecting public assistance and Medicaid
payments by the City, expenditure reductions in agencies totalling approximately
$1.2 billion and transitional labor savings of approximately $600 million. These
and other proposed actions were contained in the 1996-1999 Financial Plan as
well as the 1996 City Budget. The Budget is subject to the ability of the City
to implement the reductions in expenditures, personal services and personnel,
which are substantial and may be difficult to implement. For example, one of the
key items contained in the 1996 City Budget is the sale of the City's water
system for approximately $2.3 billion. This plan has been hotly contested since
it was announced, and is currently the focus of several lawsuits. In November,
the Mayor sued the City Comptroller to compel his signature on bonds needed to
accomplish the sale of the water system. The Comptroller had blocked the bond
sale, stating that the sale of City water assets would be illegal and 'an
improvident fiscal gimmick.' In December, a coalition of civic, housing and
environmental groups from New York City and Westchester County filed suit to
block the Mayor's plan to sell the Water System and announced an intention to
join in the Comptroller's battle to block the bond sale. In addition, certain
proposals may be offset by various State and federal legislation which could

mandate levels of City funding inconsistent with the 1996 City Budget and the
1996-1999 Financial Plan. In addition, the 1996-1999 Financial Plan anticipates
the receipt of substantial amounts of Federal aid. Certain proposed State and
federal actions are subject to legislative, the governor's and the president's
approvals, as applicable. Both federal and State actions are uncertain, certain
legislative

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proposals contemplate significant reductions in federal spending, including
proposed federal welfare reform which could result in caps on, or block grants
of, federal programs. Further, no assurance can be given that either such
actions will in fact be taken or that the projected savings will result even if
such actions are taken.

The City derives its revenues from a variety of local taxes, user charges,
miscellaneous revenues and federal and State unrestricted and categorical
grants. The City projects that local revenues will provide approximately 68.0%
of total revenues in FY1995-96 while federal aid, including categorical grants,
will provide 11.7% in FY1995-96 and State aid, including unrestricted aid and
categorical grants, will provide 20.3% in FY1995-96. As a proportion of total
revenues, State aid has remained relatively constant over the period from 1980
to 1990, while federal aid was sharply reduced (having provided nearly 20% of
total fiscal year 1980 revenues). The largest source of the City's revenues is
the real estate tax (approximately 22% of total revenues projected for
FY1995-96, at rates levied by the City council (subject to certain State
constitutional limits). the City derives the remainder of its tax revenues from
a variety of other economically sensitive local taxes (subject to authorization
by the legislature), including: a local sales and compensating use tax
(primarily dedicated to MAC debt service) imposed in addition to the State's
retail sales tax; the personal income tax on City residents and the earnings tax
on non-residents; a general corporation tax; and a financial corporation tax.
High tax burdens in the City impose political and economic constraints on the
ability of the City to increase local tax rates. The City's four-year financial
plans have been the subject of extensive public comment and criticism,
principally questioning the reasonableness of assumptions that the City will
have the capacity to generate sufficient revenues in the future to provide the
level of services contained in such City financial plans. On July 10, 1995, S&P
lowered the City's credit rating from A- to BBB+, among the lowest ratings of
any major city in the country. The rating agency cited specifically the City
budget's reliance on 'one-shot' measures to balance the budget for FY1995-96
without rectifying the underlying structural problems, its continued optimistic
projections of State and federal aid, and continued high debt levels.

delayed State aid payments, and totalled $2.25 billion in FY1991-92, $1.40
billion in FY1992-93, $1.75 billion in FY1993-94 and $2.2 billion in FY1994-95.
Current projections forecast a need of $2.4 billion of seasonal financing for
FY1995-96. The City's current capital financing program reflects major
reductions (approximately $2.13 billion) in the size of the capital program to
be implemented cumulatively through FY1998-99 which is intended to reduce future
debt service requirements. Such reductions may adversely affect the condition of
the City's aging and deteriorating infrastructure and physical assets, such as
sewers, streets, bridges and tunnels, and mass transit facilities. Further, the
City's capital financing program currently contemplates receipt of proceeds of
approximately $1 billion resulting from the sale of the City's water system to
the Water Board, and proposes to utilize a substantial portion of such proceeds
for capital project improvements. It is not certain that such proceeds will
become available for capital improvements, because, as discussed above, the City
Comptroller has stated his opposition to such proposed transfer of the water
system.

In November 1993, the voters approved a proposed charter whereby Staten
Island would secede from the City. Staten Island is one of five
counties/boroughs, comprising 4% of the City's population and 19% of its land
area. State law provides a complex mechanism for such secession.

OTHER LOCALITIES. Certain localities in addition to the City could have
financial problems which, if significant, could lead to requests for additional
State assistance during the State's FY1995-96 and thereafter. Fiscal
difficulties experienced by the City of Yonkers, for example, could result in
State actions to allocate State resources in amounts that cannot yet be
determined. In the recent past, the State provided substantial

20
<PAGE>
financial assistance to its political subdivisions, totaling approximately 68%
of General Fund disbursements in the State's FY1992-93, 69% for FY1993-94, 70%
for FY1994-95 and estimated to account for 69% of General Fund disbursements in
FY1995-96, primarily for aid to elementary, secondary and higher education and
Medicaid and income maintenance and local transportation programs. The
Legislature enacted substantial reductions from previously budgeted levels of
State aid since December 1990. To the extent the State is constrained by its
financial condition, State assistance to localities may be further reduced,
compounding the serious fiscal constraints already experienced by many local
governments. Localities also face anticipated and potential problems resulting
from pending litigation (including challenges to local property tax
assessments), judicial decisions and socioeconomic trends.

The total indebtedness of all localities in the State, other than New York

City, was approximately $17.7 billion as of the localities' fiscal years ending
during 1993 (the date of the latest data available). A small portion
(approximately $105 million) of this indebtedness represented borrowing to
finance budgetary deficits issued pursuant to enabling State legislation
(requiring budgetary review by the State Comptroller). Subsequently, certain
counties and other local governments have encountered significant financial
difficulties including the counties of Nassau, Suffolk, Monroe and Westchester
and the City of Buffalo. The State has imposed financial control on the City
from 1977 to 1986 and on the City of Yonkers since 1984 under an appointed
control board in response to fiscal crises encountered by such municipalities.
The Legislature imposed certain limited fiscal restraints on Nassau and Suffold
counties, and authorized their issuance of deficit bonds to finance over several
years their respective 1992 operating deficits.

INVESTMENT LIMITATIONS OF THE FUNDS

FUNDAMENTAL LIMITATIONS. The following investment limitations cannot be
changed for the Funds without the affirmative vote of the lesser of (1) more
than 50% of the outstanding shares of the applicable Fund or (2) 67% or more of
the shares present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy. If a
percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or the amount of total assets will not be considered a
violation of any of the following limitations.

Each Fund will not:

(1) purchase any security if, as a result of that purchase, 25% or
more of the Fund's total assets would be invested in securities of
issuers having their principal business activities in the same
industry, except that this limitation does not apply to securities
issued or guaranteed by the U.S. government, its agencies or
instrumentalities or to municipal securities.

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

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

21
<PAGE>

(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.

California Tax-Free Income Fund and National Tax-Free 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,
fundamental restriction (7): Each state (including the District
of Columbia and Puerto Rico), territory and possession of the
United States, each political subdivision, agency,
instrumentality and authority thereof, and each multi-state
agency of which a state is a member is a separate 'issuer.' When
the assets and revenues of an agency, authority, instrumentality
or other political subdivision are separate from the government
creating the subdivision and the security is backed only by the
assets and revenues of the subdivision, such subdivision would
be deemed to be the sole issuer. Similarly, in the case of an
IDB or PAB, if that bond is backed only by the assets and
revenues of the non-governmental user, then that
non-governmental user would be deemed to be the sole issuer.
However, if the creating government or another entity guarantees
a security, then to the extent that the value of all securities
issued or guaranteed by that government or entity and owned by
the Fund exceeds 10% of the Fund's total assets, the guarantee
would be considered a separate security and would be treated as
issued by that government or entity. This restriction does not
limit the percentage of the Fund's assets that may be invested
in Municipal Obligations insured by any given insurer.

NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions may be
changed by each Trust's board of trustees without shareholder approval.

Each Fund will not:

(1) purchase any security if as a result of such purchase more than 5%
of its assets would be invested in securities with respect to
which payment of interest and principal are the responsibility of
a company, including its predecessors, with less than three years
operating history.

22
<PAGE>

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

(3) make investments in warrants if such investments, valued at the
lower of cost or market, exceed 5% of the value of its net assets,
which amount may include warrants that are not listed on the New
York Stock Exchange, Inc. ('NYSE') or the American Stock Exchange,
Inc. ('AMEX'), provided that such unlisted warrants, valued at the
lower of cost or market, do not exceed 2% of the Fund's net assets
and further provided that this restriction does not apply to
warrants attached to, or sold as a unit with, other securities.

(4) purchase or retain the securities of any issuer if the officers
and trustees of the Fund and the officers and directors of
Mitchell Hutchins (each owning beneficially more than 0.5% of the
outstanding securities of an issuer) own in the aggregate more
than 5% of the securities of an issuer.

(5) 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.

(6) 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.

(7) invest in oil, gas or mineral exploration or development programs
or leases, except that investments in securities of issuers that
invest in such programs or leases and investments in asset-backed
securities supported by receivables generated from such programs
or leases are not subject to this prohibition.

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

In addition, California Tax-Free Income Fund and National Tax-Free Income
Fund will not:

(9) invest more than 35% of its total assets in debt securities rated
Ba or lower by Moody's or BB or lower by S&P (or determined by
Mitchell Hutchins to be of comparable quality). This non-
fundamental policy can be changed only upon 30 days' advance
notice to shareholders.

It is possible that one or more of the Funds from time to time will invest
more than 25% of its total assets in a particular segment of the municipal
securities market, such as hospital revenue bonds, housing agency bonds, IDBs,
PABs or airport bonds or in securities the interest upon which is paid from
revenues of a similar type of project. In such circumstances, economic,
business, political or other changes affecting one bond might also affect other
bonds in the same segment, thereby potentially increasing market risk.

<PAGE>
HEDGING AND RELATED INCOME STRATEGIES

As discussed in the Prospectus, Mitchell Hutchins may use a variety of
financial instruments ('Hedging Instruments'), including certain options,
futures contracts (sometimes referred to as 'futures') and options on futures
contracts, to attempt to hedge the Funds' portfolios and may use options to
attempt to enhance the Funds' income. The particular Hedging Instruments are
described in the Appendix to this SAI. Because each Fund intends to use options
and futures for hedging purposes, each Fund may enter into options and futures
transactions that approximate (but do not exceed) the full value of its
portfolio. Any income realized from the use of options and futures would be
taxable to shareholders; therefore, a Fund would engage in hedging or related
income strategies only under unusual market conditions. The use of options and
futures solely to enhance income may be considered a form of speculation.

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

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

Hedging Instruments on securities generally are used to hedge against price

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

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

In addition to the products and strategies described below, Mitchell
Hutchins expects to discover additional opportunities in connection with
options, futures contracts and other hedging techniques. These new opportunities
may become available as Mitchell Hutchins develops new techniques, as regulatory
authorities broaden the range of permitted transactions and as new options,
futures contracts or other techniques are developed. Mitchell Hutchins may
utilize these opportunities to the extent that they are consistent with the
Funds' investment objectives and permitted by the Funds' investment limitations
and

24
<PAGE>

applicable regulatory authorities. The Funds' 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 HEDGING STRATEGIES. The use of Hedging Instruments
involves special considerations and risks, as described below. Risks pertaining
to particular Hedging Instruments are described in the sections that follow.

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

hedge would not be fully successful. Such a lack of correlation might occur due
to factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which Hedging Instruments are
traded. The effectiveness of hedges using Hedging 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 projected a decline in the price of a security
in the Fund's portfolio, and the price of that security increased instead, the
gain from that increase might be wholly or partially offset by a decline in the
price of the Hedging Instrument. Moreover, if the price of the Hedging
Instrument declined by more than the increase in the price of the security, the
Fund could suffer a loss. In either such case, the Fund would have been in a
better position had it not hedged at all.

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

COVER FOR HEDGING STRATEGIES. Transactions using Hedging Instruments,
other than purchased options, expose a Fund to an obligation to another party. A
Fund will not enter into any such transactions unless it owns either (1) an
offsetting ('covered') position in securities or other options or futures
contracts or (2) cash and short-term liquid debt securities, with a value
sufficient at all times to cover its potential obligations to the extent not
covered as provided in (1) above. Each Fund will comply with SEC guidelines

25
<PAGE>
regarding cover for hedging transactions and will, if the guidelines so require,

set aside cash, U.S. government securities or other liquid, high-grade debt
securities in a segregated account with its custodian in the prescribed amount.

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

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

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

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

The Funds may purchase or write both exchange-traded and OTC options.
However, exchange-traded or liquid OTC options on municipal debt securities are
not currently available. Exchange markets for options on debt securities exist
but are relatively new, and these instruments are primarily traded on the OTC
market. Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction. In
contrast, OTC options are contracts between the Fund and its contra party
(usually a securities dealer or a bank) with no clearing organization guarantee.
Thus, when the Fund purchases or writes an OTC option, it relies on the contra
party to make or take delivery of the underlying investment upon exercise of the
option. Failure by the contra party to do so would result in the loss of any
premium paid by the Fund as well as the loss of any expected benefit of the
transaction. The Funds will enter into OTC option transactions only with contra
parties that have a net worth of at least $20 million.

26
<PAGE>

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

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

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

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

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

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

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

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

Futures strategies also can be used to manage the average duration of a

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

27
<PAGE>

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

Subsequent 'variation margin' payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
'marking to market.' Variation margin does not involve borrowing, but rather
represents a daily settlement of the 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 or put option thereon, it is subject
to daily variation margin calls that could be substantial in the event of
adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.

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

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

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

Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less

28
<PAGE>
onerous than margin requirements in the securities markets, there might be
increased participation by speculators in the futures markets. This
participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets involving
arbitrage, 'program trading' and other investment strategies might result in
temporary price distortions.

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

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

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

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

<PAGE>

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

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ --------------- ------------------------------
<S> <C> <C>
Margo N. Alexander**; 49 Trustee and Mrs. Alexander is president,
President chief executive officer and
a director of Mitchell
Hutchins (since January
1995). Mrs. Alexander is an
executive vice president and
director of PaineWebber.
Mrs. Alexander is also a
director or trustee of 29
investment companies and
president of 29 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as

investment adviser.
Richard Q. Armstrong; 60 Trustee Mr. Armstrong is chairman and
78 West Brother Drive principal of RQA Enterprises
Greenwich, CT 06830 (management consulting firm)
(since April 1991 and
principal occupation since
March 1995). Mr. Armstrong
is also a director of Hi Lo
Automotive, Inc. He was
chairman of the board, chief
executive officer and
co-owner of Adirondack
Beverages (producer and
distributor of soft drinks
and sparkling/still waters)
(October 1993-March 1995).
He was a partner of The New
England Consulting Group
(management consulting firm)
(December 1992-September
1993). He was managing
director of LVMH U.S.
Corporation (U.S. subsidiary
of the French luxury goods
conglomerate, Luis Vuitton
Moet Hennessey Corporation)
(1987-1991) and chairman of
its wine and spirits
subsidiary, Schieffelin &
Somerset Company
(1987-1991). Mr. Armstrong
is also a director or
trustee of 28 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
E. Garrett Bewkes, Jr.**; 69 Trustee and Mr. Bewkes is a director of,
Chairman of the and consultant to Paine
Board of Webber Group Inc. ('PW
Trustees Group') (holding company of
PaineWebber and Mitchell
Hutchins). Prior to 1988, he
was chairman of the board,
president and chief
executive office of American
Bakeries Company. Mr. Bewkes
is also a director of
Interstate Bakeries
Corporation and NaPro
BioTherapeutics, Inc. and a
director or trustee of 29
other investment companies
for which Mitchell Hutchins

or PaineWebber serves as
investment adviser.
</TABLE>

30
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ --------------- ------------------------------
<S> <C> <C>
Richard R. Burt; 49 Trustee Mr. Burt is chairman of
1101 Connecticut Avenue, N.W. International Equity
Washington, D.C. 20036 Partners (international
investments and consulting
firm) (since March 1994) and
a partner of McKinsey &
Company (management
consulting firm) (since
1991). He is also a director
of American Publishing
Company. 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
also a director or trustee
of 28 other investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Mary C. Farrell**; 46 Trustee Ms. Farrell is a managing
director, senior investment
strategist and member of the
Investment Policy Committee
of PaineWebber. Ms. Farrell
joined PaineWebber in 1982.
She is a member of the
Financial Women's
Association and Women's
Economic Roundtable, and is
employed as a regular
panelist on Wall Street Week
with Louis Rukeyser. She
also serves on the Board of
Overseers of New York
University's Stern School of

Business. Ms. Farrell also
is a director or trustee of
28 other investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Meyer Feldberg; 54 Trustee Mr. Feldberg is Dean and
Columbia University Professor of Management of
101 Uris Hall the Graduate School of
New York, New York 10027 Business, Columbia
University. Prior to 1989,
he was president of the
Illinois Institute of
Technology. Dean Feldberg is
also a director of AMSCO
International Inc.,
Federated Department Stores,
Inc. and New World
Communications Group
Incorporated and a director
or trustee of 28 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
George W. Gowen; 66 Trustee Mr. Gowen is a partner in the
666 Third Avenue law firm of Dunnington,
New York, New York 10017 Bartholow & Miller. Prior to
May 1994, he was a partner
in the law firm of Fryer,
Ross & Gowen. Mr. Gowen is
also a director of Columbia
Real Estate Investments,
Inc. and a director or
trustee of 28 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
</TABLE>

31
<PAGE>

Suite 300 (investment bank) and a
Washington, D.C. 20005 co-chairman and director of
CB Commercial Group Inc.
(real estate). From January
1992 to November 1992, he
was campaign manager of
Bush-Quayle '92. From 1990
to 1992, he was vice
chairman and, from 1989 to
1990, he was president of
Northwest Airlines Inc., NWA
Inc. (holding company of
Northwest Airlines Inc.) and
Wings Holdings Inc. (holding
company of NWA Inc.). Prior
to 1989, he was employed by
the Marriott Corporation
(hotels, restaurants,
airline catering and
contract feeding), where he
most recently was an
executive vice president and
president of Marriott Hotels
and Resorts. Mr. Malek is
also a director of American
Management Systems, Inc.,
Automatic Data Processing,
Inc., Avis, Inc., FPL Group,
Inc., National Education
Corporation and Northwest
Airlines Inc. and a director
or trustee of 28 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.

Corporation and Nutraceutix
Inc. (biotechnology). Prior
to January 1993, Mr. Schafer
was chairman of the
Investment Advisory
Committee of the Howard
Hughes Medical Institute.
Mr. Schafer also is a
director or trustee of 28
other investment companies
for which Mitchell Hutchins
or PaineWebber serves as
investment adviser.

John R. Torell III; 56 Trustee Mr. Torell is chairman of
767 Fifth Avenue Torell Management, Inc.
Suite 4605 (financial advisory firm)
New York, NY 10153 (since 1989), chairman of
Telesphere Corporation
(electronic provider of
financial information) and a
partner of Zilkha & Company
(merchant banking and
private investment company).
He is the former chairman
and chief executive officer
of Fortune Bancorp (since
</TABLE>

32
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ --------------- ------------------------------
<S> <C> <C>
1990-1991 and 1990-1994,
respectively), the former
chairman, president and
chief executive officer of
CalFed, Inc. (savings
association) (1988 to 1989)
and former president of
Manufacturers Hanover Corp.
(bank) (prior to 1988). Mr.
Torell is also a director of
American Home Products
Corp., New Colt Inc.
(armament manufacturer) and
Volt Information Sciences
Inc. Mr. Torell is a

director or trustee of 28
other investment companies
for which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Cynthia N. Bow; 37 Vice President Ms. Bow is a vice president of
(PW Mutual Fund Mitchell Hutchins. Ms. Bow
Trust only) has been with Mitchell
Hutchins since 1982. Ms. Bow
is also a vice president of
one other investment company
for which Mitchell Hutchins
or PaineWebber serves as
investment adviser.

Teresa M. Boyle; 37 Vice President Ms. Boyle is a first vice
president and
manager--advisory
administration of Mitchell
Hutchins. Prior to November
1993, she was Compliance
Manager of Hyperion Capital
Management, Inc., an
investment advisory firm.
Prior to April 1993, Ms.
Boyle was a vice president
and manager--legal
administration of Mitchell
Hutchins. Ms. Boyle is also
a vice president of 29 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Joan L. Cohen; 31 Vice President Ms. Cohen is a vice president
and Assistant and attorney of Mitchell
Secretary Hutchins. Prior to December
1993, she was an associate
at the law firm of Seward &
Kissel. Ms. Cohen is also a
vice president and assistant
secretary of 24 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
C. William Maher; 35 Vice President Mr. Maher is a first vice
and Assistant president and a senior
Treasurer manager of the mutual fund
finance division of Mitchell
Hutchins. Mr. Maher is also
a vice president and
assistant treasurer of 29
other investment companies

for which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Dennis McCauley; 48 Vice President Mr. McCauley is a managing
director and chief
investment officer--fixed
income of Mitchell Hutchins.
Prior to December 1994, he
was director of fixed income
investments of IBM
Corporation.
</TABLE>

33
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ --------------- ------------------------------
<S> <C> <C>
Mr. McCauley is also a vice
president of 17 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Ann E. Moran; 38 Vice President Ms. Moran is a vice president
and Assistant of Mitchell Hutchins. Ms.
Treasurer Moran is also a vice
president of 29 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Richard S. Murphy; 40 Vice President Mr. Murphy is a senior vice
(PW Mutual Fund president of Mitchell
Trust only) Hutchins. Prior to March
1994 Mr. Murphy was a vice
president at American
International Group.
Dianne E. O'Donnell; 44 Vice President Ms. O'Donnell is a senior vice
and Secretary president and deputy general
counsel of Mitchell
Hutchins. Ms. O'Donnell is
also a vice president and
secretary of 29 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Victoria E. Schonfeld; 45 Vice President Ms. Schonfeld is a managing

director and general counsel
of Mitchell Hutchins. From
April 1990 to May 1994, she
was a partner in the law
firm of Arnold & Porter. Ms.
Schonfeld is also a vice
president of 29 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Paul H. Schubert; 33 Vice President Mr. Schubert is a first vice
and Assistant president and a senior
Treasurer manager of the mutual fund
finance division of Mitchell
Hutchins. From August 1992
to August 1994, he was a
vice president at BlackRock
Financial Management, Inc.
Prior to August 1992, he was
an audit manager with Ernst
& Young LLP. Mr. Schubert is
also a vice president and
assistant treasurer of 29
other investment companies
for which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Julian F. Sluyters; 35 Vice President Mr. Sluyters is a senior vice
and Treasurer president and the director
of the mutual fund finance
division of Mitchell
Hutchins. Prior to 1991, he
was an audit senior manager
with Ernst & Young LLP. Mr.
Sluyters is also a vice
president and treasurer of
29 other investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
</TABLE>

34
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ --------------- ------------------------------
<S> <C> <C>

Gregory K. Todd; 39 Vice President Mr. Todd is a first vice
and Assistant president and associate
Secretary general counsel of Mitchell
Hutchins. Prior to 1993, he
was a partner in the firm of
Shereff, Friedman, Hoffman &
Goodman. Mr. Todd is also a
vice president and assistant
secretary of 29 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
William W. Veronda; 49 Vice President Mr. Veronda is a senior vice
(PW Municipal president of Mitchell
Series only) Hutchins. Prior to September
1995, he was a senior vice
president and general
manager at Invesco Funds
Group.
Keith A. Weller, 34 Vice President Mr. Weller is a first vice
and Assistant president and associate
Secretary general counsel of Mitchell
Hutchins. From September
1987 to May 1995, he was an
attorney in private
practice. Mr. Weller is also
a vice president and
assistant secretary of 23
other investment companies
for which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
</TABLE>

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

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

* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.

** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are 'interested persons' of the
Trusts as defined in the 1940 Act by virtue of their positions with PW Group.

Each Fund pays trustees who are not 'interested persons' of the Trusts
('disinterested trustees') $1,000 annually per Fund. Each Trust also pays its
disinterested trustees $150 per meeting of the board or any committee thereof.
Trustees are reimbursed for any expenses incurred in attending meetings.
Trustees of each Trust who are 'interested persons' of the Trust receive no
compensation from the Trust. Trustees and officers of the Trusts own in the
aggregate less than 1% of the shares of each Fund. Because Mitchell Hutchins and
PaineWebber perform substantially all of the services necessary for the
operation of the Trusts and the Funds, neither Trust requires any employees. No
officer, director or employee of Mitchell Hutchins or PaineWebber presently
receives any compensation from the Trusts for acting as a trustee or officer.
The table below includes certain information relating to the compensation of
each Trust's current trustees who held office during the fiscal year ended
February 29, 1996.

<PAGE>

COMPENSATION TABLE

<TABLE>
<CAPTION>
AGGREGATE COMPENSATION FROM AGGREGATE COMPENSATION FROM TOTAL COMPENSATION FROM THE
PAINEWEBBER MUNICIPAL PAINEWEBBER MUTUAL FUND TRUSTS AND THE FUND
NAME OF PERSON, POSITION SERIES* TRUST* COMPLEX**
- ------------------------------ --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Richard Q. Armstrong,
Trustee..................... $ $ $
Richard R. Burt,
Trustee.....................
Meyer Feldberg,
Trustee.....................
George W. Gowen,
Trustee.....................
Frederic V. Malek,
Trustee.....................
Carl W. Schafer,
Trustee.....................
John R. Torell, III,
Trustee.....................
</TABLE>

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

* Represents fees paid to each trustee during the fiscal year ended February
28, 1996.

** Represents total compensation paid to each trustee during the calendar year
ended December 31, 1995; no fund within the fund complex has a bonus,
pension, profit sharing or retirement plan.

INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS

INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of California Tax-Free Income Fund and National
Tax-Free Income Fund pursuant to a contract dated April 21, 1988 with
PaineWebber Mutual Fund Trust, as supplemented by a Fee Agreement dated June 30,
1992 with respect to National Tax-Free Income Fund, and of Municipal High Income
Fund and New York Tax-Free Income Fund pursuant to a contract with PaineWebber
Municipal Series dated July 1, 1989 (each an 'Advisory Contract' and,

collectively, the 'Advisory Contracts'). Under the Advisory Contracts, each Fund
pays Mitchell Hutchins a fee, computed daily and paid monthly, at the annual
rate of 0.50% of the Fund's average daily net assets (0.60% of average daily net
assets in the case of Municipal High Income Fund and New York Tax-Free Income
Fund).

Pursuant to their Advisory Contract and a substantially identical prior
contract, for the fiscal years ended February 29, 1996, February 28, 1995,
February 28, 1994, California Tax-Free Income Fund paid (or accrued) to Mitchell
Hutchins the amounts of [$ ], $1,340,491 and $1,662,653, respectively,
and National Tax-Free Income Fund paid (or accrued) to Mitchell Hutchins the
amounts of [$ ], $2,891,059 and $3,374,932, respectively. Pursuant to
their Advisory Contract, for the fiscal years ended February 29, 1996, February
28, 1995 and February 28, 1994, Municipal High Income Fund paid (or accrued) to
Mitchell Hutchins the amounts of [$ ], $768,555 and $861,664,
respectively, and New York Tax-Free Income Fund paid (or accrued) to Mitchell
Hutchins the amounts of [$ ], $481,509 (of which $10,398 was waived) and
$557,864 (of which $202,282 was waived).

36
<PAGE>

Pursuant to the Service Agreement with PaineWebber Mutual Fund Trust, during the
fiscal years ended February 29, 1996, February 28, 1995 and February 28, 1994,
California Tax-Free Income Fund paid (or accrued) the amounts of [$ ],
$24,838 and $26,755, respectively, and National Tax-Free Income Fund paid (or
accrued) the amounts of [$ ], $64,620 and $67,293, respectively. Pursuant
to the Service Agreement with PaineWebber Municipal Series, during the fiscal
years ended February 29, 1996, February 28, 1995 and February 28, 1994,
Municipal High Income Fund paid (or accrued) the amounts of [$ ], $19,534
and $19,512, respectively, and New York Tax-Free Income Fund paid (or accrued)
the amounts of [$ ], $10,747 (of which $3,734 was waived) and $9,492 (all
of which was waived), respectively.

Under the terms of the applicable Advisory Contract, each Fund bears all
expenses incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Trust not readily identifiable as belonging to
a particular Fund are allocated between the appropriate Funds by or under the
direction of the board of trustees in such manner as the board deems fair and
equitable. Expenses borne by each Fund include the following: (1) the cost
(including brokerage commissions, if any) of securities purchased or sold by the
Fund and any losses incurred in connection therewith; (2) fees payable to and
expenses incurred on behalf of the Fund by Mitchell Hutchins; (3) organizational
expenses; (4) filing fees and expenses relating to the registration and

qualification of the Fund's shares under federal and state securities laws and
maintenance of such registrations and qualifications; (5) fees and salaries
payable to trustees who are not interested persons of the Fund or Mitchell
Hutchins; (6) all expenses incurred in connection with the trustees' services,
including travel expenses; (7) taxes (including any income or franchise taxes)
and governmental fees; (8) costs of any liability, uncollectible items of
deposit and 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 Fund for violation of any law; (10) legal, accounting and auditing
expenses, including legal fees of special counsel for the independent trustees;
(11) charges of custodians, transfer agents and other agents; (12) costs of
preparing share certificates; (13) expenses of setting in type and printing
prospectuses and supplements thereto, statements of additional information and
supplements thereto, reports and proxy materials for existing shareholders and
costs of mailing such materials to existing shareholders; (14) any extraordinary
expenses (including fees and disbursements of counsel) incurred by the Fund;
(15) fees, voluntary assessments and other expenses incurred in connection with
membership in investment company organizations; (16) costs of mailing and
tabulating proxies and costs of meetings of shareholders, the board and any
committees thereof; (17) the cost of investment company literature and other
publications provided to trustees and officers; and (18) costs of mailing,
stationery and communications equipment.

As required by state regulation, Mitchell Hutchins will reimburse a Fund if
and to the extent that the aggregate operating expenses of the Fund in any
fiscal year exceed applicable limits. Currently the most restrictive such limit
applicable to a Fund is 2.5% of the first $30 million of the Fund's average
daily net assets, 2.0% of the next $70 million of its average daily net assets
and 1.5% of its average daily net assets in excess of $100 million. Certain
expenses, such as brokerage commissions, taxes, interest, distribution fees and
extraordinary items, are excluded from this limitation. For the fiscal years
ended February 29, 1996, February 28, 1995 and February 28, 1994, PaineWebber
and Mitchell Hutchins were not required to reimburse any Fund pursuant to state
limitations.

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 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 its assignment and is terminable at any time without penalty
by the

37
<PAGE>
board of trustees or by vote of the holders of a majority of a Fund's
outstanding voting securities, on 60 days' written notice to Mitchell Hutchins
or by Mitchell Hutchins on 60 days' written notice to a Fund.

The following table shows the approximate net assets as of ,

1996, sorted by category of investment objective, of the investment companies as
to which Mitchell Hutchins serves as adviser or sub-adviser. An investment
company may fall into more than one of the categories below.

<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($ MIL)
- ------------------------------------------------------------ ----------
<S> <C>
Domestic (excluding Money Market)........................... $
Global......................................................
Equity/Balanced.............................................
Fixed Income (excluding Money Market).......................
Taxable Fixed Income...................................
Tax-Free Fixed Income..................................
Money Market Funds..........................................
</TABLE>

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

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

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

Under the Class C Plan, each Fund pays Mitchell Hutchins a distribution fee,
accrued daily and payable monthly, at the annual rate of 0.50% of the average
daily net assets of the Class C shares.

Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the Trust's board of trustees at least quarterly, and the trustees
will review, reports regarding all amounts expended under the Plan and the
purposes for which such expenditures were made, (2) the Plan will continue in
effect only so long as it is approved at least annually, and any material
amendment thereto is approved, by the Trust's board of trustees, including those
trustees who are not 'interested persons' of the Trust and who have no direct or
indirect financial interest in the operation of the Plan or any agreement
related to the Plan, acting in person at

38
<PAGE>
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 that Fund and (4)
while the Plan remains in effect, the selection and nomination of trustees who
are not 'interested persons' of the Trust shall be committed to the discretion
of the trustees who are not interested persons of the Trust.

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

Under prior plans of distribution substantially similar to the Class A
Plan, each Fund paid Mitchell Hutchins a monthly distribution fee computed at
the same rate and in the same manner as the service fees under the Class A Plan.

The Funds paid (or accrued) the following fees to Mitchell Hutchins under
the Class A, Class B and Class C Plans during the fiscal year ended February 29,
1996:

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

* During the fiscal year shown above, Mitchell Hutchins waived all or a portion
of its distribution fees. If such waivers had not been made, for the Class A,
Class B and Class C shares the actual fees which would have been paid by the
Fund would have been [ ], respectively, for New
York Tax-Free Income Fund.

Mitchell Hutchins estimates that it and its parent corporation,
PaineWebber, incurred the following shareholder service-related and
distribution-related expenses with respect to the Funds during the fiscal year
ended February 29, 1996:

CLASS A

<TABLE>
<CAPTION>
CALIFORNIA NATIONAL NEW YORK
TAX-FREE TAX-FREE MUNICIPAL HIGH TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Marketing and
advertising............
Amortization of
commissions............
Printing of prospectuses
and statements of
additional
information............
Branch network costs
allocated and interest
expense................
Service fees paid to
PaineWebber Investment
executives.............
</TABLE>

39
<PAGE>

<TABLE>
<CAPTION>
CLASS B

CALIFORNIA NATIONAL NEW YORK
TAX-FREE TAX-FREE MUNICIPAL HIGH TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND

----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Marketing and
advertising............
Amortization of
commissions............
Printing of prospectuses
and statements of
additional
information............
Branch network costs
allocated and interest
expense................
Service fees paid to
PaineWebber Investment
executives.............

CLASS C
<CAPTION>

CALIFORNIA NATIONAL NEW YORK
TAX-FREE TAX-FREE MUNICIPAL HIGH TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Marketing and
advertising............
Amortization of
commissions............
Printing of prospectuses
and statements of
additional
information............
Branch network costs
allocated and interest
expense................
Service fees paid to
PaineWebber Investment
executives.............
</TABLE>

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

In approving each Fund's overall Flexible Pricing(Service Mark) system of
distribution, the Trust's board of trustees considered several factors,
including that implementation of Flexible Pricing would (1) enable investors to
choose the purchasing option best suited to their individual situation, thereby
encouraging current shareholders to make additional investments in the 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 for each Fund, the trustees considered all
the features of the distribution system, including (1) the conditions under
which initial sales charges would be imposed and the amount of such charges, (2)
Mitchell Hutchins' belief that the initial sales charge combined with a service
fee would be attractive to PaineWebber investment executives and correspondent
firms, resulting in greater growth of the Fund than might otherwise be the case,
(3) the advantages 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.

40
<PAGE>

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

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

With respect to each Plan, the trustees considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The trustees also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that Mitchell
Hutchins would receive service, distribution and advisory fees that are
calculated based upon a percentage of the average net assets of 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 and similar prior distribution contracts, for the fiscal
years and the fiscal period 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:

41
<PAGE>

CALIFORNIA TAX-FREE INCOME FUND

<TABLE>

<CAPTION>
FOR THE FISCAL YEARS ENDED
------------------------------------
FEBRUARY 28,
FEBRUARY 29, --------------------
1996 1995 1994
------------ -------- --------
<S> <C> <C> <C>
Earned......... $ 88,183 $322,044
Retained....... 6,470 8,324
</TABLE>

NATIONAL TAX-FREE INCOME FUND

<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
------------------------------------
FEBRUARY 28,
FEBRUARY 29, --------------------
1996 1995 1994
------------ -------- --------
<S> <C> <C> <C>
Earned......... $195,108 $732,825
Retained....... 14,852 47,024
</TABLE>

MUNICIPAL HIGH INCOME FUND

<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
------------------------------------
FEBRUARY 28,
FEBRUARY 29, --------------------
1996 1995 1994
------------ -------- --------
<S> <C> <C> <C>
Earned......... $ 59,937 $250,560
Retained....... 4,449 17,606
</TABLE>

NEW YORK TAX-FREE INCOME FUND

<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
------------------------------------

FEBRUARY 28,
FEBRUARY 29, --------------------
1996 1995 1994
------------ -------- --------
<S> <C> <C> <C>
Earned......... $ 38,348 $170,247
Retained....... 2,923 11,171
</TABLE>

Mitchell Hutchins earned and retained the following contingent deferred
sales charges paid upon certain redemptions of Class B shares for the fiscal
year ended February 29, 1996:

</TABLE>

PORTFOLIO TRANSACTIONS

Subject to policies established by each Trust's board of trustees, Mitchell
Hutchins is responsible for the execution of each Fund's portfolio transactions
and the allocation of brokerage transactions. In executing portfolio
transactions, Mitchell Hutchins seeks to obtain the best net results for a Fund,
taking into account such factors as the price (including the applicable dealer
spread or brokerage commission), size of order, difficulty of execution and
operational facilities of the firm involved. Each Fund effects its portfolio
transactions with municipal bond dealers. Municipal securities are traded on the
OTC market on a 'net' basis without a stated commission through dealers acting
for their own account and not as brokers. Prices paid to dealers in principal
transactions generally include a 'spread,' which is the difference between the
prices at which the dealer is willing to purchase and sell a specific security
at that time. Since inception, the Funds have not paid any brokerage
commissions.

42
<PAGE>

For purchases or sales with broker-dealer firms which act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive

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

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

Investment decisions for the Funds and for other investment accounts
managed by Mitchell Hutchins are made independently of each other in light of
differing considerations for the various accounts. However, the same investment
decision may occasionally be made for a Fund and one or more such accounts. In
such cases, simultaneous transactions are inevitable. Purchases or sales are
then averaged as to price and allocated between the Fund involved 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.

No Fund will purchase securities that are offered in underwritings in which
Mitchell Hutchins or any of its affiliates is a member of the underwriting or
selling group, except pursuant to procedures adopted by each Trust's board of
trustees pursuant to Rule 10f-3 under the 1940 Act. Among other things, these
procedures require that the commission or spread paid in connection with such a
purchase be reasonable and fair, that the purchase be at not more than the
public offering price prior to the end of the first business day after the date
of the public offering and that Mitchell Hutchins or any affiliate thereof not

participate in or benefit from the sale to a Fund.

PORTFOLIO TURNOVER. Each Fund's annual portfolio turnover rate may vary
greatly from year to year, but it will not be a limiting factor when management
deems portfolio changes appropriate. The portfolio turnover rate is calculated
by dividing the lesser of a Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year. For the fiscal years ended
February 29, 1996 and February 28, 1995, respectively, the portfolio turnover
rates for the Funds were: California Tax-Free Income Fund--[ %] and 10.61%;
National Tax-Free Income Fund--[ %] and 59.85%; Municipal High Income
Fund--[ %] and 28.44%; and New York Tax-Free Income Fund-- [ %] and
6.30%.

43
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

her holdings, and the acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time.

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

Certain PaineWebber mutual funds offered shares subject to contingent
deferred sales charges before the implementation of the Flexible Pricing System
on July 1, 1991 ('CDSC Funds'). The contingent deferred

44
<PAGE>
sales charge is waived with respect to redemptions of Class B shares of CDSC
Funds purchased prior to July 1, 1991 by officers, directors (trustees) or
employees of the CDSC Funds, Mitchell Hutchins or their affiliates (or their
spouses and children under age 21). In addition, the contingent deferred sales
charge will be reduced by 50% with respect to redemptions of Class B shares of
CDSC Funds purchased prior to July 1, 1991 with a net asset value at the time of
purchase of at least $1 million. If Class B shares of a CDSC Fund purchased
prior to July 1, 1991 are exchanged for Class B shares of a Fund, any waiver or
reduction of the contingent deferred sales charge that applied to the Class B
shares of the CDSC Fund will apply to the Class B shares of the Fund acquired
through the exchange.

ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of each Fund may be exchanged for shares of the
corresponding class of most other PaineWebber mutual funds. Shareholders will
receive at least 60 days' notice of any termination or material modification of
the exchange offer, except no notice need be given of an amendment whose only
material effect is to reduce the exchange fee, and no notice need be given if,
under extraordinary circumstances, either redemptions are suspended under the
circumstances described below or a Fund temporarily delays or ceases the sales
of its shares because it is unable to invest amounts effectively in accordance
with the Fund's investment objectives, 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. If payment is
made in securities, a shareholder may incur brokerage expenses in converting
these securities into cash. Each Trust has elected, however, to be governed by
Rule 18f-1 under the 1940 Act, under which a Fund is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of the net asset value of the
Fund during any 90-day period for one shareholder. This election is irrevocable
unless the SEC permits its withdrawal. A Fund may suspend redemption privileges
or postpone the date of payment during any period (1) when the NYSE is closed or
trading on the NYSE is restricted as determined by the SEC, (2) when an
emergency exists, as defined by the SEC, that makes it not reasonably
practicable for the Fund to dispose of securities owned by it or fairly to
determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of a Fund's portfolio at the time.

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

REINSTATEMENT PRIVILEGE-CLASS A SHARES. As described in the Prospectus,
shareholders who have redeemed their Class A shares may reinstate their account
in a Fund without a sales charge. Shareholders may exercise the reinstatement
privilege by notifying the Transfer Agent of such desire and forwarding a check
for

45
<PAGE>
the amount to be purchased within 365 days after the date of redemption. The
reinstatement will be made at the net asset value per share next computed after
the notice of reinstatement and check are received. The amount of a purchase

under this reinstatement privilege cannot exceed the amount of the redemption
proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised; however, a loss arising out of a
redemption will not be deductible to the extent the redemption proceeds are
reinvested, if the reinstatement privilege is exercised within 30 days after
redemption, and an adjustment will be made to the shareholder's tax basis for
the shares acquired pursuant to the reinstatement privilege. Gain or loss on a
redemption also will be adjusted for federal income tax purposes by the amount
of any sales charge paid on Class A shares, under the circumstances and to the
extent described below under 'Taxes'.

PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN(SERVICE MARK);

PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(REGISTERED) (RMA(REGISTERED))

Shares of the 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 anytime, but may take up to two weeks to become
effective.

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

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

46
<PAGE>

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:

o 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;

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

o automatic 'sweep' of uninvested cash into the RMA accountholder's choice
of one of the seven RMA money market funds-RMA Money Market Portfolio,
RMA U.S. Government Portfolio, RMA Tax-Free Fund, RMA California

Municipal Money Fund, RMA Connecticut Municipal Money Fund, RMA New
Jersey Municipal Money Fund and RMA New York Municipal Money Fund. Each
money market fund attempts to maintain a stable price per share of $1.00,
although there can be no assurance that it will be able to do so.
Investments in the money market funds are not insured or guaranteed by
the U.S. government;

o 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;

o 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;

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

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

o 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 each Fund will automatically convert to Class A shares,
based on the relative net asset values of each of the 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 of the Fund occurs. For the purpose of calculating the holding
period required for conversion of Class B shares, the date of initial issuance
shall mean (1) the date on which such Class B shares were issued, or (2) for
Class B shares obtained through an exchange, or a series of exchanges, the date
on which the original Class B shares were issued. If a shareholder acquired
Class B shares of a Fund through an exchange of Class B shares of a CDSC Fund
that were acquired prior to July 1, 1991, the shareholder's holding period for
purposes of conversion is determined based on the date the CDSC Fund shares were
initially issued. For purposes of

47
<PAGE>
conversion to Class A, 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, a pro
rata portion of the Class B shares in the sub-account will also convert to Class
A. The portion will be determined by the ratio that the shareholder's Class B
shares converting to Class A bears to the shareholder's total Class B shares not
acquired through dividends and other distributions.

Under normal circumstances, the net asset values per share of the two
Classes of each Fund will be the same. However, if a Fund's accrued expenses on
any Business Day were to exceed the Fund's accrued income for that Business Day,
the net asset value per share of the Class B shares could be lower than that of
the Class A shares because of the higher ongoing expenses borne by the Class B
shares. If such a divergence existed on a conversion date, a shareholder would
receive fewer Class A shares than the number of Class B shares converted,
although the dollar value would be the same. Mitchell Hutchins considers the
possibility of such an occurrence to be remote.

The availability of the conversion feature is subject to (1) the continuing
applicability of a ruling of the Internal Revenue Service that the dividends and
other distributions paid on Class A and Class B shares will not result in
'preferential dividends' under the Internal Revenue Code and (2) the continuing
availability of an opinion of counsel to the effect that the conversion of
shares does not constitute a taxable event. If the conversion feature ceased to
be available, the Class B shares of each Fund would not be converted and would

continue to be subject to the higher ongoing expenses of the Class B shares
beyond six years from the date of purchase. Mitchell Hutchins has no reason to
believe that these conditions for the availability of the conversion feature
will not continue to be met.

VALUATION OF SHARES

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

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

48
<PAGE>

PERFORMANCE INFORMATION

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

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

P(1 + T)n = ERV

where: P = a hypothetical initial payment of $1,000 to purchase shares
of a specified Class

T = average annual total return of shares of that Class

n = number of years

ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of that period.

Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or 'T' in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value for Class A shares, the
maximum 4% initial sales charge is deducted from the initial $1,000 payment and,
for Class B and Class C shares, the applicable contingent deferred sales charge
imposed on a redemption of Class B 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. Each Fund also may refer in Performance
Advertisements to total return performance data that are not calculated
according to the formula set forth above ('Non-Standardized Return'). A Fund
calculates Non-Standardized Return for specified periods of time by assuming an
investment of $1,000 in Fund shares and assuming the reinvestment of all
dividends and other distributions. The rate of return is determined by
subtracting the initial value of the investment from the ending value and by
dividing the remainder by the initial value. Neither initial nor contingent
deferred sales charges are taken into account in calculating Non-Standardized
Return; the inclusion of those charges would reduce the return.

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

The following table shows performance information for the Class A, Class B
and Class C (formerly Class D) shares of the Funds for the periods indicated.

All returns for periods of more than one year are expressed as an average annual
return.

49
<PAGE>

<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE NATIONAL TAX-FREE MUNICIPAL HIGH
INCOME FUND INCOME FUND INCOME FUND
---------------------------- --------------------------- ---------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One year ended February
29, 1996:
Standardized Return*...
Non-Standardized
Return...............
Ten years or since
Inception** to February
29, 1996:
Standardized Return*...
Non-Standardized
Return...............
Five years ended February
29, 1996:
Standardized Return*...
Non-Standardized
Return...............

<CAPTION>
NEW YORK TAX-FREE
INCOME FUND
--------------------------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
One year ended February
29, 1996:
Standardized Return*...
Non-Standardized
Return...............
Ten years or since
Inception** to February
29, 1996:
Standardized Return*...
Non-Standardized
Return...............
Five years ended February
29, 1996:

Standardized Return*...
Non-Standardized
Return...............
</TABLE>

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

* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4%. All Standardized Return figures for Class
B and Class C shares reflect deduction of the applicable contingent deferred
sales charges imposed on a redemption of shares held for the period.

** The inception dates for the Class A shares of the Funds are as follows:
California Tax-Free Income Fund--September 16, 1985; National Tax-Free
Income Fund--December 3, 1984; Municipal High Income Fund--June 23, 1987;
and New York Tax-Free Income Fund--September 23, 1988. The inception dates
for the Class B shares and Class C shares (formerly Class D shares) of each
Fund are July 1, 1991 and July 2, 1992, respectively.

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 (formerly Class D shares)) at the end of the
Period. Yield quotations are calculated according to the following formula:

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

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

Except as noted below, in determining net investment income earned during
the Period (variable 'a' in the above formula), a 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 a Fund, interest
earned during the
50
<PAGE>
Period is then determined by totalling the interest earned on all debt
obligations. For purposes of these calculations, the maturity of an obligation
with one or more call provisions is assumed to be the next date on which the
obligation reasonably can be expected to be called or, if none, the maturity
date. With respect to Class A shares, in calculating the maximum offering price
per share at the end of the Period (variable 'd' in the above formula), a Fund's
current maximum 4% initial sales charge on Class A shares is included. The Funds
had the following yields for the 30-day period ended February 29, 1996:

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
California Tax-Free Income
Fund........................ % % %
National Tax-Free Income
Fund........................
Municipal High Income Fund....
New York Tax-Free Income
Fund........................
</TABLE>

Tax-exempt yield is calculated according to the same formula except that
variable 'a' equals interest exempt from federal income tax earned during the
Period. This tax-exempt yield is then translated into tax-equivalent yield
according to the following formula:

(E)
TAX EQUIVALENT YIELD = ----- + t
(1 - p)

E = tax-exempt yield of a Class of shares
p = stated income tax rate
t = taxable yield of a Class of shares

The tax-equivalent yield of California Tax-Free Income Fund assumes a
46.24% combined effective California and federal tax rate. The tax-equivalent
yield of New York Tax-Free Income Fund assumes a 46.88% effective New York
State, New York City and federal tax rate. The tax-equivalent yield of each of
National Tax-Free Income Fund and Municipal High Income Fund assumes a 39.6%
effective federal tax rate.

The Funds had the following tax-equivalent yields for the 30-day period
ended February 29, 1996:

51
<PAGE>
such materials to mutual fund performance rankings and other data, such as

comparative asset, expense and fee levels, published by Lipper, CDA,
Wiesenberger, ICD or Morningstar. Performance Advertisements also may refer to
discussions of a Fund and comparative mutual fund data and ratings reported in
independent periodicals, including (but not limited to) THE WALL STREET JOURNAL,
MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, 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.

Each Fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. 'Compounding' refers to the fact
that, if dividends or other distributions on an investment in a Fund are
reinvested by being paid 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 the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.

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

52
<PAGE>

TAXES

must derive less than 30% of its gross income each taxable year from the sale or
other disposition of securities, options or futures held for less than three
months ('Short-Short Limitation'); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. government securities, securities of
other RICs and other securities that are limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets;
and (4) at the close of each quarter of the Fund's taxable year, not more than
25% of the value of its total assets may be invested in securities (other than
U.S. government securities or the securities of other RICs) of any one issuer.

Entities or persons who are 'substantial users' (or persons related to
'substantial users') of facilities financed by IDBs or PABs should consult their
tax advisers before purchasing Fund shares because, for users of certain of
these facilities, the interest on those bonds is not exempt from federal income
tax. For these purposes, 'substantial user' is defined to include a 'non-exempt
person' who regularly uses in a trade or business a part of a facility financed
from the proceeds of IDBs or PABs.

Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as a Fund) plus 50% of their benefits
exceeds certain base amounts. Exempt-interest dividends from a Fund still are
tax-exempt to the extent described in the Prospectus; they are only included in
the calculation of whether a recipient's income exceeds the established amounts.

Special tax rules apply when a shareholder (1) disposes of Class A shares
through a redemption or exchange within 90 days of purchase and subsequently
acquires Class A shares of a PaineWebber or MH/KP fund without paying a sales
charge due to the 365-day reinstatement privilege or exchange privilege. See
'Reduced Sales Charges--Reinstatement Privilege--Class A shares' above and
'Exchanges' in the Prospectus. In these cases, any gain on the disposition of
the Class A shares would be increased, or loss decreased, by the amount of the

sales charge paid when the shares were acquired, and that amount will increase
the basis of the PaineWebber fund shares subsequently acquired. In addition, if
shares of a Fund are purchased within 30 days before or after redeeming that
Fund's shares (regardless of Class) at a loss, that loss will not be deductible
to the extent the redemption proceeds are reinvested and will increase the basis
of the newly purchased shares.

53
<PAGE>

Although no Fund currently expects to invest in instruments that generate
taxable interest income, if a Fund does so, under the circumstances described in
the Prospectus and in the discussion of municipal market discount bonds below,
the portion of any Fund dividend attributable to the interest earned thereon
will be taxable to the Fund's shareholders as ordinary income to the extent of
the Fund's earnings and profits, and only the remaining portion will qualify as
an 'exempt-interest dividend' (as described in the Prospectus). The respective
portions will be determined by the 'actual earned' method, under which the
portion of any dividend that qualifies as exempt-interest may vary, depending on
the relative proportions of tax-exempt and taxable interest earned during the
dividend period. Moreover, if a Fund realizes capital gain as a result of market
transactions, any distributions of the gain will be taxable to its shareholders.
Each Fund is required to withhold 31% of all taxable dividends, capital gain
distributions and redemption proceeds payable to any individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number. Each Fund also is required to withhold 31% of
all taxable dividends and capital gain distributions payable to those
shareholders who otherwise are subject to backup withholding.

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. Each Fund invests exclusively in debt
securities and receives no dividend income; accordingly, no portion of the
dividends or other distributions paid by any Fund is eligible for the
dividends-received deduction allowed to corporations.

Each Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year substantially all of its
ordinary (taxable) income for the calendar year and capital gain net income for
the one-year period ending on October 31 of that year, plus certain other
amounts.

The use of hedging and option income strategies, such as writing (selling)
and purchasing options and futures, involves complex rules that will determine
for income tax purposes the character and timing of recognition of the gains and
losses a Fund realizes in connection therewith. Income from transactions in
options and futures derived by a Fund with respect to its business of investing
in securities will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures will be subject to
the Short-Short Limitation if they are held for less than three months.

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

54
<PAGE>
maturity date within one year from its issuance) generally is treated as
ordinary (taxable) income, rather than capital gain, to the extent of the bond's
accrued market discount at the time of disposition. Market discount on such a
bond generally is accrued ratably, on a daily basis, over the period from the
acquisition date to the date of maturity. In lieu of treating the disposition
gain as above, a Fund may elect to include market discount in its gross income
currently, for each taxable year to which it is attributable.

CALIFORNIA TAXES. Individual shareholders of California Tax-Free Income
Fund who reside in California will not be subject to California personal income
tax on distributions received from the Fund to the extent such distributions are

attributable to interest on tax-exempt obligations issued by the State of
California or a California local government (or interest earned on obligations
of U.S. possessions or territories) ('exempt-interest dividends'), provided that
the Fund qualifies as a RIC under the Internal Revenue Code and satisfies the
requirement of California law that at least 50% of its assets at the close of
each quarter of its taxable year be invested in obligations the interest on
which is exempt from personal income taxation under the laws or Constitution of
California or the laws of the United States. Distributions from the Fund which
are attributable to sources other than those described in the preceding sentence
will generally be taxable to such shareholders as ordinary income. However,
distributions by California Tax-Free Income Fund, if any, that are derived from
interest on obligations of the U.S. government may also be designated by the
Fund and treated by its shareholders as exempt from California personal income
tax, provided that the foregoing 50% requirement is satisfied. Moreover, under
California legislation incorporating certain portions of the provisions of the
Internal Revenue Code applicable to RICs, amounts treated as capital gain
distributions for federal income tax purposes generally will be treated as
long-term capital gains for California personal income tax purposes. In
addition, distributions to shareholders other than exempt-interest dividends are
includable in income subject to the California alternative minimum tax.

Distributions of investment income and long-term and short-term capital
gains will not be excluded from taxable income in determining the California
corporate franchise tax for corporate shareholders. In addition, such
distributions may be includable in income subject to the California alternative
minimum tax.

Interest on indebtedness incurred by shareholders to purchase or carry
shares of California Tax-Free Income Fund will not be deductible for California
personal income tax purposes.

Shares of California Tax-Free Income Fund will not be subject to the
California property tax.

the Internal Revenue Code and satisfies the requirements that at least 50% of
its assets at the close of each quarter of its taxable year constitute
obligations which are tax-exempt for federal income tax purposes. Distributions
from the Fund which are attributable to sources other than those described in
the preceding sentence (including interest on obligations of other states and
their political subdivisions) will generally be taxable to such individual
shareholders as ordinary income. However, distributions by the Fund, if any,
that are derived from interest earned on obligations of the U.S. government may
also be designated by the Fund and treated by its shareholders as exempt from
personal income taxation for New York State and City purposes, provided that at
least 50% of the value of its total assets at the close of each quarter of its
taxable year is invested in such federal obligations. Distributions to
individual

55
<PAGE>
shareholders by the Fund which represent long-term capital gains for federal
income tax purposes will be treated as long-term capital gains for New York
State and City personal income tax purposes.

Shareholders of New York Tax-Free Income Fund that are subject to the New
York State corporation franchise tax or the City general corporation tax will be
required to include exempt-interest dividends paid by the Fund in their 'entire
net income' for purposes of such taxes and will be required to include their
shares of the Fund in their investment capital for purposes of such taxes.

Shareholders of New York Tax-Free Income Fund will not be subject to the
unincorporated business taxation imposed by the City solely by reason of their
ownership of shares in the Fund. If a shareholder is subject to the
unincorporated business tax, income and gains distributed by the Fund will be
subject to such tax except to the extent such distributions are directly
attributable to interest earned on tax-exempt obligations issued by New York
State or any political subdivision thereof (including the City).

Shares of New York Tax-Free Income Fund will not be subject to property
taxes imposed by New York State or the City.

Interest on indebtedness incurred by shareholders to purchase or carry
shares of the New York Tax-Free Income Fund generally will not be deductible for
New York State personal income tax purposes.

Interest income of the Fund which is distributed to the shareholders will
generally not be taxable to the Fund for purposes of the New York State
corporation franchise tax or the New York City general corporation tax.

The foregoing is a general summary of certain provisions of federal,
California and New York State and City tax laws currently in effect as they
directly govern the taxation of shareholders of the Funds. These provisions are
subject to change by legislative or administrative action, and any such change
may be retroactive with respect to Fund transactions. Shareholders are advised
to consult with their own tax advisers for more detailed information concerning
tax matters.

TAX-FREE INCOME VS. TAXABLE INCOME--NATIONAL TAX-FREE INCOME FUND AND
MUNICIPAL HIGH INCOME FUND. Table I below illustrates approximate equivalent
taxable and tax-free yields at the 1995 federal individual income tax rates. For
example, a couple with taxable income of $90,000 in 1995, or single individuals
with taxable income of $55,000 in 1995, whose investments earn a 6% tax-free
yield, would have to earn approximately an 8.70% taxable yield to receive the
same benefit.

TABLE I. 1995 FEDERAL TAXABLE VS. TAX-FREE YIELDS*

TAXABLE INCOME (000'S) A TAX-FREE YIELD OF
- ------------------------------- ---------------------------------------------
4.00% 5.00% 6.00% 7.00% 8.00%
SINGLE JOINT FEDERAL TAX ----- ----- ----- ----- -----
RETURN RETURN BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
- ------------- -------------- ----------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0-- 22.1 $ 0-- 36.9 15.00% 4.71 % 5.88 % 7.06 % 8.24 % 9.41 %
22.1-- 53.5 36.9-- 89.2 28.00 5.56 6.94 8.33 9.72 11.11
53.5--115.0 89.2--140.0 31.00 5.80 7.25 8.70 10.14 11.59
115.0--250.0 140.0--250.0 36.00 6.25 7.81 9.38 10.94 12.50
Over 250.0 Over 250.0 39.60 6.62 8.28 9.93 11.59 13.25
</TABLE>

- ------------------
* See note following Table III.

56
<PAGE>

TAX-FREE INCOME VS. TAXABLE INCOME--CALIFORNIA TAX-FREE INCOME FUND. Table
II below illustrates approximate equivalent taxable and tax-free yields at the
1995 individual federal and 1996 California personal income tax rates. For
example, a California couple with taxable income of $90,000, or a single
California individual with taxable income of $55,000, whose investments earn a
6% tax-free yield, would have to earn a 9.59% taxable yield to receive the same
benefit.

TABLE II. 1995 FEDERAL AND 1996 CALIFORNIA TAXABLE VS. TAX-FREE YIELDS*

(See notes 1-4 below)

EFFECTIVE A TAX-FREE YIELD OF
TAXABLE INCOME (000'S) CALIFORNIA ---------------------------------------------
--------------------------------- AND 4.00% 5.00% 6.00% 7.00% 8.00%
SINGLE JOINT FEDERAL TAX ----- ----- ----- ----- -----
RETURN RETURN BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
-------------- -------------- ----------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 18.1-- 23.4 $ 36.1-- 39.0 20.10% 5.01% 6.26% 7.51% 8.76% 10.01%
23.4-- 25.1 39.0-- 50.2 32.32 5.91 7.39 8.87 10.34 11.82
25.1-- 31.7 50.2-- 63.4 33.76 6.04 7.55 9.06 10.57 12.08
31.7-- 56.6 63.4-- 94.3 34.70 6.13 7.66 9.19 10.72 12.25
56.6--118.0 94.3--143.6 37.42 6.39 7.99 9.59 11.19 12.78
118.0--256.5 143.6--256.5 41.95 6.89 8.61 10.34 12.06 13.78
Over 256.5 Over 256.5 45.22 7.30 9.13 10.95 12.78 14.60
</TABLE>

1. Net amount subject to federal income tax after deductions and exemptions.
Assumes that all income is ordinary income.

2. The income ranges shown for 1996 reflect federal and California income
brackets for 1995. Inflation adjusted income brackets for 1996 are not yet
available.

3. The rates shown reflect federal and California rates for 1996 in effect as of
the date hereof. Those rates are still subject to change with retroactive
effect for 1996.

4. Excludes the impact of the phase out of personal exemptions, limitations on
itemized deductions and other credits, exclusions and adjustments which may
increase a taxpayer's marginal tax rate as well as the effect of certain
levels of income (including tax exempt income) on the taxability of social
security payments.
- ------------------
* See note following Table III.

TAX-FREE INCOME VS. TAXABLE INCOME--NEW YORK TAX-FREE INCOME FUND. Table
III below illustrates approximate equivalent taxable and tax-free yields at the
1995 federal individual, and New York State and New York City personal, income
tax rates. For example, a New York City couple with taxable income of $90,000 in
1995, whose investments earn a 4% tax-free yield, would have to earn a 6.59%
taxable yield to receive the same benefit. A couple who lives in New York State
outside of New York City with taxable income of $90,000 in 1995 would have to
earn a 6.27% taxable yield to realize a 4% tax-free yield.

Single taxpayers may also take advantage of high tax-free income. For
example, a single individual with taxable income of $55,000 in 1995 who lives in
New York City and whose investments earn a 4% tax-free yield, would have to earn
a 6.59% taxable yield to receive the same benefit. A single individual with
taxable income of $55,000 in 1995, who lives in New York State outside of New
York City would have to earn a 6.27% taxable yield to realize a 4% tax-free
yield.

57
<PAGE>

TABLE III. 1995 FEDERAL AND NEW YORK TAXABLE VS. TAX-FREE YIELDS*

A TAX-FREE YIELD OF
---------------------------------------------
TAXABLE INCOME (000'S) COMBINED
--------------------------------- FEDERAL/ 4.00% 5.00% 6.00% 7.00% 8.00%
SINGLE JOINT NYS/NYC ----- ----- ----- ----- -----
RETURN RETURN TAX BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
-------------- -------------- ----------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0-- 22.1 $ 0-- 36.9 25.19% 5.35% 6.68% 8.02% 9.36% 10.69%
22.1-- 53.5 36.9-- 89.2 36.64 6.31 7.89 9.47 11.05 12.63
53.5--115.0 89.2--140.0 39.32 6.59 8.24 9.89 11.54 13.18
115.0--250.0 140.0--250.0 43.71 7.11 8.88 10.66 12.44 14.21
Over 250.0 Over 250.0 46.88 7.53 9.41 11.29 13.18 15.06
</TABLE>

A TAX-FREE YIELD OF
---------------------------------------------
TAXABLE INCOME (000'S)
--------------------------------- COMBINED 4.00% 5.00% 6.00% 7.00% 8.00%
SINGLE JOINT FEDERAL/NYS ----- ----- ----- ----- -----
RETURN RETURN TAX BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
-------------- -------------- ------------ ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0-- 22.1 $ 0-- 36.9 21.45% 5.09% 6.37% 7.64% 8.91% 10.19%
22.1-- 53.5 36.9-- 89.2 33.47 6.01 7.52 9.02 10.52 12.02
53.5--115.0 89.2--140.0 36.24 6.27 7.84 9.41 10.98 12.55
115.0--250.0 140.0--250.0 40.86 6.76 8.45 10.15 11.84 13.53
Over 250.0 Over 250.0 44.19 7.17 8.96 10.75 12.54 14.33
</TABLE>

- ------------------
*Single rate assumes no dependents; joint rate assumes two dependents. The
yields listed are for illustration only and are not necessarily representative
of a Fund's yield. Each Fund invests primarily in obligations the interest on
which is exempt from federal income tax and, in the case of California Tax-Free
Income Fund, from California personal income tax and, in the case of New York
Tax-Free Income Fund, from New York State and New York City personal income
taxes; however, some of a Fund's investments may generate taxable income.
Effective tax rates shown are those in effect on the date of this Statement of
Additional Information; such rates might change after that date. The effective
rates reflect the highest tax bracket within each range of income listed.
However, a California or New York taxpayer within the lowest income ranges
shown may fall within a lower effective tax bracket. The figures set forth
above do not reflect the federal alternative minimum tax, limitations on
federal or state itemized deductions and personal exemptions or any state or
local taxes payable on Fund distributions (other than California, New York
State and New York City personal income taxes in the case of Tables II and
III).

58
<PAGE>

OTHER INFORMATION

series was designated as 'Initial Series.' Prior to July 1, 1991, the name of
this Trust was PaineWebber California Tax-Exempt Income Fund. Prior to June 30,
1992, National Tax-Free Income Fund was a series of a different Massachusetts
business trust, PaineWebber Managed Municipal Trust. Prior to July 1, 1991, the
name of Municipal High Income Fund was 'PaineWebber Classic High Yield Municipal
Fund' and prior to July 1, 1989, its name was 'PaineWebber High Yield Municipal
Bond Fund.' Prior to July 1, 1991, the name of New York Tax-Free Income Fund was
'PaineWebber Classic New York Tax-Free Fund.' Prior to November 10, 1995, the
Funds' Class C shares were known as 'Class D' shares.

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

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

<PAGE>

COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C., 20036-1800, counsel to the Funds, has passed
upon the legality of the shares offered by the Funds' Prospectus. Kirkpatrick &
Lockhart LLP also acts as counsel to Mitchell Hutchins and PaineWebber in
connection with other matters. The law firm of Orrick, Herrington & Sutcliffe,
400 Sansome Street, San Francisco, CA 94111, serves as counsel to California
Tax-Free Income Fund with respect to California law. The law firm of Orrick,
Herrington & Sutcliffe, 666 Fifth Avenue, New York, New York 10103, serves as
counsel to New York Tax-Free Income Fund with respect to New York law.

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

FINANCIAL STATEMENTS

The Funds' Annual Report to Shareholders for the fiscal year ended February
28, 1996 is a separate document supplied with this Statement of Additional
Information and the financial statements, accompanying notes and report of
independent auditors appearing therein are incorporated by reference in this
Statement of Additional Information.

<PAGE>

APPENDIX A

EACH FUND MAY INVEST IN A VARIETY OF MUNICIPAL SECURITIES, AS DESCRIBED BELOW:

MUNICIPAL BONDS--Municipal bonds are debt obligations issued to obtain
funds for various public purposes that pay interest that is exempt from federal
income tax in the opinion of issuer's counsel. The two principal classifications
of municipal bonds are 'general obligation' and 'revenue' bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as from the user of the facility being financed.
The term 'municipal bonds' also includes 'moral obligation' issues, which are
normally issued by special purpose authorities. In the case of such issues, an
express or implied 'moral obligation' of a related government unit is pledged to
the payment of the debt service, but is usually subject to annual budget
appropriations. The term 'municipal bonds' also includes municipal lease
obligations, such as leases, installment purchase contracts and conditional
sales contracts, and certificates of participation therein. Municipal lease
obligations are issued by state and local governments and authorities to
purchase land or various types of equipment or facilities and may be subject to
annual budget appropriations. The Funds generally invest in municipal lease
obligations through certificates of participation. The Funds do not presently
intend to purchase municipal lease obligations that are not rated by Moody's or
S&P.

INDUSTRIAL DEVELOPMENT BONDS AND PRIVATE ACTIVITY BONDS--IDBs and PABs are
issued by or on behalf of public authorities to finance various privately
operated facilities, such as airport or pollution control facilities. These
obligations are included within the term 'municipal bonds' if the interest paid
thereon is exempt from federal income tax in the opinion of the bond issuer's
counsel. IDBs and PABs are in most cases revenue bonds and thus are not payable
from the unrestricted revenues of the issuer. The credit quality of IDBs and
PABs is usually directly related to the credit standing of the user of the
facilities being financed. IDBs issued after August 15, 1986 generally are
considered PABs, and to the extent a Fund invests in such PABs, shareholders
generally will be required to include a portion of their exempt-interest
dividends from that Fund in calculating their liability for the AMT. See
'Dividends and Taxes.' Each Fund is authorized to invest more than 25% of its
net assets in IDBs and PABs.

FLOATING RATE AND VARIABLE RATE OBLIGATIONS--Floating rate and variable
rate obligations bear interest at rates that are not fixed, but that vary with

changes in specified market rates or indices. Accordingly, as interest rates
decrease or increase, the potential for capital appreciation or capital
depreciation is less than for fixed rate obligations. Floating rate or variable
rate obligations typically permit the holder to demand payment of principal from
the issuer or remarketing agent at par value prior to maturity and may permit
the issuer to prepay principal, plus accrued interest, at its discretion after a
specified notice period. Frequently, floating rate or variable rate obligations
and/or the demand features thereon are secured by letters of credit or other
credit support arrangements provided by banks, the credit standing of which
affects the credit quality of the obligations.

PARTICIPATION INTERESTS--Participation interests are interests in municipal
bonds, including IDBs and PABs, and floating and variable rate obligations that
are owned by banks. These interests carry a demand feature permitting the holder
to tender them back to the bank, which demand feature generally is backed by an
irrevocable letter of credit or guarantee of the bank. The credit standing of
such bank affects the credit quality of the participation interests.

61
<PAGE>

TENDER OPTION BONDS--Tender option bonds are long-term municipal securities
sold by a bank subject to a 'tender option' that gives the purchaser the right
to tender them to the bank at par plus accrued interest at designated times (the
'tender option'). The tender option may be exercisable at intervals ranging from
bi-weekly to semi-annually, and the interest rate on the bonds is typically
reset at the end of the applicable interval in an attempt to cause the bonds to
have a market value that approximates their par value. The tender option
generally would not be exercisable in the event of a default on, or significant
downgrading of, the underlying municipal securities. Therefore, a Fund's ability
to exercise the tender option will be affected by the credit standing of both
the bank involved and the issuer of the underlying securities.

PUT BONDS--A put bond is a municipal bond which gives the holder the
unconditional right to sell the bond back to the issuer or a remarketing agent
at a specified price and exercise date, which is typically well in advance of
the bond's maturity date. The obligation to purchase the bond on the exercise
date may be supported by a letter of credit or other credit support arrangement
from a bank, insurance company or other financial institution, the credit
standing of which affects the credit quality of the obligation.

TAX-EXEMPT COMMERCIAL PAPER AND SHORT-TERM MUNICIPAL NOTES--Tax-exempt
commercial paper and short-term municipal notes include tax anticipation notes,
bond anticipation notes, revenue anticipation notes and other forms of
short-term loans. Such notes are issued with a short-term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements and
other revenues.

INVERSE FLOATERS--Each Fund may invest in municipal obligations on which
the rate of interest varies inversely with interest rates on other municipal
obligations or an index. Such obligations include components of securities on
which interest is paid in two separate parts-an auction component, which pays
interest at a market rate that is set periodically through an auction process or
other method, and a residual component, or 'inverse floater,' which pays
interest at a rate equal to the difference between the rate that the issuer
would have paid on a fixed-rate obligation at the time of issuance and the rate
paid on the auction component. The market value of an inverse floater will be
more volatile than that of a fixed-rate obligation and, like most debt
obligations, will vary inversely with changes in interest rates.

Because the interest rate paid to holders of inverse floaters is generally
determined by subtracting the interest rate paid to the holders of auction
components from a fixed amount, the interest rate paid to holders of inverse
floaters will decrease as market rates increase and increase as market rates
decrease. Moreover, the extent of the increases and decreases in the market
value of inverse floaters may be larger than comparable changes in the market
value of an equal principal amount of a fixed rate municipal obligation having
similar credit quality redemption provisions and maturity. In a declining
interest rate environment, inverse floaters can provide a Fund with a means of
increasing or maintaining the level of tax-exempt interest paid to shareholders.
However, because of the market volatility associated with inverse floaters, no
Fund will invest more than 10% of its total assets in inverse floaters.

<PAGE>

APPENDIX B

Municipal bonds are rated by Moody's and S&P. Moody's and S&P also publish
separate ratings for municipal notes and tax-exempt commercial paper.
Descriptions of these ratings are set forth below.

DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS:

Aaa. Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. 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. They are rated lower than the Aaa bonds because margins of protection
may not be as large as in Aaa securities, fluctuation of protective elements may
be of greater amplitude, or there may be other elements present which made the
long-term risks appear somewhat larger than in Aaa securities.

A. Bonds which are rated A are judged to be upper medium grade
obligations. Security for principal and interest are considered adequate, but
elements may be present which suggest susceptibility to impairment sometime in
the future.

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

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

position characterizes bonds in this class.

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

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

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

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

DESCRIPTION OF S&P'S MUNICIPAL BOND RATINGS:

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

AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.

63
<PAGE>

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

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

category than in higher rated categories.

BB, B, CCC, CC AND C. Debt rated BB, B, CCC, CC and C is regarded as
having predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.

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

D. Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments 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 if debt service payments are continued.

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
ratings categories.

DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES AND OTHER SHORT-TERM
LOANS:

Moody's ratings for state and municipal notes and other short-term loans
are designated 'Moody's Investment Grade' ('MIG' or, for variable or floating
rate obligations, 'VMIG'). Such ratings recognize the differences between
short-term credit risk and long-term risk. Factors affecting the liquidity of
the borrower and short-term cyclical elements are critical in short-term
ratings. Symbols used will be as follows:

MIG-1/VMIG-1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.

MIG-2/VMIG-2. This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.

MIG-3/VMIG-3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.

MIG-4/VMIG-4. This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.

64
<PAGE>

DESCRIPTION OF S&P'S RATINGS OF STATE AND MUNICIPAL NOTES AND OTHER SHORT-TERM
LOANS:

S&P's tax-exempt note ratings are generally given to such notes that mature
in three years or less. The three rating categories are as follows:

SP-1. Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (1) designation.

SP-2. Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.

SP-3. Speculative capacity to pay principal and interest.

DESCRIPTION OF COMMERCIAL PAPER RATINGS

Commercial paper rated Prime-1 by Moody's are judged by Moody's to be of
the best quality. Their short-term debt obligations carry the smallest degree of
investment risk. Margins of support for current indebtedness are large or stable
with cash flow and asset protection well assured. Current liquidity provides
ample coverage of near-term liabilities and unused alternative financing
arrangements are generally available. While protective elements may change over
the intermediate or longer term, such changes are most unlikely to impair the

fundamentally strong position of short-term obligations.

Commercial paper rated A by S&P have the following characteristics.
Liquidity ratios are better than industry average. Long-term debt rating is A or
better. The issuer has access to at least two additional channels of borrowing.
Basic earnings and cash flow are in an upward trend. Typically, the issuer is a
strong company in a well-established industry and has superior management.
Issuers rated A are further refined by use of numbers 1, 2, and 3 to denote
relative strength within this highest classification. Those issues rated A-1
that are determined by S&P to possess extremely strong safety characteristics
are denoted with a plus (+) sign designation.

<PAGE>

APPENDIX C

THE FUNDS MAY USE THE FOLLOWING HEDGING AND OPTION INCOME INSTRUMENTS:

OPTIONS ON DEBT SECURITIES--A call option is a short-term contract pursuant
to which the purchaser of the option, in return for a premium, has the right to
buy the security underlying the option at a specified price at any time during
the term of the option. The writer of the call option, who receives the premium,
has the obligation, upon exercise of the option during the option term, to
deliver the underlying security against payment of the exercise price. A put
option is a similar contract which gives its purchaser, in return for a premium,
the right to sell the underlying security at a specified price during the option
term. The writer of the put option, who receives the premium, has the
obligation, upon exercise during the option term, to buy the underlying security
at the exercise price. Options on debt securities are traded primarily in the
OTC market rather than on any of the several options exchanges. At present, only
options on U.S. Treasury securities are listed for trading on any recognized
exchange.

OPTIONS ON INDEXES OF DEBT SECURITIES--An index assigns relative values to
the securities included in the index and fluctuates with changes in the market
values of such securities. Index options operate in the same way as more
traditional options except that exercises of index options are effected with
cash payments and do not involve delivery of securities. Thus, upon exercise of
an index option, the purchaser will realize and the writer will pay, an amount
based on the difference between the exercise price and the closing price of the
index. Currently, options on indexes of debt securities do not exist.

MUNICIPAL BOND INDEX FUTURES CONTRACTS--A municipal bond index futures
contract is a bilateral agreement pursuant to which one party agrees to accept
and the other party agrees to make delivery of an amount of cash equal to a
specified dollar amount times the difference between the index value at the
close of trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the bonds comprising the index is
made; generally contracts are closed out prior to the expiration date of the
contract.

MUNICIPAL DEBT FUTURES CONTRACTS--A municipal debt futures contract is a
bilateral agreement pursuant to which one party agrees to accept and the other
party agrees to make delivery of the specific type of municipal debt security
called for in the contract at a specified future time and at a specified price.
Currently there is no public market for municipal debt futures contracts.

OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right, in return for the premium, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a
specified price at any time during the option term. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be
accompanied by delivery of the accumulated balance, which 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.

66
<PAGE>

[This page intentionally left blank]

<PAGE>

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

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

TABLE OF CONTENTS

<S> <C>
PAGE
----
Investment Policies and Restrictions........... 1
Hedging and Related Income Strategies.......... 24
Trustees and Officers.......................... 30
Investment Advisory and Distribution
Arrangements................................. 36
Portfolio Transactions......................... 42
Reduced Sales Charges, Additional Exchange and
Redemption Information and Other Services.... 44
Conversion of Class B Shares................... 47
Valuation of Shares............................ 48
Performance Information........................ 49
Taxes.......................................... 53
Other Information.............................. 59
Financial Statements........................... 60
Appendix....................................... 61
</TABLE>

================================================================================

(Copyright)1996 PaineWebber Incorporated

Printed on
Recycled
Paper

================================================================================

PAINEWEBBER CALIFORNIA
TAX-FREE INCOME FUND

PAINEWEBBER NATIONAL

TAX-FREE INCOME FUND

PAINEWEBBER MUNICIPAL
HIGH INCOME FUND

PAINEWEBBER NEW YORK
TAX-FREE INCOME FUND

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

STATEMENT OF ADDITIONAL
INFORMATION

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

PAINEWEBBER

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

JULY 1, 1996

================================================================================

<PAGE>

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

PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND
NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND
NEW YORK TAX-FREE INCOME FUND
CLASS Y SHARES

1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
PROSPECTUS -- JULY 1, 1996

The Class Y shares described in this Prospectus are currently offered for sale
primarily to participants in the INSIGHT Investment Advisory Program
('INSIGHT'), when purchased through that program, and to the trustee of the

PaineWebber Savings Investment Plan ('PW SIP') on behalf of the PW SIP. See
'How to Buy Shares.'

--------------------
Prospectus Page 1

<PAGE>

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

PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

- --------------------------------------------------------------------------------
THE FUNDS AT A GLANCE
- --------------------------------------------------------------------------------

CALIFORNIA TAX-FREE INCOME FUND

INVESTMENT OBJECTIVE: High current income exempt from federal income tax and
California personal income tax.

SIZE: On , 1996, the Fund had over $ million in assets.

NATIONAL TAX-FREE INCOME FUND

GOAL: To provide you with superior current income on your investment that is
exempt from federal income tax, consistent with the Fund's quality standards for
preservation of capital and liquidity.

INVESTMENT OBJECTIVE: High current income exempt from federal income tax.

SIZE: On , 1996, the Fund had over $ million in assets.

MUNICIPAL HIGH INCOME FUND

GOAL: To provide you with superior current income on your investment that is
exempt from federal income tax by investing primarily in high yield, high risk
medium and lower grade securities.

INVESTMENT OBJECTIVE: High current income exempt from federal income tax.

RISKS: The Fund's net asset value fluctuates with movements in interest rates

and, during periods of market uncertainty, the value of municipal securities can
become volatile. The lower rated municipal securities in which the Fund may
invest are subject to greater risks of default and greater volatility than
higher rated securities. In addition, the market for lower rated municipal
securities may be thinner and less active than for higher rated securities. The
Fund's ability to invest more than 25% of its total assets in municipal
securities, the interest on which is paid from similar types of projects, may
increase the risk of investing in the Fund.

SIZE: On , 1996, the Fund had over $ million in assets.

NEW YORK TAX-FREE INCOME FUND

INVESTMENT OBJECTIVE: High current income exempt from federal income tax and New
York personal income tax.

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

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

PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND

MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

ability to invest more than 25% of its total assets in municipal securities, the
interest on which is paid from similar types of projects, may increase the risk
of investing in the Fund. The concentration of the Fund's investments in
securities issued by the State of New York, its municipalities and public
authorities may subject the Fund to greater risk than a fund that has a broader
range of investments. The State of New York and many of its agencies and local
governments have been experiencing, and continue to experience, significant
financial difficulties, and the credit standings of New York and of certain
local governments have been, and could be further, reduced.

SIZE: On , 1996, the Fund had over $ million in assets.

MANAGEMENT

Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), an asset
management subsidiary of PaineWebber Incorporated ('PaineWebber'), is the
investment adviser and administrator of the California Tax-Free Income Fund, the
National Tax-Free Income Fund, the Municipal High Income Fund, and the New York
Tax-Free Income Fund (each a 'Fund' and, collectively, the 'Funds').

MINIMUM INVESTMENT

To open an account, investors need $1,000; to add to an account, investors need
only $100.

WHO SHOULD INVEST

from federal income tax and California personal income tax (collectively,
'California Obligations'). Accordingly, the Fund is designed for investors
seeking income that is exempt from those taxes.

HOW TO PURCHASE CLASS Y SHARES

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

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

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

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

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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

THE PAINEWEBBER FAMILY OF FUNDS

o Money Market Funds for income and stability by investing in high-quality,
short-term investments.

o Bond Funds for income by investing mainly in bonds.

o Tax-Free Bond Funds for income exempt from federal income taxes and, in some
cases, state and local income taxes, by investing in municipal bonds.

o Asset Allocation Funds for long-term growth and income by investing in stocks
and bonds.

o Growth Funds for long-term growth by investing mainly in stocks.

o Global Funds for long-term growth by investing mainly in foreign stocks or
high current income by investing mainly in global debt instruments.

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

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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

- --------------------------------------------------------------------------------
EXPENSE TABLE
- --------------------------------------------------------------------------------

CLASS Y
-------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge on Purchases of Shares (as a % of offering price)................................... None
Sales Charge on Reinvested Dividends (as a % of offering price).......................................... None
Maximum Contingent Deferred Sales Charge (as a % of redemption proceeds)................................. None
Exchange Fee............................................................................................. None

ANNUAL FUND OPERATING EXPENSES* (as a % of average net assets)
CALIFORNIA TAX-FREE INCOME FUND
Management Fees........................................................................................
12b-1 Fees.............................................................................................
Other Expenses.........................................................................................
Total Operating Expenses............................................................................
NATIONAL TAX-FREE INCOME FUND
Management Fees........................................................................................
12b-1 Fees.............................................................................................
Other Expenses.........................................................................................
Total Operating Expenses............................................................................
MUNICIPAL HIGH INCOME FUND
Management Fees........................................................................................
12b-1 Fees.............................................................................................
Other Expenses.........................................................................................
Total Operating Expenses............................................................................
NEW YORK TAX-FREE INCOME FUND
Management Fees........................................................................................
12b-1 Fees.............................................................................................
Other Expenses.........................................................................................
Total Operating Expenses............................................................................
</TABLE>

- ------------------
* See 'Management' for additional information. The fees and expenses are those
actually incurred for the fiscal year ended February 29, 1996. Participation
in INSIGHT is subject to payment of an advisory fee at the maximum annual
rate of 1.50% of assets held through INSIGHT. This account charge is not
included in the table because non-INSIGHT participants are permitted to
purchase Class Y shares of the Funds.

--------------------
Prospectus Page 5

<PAGE>

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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

- --------------------------------------------------------------------------------
EXPENSE TABLE
(Continued)
- --------------------------------------------------------------------------------

EXAMPLE OF EFFECT OF FUND EXPENSES

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

<TABLE>
<CAPTION>
EXAMPLE ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- --------------------------------- -------- ----------- ---------- ---------

<S> <C> <C> <C> <C>
CALIFORNIA TAX-FREE INCOME FUND
Class Y..........................

NATIONAL TAX-FREE INCOME FUND
Class Y..........................

MUNICIPAL HIGH INCOME FUND
Class Y..........................

NEW YORK TAX-FREE INCOME FUND
Class Y..........................
</TABLE>

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Prospectus Page 6

<PAGE>

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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

The following tables provide investors with data and ratios for one Class Y
share of National Tax-Free Income Fund for the period shown. This information is
supplemented by the financial statements and accompanying notes appearing in the
Fund's Annual Report to Shareholders for the fiscal year ended February 29,
1996, which is incorporated by reference into the Statement of Additional
Information. The financial statements and notes, as well as the financial
information in the table below relating to the fiscal year ended February 29,
1996, have been audited by Ernst & Young LLP, independent auditors. Their report
is included in the Fund's Annual Report to Shareholders, which may be obtained
without charge. Further information about the Fund's performance is also
included in the Annual Report to Shareholders. As of February 29, 1996, Class Y
Shares for California Tax-Free Income Fund, Municipal High Income Fund, and New
York Tax-Free Income Fund had not yet commenced operations and no financial
information was therefore available.

<TABLE>
<CAPTION>
NATIONAL TAX-FREE
INCOME FUND
--------------------
CLASS Y
--------------------
FOR THE YEAR ENDED
FEBRUARY 29, 1996
--------------------
<S> <C>
Net asset value, beginning of period.............................................
-----------
Net investment income............................................................
Net realized and unrealized gains (losses) from investment transactions..........
-----------
Total from investment operations.................................................
-----------
Dividends from net investment income.............................................

Distributions from net realized gains from investment transactions...............
-----------
Total dividends and distributions to shareholders................................
-----------
Net asset value, end of period...................................................
-----------
-----------
Total investment return (1)......................................................
-----------
-----------
Ratios and Supplemental Data:
Net assets, end of period (000's)..............................................
Ratios of expenses to average
net assets..................................................................
Ratios of net investment income to average net assets..........................
Portfolio turnover rate..........................................................
</TABLE>

- ------------------
* Annualized.

+ Commencement of offering of shares.

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Prospectus Page 7

<PAGE>

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

PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------

CALIFORNIA TAX-FREE INCOME FUND

NATIONAL TAX-FREE INCOME FUND

MUNICIPAL HIGH INCOME FUND

NEW YORK TAX-FREE INCOME FUND

* * * *

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

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

PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

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

INVESTMENT PHILOSOPHY & PROCESS
- --------------------------------------------------------------------------------

The Team's investment process for each of PaineWebber California Tax-Free Income
Fund, PaineWebber National Tax-Free Income Fund, PaineWebber Municipal High
Income Fund and PaineWebber New York Tax-Free Income Fund consists of three
fundamental steps to determine duration, sector and security. Duration is set
based on the direction of interest rates and the shape of the yield curve.
Sector is determined by analyzing the spread between the prevailing yields of
municipal and treasury securities, investment opportunities within the municipal
market, and state tax exemption. Finally, security selection is established by
performing an analysis of both credit quality and structure of individual
issues.

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

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

PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

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

These charts show the total returns for Class Y shares of National Tax-Free
Income Fund. Past results are not a guarantee of future results. As of February
29, 1996, Class Y shares for California Tax-Free Income Fund, Municipal High
Income Fund, and New York Tax-Free Income Fund had not yet commenced operations
and no performance information was therefore available.

NATIONAL TAX-FREE INCOME FUND

As Class Y shares commenced operations on November 10, 1996, the 1996 return
represents the period from November 10, 1996 through December 31, 1996.

(CHART)

NATIONAL TAX-FREE INCOME FUND
AVERAGE ANNUAL RETURNS
As of February 29, 1996

CLASS Y SHARES
--------------
<S> <C>
Inception Date............................................... 11/10/95

Life......................................................... %
</TABLE>

PERFORMANCE INFORMATION

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

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

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

PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

- --------------------------------------------------------------------------------
THE FUNDS' INVESTMENTS
- --------------------------------------------------------------------------------

RISKS

Under normal circumstances, each Fund invests primarily in municipal securities.
Following is a discussion of certain risks that may affect each Fund:

Credit ratings attempt to evaluate the safety of principal and interest
payments and do not evaluate the volatility of the municipal security's value
or its liquidity and do not guarantee the performance of the issuer. The rating
agencies also may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial condition may be better
or worse than the rating indicates. There is a risk that rating agencies will
downgrade municipal securities. The Statement of Additional Information contains
further information about the Moody's and S&P ratings.

YIELD AND INTEREST RATES. The yield of a municipal security depends on a
variety of factors, including general municipal and fixed-income security market
conditions, the financial condition of the issuer, the size of the particular
offering, the maturity, credit quality and rating of the issue and expectations
regarding changes in tax rates. Generally, the longer the maturity of a
municipal security, the higher the rate of interest paid and the greater the
volatility. Further, if general market interest rates are increasing, the prices
of municipal obligations ordinarily will decrease and, if rates decrease, the
opposite generally will be true. During periods of market uncertainty, the
market values of municipal securities can become volatile. Each Fund may invest
in municipal securities with a broad range of maturities, based on Mitchell
Hutchins' judgment of current and future market conditions as well as other
factors, such as the Fund's liquidity needs. Accordingly, the average weighted
maturity of each Fund's portfolio may vary.

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

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

PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

In addition to these general risks, investments in each of the Funds are subject
to special risk considerations:

CALIFORNIA TAX-FREE INCOME FUND

RISKS OF CALIFORNIA OBLIGATIONS. California Tax-Free Income Fund's investment
concentration in California Obligations involves greater risks than if it
invested in the securities of a broader range of issuers. The Fund's yield and
net asset value per share can be affected by political and economic developments
within California, and by the financial condition of California, its public
authorities and political subdivisions. California suffered a severe recession
between 1990-1993, resulting in significant revenue shortfalls for both the
State and local government, and increased social service expenses. Further, in
the past California voters have passed amendments to the California Constitution
and other measures that limit the taxing and spending authority of California
governmental entities, and future voter initiatives could result in adverse
consequences affecting California Obligations. A more detailed discussion of the
risks of investing in California Obligations is included in the Statement of
Additional Information.

NEW YORK TAX-FREE INCOME FUND

RISKS OF NEW YORK OBLIGATIONS. New York Tax-Free Income Fund's investment
concentration in New York Obligations involves greater risks than if it invested
in the securities of a broader range of issuers. The Fund's yield and net asset
value per share can be affected by political and economic developments within
the State of New York, its public authorities and political subdivisions,
particularly New York City. Although New York State reduced its accumulated
general fund deficits and experienced operating surpluses in fiscal years
1991-92 through 1993-94, it continues to experience substantial financial
difficulties related to the recent recession, and an estimated budget gap of
approximately $4.7 billion is projected for fiscal year 1995-96 unless numerous
and substantial corrective measures are successfully implemented. New York City
and most suburban county governments are also experiencing serious fiscal
problems related to the recessionary performance of the regional economy, which
has caused substantial, broad-based and recurring revenue shortfalls. The credit
standings of New York State and New York City have been, and could be further,
reduced; and their ability to provide assistance to its public authorities and
political subdivisions has been, and could be further, impaired. A more detailed
discussion of the risks of investing in New York Obligations is included in the
Statement of Additional Information.

MUNICIPAL HIGH INCOME FUND

securities are those rated Ba, B, MIG-3 or MIG-4 by Moody's, BB, B or SP-3 by
S&P, have an equivalent rating from another NRSRO or, if unrated, are determined
by Mitchell Hutchins to be of comparable quality. Municipal securities rated
below investment grade are deemed by Moody's and S&P to be predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal and may involve major risk exposure to adverse conditions. The Fund's
policy of investing a portion of its assets in lower rated securities thus
entails greater risks than those associated with investment in higher rated
securities.

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

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

PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

INVESTMENT TECHNIQUES AND STRATEGIES

be considered a form of speculation. The Statement of Additional Information for
the Funds contains further information on these strategies.

o the fact that the skills needed to use hedging instruments are different from
those needed to select securities for the Funds,

o the possibility of imperfect correlation, or even no correlation, between
price movements of hedging instruments and price movements of the securities
being hedged,

o possible constraints placed on a Fund's ability to purchase or sell portfolio
investments at

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

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

PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

advantageous times due to the need for the Fund to maintain 'cover' or to
segregate securities, and

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

National Tax-Free Income Fund and New York Tax-Free Income Fund, for defensive
purposes, temporarily may invest more than 20% of its net assets in other
municipal obligations. For this purpose, 'suitable municipal obligations' means,
in the case of California Tax-Free Income Fund, California Obligations that pay
AMT exempt interest, in the case of National Tax-Free, municipal obligations
that pay AMT exempt interest and, in the case of New York Tax-Free Income Fund,
New York Obligations that pay AMT exempt interest. 'Other municipal obligations'
means municipal obligations that pay interest that is exempt from federal income
tax but is subject to California personal income tax (in the case of California
Tax-Free Income Fund), New York personal income tax (in the case of New York
Tax-Free Income Fund) or is not AMT exempt interest.

the income generated by securities lending activities is taxable, the Funds do
not expect to engage in securities lending except under unusual circumstances.

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

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

PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

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

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

INSIGHT

An investor who purchases $50,000 or more of shares of the mutual funds that are
available to INSIGHT participants (which include the PaineWebber mutual funds in
the Flexible Pricing System(Service Mark) and certain other specified mutual
funds) may take part in INSIGHT, a total portfolio asset allocation program
sponsored by PaineWebber, and thus become eligible to purchase Class Y shares.
INSIGHT offers comprehensive investment services, including a personalized asset
allocation investment strategy using an appropriate combination of funds,
monitoring of investment performance and comprehensive quarterly reports that
cover market trends, portfolio summaries and personalized account information.

Participating in INSIGHT is subject to payment of an advisory fee to PaineWebber
at the maximum annual rate of 1.5% of assets held through the program (generally
charged quarterly in advance), which covers all INSIGHT investment advisory
services and program administration fees. Employees of PaineWebber and its
affiliates are entitled to a 50% reduction in the fee otherwise payable for
participation in INSIGHT. INSIGHT clients may elect to have their INSIGHT fees
charged to their PaineWebber accounts (by the automatic redemption of money
market fund shares) or, if a qualified plan, invoiced.

Please contact your PaineWebber investment executive or PaineWebber
correspondent firm or call 1-800-697-1568 for more information concerning mutual
funds that are available to INSIGHT participants or for other INSIGHT program
information.

PURCHASES BY THE TRUSTEE OF THE PW SIP

The Class Y shares also are offered for sale to the trustee of the PW SIP, a
defined contribution plan sponsored by PaineWebber Group Inc. ('PW Group'). The
trustee of the PW SIP purchases and redeems Class Y shares to implement the
investment choices of individual plan participants with respect to their PW SIP
contributions. Individual plan participants should consult the Plan Information
Statement and Summary Plan Description of the PW SIP (collectively the 'Plan
Documents') for a description of the procedures and limitations applicable to
making and changing investment choices.

Copies of the Plan Documents are available from the PaineWebber Incorporated
Benefits Department, 1000 Harbor Boulevard, 10th Floor, Weehawken, NJ 07087
(telephone 1-201-902-4444).

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

ACQUISITION OF CLASS Y SHARES BY OTHERS

Present holders of Class Y shares of a former Mitchell Hutchins/Kidder, Peabody
('MH/KP') mutual fund who are not current INSIGHT participants may acquire Class
Y shares of a Fund only when those shares are issued in connection with the
reorganization of the MH/KP mutual fund into that Fund. This category includes
former employees of Kidder, Peabody & Co., Incorporated ('Kidder, Peabody'),
their associated accounts, present and former directors and trustees of the
MH/KP mutual funds.

--------------------
Prospectus Page 15
<PAGE>

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

PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

Dividends and other distributions on Class Y shares of a Fund issued in
connection with the reorganization will be paid in additional Class Y shares at
net asset value, unless the shareholder has requested cash payments. These
holders may not otherwise purchase additional Class Y shares.

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

- --------------------------------------------------------------------------------
HOW TO SELL SHARES
- --------------------------------------------------------------------------------

Class Y shares may be redeemed at their net asset value and redemption proceeds

will be paid after receipt of a redemption request, as described below.

REDEMPTIONS THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS

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

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

REDEMPTIONS THROUGH THE TRANSFER AGENT

Shareholders also may redeem Fund shares through the Transfer Agent.
Shareholders should mail redemption requests directly to the Transfer Agent:
PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington, Delaware
19899. A redemption request will be executed at the net asset value next
computed after it is received in 'good order,' and redemption proceeds will be
paid within seven days of the receipt of the request.

'Good order' means that the request must be accompanied by the following: (1) a
letter of instruction or a stock assignment specifying the number of shares or
amount of investment to be redeemed (or that all shares credited to the Fund
account be redeemed), signed by all registered owners of the shares in the exact
names in which they are registered, (2) a guarantee of the signature of each
registered owner by an eligible institution acceptable to the Transfer Agent and

in accordance with SEC rules, such as a commercial bank, trust company or member
of a recognized stock exchange, (3) other supporting legal documents for
estates, trusts, guardianships, custodianships, partnerships and corporations
and (4) duly endorsed share certificates, if any. Shareholders are responsible
for ensuring that a request for redemption is received in 'good order.'

REDEMPTIONS FOR PARTICIPANTS
IN PW SIP

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

ADDITIONAL INFORMATION ON REDEMPTIONS

A shareholder (other than a participant in the PW SIP) may have redemption
proceeds of

--------------------
Prospectus Page 16
<PAGE>

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

PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

$1 million or more wired to the shareholder's PaineWebber brokerage account or a
commercial bank account designated by the shareholder. Questions about this
option, or redemption requirements generally, should be referred to the
shareholder's investment executive at PaineWebber or one of its correspondent
firms. If a shareholder requests redemption of shares which were purchased

recently, a Fund may delay payment until it is assured that good payment has
been received. In the case of purchases by check, this can take up to 15 days.

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

- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------

Mr. Gerry has portfolio management responsibility for over $4 billion in

municipal assets at Mitchell Hutchins, including municipal bond and money funds
and private accounts. Mr. Gerry has been with Mitchell Hutchins since January
1996. Prior to January 1996, Mr. Gerry had been associated with J.P. Morgan
Private Banking since 1981, where he was responsible for managing municipal
assets, including several municipal bond funds. Ms. Bow has been with Mitchell
Hutchins since 1982. Mr. Murphy has been with Mitchell Hutchins since April
1994. From 1990 to March 1994, he was a vice president at American International
Group, where he managed the municipal bond portfolio. Mr. Veronda has been with
Mitchell Hutchins since September 1995. From 1984 to August 1995, he was a
senior vice president and general manager at Invesco Funds Group, where he
managed municipal bond and high yield corporate bond portfolios.

Other members of Mitchell Hutchins' municipal investments group provide input on
market outlook, interest rate forecasts, and other considerations pertaining to
municipal investments. This group, together with the municipal portfolio
managers, comprise the Municipal Investment Team that sets the strategy for the
management of PaineWebber municipal bond funds. The Municipal Investment Team is
complemented by a team of research analysts specializing in economic, credit,
quantitative and market research.

The board of each Trust has determined that brokerage transactions for its
respective Funds may

--------------------
Prospectus Page 17
<PAGE>

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

PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

be conducted through PaineWebber or its affiliates in accordance with procedures
adopted by the board.

ABOUT THE INVESTMENT ADVISER

Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, is the asset management subsidiary of PaineWebber, which is wholly owned

by PaineWebber Group Inc., a publicly owned financial services holding company.
On , 1996, Mitchell Hutchins was adviser or sub-adviser of
investment companies with separate portfolios and aggregate assets of
approximately $ billion.

MANAGEMENT FEES & OTHER EXPENSES

Each Fund also pays PaineWebber an annual fee of $4.00 per active shareholder
account held at PaineWebber for certain services not provided by the Transfer
Agent.

Each Fund values its assets based on their current market value when market
quotations are readily available. If that value is not readily available, assets
are valued at fair value as determined in good faith by or under the direction
of its board of trustees. The amortized cost method of valuation generally is
used to value debt obligations with 60 days or less remaining to maturity,
unless its board determines that this does not represent fair value.

- --------------------------------------------------------------------------------
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------

DIVIDENDS

Dividends from each Fund's net investment income are declared daily and paid
monthly. California Tax-Free Income Fund pays dividends about the fifth day of
each month, and National Tax-Free Income Fund pays dividends about the fifteenth
day of each month. Municipal High Income Fund and New York Tax-Free Income Fund
pay dividends on or about the first Wednesday of each month. Net investment
income includes accrued interest and discount, less amortization of premium and
accrued expenses, with respect to municipal securities. Each Fund distributes
substantially all of its net capital gain (the excess of net long-term capital
gain over net short-term capital loss), if any, together with any other taxable
income (including any net short-term capital gain) at least annually. A Fund may
make more frequent distributions of any net capital gain and other taxable
income if necessary to avoid a 4% excise tax on undistributed income and capital
gain.

Dividends and other distributions paid on Class Y shares of each Fund are
calculated at the same time and in the same manner as dividends and
distributions on other classes of shares.

Each Fund's dividends and capital gain distributions are paid in additional Fund
shares of the same class at net asset value, unless the shareholder has

--------------------
Prospectus Page 18
<PAGE>

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

PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

requested cash payments. Shareholders who wish to receive dividends and/or
capital gain distributions in cash, either mailed to the shareholder by check or
credited to the shareholder's PaineWebber account, should contact their
investment executive at PaineWebber or one of its correspondent firms or

complete the appropriate section of the account application. For PW SIP
participants, the Fund's Class Y dividends and distributions are paid in
additional Class Y shares at net asset value unless the transfer agent is
instructed otherwise.

TAXES

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

If a Fund realizes capital gains as a result of market transactions, any
distribution of those gains is taxable to its shareholders.

YEAR-END TAX REPORTING

deemed paid) that year.

BACKUP WITHHOLDING

TAXES ON THE SALE OR EXCHANGE OF FUND SHARES

Qualified profit-sharing plans such as the PW SIP generally pay no Federal
income tax. Individual participants in the PW SIP should consult the plan
documents and their own tax advisers for information on the tax consequences
associated with participating in the PW SIP.

CALIFORNIA TAXES

gains are taxable under California law at ordinary income rates. Interest on
indebtedness incurred by a shareholder to purchase or carry shares of the Fund
is not deductible for California personal income tax purposes. California
exempt-interest dividends may affect the calculation of certain adjustments to
alternative minimum taxable

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

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

PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

income for shareholders that are corporations. The Fund itself will not be
subject to California franchise or corporate income tax on interest income or
net capital gain distributed to its shareholders.

NEW YORK STATE AND NEW YORK CITY TAXES

If New York Tax-Free Income Fund continues to qualify as a RIC under the
Internal Revenue Code and at the end of each quarter of such Fund's taxable year
at least 50% of the value of its total assets consists of New York Obligations,
exempt-interest dividends paid by New York Tax-Free Income Fund that are derived
from interest on qualifying New York Obligations will be exempt from New York
State and New York City personal income taxes, but not corporate franchise
taxes. Dividends and other distributions derived from taxable income and capital
gains are not exempt from New York State and New York City taxes. Interest on
indebtedness incurred or continued by a shareholder to purchase or carry shares
of the Fund is not deductible for New York State or New York City personal
income tax purposes. Shareholders receive notification annually stating the
portion of the Fund's tax-exempt income attributable to issuers in New York
State, New York City and other states. Interest income of New York Tax-Free
Income Fund which is distributed to shareholders will generally not be taxable
to the Fund for purposes of the New York State corporation franchise tax or the
New York City general corporation tax.

ADDITIONAL INFORMATION

- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------

ORGANIZATION

California Tax-Free Income Fund and National Tax-Free Income Fund are series of
PaineWebber Mutual Fund Trust and PaineWebber Municipal High Income Fund and
PaineWebber New York Tax-Free Income Fund are series of PaineWebber Municipal
Series (each a 'Trust').

and preferences. However, each class may differ with respect to sales charges,
if any, distribution and/or service fees, if any, the expenses allocable
exclusively to each class, voting rights on matters exclusively affecting that
class, and its exchange privilege. The different sales charges and other
expenses applicable to the different classes of shares of the Funds will affect
the performance of those classes.

More information concerning Class A, Class B and Class C shares may be obtained
from an investment

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

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

PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

executive at PaineWebber or one of its correspondent firms or by calling
toll-free 1-800-647-1568.

VOTING RIGHTS

SHAREHOLDER MEETINGS

The Funds do not intend to hold annual meetings.

REPORTS TO SHAREHOLDERS

CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND AGENT

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

<PAGE>

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

PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

- --------------------------------------------------------------------------------
PAINEWEBBER FAMILY OF FUNDS
- --------------------------------------------------------------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
-----
<S> <C>
The Funds at a Glance...................... 2
Expense Table.............................. 5
Financial Highlights....................... 7
Investment Objective & Policies............ 8
Investment Philosophy & Process............ 9
Performance................................ 10
The Funds' Investments..................... 11
How to Buy Shares.......................... 15
How to Sell Shares......................... 16
Management................................. 17
Determining the Shares' Net Asset Value.... 18
Dividends and Taxes........................ 18
General Information........................ 20

</TABLE>

PAINEWEBBER MONEY MARKET FUND

PAINEWEBBER BOND FUNDS
High Income Fund
Investment Grade Income Fund
Low Duration U.S. Government Income Fund
Strategic Income Fund
U.S. Government Income Fund

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

PAINEWEBBER ASSET ALLOCATION FUNDS
Balanced Fund
Tactical Allocation Fund

PAINEWEBBER GROWTH FUNDS
Capital Appreciation Fund
Growth Fund
Growth and Income Fund
Financial Services Growth Fund
Small Cap Value Fund
Utility Income Fund

PAINEWEBBER GLOBAL FUNDS
Emerging Markets Equity Fund
Global Equity Fund
Global Income Fund

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

No person has been authorized to give any information or make any
representations not contained in this Prospectus in connection with the
offering made by this Prospectus. If given or made, such information or
representations must not be relied upon as having been authorized by the Funds
or their distributor. This Prospectus does not constitute an offering by the
Funds or their distributor in any jurisdiction in which such offering may not
lawfully be made.

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

<PAGE>

PAINEWEBBER CALIFORNIA TAX-FREE INCOME FUND
PAINEWEBBER NATIONAL TAX-FREE INCOME FUND
PAINEWEBBER MUNICIPAL HIGH INCOME FUND
PAINEWEBBER NEW YORK TAX-FREE INCOME FUND
CLASS Y SHARES
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019

STATEMENT OF ADDITIONAL INFORMATION

INVESTMENT POLICIES AND RESTRICTIONS

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

YIELD FACTORS AND RATINGS. Moody's Investors Service, Inc. ('Moody's') and
Standard & Poor's, a division of The McGraw Hill Companies, Inc. ('S&P') and

other nationally recognized statistical rating organizations ('NRSROs') are
private services that provide ratings of the credit quality of debt obligations,
including issues of municipal securities. A description of the range of ratings
assigned to municipal securities by Moody's and S&P is included in Appendix B to
the SAI. 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, municipal
securities with the same maturity, interest rate and rating may have different
market prices. Credit ratings attempt to evaluate the safety of principal and
interest payments and do not evaluate the risks of fluctuations in market value.
Also, rating agencies may fail to make timely changes in credit ratings in
response to subsequent events, so that an issuer's current financial condition
may be better or worse than the rating indicates. Subsequent to its purchase by
a Fund, an issue of municipal securities may cease to be rated or its rating may
be reduced below the minimum rating required for purchase by the Fund.

<PAGE>

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

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PUT BONDS. Each Fund may invest in put bonds that have a fixed rate of
interest and a final maturity beyond the date on which the put may be exercised.
If the put is a 'one time only' put, the Fund ordinarily will either sell the
bond or put the bond, depending upon the more favorable price. If the bond has a
series of puts after the first put, the bond will be held as long as, in the
judgment of Mitchell Hutchins, it is in the best interest of the Fund to do so.
There is no assurance that the issuer of a put bond acquired by a Fund will be
able to repurchase the bond upon the exercise date, if the Fund chooses to
exercise its right to put the bond back to the issuer.

specified notice, for all or any part of the principal amount of the Fund's
participation interest plus accrued interest. Generally, each Fund intends to
exercise the demand under the letters of credit or other guarantees only (1)
upon a default under the terms of the underlying bond, (2) to maintain the
Fund's portfolio in accordance with its investment objective and policies or (3)
as needed to provide liquidity to the Fund in order to meet redemption requests.
The ability of a bank to fulfill its obligations under a letter of credit or
guarantee might be affected by possible financial difficulties of its borrowers,
adverse interest rate or economic conditions, regulatory limitations or other
factors. Mitchell Hutchins will monitor the pricing, quality and liquidity of
the participation interests held by a Fund, and the credit standing of banks
issuing

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letters of credit or guarantees supporting such participation interests on the
basis of published financial information reports of rating services and bank
analytical services.

FLOATING RATE AND VARIABLE RATE MUNICIPAL SECURITIES. As noted in the
Prospectus, each Fund may invest in floating rate and variable rate municipal
securities with or without demand features. A demand feature gives the Fund the
right to sell the securities to a specified party, usually a remarketing agent,
on a specified date. A demand feature is often backed by a letter of credit or
guarantee from a bank. As discussed under 'Participation Interests,' to the
extent that payment of an obligation is backed by a bank's letter of credit or
guarantee, such payment may be subject to the bank's ability to satisfy that
commitment. The interest rate on floating rate or variable rate securities
ordinarily is readjusted on the basis of the prime rate of the bank that
originated the financing or some other index or published rate, such as the
90-day U.S. Treasury Bill rate. Generally, these interest rate adjustments cause
the market value of floating rate and variable rate municipal securities to
fluctuate less than the market value of fixed rate obligations. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation or
capital depreciation is less than for fixed rate obligations.

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security, (2) the number of dealers that make quotes for the security, (3) the
number of dealers that have undertaken to make a market in the security, (4) the
number of other potential purchasers and (5) the nature of the security and how
trading is effected (e.g., the time needed to sell the security, how offers are
solicited and the mechanics of transfer). Mitchell Hutchins monitors the
liquidity of securities in each Fund's portfolio and reports periodically on
liquidity decisions to each Trust's board of trustees.

under such transactions. As described below under 'Hedging and Related Income
Strategies,' segregated accounts may also be required in connection with certain
transactions involving options or futures contracts.

SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES

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substantial population growth during the 1980s stimulated local economic growth
and diversification, it also increased demands on State services. Total personal
income in the State, at an estimated $703 billion in 1994, accounts for more
than 12% of all personal income in the nation.

STATE DEBT. Under the California Constitution, debt service on outstanding
general obligation bonds is the second charge to the General Fund after support
of the public school system and public institutions of higher education. Total
outstanding general obligation bonds and lease purchase debt of the State
increased from $9.4 billion at June 30, 1988 to $24.6 billion at June 30, 1995.
State agencies and authorities had approximately $19.0 billion of revenue bonds
and notes outstanding at June 30, 1995 for which the State General Fund has no
liability.

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the largest programs supported by the General Fund (education, health, welfare
and corrections) growing at rates significantly higher than the growth rates for
the principal revenue sources of the General Fund.

o significant cuts in health and welfare program expenditures;

o transfers of program responsibilities and funding from the State to local
governments, coupled with some reduction in mandates on local government;

o reduction in growth of support for higher education programs, coupled
with increases in student fees;

o revenue increases (particularly in the 1991-92 Fiscal Year budget), most
of which were for a short duration;

o various one-time adjustments and accounting changes.

reserves, the State Controller was forced to issue registered warrants ('IOUs')
to pay a variety of obligations

7
<PAGE>

representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4, 1992
the State Controller issued a total of approximately $3.8 billion of registered
warrants. After that date, all remaining outstanding registered warrants (about
$2.9 billion) were called for redemption from proceeds of the issuance of 1992
Interim Notes after the budget was adopted.

The 1995-96 Budget Act was signed by the Governor on August 3, 1995, 34
days after the start of the fiscal year. The Budget Act projected General Fund

revenues and transfers of $44.1 billion, a 3.5 percent increase from the prior
year. Expenditures are budgeted at $43.4 billion, a 4 percent increase. The
Department of Finance projected that, after repaying the last of the carryover
budget deficit, there would be a positive balance of less than $30 million in
the budget reserve, the Special Fund for Economic Uncertainties, at June 30,
1996, providing no margin for adverse results during the year.

8
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REVENUE BASE. The recession seriously affected the State's tax revenue,

which basically mirrors general economic conditions. The principal sources of
General Fund revenues are economically sensitive, and include the California
personal income tax (44% of total FY1993-94 revenues), the sales tax (35%), bank
and corporation taxes (12%), and the gross premium tax on insurance (3%).
Personal income tax receipts are generated disproportionately by relatively few
taxpayers (the top 4% of taxpayers paid 49% of the total tax in 1990), and
capital gains are a significant component of such collections. Auto sales and
building materials are significant components of retail sales tax collections.
Tax rates, increased in 1991, are relatively high, and may impose political and
economic constraints on the ability of the State to further increase its taxes.
By statute, certain recent increases in the rates of income taxes will expire on
December 31, 1995. In November 1993, the voters approved a constitutional
amendment to permanently extend 0.5 percent of the sales tax for local law
enforcement and thus not available as General Fund revenues.

9
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programs. As of December 1995, no school districts became insolvent as a result
of the bankruptcy of the County, and no other State obligation has been
asserted.

Proposition 98 established a minimum expenditure base for State aid to K-14
districts, currently requiring allocation of over 34% of General Fund revenues
to such districts.

PUBLIC ASSISTANCE. California has the largest number of persons receiving
public assistance (Aid to Families with Dependent Children ('AFDC') and General
Relief) of any state. AFDC costs are shared among the federal government, the
State and its counties by statutory formula. Caseloads tend to rise
significantly during economic downturns, but are also significantly affected by
changing demographic and social trends which may impede the reduction of
caseloads during an economic recovery. The State has reduced AFDC payments to
meet budget pressures in recent years.

10
<PAGE>

by the State to assist municipal issuers to raise revenues. In response to the
State's current fiscal difficulties, the State has reduced its financial
assistance to counties and cities, and adopted measures to transfer certain
governmental functions to its counties, accompanied by new funding sources. The

FY1993-94 Budget Act eliminated the remaining Proposition 13 assistance to all
local government entities other than K-14 education districts. Such actions have
compounded the serious fiscal constraints already experienced by many local
governments, several of which have been compelled to seek special assistance
from the State.

Los Angeles County, the largest in the State, has reported severe fiscal

problems, leading to a nominal $1.2 billion deficit in its $12 billion budget
for the 1995-96 Fiscal Year. To balance the budget, the county has imposed
severe cuts in services, particularly for health care. Both Moody's and S&P have
reduced Los Angeles County's debt ratings in August 1995 (to 'A' and 'A-'),
respectively, and it remains on S&P Credit Watch with negative implications.
Orange County, which is presently operating under protection of the federal
Bankruptcy Court (see above), has substantially reduced services and personnel
in order to live within much reduced means.

SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL SECURITIES

11
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certain of its Authorities, the City and certain other localities, as publicly
available on the date of this Statement of Additional Information. The
information contained in such publicly available documents has not been
independently verified. It should be noted that the creditworthiness of
obligations issued by local issuers may be unrelated to the creditworthiness of
New York State, and that there is no obligation on the part of New York State to
make payment on such local obligations in the event of default in the absence of
a specific guarantee or pledge provided by New York State.

adversely affected, and their respective access to the public credit markets
jeopardized.

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region in general and the State in particular was more heavily damaged than that
of the rest of the nation and has been slower to recover.

Although the Mid-Year Update projects a continued balance in the 1995-96 State
Financial Plan, downward revisions have been made to estimates of both receipts
and disbursements. As the 1995-96 State Financial Plan and the Mid-Year Update
are each based upon forecasts of national and State economic activity it should
be noted that many uncertainties exist in such forecasts, including federal
financial and monetary policies, the availability of credit and the condition of
the world economy. In addition, the economic and financial condition of the
State may be affected by various financial, social, economic and political
factors. These factors can be complex, may vary from year to year and are
frequently the results of actions taken not only by the State and its agencies
and instrumentalities, but also by other entities, such as the federal
government, that are not under the control of the State.

13
<PAGE>

companies occurred. The effects of the recession have extended to banking,
insurance, business services (such as law, accounting and advertising),
publishing and communications. Factors which may inhibit the City's economic
recovery include (i) credit restraints imposed by the weak financial condition
of several major money center banks located in the City; (ii) increases in
combined State and local tax burdens, if uncompetitive tax rates are imposed;
(iii) perceived declines in the quality of life attributable to service
reductions and the deterioration of the City's infrastructure; (iv) additional
employment losses in the City's banking sector or corporate headquarters complex
due to further corporate relocations or restructurings; or (v) increased
expenditures for public assistance and health care. The City's future economic
condition will also likely be affected by its competitive position as a world
financial center (compared to London, Tokyo, Frankfurt and competing regional
U.S. centers). Investors should note that the budget for the City FY1995-96
addresses a projected $2.7 billion budget gap. Most of the budget-gap closing
initiatives may be implemented only with the cooperation of the City's municipal
unions, or the State or Federal governments. No assurance can be given that such
initiatives will be successfully undertaken.

While the State's economy is broader-based than that of the City,
particular industries are concentrated in and have a disproportionate impact on

certain areas, such as heavy industry in Buffalo, photographic and optical
equipment in Rochester, machinery and transportation equipment in Syracuse and
Utica-Rome, computers in Binghamton and in the Mid-Hudson Valley and electrical
equipment in the Albany-Troy-Schenectady area. Constraints on economic growth,
taxpayer resistance to proposed substantial increases in local tax rates, and
reductions in State aid in regions apart from the City have contributed to
financial difficulties for several county and other local governments.

The State has been experiencing and continues to experience substantial
financial difficulties with General Fund (the principal operating account)
deficits incurred during FY1989-90 through FY1991-92. The State's accumulated
General Fund deficit (on a GAAP basis) grew 91% from FY1986-87 to FY1990-91, and
reached a then-record $6.265 billion (audited) by March 31, 1991. An accumulated
General Fund deficit at March 31, 1992 was restated to be $4.616 billion and at
March 31, 1993 was $2.551 billion. The State ended FY1993-94 with a negative
General Fund balance of $1.637 billion. This represented an improvement over
prior fiscal years, primarily due to an improving national and State economy
resulting in higher-than-expected receipts from personal income tax and various
business taxes and the relative success of the New York Local Government
Assistance Corporation ('LGAC'). The General Fund showed an operating surplus of
$914 million (on a GAAP basis). The State's budget for FY1994-95 was adopted on
June 8, 1994, more than two months after the beginning of the State's fiscal
year and has made all of the required quarterly revisions thereto as of the date
hereof. The State ended its FY1994-95 reporting a General Fund operating deficit
of $1.426 billion, primarily due to change in accounting methodologies used by
the State Comptroller and the use of $1.026 billion of the FY1993-94
cash-surplus to fund operating expenses in FY1994-95. These factors were offset
by net proceeds of $315 million of bonds issued by LGAC. Actual receipts
reported fell short of original projections, primarily in the categories of
business taxes. These shortfalls were offset by better than expected performance
in the remaining taxes, principally the user taxes and fees. Total expenditures
for FY1994-95 increased $2.083 billion, or 6.7% over the prior fiscal year.

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<PAGE>

REVENUE BASE. The State's principal revenue sources are economically
sensitive, and include the personal income tax (53% of FY1994-95 and
approximately 54% of estimated FY1995-96 General Fund tax receipts,
respectively), user taxes and fees (20% of FY1994-95 and nearly 21% of estimated
FY1995-96 General Fund tax receipts) and business taxes (15% of both FY1994-95
and estimated FY1995-96 General Fund tax receipts, respectively). Uncertainties
in taxpayer behavior as a result of actual and proposed changes in Federal tax
law also may have an adverse impact on State tax receipts. One-fourth of the 4%
State sales tax has been dedicated to pay debt service of LGAC, and has
correspondingly reduced General Fund receipts. To the extent those moneys are
not necessary for payment to LGAC, they are transferred from the LGAC Tax Fund
to the General Fund and reported as a transfer from other funds rather than as a
sales and use tax receipts. During FY1991-1992, 1992-93, 1993-94 and 1994-95,
moneys were so transferred. Capital gains are a significant component of income
tax collections. Auto sales and building materials are significant components of
retail sales tax collections. Tax rates are relatively high and may impose
political and economic constraints on the ability of the State to further
increase its taxes. In 1995, the State enacted a tax-reduction program designed
to reduce, by 20 percent over three years, receipts from the personal income
tax. The tax had remained unchanged since 1989 as a result of annual deferrals
of tax reductions originally enacted in 1987. The tax-reduction program is

estimated to reduce receipts by $515 million in FY1995-96, $2.2 billion in
FY1996-97 and to produce further significant reductions in FY1997-98. In
addition to such reductions in overall tax rates, the tax-reduction program also
includes other modifications to the tax laws which will have the effect of
lowering the amount of tax revenues to be received by the State. In the absence
of countervailing economic growth or expenditure cuts the tax cuts could make
the achievement of a balanced State budget more difficult in future years. A
significant risk to the 1995-96 State Financial Plan arises from tax legislation
pending in the U.S. Congress. Changes to the federal tax treatment of capital
gains, if made, are likely to flow automatically to the State personal income
tax. Such changes, depending upon their precise character and

15
<PAGE>

timing, as well as taxpayer response, could produce either revenue gain or loss
during the remainder of the State's 1995-96 fiscal year.

of the budget, and total appropriations and distribution of such aid is
especially contentious politically. Furthermore, the State's ability to respond
to unanticipated developments in the future may have been impaired since the
State has utilized a substantial range of actions of a non-recurring nature in
recent years to finance its General Fund operations, including tapping excess
monies in special funds, refinancing outstanding debt to reduce reserve fund
requirements and current (but not long-term) debt service costs, recalculating
pension fund contributions, selling State assets, reimbursing past General Fund
expenditures by the issuance of authority debt and deferring payment for
expenditures to future fiscal years. The 1995-96 State Financial Plan contains
actions of a non-recurring nature including mergers of certain authorities,
payments from the sale of certain State assets and payments associated with the
resolution of certain court cases, totalling approximately $900 million to $1
billion. The 1996-97 Executive Budget, however, contains actions of a
non-recurring nature only to the extent of approximately $123 million.

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cost method in FY1994-95 using a four-year phase-in. Employer contributions,
including the State's, are expected to increase over the next five to ten years.

MEDICAID. New York participates in the federal Medicaid program under a
state plan approved by the Health Care Financing Administration. The federal

government provides a substantial portion of eligible program costs, with the
remainder shared by the State and its counties (including the City). Basic
program eligibility and benefits are determined by federal guidelines, but the
State provides a number of optional benefits and expanded eligibility. Program
costs have increased substantially in recent years, and account for a rising
share of the State budget. Federal law requires that the State adopt
reimbursement rates for hospitals and nursing homes that are reasonable and
adequate to meet the costs that must be incurred by efficiently and economically
operated facilities in providing patient care, a standard that has led to past
litigation by hospitals and nursing homes seeking higher reimbursement from the
State. The budget adopted for FY1995-96 and, in particular, the 1996-97
Executive Budget includes reductions in spending for Medicaid. Cutbacks in State
spending for Medicaid may adversely affect the financial condition of hospitals
and health care institutions that are the obligors of bonds that may be held by
the Fund.

significantly in the late 1970s due to deferred maintenance, the MTA prepares a
five year capital program subject to approval by the MTA Capital Program Review
Board. In April 1993, the State Legislature authorized the funding of a portion
of a five year $9.56 billion capital plan for the MTA for 1992 through 1996.
MTA's five year capital program for 1992-96 was approved by the State Capital
Program Review Board in

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December 1993. There can be no assurance that all governmental actions for the
1992-96 Capital Program will be taken, that funding sources currently identified
will not be decreased or eliminated, or that the Capital Program will not be
delayed or reduced. If the Capital Program is delayed or reduced, ridership and
fare revenues may decline, which could impair the MTA's ability to meet its
operating expenses without additional State assistance. In addition, because
fares are not sufficient to finance its mass transit operations, the MTA has
depended and will continue to depend for operating support upon a system of
State, local government and TBTA support, and, to the extent available, Federal
assistance (including loans, grants and operating subsidies). There can be no
assurance that any such assistance will continue at any particular level or in
any fixed relationship to the operating costs and capital needs of the MTA.

and families who qualify for such assistance. State law requires the City to
allocate a large portion of its total budget to Board of Education operations,
and mandates that the City assume the local share of public assistance and
Medicaid costs. While the City has had GAAP operating surpluses in recent fiscal
years, the City has experienced growing financial difficulties, primarily
related to the impact of the recession on the local economy (reducing revenues
from most major taxes and increasing public assistance and Medicaid caseloads),
rising health care costs for City employees and for Medicaid and rising
inflation and interest rates. In response, the City implemented gap-closing
programs, which initially relied primarily on actions of a non-recurring nature,
but included substantial property tax rate increases and a personal income tax
surcharge imposed in FY1991 and selected service cutbacks. Reductions in State
aid, larger than budgeted labor settlements and increased police expenditures
added to the adverse budgetary impact of the local recession, confronting the
City with a potential $3.5 billion imbalance during FY1992 budget negotiations.
This initial budget gap was closed by adoption of a budget providing for various
tax increases and significant service reductions. Aid to nonprofit cultural
institutions in the City was significantly reduced (as was State aid to such
institutions), including certain institutions that are obligors of bonds that
may be held by the Fund.

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to the next. The City budget adopted for FY1995-96 reduces City-funded spending
for the second consecutive year. Pursuant to State law, the City prepares a
four-year annual financial plan, which is reviewed and revised on a quarterly
basis and includes the City's capital, revenue and expense projections and
outlines proposed budget gap-closing programs for those years with projected
budget gaps. The mayor is responsible for preparing the City's four-year
financial plan including the City's current financial plan for the 1996 through
1999 fiscal years (the '1996-1999 Financial Plan'). The City's projections set
forth in the 1996-1999 Financial Plan are based on various assumptions and
contingencies which are uncertain and which may not materialize. Changes in
major assumptions could significantly effect the City's ability to balance its
budget and to meet its annual cash flow and financing requirements. Such
assumptions and contingencies include the timing and pace of a regional and
local economic recovery, increases in interest rates, the impact on real estate
tax revenues of the real estate market, wage increases for city employees
consistent with those assumed in the 1996-99 Financial Plan, employment growth,
the ability to implement proposed reductions in City personnel and other cost
reduction initiatives which may require in certain cases the cooperation of the
City's municipal unions, the ability of New York City Health and Hospitals
Corporation and the Board of Education to take actions to offset reduced

revenues, the ability to complete revenue generating transactions, provision of
State and federal aid and mandate relief, and the impact on City revenues of
proposals for federal and State welfare reform. No assurance can be given that
the assumptions used by the City in the 1996-1999 Financial Plan will be
realized. Furthermore, actions taken in recent fiscal years to avert deficits
may have reduced the City's flexibility in responding to future budgetary
imbalances, and have deferred certain expenditures to later fiscal years.

19
<PAGE>

proposals contemplate significant reductions in federal spending, including
proposed federal welfare reform which could result in caps on, or block grants
of, federal programs. Further, no assurance can be given that either such
actions will in fact be taken or that the projected savings will result even if

such actions are taken.

The City is the largest municipal debt issuer in the nation, and has more
than doubled its debt load since the end of FY1987-88, in large measure to
rehabilitate its extensive, aging physical plant. The City's seasonal borrowing
needs increased significantly during FY1989-90 and FY1990-91, largely due to
delayed State aid payments, and totalled $2.25 billion in FY1991-92, $1.40
billion in FY1992-93, $1.75 billion in FY1993-94 and $2.2 billion in FY1994-95.
Current projections forecast a need of $2.4 billion of seasonal financing for
FY1995-96. The City's current capital financing program reflects major
reductions (approximately $2.13 billion) in the size of the capital program to
be implemented cumulatively through FY1998-99 which is intended to reduce future
debt service requirements. Such reductions may adversely affect the condition of
the City's aging and deteriorating infrastructure and physical assets, such as
sewers, streets, bridges and tunnels, and mass transit facilities. Further, the
City's capital financing program currently contemplates receipt of proceeds of
approximately $1 billion resulting from the sale of the City's water system to
the Water Board, and proposes to utilize a substantial portion of such proceeds
for capital project improvements. It is not certain that such proceeds will

become available for capital improvements, because, as discussed above, the City
Comptroller has stated his opposition to such proposed transfer of the water
system.

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financial assistance to its political subdivisions, totaling approximately 68%
of General Fund disbursements in the State's FY1992-93, 69% for FY1993-94, 70%
for FY1994-95 and estimated to account for 69% of General Fund disbursements in
FY1995-96, primarily for aid to elementary, secondary and higher education and
Medicaid and income maintenance and local transportation programs. The
Legislature enacted substantial reductions from previously budgeted levels of
State aid since December 1990. To the extent the State is constrained by its
financial condition, State assistance to localities may be further reduced,
compounding the serious fiscal constraints already experienced by many local
governments. Localities also face anticipated and potential problems resulting
from pending litigation (including challenges to local property tax
assessments), judicial decisions and socioeconomic trends.

The total indebtedness of all localities in the State, other than New York
City, was approximately $17.7 billion as of the localities' fiscal years ending
during 1993 (the date of the latest data available). A small portion
(approximately $105 million) of this indebtedness represented borrowing to
finance budgetary deficits issued pursuant to enabling State legislation
(requiring budgetary review by the State Comptroller). Subsequently, certain
counties and other local governments have encountered significant financial
difficulties including the counties of Nassau, Suffolk, Monroe and Westchester
and the City of Buffalo. The State has imposed financial control on the City
from 1977 to 1986 and on the City of Yonkers since 1984 under an appointed
control board in response to fiscal crises encountered by such municipalities.
The Legislature imposed certain limited fiscal restraints on Nassau and Suffold
counties, and authorized their issuance of deficit bonds to finance over several

years their respective 1992 operating deficits.

INVESTMENT LIMITATIONS OF THE FUNDS

Each Fund will not:

paper, certificates of deposit, bankers' acceptances or similar
instruments will not be considered the making of a loan.

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<PAGE>

California Tax-Free Income Fund and National Tax-Free Income Fund each will
not:

The following interpretation applies to, but is not a part of,
fundamental restriction (7): Each state (including the District
of Columbia and Puerto Rico), territory and possession of the
United States, each political subdivision, agency,
instrumentality and authority thereof, and each
multi-state agency of which a state is a member is a separate
'issuer.' When the assets and revenues of an agency, authority,
instrumentality or other political subdivision are separate from
the government creating the subdivision and the security is
backed only by the assets and revenues of the subdivision, such
subdivision would be deemed to be the sole issuer. Similarly, in
the case of an IDB or PAB, if that bond is backed only by the
assets and revenues of the non-governmental user, then that
non-governmental user would be deemed to be the sole issuer.
However, if the creating government or another entity guarantees
a security, then to the extent that the value of all securities
issued or guaranteed by that government or entity and owned by
the Fund exceeds 10% of the Fund's total assets, the guarantee
would be considered a separate security and would be treated as
issued by that government or entity. This restriction does not
limit the percentage of the Fund's assets that may be invested
in Municipal Obligations insured by any given insurer.

NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions may be
changed by each Trust's board of trustees without shareholder approval.

Each Fund will not:

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(8) purchase securities of other investment companies, except to the

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

In addition, California Tax-Free Income Fund and National Tax-Free Income
Fund will not:

<PAGE>

HEDGING AND RELATED INCOME STRATEGIES

appreciated call option and realizing a gain.

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

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

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<PAGE>

use of Hedging Instruments, there can be no assurance that any particular
hedging strategy adopted will succeed.

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

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<PAGE>

regarding cover for hedging transactions and will, if the guidelines so require,
set aside cash, U.S. government securities or other liquid, high-grade debt
securities in a segregated account with its custodian in the prescribed amount.

of up to nine months. Generally, OTC options on debt securities are European
style options. This means that the option is only exercisable immediately prior
to its expiration. This is in contrast to American-style options, which are
exercisable at any time prior to the expiration date of the option. Options that
expire unexercised have no value.

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

26
<PAGE>

any time prior to its expiration.

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

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

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

27
<PAGE>

variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.

<PAGE>

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.

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

<PAGE>

TRUSTEES AND OFFICERS

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

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ --------------- ------------------------------

<S> <C> <C>
Margo N. Alexander**; 49 Trustee and Mrs. Alexander is president,
President chief executive officer and
a director of Mitchell
Hutchins (since January
1995). Mrs. Alexander is an
executive vice president and
director of PaineWebber.
Mrs. Alexander is also a
director or trustee of 29
investment companies and
president of 29 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Richard Q. Armstrong; 60 Trustee Mr. Armstrong is chairman and
78 West Brother Drive principal of RQA Enterprises
Greenwich, CT 06830 (management consulting firm)
(since April 1991 and
principal occupation since
March 1995). Mr. Armstrong
is also a director of Hi Lo
Automotive, Inc. He was
chairman of the board, chief
executive officer and
co-owner of Adirondack
Beverages (producer and
distributor of soft drinks
and sparkling/still waters)
(October 1993-March 1995).
He was a partner of The New
England Consulting Group
(management consulting firm)

(December 1992-September
1993). He was managing
director of LVMH U.S.
Corporation (U.S. subsidiary
of the French luxury goods
conglomerate, Luis Vuitton
Moet Hennessey Corporation)
(1987-1991) and chairman of
its wine and spirits
subsidiary, Schieffelin &
Somerset Company
(1987-1991). Mr. Armstrong
is also a director or
trustee of 28 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
E. Garrett Bewkes, Jr.**; 69 Trustee and Mr. Bewkes is a director of,
Chairman of the and consultant to Paine
Board of Webber Group Inc. ('PW
Trustees Group') (holding company of
PaineWebber and Mitchell
Hutchins). Prior to 1988, he
was chairman of the board,
president and chief
executive office of American
Bakeries Company. Mr. Bewkes
is also a director of
Interstate Bakeries
Corporation and NaPro
BioTherapeutics, Inc. and a
director or trustee of 29
other investment companies
for which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
</TABLE>

30
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ --------------- ------------------------------

<S> <C> <C>
Richard R. Burt; 49 Trustee Mr. Burt is chairman of
1101 Connecticut Avenue, N.W. International Equity
Washington, D.C. 20036 Partners (international
investments and consulting

firm) (since March 1994) and
a partner of McKinsey &
Company (management
consulting firm) (since
1991). He is also a director
of American Publishing
Company. 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
also a director or trustee
of 28 other investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.

Mary C. Farrell**; 46 Trustee Ms. Farrell is a managing
director, senior investment
strategist and member of the
Investment Policy Committee
of PaineWebber. Ms. Farrell
joined PaineWebber in 1982.
She is a member of the
Financial Women's
Association and Women's
Economic Roundtable, and is
employed as a regular
panelist on Wall Street Week
with Louis Rukeyser. She
also serves on the Board of
Overseers of New York
University's Stern School of
Business. Ms. Farrell also
is a director or trustee of
28 other investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Meyer Feldberg; 54 Trustee Mr. Feldberg is Dean and
Columbia University Professor of Management of
101 Uris Hall the Graduate School of
New York, New York 10027 Business, Columbia
University. Prior to 1989,
he was president of the
Illinois Institute of
Technology. Dean Feldberg is
also a director of AMSCO
International Inc.,

Federated Department Stores,
Inc. and New World
Communications Group
Incorporated and a director
or trustee of 28 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
George W. Gowen; 66 Trustee Mr. Gowen is a partner in the
666 Third Avenue law firm of Dunnington,
New York, New York 10017 Bartholow & Miller. Prior to
May 1994, he was a partner
in the law firm of Fryer,
Ross & Gowen. Mr. Gowen is
also a director of Columbia
Real Estate Investments,
Inc. and a director or
trustee of 28 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
</TABLE>

31
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ --------------- ------------------------------

<S> <C> <C>
Frederic V. Malek; 59 Trustee Mr. Malek is chairman of
901 15th Street, N.W. Thayer Capital Partners
Suite 300 (investment bank) and a
Washington, D.C. 20005 co-chairman and director of
CB Commercial Group Inc.
(real estate). From January
1992 to November 1992, he
was campaign manager of
Bush-Quayle '92. From 1990
to 1992, he was vice
chairman and, from 1989 to
1990, he was president of
Northwest Airlines Inc., NWA
Inc. (holding company of
Northwest Airlines Inc.) and
Wings Holdings Inc. (holding

company of NWA Inc.). Prior
to 1989, he was employed by
the Marriott Corporation
(hotels, restaurants,
airline catering and
contract feeding), where he
most recently was an
executive vice president and
president of Marriott Hotels
and Resorts. Mr. Malek is
also a director of American
Management Systems, Inc.,
Automatic Data Processing,
Inc., Avis, Inc., FPL Group,
Inc., National Education
Corporation and Northwest
Airlines Inc. and a director
or trustee of 28 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.

Carl W. Schafer; 60 Trustee Mr. Schafer is president of
P.O. Box 1164 the Atlantic Foundation
Princeton, New Jersey 08542 (charitable foundation
supporting mainly
oceanographic exploration
and research). He also is a
director of Roadway Express,
Inc. (trucking), The
Guardian Group of Mutual
Funds, Evans Systems, Inc.
(a motor fuels, convenience
store and diversified
company), Hidden Lake Gold
Mines Ltd. (gold mining),
Electronic Clearing House,
Inc. (financial transactions
processing), Wainoco Oil
Corporation and Nutraceutix
Inc. (biotechnology). Prior
to January 1993, Mr. Schafer
was chairman of the
Investment Advisory
Committee of the Howard
Hughes Medical Institute.
Mr. Schafer also is a
director or trustee of 28
other investment companies
for which Mitchell Hutchins
or PaineWebber serves as
investment adviser.

32
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ --------------- ------------------------------

<S> <C> <C>
1990-1991 and 1990-1994,
respectively), the former
chairman, president and
chief executive officer of
CalFed, Inc. (savings
association) (1988 to 1989)
and former president of
Manufacturers Hanover Corp.
(bank) (prior to 1988). Mr.
Torell is also a director of
American Home Products
Corp., New Colt Inc.
(armament manufacturer) and
Volt Information Sciences
Inc. Mr. Torell is a
director or trustee of 28
other investment companies
for which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Cynthia N. Bow; 37 Vice President Ms. Bow is a vice president of
(PW Mutual Fund Mitchell Hutchins. Ms. Bow
Trust only) has been with Mitchell
Hutchins since 1982. Ms. Bow
is also a vice president of
one other investment company

for which Mitchell Hutchins
or PaineWebber serves as
investment adviser.

</TABLE>

33
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ --------------- ------------------------------

<S> <C> <C>
Mr. McCauley is also a vice
president of 17 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Ann E. Moran; 38 Vice President Ms. Moran is a vice president
and Assistant of Mitchell Hutchins. Ms.
Treasurer Moran is also a vice
president of 29 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.

Richard S. Murphy; 40 Vice President Mr. Murphy is a senior vice
(PW Mutual Fund president of Mitchell
Trust only) Hutchins. Prior to March
1994 Mr. Murphy was a vice
president at American
International Group.
Dianne E. O'Donnell; 44 Vice President Ms. O'Donnell is a senior vice
and Secretary president and deputy general
counsel of Mitchell
Hutchins. Ms. O'Donnell is
also a vice president and
secretary of 29 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Victoria E. Schonfeld; 45 Vice President Ms. Schonfeld is a managing
director and general counsel
of Mitchell Hutchins. From
April 1990 to May 1994, she
was a partner in the law
firm of Arnold & Porter. Ms.
Schonfeld is also a vice

president of 29 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Paul H. Schubert; 33 Vice President Mr. Schubert is a first vice
and Assistant president and a senior
Treasurer manager of the mutual fund
finance division of Mitchell
Hutchins. From August 1992
to August 1994, he was a
vice president at BlackRock
Financial Management, Inc.
Prior to August 1992, he was
an audit manager with Ernst
& Young LLP. Mr. Schubert is
also a vice president and
assistant treasurer of 29
other investment companies
for which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Julian F. Sluyters; 35 Vice President Mr. Sluyters is a senior vice
and Treasurer president and the director
of the mutual fund finance
division of Mitchell
Hutchins. Prior to 1991, he
was an audit senior manager
with Ernst & Young LLP. Mr.
Sluyters is also a vice
president and treasurer of
29 other investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
</TABLE>

34
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ --------------- ------------------------------

<S> <C> <C>
Gregory K. Todd; 39 Vice President Mr. Todd is a first vice
and Assistant president and associate
Secretary general counsel of Mitchell
Hutchins. Prior to 1993, he
was a partner in the firm of
Shereff, Friedman, Hoffman &

Goodman. Mr. Todd is also a
vice president and assistant
secretary of 29 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.

William W. Veronda; 49 Vice President Mr. Veronda is a senior vice
(PW Municipal president of Mitchell
Series only) Hutchins. Prior to September
1995, he was a senior vice
president and general
manager at Invesco Funds
Group.
Keith A. Weller, 34 Vice President Mr. Weller is a first vice
and Assistant president and associate
Secretary general counsel of Mitchell
Hutchins. From September
1987 to May 1995, he was an
attorney in private
practice. Mr. Weller is also
a vice president and
assistant secretary of 23
other investment companies
for which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
</TABLE>

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

* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.

** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are 'interested persons' of the
Trusts as defined in the 1940 Act by virtue of their positions with PW Group.

receives any compensation from the Trusts for acting as a trustee or officer.
The table below includes certain information relating to the compensation of
each Trust's current trustees who held office during the fiscal year ended
February 29, 1996.

<PAGE>

COMPENSATION TABLE

- ------------------
Only independent members of the board are compensated by the Trusts and
identified above; trustees who are 'interested persons,' as defined by the
1940 Act, do not receive compensation.
* Represents fees paid to each trustee during the fiscal year ended February
28, 1996.
** Represents total compensation paid to each trustee during the calendar year
ended December 31, 1995; no fund within the fund complex has a bonus,
pension, profit sharing or retirement plan.

INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS

INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of California Tax-Free Income Fund and National

Tax-Free Income Fund pursuant to a contract dated April 21, 1988 with
PaineWebber Mutual Fund Trust, as supplemented by a Fee Agreement dated June 30,
1992 with respect to National Tax-Free Income Fund, and of Municipal High Income
Fund and New York Tax-Free Income Fund pursuant to a contract with PaineWebber
Municipal Series dated July 1, 1989 (each an 'Advisory Contract' and,
collectively, the 'Advisory Contracts'). Under the Advisory Contracts, each Fund
pays Mitchell Hutchins a fee, computed daily and paid monthly, at the annual
rate of 0.50% of the Fund's average daily net assets (0.60% of average daily net
assets in the case of Municipal High Income Fund and New York Tax-Free Income
Fund).

36
<PAGE>

Under a Service Agreement with each Trust that is reviewed by each Trust's
board of trustees annually, PaineWebber provides certain services to the Funds
not otherwise provided by the Fund's transfer agent. Pursuant to the Service
Agreement with PaineWebber Mutual Fund Trust, during the fiscal years ended
February 29, 1996, February 28, 1995 and February 28, 1994, California Tax-Free
Income Fund paid (or accrued) the amounts of [$ ], $24,838 and $26,755,
respectively, and National Tax-Free Income Fund paid (or accrued) the amounts of
[$ ], $64,620 and $67,293, respectively. Pursuant to the Service
Agreement with PaineWebber Municipal Series, during the fiscal years ended
February 29, 1996, February 28, 1995 and February 28, 1994, Municipal High
Income Fund paid (or accrued) the amounts of [$ ], $19,534 and $19,512,
respectively, and New York Tax-Free Income Fund paid (or accrued) the amounts of
[$ ], $10,747 (of which $3,734 was waived) and $9,492 (all of which was
waived), respectively.

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

<PAGE>

performance of its duties or from reckless disregard of its duties and
obligations thereunder. Each Advisory Contract terminates automatically upon its
assignment and is terminable at any time without penalty by the board of
trustees or by vote of the holders of a majority of a Fund's outstanding voting
securities, on 60 days' written notice to Mitchell Hutchins or by Mitchell
Hutchins on 60 days' written notice to a Fund.

The following table shows the approximate net assets as of ,
1996, 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.

DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the

Class Y shares of each Fund under separate distribution contracts with each
Trust dated , that require Mitchell Hutchins to use its best efforts,
consistent with its other business, to sell shares of the Funds. Class Y shares
of the Funds are offered continuously. Under exclusive dealer agreements between
Mitchell Hutchins and PaineWebber dated , PaineWebber and its
correspondent firms sell each Fund's Class Y shares.

PORTFOLIO TRANSACTIONS

For purchases or sales with broker-dealer firms which act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with those transactions,
Mitchell Hutchins will not purchase securities at a higher price or sell
securities at a lower

38
<PAGE>

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

National Tax-Free Income Fund--[ %] and 59.85%; Municipal High Income
Fund--[ %] and 28.44%; and New York Tax-Free Income Fund-- [ %] and
6.30%.

<PAGE>

VALUATION OF SHARES

PERFORMANCE INFORMATION

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

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

The following table shows performance information for the Class Y shares of
National Tax-Free Income Fund for the period indicated. As of February 29, 1996,
the Class Y shares of California Tax-Free Income

40
<PAGE>

Fund, Municipal High Income Fund, and New York Tax-Free Income Fund had not yet
commenced operations and no performance information was therefore available.

<TABLE>
<CAPTION>
NATIONAL TAX-FREE
INCOME FUND
-----------------
CLASS Y

-----------------
<S> <C>
Since Inception* to February 29, 1996:
Standardized Return**.........................
Non-Standardized Return.......................
</TABLE>

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

* The inception date for the Class Y shares of National Tax-Free Income Fund
was November 10, 1995.

** Class Y shares do not impose an initial or contingent deferred sales charge;
therefore, Non-Standardized Return is identical to Standardized Return.

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

where: a = interest earned during the Period attributable to a Class
of shares

b = expenses accrued for the Period attributable to a Class of
shares (net of reimbursements)

c = the average daily number of shares of the Class
outstanding during the Period that were entitled to
receive dividends

d = the maximum offering price per share (in the case of
Class A shares) or the net asset value per share (in the

case of Class B and Class C shares) on the last day of
the Period.

Except as noted below, in determining net investment income earned during
the Period (variable 'a' in the above formula), a 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 a Fund, interest
earned during the Period is then determined by totalling the interest earned on
all debt obligations. For purposes of these calculations, the maturity of an
obligation with one or more call provisions is assumed to be the next date on
which the obligation reasonably can be expected to be called or, if none, the
maturity date. National Tax-Free Income Fund had the following yield for the
30-day period ended February 29, 1996:

CLASS Y
-------
National Tax-Free Income
Fund........................ %

<PAGE>

TAX EQUIVALENT YIELD = ( E )
------- + t
(1 - p)

E = tax-exempt yield of a Class of shares
p = stated income tax rate
t = taxable yield of a Class of shares

The tax-equivalent yield of National Tax-Free Income Fund assumes a 39.6%
effective federal tax rate.

National Tax-Free Income Fund had the following tax-equivalent yield for
the 30-day period ended February 29, 1996:

CLASS Y
-------
National Tax-Free Income
Fund........................ %

OTHER INFORMATION. In Performance Advertisements, each Fund may compare
its Standardized Return and/or its Non-Standardized Return with data published
by Lipper Analytical Services, Inc. ('Lipper'), 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 recognized stock, bond and other
indexes, including (but not limited to) the Municipal Bond Buyers Indices,
Lehman Bond Index, the Standard & Poor's 500 Composite Stock Price Index, the
Dow Jones Industrial Average, Merrill Lynch Municipal Bond Indices, the Morgan
Stanley Capital International World Index, the Lehman Brothers Treasury Bond
Index, Lehman Brothers Government/Corporate Bond Index, the Salomon Brothers
World Government Bond Index and changes in the Consumer Price Index as published
by the U.S. Department of Commerce. Each Fund also may refer in such materials
to mutual fund performance rankings and other data, such as comparative asset,
expense and fee levels, published by Lipper, CDA, Wiesenberger, ICD or
Morningstar. Performance Advertisements also may refer to discussions of a Fund
and comparative mutual fund data and ratings reported in independent
periodicals, including (but not limited to) THE WALL STREET JOURNAL, MONEY
Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, 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.

quickly than if dividends or other distributions had been paid in cash.

<PAGE>

TAXES

FEDERAL TAXES. In order to continue to qualify for treatment as a
regulated investment company ('RIC') under the Internal Revenue Code, each Fund
must distribute to its shareholders for each taxable year at least 90% of the
sum of its net interest income excludable from gross income under section 103(a)
of the Internal Revenue Code plus its investment company taxable income
(consisting generally of taxable net investment income plus net short-term
capital gain) 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 other income (including gains from options or futures) derived with respect
to its business of investing in securities ('Income Requirement'); (2) the Fund
must derive less than 30% of its gross income each taxable year from the sale or
other disposition of securities, options or futures held for less than three
months ('Short-Short Limitation'); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. government securities, securities of
other RICs and other securities that are limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets;
and (4) at the close of each quarter of the Fund's taxable year, not more than
25% of the value of its total assets may be invested in securities (other than
U.S. government securities or the securities of other RICs) of any one issuer.

If Fund shares are sold at a loss after being held for six months or less,
the loss will be disallowed to the extent of any exempt-interest dividends
received on those shares and any loss not disallowed will be treated as
long-term, instead of short-term, capital loss to the extent of any capital gain
distributions received thereon. Investors also should be aware that if shares
are purchased shortly before the record date for a capital gain distribution,
the shareholder will pay full price for the shares and receive some portion of
the price back as a taxable distribution. In addition, if shares of a Fund are
purchased within 30 days before or after redeeming that Fund's shares
(regardless of Class) at a loss, that loss will not be deductible to the extent
the redemption proceeds are reinvested and will increase the basis of the newly
purchased shares.

43
<PAGE>

market transactions, any distributions of the gain will be taxable to its
shareholders. Each Fund is required to withhold 31% of all taxable dividends,
capital gain distributions and redemption proceeds payable to any individuals
and certain other noncorporate shareholders who do not provide the Fund with a
correct taxpayer identification number. Each Fund also is required to withhold
31% of all taxable dividends and capital gain distributions payable to those
shareholders who otherwise are subject to backup withholding.

Each Fund may invest in municipal bonds that are purchased, generally not
on their original issue, with market discount (that is, at a price less than the
principal amount of the bond or, in the case of a bond that was issued with
original issue discount, a price less than the amount of the issue price plus
accrued original issue discount) ('municipal market discount bonds'). If a
bond's market discount is less than the product of (1) 0.25% of the redemption
price at maturity times (2) the number of complete years to maturity after the
taxpayer acquired the bond, then no market discount is considered to exist. Gain
on the disposition of a municipal market discount bond purchased by a Fund after
April 30, 1993 (other than a bond with a fixed maturity date within one year
from its issuance) generally is treated as ordinary (taxable) income, rather
than capital gain, to the extent of the bond's accrued market discount at the
time of disposition. Market discount on such a bond generally is accrued
ratably, on a daily basis, over the period from the acquisition date to the date
of maturity. In lieu of treating the disposition gain as above, a Fund may elect
to include market discount in its gross income currently, for each taxable year

to which it is attributable.

44
<PAGE>

or a California local government (or interest earned on obligations of U.S.
possessions or territories) ('exempt-interest dividends'), provided that the
Fund qualifies as a RIC under the Internal Revenue Code and satisfies the
requirement of California law that at least 50% of its assets at the close of
each quarter of its taxable year be invested in obligations the interest on
which is exempt from personal income taxation under the laws or Constitution of
California or the laws of the United States. Distributions from the Fund which
are attributable to sources other than those described in the preceding sentence
will generally be taxable to such shareholders as ordinary income. However,
distributions by California Tax-Free Income Fund, if any, that are derived from
interest on obligations of the U.S. government may also be designated by the
Fund and treated by its shareholders as exempt from California personal income
tax, provided that the foregoing 50% requirement is satisfied. Moreover, under
California legislation incorporating certain portions of the provisions of the
Internal Revenue Code applicable to RICs, amounts treated as capital gain
distributions for federal income tax purposes generally will be treated as
long-term capital gains for California personal income tax purposes. In
addition, distributions to shareholders other than exempt-interest dividends are
includable in income subject to the California alternative minimum tax.

Interest on indebtedness incurred by shareholders to purchase or carry
shares of California Tax-Free Income Fund will not be deductible for California
personal income tax purposes.

Shares of California Tax-Free Income Fund will not be subject to the

California property tax.

NEW YORK TAXES. Individual shareholders of New York Tax-Free Income Fund
will not be required to include in their gross income for New York State
purposes any portion of distributions received from the Fund to the extent such
distributions are directly attributable to interest earned on tax-exempt
obligations issued by New York State or any political subdivisions thereof
(including the City) or interest earned on obligations of U.S. possessions or
territories to the extent interest on such obligations is exempt from state
taxation pursuant to federal law provided that the Fund qualifies as a RIC under
the Internal Revenue Code and satisfies the requirements that at least 50% of
its assets at the close of each quarter of its taxable year constitute
obligations which are tax-exempt for federal income tax purposes. Distributions
from the Fund which are attributable to sources other than those described in
the preceding sentence (including interest on obligations of other states and
their political subdivisions) will generally be taxable to such individual
shareholders as ordinary income. However, distributions by the Fund, if any,
that are derived from interest earned on obligations of the U.S. government may
also be designated by the Fund and treated by its shareholders as exempt from
personal income taxation for New York State and City purposes, provided that at
least 50% of the value of its total assets at the close of each quarter of its
taxable year is invested in such federal obligations. Distributions to
individual shareholders by the Fund which represent long-term capital gains for
federal income tax purposes will be treated as long-term capital gains for New
York State and City personal income tax purposes.

45
<PAGE>

tax except to the extent such distributions are directly attributable to
interest earned on tax-exempt obligations issued by New York State or any
political subdivision thereof (including the City).

Shares of New York Tax-Free Income Fund will not be subject to property
taxes imposed by New York State or the City.

Interest on indebtedness incurred by shareholders to purchase or carry
shares of the New York Tax-Free Income Fund generally will not be deductible for
New York State personal income tax purposes.

TABLE I. 1995 FEDERAL TAXABLE VS. TAX-FREE YIELDS*

TAXABLE INCOME (000'S) A TAX-FREE YIELD OF
- ------------------------------- ---------------------------------------------
SINGLE JOINT FEDERAL TAX 4.00% 5.00% 6.00% 7.00% 8.00%
RETURN RETURN BRACKET ----- ----- ----- ----- -----
IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
- ------------ -------------- ----------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0-- 22.1 $ 0-- 36.9 15.00% 4.71% 5.88% 7.06% 8.24% 9.41%
22.1-- 53.5 36.9-- 89.2 28.00 5.56 6.94 8.33 9.72 11.11
53.5--115.0 89.2--140.0 31.00 5.80 7.25 8.70 10.14 11.59
115.0--250.0 140.0--250.0 36.00 6.25 7.81 9.38 10.94 12.50
Over 250.0 Over 250.0 39.60 6.62 8.28 9.93 11.59 13.25
</TABLE>

- ------------------
* See note following Table III.

46
<PAGE>

TABLE II. 1995 FEDERAL AND 1996 CALIFORNIA TAXABLE VS. TAX-FREE YIELDS*

(See notes 1-4 below)

EFFECTIVE A TAX-FREE YIELD OF
TAXABLE INCOME (000'S) CALIFORNIA ---------------------------------------------

--------------------------------- AND 4.00% 5.00% 6.00% 7.00% 8.00%
SINGLE JOINT FEDERAL TAX ----- ----- ----- ----- -----
RETURN RETURN BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
-------------- -------------- ----------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 18.1-- 23.4 $ 36.1-- 39.0 20.10% 5.01% 6.26% 7.51% 8.76% 10.01%
23.4-- 25.1 39.0-- 50.2 32.32 5.91 7.39 8.87 10.34 11.82
25.1-- 31.7 50.2-- 63.4 33.76 6.04 7.55 9.06 10.57 12.08
31.7-- 56.6 63.4-- 94.3 34.70 6.13 7.66 9.19 10.72 12.25
56.6--118.0 94.3--143.6 37.42 6.39 7.99 9.59 11.19 12.78
118.0--256.5 143.6--256.5 41.95 6.89 8.61 10.34 12.06 13.78
Over 256.5 Over 256.5 45.22 7.30 9.13 10.95 12.78 14.60
</TABLE>

1. Net amount subject to federal income tax after deductions and exemptions.
Assumes that all income is ordinary income.

2. The income ranges shown for 1996 reflect federal and California income
brackets for 1995. Inflation adjusted income brackets for 1996 are not yet
available.

3. The rates shown reflect federal and California rates for 1996 in effect as of
the date hereof. Those rates are still subject to change with retroactive
effect for 1996.

a 6.59% taxable yield to receive the same benefit. A single individual with
taxable income of $55,000 in 1995, who lives in New York State outside of New
York City would have to earn a 6.27% taxable yield to realize a 4% tax-free
yield.

<PAGE>

TABLE III. 1995 FEDERAL AND NEW YORK TAXABLE VS. TAX-FREE YIELDS*

A TAX-FREE YIELD OF
TAXABLE INCOME (000'S) COMBINED ---------------------------------------------
--------------------------------- FEDERAL/ 4.00% 5.00% 6.00% 7.00% 8.00%
SINGLE JOINT NYS/NYC ----- ----- ----- ----- -----
RETURN RETURN TAX BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
-------------- -------------- ----------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0-- 22.1 $ 0-- 36.9 25.19% 5.35% 6.68% 8.02% 9.36% 10.69%
22.1-- 53.5 36.9-- 89.2 36.64 6.31 7.89 9.47 11.05 12.63
53.5--115.0 89.2--140.0 39.32 6.59 8.24 9.89 11.54 13.18
115.0--250.0 140.0--250.0 43.71 7.11 8.88 10.66 12.44 14.21
Over 250.0 Over 250.0 46.88 7.53 9.41 11.29 13.18 15.06
</TABLE>

A TAX-FREE YIELD OF
TAXABLE INCOME (000'S) ---------------------------------------------
--------------------------------- COMBINED 4.00% 5.00% 6.00% 7.00% 8.00%
SINGLE JOINT FEDERAL/NYS ----- ----- ----- ----- -----
RETURN RETURN TAX BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
-------------- -------------- ------------ ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0-- 22.1 $ 0-- 36.9 21.45% 5.09% 6.37% 7.64% 8.91% 10.19%
22.1-- 53.5 36.9-- 89.2 33.47 6.01 7.52 9.02 10.52 12.02
53.5--115.0 89.2--140.0 36.24 6.27 7.84 9.41 10.98 12.55
115.0--250.0 140.0--250.0 40.86 6.76 8.45 10.15 11.84 13.53
Over 250.0 Over 250.0 44.19 7.17 8.96 10.75 12.54 14.33
</TABLE>

<PAGE>

OTHER INFORMATION

The names of the Trusts are PaineWebber Mutual Fund Trust and PaineWebber
Municipal Series. Prior to April 6, 1992, the name of PaineWebber Mutual Fund
Trust was PaineWebber California Tax-Free Income Fund and its sole operating
series was designated as 'Initial Series.' Prior to July 1, 1991, the name of
this Trust was PaineWebber California Tax-Exempt Income Fund. Prior to June 30,
1992, National Tax-Free Income Fund was a series of a different Massachusetts
business trust, PaineWebber Managed Municipal Trust. Prior to July 1, 1991, the
name of Municipal High Income Fund was 'PaineWebber Classic High Yield Municipal
Fund' and prior to July 1, 1989, its name was 'PaineWebber High Yield Municipal
Bond Fund.' Prior to July 1, 1991, the name of New York Tax-Free Income Fund was
'PaineWebber Classic New York Tax-Free Fund.' Prior to November 10, 1995, the

Funds' Class C shares were known as 'Class D' shares.

49
<PAGE>

Tax-Free Income Fund with respect to California law. The law firm of Orrick,
Herrington & Sutcliffe, 666 Fifth Avenue, New York, New York 10103, serves as
counsel to New York Tax-Free Income Fund with respect to New York law.

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

FINANCIAL STATEMENTS

<PAGE>

APPENDIX A

EACH FUND MAY INVEST IN A VARIETY OF MUNICIPAL SECURITIES, AS DESCRIBED BELOW:

FLOATING RATE AND VARIABLE RATE OBLIGATIONS--Floating rate and variable
rate obligations bear interest at rates that are not fixed, but that vary with
changes in specified market rates or indices. Accordingly, as interest rates
decrease or increase, the potential for capital appreciation or capital
depreciation is less than for fixed rate obligations. Floating rate or variable
rate obligations typically permit the holder to demand payment of principal from
the issuer or remarketing agent at par value prior to maturity and may permit
the issuer to prepay principal, plus accrued interest, at its discretion after a
specified notice period. Frequently, floating rate or variable rate obligations
and/or the demand features thereon are secured by letters of credit or other
credit support arrangements provided by banks, the credit standing of which
affects the credit quality of the obligations.

51
<PAGE>

<PAGE>

APPENDIX B

Municipal bonds are rated by Moody's and S&P. Moody's and S&P also publish
separate ratings for municipal notes and tax-exempt commercial paper.
Descriptions of these ratings are set forth below.

DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS:

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.

DESCRIPTION OF S&P'S MUNICIPAL BOND RATINGS:

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

AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.

53
<PAGE>

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

Plus (1) 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
ratings categories.

DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES AND OTHER SHORT-TERM
LOANS:

MIG-2/VMIG-2. This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.

54
<PAGE>

DESCRIPTION OF S&P'S RATINGS OF STATE AND MUNICIPAL NOTES AND OTHER SHORT-TERM
LOANS:

S&P's tax-exempt note ratings are generally given to such notes that mature
in three years or less. The three rating categories are as follows:

SP-1. Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (1) designation.

SP-2. Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.

SP-3. Speculative capacity to pay principal and interest.

DESCRIPTION OF COMMERCIAL PAPER RATINGS

<PAGE>

APPENDIX C

THE FUNDS MAY USE THE FOLLOWING HEDGING AND OPTION INCOME INSTRUMENTS:

56
<PAGE>

[This page intentionally left blank]

<PAGE>

==============================================================================

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

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions........... 1
Hedging and Related Income Strategies.......... 24
Trustees and Officers.......................... 30
Investment Advisory and Distribution
Arrangements................................. 36
Portfolio Transactions......................... 38
Valuation of Shares............................ 40
Performance Information........................ 40
Taxes.......................................... 43
Other Information.............................. 49
Financial Statements........................... 50
Appendix....................................... 51
</TABLE>

PAINEWEBBER CALIFORNIA
TAX-FREE INCOME FUND

PAINEWEBBER NATIONAL
TAX-FREE INCOME FUND

PAINEWEBBER MUNICIPAL

HIGH INCOME FUND

PAINEWEBBER NEW YORK
TAX-FREE INCOME FUND

CLASS Y SHARES

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

STATEMENT OF ADDITIONAL
INFORMATION

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

PAINEWEBBER

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

JULY 1, 1996

==============================================================================

[LOGO] Printed on
Recycled
Paper

<PAGE>
PART C. OTHER INFORMATION

Item 24. Financial Statements and Exhibits

(a) Financial Statements: (to be filed)

PaineWebber California Tax-Free Income Fund

Included in Part A of this Registration Statement:

Financial Highlights for one Class A share of the Fund for
each of the three years in the period ended February 29, 1996,
for the three months ended February 28, 1993, and for each of
the seven years in the period ended November 30, 1992.

Financial Highlights for one Class B share of the Fund for
each of the three years in the period ended February 29, 1996,
for the three months ended February 28, 1993, for the year
ended November 30, 1992 and for the period July 1, 1991
(commencement of offering) to November 30, 1991.

Financial Highlights for one Class C share of the Fund for
each of the three years in the period ended February 29, 1996,
for the three months ended February 28, 1993 and for the
period July 2, 1992 (commencement of offering) to November 30,
1992.

Included in Part B of this Registration Statement through incorporation
by reference from the Annual Report to Shareholders (to be filed with
the Securities and Exchange Commission through EDGAR on May , 1996,
Accession No. ):

Portfolio of Investments at February 29, 1996.

Statement of Assets and Liabilities at February 29, 1996.

Statement of Operations for the year ended February 29, 1996.

Statement of Changes in Net Assets for the two years in the
period ended February 29, 1996.

Notes to Financial Statements

Financial Highlights for one Class A share of the Fund for
each of the three years in the period ended February 29, 1996,
for the three months ended February 28, 1993 and for each of
the two years in the period ended November 30, 1992.

Financial Highlights for one Class C share of the Fund for
each of the three years ended February 29, 1996, for the three
months ended February 28, 1993 and for the period July 2, 1992
(commencement of offering) to November 30, 1992.

Report of Ernst & Young LLP, Independent Auditors, dated April
, 1996 relating to PaineWebber Mutual Fund Trust (comprised of
PaineWebber California Tax-Free Income Fund and PaineWebber
National Tax-Free Income Fund).

C-1

<PAGE>
PaineWebber National Tax-Free Income Fund

Included in Part A of this Registration Statement:

Financial Highlights for one Class Y share of the Fund for the
period November , 1995 (commencement of offering) to
February 29, 1996.

Portfolio of Investments at February 28, 1996.

Statement of Assets and Liabilities at February 29, 1996.

Statement of Operations for the year ended February 29, 1996.

Statement of Changes in Net Assets for the two years in the
period ended February 29, 1996.

Notes to Financial Statements

Financial Highlights for one Class Y share of the Fund for the
period November , 1995 (commencement of offering) to February
29, 1996.

C-2

<PAGE>
b) Exhibits:

(6) (a) Distribution Contract (Class A Shares) 16/
(b) Distribution Contract (Class B Shares) 16/
(c) Distribution Contract (Class C Shares) (to be filed)
(d) Distribution Contract (Class Y Shares) (to be filed)
(e) Exclusive Dealer Agreement (Class A Shares) 16/
(f) Exclusive Dealer Agreement (Class B Shares) 16/
(g) Exclusive Dealer Agreement (Class C Shares) (to be filed)
(h) Exclusive Dealer Agreement (Class Y Shares) (to be filed)
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement 3/
(9) (a) Transfer Agency and Service Contract 8/
(b) Service Contract 7/
(10) (a) Opinion and consent of Kirkpatrick & Lockhart LLP with respect to
Class A, B and C shares 14/
(b) Opinion and consent of Kirkpatrick & Lockhart LLP with respect to
Class Y shares of PaineWebber National Tax-Free Income Fund 19/
(c) Opinion and consent of Kirkpatrick & Lockhart LLP with respect
to Class Y shares of PaineWebber California Tax-Free Income Fund
(to be filed)
(11) (a) Independent Auditor's Consent (to be filed)
(b) Consent of Special Counsel with respect to California law
(to be filed)
(12) Financial statements omitted from prospectus - none
(13) Letter of investment intent 4/
(14) Prototype Retirement Plan 5/
(15) (a) Plan of Distribution pursuant to Rule 12b-1 (Class A Shares) 11/

C-3
<PAGE>
(b) Plan of Distribution pursuant to Rule 12b-1 (Class B Shares) 11/
(c) Plan of Distribution pursuant to rule 12b-1 (Class C Shares) 15/
(16) (a) Schedule for Computation of Performance Quotations for Class A
shares of PaineWebber California Tax-Free Income Fund 9/
(b) Schedule for Computation of Performance Quotations for Class B
shares of PaineWebber California Tax-Free Income Fund 11/
(c) Schedule for Computation of Performance Quotations for Class A
shares of PaineWebber National Tax-Free Income Fund 12/
(d) Schedule for Computation of Performance Quotations for Class B
shares of PaineWebber National Tax-Free Income Fund 13/
(e) Schedule for Computation of Performance Quotations for Class C
shares of PaineWebber California Tax-Free Income Fund 15/
(f) Schedule for Computation of Performance Quotations for Class C
shares of PaineWebber National Tax-Free Income Fund 15/
(g) Schedule for Computation of Performance Quotations for Class Y
shares of PaineWebber National Tax-Free Income Fund (to be filed)
(17) and (27) Financial Data Schedule (to be filed)
(18) Plan pursuant to Rule 18f-3 (to be filed)
(19) Powers of Attorney dated April 18, 1996 (filed herewith)

1/ Incorporated by reference from Post-Effective Amendment No. 3 to
registration statement, SEC File No. 2-98149, filed January 30, 1987.

2/ Incorporated by reference from Post-Effective Amendment No. 6 to
registration statement, SEC File No. 2-98149, filed March 31, 1988.

3/ Incorporated by reference from Post-Effective Amendment No. 5 to
registration statement, SEC File No. 2-98149, filed February 1, 1988.

4/ Incorporated by reference from Post-Effective Amendment No. 2 to
registration statement, SEC File No. 2-98149, filed August 30, 1985.

5/ Incorporated by reference from Post-Effective Amendment No. 20 of
PaineWebber Managed Investments Trust, SEC File No. 2-91362, filed April 1,
1992.

6/ Incorporated by reference from Post-Effective Amendment No. 7 to
registration statement, SEC File No. 2-98149, filed March 31, 1989.

7/ Incorporated by reference from Post-Effective Amendment No. 8 to
registration statement, SEC File No. 2-98149, filed March 30, 1990.

8/ Incorporated by reference from Post-Effective Amendment No. 9 to
registration statement, SEC File No. 2-98149, filed February 1, 1991.

9/ Incorporated by reference from Post-Effective Amendment No. 10 to
registration statement, SEC File No. 2-98149, filed March 28, 1991.

10/ Incorporated by reference from Post-Effective Amendment No. 11 to
registration statement, SEC File No. 2-98149, filed April 29, 1991.

11/ Incorporated by reference from Post-Effective Amendment No. 12 to
registration statement, SEC File No. 2-98149, filed March 31, 1992.

12/ Incorporated by reference from Post-Effective Amendment No. 20 to
registration statement of PaineWebber Managed Municipal Trust, SEC File No.
2-89016, filed March 28, 1991.

C-4
<PAGE>

13/ Incorporated by reference from Post-Effective Amendment No. 23 to
registration statement of PaineWebber Managed Municipal Trust, SEC File No.
2-89016, filed March 31, 1992.

14/ Incorporated by reference from Post-Effective Amendment No. 13 to
registration statement of PaineWebber Mutual Fund Trust, SEC File
No. 2-98149, filed April 29, 1992.

15/ Incorporated by reference from Post-Effective Amendment No. 14 to
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed April 1, 1993.

16/ Incorporated by reference from Post-Effective Amendment No. 16 to
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed July 1, 1994.

17/ Incorporated by reference from Articles III, VIII, IX, X and XI of
Registrant's Declaration of Trust, as amended effective January 28, 1988,

March 21, 1991, July 1, 1991, April 6, 1992, June 30, 1992, July 20, 1995,
and November 10, 1995, and from Articles II, VII, X of the Registrant's
By-Laws, as amended September 28, 1994.

18/ Incorporated by reference from Post-Effective Amendment No. 17 to
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed June 30, 1995.

19/ Incorporated by reference from Post-Effective Amendment No. 18 to
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed August 31, 1995.

Item 25. Persons Controlled by or under Common Control with Registrant

None.

Item 26. Number of Holders of Securities

Number of Record Shareholders
Title of Class as of February 9, 1996
-------------- ----------------------
Shares of beneficial interest, par value
$.001 per share
PaineWebber California Tax-Free Income Fund
Class A Shares 2,986
Class B Shares 862
Class C Shares 697
Class Y Shares 0
PaineWebber National Tax-Free Income Fund
Class A Shares 8,633
Class B Shares 1,812
Class C Shares 2,978
Class Y Shares 22

C-5
<PAGE>

Item 27. Indemnification

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

Registrant may maintain insurance policies covering such rights of
indemnification.

Additionally, "Limitation of Liability" in Article X of the Declaration
of Trust provides that the trustees or officers of the Registrant shall not be
personally liable to any person extending credit to, contracting with or having
a claim against the Trust; and that, provided they have exercised reasonable
care and have acted under the reasonable belief that their actions 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, trustees shall not be liable for errors of judgment or mistakes of
fact or law, 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 IX 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 any liability to the
Registrant or its shareholders to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office.

Section 9 of the Investment Advisory and Administration Contract (the
"Contract") provides that Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins") shall not be liable for any error of judgement or mistake of law or
for any loss suffered by the Registrant in connection with the matters to which
the Contract relates, except for a loss resulting from the 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
Contract. Section 10 of the Contract provides that the trustees shall not be
liable for any obligations of the Registrant under the Contract and that
Mitchell Hutchins shall look only to the assets and property of the Registrant
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 Registrant
will indemnify Mitchell Hutchins, its officers, directors and 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 Registrant for use in the

Registration Statement; and provided that

C-6
<PAGE>
this indemnity agreement shall not protect any such persons against liabilities
arising by reason of their bad faith, gross negligence or willful misfeasance
and shall not inure to the benefit of any such persons unless a court of
competent jurisdiction or controlling precedent determines that such result is
not against public policy as expressed in the Securities Act of 1933. Section 9
also provides that Mitchell Hutchins agrees to indemnify, defend and hold the
Registrant, 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 the Distribution Contract.

Section 9 of each Exclusive Dealer Agreement contains provisions
similar to Section 9 of the Distribution Contract, with respect to PaineWebber
Incorporated ("PaineWebber").

Section 6 of the Service Contract provides that PaineWebber shall be
indemnified and held harmless by the Registrant against all liabilities, except
those arising out of bad faith, gross negligence, willful misfeasance or
reckless disregard of its duties under the Service Contract.

Section 10 of the Distribution Contract and Section 7 of the Service
Contract contain provisions similar to that of Section 10 of the Investment
Advisory and Administration Contract, with respect to Mitchell Hutchins and
PaineWebber, as appropriate.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be provided to trustees, officers and controlling
persons of the Registrant, pursuant to the foregoing provisions or otherwise,
the Registrant 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
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding or payment pursuant to any insurance policy) is
asserted against the Registrant by such trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

Item 28. Business and Other Connections of Investment Adviser

Mitchell Hutchins, a Delaware corporation, is a registered investment
adviser 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.

Item 29. Principal Underwriters

(a) Mitchell Hutchins serves as principal underwriter and/or investment
adviser for the following investment companies:

ALL AMERICAN TERM TRUST INC.
GLOBAL HIGH INCOME DOLLAR FUND INC.
GLOBAL SMALL CAP FUND INC.
INSURED MUNICIPAL INCOME FUND INC.

C-7

INVESTMENT GRADE INCOME FUND INC.
MANAGED HIGH YIELD FUND INC.
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
PAINEWEBBER INVESTMENT TRUST III
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER MASTER SERIES, INC.
PAINEWEBBER MUNICIPAL SERIES
PAINEWEBBER MUTUAL FUND TRUST
PAINEWEBBER OLYMPUS FUND
PAINEWEBBER SECURITIES TRUST
PAINEWEBBER SERIES TRUST
STRATEGIC GLOBAL INCOME FUND, INC.
TRIPLE A AND GOVERNMENT SERIES - 1997, INC.
2002 TARGET TERM TRUST INC.

(b) Mitchell Hutchins is the principal underwriter for the Registrant.
PaineWebber acts as exclusive dealer for the shares of the Registrant. The
directors and officers of Mitchell Hutchins, their principal business addresses,
and their positions and offices with Mitchell Hutchins are identified in its
Form ADV, as filed with the Securities and Exchange Commission (Registration
Number 801-13219). The directors and officers of PaineWebber, their principal
business addresses, and their positions and offices with PaineWebber are
identified in its Form ADV, as filed with the Securities and Exchange Commission
(registration number 801-7163). The foregoing information is hereby incorporated
herein 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:

<TABLE>
<CAPTION>
Positions and Offices With
Name and Principal Business Position With Underwriter or

Address Registrant Exclusive Dealer
------- ---------- ----------------
<S> <C> <C>
Margo N. Alexander Trustee and President President, Chief Executive Officer and a
1285 Avenue of the Americas Director of Mitchell Hutchins; Executive
New York, New York 10019 Vice President and Director of PaineWebber

Mary C. Farrell Trustee Managing Director, Senior Investment
1285 Avenue of the Americas Strategist and Member of the Investment
New York, New York 10019 Policy Committee of PaineWebber

Teresa M. Boyle Vice President First Vice President and Manager -
1285 Avenue of the Americas Advisory Administration of Mitchell
New York, New York 10019 Hutchins

Joan L. Cohen Vice President and Assistant Vice President and Attorney of Mitchell
1285 Avenue of the Americas Secretary Hutchins
New York, New York 10019
</TABLE>

C-8

<PAGE>
<TABLE>
<CAPTION>
Positions and Offices With
Name and Principal Business Position With Underwriter or
Address Registrant Exclusive Dealer
------- ---------- ----------------
<S> <C> <C>
C. William Maher Vice President and Assistant First Vice President and a Senior Manager
1285 Avenue of the Americas Treasurer of the Mutual Fund Finance Division of
New York, New York 10019 Mitchell Hutchins

Dennis McCauley Vice President Managing Director and Chief Investment
1285 Avenue of the Americas Officer - Fixed Income of Mitchell
New York, New York 10019 Hutchins

Ann E. Moran Vice President and Assistant Vice President of Mitchell Hutchins
1285 Avenue of the Americas Treasurer
New York, New York 10019

Richard S. Murphy Vice President Senior Vice President of Mitchell Hutchins
1285 Avenue of the Americas
New York, New York 10019

Dianne E. O'Donnell Vice President and Secretary Senior Vice President and Deputy General
1285 Avenue of the Americas Counsel of Mitchell Hutchins
New York, New York 10019

Victoria E. Schonfeld Vice President Managing Director and General Counsel of
1285 Avenue of the Americas Mitchell Hutchins
New York, New York 10019

Paul H. Schubert Vice President and Assistant Vice President and a Senior Manager of
1285 Avenue of the Americas Treasurer the Mutual Fund Finance Division of
New York, New York 10019 Mitchell Hutchins

Julian F. Sluyters Vice President and Treasurer Senior Vice President and Director of the
1285 Avenue of the Americas Mutual Fund Finance Division of Mitchell
New York, New York 10019 Hutchins

Gregory K. Todd Vice President and Assistant First Vice President and Associate
1285 Avenue of the Americas Secretary General Counsel of Mitchell Hutchins
New York, New York 10019

Keith A. Weller Vice President and Assistant First Vice President and Associate
1285 Avenue of the Americas Secretary General Counsel of Mitchell Hutchins

</TABLE>

c) None

Item 30. Location of Accounts and Records

The books and other documents required by paragraphs (b)(4), (c) and
(d) of Rule 31a-1 under the Investment Company Act of 1940 are maintained in the
physical possession of Mitchell Hutchins Asset Management Inc., 1285 Avenue of
the Americas, New York, New York 10019. All other accounts, books and documents
required by Rule 31a-1 are maintained in the physical possession of Registrant's
transfer agent and custodian.

C-9

<PAGE>

Item 31. Management Services

Not applicable.

Item 32. Undertakings

Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.

C-10

<PAGE>

PAINEWEBBER MUTUAL FUND TRUST
EXHIBIT INDEX

Exhibit
Number
- ------

(1) (a) Declaration of Trust 1/
(b) Amendment effective January 28, 1988 to Declaration of Trust 2/
(c) Amendment effective March 21, 1991 to Declaration of Trust 9/
(d) Amendment effective July 1, 1991 to Declaration of Trust 11/
(e) Amendment effective April 6, 1992 to Declaration of Trust 14/
(f) Amendment effective June 30, 1992 to Declaration of Trust 15/
(g) Amendment effective July 20, 1995 to Declaration of Trust 19/
(h) Amendment effective November 10, 1995 to Declaration of Trust
(to be filed)
(2) (a) By-Laws 1/
(b) Amendment dated March 19, 1991 to By-Laws 9/
(c) Amendment dated September 28, 1994 to By-Laws 18/
(3) Voting trust agreement - none
(4) Instruments defining the rights of holders of Registrant's shares of
beneficial interest 17/
(5) Investment Advisory and Administration Contract 6/
(6) (a) Distribution Contract (Class A Shares) 16/
(b) Distribution Contract (Class B Shares) 16/
(c) Distribution Contract (Class C Shares) (to be filed)
(d) Distribution Contract (Class Y Shares) (to be filed)
(e) Exclusive Dealer Agreement (Class A Shares) 16/
(f) Exclusive Dealer Agreement (Class B Shares) 16/
(g) Exclusive Dealer Agreement (Class C Shares) (to be filed)
(h) Exclusive Dealer Agreement (Class Y Shares) (to be filed)
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement 3/
(9) (a) Transfer Agency and Service Contract 8/
(b) Service Contract 7/
(10) (a) Opinion and consent of Kirkpatrick & Lockhart LLP with respect to
Class A, B and C shares14/
(b) Opinion and consent of Kirkpatrick & Lockhart LLP with respect to
Class Y shares of PaineWebber National Tax-Free Income Fund 19/
(c) Opinion and consent of Kirkpatrick & Lockhart LLP with respect to
Class Y shares of PaineWebber California Tax-Free Income Fund (to be
filed)
(11) (a) Independent Auditor's Consent (to be filed)
(b) Consent of Special Counsel with respect to California Law
(to be filed)
(12) Financial statements omitted from prospectus - none
(13) Letter of investment intent 4/
(14) Prototype Retirement Plan 5/
(15) (a) Plan pursuant to Rule 12b-1 (Class A Shares) 11/
(b) Plan pursuant to Rule 12b-1 (Class B Shares) 11/
(c) Plan pursuant to Rule 12b-1 (Class C Shares) 15/
(16) (a) Schedule for Computation of Performance Quotations for Class A shares

of PaineWebber California Tax-Free Income Fund 9/
(b) Schedule for Computation of Performance Quotations for Class B shares
of PaineWebber California Tax-Free Income Fund 11/
(c) Schedule for Computation of Performance Quotations for Class A shares
of PaineWebber National Tax-Free Income Fund 12/
(d) Schedule for Computation of Performance Quotations for Class B shares
of PaineWebber National Tax-Free Income Fund 13/
(e) Schedule for Computation of Performance Quotations for Class C shares
of PaineWebber California Tax-Free Income Fund 15/
(f) Schedule for Computation of Performance Quotations for Class C shares
of PaineWebber National Tax-Free Income Fund 15/
(g) Schedule for Computation of Performance Quotations for Class Y shares
of PaineWebber National Tax-Free Income Fund (to be filed)
(17) and (27) Financial Data Schedule (to be filed)
(18) Plan pursuant to Rule 18f-3 (to be filed)
(19) Powers of Attorney dated April 18, 1996 (filed herewith)

- -----------------------
1/ Incorporated by reference from Post-Effective Amendment No. 3 to
registration statement, SEC File No. 2-98149, filed January 30, 1987.

2/ Incorporated by reference from Post-Effective Amendment No. 6 to
registration statement, SEC File No. 2-98149, filed March 31, 1988.

3/ Incorporated by reference from Post-Effective Amendment No. 5 to
registration statement, SEC File No. 2-98149, filed February 1, 1988.

4/ Incorporated by reference from Post-Effective Amendment No. 2 to
registration statement, SEC File No. 2-98149, filed August 30, 1985.

5/ Incorporated by reference from Post-Effective Amendment No. 20 of
PaineWebber Managed Investments Trust, SEC File No. 2-91362, filed April 1,
1992.

6/ Incorporated by reference from Post-Effective Amendment No. 7 to
registration statement, SEC File No. 2-98149, filed March 31, 1989.

7/ Incorporated by reference from Post-Effective Amendment No. 8 to
registration statement, SEC File No. 2-98149, filed March 30, 1990.

8/ Incorporated by reference from Post-Effective Amendment No. 9 to
registration statement, SEC File No. 2-98149, filed February 1, 1991.

9/ Incorporated by reference from Post-Effective Amendment No.10 to
registration statement, SEC File No. 2-98149, filed March 28, 1991.

10/ Incorporated by reference from Post-Effective Amendment No.11 to
registration statement, SEC File No. 2-98149, filed April 29, 1991.

11/ Incorporated by reference from Post-Effective Amendment No. 12 to
registration statement, SEC File No. 2-98149, filed March 31, 1992.

12/ Incorporated by reference from Post-Effective Amendment No. 20 to
registration statement of PaineWebber Managed Municipal Trust, SEC File No.

2-89016, filed March 28, 1991.

13/ Incorporated by reference from Post-Effective Amendment No. 23 to
registration statement of PaineWebber Managed Municipal Trust, SEC File No.
2-89016, filed March 31, 1992.

14/ Incorporated by reference from Post-Effective Amendment No. 13 to
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed April 29, 1992.

15/ Incorporated by reference from Post-Effective Amendment No. 14 to
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed April 1, 1993.

16/ Incorporated by reference from Post-Effective Amendment No. 16 to
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed July 1, 1994.

17/ Incorporated by reference from Articles III, VIII, IX, X and XI of
Registrant's Declaration of Trust, as amended effective January 28, 1988,
March 21, 1991, July 1, 1991, April 6, 1992, June 30, 1992, July 20, 1995,
and November 10, 1995, and from Articles II, VII, X of the Registrant's
By-Laws, as amended September 28, 1994.

18/ Incorporated by reference from Post-Effective Amendment No. 17 to
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed June 30, 1995.

19/ Incorporated by reference from Post-Effective Amendment No. 18 to
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed August 31, 1995.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
New York and State of New York, on the 24th day of April, 1996.

PaineWebber Mutual Fund Trust

By: /s/ Dianne E. O'Donnell
---------------------------
Dianne E. O'Donnell
Vice President and Secretary

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment has been signed below by the following persons
in the capacities and on the dates indicated:

Signature Title Date

*
/s/ Margo N. Alexander ** President and Trustee April 24, 1996
- ------------------------- (Chief Executive Officer)
Margo N. Alexander

/s/ E. Garrett Bewkes, Jr.*** Trustee and Chairman April 24, 1996
- -------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr.

/s/ Richard Q. Armstrong ** Trustee April 24, 1996
- --------------------------
Richard Q. Armstrong

/s/ Richard Burt ** Trustee April 24, 1996
- --------------------------
Richard Burt

/s/ Mary C. Farrell ** Trustee April 24, 1996
- --------------------------
Mary C. Farrell

/s/ Meyer Feldberg ** Trustee April 24, 1996
- --------------------------
Meyer Feldberg

/s/ George W. Gowen **** Trustee April 24, 1996
- --------------------------
George W. Gowen

/s/ Frederic V. Malek ** Trustee April 24, 1996
- --------------------------

Frederic V. Malek

/s/ Carl W. Schafer ** Trustee April 24, 1996
- --------------------------
Carl W. Schafer

/s/ John R. Torell III ** Trustee April 24, 1996
- --------------------------
John R. Torell III

/s/ Julian F. Sluyters Vice President and April 24, 1996
- -------------------------- Treasurer (Chief
Julian F. Sluyters Financial and
Accounting Officer)

<PAGE>
SIGNATURES (Continued)

* Signature affixed by Elinor W. Gammon pursuant to power of
attorney dated May 8, 1995 and incorporated by reference from
Post-Effective Amendment No. 34 to the registration statement of
PaineWebber America Fund, SEC File No. 2-78626, filed May 10, 1995.

** Signature affixed by Elinor W. Gammon pursuant to power of
attorney dated April 18, 1996 and filed herewith.

*** Signature affixed by Elinor W. Gammon pursuant to power of
attorney dated January 3, 1994 and incorporated by reference from
Post-Effective Amendment No. 25 to the registration statement
Paine-Webber Investment Series, SEC File No. 33-11025, filed
March 1, 1994.

**** Signature affixed by Elinor W. Gammon pursuant to power of
attorney dated March 27, 1990 and incorporated by reference from
Post-Effective Amendment No. 7 to the registration statement of
PaineWebber Municipal Series, SEC File No. 33-11611, filed
June 29, 1990.

Exhibit 19

POWER OF ATTORNEY

I, Mary C. Farrell, Trustee of PaineWebber Securities Trust,
PaineWebber Investment Trust, PaineWebber Investment Trust II,
PaineWebber Investment Trust III, PaineWebber America Fund, PaineWebber
Olympus Fund, PaineWebber Managed Investments Trust, PaineWebber Mutual
Fund Trust, PaineWebber Series Trust, PaineWebber Municipal Series,
PaineWebber Investment Series and PaineWebber Managed Assets Trust
(collectively, the "Funds"), hereby constitute and appoint Victoria E.
Schonfeld, Dianne E. O'Donnell, Gregory K. Todd, Joan L. Cohen, Keith A.
Weller, Elinor W. Gammon and Robert A. Wittie, and each of them singly,
my true and lawful attorneys, with full power to them to sign for me,
and in my capacity as Trustee for the Fund, any and all amendments to
each of the particular registration statements of the Fund, and all
instruments necessary or desirable in connection therewith, filed with
the Securities and Exchange Commission, hereby ratifying and confirming
my signature as it may be signed by said attorneys to any and all
amendments to said registration statements.

Pursuant to the requirements of the Securities Act of 1933, this instrument
has been signed below by the following in the capacity and on the date
indicated.

Signature Title Date
--------- ----- ----
/s/ Mary C. Farrell Trustee April 18, 1996
- -------------------
Mary C. Farrell

POWER OF ATTORNEY

I, Margo N. Alexander, Trustee of PaineWebber Securities Trust,
PaineWebber Investment Trust, PaineWebber Investment Trust II,
PaineWebber Investment Trust III, PaineWebber America Fund, PaineWebber
Olympus Fund, PaineWebber Managed Investments Trust, PaineWebber Mutual
Fund Trust, PaineWebber Series Trust, PaineWebber Municipal Series,
PaineWebber Investment Series and PaineWebber Managed Assets Trust
(collectively, the "Funds"), hereby constitute and appoint Victoria E.
Schonfeld, Dianne E. O'Donnell, Gregory K. Todd, Joan L. Cohen, Keith A.
Weller, Elinor W. Gammon and Robert A. Wittie, and each of them singly,
my true and lawful attorneys, with full power to them to sign for me,
and in my capacity as Trustee for the Fund, any and all amendments to
each of the particular registration statements of the Fund, and all
instruments necessary or desirable in connection therewith, filed with
the Securities and Exchange Commission, hereby ratifying and confirming
my signature as it may be signed by said attorneys to any and all
amendments to said registration statements.

Pursuant to the requirements of the Securities Act of 1933, this instrument
has been signed below by the following in the capacity and on the date
indicated.

Signature Title Date
--------- ----- ----
/s/ Margo N. Alexander Trustee April 18, 1996
- ----------------------
Margo N. Alexander

POWER OF ATTORNEY

I, Richard Q. Armstrong, Trustee of PaineWebber Securities Trust,
PaineWebber Investment Trust, PaineWebber Investment Trust II,
PaineWebber Investment Trust III, PaineWebber America Fund, PaineWebber
Olympus Fund, PaineWebber Managed Investments Trust, PaineWebber Mutual
Fund Trust, PaineWebber Series Trust, PaineWebber Municipal Series,
PaineWebber Investment Series and PaineWebber Managed Assets Trust
(collectively, the "Funds"), hereby constitute and appoint Victoria E.
Schonfeld, Dianne E. O'Donnell, Gregory K. Todd, Joan L. Cohen, Keith A.
Weller, Elinor W. Gammon and Robert A. Wittie, and each of them singly,
my true and lawful attorneys, with full power to them to sign for me,
and in my capacity as Trustee for the Fund, any and all amendments to
each of the particular registration statements of the Fund, and all
instruments necessary or desirable in connection therewith, filed with
the Securities and Exchange Commission, hereby ratifying and confirming
my signature as it may be signed by said attorneys to any and all
amendments to said registration statements.

Pursuant to the requirements of the Securities Act of 1933, this instrument
has been signed below by the following in the capacity and on the date
indicated.

Signature Title Date
--------- ----- ----
/s/ Richard Q. Armstrong Trustee April 18, 1996
- ------------------------
Richard Q. Armstrong

POWER OF ATTORNEY

I, Richard R. Burt, Trustee of PaineWebber Securities Trust,
PaineWebber Investment Trust, PaineWebber Investment Trust II,
PaineWebber Investment Trust III, PaineWebber America Fund, PaineWebber
Olympus Fund, PaineWebber Managed Investments Trust, PaineWebber Mutual
Fund Trust, PaineWebber Series Trust, PaineWebber Municipal Series,
PaineWebber Investment Series and PaineWebber Managed Assets Trust
(collectively, the "Funds"), hereby constitute and appoint Victoria E.
Schonfeld, Dianne E. O'Donnell, Gregory K. Todd, Joan L. Cohen, Keith A.
Weller, Elinor W. Gammon and Robert A. Wittie, and each of them singly,
my true and lawful attorneys, with full power to them to sign for me,
and in my capacity as Trustee for the Fund, any and all amendments to
each of the particular registration statements of the Fund, and all
instruments necessary or desirable in connection therewith, filed with
the Securities and Exchange Commission, hereby ratifying and confirming
my signature as it may be signed by said attorneys to any and all
amendments to said registration statements.

Pursuant to the requirements of the Securities Act of 1933, this instrument
has been signed below by the following in the capacity and on the date
indicated.

Signature Title Date
--------- ----- ----
/s/ Richard R. Burt Trustee April 18, 1996
- -------------------
Richard R. Burt

POWER OF ATTORNEY

I, Meyer Feldberg, Trustee of PaineWebber Securities Trust,
PaineWebber Investment Trust, PaineWebber Investment Trust II,
PaineWebber Investment Trust III, PaineWebber America Fund, PaineWebber
Olympus Fund, PaineWebber Managed Investments Trust, PaineWebber Mutual
Fund Trust, PaineWebber Series Trust, PaineWebber Municipal Series,
PaineWebber Investment Series and PaineWebber Managed Assets Trust
(collectively, the "Funds"), hereby constitute and appoint Victoria E.
Schonfeld, Dianne E. O'Donnell, Gregory K. Todd, Joan L. Cohen, Keith A.
Weller, Elinor W. Gammon and Robert A. Wittie, and each of them singly,
my true and lawful attorneys, with full power to them to sign for me,
and in my capacity as Trustee for the Fund, any and all amendments to
each of the particular registration statements of the Fund, and all
instruments necessary or desirable in connection therewith, filed with
the Securities and Exchange Commission, hereby ratifying and confirming
my signature as it may be signed by said attorneys to any and all
amendments to said registration statements.

Pursuant to the requirements of the Securities Act of 1933, this instrument
has been signed below by the following in the capacity and on the date
indicated.

Signature Title Date
--------- ----- ----
/s/ Meyer Feldberg Trustee April 18, 1996
- ------------------
Meyer Feldberg

POWER OF ATTORNEY

I, Frederic V. Malek, Trustee of PaineWebber Securities Trust,
PaineWebber Investment Trust, PaineWebber Investment Trust II,
PaineWebber Investment Trust III, PaineWebber America Fund, PaineWebber
Olympus Fund, PaineWebber Managed Investments Trust, PaineWebber Mutual
Fund Trust, PaineWebber Series Trust, PaineWebber Municipal Series,
PaineWebber Investment Series and PaineWebber Managed Assets Trust
(collectively, the "Funds"), hereby constitute and appoint Victoria E.
Schonfeld, Dianne E. O'Donnell, Gregory K. Todd, Joan L. Cohen, Keith A.
Weller, Elinor W. Gammon and Robert A. Wittie, and each of them singly,
my true and lawful attorneys, with full power to them to sign for me,
and in my capacity as Trustee for the Fund, any and all amendments to
each of the particular registration statements of the Fund, and all
instruments necessary or desirable in connection therewith, filed with
the Securities and Exchange Commission, hereby ratifying and confirming
my signature as it may be signed by said attorneys to any and all
amendments to said registration statements.

Pursuant to the requirements of the Securities Act of 1933, this instrument
has been signed below by the following in the capacity and on the date
indicated.

Signature Title Date
--------- ----- ----
/s/ Frederic V. Malek Trustee April 18, 1996
- ---------------------
Frederic V. Malek

POWER OF ATTORNEY

I, Carl W. Schafer, Trustee of PaineWebber Securities Trust,
PaineWebber Investment Trust, PaineWebber Investment Trust II,
PaineWebber Investment Trust III, PaineWebber America Fund, PaineWebber
Olympus Fund, PaineWebber Managed Investments Trust, PaineWebber Mutual
Fund Trust, PaineWebber Series Trust, PaineWebber Municipal Series,
PaineWebber Investment Series and PaineWebber Managed Assets Trust
(collectively, the "Funds"), hereby constitute and appoint Victoria E.
Schonfeld, Dianne E. O'Donnell, Gregory K. Todd, Joan L. Cohen, Keith A.
Weller, Elinor W. Gammon and Robert A. Wittie, and each of them singly,
my true and lawful attorneys, with full power to them to sign for me,
and in my capacity as Trustee for the Fund, any and all amendments to
each of the particular registration statements of the Fund, and all
instruments necessary or desirable in connection therewith, filed with
the Securities and Exchange Commission, hereby ratifying and confirming
my signature as it may be signed by said attorneys to any and all
amendments to said registration statements.

Pursuant to the requirements of the Securities Act of 1933, this instrument
has been signed below by the following in the capacity and on the date
indicated.

Signature Title Date
--------- ----- ----
/s/ Carl W. Schafer Trustee April 18, 1996
- -------------------
Carl W. Schafer

POWER OF ATTORNEY

I, John R. Torell III, Trustee of PaineWebber Securities Trust,
PaineWebber Investment Trust, PaineWebber Investment Trust II,
PaineWebber Investment Trust III, PaineWebber America Fund, PaineWebber
Olympus Fund, PaineWebber Managed Investments Trust, PaineWebber Mutual
Fund Trust, PaineWebber Series Trust, PaineWebber Municipal Series,
PaineWebber Investment Series and PaineWebber Managed Assets Trust
(collectively, the "Funds"), hereby constitute and appoint Victoria E.
Schonfeld, Dianne E. O'Donnell, Gregory K. Todd, Joan L. Cohen, Keith A.
Weller, Elinor W. Gammon and Robert A. Wittie, and each of them singly,
my true and lawful attorneys, with full power to them to sign for me,
and in my capacity as Trustee for the Fund, any and all amendments to
each of the particular registration statements of the Fund, and all
instruments necessary or desirable in connection therewith, filed with
the Securities and Exchange Commission, hereby ratifying and confirming
my signature as it may be signed by said attorneys to any and all
amendments to said registration statements.

Pursuant to the requirements of the Securities Act of 1933, this instrument
has been signed below by the following in the capacity and on the date
indicated.

Signature Title Date
--------- ----- ----
/s/ John R. Torell III Trustee April 18, 1996
- ----------------------
John R. Torell III