MITCHELL HUTCHINS KIDDER PEABODY GOVERNMENT INCOME FUND INC
485APOS, 1995-05-23
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<PAGE>
      AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 23, 1995
                                                 SECURITIES ACT FILE NO. 2-98558
                                        INVESTMENT COMPANY ACT FILE NO. 811-4333
________________________________________________________________________________
________________________________________________________________________________
 
                       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. 16                      [x]
                                     AND/OR
        REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940      [x]
                                AMENDMENT NO. 18                             [x]
 
                        (CHECK APPROPRIATE BOX OR BOXES)
 
                            ------------------------
 
         MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
               (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
 
<TABLE>
<S>                                                         <C>
               1285 AVENUE OF THE AMERICAS                       10019
                    NEW YORK, NEW YORK                        (ZIP CODE)
         (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
</TABLE>
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 713-2000
 
                              DIANNE E. O'DONNELL
                    MITCHELL HUTCHINS ASSET MANAGEMENT INC.
                          1285 AVENUE OF THE AMERICAS
                            NEW YORK, NEW YORK 10019
                    (NAME AND ADDRESS OF AGENT FOR SERVICE)
 
                                    COPY TO:
                         JOHN E. BAUMGARDNER, JR., ESQ.
                              SULLIVAN & CROMWELL
                                125 BROAD STREET
                            NEW YORK, NEW YORK 10004
 
     IT  IS PROPOSED THAT  THIS FILING WILL  BECOME EFFECTIVE (CHECK APPROPRIATE
BOX)
              [ ] IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (b) OF RULE 485
              [ ] ON                PURSUANT TO PARAGRAPH (b) OF RULE 485
              [x] 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (a)(1) OF RULE 485
              [ ] ON               PURSUANT TO PARAGRAPH (a)(1) OF RULE 485
              [ ] 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (a)(2) OF RULE 485
              [ ] ON               PURSUANT TO PARAGRAPH (a)(2) OF RULE 485.
 
     The Registrant has registered an indefinite number of its shares under  the
Securities  Act of 1933 pursuant to Rule  24f-2 under the Investment Company Act
of 1940.  The notice  required by  such rule  for the  Registrant's most  recent
fiscal year was filed on March 31, 1995.
 
________________________________________________________________________________
________________________________________________________________________________

<PAGE>
         MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
                      REGISTRATION STATEMENT ON FORM N-1A
                             CROSS REFERENCE SHEET
 
<TABLE>
<CAPTION>
                          N-1A
                        ITEM NO.                                                  LOCATION
---------------------------------------------------------  ------------------------------------------------------
 
<S>                                                        <C>
PART A
 
 1. Cover Page...........................................  Cover Page
 2. Synopsis.............................................  Fee Table; Highlights
 3. Condensed Financial Information......................  Financial Highlights; Performance Data
 4. General Description of Registrant....................  Cover Page; Highlights; Investment Objective and
                                                             Policies; Appendix
 5. Management of the Fund...............................  Fee Table; Investment Objective and Policies;
                                                             Management of the Fund; Custodian and Transfer,
                                                             Dividend Disbursing and Recordkeeping Agent
 5A. Management's Discussion of Fund Performance.........  Not Applicable (in the annual report)
 6. Capital Stock and Other Securities...................  Cover Page; Dividends, Distributions and Taxes;
                                                             General Information
 7. Purchase of Securities Being Offered.................  Cover Page; Fee Table; Purchase of Shares; Management
                                                             of the Fund; Determination of Net Asset Value;
                                                             Exchange Privilege; The Distributor
 8. Redemption or Repurchase.............................  Redemption of Shares
 9. Pending Legal Proceedings............................  Not Applicable
 
PART B
 
10. Cover Page...........................................  Cover Page
11. Table of Contents....................................  Back Cover Page
12. General Information and History......................  Not Applicable
13. Investment Objectives and Policies...................  Investment Objective and Policies; Investment
                                                             Restrictions
14. Management of the Fund...............................  Management of the Fund
15. Control Persons and Principal Holders of
       Securities........................................  Management of the Fund; Principal Shareholders
16. Investment Advisory and Other Services...............  Management of the Fund
17. Brokerage Allocation.................................  Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities...................  Shares of the Fund (in the prospectus)
19. Purchase, Redemption and Pricing of Securities Being
       Offered...........................................  Purchase of Class A Shares; Redemption and Exchange of
                                                             Shares; Determination of Net Asset Value; Statement
                                                             of Assets and Liabilities
20. Tax Status...........................................  Taxes
21. Underwriters.........................................  Management of the Fund
22. Calculations of Performance Data.....................  Performance Data
23. Financial Statements.................................  Financial Statements
</TABLE>
 
PART C
 
     Information  required  to be  included in  Part  C is  set forth  under the
appropriate Item, so numbered, in Part C to this Registration Statement.

<PAGE>
Prospectus                                                          May 31, 1995
--------------------------------------------------------------------------------
         Mitchell Hutchins/Kidder, Peabody Government Income Fund, Inc.
    1285 AVENUE OF THE AMERICAS   NEW YORK, NEW YORK 10019   (800) 647-1568
 
Mitchell Hutchins/Kidder, Peabody Government Income Fund, Inc. (the 'Fund') is a
diversified,  open-end  management  investment  company  whose  objective  is to
provide high current income.  The Fund's investments  consist primarily of  U.S.
Government  securities, including  U.S. Treasury  Bills, Notes,  Bonds and other
debt  securities  issued  by  the  U.S.  Treasury,  and  obligations  issued  or
guaranteed  by U.S.  Government agencies  or instrumentalities;  writing covered
call options and covered put options with respect to certain of such securities;
and entering into closing purchase and sale transactions with respect to certain
of such options. In order to hedge  against changes in interest rates, the  Fund
may also purchase put options and engage in transactions involving interest rate
futures  contracts and options on such contracts. The Fund may also borrow money
from banks. See 'Investment Objective and Policies.'
 
This Prospectus  sets forth  concisely the  information about  the Fund  that  a
prospective  investor ought to know before investing. lnvestors should read this
Prospectus and retain it for future reference.
 
Additional information about  the Fund has  been filed with  the Securities  and
Exchange  Commission (the 'SEC') in a  Statement of Additional Information dated
May 31, 1995 which is hereby incorporated by reference and is available  without
charge upon request made to the Fund at the above address. Shareholder inquiries
may be directed to the Fund at the same address.
 
--------------------------------------------------------------------------------
 
               INVESTMENT ADVISER, ADMINISTRATOR AND DISTRIBUTOR
                    Mitchell Hutchins Asset Management Inc.
 
--------------------------------------------------------------------------------
   THESE   SECURITIES  HAVE   NOT  BEEN   APPROVED  OR   DISAPPROVED  BY  THE
     SECURITIES  AND  EXCHANGE   COMMISSION  OR   ANY  STATE   SECURITIES
       COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
         STATE  SECURITIES  COMMISSION  PASSED UPON  THE  ACCURACY OR
           ADEQUACY OF  THIS  PROSPECTUS.  ANY  REPRESENTATION  TO
                            THE CONTRARY IS A CRIMINAL OFFENSE.

<PAGE>
--------------------------------------------------------------------------------
 
                                   FEE TABLE
The  table appearing below shows  the costs and expenses  that an investor would
incur, either directly or indirectly, as  a shareholder of the Fund, based  upon
the Fund's annual operating expenses.
 
<TABLE>
<CAPTION>
                                                                      CLASS A     CLASS B     CLASS C
                                                                      -------     -------     -------
<S>                                                                   <C>         <C>         <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of
  offering price).................................................     2.25%          0%          0%
Maximum Sales Charge Imposed on Reinvested Dividends (as a
  percentage of offering price)...................................        0%          0%          0%
Maximum Contingent Deferred Sales Charge (as a percentage of
  redemption proceeds)............................................        0%          0%          0%
Redemption Fees (as a percentage of amount redeemed)..............        0%          0%          0%
Maximum Exchange Fee..............................................        0%          0%          0%
Maximum Annual Investment Advisory Fee Payable by Shareholders
  Holding Class C Shares through the INSIGHT Investment Advisory
  Program (as a percentage of average daily value of shares
  held)...........................................................        0%          0%       1.50%
</TABLE>
 
<TABLE>
<CAPTION>
                                                                      CLASS A     CLASS B     CLASS C
                                                                      -------     -------     -------
<S>                                                                   <C>         <C>         <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
Management Fees...................................................      .63%        .63%        .63%
12b-1 Fees........................................................       .50         .75         .00
Other Expenses....................................................       .40         .40         .40
    Total Fund Operating Expenses.................................     1.53%       1.78%       1.03%
</TABLE>
 
     The  nature of the services provided  to, and the aggregate management fees
paid by, the Fund are described below  under 'Management of the Fund.' The  Fund
reimburses  its distributor, Mitchell Hutchins  Asset Management Inc. ('Mitchell
Hutchins'), for the expenses it incurs in servicing shareholder accounts in, and
distributing shares of, Class A at the maximum annual rate of .50% of the  value
of  the  average daily  net assets  of the  Class,  of which  the first  .25% is
characterized as  a  Rule  12b-1  service  fee  and  the  balance  of  which  is
characterized  as a Rule 12b-1  distribution fee. The Fund  bears an annual Rule
12b-1 fee of  .75% of  the value  of the  average daily  net assets  of Class  B
shares,  consisting of a .25% service fee and a .50% distribution fee. The 12b-1
fees shown  in the  table, however,  have been  restated based  on these  rates.
During  the Fund's fiscal  year ended January  31, 1995, the  Fund actually paid
aggregate Rule 12b-1 fees with respect to  Class A shares and Class B shares  in
an  amount equal to, on an annualized basis, .50% and .75%, respectively, of the
value of such Class' average daily net assets. Long-term shareholders of  shares
that  bear a distribution fee  may pay more than  the economic equivalent of the
maximum front-end sales charge currently permitted by the rules of the  National
Association  of  Securities  Dealers, Inc.  governing  investment  company sales
charges. See 'The Distributor.'
     The following example  demonstrates the  projected dollar  amount of  total
cumulative  expenses that would be incurred over various periods with respect to
a hypothetical $1,000 investment  in the Fund assuming  (1) a 5% annual  return,
(2)  payment of the  shareholder transaction expenses  and annual Fund operating
expenses set forth in the table above and (3) complete redemption at the end  of
the period.
 
<TABLE>
<CAPTION>
EXAMPLE*                                                              1 YEAR      3 YEARS     5 YEARS     10 YEARS
------------------------------------------------------------------    -------     -------     -------     --------
<S>                                                                   <C>         <C>         <C>         <C>
Class A...........................................................      $38         $70        $ 104        $201
Class B...........................................................      $18         $56        $  96        $209
Class C...........................................................      $11         $33        $  57        $126
</TABLE>
 
*  The above example is intended to  assist an investor in understanding various
costs and expenses that the investor  would bear upon becoming a shareholder  of
the Fund. The example should not be considered to be a representation of past or
future  expenses. Actual expenses of the Fund  may be greater or less than those
shown above. The assumed 5% annual  return shown in the example is  hypothetical
and  should not be  considered to be  a representation of  past or future annual
return; the actual return of  the Fund may be greater  or less than the  assumed
return.
 
                                       2

<PAGE>
--------------------------------------------------------------------------------
 
                                   HIGHLIGHTS
 
<TABLE>
<S>                  <C>
------------------------------------------------------------------------------------------------------------------
-------------------
The Fund                    The  Fund  is a  diversified, open-end,  management  investment company  whose objective  is to
and Its                     provide high  current income.  The  Fund's investments  consist  primarily of  U.S.  Government
Investment                  securities, including U.S. Treasury Bills, Notes, Bonds and other debt securities issued by the
Objective                   U.S.   Treasury,  and  obligations  issued  or   guaranteed  by  U.S.  Government  agencies  or
                            instrumentalities. No assurance  can be given  that the  Fund will achieve  its objective.  See
                            'Investment Objective and Policies.'
------------------------------------------------------------------------------------------------------------------
-------------------
Benefits of                 Mutual  funds,  such  as  the  Fund,  are  flexible  investment  tools  that  are  increasingly
Investing                   popular -- one of four American households now owns  shares of at least one mutual fund --  for
in the                      very sound reasons. The Fund offers investors the following important benefits:
Fund                        Professional Management
                             By  pooling  the funds of many investors, the Fund enables shareholders to obtain the benefits
                             of full-time professional  management and a  degree of diversification  of investment that  is
                             beyond  the means  of most  investors. The Fund's  investment adviser  reviews the fundamental
                             characteristics of many more securities than can a typical individual investor, and may employ
                             portfolio  management  techniques  that  frequently  are  not  used  by  individual  or   many
                             institutional investors. See 'Management of the Fund.'
                            Brokerage Savings
                             By  investing  in  the  Fund, a  shareholder is  able  to acquire  ownership in  a diversified
                             portfolio of securities without paying the higher brokerage costs associated with a series  of
                             small securities purchases.
                            Convenience
                             Fund  shareholders  are  relieved  of the  administrative  and recordkeeping  burdens normally
                             associated with direct ownership of securities.
                            Liquidity
                             The  Fund's  convenient purchase  and redemption  procedures provide  shareholders with  ready
                             access  to their money  and reduce the delays  frequently involved in  the direct purchase and
                             sale of securities. See 'Purchase of Shares' and 'Redemption of Shares.'
                            Choice Pricing System
                             Under  the  Choice Pricing System'sm', the  Fund  presently  offers three  classes  of  shares
                             ('Classes')  that  provide  different  methods  of  purchasing  shares  and  allow  investment
                             flexibility and a wider range of investment choices. See 'Purchase of Shares.'
                            Exchange Privilege
                             Shareholders  of the  Fund may exchange  all or a portion  of their shares  for shares of  the
                             corresponding Class of most PaineWebber and Mitchell Hutchins/Kidder, Peabody ('MH/KP') mutual
                             funds. See 'Exchange Privilege.'
</TABLE>
 
                                       3
 
<PAGE>
<TABLE>
<S>                      <C>
------------------------------------------------------------------------------------------------------------------
-------------------
Purchase of                 Mitchell Hutchins acts as the distributor of the Fund's shares. The Fund presently offers three
Shares                      Classes  that differ principally  in terms of the  sales charges and rate  of expenses to which
                            they are subject and are designed to provide  an investor with the flexibility of selecting  an
                            investment best suited to the investor's needs. See 'Purchase of Shares' and 'The Distributor.'
                            Class A Shares
                             The  public  offering price of Class A shares is the net asset value per share next determined
                             after a purchase order  is received, plus a  maximum sales charge of  2.25% (2.33% of the  net
                             amount  invested). Investors purchasing $50,000 or more are eligible for reduced sales charges
                             and the entire sales charge is waived for certain eligible purchasers. The Fund reimburses its
                             distributor, Mitchell Hutchins, for the expenses  it incurs in servicing shareholder  accounts
                             in, and distributing shares of, Class A at the maximum annual rate of .50% of the value of the
                             average  daily net assets attributable to Class A, of which the first .25% is characterized as
                             a Rule  12b-1  service  fee  and the  balance  of  which  is characterized  as  a  Rule  12b-1
                             distribution fee.
                            Class B Shares
                             The  public  offering price of Class B shares is the net asset value per share next determined
                             after a  purchase order  is received,  without imposition  of a  sales charge.  The Fund  pays
                             Mitchell  Hutchins a service  fee at the  annual rate of  .25%, and a  distribution fee at the
                             annual rate of .50%, of the average daily net assets attributable to this Class.
                            Class C Shares
                             The  public  offering price  of Class  C shares,  which are  available exclusively  to  former
                             employees  of  Kidder, Peabody  & Co.  Incorporated ('Kidder,  Peabody') and  their associated
                             accounts, directors  or trustees  of any  PaineWebber/Kidder, Peabody  or MH/KP  mutual  fund,
                             employee  benefit plans of Kidder, Peabody and participants in the INSIGHT Investment Advisory
                             ProgramSM ('INSIGHT'), is the net asset value per share next determined after a purchase order
                             is received without imposition of a sales charge. This Class bears no service or  distribution
                             fees.  Participation in INSIGHT is subject to payment of an advisory fee at the maximum annual
                             rate of 1.50% of assets held through INSIGHT, generally charged quarterly in advance.
                            Investment Minimums
                             The  minimum  initial investment  in  the  Fund  is  $1,000  and the  minimum  for  subsequent
                             investments  is  $50,  except that  for  individual  retirement accounts  ('IRAs'),  other tax
                             qualified retirement plans and  accounts established pursuant to  the Uniform Gifts to  Minors
                             Act,  the minimum initial investment  is $250 and the  minimum subsequent investment is $1.00.
                             See 'Purchase of Shares' and 'Determination of Net Asset Value.'
</TABLE>
 
                                       4
 
<PAGE>
<TABLE>
<S>                      <C>
------------------------------------------------------------------------------------------------------------------
-------------------
Redemption of               Class A shares, Class B shares  and Class C shares of the  Fund may be redeemed at the  current
Shares                      net  asset value per  share without imposition  of any charge.  The Fund reserves  the right to
                            redeem automatically upon  not less  than 60  days' written notice,  any Fund  account that  is
                            reduced  by  a  shareholder  to a  value  of  $500  or less.  See  'Redemption  of  Shares' and
                            'Determination of Net Asset Value.'
------------------------------------------------------------------------------------------------------------------
-------------------
Management                  Mitchell Hutchins,  a  wholly owned  subsidiary  of PaineWebber  Incorporated  ('PaineWebber'),
                            serves  as investment adviser and administrator of the Fund and receives an annual fee of .625%
                            of the Fund's average daily net assets. See 'Management of the Fund.'
------------------------------------------------------------------------------------------------------------------
-------------------
Risks and                   The Fund may write (i.e., sell) covered put and call options on U.S. Government securities, and
Special                     may hedge  its investments  by purchasing  put options  on U.S.  Government securities  and  by
Characteristics             purchasing  and selling interest rate  futures contracts and put  and call options thereon. The
                            Fund may also make loans  of U.S. Government securities,  invest in U.S. Government  securities
                            subject  to  repurchase agreements,  purchase U.S.  Government securities  on a  when-issued or
                            delayed delivery basis and borrow money in an amount up to 30% of its net assets. All of  these
                            techniques may involve special risks, such as the imperfect correlation of the cash and futures
                            markets  and the exaggerated effect of leveraging on  the Fund's net asset value. Certain other
                            of the  instruments  held by  the  Fund  might expose  the  Fund to  certain  risks,  including
                            mortgage-related  securities (which include collateralized mortgage obligations ('CMOs')). CMOs
                            are subject to prepayment or  early payout risks, which are  affected by changes in  prevailing
                            interest  rates and  numerous economic, geographic,  social and other  factors. See 'Investment
                            Objective and Policies' and the Appendix.
</TABLE>
 
                                       5

<PAGE>
--------------------------------------------------------------------------------
 
                              FINANCIAL HIGHLIGHTS
 
The  financial information for one Class A, one Class B and one Class C share of
the Fund has been presented  in the table below for  each of the periods  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  January 31, 1995, which are  incorporated by reference into the Statement
of Additional Information. The  financial statements and notes,  as well as  the
information in the table appearing below, have been audited by Deloitte & Touche
LLP, independent auditors, whose report thereof is included in the Annual Report
to  Shareholders. Further information about the  performance of the Fund is also
included in the  Annual Report to  Shareholders, which may  be obtained  without
charge.
<TABLE>
<CAPTION>
                                                                         CLASS A
                           ----------------------------------------------------------------------------------------------------
                                                                  YEARS ENDED AUGUST 31,
                           ----------------------------------------------------------------------------------------------------
                             1986`D'          1987         1988         1989         1990        1991        1992        1993
                           ----------------------------------------------------------------------------------------------------
<S>                        <C>              <C>          <C>          <C>          <C>          <C>         <C>         <C>
Net asset value,
 beginning of period...          $15.00       $14.97       $14.39       $14.22       $14.43      $14.21      $14.58      $14.88
                           ----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
 OPERATIONS:
Net investment
 income................            0.92         1.12         1.14         1.17         1.20        1.18        1.13        0.97
Net realized and
 unrealized gain (loss)
 on investments........            0.13        (0.52)       (0.13)        0.21        (0.22)       0.37        0.30        0.12
                           ----------------------------------------------------------------------------------------------------
Total increase in net
 asset value from
 investment
 operations............            1.05         0.60         1.01         1.38         0.98        1.55        1.43        1.09
                           ----------------------------------------------------------------------------------------------------
 
DISTRIBUTIONS TO
 SHAREHOLDERS FROM
 (NOTE 1G):
Net investment
 income................           (0.92)       (1.12)       (1.14)       (1.17)       (1.20)      (1.18)      (1.13)      (0.97)
Net realized capital
 gains.................              --        (0.06)       (0.04)          --           --          --          --          --
Return of capital......           (0.16)          --           --           --           --          --          --          --
                           ----------------------------------------------------------------------------------------------------
Total distributions....           (1.08)       (1.18)       (1.18)       (1.17)       (1.20)      (1.18)      (1.13)      (0.97)
                           ----------------------------------------------------------------------------------------------------
Net asset value, end of
 period................          $14.97       $14.39       $14.22       $14.43       $14.21      $14.58      $14.88      $15.00
                           ----------------------------------------------------------------------------------------------------
                           ----------------------------------------------------------------------------------------------------
Total return#..........            9.06%        4.00%        7.24%       10.22%        6.98%      11.41%      10.13%       7.70%
 
RATIOS/SUPPLEMENTAL
 DATA:
Net assets, end of
 period (in
 thousands)............      $  140,289     $151,895     $125,502     $110,045     $100,148     $96,920     $91,955     $85,453
 
RATIOS TO AVERAGE NET
 ASSETS:
Expenses...............           1.92%*       1.80%        1.74%        1.68%        1.40%       1.23%       1.18%       1.23%
Net investment
 income................           7.55%*       7.47%        7.97%        8.16%        8.33%       8.29%       7.67%       6.38%
Portfolio turnover
 rate..................         218.89%      163.08%       45.54%           --      142.98%       3.27%      74.95%     138.77%
 
<CAPTION>
                           FIVE
                          MONTHS
                           ENDED         YEAR
                         JAN. 31,       ENDED
                         (NOTE 1)      JAN. 31,
                           1994          1995
<S>                        <C>         <C>
Net asset value,
 beginning of period...    $15.00       $14.93
 
INCOME FROM INVESTMENT
 OPERATIONS:
Net investment
 income................      0.25         0.78
Net realized and
 unrealized gain (loss)
 on investments........     (0.07)       (1.35 )
 
Total increase in net
 asset value from
 investment
 operations............      0.18        (0.57 )
 
DISTRIBUTIONS TO
 SHAREHOLDERS FROM
 (NOTE 1G):
Net investment
 income................     (0.25)       (0.78 )
Net realized capital
 gains.................        --           --
Return of capital......        --           --
 
Total distributions....      0.25        (0.78 )
 
Net asset value, end of
 period................    $14.93       $13.58
 
Total return#..........      2.88%*      (3.95 )%
RATIOS/SUPPLEMENTAL
 DATA:
Net assets, end of
 period (in
 thousands)............   $75,260      $44,985
RATIOS TO AVERAGE NET
 ASSETS:
Expenses...............     1.56%*       1.53%
Net investment
 income................     4.02%*       5.57%
Portfolio turnover
 rate..................   126.76%      255.76%
</TABLE>
 
 `D' From November 22, 1985 (Commencement of Operations) to August 31, 1986.
`D'`D' From June 14, 1993 (Commencement of Class Operations) to August 31, 1993.
 * Annualized
 # Total return does not consider the effects of a sales load, and is calculated
   by giving effect to the reinvestment of dividends on the dividend payment
   date.
 
Note 1 The Fund changed its fiscal year end from August 31 to January 31.
 
                                       6
 
<PAGE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                      CLASS B                                CLASS C
         ----------------------------------     ----------------------------------
                        FIVE                                   FIVE
                       MONTHS                                 MONTHS
           YEAR        ENDED         YEAR         YEAR        ENDED         YEAR
          ENDED       JAN. 31,      ENDED        ENDED       JAN. 31,      ENDED
         AUG. 31,     (NOTE 1)     JAN. 31,     AUG. 31,     (NOTE 1)     JAN. 31,
         ----------------------------------     ----------------------------------
         1993`D'`D'     1994         1995       1993`D'`D'     1994         1995
         ----------------------------------     ----------------------------------
         <S>          <C>          <C>          <C>          <C>          <C>
           $14.99       $15.00       $14.92       $15.00       $14.99       $14.92
         ----------------------------------     ----------------------------------
             0.17         0.23         0.74         0.20         0.28         0.84
            (0.01)       (0.07)       (1.35)       (0.01)       (0.07)       (1.35)
         ----------------------------------     ----------------------------------
             0.16         0.16        (0.61)        0.19         0.21        (0.51)
         ----------------------------------     ----------------------------------
 
            (0.17)       (0.23)       (0.74)       (0.20)       (0.28)       (0.84)
               --           --           --           --           --           --
               --           --           --           --           --           --
         ----------------------------------     ----------------------------------
            (0.17)       (0.23)       (0.74)       (0.20)       (0.28)       (0.84)
         ----------------------------------     ----------------------------------
           $14.99       $14.92       $13.57       $14.99       $14.92       $13.57
         ----------------------------------     ----------------------------------
         ----------------------------------     ----------------------------------
             4.93%*       2.54%*      (4.20)%       5.64%*       3.29%*      (3.49)%
 
         $  1,112     $  1,647     $  1,280     $  1,981     $  3,677     $  3,860
 
            1.59%*       1.87%*       1.78%         .93%*       1.14%*       1.03%
            6.02%*       3.70%*       5.32%        6.68%*       4.44%*       6.07%
          138.77%      126.76%      255.76%      138.77%      126.76%      255.76%
</TABLE>
 
                                       7

<PAGE>
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                       INVESTMENT OBJECTIVE AND POLICIES
 
INVESTMENT OBJECTIVE
The  Fund's investment  objective is  to provide  high current  income. The Fund
seeks high current income  primarily from interest  income from U.S.  Government
securities, premiums from put and call options on U.S. Government securities and
net gains from closing purchase and sale transactions with respect to options on
U.S.  Government securities. The Fund may invest in mortgage-related securities,
including CMOs. The  Fund may also  realize net short-term  gains from sales  of
portfolio  securities. In addition,  the Fund may  also invest up  to 20% of its
assets in high-quality short-term investments, including repurchase  agreements.
The  Fund expects that under normal market  conditions, not less than 65% of the
Fund's total assets will be invested in U.S. Government securities.
     The Fund's investment objective of high  current income may not be  changed
without  the approval  of the  holders of a  majority of  the Fund's outstanding
voting securities, as defined in the Investment Company Act of 1940, as  amended
(the 'Act'). A 'majority of the Fund's outstanding voting securities,' when used
in  this Prospectus, means the lesser of (i)  67% of the shares represented at a
meeting at which more than 50% of  the outstanding shares are present in  person
or represented by proxy or (ii) more than 50% of the outstanding shares.
     The  Fund's  annual  report for  the  fiscal  year ended  January  31, 1994
contains information  regarding those  factors,  including the  relevant  market
conditions  and  the investment  strategies and  techniques pursued  by Mitchell
Hutchins during  such fiscal  year,  and is  available to  shareholders  without
charge  upon request made to  the Fund at the address  listed on the front cover
page of this Prospectus.
 
U.S. GOVERNMENT SECURITIES
     U.S. TREASURY SECURITIES.  The Fund  invests in  U.S. Treasury  securities,
including  Bills,  Notes, Bonds  and other  debt securities  issued by  the U.S.
Treasury. These instruments are  direct obligations of  the U.S. Government  and
differ primarily in interest rates, maturities, call provisions and the times of
their  issuances. A fund investing in these  securities will not yield as high a
level of income as a fund which invests in lower rated corporate securities.
     SECURITIES  ISSUED   OR  GUARANTEED   BY  U.S.   GOVERNMENT  AGENCIES   AND
INSTRUMENTALITIES. The Fund invests in securities issued by agencies of the U.S.
Government or instrumentalities established or sponsored by the U.S. Government.
These  obligations, including those which are  guaranteed by Federal agencies or
instrumentalities, may or may not  be backed by the  'full faith and credit'  of
the  United States.  While the U.S.  Government may guarantee  the principal and
interest on these securities, the guarantee does not extend to the market  value
of  such securities nor does it extend to the value of the Fund's shares. In the
case of securities not backed by the full faith and credit of the United States,
the Fund  must  look principally  to  the  agency issuing  or  guaranteeing  the
obligation  for ultimate repayment and may not be able to assert a claim against
the United States  itself in the  event the agency  or instrumentality does  not
meet  its commitments.  Securities in  which the  Fund may  invest that  are not
backed by the full faith  and credit of the United  States include, but are  not
limited  to, obligations of the Tennessee Valley Authority, the Federal National
Mortgage Association  ('FNMA'),  the  Federal  Home  Loan  Mortgage  Corporation
('FHLMC')  and the United States Postal Service,  each of which has the right to
borrow from the U.S.  Treasury to meet its  obligations, and obligations of  the
Federal Farm Credit System and
 
                                       8
 
<PAGE>
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the  Federal Home Loan Banks, the obligations  of which may only be satisfied by
the individual  credit of  the  issuing agency.  Obligations of  the  Government
National  Mortgage Association ('GNMA'), the Farmers Home Administration and the
Export-Import Bank are backed by the full faith and credit of the United States.
     The Fund  may  also purchase  obligations  of the  International  Bank  for
Reconstruction  and Development  that are  supported by  appropriated but unpaid
commitments of its member  countries, including the United  States. There is  no
assurance  that the commitments will be undertaken  in the future. The Fund does
not anticipate at this time investing in excess of 5% of its net assets in these
obligations.
     MORTGAGE-RELATED SECURITIES. The Fund invests in mortgage-backed securities
which represent an  undivided ownership interest  in a pool  of mortgage  loans,
e.g.,   certificates  of  GNMA,  FNMA  and  FHLMC.  See  'Additional  Investment
Information --  Mortgage-Related  Securities'  in the  Statement  of  Additional
Information.
     Certificates  of GNMA ('GNMA  Certificates') are mortgage-backed securities
which evidence  an  undivided  interest  in  a  pool  of  mortgage  loans.  GNMA
Certificates  differ from bonds  in that principal  is paid back  monthly by the
borrower over  the term  of the  loan  rather than  returned in  a lump  sum  at
maturity.  The Fund  purchases 'modified  pass-through' GNMA  Certificates which
entitle the holder  to receive a  share of all  interest and principal  payments
paid  and owed on  the mortgage pool, net  of fees paid to  the issuer and GNMA,
regardless of whether or not the mortgagor actually makes the payment.
     The coupon rate of interest of GNMA Certificates is lower than the interest
rate  paid  on  the   Veterans  Administration-guaranteed  or  Federal   Housing
Administration-insured  mortgages underlying the GNMA Certificates by the amount
of the fees paid  to GNMA and  the issuer. The coupon  rate by itself,  however,
does  not indicate the yield  which is earned on  GNMA Certificates. First, GNMA
Certificates may be issued at  a premium or discount,  rather than at par,  and,
after issuance, GNMA Certificates may trade in the secondary market at a premium
or  discount. Second, interest  is earned monthly,  rather than semi-annually as
with traditional bonds; monthly compounding  raises the effective yield  earned.
Third,  the actual yield of  a GNMA Certificate is  influenced by the prepayment
experience of the underlying mortgage pool. For example, if the  higher-yielding
mortgages from the pool are prepaid, the yield on the remaining pool is reduced.
     GNMA  Certificates currently offer yields  higher than those available from
other types  of  U.S. Government  securities  but because  of  their  prepayment
aspects  they are less  effective than other  types of securities  as a means of
locking in attractive long term  interest rates. This is  caused by the need  to
reinvest prepayments of principal and the possibility of significant unscheduled
prepayments   resulting  from   declines  in  mortgage   interest  rates.  These
prepayments would have to  be reinvested at  the lower rates.  As a result,  the
Fund's GNMA Certificates may have less potential for capital appreciation during
periods  of declining  interest rates than  other U.S.  Government securities of
comparable maturities, although such obligations  may have a comparable risk  of
decline in market value during periods of rising interest rates.
     The  Fund may invest  in CMOs which are  debt obligations collateralized by
mortgage  loans  or  mortgage  pass-through  securities.  Typically,  CMOs   are
collateralized   by  GNMA,  FNMA   or  FHLMC  certificates,   but  also  may  be
collateralized by whole loans or private mortgage pass-through securities  (this
collateral  being  referred  to  collectively in  this  Prospectus  as 'Mortgage
Assets'). Multi-class pass-through  securities are equity  interests in a  trust
composed of Mortgage
 
                                       9
 
<PAGE>
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Assets.  Payments of principal of  and interest on the  Mortgage Assets, and any
reinvestment income  on the  Mortgage  Assets, provide  the  funds to  pay  debt
service  on  the  CMOs  or  make  scheduled  distributions  on  the  multi-class
pass-through securities. CMOs may be issued by agencies or instrumentalities  of
the  U.S. Government,  or by private  originators of, or  investors in, mortgage
loans, including depository institutions,  mortgage banks, investment banks  and
special  purpose subsidiaries  of these types  of institutions.  Only those CMOs
issued  by  agencies  or  instrumentalities  of  the  U.S.  Government  will  be
considered  U.S.  Government securities  for purposes  of  the Fund's  policy of
investing, under normal market conditions, at  least 65% of its total assets  in
such  securities. The issuer  of a series of  CMOs may elect to  be treated as a
Real Estate Mortgage Investment Conduit. The Fund will not invest more than  35%
of its total assets in CMOs issued by private issuers.
 
     In  a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs,  often referred to  as a 'tranch,' is  issued at a  specific
fixed  or floating coupon rate  and has a stated  maturity or final distribution
date. Principal prepayments  on the  Mortgage Assets may  cause the  CMOs to  be
retired substantially earlier than their stated maturities or final distribution
dates.  Interest is  paid or accrues  on all classes  of the CMOs  on a monthly,
quarterly or semi-annual basis.  The principal of and  interest on the  Mortgage
Assets may be allocated among the several classes of a CMO series in a number of
different  ways. Generally, the purpose of the  allocation of the cash flow of a
CMO to the  various classes is  to obtain a  more predictable cash  flow to  the
individual  tranches than exists with the underlying collateral of the CMO. As a
general rule, the more predictable the cash flow is on a CMO tranche, the  lower
the  anticipated yield will be on that  tranche at the time of issuance relative
to prevailing market yields on mortgage-related securities.
 
     The Fund may invest in, among  other things, parallel pay CMOs and  Planned
Amortization  Class  CMOs ('PAC  Bonds'). Parallel  pay  CMOs are  structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated  maturity
date or final distribution date of each class, which, like other CMO structures,
must  be retired by its stated maturity  date or final distribution date but may
be retired  earlier. PAC  Bonds are  parallel pay  CMOs that  generally  require
payment  of a specified amount  of principal on each  payment date; the required
principal payment on PAC Bonds have the highest priority after interest has been
paid to all classes.
 
     WHEN-ISSUED AND DELAYED  DELIVERY SECURITIES.  The Fund  may purchase  U.S.
Government  securities  (including  GNMA,  FNMA  and  FHLMC  Certificates)  on a
when-issued  or  delayed  delivery   basis.  When-issued  or  delayed   delivery
transactions  arise  when securities  are  purchased or  sold  by the  Fund with
payment and delivery taking place in the future. The yield on a security subject
to a when-issued or delayed  delivery purchase or sale  may vary from the  yield
available  on a  comparable security  when delivery  takes place.  When the Fund
engages in  a when-issued  or delayed  delivery transaction,  it relies  on  the
seller  or buyer, as  the case may  be, to consummate  the transaction. The Fund
will establish  with  its  custodian,  or with  a  designated  sub-custodian,  a
segregated  account  consisting of  cash,  U.S. Government  securities  or other
liquid high-grade  debt obligations  in an  amount equal  to the  amount of  its
when-issued or delayed delivery purchase commitments. See 'Additional Investment
Information  -- When-Issued and Delayed Delivery Securities' in the Statement of
Additional Information.
 
                                       10
 
<PAGE>
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OPTIONS TRANSACTIONS
 
     WRITING COVERED OPTIONS. The Fund writes (i.e., sells) covered call options
and covered put options  on U.S. Government securities.  In addition to  writing
options  which  are traded  on  U.S. securities  exchanges,  the Fund  may write
covered call  and covered  put  options which  are not  listed  or traded  on  a
securities  exchange or  cleared through  the Options  Clearing Corporation (the
'OCC') ('conventional  options'). By  writing a  call option,  the Fund  becomes
obligated during the term of the option to deliver the securities underlying the
option upon payment of the exercise price if the option is exercised. By writing
a  put  option, the  Fund becomes  obligated during  the term  of the  option to
purchase the  securities underlying  the option  at the  exercise price  if  the
option is exercised. The Fund also may write straddles, which is the purchase of
a  put option and the sale  of a call option on  the same security. The value of
underlying securities on which covered call  options will be written at any  one
time by the Fund will not exceed 5% of the Fund's total assets.
 
     The Fund writes only 'covered' options. This means that so long as the Fund
is  obligated  as  the writer  of  a call  option,  it will  own  the underlying
securities subject to the option,  except that, in the  case of call options  on
U.S.  Treasury Bills,  the Fund  might own  U.S. Treasury  Bills of  a different
series from  those underlying  the  call option,  but  with a  principal  amount
corresponding  to the option contract  amount and a maturity  date no later than
that of the securities deliverable under the call option.
 
     The Fund is considered 'covered' with respect to a put option it writes if,
so long as  it is  obligated as  the writer  of a  put option,  it deposits  and
maintains   with  its  custodian  cash,  U.S.  Government  securities  or  other
high-grade debt obligations having a value equal to or greater than the exercise
price of the option.
 
     The principal reason for writing call or put options is to obtain,  through
the  receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Fund receives a premium from writing a call  or
put  option, which it retains whether or not the option is exercised. By writing
a call option  the Fund  might lose  the potential  for gain  on the  underlying
security  while the option is  open, and by writing a  put option the Fund might
become obligated to purchase the underlying  security for more than its  current
market  price upon  exercise. In addition,  since each conventional  option is a
separately  negotiated  transaction  between  the  Fund  and  another  financial
institution  (and does  not typically  provide for  free assignability  or early
termination), there has not developed a trading market in such options, although
they have become accepted  financial instruments among institutional  investors.
Consequently,  conventional options  may be  more illiquid  than exchange traded
options and there is no assurance that the Fund will be able to affect a closing
transaction at a time when Mitchell  Hutchins believes it would be  advantageous
to  do so. The Fund will not enter into a conventional option transaction unless
the financial institution is deemed creditworthy by Mitchell Hutchins.
 
     PURCHASING OPTIONS. The  Fund may purchase  both exchange and  non-exchange
traded  put options to protect its  portfolio holdings in an underlying security
against a  substantial  decline in  the  market  value of  such  holdings.  Such
protection  is provided during the life of the put because the Fund may sell the
underlying security at the  put exercise price, regardless  of a decline in  the
underlying  security's market  price. Any  loss to  the Fund  is limited  to the
premium paid for, and transaction costs paid in connection with, the put. If the
market price of such security increases,
 
                                       11
 
<PAGE>
--------------------------------------------------------------------------------
 
the profit the Fund realizes on the sale of the security will be reduced by  the
premium paid for the put option less any amount for which the put is sold.
     The Fund may wish to protect certain portfolio securities against a decline
in market value at a time when no put options on those particular securities are
available  for  purchase.  The  Fund  may therefore  purchase  a  put  option on
securities other than those it  wishes to protect even  though it does not  hold
such  other securities in its  portfolio. While changes in  the value of the put
option should generally  offset changes  in the value  of the  securities to  be
hedged,  the  correlation  may not  be  as  close in  these  transactions  as in
transactions in which the Fund purchases a put option on an underlying  security
it owns.
     The  Fund may  also purchase  call options  for the  purpose of temporarily
offsetting previously written call options of the same series.
     See  'Risks   and  Other   Information   Regarding  Futures   and   Options
Transactions' for additional information on options transactions.
 
TRANSACTIONS IN INTEREST RATE FUTURES CONTRACTS AND OPTIONS THEREON
The  Fund  may  purchase  and sell  interest  rate  futures  contracts ('futures
contracts') that are traded on U.S.  commodity exchanges to hedge its  portfolio
of  U.S.  Government securities  against changes  in  interest rates.  A futures
contract is an agreement to purchase or sell an agreed amount of debt securities
at a set price for delivery on a future date. The Fund may be able to reduce the
risk of  fluctuations in  asset value  caused by  changes in  interest rates  by
hedging  its portfolio through the use of futures contracts. The Fund may sell a
futures contract as a hedge against  an anticipated increase in interest  rates,
and  resulting decline in  market price, in  debt securities the  Fund owns. The
Fund may purchase a futures contract  as a hedge against an anticipated  decline
in  interest rates, and  resulting increase in market  price, in debt securities
the Fund intends to acquire.
     The Fund may also purchase and write  (i.e., sell) call and put options  on
futures contracts that are traded on U.S. commodity exchanges and may enter into
closing  transactions  with  respect  to  such  options  to  terminate  existing
positions, in  compliance with  the  regulatory positions  of  the SEC  and  the
Commodity  Futures Trading Commission ('CFTC'). An  option on a futures contract
gives the purchaser  the right,  in return  for the  premium paid,  to assume  a
position  in a futures contract (a  long position if the option  is a call and a
short position if the option is a put) at a specified exercise price at any time
before the expiration of the option. The Fund uses options on futures  contracts
in  connection with  hedging strategies similar  to those  applicable to futures
contracts.
     Hedging transactions are  entered into  in accordance  with regulations  or
current  interpretive  positions of  the  SEC and  the  CFTC. The  Fund  may not
purchase or sell futures contracts or related options if immediately  thereafter
the  sum of the amount of initial margin deposits on the Fund's existing futures
and options on futures and for premiums paid for related options, other than for
bona fide hedging transactions, would exceed 5% of the liquidation value of  the
Fund's total assets, after taking into account unrealized profits and unrealized
losses  on such contracts  it has entered  into; provided, however,  that in the
case of an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in calculating the 5%.
     There are risks associated  with hedging transactions and  there can be  no
assurance that hedges will have the intended result. While futures contracts and
options  thereon may limit the Fund's exposure  to loss, they may also limit the
Fund's potential for capital gains. The Fund's
 
                                       12
 
<PAGE>
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ability to enter into  futures contracts and options  thereon may be limited  by
the  requirements for qualification as a  regulated investment company under the
Internal Revenue  Code of  1986, as  amended (the  'Code'). See  'Taxes' in  the
Statement of Additional Information.
 
     See   'Risks   and  Other   Information   Regarding  Futures   and  Options
Transactions' for  additional  information  on  futures  contracts  and  options
thereon.
 
LENDING OF SECURITIES AND REPURCHASE AGREEMENTS
 
To  generate additional income, the Fund may lend its U.S. Government securities
to  broker-dealers.  Loans  are  made  pursuant  to  agreements  which   provide
safeguards  for the Fund, e.g., the loans are continuously secured by collateral
in any  combination  of cash,  letters  of credit  and  securities of  the  U.S.
Government  or its agencies, equal to at least  the market value at all times of
the securities lent. The bank or banks  issuing any such letters of credit  must
meet  creditworthiness standards approved by the  Fund's Board of Directors. The
Fund currently does not expect to  accept letters of credit from foreign  banks.
The  Fund does  not make securities  loans if as  a result the  aggregate of all
outstanding securities  loans exceeds  30%  of the  value  of the  Fund's  total
assets. The Fund receives compensation for lending its securities in the form of
fees  or  it  retains  a portion  of  interest  on the  investment  of  any cash
collateral it  receives. The  Fund also  continues to  receive interest  on  the
securities  lent. However, the  amounts received by  the Fund may  be reduced by
finders' fees paid to broker-dealers and related expenses.
 
     The Fund may  purchase U.S.  Government securities  and concurrently  enter
into  repurchase agreements  with the  seller, which  agrees to  repurchase such
securities at the Fund's cost plus  interest within a specified time  (generally
one  day). The Fund's repurchase agreements, which  are in the nature of secured
loans by the  Fund, provide  safeguards for  the Fund,  e.g., the  value of  the
collateral  underlying the repurchase agreement is  always at least equal to the
repurchase price,  including  any  accrued interest  earned  on  the  repurchase
agreement.
 
     The Fund enters into securities lending and repurchase agreements only with
parties  who meet  creditworthiness standards  approved by  the Fund's  Board of
Directors. In the event of a default or bankruptcy by a seller or borrower,  the
Fund  will promptly seek  to liquidate the collateral.  However, the exercise of
the Fund's right  to liquidate such  collateral could involve  certain costs  or
delays  and, to  the extent  that proceeds  from any  sale of  collateral upon a
default of the  seller or  borrower were less  than the  seller's or  borrower's
obligation, the Fund could suffer a loss.
 
OTHER SHORT-TERM INVESTMENTS
 
While  the  Fund invests  primarily in  U.S.  Government securities  and related
options, it is permitted to invest up to 20% of its assets in high quality money
market instruments,  including commercial  paper  of domestic  corporations  and
certificates  of deposit, bankers' acceptances and other obligations of domestic
banks. The Fund invests in obligations of foreign branches of U.S. banks only if
after giving effect  to such  investment all such  investments would  constitute
less than 10% of the Fund's total assets (determined at the time of investment).
Such  investments  may be  subject to  certain  risks, including  adverse future
political and  economic developments,  the  possible imposition  of  withholding
taxes on interest income, the seizure or nationalization of foreign deposits and
foreign exchange controls, currency blockage or other restrictions.
 
                                       13
 
<PAGE>
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OTHER INVESTMENT POLICIES
 
The  Fund is permitted  to use the following  investment techniques, although it
does not anticipate that any of them will be used with great frequency:
 
     SHORT SALES 'AGAINST THE BOX.' The Fund may make short sales of  securities
or  maintain a short position, provided that  at all times when a short position
is open  the  Fund  owns  an  equal  amount  of  the  securities  or  securities
convertible  into, or exchangeable without  payment of any further consideration
for, securities of the  same issue as,  and equal in  amount to, the  securities
sold  short, and that not more than 10%  of the Fund's net assets (determined at
the time of the short sale) may be held as collateral for such sales. It is  the
present  intention  of the  Fund  to make  such sales  only  for the  purpose of
deferring realization of gain or loss for Federal income tax purposes.
 
     BORROWING. The Fund may borrow for  leverage purposes from banks up to  30%
of  the value of its  net assets (not including  the amount of such borrowings).
Leverage increases investment  risk as  well as investment  opportunity. If  the
income  and investment gains on securities  purchased with borrowed money exceed
the interest paid on  the borrowing, the  net asset value  of the Fund's  shares
will  rise faster than  would otherwise be the  case. On the  other hand, if the
income and investment gains fail to  cover the cost, including interest, of  the
borrowings,  or if there  are losses, the  net asset value  of the Fund's shares
will  decrease  faster  than  otherwise  would  be  the  case.  See  'Additional
Investment   Information  --   Borrowings'  in   the  Statement   of  Additional
Information.
 
     Subject to the 30% limitation on all borrowings, the Fund may borrow up  to
5% of the value of its total assets, and may also pledge up to 10% of the lesser
of  the cost or value  of its total assets,  to secure borrowings for temporary,
extraordinary or emergency purposes.
 
     ILLIQUID SECURITIES.  The Fund  may invest  up  to 10%  of its  net  assets
(determined at the time of investment) in securities for which market quotations
are  not readily  available and in  repurchase agreements which  have a maturity
longer than seven days.
 
PORTFOLIO TURNOVER AND BROKERAGE
 
Mitchell Hutchins  is responsible  for  decisions to  buy and  sell  securities,
futures  contracts and options on such securities  and futures for the Fund, the
selection of brokers,  dealers and  futures commission merchants  to effect  the
transactions   and   the   negotiation  of   brokerage   commissions,   if  any.
Broker-dealers may receive brokerage commissions on Fund portfolio transactions,
including options, futures contracts, and  options on futures contracts and  the
purchase  and sale of underlying securities upon the exercise of options. Orders
may be directed to any securities or commodities broker including, to the extent
and in  the manner  permitted  by applicable  law, PaineWebber.  See  'Portfolio
Transactions and Brokerage' in the Statement of Additional Information.
 
     There  may be a  substantial turnover of  the Fund's portfolio  if the Fund
writes a substantial number of put and call options. See 'Options  Transactions'
above  and  in  the  Appendix and  'Additional  Investment  Information'  in the
Statement of Additional Information.  Additionally, uncertain market  conditions
may  result in a higher than anticipated portfolio turnover. While the Fund pays
commissions in connection with its  options and futures contracts  transactions,
U.S.  Government securities are  generally traded on a  'net' basis with dealers
acting as  principal  for  their  own  accounts  without  a  stated  commission.
Nevertheless, high portfolio turnover (100% or
 
                                       14
 
<PAGE>
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more)  may  involve  correspondingly  greater  brokerage  commissions  and other
transaction costs, which will be borne directly by the Fund.
 
INVESTMENT RESTRICTIONS
The  Fund  is  subject  to  certain  investment  restrictions  which  constitute
fundamental  policies,  including  limitations  on  the  Fund's  investments  in
securities of  other investment  companies and  the purchase  of warrants.  Such
fundamental  policies cannot be changed without the approval of the holders of a
majority  of  the   Fund's  outstanding  voting   securities.  See   'Investment
Restrictions' in the Statement of Additional Information.
 
                             MANAGEMENT OF THE FUND
 
DIRECTORS AND OFFICERS
The  business and  affairs of the  Fund are  managed under the  direction of its
Board of Directors as required by Maryland law. The day-to-day operations of the
Fund are conducted through or under the direction of its officers. The Statement
of Additional Information contains general background information regarding each
Director and officer of the Fund.
 
INVESTMENT ADVISER AND ADMINISTRATOR
At a special meeting of shareholders that took place on April 13, 1995, Mitchell
Hutchins, 1285 Avenue of the Americas, New York, New York 10019, was approved as
the Fund's investment adviser and  administrator. Mitchell Hutchins is a  wholly
owned  subsidiary of PaineWebber, which in turn  is wholly owned by Paine Webber
Group Inc. ('PW Group'),  a publicly owned  financial services holding  company.
Mitchell Hutchins, organized in May 1977, is registered as an investment adviser
under  the Investment  Advisers Act  of 1940  and as  a broker-dealer  under the
Securities Exchange Act  of 1934.  As of March  31, 1995,  Mitchell Hutchins  or
PaineWebber  served  as  investment  adviser  or  sub-adviser  to  42 investment
companies with an aggregate of 77 separate portfolios having aggregate assets of
over $26 billion.
     The Fund  pays the  same  fee for  investment advisory  and  administration
services  to  Mitchell  Hutchins  as previously  paid  to  Kidder  Peabody Asset
Management,  Inc.  ('KPAM'),  the  Fund's  predecessor  investment  adviser  and
administrator,  and Mitchell Hutchins continues to manage the Fund in accordance
with the Fund's investment objective, policies and restrictions.
     Subject to the supervision and direction of the Fund's Board of  Directors,
Mitchell  Hutchins manages  the Fund's portfolio  in accordance  with the stated
policies of the Fund. Mitchell Hutchins makes investment decisions for the  Fund
and places the purchase and sale orders for portfolio transactions. In addition,
Mitchell  Hutchins  pays the  salaries  of all  officers  and employees  who are
employed by both it  and the Fund  and, subject to the  direction of the  Fund's
Board of Directors, manages the Fund.
     Dennis  L.  McCauley  and  Nirmal Singh  are  jointly  responsible  for the
day-to-day management of the Fund. Mr. McCauley is a Managing Director and Chief
Investment  Officer  --  Fixed  Income  of  Mitchell  Hutchins  responsible  for
overseeing  all active fixed  income investments, including  domestic and global
taxable and tax-exempt mutual funds. Prior to joining Mitchell Hutchins in 1994,
Mr. McCauley worked for  IBM Corporation where he  was Director of Fixed  Income
Investments  responsible for developing and managing investment strategy for all
fixed income and  cash management investments  of IBM's pension  fund and  self-
 
                                       15
 
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insured  medical funds. Mr.  McCauley has also  served as Vice  President of IBM
Credit Corporation's  mutual  funds and  as  a  member of  the  Retirement  Fund
Investment Committee.
     Nirmal  Singh  is a  Vice President  of  Mitchell Hutchins  responsible for
overseeing investments  in  the  mortgage-backed securities  section.  Prior  to
joining  Mitchell Hutchins  in 1993,  Mr. Singh  worked for  Merrill Lynch Asset
Management where he was  a member of the  portfolio management team  responsible
for  several diversified funds, including mortgage-backed securities funds, with
assets totalling $8  billion. Mr.  Singh has also  held the  position of  Senior
Portfolio  Manager at Nomura  Mortgage Funds Management and  prior to Nomura, he
worked as a transactions strategist at Shearson Lehman Brothers Inc. and for two
years at the Federal National Mortgage Association.
     Although investment  decisions for  the Fund  are made  independently  from
those  of the  other accounts managed  by Mitchell Hutchins,  investments of the
type the Fund may make may also be  made by those other accounts. When the  Fund
and  one or  more other  accounts managed by  Mitchell Hutchins  are prepared to
invest in, or desire to dispose of, the same security, available investments  or
opportunities  for sales are allocated in a manner believed by Mitchell Hutchins
to be equitable to each. In some cases, this procedure may adversely affect  the
price  paid or  received by  the Fund or  the size  of the  position obtained or
disposed of by the Fund.
     As compensation for Mitchell Hutchins'  services rendered to the Fund,  the
Fund  pays a fee, computed daily and paid monthly, at an annual rate of .625% of
the average value  of the Fund's  daily net  assets. For the  fiscal year  ended
January  31, 1995, Class A's, Class B's and Class C's total expenses represented
1.53%, 1.78% and 1.03%,  respectively, of their average  daily net assets.  Each
Class  bears its own expenses, which generally include all expenses not borne by
Mitchell Hutchins.  Included  among a  Class'  expenses are  costs  incurred  in
connection  with  the Class'  organization,  management and  investment advisory
fees, any distribution and/or service fees, fees for necessary professional  and
brokerage  services,  costs  of  regulatory  compliance,  maintaining  corporate
existence and shareholder relations. From time to time, Mitchell Hutchins in its
sole discretion may waive all or a portion of its fee and/or reimburse all or  a
portion of the Fund's operating expenses.
 
                       DIVIDENDS, DISTRIBUTIONS AND TAXES
 
DIVIDENDS AND DISTRIBUTIONS
Immediately  prior to 4:00 p.m., Eastern time,  on each day that each Class' net
asset value  per share  is  determined, a  dividend of  all  of the  Fund's  net
investment income is declared for each Class to shareholders of record as of the
close  of business of the preceding business day. Net investment income consists
of accrued interest less  the estimated expenses of  the Class for the  dividend
period.  The amount of dividend  may fluctuate from day  to day. These dividends
are paid monthly.
     Shares begin earning  daily dividends on  the day on  which the shares  are
issued,  the date of issuance customarily  being the settlement date. Settlement
date is the date when  the Fund receives payment  and shares are issued.  Shares
continue  to earn daily dividends until the  day prior to settlement date of the
redemption. In the  event a shareholder  redeems all  the shares in  his or  her
account  at any time during the month, all daily dividends declared prior to the
settlement date of redemption will be paid within five business days. The Fund's
net investment income accrued on weekends, holidays and other days on which  the
Fund is closed for business
 
                                       16
 
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are  declared  as a  dividend on  shares outstanding  on the  close of  the last
previous business day on which the Fund is open for business.
     The Fund  makes quarterly  distributions of  net short-term  capital  gains
(i.e.,  net short-term capital gains in excess of net long-term capital losses).
Short-term capital gains include a portion  of the premiums from expired put  or
call  options  written by  the Fund,  net gains  from closing  transactions with
respect to such options  and net gains from  the disposition of securities  held
less  than one year. The Fund may reserve  (and not distribute) a portion of any
net short-term capital gains in order  to preclude the distribution of a  return
of  capital. Net long-term  capital gains (i.e., net  long-term capital gains in
excess of net short-term capital losses), if any, are paid once a year.
     Unless otherwise requested by the shareholder, daily dividends on shares of
any Class are automatically reinvested on or about the last business day of each
month, and quarterly distributions are reinvested on or about the last  business
day  of the  month in which  declared. Such  reinvestments are made  in full and
fractional shares (to three decimal places) of the Class at the net asset  value
per  share  determined  on  the  record  (for  distributions)  or  payment  (for
dividends) date. The  per share dividends  and distributions on  Class C  shares
will  be higher than those on Class A  shares, which in turn will be higher than
those on Class B shares, as a result of the different service, distribution  and
transfer  agency fees applicable  to the Classes. See  'Fee Table,' 'Purchase of
Shares,' 'The Distributor' and 'General Information.'
 
TAXES
The Fund qualified for the  fiscal year ended January  31, 1995 as a  'regulated
investment  company'  under the  Code,  and intends  to  remain qualified.  As a
regulated investment company,  the Fund pays  no Federal income  tax on its  net
investment  income and net  capital gains which  it distributes to shareholders,
provided it  distributes at  least 90%  of  its net  investment income  and  net
short-term capital gains for each year.
     Dividends  of  net investment  income and  distributions of  net short-term
capital gains are taxable as ordinary income, whether paid in cash or reinvested
in additional  shares.  Dividends  paid by  the  Fund  do not  qualify  for  the
dividends  received  deduction allowed  for  corporations. Distributions  of net
long-term capital gains, if any, are taxable as long-term capital gains, whether
paid in cash  or reinvested  in additional shares,  regardless of  how long  the
shareholder  has held the Fund's  shares and are not  eligible for the dividends
received deduction for corporations. Dividends declared by the Fund in  October,
November  or December of any year  (to holders of record as  of a date in such a
month) payable the following January are treated for Federal income tax purposes
as having been  received by shareholders  on December  31 of the  year in  which
declared.
     Any  gain or loss  realized upon a sale  or redemption of  Fund shares by a
shareholder who is not a dealer in securities generally is treated as  long-term
capital  gain or loss if the  shares have been held for  more than one year, and
otherwise as short-term capital gain or loss. Any loss realized by a shareholder
upon the sale or redemption of Fund shares held 6 months or less is treated as a
long-term capital loss, however, to the extent of any net long-term capital gain
distributions received by the shareholder, if  any. Any loss realized on a  sale
or  exchange  is  disallowed to  the  extent  that the  shares  disposed  of are
replaced, including,  for example,  pursuant to  the automatic  reinvestment  of
daily dividends and quarterly distributions, within a 61-day period beginning 30
days   before   and   ending   30   days  after   the   date   the   shares  are
 
                                       17
 
<PAGE>
--------------------------------------------------------------------------------
 
disposed. In such  a case, a  shareholder will  adjust the basis  of the  shares
acquired to reflect the disallowed loss.
     The  Fund generally  is subject  to an excise  tax of  4% on  the amount of
income or capital  gains distributed to  shareholders on a  basis such that  the
income  or gain is not taxable to shareholders  in the calendar year in which it
was earned by the Fund.
     The Fund notifies each  shareholder annually of the  dollar amount and  the
tax status of that year's distributions. Shareholders are urged to consult their
own  tax advisers  regarding specific  questions as  to Federal,  state or local
taxes. There is  a possibility that  a portion  of the Fund's  dividends may  be
exempt from state tax.
     The  Fund may be required to withhold Federal income tax at the rate of 31%
('backup withholding') of all taxable distributions payable to shareholders  who
fail to provide the Fund with their correct taxpayer identification number or to
make  required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate shareholders  and
other   shareholders  specified  in  the  Code   are  exempt  from  such  backup
withholding. Backup withholding is not  an additional tax. Any amounts  withheld
may be credited against a shareholder's U.S. Federal income tax liability.
     A  shareholder  who,  as to  the  United  States, is  a  non-resident alien
individual,  a  foreign  trust  or   estate,  foreign  corporation  or   foreign
partnership may be subject to 30% United States withholding tax unless a reduced
rate of withholding is provided under applicable treaty provisions.
 
                        DETERMINATION OF NET ASSET VALUE
The  Fund  computes each  Class' net  asset value  once daily  as of  4:00 p.m.,
Eastern time, Monday through Friday, except that net asset value is not computed
on a day in which  no orders to purchase, sell,  exchange or redeem Fund  shares
have  been received,  any day on  which there  is not sufficient  trading in the
Fund's portfolio securities that the Fund's net asset values per share might  be
materially  affected by changes in the value  of such portfolio securities or on
days on which the New York Stock Exchange (the 'NYSE') is not open for  trading.
Net  asset value per share of  a Class is computed by  dividing the value of the
Fund's total assets  less liabilities attributable  to that Class  by the  total
number  of  shares  outstanding of  the  Class.  The Fund's  expenses  and fees,
including Mitchell Hutchins' fee,  are accrued daily and  taken into account  in
determining net asset value.
     In  determining the value of the assets of the Fund, the value of each U.S.
Government security for which quotations are  available is based on the  average
of  the quoted bid and  asked prices as of  the close of the  NYSE. The Board of
Directors has authorized the use of an independent pricing service to  determine
valuations  for normal institutional  size trading units  of securities. Pricing
services consider  such factors  as security  prices, yields,  maturities,  call
features,  ratings and developments relating  to specific securities in arriving
at securities valuations. Options  on U.S. Government  securities are valued  at
their  last sale  price as  of the  close of  options trading  on the applicable
exchanges. Futures contracts are marked to market daily, and options thereon are
valued at their last sale price, as  of the close of the applicable  commodities
exchanges.
     Securities  or other  assets for  which market  quotations are  not readily
available are valued  by appraisal  at their fair  value as  determined in  good
faith by Mitchell Hutchins under procedures established by and under the general
supervision of the Fund's Board of Directors.
 
                                       18
 
<PAGE>
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Short-term  investments which mature in 60 days  or less are valued at amortized
cost if their original term  to maturity was 60 days  or less, or by  amortizing
their value on the 61st day prior to maturity if their original term to maturity
exceeded  60 days, unless this is determined  not to represent fair value by the
Board of Directors.
 
                               PURCHASE OF SHARES
 
GENERAL INFORMATION
 
Purchases are effected at  the public offering price  of the Fund's shares  next
determined  after a purchase order  is received. The Fund  reserves the right to
reject any purchase order for shares of the Fund and to suspend the offering  of
shares  for any period  of time. The  minimum initial investment  in the Fund is
$1,000 and the minimum subsequent investment is $50, except that for IRAs, other
tax qualified retirement plans and accounts established pursuant to the  Uniform
Gifts  to Minors  Act, the  minimum initial investment  is $250  and the minimum
subsequent investment is $1.00. The Fund reserves the right to vary the  minimum
initial or subsequent investment amounts.
 
     Purchase orders for shares of the Fund that are received prior to the close
of regular trading on the NYSE on a particular day (currently 4:00 p.m., Eastern
time)  are priced  according to  the net  asset values  determined on  that day.
Purchase orders received  after the  close of regular  trading on  the NYSE  are
priced  as of the time each Class' net asset value per share is next determined.
See 'Determination of Net Asset Value' above  for a description of the times  at
which each Class' net asset value per share is determined.
 
     The  Fund offers  shareholders an Automatic  Investment Plan  under which a
shareholder  may   authorize  PaineWebber   to  place   monthly,  quarterly   or
semi-annually,  as selected by the shareholder, a purchase order for Fund shares
in an amount not less than $100. The purchase price is paid automatically from a
designated bank  account of  the shareholder.  The Fund  reserves the  right  to
terminate or change the provisions of the Automatic Investment Plan.
 
     The  Fund  presently offers  three methods  of purchasing  shares, enabling
investors to choose the Class that best  suits their needs, given the amount  of
purchase  and intended  length of investment.  PaineWebber Investment Executives
and other  persons remunerated  on the  basis  of sales  of shares  may  receive
different  levels of compensation for selling  one Class of shares over another.
When purchasing shares of the Fund, investors must specify whether the  purchase
is for Class A shares, Class B shares or Class C shares, as described below.
 
     PURCHASES  THROUGH  PAINEWEBBER OR  CORRESPONDENT FIRMS.  Purchases through
PaineWebber investment executives or correspondent  firms may be made in  person
or  by  mail,  telephone or  wire;  the  minimum wire  purchase  is  $1 million.
Investment executives and correspondent  firms are responsible for  transmitting
purchase  orders to PaineWebber's New York  city offices promptly. Investors may
pay for  purchases  with checks  drawn  on U.S.  banks  or with  funds  held  in
brokerage  accounts  at  PaineWebber  or  its  correspondent  firms.  For orders
received on or before  June 2, 1995,  payment is due on  the fifth Business  Day
after  the order is received at PaineWebber's  New York City offices. For orders
received on June 5, 1995 and June 6, 1995, payment is due on the fourth Business
Day   after   the   order   is    received.   For   orders   received   on    or
 
                                       19
 
<PAGE>
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after  June 7, 1995, payment is due on the third Business Day after the order is
received. A 'Business Day' is any day,  Monday through Friday, on which the  New
York Stock Exchange, Inc. ('NYSE') is open for business.
 
     PURCHASES  THROUGH THE  TRANSFER AGENT.  Investors who  are not PaineWebber
clients may purchase shares of the Fund  through PFPC Inc., a subsidiary of  PNC
Bank,  National  Association (the  'Transfer Agent').  Shares of  a Fund  may be
purchased, and an account with the Fund established, by completing and signing a
purchase application  and  mailing  it,  together with  a  check  to  cover  the
purchase, to the Transfer Agent: PFPC Inc., Attn: PaineWebber Mutual Funds, P.O.
Box  8950,  Wilmington,  Delaware  19899.  Subsequent  investments  need  not be
accompanied by an application.
 
CLASS A SHARES
 
The public offering price of Class A shares  is the net asset value per Class  A
share next determined after a purchase order is received plus a sales charge, if
applicable.  The  Fund reimburses  its distributor,  Mitchell Hutchins,  for the
expenses it incurs in servicing shareholder accounts in, and distributing shares
of, Class A at the maximum annual rate of .50% of the value of the average daily
net assets attributable to Class A, of which the first .25% is characterized  as
a  Rule 12b-1 service  fee and the balance  of which is  characterized as a Rule
12b-1 distribution fee. See 'The Distributor.' The sales charge payable upon the
purchase of Class  A shares  varies with  the amount  of purchase  as set  forth
below.
 
<TABLE>
<CAPTION>
                                                                              TOTAL SALES CHARGES
                                                                  -------------------------------------------
                      AMOUNT OF PURCHASE                            AS PERCENTAGE          AS PERCENTAGE
                       AT OFFERING PRICE                          OF OFFERING PRICE    OF NET AMOUNT INVESTED
                     --------------------                         -----------------    ----------------------
 
<S>                                                                   <C>                     <C>
Less than $50,000..............................................          2.25%                   2.33%
$50,000 but less than $100,000.................................          1.75%                   1.75%
$100,000 but less than $250,000................................          1.50%                   1.50%
$250,000 but less than $500,000................................          1.00%                   1.00%
$500,000 but less than $1,000,000..............................           .75%                    .75%
$1,000,000 or more.............................................             0%                      0%
</TABLE>
 
     SALES  CHARGE WAIVERS  -- CLASS A  SHARES. Class  A shares of  the Fund are
available without a sales  charge through exchanges for  Class A shares of  most
other  PaineWebber and MH/KP mutual funds. See 'Exchanges.' In addition, Class A
shares may  be purchased  without a  sales charge  by employees,  directors  and
officers of PaineWebber or its affiliates, directors or trustees and officers of
any  PaineWebber or MH/KP fund, their spouses, parents and children and advisory
clients of Mitchell Hutchins.
 
     Class A shares of the Fund also may be purchased without a sales charge  if
the purchase is made through a PaineWebber investment executive who formerly was
employed  as a broker with  another firm registered as  a broker-dealer with the
SEC, provided (1)  the purchaser was  the investment executive's  client at  the
competing  brokerage firm, (2) within 90 days  of the purchase of Class A shares
the purchaser  redeemed  shares of  one  or more  mutual  funds for  which  that
competing  firm  or  its  affiliates  was  principal  underwriter,  provided the
purchaser either paid a sales charge to invest in those funds, paid a contingent
deferred sales charge upon redemption or
 
                                       20
 
<PAGE>
--------------------------------------------------------------------------------
 
held shares of  those funds for  the period  required not to  pay the  otherwise
applicable  contingent deferred sales charge and  (3) the total amount of shares
of all PaineWebber or MH/KP funds purchased under this sales charge waiver  does
not  exceed the amount of the purchaser's redemption proceeds from the competing
firm's funds.  To  take advantage  of  this  waiver, an  investor  must  provide
satisfactory  evidence that all  the above-noted conditions  are met. Qualifying
investors should  contact  their  PaineWebber  investment  executives  for  more
information.
 
     Certificate  holders  of  unit  investment  trusts  ('UITs')  sponsored  by
PaineWebber may acquire  Class A shares  of any Fund  without regard to  minimum
investment  requirements and without sales charges by electing to have dividends
and other  distributions from  their UIT  investment automatically  invested  in
Class A shares.
 
     REDUCED  SALES CHARGE PLANS --  CLASS A SHARES. If  an investor or eligible
group of related Fund investors purchases Class A shares of a Fund  concurrently
with  Class A shares of  other PaineWebber or MH/KP  mutual funds, the purchases
may be combined to  take advantage of their  reduced sales charge applicable  to
larger purchases. In addition, the right of accumulation permits a Fund investor
or  eligible  group of  related Fund  investors  to pay  the lower  sales charge
applicable to larger purchases by basing  the sales charge on the dollar  amount
of  Class A shares  currently being purchased,  plus the net  asset value of the
investor's or group's total existing Class A shareholdings in other  PaineWebber
or MH/KP mutual funds.
 
     An  'eligible group of related Fund  investors' includes an individual, the
individual's  spouse,  parents   and  children,   the  individual's   individual
retirement  account ('IRA'), certain companies  controlled by the individual and
employee benefit plans of those companies, and trusts or Uniform Gifts to Minors
Act/Uniform Transfers  to  Minors Act  accounts  created by  the  individual  or
eligible  group  of individuals  for the  benefit of  the individual  and/or the
individual's spouse, parents  or children.  The term  also includes  a group  of
related  employers and one or more qualified retirement plans of such employers.
For more information,  an investor  should consult the  Statement of  Additional
Information  or contact a PaineWebber investment executive or correspondent firm
or the Transfer Agent.
 
     REINSTATEMENT PRIVILEGE. The  Fund offers a  reinstatement privilege  under
which  a shareholder that has redeemed Class  A shares may reinvest the proceeds
from  the  redemption  without  imposition  of  a  sales  charge,  provided  the
reinvestment is made within 365 days of the redemption. The tax status of a gain
realized  on a redemption will not be  affected by exercise of the reinstatement
privilege but a loss  will be nullified  if the reinvestment  is made within  30
days  of the redemption. See the Statement of Additional Information for the tax
consequences when, within 90 days  of a purchase of  Class A shares, the  shares
are redeemed and reinvested in the Fund or another mutual fund.
 
CLASS B SHARES
 
The  public offering price  of Class B shares  is the net  asset value per share
next determined after  a purchase order  is received without  imposition of  any
sales  charge. Class B shares are subject to a service fee at the annual rate of
.25%, and a distribution  fee at the annual  rate of .75%, of  the value of  the
Fund's   average  daily  net  assets  attributable   to  this  Class.  See  'The
Distributor.'
 
                                       21
 
<PAGE>
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CLASS C SHARES
 
The public offering price  of Class C  shares is the net  asset value per  share
next  determined after  a purchase order  is received without  imposition of any
sales charge.  Class C  shares, which  are not  subject to  any service  fee  or
distribution  fee,  are available  exclusively  to former  employees  of Kidder,
Peabody  and  their   associated  accounts,   directors  or   trustees  of   any
PaineWebber/Kidder,  Peabody or  MH/KP fund,  employee benefit  plans of Kidder,
Peabody and  participants in  INSIGHT  when shares  are purchased  through  that
program.  Investors eligible  to purchase  Class C  shares may  not purchase any
other Class of shares.
 
     INSIGHT.  An   investor   purchasing  $50,000   or   more  of   shares   of
PaineWebber/Kidder,  Peabody or MH/KP funds may  participate in INSIGHT, a total
portfolio asset allocation program, and  receive Class C shares. INSIGHT  offers
comprehensive  investment  services, including  a personalized  asset allocation
investment strategy  using an  appropriate  combination of  funds,  professional
investment advice regarding investment among the funds by portfolio specialists,
monitoring  of investment  performance and comprehensive  quarterly reports that
cover market trends, portfolio  summaries and personalized account  information.
Participation  in INSIGHT is subject  to payment of an  advisory fee to Mitchell
Hutchins 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. Former employees of  Kidder,
Peabody  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  accounts (by  the automatic  redemption of  money market fund
shares) or another of their PaineWebber accounts or, billed separately.
 
                              REDEMPTION OF SHARES
 
As described below, Fund  shares may be  redeemed at their  net asset value  and
redemption  proceeds  will  be  paid  within seven  days  of  the  receipt  of a
redemption request.  PaineWebber  clients  may  redeem  non-certificated  shares
through  PaineWebber  or its  correspondent firms;  all other  shareholders must
redeem through the  Transfer Agent. If  a redeeming shareholder  owns shares  of
more  than one Class, the shares will  be redeemed in the following order unless
the shareholder specifically requests  otherwise: Class B  shares, then Class  A
shares.
 
     REDEMPTION  THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. PaineWebber clients
may submit redemption requests to  their investment executives or  correspondent
firms  in person or by telephone, mail or wire. As the Fund's agent, PaineWebber
may honor a  redemption request  by repurchasing  Fund shares  from a  redeeming
shareholder  at the shares' net asset value next determined after receipt of the
request by PaineWebber's New York City offices. For repurchase requests made  on
or  before June 2, 1995,  repurchase proceeds will be  paid within five Business
Days after receipt  of the  request by check  or credited  to the  shareholder's
brokerage  account at the election of the shareholder. For requests made on June
5, 1995 and June 6, 1995, repurchase proceeds will be paid within four  Business
Days  after receipt of the request. For requests  made on or after June 7, 1995,
repurchase proceeds will be paid within three Business Days after receipt of the
request.  PaineWebber  investment   executives  and   correspondent  firms   are
responsible  for promptly  forwarding redemption  requests to  PaineWebber's New
York City offices.
 
                                       22
 
<PAGE>
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     PaineWebber reserves  the right  not to  honor any  redemption request,  in
which  case PaineWebber promptly will forward  the request to the Transfer Agent
for treatment as described below.
 
     REDEMPTION THROUGH  THE  TRANSFER  AGENT. Fund  shareholders  who  are  not
PaineWebber  clients or who wish to redeem certificated shares must redeem their
shares through the Transfer  Agent by mail; other  shareholders also may  redeem
Fund  shares  through the  Transfer Agent.  Shareholders should  mail redemption
requests directly to  the Transfer  Agent: PFPC Inc.,  Attn: PaineWebber  Mutual
Funds,  P.O. Box 8950, Wilmington, Delaware  19899. A redemption request will be
executed at the  net asset value  next computed  after it is  received in  'good
order.'  'Good  order'  means  that  the  request  must  be  accompanied  by the
following: (1) a  letter of  instruction or  a stock  assignment specifying  the
number  of shares  or amount of  investment to  be redeemed (or  that all shares
credited to a Fund account be redeemed), signed by all registered owners of  the
shares  in the exact names in which they  are registered, (2) a guarantee of the
signature of each registered owner by an eligible institution acceptable to  the
Transfer  Agent and  in accordance  with SEC rules,  such as  a commercial bank,
trust company or  member of a  recognized stock exchange,  (3) other  supporting
legal documents for estates, trusts, guardianships, custodianships, partnerships
and  corporations and (4) duly endorsed share certificates, if any. Shareholders
are responsible for ensuring that a request for redemption is received in  'good
order.'
 
     ADDITIONAL   INFORMATION   ON   REDEMPTION.   A   shareholder   who   holds
non-certificated Fund shares may have redemption proceeds of $1 million or  more
wired  to the shareholder's  PaineWebber brokerage account  or a commercial bank
account  designated  by  the  shareholder.  Questions  about  this  option,   or
redemption  requirements  generally,  should be  referred  to  the shareholder's
PaineWebber investment executive or correspondent firm, or to the Transfer Agent
if the shares are not held in a PaineWebber brokerage account. If a  shareholder
requests  redemption of shares  which were purchased recently,  a Fund may delay
payment until it is assured that good payment has been received. In the case  of
purchases by check, this can take up to 15 days.
 
     Because  the  Fund incurs  certain fixed  costs in  maintaining shareholder
accounts, the  Fund  reserves  the  right  to redeem  all  Fund  shares  in  any
shareholder  account of less than $500 net asset value. If the 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 $500 solely  as a  result of  a
reduction in net asset value per share.
 
     Shareholders  who have  redeemed Class  A shares  may reinstate  their Fund
account without a sales  charge up to the  dollar amount redeemed by  purchasing
Class  A shares of the Fund within 365 days of the redemption. To take advantage
of this  reinstatement privilege,  shareholders  must notify  their  PaineWebber
investment  executive  or  correspondent  firm  at  the  time  the  privilege is
exercised.
 
                                       23
 
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                         OTHER SERVICES AND INFORMATION
 
Investors interested  in  the  services described  below  should  consult  their
PaineWebber  investment executives or  correspondent firms or  call the Transfer
Agent toll-free at 1-800-647-1568.
 
     SYSTEMATIC WITHDRAWAL PLAN. Shareholders who own non-certificated shares of
a Fund with a value of $5,000 or  more may have PaineWebber redeem a portion  of
their shares monthly, quarterly or semi-annually under the systematic withdrawal
plan.  The  minimum amount  for  all withdrawals  of  shares is  $100. Quarterly
withdrawals are made  in March,  June, September and  December, and  semi-annual
withdrawals are made in June and December. Shareholders who receive dividends or
other  distributions in  cash may not  participate in  the systematic withdrawal
plan. Purchases of additional shares of the Fund concurrent with withdrawals are
ordinarily disadvantageous to shareholders because  of tax liabilities and,  for
Class A shares, any sales charges.
 
     INDIVIDUAL RETIREMENT ACCOUNTS. Shares of the Fund may be purchased through
IRAs  available through the Fund. In  addition, a Self-Directed IRA is available
through PaineWebber under which investments may be  made in the Fund as well  as
in  other  investments  available  through  PaineWebber.  Investors  considering
establishing as IRA should review applicable  tax laws and should consult  their
tax advisors.
 
     TRANSFER  OF ACCOUNTS.  If a  shareholder holding shares  of the  Fund in a
PaineWebber brokerage account transfers his  brokerage account to another  firm,
the  Fund shares normally  will be transferred  to an account  with the Transfer
Agent. However, if the other firm  has entered into a selected dealer  agreement
with Mitchell Hutchins relating to the Fund, the shareholder may be able to hold
Fund shares in an account with the other firm.
 
                               EXCHANGE PRIVILEGE
 
Shares  of the Fund  may be exchanged  for shares of  the corresponding Class of
other PaineWebber and MH/KP mutual funds, or may be acquired through an exchange
of shares of the corresponding Class of those funds. No initial sales charge  is
imposed on the shares being acquired, and no contingent deferred sales charge is
imposed  on the shares being disposed of, through an exchange. Class B shares of
MH/KP mutual funds differ from those of PaineWebber mutual funds. Class B shares
of MH/KP mutual  funds are equivalent  to Class D  shares of PaineWebber  mutual
funds. Thus, contingent deferred sales charges are not applicable to redemptions
of the Class B shares of MH/KP mutual funds. Exchanges may be subject to minimum
investment requirements of the fund into which exchanges are made.
 
     Exchanges  are  permitted with  other PaineWebber  and MH/KP  mutual funds,
including:
 
     INCOME FUNDS
 
              MH/KP Adjustable Rate Government Fund
 
              MH/KP Global Fixed Income Fund
 
              MH/KP Intermediate Fixed Income Fund
 
              PW Global Income Fund
 
                                       24
 
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              PW High Income Fund
 
              PW Investment Grade Income Fund
 
              PW Short-Term U.S. Government Income Fund
 
              PW Short-Term U.S. Government Income Fund for Credit Unions
 
              PW Strategic Income Fund
 
              PW U.S. Government Income Fund
 
     TAX-FREE INCOME FUNDS
 
              MH/KP Municipal Bond Fund
 
              PW California Tax-Free Income Fund
 
              PW Municipal High Income Fund
 
              PW National Tax-Free Income Fund
 
              PW New York Tax-Free Income Fund
 
     GROWTH FUNDS
 
              MH/KP Emerging Markets Equity Fund
 
              MH/KP Global Equity Fund
 
              MH/KP Small Cap Growth Fund
 
              PW Atlas Global Growth Fund
 
              PW Blue Chip Growth Fund
 
              PW Capital Appreciation Fund
 
              PW Communications & Technology Growth Fund
 
              PW Europe Growth Fund
 
              PW Growth Fund
 
              PW Regional Financial Growth Fund
 
              PW Small Cap Value Fund
 
     GROWTH AND INCOME FUNDS
 
              MH/KP Asset Allocation Fund
 
              MH/KP Equity Income Fund
 
              PW Asset Allocation Fund
 
                                       25
 
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              PW Global Energy Fund
 
              PW Global Growth and Income Fund
 
              PW Growth and Income Fund
 
              PW Utility Income Fund
 
     PAINEWEBBER MONEY MARKET FUND
 
PaineWebber  clients  must  place  exchange  orders  through  their  PaineWebber
investment  executives or correspondent firms unless  the shares to be exchanged
are held in certificated form. Shareholders  who are not PaineWebber clients  or
who hold their shares in certificated form must place exchange orders in writing
with  the Transfer  Agent: PFPC Inc.,  Attn: PaineWebber Mutual  Funds, P.O. Box
8950, Wilmington, Delaware 19899.  All exchanges will be  effected based on  the
relative  net asset values per share next determined after the exchange order is
received at PaineWebber's New York City offices or by the Transfer Agent. Shares
of the Funds  purchased through PaineWebber  or its correspondent  firms may  be
exchanged  only after the settlement date has passed and payment for such shares
has been made.
 
     OTHER EXCHANGE  INFORMATION. This  exchange privilege  may be  modified  or
terminated  at  any time,  upon at  least 60  days' notice  when such  notice is
required by SEC rules. See the  Statement of Additional Information for  further
details.  This exchange privilege is available only in those jurisdictions where
the sale of the PaineWebber  and MH/KP fund shares  to be acquired through  such
exchange  may be legally  made. Before making  any exchange, shareholders should
contact their PaineWebber  investment executives or  correspondent firms or  the
Transfer  Agent to obtain  more information and  prospectuses of the PaineWebber
and MH/KP funds to be acquired through the exchange.
 
                                THE DISTRIBUTOR
 
The Directors  of the  Fund have  approved a  Distribution Agreement  appointing
Mitchell  Hutchins as  distributor of the  Fund's shares.  Mitchell Hutchins has
appointed PaineWebber as the exclusive dealer for the sale of the Fund's shares.
 
     To reimburse Mitchell  Hutchins for the  services it provides  and for  the
expenses  it  bears under  the Distribution  Agreement, the  Fund has  adopted a
shareholder servicing and distribution  plan pursuant to Rule  12b-1 of the  Act
(the  'Class  A Plan')  under which  the Fund  pays Mitchell  Hutchins a  fee in
reimbursement  of  its  expenses  associated  with  providing  shareholder   and
distribution  related services in respect of Class A shares calculated daily and
paid monthly  by the  Fund at  the annual  rate of  .50% (consisting  of a  .25%
service  fee and  .25% distribution  fee) of the  lesser of  (1) aggregate gross
sales of the Class  of shares (and  any predecessor of  those shares) since  the
Fund's  inception  (not  including  reinvestment of  dividends  or  capital gain
distributions from the Fund) less the aggregate net asset value of the Class  of
shares of the Fund (and any predecessor of those shares) that have been redeemed
since  the  Fund's  inception  upon which  a  contingent  deferred  sales charge
('CDSC') has been imposed or
 
                                       26
 
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upon which such  charge has been  waived, or  (2) the Fund's  average daily  net
assets attributable to the Class of shares.
 
     Mitchell  Hutchins is paid monthly fees by  the Fund in connection with the
servicing  of  shareholder  accounts  in,  and  providing  distribution  related
services  in  respect of,  Class  B shares.  A  monthly service  fee, authorized
pursuant to a shareholder servicing and  distribution plan (the 'Class B  Plan')
adopted  by the Fund pursuant  to Rule 12b-1 under the  Act, is paid to Mitchell
Hutchins calculated at the annual rate of .25% of the value of the average daily
net assets of the Fund attributable to Class B shares. In addition, pursuant  to
the  Class B Plan, the Fund pays to Mitchell Hutchins a monthly distribution fee
at the annual rate of .50% of  the Fund's average daily net assets  attributable
to Class B shares.
 
     Under  all Plans, Mitchell Hutchins uses  the service fees primarily to pay
PaineWebber for shareholder servicing, currently at the annual rate of 0.25%  of
the  aggregate investment amounts maintained in the Fund by PaineWebber clients.
PaineWebber passes on a  portion of these fees  to its investment executives  to
compensate  them for  shareholder servicing  that they  perform and  retains the
remainder to offset its  own expenses in  servicing and maintaining  shareholder
accounts.  These expenses may include costs  of the PaineWebber branch office in
which the investment executive is based, such as rent, communications equipment,
employee salaries and other overhead costs.
 
     Mitchell Hutchins uses the distribution fees under the Plans to offset  the
commissions  it pays to  PaineWebber for selling  the Funds' shares. PaineWebber
passes on  to its  investment  executives a  portion  of these  commissions  and
retains  the remainder to offset its  expenses in selling shares. These expenses
may include the branch office costs noted above. In addition, Mitchell  Hutchins
uses  the distribution fees under the Plans to offset the Fund's marketing costs
attributable to each Class, such as preparation of sales literature, advertising
and printing and  distributing prospectuses and  other shareholder materials  to
prospective  investors. Mitchell Hutchins also may  use the distribution fees to
pay additional compensation to PaineWebber and other costs allocated to Mitchell
Hutchins'  and   PaineWebber's  distribution   activities,  including   employee
salaries, bonuses and other overhead expenses.
 
     Mitchell  Hutchins expects  that, from time  to time,  PaineWebber will pay
shareholder servicing fees and sales commissions to its investment executives at
the time  of sale  of Class  B shares  of the  Fund. If  PaineWebber makes  such
payments,  it will retain  the service and  distribution fees on  Class B shares
until it has been reimbursed and thereafter  will pass a portion of the  service
and distribution fees on Class B shares on to its investment executives.
 
     Mitchell  Hutchins receives the  proceeds of the  initial sales charge paid
upon the purchase of Class A shares, and  may use these proceeds for any of  the
distribution expenses described above.
 
     During  the period they  are in effect, the  Plans and related distribution
contracts pertaining to each Class of shares ('Distribution Contracts') obligate
the  Fund  to  pay  service  and  distribution  fees  to  Mitchell  Hutchins  as
compensation  for its service and  distribution activities, not as reimbursement
for specific expenses incurred. Thus, even if Mitchell Hutchins' expenses exceed
its service or distribution fees for the Fund, the Fund will not be obligated to
pay more than those fees, and, if Mitchell Hutchins' expenses are less than such
fees, it will retain its full fees and  realize a profit. The Fund will pay  the
service and distribution fees to Mitchell Hutchins
 
                                       27
 
<PAGE>
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until  either the applicable Plan or  Distribution Contract is terminated or not
renewed. In that  event, Mitchell Hutchins'  expenses in excess  of service  and
distribution  fees  received or  accrued through  the  termination date  will be
Mitchell Hutchins' sole responsibility and not obligations of the Fund. In their
annual consideration of the continuation of the Fund's Plans, the directors will
review the Plan  and Mitchell  Hutchins' corresponding expenses  for each  Class
separately from the Plan and corresponding expenses for the other Class.
 
     At  a meeting of the  Board of Directors on May  7, 1986, the Directors who
are not interested persons of the Fund, as defined in the Act, after  consulting
with  counsel, and with the Directors who are interested persons of the Fund, as
defined in the Act, abstaining, accepted the  position that it would not make  a
claim  for payment of any distribution expenses incurred on or after May 7, 1986
not previously reimbursed  or recovered  through CDSCs if  the Class  A Plan  is
terminated or not continued.
 
     For the fiscal years ended August 31, 1992, August 31, 1993, from September
1,  1993 through the new  fiscal year ended January 31,  1994 and for the fiscal
year  ended  January   31,  1995,  Kidder,   Peabody,  the  Fund's   predecessor
distributor, incurred distribution expenses under the Class A Plan, with respect
to  the Fund's  then sole  outstanding Class until  June 14,  1993, of $480,685,
$268,285, $140,652 and $417,384, respectively, and recovered $119,780,  $32,567,
$0  and $0, respectively, in  the form of CDSCs  paid by investors and $285,773,
$268,285, $140,652 and $310,754, respectively, in  payments made by the Fund  to
Kidder,  Peabody at the  rate provided in  the Class A  Plan. Taking payments of
CDSCs into account,  there was from  November 22, 1985  through the fiscal  year
ended  January 31, 1995, an unreimbursed balance  owed to Kidder, Peabody in the
amount of $106,630  (0.24% of the  net assets of  Class A on  January 31,  1995)
which  is subject to recovery by  Mitchell Hutchins, the Fund's new distributor,
in future years in accordance with the terms of the Class A Plan.
 
     For the period June  14, 1993 (commencement  date of the  Class B Plan)  to
August  31,  1993, from  September 1,  1993  through the  new fiscal  year ended
January 31,  1994  and for  the  fiscal year  ended  January 31,  1995,  Kidder,
Peabody,  the  Fund's  predecessor distributor,  incurred  distribution expenses
under the Class B Plan of $951, $4,608, and $12,624, respectively, of which  $0,
$4,608  and $11,650, respectively, was recovered in the form of payments made by
the Fund to Kidder, Peabody at the rate provided in the Class B Plan. There  was
from  June  14,  1993  through  the  fiscal  year  ended  January  31,  1995, an
unreimbursed balance owed to Kidder, Peabody in the amount of $974 (0.08% of the
net assets of Class B shares on  January 31, 1995) which is subject to  recovery
by  Mitchell Hutchins, the Fund's new distributor, in future years in accordance
with the terms of the Class B Plan.
 
      CUSTODIAN AND TRANSFER, DIVIDEND DISBURSING AND RECORDKEEPING AGENT
 
State Street Bank and Trust Company ('State Street'), one Heritage Drive,  North
Quincy, Massachusetts 02171, serves as the Fund's custodian. PFPC Inc. serves as
the Fund's transfer, dividend disbursing and recordkeeping agent.
 
                            PERFORMANCE INFORMATION
 
From  time to time, the Fund may advertise the 30-day 'yield' of each Class. The
yield refers to the income generated by an investment in a Class over the 30-day
period identified  in the  advertisement and  is computed  by dividing  the  net
investment income per share earned by the
 
                                       28
 
<PAGE>
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Class  during the period  by the net asset  value per share of  the Class on the
last day of the period. This income is 'annualized' by assuming that the  amount
of  income is  generated each  month over  a one-year  period and  is compounded
semi-annually. The annualized income  is then shown as  a percentage of the  net
asset value.
 
     From time to time, the Fund may advertise its 'average annual total return'
over  various periods of  time for each  Class. Total return  figures, which are
based  on  historical  earnings  and   are  not  intended  to  indicate   future
performance, show the average percentage change in value of an investment in the
Class  from the beginning date of a measuring  period to the end of that period.
These figures reflect changes in the price of shares and assume that any  income
dividends  and/or capital gains distributions made by the Fund during the period
were reinvested in shares of the same Class. Total return figures will be  given
for  the most recent  one-, five- and ten-year  periods, or for  the life of the
Class to the extent  that it has not  been in existence for  the full length  of
those  periods,  and may  be  given for  other  periods as  well,  such as  on a
year-by-year basis. The average annual total return for any one year in a period
longer than one year might  be greater or less than  the average for the  entire
period.  Average annual total return figures  must take into account the maximum
sales charge to which the Class A shares are subject; however, the Fund may from
time to time also quote such figures, computed exclusive of such sales  charges,
with respect to Class A shares.
 
     Performance  data for the Fund may,  in reports and promotional literature,
be compared to: (1)  other mutual funds (or  classes thereof) tracked by  Lipper
Analytical  Services, a widely used independent research firm which ranks mutual
funds by overall performance,  investment objectives and  assets, or tracked  by
other  services, companies,  publications or  persons who  rank mutual  funds on
overall performance or other criteria;  (2) unmanaged indices so that  investors
may  compare the Fund's  results with those  of a group  of unmanaged securities
widely regarded by investors as representative of the market in general; and (3)
the Consumer  Price  Index  (inflation  measure).  Promotional  and  advertising
literature  may also  contain information  regarding the  volatility of  the net
asset value and may refer to discussions of the Fund and comparative mutual fund
data and ratings reported in independent periodicals. The Fund may also  include
in  communications  to its  shareholders evaluations  of  the Fund  published by
nationally recognized ranking  services and by  financial publications that  are
nationally  recognized, such  as Barron's, Business  Week, Forbes, Institutional
Investor,  Investor's  Daily,  Kiplinger's  Personal  Finance  Magazine,  Money,
Morningstar  Mutual Fund  Values, The  New York  Times, USA  Today and  The Wall
Street Journal. Any  given performance  comparison should not  be considered  as
representative of the Fund's performance for any future period.
 
                              GENERAL INFORMATION
 
ORGANIZATION OF THE FUND
 
The  Fund was incorporated under  the laws of the State  of Maryland on June 20,
1985 and commenced operations on November  22, 1985. The Fund is a  diversified,
open-end, management investment company.
 
     Effective  September 1,  1993, the  Fund changed  its fiscal  year end from
August 31 to January 31.
 
                                       29
 
<PAGE>
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SHARES OF THE FUND
 
The authorized  common  stock  of  the  Fund  consists  of  500,000,000  shares,
consisting  of several Classes, with  a par value of  $.01 per share. Each share
has one vote and, when issued and paid  for in accordance with the terms of  the
offering,  is  fully  paid  and  non-assessable.  Shares  have  no  pre-emptive,
subscription or conversion rights (other than those described elsewhere in  this
Prospectus)  and are  freely transferable  and redeemable  at the  option of the
shareholder.
 
     Each Class  represents  an  identical interest  in  the  Fund's  investment
portfolio.  As  a  result, the  Classes  have  the same  rights,  privileges and
preferences, except with respect to: (1) the designation of each Class; (2)  the
effect  of  the  respective sales  charges,  if  any, for  each  Class;  (3) the
distribution and/or service fees, if any, borne by each Class; (4) the  expenses
allocable  exclusively to each  Class; (5) voting  rights on matters exclusively
affecting a single  Class; and  (6) the exchange  privilege of  each Class.  The
Board  of Directors does not  anticipate that there will  be any conflicts among
the interests of  the holders of  the different Classes.  However, the Board  of
Directors,  on an ongoing basis, will  consider whether any conflict exists and,
if so, take appropriate action.
 
     Generally, shares of the  Fund will be  voted on a  Fund-wide basis on  all
matters  except those  affecting only  the interests of  one Class,  such as the
terms of a shareholder servicing and distribution plan as it relates to a Class.
 
     Certificates representing  the  Fund's  shares  are  no  longer  physically
issued.   PFPC  Inc.  maintains  a   record  of  each  shareholder's  ownership.
Shareholders receive  confirmations  of  all transactions  in  Fund  shares  and
periodic statements reflecting share balances and dividends.
 
REPORTS TO SHAREHOLDERS
 
The  Fund sends  shareholders semi-annual  and audited  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.
 
                                       30

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                                   APPENDIX:
     RISKS AND OTHER INFORMATION REGARDING FUTURES AND OPTIONS TRANSACTIONS
 
OPTIONS TRANSACTIONS
The  Fund writes only covered options. Options written by the Fund normally have
expiration dates  of  not more  than  nine months  from  the date  written.  The
exercise  price of  the options  may be  below, equal  to, or  above the current
market values of the underlying securities at the time the options are written.
     Unless the option has been exercised, the  Fund may close out an option  it
has written by effecting a closing purchase transaction, whereby it purchases an
option  covering the same underlying security and having the same exercise price
and expiration date ('of  the same series')  as the one it  has written. If  the
Fund  desires  to sell  a particular  security on  which it  has written  a call
option, it will effect a closing  purchase transaction prior to or  concurrently
with  the sale  of the security.  If the  Fund is able  to enter  into a closing
purchase transaction,  the  Fund will  realize  a  profit (or  loss)  from  such
transaction  if the cost of such transaction  is less (or more) than the premium
received from the writing of the option.
     An open position on an exchange traded option may be closed out only on  an
exchange  which provides a  secondary market for  an option of  the same series.
There is no  assurance that it  will be  possible to effect  a closing  purchase
transaction  in a particular option. If a  secondary market happens not to exist
at the time the Fund seeks to  enter a closing purchase transaction, it may  not
be  able  to sell  the  underlying securities  until  the option  expires  or it
delivers the underlying securities upon exercise.
     Because the  Fund  has qualified  and  intends  to remain  qualified  as  a
regulated  investment company under the  Code, the extent to  which the Fund may
write covered call options and enter into straddle transactions involving put or
call options  may  be  limited.  See 'Taxes'  in  the  Statement  of  Additional
Information.
     Options  on U.S. Treasury  Bonds, Bills and Notes  are traded on registered
securities exchanges. Options traded on such exchanges are issued by the OCC,  a
clearing  corporation which assumes responsibility for the completion of options
transactions.
 
OPTIONS WRITING AND RELATED RISKS
The Fund  may write  (i.e., sell)  covered call  options and  put options.  Such
options  may, but  need not, be  traded on registered  securities exchanges (the
'Exchanges'). A call option gives the purchaser of the option the right to  buy,
and  the writer the obligation to sell,  the underlying security at the exercise
price during the option period. Conversely, a put option gives the purchaser the
right to sell and the  writer the obligation to  buy the underlying security  at
the exercise price during the option period.
     So  long  as the  obligation of  the  writer continues,  the writer  may be
assigned an exercise notice  by the broker-dealer through  which the option  was
sold.  The exercise notice would require the writer to deliver, in the case of a
call, or take delivery of, in the case of a put, the underlying security against
payment of the exercise price. This obligation terminates upon expiration of the
option, or  at such  earlier time  that the  writer effects  a closing  purchase
transaction  by purchasing an  option of the  same series as  the one previously
sold. Once an option has  been exercised, the writer  may not execute a  closing
purchase    transaction.   To    secure   the   obligation    to   deliver   the
 
                                      A-1
 
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underlying security in  the case of  a call  option traded on  an Exchange,  the
writer of the option is required to deposit in escrow the underlying security or
other  assets in accordance with the rules of the OCC, an institution created to
interpose itself between  buyers and  sellers of options.  Technically, the  OCC
assumes  the other side of  every purchase and sales  transaction on an Exchange
and, by  doing  so, gives  its  guarantee  to the  transaction.  Similar  escrow
arrangements  are entered into with each institution with which the Fund engages
in conventional options transactions (non-exchange traded options).
     The principal reason for  writing options on a  securities portfolio is  to
attempt to realize, through the receipt of premiums, a greater return than would
be  realized on the underlying securities alone.  In return for the premium, the
covered call option writer has given up the opportunity for profit from a  price
increase  in the  underlying security  above the exercise  price so  long as the
option remains  open, but  retains the  risk of  loss should  the price  of  the
security  decline. Conversely, the put option writer gains a profit, in the form
of the premium, so long  as the price of  the underlying security remains  above
the  exercise  price,  but  assumes an  obligation  to  purchase  the underlying
security from the buyer of the put option at the exercise price, even though the
security may  fall below  the exercise  price,  at any  time during  the  option
period.  If an option expires,  the writer realizes a gain  in the amount of the
premium. Such a gain may, in the case  of a covered call option, be offset by  a
decline in the market value of the underlying security during the option period.
If  a call option is exercised, the writer realizes a gain or loss from the sale
of the  underlying security.  If a  put  option is  exercised, the  writer  must
fulfill  his  obligation to  purchase the  underlying  security at  the exercise
price, which  will  usually  exceed  the then-market  value  of  the  underlying
security.
     Because  the Fund can write only covered options, it may at times be unable
to write additional options unless it sells a portion of its portfolio  holdings
to  obtain new  debt securities  against which  it can  write options.  This may
result in  higher  portfolio  turnover  and  correspondingly  greater  brokerage
commissions and other transaction costs.
     To  the extent that a  secondary market is available  on the Exchanges, the
covered option writer may close out exchange traded options it has written prior
to the assignment  of an exercise  notice by purchasing,  in a closing  purchase
transaction,  an option of the same series  as the option previously written. If
the cost of such a closing purchase, plus transaction costs, is greater than the
premium received upon writing the original option, the writer will incur a  loss
in the transaction.
     PURCHASING  PUT AND  CALL OPTIONS.  The Fund  can close  out a  put or call
option it has purchased  by effecting a closing  sale transaction; for  example,
the  Fund may close out a  put option it has purchased  by selling a put option.
If, however, a  secondary market does  not exist at  a time the  Fund wishes  to
effect  a closing sale transaction, the Fund will have to exercise the option to
realize any profit. In addition, in a transaction in which the Fund does not own
the security  underlying  a put  option  it has  purchased,  the Fund  would  be
required,  in  the absence  of a  secondary market,  to purchase  the underlying
security before it  could exercise the  option. In each  such instance the  Fund
would incur additional transaction costs.
     The  Fund  will  not purchase  a  put  or call  option  on  U.S. Government
securities if, as a result of such  purchase, more than 10% of its total  assets
would  be invested in premiums for such  options. The Fund's ability to purchase
put and call options may be limited by the Code's requirements for qualification
as a regulated investment  company. See 'Taxes' in  the Statement of  Additional
Information.
 
                                      A-2
 
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FUTURES CONTRACTS AND OPTIONS THEREON
     CHARACTERISTICS  AND  PURPOSES  OF  FUTURES  CONTRACTS.  There  are futures
contracts based on U.S.  Treasury Bonds, U.S.  Treasury Notes, three-month  U.S.
Treasury Bills and GNMA certificates. A clearing corporation associated with the
commodities  exchange on which a  futures contract trades assumes responsibility
for the completion of  transactions and guarantees  that open futures  contracts
will  be  performed.  Although futures  contracts  call for  actual  delivery or
acceptance of debt securities,  in most cases the  futures contracts are  closed
out before the settlement date without the making or taking of delivery.
     The  Fund purchases and sells futures contracts only to hedge its actual or
anticipated holdings of  U.S. Government  securities. For example,  if the  Fund
holds  cash  reserves  or  short-term debt  securities  and  interest  rates are
expected to  decline, the  Fund  might purchase  futures  contracts as  a  hedge
against  anticipated increases  in the price  of the  U.S. Government securities
that the Fund  intends to acquire  (an 'anticipatory hedge').  If, on the  other
hand,  the Fund owns U.S. Government  securities and interest rates are expected
to increase, it might sell futures contracts. If interest rates do increase, the
value of the securities in the Fund's portfolio would decline, but the value  of
the  Fund's short  futures contracts  would increase  at approximately  the same
rate, thereby offsetting the decline in the value of the securities.
     CHARACTERISTICS AND PURPOSES OF OPTIONS ON FUTURES CONTRACTS. Upon exercise
of an option on a futures contract, the delivery of the futures position by  the
writer of the option to the holder of the option will be accompanied by delivery
of  the  accumulated  balance  in  the  writer's  futures  margin  account which
represents the amount  by which  the market price  of the  futures contract,  at
exercise, 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  futures contract.  See 'Additional
Investment Information  -- Options  on Futures  Contracts' in  the Statement  of
Additional  Information. The Fund  is required to  deposit initial and variation
margin with respect to options on  futures contracts written by it, pursuant  to
brokers'  requirements  similar to  those applicable  to futures  contracts. See
'Additional Investment Information  -- Interest Rate  Futures Contracts' in  the
Statement of Additional Information.
     The  purchase of put options on futures contracts is a means of hedging the
Fund's portfolio of debt securities against  the risk of rising interest  rates,
and  the purchase of call options on futures contracts is a means of hedging the
Fund's portfolio against a market advance at  a time when the Fund is not  fully
invested in U.S. Government securities (other than U.S. Treasury Bills).
     Writing  a call option  on a futures  contract serves as  a hedge against a
modest decline in prices of debt securities held in the Fund's portfolio. If the
futures price at expiration of the option is below the exercise price, the  Fund
will retain the full amount of the option premium which provides a partial hedge
against  any  decline that  may have  occurred  in the  Fund's holdings  of debt
securities. If  the futures  price when  the option  is exercised  is above  the
exercise  price, however,  the Fund will  incur a  loss, which may  be wholly or
partially offset by  the increase in  the value  of the security  in the  Fund's
portfolio which was being hedged.
     Writing  a  put option  on a  futures  contract serves  as a  partial hedge
against an increase in the value of debt securities the Fund intends to acquire.
If the futures price at  expiration of the option  is above the exercise  price,
the  Fund will  retain the full  amount of  the option premium  which provides a
partial hedge against any increase  that may have occurred  in the price of  the
debt  securities the  Fund intends  to acquire.  If the  futures price  when the
option is exercised is
 
                                      A-3
 
<PAGE>
--------------------------------------------------------------------------------
 
below the exercise  price, however, the  Fund will  incur a loss,  which may  be
wholly  or partially offset by  the decrease of the  price of the securities the
Fund intends to acquire.
 
     LIMITATIONS ON THE USE OF FUTURES  CONTRACTS AND OPTIONS THEREON. The  Fund
does  not engage  in transactions  in futures  contracts or  options thereon for
speculation but only as a hedge against changes in interest rates which could or
would affect  the  values  of debt  securities  which  are held  in  the  Fund's
portfolio  or  which the  Fund intends  to  purchase. When  the Fund  hedges its
portfolio by selling a futures contract, purchasing a put option thereon, or  by
writing  a call  option thereon,  it always  owns an  amount of  U.S. Government
securities corresponding to the  open futures or  option position. In  instances
involving  the purchase of futures contracts, or  the writing of put or purchase
of call  options  thereon  by the  Fund,  an  amount of  cash,  U.S.  Government
securities  or other high-grade  debt obligations, equal to  the market value of
the obligation under the futures contracts and options (less any related  margin
deposits),  will be deposited in a  segregated account with the Fund's custodian
to ensure that the use of such futures contracts and options is unleveraged. The
Fund makes a  similar deposit  in a  segregated account  when it  writes a  call
option on a futures contract which is in the money.
 
     When  the Fund purchases  a futures contract  or a call  option thereon, or
writes a put  option thereon,  it does  so with  the intention  of acquiring  an
amount  of U.S. Government securities corresponding to the futures contract, but
under unusual  market conditions  it may  terminate such  a position  without  a
corresponding purchase of debt securities.
 
     SPECIAL RISK CONSIDERATIONS. While the use of futures contracts and options
thereon  for hedging is not a  speculative technique, certain risks are inherent
in the use  of such instruments.  One such risk  arises because the  correlation
between  movements in the price of futures  contracts and movements in the price
of debt securities that are  the subject of the hedge  may be imperfect. If  the
price  of a futures contract moves more or less than the price of the securities
that are the subject of the hedge, the Fund experiences either a loss or a  gain
on  the futures contract that is not completely offset by movements in the price
of the securities which are the subject of the hedge.
 
     If the  Fund purchases  a futures  contract or  a call  option thereon,  or
writes  a put option on a futures contract, in an anticipatory hedge transaction
and for  any  reason  fails  to complete  the  transaction  by  purchasing  debt
securities,  the Fund  may experience  a loss  or gain  on the  futures contract
transaction which is not  offset by price movements  in the debt security  which
was the subject of the anticipatory hedge.
 
     The  Fund's  ability  to  establish  and  close  out  positions  in futures
contracts and options  on futures contracts  is subject to  the development  and
maintenance  of a liquid secondary market. Although the Fund generally purchases
only those futures contracts and options  thereon for which there appears to  be
an active secondary market, there is no assurance that a liquid secondary market
on  an exchange exists for any particular  futures contract or option thereon at
any particular time. In the event no such market exists for a particular futures
contract or  option  thereon, it  might  not be  possible  to effect  a  closing
transaction in such instrument, with the result that the Fund would have to make
or  take delivery  under the  futures contracts, or  exercise the  option it has
purchased, in order to realize any profit. In the case of futures contracts, the
Fund is required to maintain margin deposits on the contract until it is closed.
See 'Additional Investment Information --  Options on Futures Contracts' in  the
Statement of Additional Information.
 
                                      A-4

<PAGE>
   No person has been authorized to give any information or to make any
   representations not contained in this Prospectus or in the Statement
   of Additional Information incorporated into this Prospectus by
   reference in connection with the offering made by this Prospectus,
   and, if given or made, any such information or representations must
   not be relied upon as having been authorized by the Fund or its
   distributor. This Prospectus does not constitute an offering by the
   Fund or by its distributor in any jurisdiction in which such
   offering may not lawfully be made.
 
<TABLE>
<S>                                               <C>
------------------------------------
Contents
------------------------------------
Fee Table                                              2
------------------------------------
Highlights                                             3
------------------------------------
Financial Highlights                                   6
------------------------------------
Investment Objective and Policies                      8
------------------------------------
Management of the Fund                                15
------------------------------------
Dividends, Distributions and Taxes                    16
------------------------------------
Determination of Net Asset Value                      18
------------------------------------
Purchase of Shares                                    19
------------------------------------
Redemption of Shares                                  22
------------------------------------
Other Services and Information                        24
------------------------------------
Exchange Privilege                                    24
------------------------------------
The Distributor                                       26
------------------------------------
Custodian and Transfer, Dividend Disbursing
  and Recordkeeping Agent                             28
------------------------------------
Performance Information                               28
------------------------------------
General Information                                   29
------------------------------------
Appendix -- Risks and Other Information
  Regarding Futures and Options Transactions         A-1
------------------------------------
</TABLE>
 
<PAGE>
 
                                  Mitchell
                                 Hutchins/
                                   Kidder,
                                   Peabody
                                Government
                                    Income
                                     Fund,
                                      Inc.
 
Prospectus
 
   May 31, 1995




<PAGE>
Statement of Additional Information                                 May 31, 1995
--------------------------------------------------------------------------------
         Mitchell Hutchins/Kidder, Peabody Government Income Fund, Inc.
    1285 AVENUE OF THE AMERICAS   NEW YORK, NEW YORK 10019   (800) 647-1568
 
Mitchell Hutchins/Kidder, Peabody Government Income Fund, Inc. (the 'Fund') is a
diversified,  open-end,  management  investment company  whose  objective  is to
provide high current income. This  Statement of Additional Information  relating
to  the Fund  is not  a prospectus and  should be  read in  conjunction with the
Fund's prospectus. A copy of the Fund's prospectus can be obtained from the Fund
at the above address. The date of the prospectus to which this Statement relates
is May 31, 1995.
 
--------------------------------------------------------------------------------
 
               INVESTMENT ADVISER, ADMINISTRATOR AND DISTRIBUTOR
                    Mitchell Hutchins Asset Management Inc.
 
--------------------------------------------------------------------------------

<PAGE>
--------------------------------------------------------------------------------
 
                       INVESTMENT OBJECTIVE AND POLICIES
 
The  Fund's investment objective is to seek  high current income. The Fund seeks
high  current  income  primarily  from  interest  income  from  U.S.  Government
securities, premiums from put and call options on U.S. Government securities and
net gains from closing purchase and sale transactions with respect to options on
U.S.  Government securities. The Fund  may also realize net  gains from sales of
portfolio securities.
 
U.S. GOVERNMENT SECURITIES
 
     U.S. TREASURY SECURITIES.  The Fund  invests in  U.S. Treasury  securities,
including  Bills,  Notes, Bonds  and other  debt securities  issued by  the U.S.
Treasury. These instruments are  direct obligations of  the U.S. Government  and
differ  primarily in their  interest rates, the lengths  of their maturities and
the times of their issuances.
 
     SECURITIES  ISSUED   OR  GUARANTEED   BY  U.S.   GOVERNMENT  AGENCIES   AND
INSTRUMENTALITIES. The Fund invests in securities issued by agencies of the U.S.
Government or instrumentalities established or sponsored by the U.S. Government.
These  obligations, including those which are  guaranteed by Federal agencies or
instrumentalities, may or may not  be backed by the  'full faith and credit'  of
the  United States. In the  case of securities not backed  by the full faith and
credit of  the United  States, the  Fund  must look  principally to  the  agency
issuing  or guaranteeing  the obligation for  ultimate repayment and  may not be
able to assert a claim against the United States itself in the event the  agency
or  instrumentality does not meet its  commitments. Securities in which the Fund
may invest which  are not  backed by  the full faith  and credit  of the  United
States  include, but  are not  limited to,  obligations of  the Tennessee Valley
Authority, the Federal National Mortgage Association ('FNMA'), the Federal  Home
Loan  Mortgage Corporation ('FHLMC') and the  United States Postal Service, each
of which has the right to borrow from the U.S. Treasury to meet its obligations,
and obligations of  the Federal  Farm Credit System  and the  Federal Home  Loan
Banks,  the obligations of which may only  be satisfied by the individual credit
of  the  issuing  agency.  Obligations  of  the  Government  National   Mortgage
Association ('GNMA'), the Farmers Home Administration and the Export-Import Bank
are backed by the full faith and credit of the United States.
 
     The  Fund  may  also purchase  obligations  of the  International  Bank for
Reconstruction and Development  which are supported  by appropriated but  unpaid
commitments  of its member  countries, including the United  States. There is no
assurance that the commitments will be undertaken in the future.
 
MORTGAGE-RELATED SECURITIES
 
The Fund invests in mortgage-backed securities, including those representing  an
undivided  ownership interest in a pool of mortgage loans, e.g., Certificates of
GNMA, FNMA and FHLMC.
 
     GNMA  CERTIFICATES.  Certificates   of  GNMA   ('GNMA  Certificates')   are
mortgage-backed  securities, which evidence  an undivided interest  in a pool of
mortgage loans. GNMA Certificates  differ from bonds in  that principal is  paid
back monthly by the borrower over the term of the loan rather than returned in a
lump   sum   at   maturity.   GNMA   Certificates   that   the   Fund  purchases
 
                                       2
 
<PAGE>
--------------------------------------------------------------------------------
are the 'modified pass-through' type which entitle the holder to receive a share
of all interest and principal payments paid and owned on the mortgage pool,  net
of  fees paid to the issuer and GNMA, regardless of whether or not the mortgagor
actually makes the payment.
 
     GNMA GUARANTEE. The National Housing  Act authorizes GNMA to guarantee  the
timely  payment of  principal and  interest on  securities backed  by a  pool of
mortgages insured by the Federal Housing Administration ('FHA') or the  Farmers'
Home  Administration  ('FMHA'),  or guaranteed  by  the  Veterans Administration
('VA'). The GNMA guarantee is backed by the full faith and credit of the  United
States.  The GNMA is also  empowered to borrow without  limitation from the U.S.
Treasury, if necessary, to make any payments required under its guarantee.
 
     LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is likely
to be  substantially less  than  the original  maturity  of the  mortgage  pools
underlying  the securities. Prepayments of  principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of  principal
investment  long before the maturity of  the mortgages in the pool. Foreclosures
impose no risk to principal investment because of the GNMA guarantee.
 
     As prepayment rates  of individual mortgage  pools vary widely,  it is  not
possible  to predict accurately the  average life of a  particular issue of GNMA
Certificates. However, statistics published by the FHA indicate that the average
life of single-family dwelling mortgages with 25-to 30-year maturities, the type
of mortgages backing the vast majority of GNMA Certificates, is approximately 12
years. Therefore,  it  is  customary  to  treat  GNMA  Certificates  as  30-year
mortgage-backed securities which prepay fully in the twelfth year.
 
     YIELD  CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of interest of
GNMA Certificates is lower than the  interest rate paid on the VA-guaranteed  or
FHA-insured  mortgages underlying  the GNMA Certificates,  by the  amount of the
fees paid to GNMA and the issuer.
 
     The coupon rate  by itself, however  does not indicate  the yield which  is
earned on GNMA Certificates. First, GNMA Certificates may be issued at a premium
or  discount, rather  than at  par, and,  after issuance,  GNMA Certificates may
trade in the  secondary market  at a premium  or discount.  Second, interest  is
earned  monthly, rather  than semi-annually  as with  traditional bonds; monthly
compounding raises the effective yield earned. Third, the actual yield of a GNMA
Certificate is  influenced  by  the  prepayment  experience  of  the  underlying
mortgage  pool. For example, if the  higher-yielding mortgages from the pool are
prepaid, the yield on the remaining pool is reduced.
 
     FHLMC CERTIFICATES. The FHLMC was created through enactment of Title III of
the Emergency Home Finance Act of 1970. Its purpose is to promote development of
a nationwide secondary market in conventional residential mortgages.
 
     The FHLMC issues  two types of  mortgage pass-through securities,  mortgage
participation   certificates  ('PCs')   and  guaranteed   mortgage  certificates
('GMCs'). PCs resemble GNMA Certificates in  that each PC represents a pro  rata
share  of all interest  and principal payments  made and owed  on the underlying
pool. The FHLMC guarantees timely payment of interest on PCs and the full return
of principal. Like  GNMA Certificates, PCs  are assumed to  be prepaid fully  in
their twelfth year.
 
                                       3
 
<PAGE>
--------------------------------------------------------------------------------
 
     GMCs  also represent a pro  rata interest in a  pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The  expected average life  of these securities  is
approximately ten years.
 
     FNMA  CERTIFICATES. The FNMA was established  in 1938 to create a secondary
market in mortgages insured by the FHA.
 
     FNMA  issues   guaranteed   mortgage   pass-through   certificates   ('FNMA
Certificates').  FNMA Certificates resemble GNMA  Certificates in that each FNMA
Certificate represents a pro rata share  of all interest and principal  payments
made  and owed  on the underlying  pool. The FNMA  Certificate guarantees timely
payment of interest on FNMA Certificates and the full return of principal.  Like
GNMA  Certificates, FNMA Certificates  are assumed to be  prepaid fully in their
twelfth year.
 
WHEN-LSSUED AND DELAYED DELIVERY SECURITIES
 
The Fund  may purchase  and  sell securities  (including  GNMA, FHLMC  and  FNMA
Certificates) on a when-issued or delayed delivery basis. When-issued or delayed
delivery  transactions arise when  securities are purchased or  sold by the Fund
with payment and delivery taking place in the future in order to secure what  is
considered  to be  an advantageous price  and yield to  the Fund at  the time of
entering into  the transaction.  However,  the yield  on a  comparable  security
available  when delivery takes place may vary  from the yield on the security at
the time the when-issued or delayed  delivery transaction was entered. When  the
Fund  engages in when-issued and delayed  delivery transactions, the Fund relies
on the seller or buyer, as the case  may be, to consummate the sale. Failure  to
do  so may result  in the Fund missing  the opportunity of  obtaining a price or
yield  considered  to   be  advantageous.  When-issued   and  delayed   delivery
transactions  may be  expected to  settle within three  months from  the date on
which the transaction was  entered. However, no payment  or delivery is made  by
the  Fund until  it receives  delivery or  payment from  the other  party to the
transaction.
 
     When the Fund  purchases securities  on a when-issued  or delayed  delivery
basis,  it  will  maintain  in  a  segregated  account  with  its  custodian, or
designated sub-custodian, cash, U.S.  Government securities or other  high-grade
debt  obligations having an aggregate value equal to the amount of such purchase
commitments until payment is made;  the Fund will likewise segregate  securities
it sells on a delayed delivery basis.
 
OPTIONS WRITING AND RELATED RISKS
 
The  Fund may  write (i.e.,  sell) covered  call options  and put  options. Such
options may, but  need not, be  traded on registered  securities exchanges  (the
'Exchanges').  A call option gives the purchaser of the option the right to buy,
and the writer the obligation to  sell, the underlying security at the  exercise
price during the option period. Conversely, a put option gives the purchaser the
right  to sell, and the writer the obligation to buy, the underlying security at
the exercise price during the option period.
 
     So long  as the  obligation of  the  writer continues,  the writer  may  be
assigned  an exercise  notice by the  broker-dealer through whom  the option was
sold. The exercise notice would
 
                                       4
 
<PAGE>
--------------------------------------------------------------------------------
require the writer to deliver,  in the case of a  call, or take delivery of,  in
the  case of  a put,  the underlying  security against  payment of  the exercise
price. This obligation  terminates upon  expiration of  the option,  or at  such
earlier  time  that  the  writer  effects  a  closing  purchase  transaction  by
purchasing an option covering the same  underlying security and having the  same
exercise  price and expiration date ('of the same series') as the one previously
sold. Once an option has  been exercised, the writer  may not execute a  closing
purchase  transaction.  To  secure  the  obligation  to  deliver  the underlying
security in the case of a call option  traded on an Exchange, the writer of  the
option  is required to deposit in escrow the underlying security or other assets
in accordance with the rules of the Options Clearing Corporation (the 'OCC'), an
institution created to interpose itself  between buyers and sellers of  options.
Technically,  the  OCC  assumes  the  other  side  of  every  purchase  and sale
transaction on  an  Exchange  and, by  doing  so,  gives its  guarantee  to  the
transaction.  Similar escrow arrangements are entered into with each institution
with which the Fund engages  in conventional options transactions  (non-exchange
traded options).
 
     The  principal reason for  writing options on a  securities portfolio is to
attempt to realize, through the receipt of premiums, a greater return than would
be realized on the underlying securities  alone. In return for the premium,  the
covered  call option writer has given up the opportunity for profit from a price
increase in the  underlying security  above the exercise  price so  long as  the
option  remains  open, but  retains the  risk of  loss should  the price  of the
security decline. Conversely, the put option writer gains a profit, in the  form
of  the premium, so long  as the price of  the underlying security remains above
the exercise  price,  but  assumes  an obligation  to  purchase  the  underlying
security from the buyer of the put option at the exercise price, even though the
security  may  fall below  the exercise  price,  at any  time during  the option
period. If an option expires,  the writer realizes a gain  in the amount of  the
premium.  Such a gain may, in the case of  a covered call option, be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer realizes a gain or loss from the  sale
of  the  underlying security.  If a  put  option is  exercised, the  writer must
fulfill his  obligation to  purchase  the underlying  security at  the  exercise
price, which usually exceeds the then-market value of the underlying security.
 
     Because  the Fund can write only covered options, it may at times be unable
to write additional options unless it sells a portion of its portfolio  holdings
to  obtain new  debt securities  against which  it can  write options.  This may
result in  higher  portfolio  turnover  and  correspondingly  greater  brokerage
commissions and other transaction costs.
 
     To  the extent that a  secondary market is available  on the Exchanges, the
covered option writer may close out exchange traded options it has written prior
to the assignment  of an exercise  notice by purchasing,  in a closing  purchase
transaction,  an option of the same series  as the option previously written. If
the cost of such a closing purchase, plus transaction costs, is greater than the
premium received upon writing the original option, the writer will incur a  loss
in the transaction.
 
                                       5
 
<PAGE>
--------------------------------------------------------------------------------
 
SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS
 
     ON U.S. TREASURY BONDS AND NOTES. Because trading interest in U.S. Treasury
Bonds  and Notes  tends to  center on  the most  recently auctioned  issues, the
Exchanges will not indefinitely continue to introduce new series of options with
expirations to  replace  expiring options  on  particular issues.  Instead,  the
expirations  introduced at the  commencement of options  trading on a particular
issue will be  allowed to  run their  course, with  the possible  addition of  a
limited  number of new expirations as  the original ones expire. Options trading
on each series  of Bonds or  Notes will thus  be phased out  as new options  are
listed  on the more recent issues, and a full range of expiration dates will not
ordinarily be available for every series on which options are traded.
 
     ON U.S. TREASURY BILLS. Because the deliverable U.S. Treasury Bill  changes
from  week to week, writers of U.S. Treasury Bill call options cannot provide in
advance for their  potential exercise  settlement obligations  by acquiring  and
holding  the underlying security. However, if the  Fund holds a long position in
U.S. Treasury Bills with a principal amount corresponding to the option contract
size, the Fund  may be  hedged from  a risk  standpoint. In  addition, the  Fund
maintains  in  a  segregated  account with  its  custodian  U.S.  Treasury Bills
maturing no later  than those  which would  be deliverable  in the  event of  an
assignment  of an  exercise notice to  ensure that  it can meet  its open option
obligations.
 
     ON GNMA CERTIFICATES. Options on GNMA Certificates are not currently traded
on any  Exchange. Since  the remaining  principal balance  of GNMA  Certificates
declines each month as a result of mortgage payments, the Fund, as a writer of a
covered  GNMA call holding GNMA Certificates  as 'cover' to satisfy its delivery
obligation in the event of assignment of  an exercise notice, may find that  its
GNMA  Certificates no longer  have a sufficient  remaining principal balance for
this purpose. Should  this occur, the  Fund will enter  into a closing  purchase
transaction or will purchase additional GNMA Certificates from the same pool (if
obtainable)  or replacement  GNMA Certificates  in the  cash market  in order to
remain covered.
 
     A GNMA Certificate held by the Fund to cover an option position in any  but
the  nearest expiration month may cease to represent cover for the option in the
event of a decline  in the GNMA  coupon rate at which  new pools are  originated
under  the FHA/VA loan ceiling  in effect at any  given time. Should this occur,
the Fund  will no  longer be  covered, and  the Fund  will either  enter into  a
closing  purchase  transaction  or  replace the  GNMA  Certificate  with  a GNMA
Certificate which  represents  cover.  When  the Fund  closes  its  position  or
replaces  the GNMA Certificate,  it may realize an  unanticipated loss and incur
transaction costs.
 
     RISKS  PERTAINING   TO   CONVENTIONAL   OPTIONS.   Each   conventional   or
Over-the-Counter  ('OTC') option is a  separately negotiated transaction between
the Fund and another  financial institution and  is not listed  or traded on  an
Exchange or cleared through the OCC. The Fund will not enter into a conventional
option transaction unless the other financial institution is deemed creditworthy
by  Mitchell Hutchins  Asset Management  Inc. ('Mitchell  Hutchins'), the Fund's
investment adviser and administrator. Closing  transactions are also subject  to
separate  negotiation  (and  conventional  option  agreements  do  not typically
provide for free assignability or early termination). As a result, there has not
developed a trading market in such  options, although they have become  accepted
financial instruments among institutional investors. In
 
                                       6
 
<PAGE>
--------------------------------------------------------------------------------
addition,  options  purchased or  written  in negotiated  transactions  are more
illiquid than exchange traded  options and there is  no assurance that the  Fund
will  be able to effect  a closing transaction at  a time when Mitchell Hutchins
believes it would be advantageous to do so. Moreover, the staff of the  Division
of  Investment Management of the Securities  and Exchange Commission (the 'SEC')
has taken the  position that purchases  of OTC  options and the  assets used  as
cover for written OTC options are illiquid securities and are subject to the SEC
interpretive  position that a fund may only invest up to 10% of its total assets
in illiquid securities.
 
     RISKS PERTAINING TO THE SECONDARY MARKET. An option position on an exchange
traded option may be closed out only  on an Exchange which provides a  secondary
market  for an option  of the same series.  There is no  assurance that a liquid
secondary market on  an Exchange  will exist for  any particular  option at  any
particular  time. In  such event,  it might  not be  possible to  effect closing
transactions in particular options, with the result that the Fund would have  to
exercise  its options in order  to realize any profit  and may incur transaction
costs in connection therewith. If the Fund, as a covered call option writer,  is
unable  to effect a closing purchase transaction  in a secondary market, it will
not be able  to sell  the underlying  security until  the option  expires or  it
delivers the underlying security upon exercise.
 
     Reasons for the absence of a liquid secondary market on an Exchange include
the  following:  (i)  insufficient  trading interest  in  certain  options; (ii)
restrictions on  transactions  imposed  by an  Exchange;  (iii)  trading  halts,
suspensions  or other restrictions imposed with respect to particular classes or
series of  options or  underlying securities;  (iv) interruption  of the  normal
operations  on an Exchange; (v)  inadequacy of the facilities  of an Exchange or
the OCC to  handle current trading  volume; or (vi)  a decision by  one or  more
Exchange  to discontinue the trading of options (or a particular class or series
of options), in which event  the secondary market on  that Exchange (or in  that
class  or series of options) would  cease to exist, although outstanding options
on that Exchange that had been issued by  the OCC as a result of trades on  that
Exchange  would generally  continue to be  exercisable in  accordance with their
terms.
 
     The hours of  trading for  options on  U.S. Government  securities may  not
conform  to the hours during which the  underlying securities are traded. To the
extent that  the option  markets close  before the  markets for  the  underlying
securities,  significant  price  and  rate  movements  can  take  place  in  the
underlying markets that cannot be reflected in the option markets.
 
INTEREST RATE FUTURES CONTRACTS
 
     CHARACTERISTICS. Interest rate futures contracts ('futures contracts')  can
be purchased and sold with respect to such securities as U.S. Treasury Bonds and
Notes,  and GNMA Certificates on The Chicago Board of Trade and, with respect to
U.S. Treasury  Bills,  on the  International  Monetary Market  Division  of  The
Chicago Mercantile Exchange.
 
     The  Fund neither pays  nor receives money  upon the purchase  or sale of a
futures contract. Instead, when the Fund enters into a futures contract, it will
initially be  required to  deposit with  its custodian  for the  benefit of  the
broker (the 'futures commission merchant') an amount of 'initial margin' of cash
or  U.S. Treasury Bills, currently equal to approximately 1 1/2% of the contract
amount for futures on U.S. Treasury Bonds and Notes and approximately 1/10 of 1%
of the contract  amount for futures  on U.S. Treasury  Bills. Initial margin  in
futures contract
 
                                       7
 
<PAGE>
--------------------------------------------------------------------------------
transactions is different from margin in securities transactions in that futures
contract  initial margin does not involve the borrowing of funds by the customer
to finance the transactions. Rather, initial margin  is in the nature of a  good
faith  deposit  on the  futures  contract which  is  returned to  the  Fund upon
termination of the futures contract,  assuming all contractual obligations  have
been  satisfied. Subsequent payments,  called variation margin,  to and from the
futures commission merchant are made on a daily basis as the market price of the
futures contract fluctuates. This  process is known as  'marking to market.'  At
any  time prior  to expiration of  the futures  contract, the Fund  may elect to
close the  position by  taking  an offsetting  position  which will  operate  to
terminate  the  Fund's  position  in  the  futures  contract.  Although  futures
contracts provide for the  delivery and acceptance  of securities, most  futures
contracts are terminated by entering into offsetting transactions.
 
     RISKS  OF TRANSACTIONS  IN FUTURES  CONTRACTS. There  are several  risks in
connection with the use  of futures contracts  as a hedging  device. Due to  the
imperfect  correlation between the  price of futures  contracts and movements in
the price of the underlying U.S.  Government securities, the price of a  futures
contract  may move more or  less than the price  of the securities being hedged.
Therefore, a correct forecast of interest  rate trends by Mitchell Hutchins  may
still not result in a successful hedging transaction.
 
     Although  the Fund purchases  or sells futures  contracts only on Exchanges
where there appears to  be an adequate secondary  market, there is no  assurance
that  a liquid  secondary market  on an Exchange  will exist  for any particular
futures contract  or  at any  particular  time.  Accordingly, there  can  be  no
assurance  that it will be possible, at  any particular time, to close a futures
contract position. In  the event  the Fund could  not close  a futures  contract
position  and the value of such position declined, the Fund would be required to
continue to make daily cash payments of variation margin. However, in the  event
futures  contracts have been used to hedge portfolio securities, such securities
will not  be  sold  until  the  futures contract  can  be  terminated.  In  such
circumstances, an increase in the price of the securities, if any, may partially
or  completely  offset losses  on  the futures  contract.  However, there  is no
guarantee that the price  movements of the securities  will, in fact,  precisely
correlate  with the price movements in the  futures contract and thus provide an
offset to losses on a futures contract.
 
     Successful use of  futures contracts  by the Fund  is also  subject to  the
ability  of Mitchell Hutchins to predict correctly movements in the direction of
interest rates and other factors affecting markets for securities. For  example,
if  the Fund has hedged against the possibility of an increase in interest rates
which would adversely affect  the price of securities  in its portfolio and  the
price  of such securities increases  instead, the Fund will  lose part or all of
the benefit  of the  increased value  of  its securities  because it  will  have
offsetting  losses  in  its futures  contract  positions. In  addition,  in such
situations, if the  Fund has insufficient  cash to meet  daily variation  margin
requirements,  it may  have to sell  securities to meet  such requirements. Such
sales of securities  may be, but  will not necessarily  be, at increased  prices
which  reflect the rising market. The Fund may have to sell securities at a time
when it is disadvantageous to do so.
 
     The hours of  trading of  futures contracts may  not conform  to the  hours
during  which the Fund may trade U.S.  Government securities. To the extent that
the futures  markets  close  before  the  U.S.  Government  securities  markets,
significant  price  and rate  movements can  take place  in the  U.S. Government
securities markets that cannot be reflected in the futures markets.
 
                                       8
 
<PAGE>
--------------------------------------------------------------------------------
 
OPTIONS ON FUTURES CONTRACTS
 
     CHARACTERISTICS. An option on  a futures contract  gives the purchaser  the
right,  but not the  obligation, 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)  at  a specified  exercise price  at  any time  during the  option exercise
period. The  writer  of  the option  is  required  upon exercise  to  assume  an
offsetting  futures contract position (a short position  if the option is a call
and a long position if  the option is a put).  Upon exercise of the option,  the
assumption  of offsetting futures contract positions by the writer and holder of
the option will  be accompanied by  delivery of the  accumulated balance in  the
writer's  futures margin account which represents the amount by which the market
price of the futures contract, at exercise,  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
futures contract. Currently options can be purchased or written with respect  to
futures contracts on U.S. Treasury Bonds on The Chicago Board of Trade.
 
     The  holder or writer of an option may terminate his position by selling or
purchasing an option of the same series. There is no guarantee that such closing
transactions can be effected.
 
     The Fund is required to deposit initial and maintenance margin with respect
to put and  call options  on futures  contracts written  by it  pursuant to  the
Fund's  futures commissions merchants' requirements  similar to those applicable
to futures contracts, described above.
 
BORROWINGS
 
If the Fund borrows money for other than temporary or emergency purposes, it may
borrow no more than 30% of  its net assets and, in  any event, the value of  its
assets  (including borrowings)  less its  liabilities (excluding  borrowings but
including securities borrowed in connection with short sales) must at all  times
be  maintained at not less than 300%  of all outstanding borrowings. If, for any
reason, including adverse market conditions, the  Fund should fail to meet  this
test, it will be required to reduce its borrowings within three business days to
the  extent necessary to meet  the test. This requirement  may make it necessary
for the Fund to sell a portion of its portfolio securities at a time when it  is
disadvantageous to do so.
 
INVESTMENT RESTRICTIONS
 
The   following  restrictions  are   fundamental  policies  of   the  Fund.  The
restrictions cannot be changed without the approval of the holders of a majority
of the Fund's outstanding shares, defined in the Investment Company Act of 1940,
as amended (the '1940  Act'), as the approval  of the lesser of  (i) 67% of  the
Fund's  shares present  at a  meeting if  the holders  of more  than 50%  of the
outstanding shares are present in person or  by proxy, or (ii) more than 50%  of
the Fund's outstanding shares. The Fund may not:
 
          1.  Purchase  securities  on  margin (but  the  Fund  may  obtain such
     short-term credits as may be necessary for the clearance of  transactions);
     the  deposit  or payment  by the  Fund  of initial  or variation  margin in
     connection  with  interest  rate  futures  contracts  or  related   options
     transactions is not considered the purchase of a security on margin.
 
                                       9
 
<PAGE>
--------------------------------------------------------------------------------
 
          2. Make short sales of securities or maintain a short position, except
     short sales 'against the box.'
 
          3.  Borrow money or pledge its assets, except that the Fund may borrow
     money up to 30% of the value of its net assets (not including the amount of
     such borrowings); the Fund may  pledge up to 10% of  the lesser of cost  or
     value of its total assets to secure borrowings for temporary, extraordinary
     purposes,  which borrowings may  not exceed 5%  of the value  of the Fund's
     total assets when the loan is made; and the purchase or sale of  securities
     on a when-issued or delayed delivery basis and collateral arrangements with
     respect  to the writing of options on securities or the purchase or sale of
     futures  contracts,  options  on   futures  contracts  and  other   similar
     instruments are not deemed to be a pledge of assets.
 
          4.   Purchase  any  security  (other  than  obligations  of  the  U.S.
     Government, its agencies, or  instrumentalities) if as  a result: (i)  more
     than  5% of the Fund's total assets  (determined at the time of investment)
     would then be invested in securities of a single issuer, or (ii) more  than
     25% of the Fund's total assets (determined at the time of investment) would
     be invested in a single industry.
 
          5.  Purchase any security if as a result the Fund would then hold more
     than 10% of any class of securities  of an issuer (taking all common  stock
     issues  of an  issuer as a  single class,  all preferred stock  issues as a
     single class, and all debt  issues as a single class)  or more than 10%  of
     the outstanding voting securities of an issuer.
 
          6.  Purchase any security if as a result the Fund would then have more
     than 5% of its total assets (determined at the time of investment) invested
     in securities of companies (including  predecessors) less than three  years
     old  or in  equity securities for  which market quotations  are not readily
     available, except that the  Fund may invest in  the securities of any  U.S.
     Government  agency or  instrumentality, and  in any  security guaranteed by
     such an agency or instrumentality.
 
          7. Invest in  securities of  any issuer if,  to the  knowledge of  the
     Fund,  any officer or director of the Fund, the Fund's administrator or the
     Fund's investment  adviser owns  more than  1/2 of  1% of  the  outstanding
     securities  of such  issuer, and such  officers and directors  who own more
     than 1/2  of 1%  own  in the  aggregate more  than  5% of  the  outstanding
     securities of such issuer.
 
          8.  Buy or sell  commodities or commodity contracts  or real estate or
     interests in real estate; except it may purchase and sell securities  which
     are secured by real estate, securities of companies which invest or deal in
     real  estate, interest rate  futures contracts and  other financial futures
     contracts and options thereon.
 
          9. Act as underwriter  except to the extent  that, in connection  with
     the  disposition  of  portfolio  securities,  it may  be  deemed  to  be an
     underwriter under certain federal securities laws.
 
          10.  Make  investments  for  the  purpose  of  exercising  control  or
     management.
 
          11.  Purchase any security restricted  as to disposition under federal
     securities laws.
 
                                       10
 
<PAGE>
--------------------------------------------------------------------------------
 
          12. Invest  in securities  of other  registered investment  companies,
     except  by purchases in the open  market involving only customary brokerage
     commissions and as a result of which  not more than 5% of its total  assets
     (determined   at  the  time  of  investment)  would  be  invested  in  such
     securities,  or  except  as  part  of  a  merger,  consolidation  or  other
     acquisition.
 
          13.  Invest in interests  in oil, gas or  other mineral exploration or
     development programs.
 
          14. Make loans, except  through (i) repurchase agreements  (repurchase
     agreements  with a maturity of longer than 7 days together with not readily
     marketable assets being limited to 10% of the Fund's total assets) and (ii)
     loans of portfolio securities (limited to 30% of the Fund's total assets).
 
          15. Purchase warrants if as a result of the Fund would then have  more
     than 5% of its total assets (determined at the time of investment) invested
     in warrants.
 
          16.  Write, purchase or  sell puts, calls  or combinations thereof, or
     purchase or sell futures contracts or related options, except that the Fund
     may write put and call options on U.S. Government securities, purchase  put
     and  call options  on U.  S. Government  securities, and  engage in futures
     contracts  and  other  financial  futures  contracts  and  related  options
     transactions.
 
          17.  Issue  senior securities  as defined  in the  Act and  any rules,
     orders and interpretations thereunder,  except insofar as  the Fund may  be
     deemed to have issued senior securities by reason of (a) borrowing money or
     purchasing  securities  on a  when-issued  or delayed  delivery  basis, (b)
     purchasing or selling  futures contracts and  options on futures  contracts
     and other similar instruments and (c) issuing separate classes of shares.
 
                             MANAGEMENT OF THE FUND
 
Information  regarding  the  Directors  and  officers  of  the  Fund,  including
information as  to their  principal business  occupations during  the last  five
years, is listed below. Each Director who is an 'interested person' of the Fund,
as defined in the Act, is indicated by an asterisk.
 
     David  J. Beaubien, 60, Director. Chairman of Yankee Environmental Systems,
Inc., manufacturer of meteorological measuring  systems. Director of IEC,  Inc.,
manufacturer  of electronic assemblies,  Belfort Instruments, Inc., manufacturer
of  environmental  instruments,  and   Oriel  Corp.,  manufacturer  of   optical
instruments.  Prior  to January  1991, Senior  Vice President  of EG&G,  Inc., a
company which  makes  and  provides  a variety  of  scientific  and  technically
oriented  products and  services. Mr.  Beaubien is a  director or  trustee of 12
other investment companies for which Mitchell Hutchins or PaineWebber serves  as
investment adviser.
 
     William  W.  Hewitt,  Jr.,  66, Director.  Trustee  of  The  Guardian Asset
Allocation Fund, The Guardian Baillie  Gifford International Fund, The  Guardian
Bond  Fund, Inc.,  The Guardian  Cash Fund,  Inc., The  Guardian Cash Management
Trust, The  Guardian Park  Ave. Fund,  The  Guardian Stock  Fund, Inc.  and  The
Guardian  U.S. Government Trust. Mr. Hewitt is a director or trustee of 12 other
investment companies  for  which  Mitchell Hutchins  or  PaineWebber  serves  as
investment adviser.
 
                                       11
 
<PAGE>
--------------------------------------------------------------------------------
 
     Thomas  R.  Jordan, 66,  Director. Principal  of The  Dilenschneider Group,
Inc., a corporate  communications and  public policy counseling  firm. Prior  to
January  1992, Senior Vice President of Hill  & Knowlton, a public relations and
public affairs  firm. Prior  to April  1991, President  of The  Jordan Group,  a
management  consulting and strategies development firm. Mr. Jordan is a director
or trustee  of 12  other investment  companies for  which Mitchell  Hutchins  or
PaineWebber serves as investment adviser.
 
     *Frank  P.L. Minard, 49, Director and  President. Mr. Minard is chairman of
Mitchell Hutchins,  chairman of  the board  of Mitchell  Hutchins  Institutional
Investors  Inc. and  a director  of PaineWebber. Prior  to 1993,  Mr. Minard was
managing director of Oppenheimer Capital in New York and Director of Oppenheimer
Capital Ltd.  in  London. Mr.  Minard  is a  director  or trustee  of  26  other
investment  companies  for  which  Mitchell Hutchins  or  PaineWebber  serves as
investment adviser.
 
     Carl W.  Schafer, 59,  Director. President  of the  Atlantic Foundation,  a
charitable  foundation supporting mainly oceanographic exploration and research.
Director of International Agritech  Resources, Inc., an agribusiness  investment
and consulting firm, Ardic Exploration and Development Ltd. and Hidden Lake Gold
Mines  Ltd., gold mining companies, Electronic Clearing House, Inc., a financial
transactions processing  company, Wainoco  Oil  Corporation and  Bio  Techniques
Laboratories Inc., an agricultural biotechnology company. Prior to January 1993,
chairman  of  the Investment  Advisory Committee  of  the Howard  Hughes Medical
Institute and director of Ecova Corporation, a toxic waste treatment firm. Prior
to May 1990, principal of Rockefeller and Company, Inc., manager of investments.
Mr. Schafer is a director or trustee of 12 other investment companies for  which
Mitchell Hutchins or PaineWebber serves as investment adviser.
 
     Dennis L. McCauley, 48, Vice President. Mr. McCauley is a Managing Director
and  Chief Investment  Officer --  Fixed Income  of Mitchell  Hutchins. Prior to
               1994,  he  was  Director  of  Fixed  Income  Investments  of  IBM
Corporation.  Mr.  McCauley  is also  a  vice  president of  8  other investment
companies for  which  Mitchell  Hutchins or  PaineWebber  serves  as  investment
adviser.
 
     Ann  E. Moran, 37, Vice  President and Assistant Treasurer.  Ms. Moran is a
vice president of  Mitchell Hutchins.  Ms. Moran is  also a  vice president  and
assistant treasurer of 39 other investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
 
     Dianne  E. O'Donnell, 42, Vice President  and Secretary. Ms. O'Donnell is a
senior vice president and senior associate general counsel of Mitchell Hutchins.
Ms. O'Donnell is  also a  vice president and  secretary of  39 other  investment
companies  for  which  Mitchell  Hutchins or  PaineWebber  serves  as investment
adviser.
 
     Victoria E.  Schonfeld, 44,  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. Prior to April 1990,  she
was  a partner  in the  law firm  of Shereff,  Friedman, Hoffman  & Goodman. Ms.
Schonfeld is  also  a  vice  president  and  assistant  secretary  of  39  other
investment  companies  for  which  Mitchell Hutchins  or  PaineWebber  serves as
investment adviser.
 
                                       12
 
<PAGE>
--------------------------------------------------------------------------------
 
     Paul H. Schubert, 32, Vice President and Assistant Treasurer. Mr.  Schubert
is  a vice president of  Mitchell Hutchins. From August  1992 to August 1994, he
was a vice  president at  BlackRock Financial  Management L.P.  Prior to  August
1992,  he was an  audit manager with Ernst  & Young LLP. Mr.  Schubert is also a
vice president  and assistant  treasurer of  39 other  investment companies  for
which Mitchell Hutchins or PaineWebber serves as investment adviser.
 
     Nirmal Singh, 38, Vice President. Mr. Singh is a vice president of Mitchell
Hutchins.  Prior to                      1993  he was a  member of the portfolio
management team at  Merrill Lynch  Asset Management. Mr.  Singh is  also a  vice
president  of  2  other  investment companies  for  which  Mitchell  Hutchins or
PaineWebber serves as investment adviser.
 
     Martha J. Slezak, 32, Vice President and Assistant Treasurer. Ms. Slezak is
a vice president of  Mitchell Hutchins. From September  1991 to April 1992,  she
was  a fundraising director for a U.S. Senate campaign. Prior to September 1991,
she was a  tax manager  with Arthur Andersen  & Co.  Ms. Slezak is  also a  vice
president  and assistant  treasurer of 39  other investment  companies for which
Mitchell Hutchins or PaineWebber serves as investment adviser.
 
     Julian F. Sluyters,  34, Vice President  and Treasurer. Mr.  Sluyters is  a
senior  vice 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 39 other
investment companies  for  which  Mitchell Hutchins  or  PaineWebber  serves  as
investment adviser.
 
     Gregory  K. Todd, 38, Vice President and Assistant Secretary. Mr. Todd is a
first vice president and associate  general counsel of Mitchell Hutchins.  Prior
to  1993, he  was a partner  with the law  firm of Shereff,  Friedman, Hoffman &
Goodman. Mr. Todd is also a vice  president and assistant secretary of 39  other
investment  companies  for  which  Mitchell Hutchins  or  PaineWebber  serves as
investment adviser.
 
     The Directors  and officers  of  the Fund  are directors,  trustees  and/or
officers  of other mutual funds managed by Mitchell Hutchins or PaineWebber. The
addresses of the non-interested Trustees are as follows: Mr. Beaubien,  Montague
Industrial  Park,  101 Industrial  Road,  Box 746,  Turner  Falls, Massachusetts
01376; Mr. Hewitt, P.O. Box 2359, Princeton, New Jersey 08543-2359; Mr.  Jordan,
200  Park Avenue,  New York,  New York  10166; and  Mr. Schafer,  P.O. Box 1164,
Princeton, New Jersey 08542. The address of Mr. Minard and each of the  officers
is 1285 Avenue of the Americas, New York, New York 10019.
 
     By  virtue of the management  responsibilities assumed by Mitchell Hutchins
under the Investment Advisory and Administration Agreement, the Fund requires no
executive employees other than its officers,  none of whom devotes full time  to
the  affairs of the Fund. Directors and officers  of the Fund, as a group, owned
less than 1% of the outstanding common stock of each Class of the Fund as of May
1, 1995. The Fund pays each Director who is not an officer, director or employee
of Mitchell Hutchins or any of its affiliates an annual retainer of $1,000,  and
$375  for each Board of Directors  meeting attended, and reimburses the Director
for out-of-pocket expenses  associated with  attendance at  Board meetings.  The
Chairman  of the  Board's audit  committee receives  an annual  fee of  $250. No
officer, director or employee of Mitchell Hutchins or any affiliate receives any
compensation from the Fund for  serving as an officer  or Director of the  Fund.
The amount of compensation paid by the Fund to each Director for the fiscal year
 
                                       13
 
<PAGE>
--------------------------------------------------------------------------------
ended  January 31, 1995, and  the aggregate amount of  compensation paid to each
such Director for the year  ended December 31, 1994 by  all funds in the  former
Kidder Family of Funds for which such person is a Board member were as follows:
 
<TABLE>
<CAPTION>
                                                                                                        (5)
                                                              (3)                                TOTAL COMPENSATION
                                        (2)               PENSION OR               (4)            FROM FUND AND 12
             (1)                     AGGREGATE        RETIREMENT BENEFITS    ESTIMATED ANNUAL     OTHER INVESTMENT
        NAME OF BOARD            COMPENSATION FROM    ACCRUED AS PART OF      BENEFITS UPON       COMPANIES IN THE
            MEMBER                     FUND*             FUND EXPENSES          RETIREMENT         FUND COMPLEX**
------------------------------   -----------------    -------------------    ----------------    ------------------
 
<S>                                <C>                  <C>                    <C>                 <C>
David J. Beaubien                     $ 6,000                 None                 None               $ 80,700
William W. Hewitt, Jr.                $ 6,000                 None                 None               $ 74,425
Thomas R. Jordan                      $ 6,000                 None                 None               $ 83,125
Carl W. Schafer                       $ 6,250                 None                 None               $ 84,575
</TABLE>
 
------------
 
 * There were no reimbursed expenses for attending Board meetings.
 
** Represents  total compensation paid to each Director during the calendar year
   ended December 31, 1994.
 
INVESTMENT ADVISER AND ADMINISTRATOR
 
Mitchell Hutchins  acts as  investment  adviser and  administrator of  the  Fund
pursuant  to an Investment Advisory and Administration Agreement dated April 13,
1995. Subject to the supervision and direction of the Fund's Board of Directors,
Mitchell Hutchins manages  the Fund's  portfolio in accordance  with the  stated
policies  of the Fund. Mitchell Hutchins makes investment decisions for the Fund
and places the purchase and sale orders for portfolio transactions. In addition,
Mitchell Hutchins  pays the  salaries  of all  officers  and employees  who  are
employed  by  both  it  and the  Fund,  maintains  office  facilities, furnishes
statistical and research  data, clerical help  and accounting, data  processing,
bookkeeping,  internal auditing  and legal  services and  certain other services
required by  the Fund,  prepares reports  to shareholders,  tax returns  to  and
filings with the SEC and state Blue Sky authorities and generally assists in all
aspects  of  the  Fund's operations.  Mitchell  Hutchins bears  all  expenses in
connection with the performance of its services.
 
     Expenses incurred in the operation of the Fund, including, but not  limited
to, taxes, interest, brokerage fees and commissions, compensation paid under the
Fund's  shareholder  servicing and  distribution  plans (the  'Plans'),  fees of
Directors who are not officers, directors, stockholders or employees of Mitchell
Hutchins, SEC  fees and  related expenses,  state Blue  Sky qualification  fees,
charges  of the  custodian and  transfer, dividend  disbursing and recordkeeping
agent, charges  and expenses  of any  outside service  used for  pricing of  the
Fund's  portfolio securities and  calculating net asset  value, outside auditing
and legal expenses, and costs of maintenance of corporate existence, shareholder
services, printing of prospectuses and statements of additional information  for
regulatory  purposes or for distribution  to shareholders, shareholders' reports
and corporate meetings, are borne by the Fund.
 
     Mitchell Hutchins has  agreed that if,  in any fiscal  year, the  aggregate
expenses  of the  Fund (including fees  pursuant to the  Investment Advisory and
Administration Agreement but
 
                                       14
 
<PAGE>
excluding interest,  taxes, brokerage  and distribution  fees and  extraordinary
expenses)  exceed the expense  limitation of any  state having jurisdiction over
the Fund, Mitchell  Hutchins will reimburse  the Fund for  such excess  expense.
This  expense reimbursement obligation is not  limited to the amount of Mitchell
Hutchins'  fees.  Such  expense  reimbursement,  if  any,  will  be   estimated,
reconciled and credited on a monthly basis. The Fund believes that currently the
most  stringent state expense limitations are 2 1/2% of the first $30 million of
the average value  of the  Fund's net  assets, 2% of  the next  $70 million  and
1  1/2% of the  remaining net assets  of the Fund.  No expense reimbursement was
required for the fiscal year ended January 31, 1995.
 
     The  Investment  Advisory  and  Administration  Agreement  shall   continue
automatically  for  successive  annual  periods  provided  such  continuance  is
specifically approved at  least annually by  (i) the Board  of Directors of  the
Fund or by (ii) vote by the holders of a majority, as defined in the Act, of the
outstanding  voting securities  of the Fund,  provided that in  either event the
continuance is  also  approved  by a  majority  of  the Directors  who  are  not
'interested  persons,' as defined in the Act,  of the Fund or Mitchell Hutchins,
by vote cast in  person at a meeting  called for the purpose  of voting on  such
approval.  The Investment Advisory and Administration Agreement is terminable at
any time without penalty on 60 days'  written notice, by the Board of  Directors
of  the Fund, or by vote by the  holders of a majority of the outstanding voting
securities of the  Fund, or by  Mitchell Hutchins. The  Investment Advisory  and
Administration  Agreement  will  terminate  automatically in  the  event  of its
assignment.
 
     As compensation for Mitchell Hutchins'  services rendered to the Fund,  the
Fund  pays a fee, computed daily and paid monthly, at an annual rate of .625% of
the Fund's  average daily  net assets.  The fees  paid to  Kidder Peabody  Asset
Management,  Inc., the Fund's predecessor  investment adviser and administrator,
for the fiscal year ended January 31,  1995, from September 1, 1993 through  the
new fiscal year ended January 31, 1994 and for the fiscal years ended August 31,
1993  and  August  31,  1992 were  $407,105,  $224,812,  $564,317  and $595,563,
respectively.
 
     Mitchell Hutchins shall not be liable for any error of judgment or  mistake
of  law or for any loss  suffered by the Fund in  connection with the matters to
which the Investment Advisory and Administration Agreement relates, except for a
loss resulting from willful  misfeasance, bad faith or  gross negligence on  its
part  in the performance of  its duties or from reckless  disregard by it of its
obligations  and  duties  under  the  Investment  Advisory  and   Administration
Agreement.
 
DISTRIBUTOR
 
Mitchell  Hutchins is the  distributor of the  Fund's shares and  is acting on a
best efforts basis. Under the Plans adopted  by the Fund pursuant to Rule  12b-1
under  the Act, the Fund pays Mitchell  Hutchins monthly fees based on the value
of the Fund's average daily net assets attributable to Class A shares and  Class
B shares. Under its terms, each Plan continues from year to year, so long as its
continuance  is  approved annually  by vote  of the  Fund's Board  of Directors,
including a majority of the Directors who are not interested persons of the Fund
and who have no direct  or indirect financial interest  in the operation of  the
Plan  (the 'Independent  Directors'). Neither  Plan may  be amended  to increase
materially the amount to be spent for the services provided by Mitchell Hutchins
with respect to the related Class without approval of that Class'  shareholders,
and  all material amendments of the Plan  also must by approved by the Directors
in the manner described above. A Plan may be terminated with respect to a  Class
at any time,
 
                                       15
 
<PAGE>
without penalty, by vote of a majority of the Independent Directors or by a vote
of  a majority  of the  outstanding voting  securities (as  defined in  the Act)
represented by the Class on  not more than 30  days' written notice to  Mitchell
Hutchins.
 
     Pursuant  to  each Plan,  Mitchell Hutchins  provides  the Fund's  Board of
Directors with  periodic reports  of amounts  expended under  the Plan  and  the
purpose  for which  the expenditures were  made. The Directors  believe that the
Fund's expenditures under  the Plans benefit  the Fund and  its shareholders  by
providing   better  shareholder  services  and  by  facilitating  the  sale  and
distribution of shares.  With respect  to Class A  shares, for  the fiscal  year
ended  January 31,  1995, Kidder,  Peabody, the  Fund's predecessor distributor,
received $310,754, of which it is estimated that $0 was spent on advertising, $0
was spent  on  printing  and  mailing of  prospectuses  to  other  than  current
shareholders,  $149,610 was  spent on commission  credits to  branch offices for
payments of  commissions to  Investment  Executives and  $161,144 was  spent  on
overhead  and other branch office distribution-related expenses. With respect to
Class B shares, for the fiscal year ended January 31, 1995, Kidder, Peabody, the
Fund's predecessor distributor, received $11,650, of which it is estimated  that
$0  was  spent  on  advertising,  $0  was  spent  on  printing  and  mailing  of
prospectuses to other than current shareholders, $5,542 was spent on  commission
credits  to branch offices for payments  of commissions to Investment Executives
and $6,108 was spent  on overhead and  other branch office  distribution-related
expenses.  The  term  'overhead  and  other  branch  office distribution-related
expenses' represents (1) the expenses of operating branch offices in  connection
with  the sale of Fund shares, including  lease costs, the salaries and employee
benefits  of   operations   and   sales  support   personnel,   utility   costs,
communications  costs and the costs of stationery and supplies, (2) the costs of
client sales seminars, (3) travel expenses of mutual fund sales coordinators  to
promote  the sale of Fund  shares and (4) other  incidental expenses relating to
branch promotion of Fund sales.
 
     Prior to implementation of the Choice Pricing SystemSM (effective June  14,
1993),  Kidder, Peabody, the  Fund's predecessor distributor,  also received the
proceeds of contingent deferred  sales charges paid  by investors in  connection
with  certain  redemptions  of  shares.  The  amount  of  distribution  expenses
reimburseable by the Fund was reduced by the amount of these proceeds.
 
CUSTODIAN AND TRANSFER, DIVIDEND DISBURSING AND RECORDKEEPING AGENT
 
State Street Bank and Trust Company ('State Street'), One Heritage Drive,  North
Quincy,  Massachusetts  02171,  serves as  the  Fund's custodian.  PFPC  Inc., a
subsidiary of PNC  Bank, National  Association, whose principal  address is  400
Bellevue  Parkway, Wilmington,  Delaware 19809,  serves as  the Fund's transfer,
dividend  disbursing  and  recordkeeping  agent.  As  custodian,  State   Street
maintains  custody of the  Fund's portfolio securities.  As transfer agent, PFPC
Inc.  maintains  the  Fund's  official  record  of  shareholders,  as   dividend
disbursing  agent, it  is responsible  for crediting  dividends to shareholders'
accounts and,  as  recordkeeping  agent, it  maintains  certain  accounting  and
financial records of the Fund.
 
INDEPENDENT AUDITORS
 
Deloitte  & Touche LLP,  Two World Financial  Center, New York,  New York 10281,
acts as independent auditors for the  Fund. In such capacity, Deloitte &  Touche
LLP audits the Fund's annual financial statements.
 
                                       16
 
<PAGE>
LEGAL COUNSEL
 
Sullivan & Cromwell, 125 Broad Street, New York, New York 10004, acts as counsel
for the Fund.
 
                             PRINCIPAL SHAREHOLDERS
 
To  the knowledge of the Fund, the following  persons owned of record 5% or more
of Class B's shares of common stock on May 5, 1995:


     John P. Wilson, Jr. & Constance McWilliams Wilson, Successor Trustees under
the John P. Wilson,  Sr. Revocable Trust,  10531 Rampart, Cupertino,  California
95014-4524, owned 15.99% of the Class' outstanding shares.



     John P. Wilson, Jr. & Constance McWilliams Wilson, Successor Trustees under
the  Kathleen K.  Wilson Revocable  Trust, 10531  Rampart, Cupertino, California
95014-4524, owned 12.05% of the Class' outstanding shares.

 
     The Fund is not aware whether or to what extent shares owned of record also
are owned beneficially.
 
                      PORTFOLIO TRANSACTIONS AND BROKERAGE
 
Mitchell Hutchins  is responsible  for  decisions to  buy and  sell  securities,
futures  contracts and options on such  securities and futures contracts for the
Fund, the  selection of  brokers, dealers  and futures  commission merchants  to
effect  the transactions and  the negotiation of  brokerage commissions, if any.
Broker-dealers may receive brokerage commissions on Fund portfolio transactions,
including  options,  futures  contracts,   and  options  on  futures   contracts
transactions  and  the  purchase  and sale  of  underlying  securities  upon the
exercise of options.  Orders may  be directed to  any broker  including, to  the
extent  and in the manner permitted by applicable law, PaineWebber. No brokerage
commissions have been incurred  for the fiscal years  ended August 31, 1992  and
August  31,  1993, from  September 1,  1993  through the  new fiscal  year ended
January 31, 1994 and for  the fiscal year ended January  31, 1995 on the  Fund's
securities transactions and transactions with respect to futures and options.
 
     In  the U. S. Government securities market, securities are generally traded
on a 'net' basis with dealers acting as principal for their own accounts without
a stated  commission, although  the price  of the  security usually  includes  a
profit  to the dealer. In underwritten  offerings, securities are purchased at a
fixed price  which  includes  an  amount of  compensation  to  the  underwriter,
generally  referred to as the underwriter's concession or discount. On occasion,
certain money market instruments and agency securities may be purchased directly
from the issuer, in which  case no commissions or  discounts are paid. The  Fund
does  not  deal with  Mitchell  Hutchins in  any  transaction in  which Mitchell
Hutchins acts  as  principal.  Thus,  it  does not  deal  in  U.  S.  Government
securities  with  Mitchell Hutchins  acting  as market  maker,  and it  does not
execute a negotiated trade with Mitchell Hutchins if execution involves Mitchell
Hutchins' acting as principal with respect to any part of the Fund's order.
 
     Portfolio securities may not be purchased from any underwriting or  selling
group  of which  PaineWebber, during  the existence of  the group,  is a member,
except in accordance with  procedures adopted by the  Fund's board of  directors
pursuant to Rule 10f-3 under the 1940 Act.
 
                                       17
 
<PAGE>
This  limitation, in the opinion of the  Fund, does not significantly affect the
Fund's  ability  to   pursue  its  investment   objective.  However,  in   other
circumstances,  the Fund may be at a  disadvantage because of this limitation in
comparison to  other funds  with  similar objectives  but  not subject  to  such
limitations.
 
     In  placing orders for portfolio securities  of the Fund, Mitchell Hutchins
is required to give primary consideration to obtaining the most favorable  price
and  efficient execution. Consistent with the  interests of the Fund and subject
to the review of the Fund's board of directors, Mitchell Hutchins may cause  the
Fund to purchase and sell portfolio securities through brokers which provide the
Fund  with research, analysis,  advice and similar services.  In return for such
services, the Fund  may pay to  those brokers  a higher commission  than may  be
charged  by other  brokers, provided that  Mitchell Hutchins  determines in good
faith that such  commission is  reasonable in  terms either  of that  particular
transaction  or of the  overall responsibility of Mitchell  Hutchins to the Fund
and its other clients and  that the total commissions paid  by the Fund will  be
reasonable  in relation  to the  benefits to  the Fund  over the  long term. 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 these 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
transaction on an agency basis.
 
     Research services  furnished  by  brokers  through  which  a  Fund  effects
securities transactions may be used by Mitchell Hutchins in advising other funds
or accounts and, conversely, research services furnished to Mitchell Hutchins by
brokers in connection with other funds or accounts Mitchell Hutchins advises may
be  used by  Mitchell Hutchins  in advising  the Fund.  Information and research
received from such  brokers will  be in  addition to, and  not in  lieu of,  the
services  required  to  be performed  by  Mitchell Hutchins  under  the Advisory
Contract. For  the fiscal  year ended  January 31,  1995, the  Fund directed  no
portfolio   transactions  to  brokers  chosen  because  they  provided  research
services. The  Fund may  purchase  and sell  portfolio  securities to  and  from
dealers who provide the Fund with research services. Portfolio transactions will
not  be directed by the Fund to dealers solely on the basis of research services
provided. The Fund will not purchase  portfolio securities at a higher price  or
sell  such securities at a lower  price in connection with transactions effected
with a dealer, acting as principal, who furnishes research services to  Mitchell
Hutchins  than would be the case if no weight were given by Mitchell Hutchins to
the dealer's furnishing  of such  services. Research services  furnished by  the
dealers through which or with which the Fund effects securities transactions may
be  used  by  Mitchell  Hutchins  in  advising  other  funds  or  accounts, and,
conversely, research services furnished to Mitchell Hutchins in connection  with
other  funds or accounts that Mitchell Hutchins  advises may be used in advising
the Fund.
 
                                       18
 
<PAGE>
     Subject to the above  considerations, PaineWebber may  act as a  securities
broker  and futures  commission merchant  for the Fund  and the  Fund's Board of
Directors has determined  that any  portfolio transaction  for the  Fund may  be
effected  through PaineWebber. In order for  PaineWebber to effect any portfolio
transactions for the Fund, the commissions, fees or other remuneration  received
by  PaineWebber must be reasonable and fair compared to the commissions, fees or
other  remuneration  paid  to  other  brokers  in  connection  with   comparable
transactions involving similar securities being purchased or sold on an exchange
during  a comparable period of time. This standard allows PaineWebber to receive
no more than  the remuneration  which would  be expected  to be  received by  an
unaffiliated broker in a commensurate arm's-length transaction. Furthermore, the
Board  of Directors of the  Fund, including a majority  of the Directors who are
not 'interested persons,' have adopted procedures which are reasonably  designed
to  provide that any commissions, fees or other remuneration paid to PaineWebber
are consistent with the foregoing standard. The rule and procedures also contain
review requirements  and require  Mitchell Hutchins  to furnish  reports to  the
Board  of Directors  and to  maintain records  in connection  with such reviews.
Brokerage transactions  with  PaineWebber are  also  subject to  such  fiduciary
standards  as  may be  imposed  by applicable  law.  Mitchell Hutchins  does not
participate in commissions from brokerage given by the Fund to other brokers  or
dealers.
 
     Even  though investment decisions for the  Fund are made independently from
those of the  other accounts managed  by Mitchell Hutchins,  investments of  the
kind  made by the Fund may  also be made by those  other accounts. When the Fund
and one or more accounts managed by Mitchell Hutchins are prepared to invest in,
or  desire  to  dispose  of,   the  same  security,  available  investments   or
opportunities  for sales is allocated in  a manner believed by Mitchell Hutchins
to be equitable. In  some cases, this procedure  may adversely affect the  price
paid  or  received by  the Fund  or the  size  of the  position obtained  for or
disposed of by the Fund.
 
OPTIONS TRADING LIMITS
 
The writing by the Fund of options on debt securities is subject to  limitations
established  by each of the Exchanges governing the maximum number of options in
each class which  may be  written by  a single  investor or  group of  investors
acting  in concert, regardless of whether the options are written on the same or
different Exchange or are held or written in one or more accounts or through one
or more brokers. Thus,  the number of  options which the Fund  may write may  be
affected  by options  written by other  investment advisory  clients of Mitchell
Hutchins. An Exchange  may order the  liquidations of positions  found to be  in
excess of these limits, and it may impose certain other sanctions.
 
                              REDEMPTION OF SHARES
 
The  right of redemption may  be suspended or the  date of payment postponed (a)
for any period during which the New  York Stock Exchange (the 'NYSE') is  closed
other  than for customary weekend and holiday  closings, (b) when trading in the
markets the  Fund normally  utilizes is  restricted, or  when an  emergency,  as
defined  by the rules and regulations of the SEC, exists, making disposal of the
Fund's  investments  or  determination  of   net  asset  value  not   reasonably
practicable,  or (c) for  any other periods as  the SEC by  order may permit for
protection of the Fund's shareholders.
 
                                       19
 
<PAGE>
                               EXCHANGE PRIVILEGE
 
As discussed in the Prospectus, eligible shares of the Fund may be exchanged for
shares of  the  corresponding  Class  of  most  other  PaineWebber  or  Mitchell
Hutchins/Kidder,  Peabody 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 the Fund temporarily delays or ceases the sales of its shares
because it is unable to invest amounts effectively in accordance with the Fund's
investment objective, policies and restrictions.
 
                        DETERMINATION OF NET ASSET VALUE
 
The Fund  computes each  Class' net  asset value  once daily  as of  4:00  p.m.,
eastern  time, on  Monday through  Friday, except  that net  asset value  is not
computed on a day in which no orders to purchase, sell, exchange or redeem  Fund
shares  have been received, any day on  which there is not sufficient trading in
the Fund's portfolio securities that the Fund's net asset values per share might
be materially affected by changes in  the value of such portfolio securities  or
on  days on which the NYSE is not open for trading. The NYSE is currently closed
on the  following holidays  (observed): New  Year's Day,  Presidents' Day,  Good
Friday,  Memorial  Day,  Independence  Day,  Labor  Day,  Thanksgiving  Day  and
Christmas Day. If one of these holidays falls on a Saturday or Sunday, the  NYSE
will  be closed on  the preceding Friday or  the following Monday, respectively.
The days on which net  asset value is determined  are the Fund's business  days.
Net  asset value per share of  a Class is computed by  dividing the value of the
Fund's total assets  less liabilities attributable  to that Class  by the  total
number  of  shares outstanding  of  that Class.  The  Fund's expenses  and fees,
including Mitchell Hutchins' fee,  are accrued daily and  taken into account  in
determining net asset value.
 
     In  determining the value of the assets of the Fund, the value of each U.S.
Government security for which quotations are  available is based on the  average
of  the quoted bid and  asked prices as of  the close of the  NYSE. The Board of
Directors has authorized the use of an independent pricing service to  determine
valuations  for normal institutional  size trading units  of securities. Pricing
services consider  such factors  as security  prices, yields,  maturities,  call
features,  ratings and developments relating  to specific securities in arriving
at securities valuations. Options  on U.S. Government  securities are valued  at
their  last sale  price as  of the  close of  options trading  on the applicable
Exchanges. Futures contracts are marked to market daily, and options thereon are
valued at their last sale  price as of the  close of the applicable  commodities
exchanges.
 
     Securities  or other  assets for  which market  quotations are  not readily
available are valued  by appraisal  at their fair  value as  determined in  good
faith by Mitchell Hutchins under procedures established by and under the general
supervision  of  the Fund's  Board  of Directors.  Short-term  investments which
mature in 60 days or less are valued at amortized cost if their original term to
maturity was 60 days or less, or by amortizing their value on the 61st day prior
to maturity if their original term to maturity exceeded 60 days, unless this  is
determined not to represent fair value by the Board of Directors.
 
                                       20
 
<PAGE>
     Short-term  obligations with  maturities of 60  days or less  are valued at
amortized cost, which constitutes fair value  as determined by the Fund's  Board
of Directors. All other securities and other assets of the Fund are appraised at
their fair value as determined in good faith by the Directors.
 
                                     TAXES
 
The  Fund qualified for the  fiscal year ended January  31, 1995 as a 'regulated
investment company' under  the Internal Revenue  Code of 1986,  as amended  (the
'Code') and intends to remain qualified. Qualification as a regulated investment
company results in the Fund's paying no Federal income tax on net income and net
realized  capital  gains  which  it  distributes  to  shareholders,  provided it
distributes at least 90% of its net investment income and net short-term capital
gains for each year. To qualify for  this treatment, the Fund must, among  other
things,  (a) derive  at least  90% of  its annual  gross income  from dividends,
interest, payments with  respect to  securities loans,  gains from  the sale  or
other  disposition of  stock or securities  and other income  (including but not
limited to gains from options and futures contracts) derived with respect to the
Fund's business of investing in such  stock or securities; (b) derive less  than
30%  of its annual gross  income from the sale or  other disposition of stock or
securities or options or futures contracts, held for less than three months; and
(c) diversify its holdings so  that, at the end of  each quarter of the  taxable
year, (i) at least 50% of the value of the Fund's assets is represented by cash,
U.S.  Government securities and  other securities limited in  respect of any one
issuer to an  amount not greater  than 5% of  the Fund's assets  and 10% of  the
outstanding  voting securities of such issuer, and (ii) not more than 25% of the
value of the assets is invested in the securities of any one issuer (other  than
U.S. Government securities).
 
     Gains or losses on sales of securities by the Fund are treated as long-term
capital gains or losses if the securities have been held by it for more than one
year,  except in certain  cases where the Fund  acquires a put  or writes a call
thereon. Other gains or losses on the sale of securities are short-term  capital
gains  or losses. Gains and  losses on the sale  or other termination of futures
contracts or options thereon generally are treated as gains and losses from  the
sale of securities. Certain futures contracts, options on futures contracts, and
options  on  U.S. Government  securities held  by  the Fund  are required  to be
'marked to market' for Federal income  tax purposes, that is, treated as  having
been sold at their fair market value on the last day of the Fund's taxable year.
Any  gain  or  loss  recognized  on actual  or  deemed  sales  of  these futures
contracts,  options  on  futures  contracts,  or  options  on  U.S.   Government
securities  is  treated  60% as  long-term  capital  gain or  loss,  and  40% as
short-term capital  gain  or  loss.  The  Fund may  be  required  to  defer  the
recognition  of losses on securities and futures  contracts to the extent of any
unrecognized gain on offsetting positions held by the Fund.
 
     Special rules  contained in  the Code  apply when  a Fund  shareholder  (1)
disposes  of shares of the Fund through  a redemption or exchange within 90 days
of purchase  and (2)  subsequently  acquires shares  of another  PaineWebber  or
Mitchell  Hutchins/Kidder, Peabody mutual fund on  which a sales charge normally
is imposed  without  paying a  sales  charge  in accordance  with  the  exchange
privilege  described  in  the  Prospectus.  In  these  cases,  any  gain  on the
disposition of the  Fund shares  will be increased,  or loss  decreased, by  the
amount  of the sales charge paid when  the shares were acquired, and that amount
will increase the adjusted  basis of the Fund  shares subsequently acquired.  In
addition,   if   shares  of   the  Fund   are  purchased   within  30   days  of
 
                                       21
 
<PAGE>
redeeming shares at a loss,  the loss, will not  be deductible and instead  will
increase the basis of the newly purchased shares.
 
     The  Fund will generally be subject to an excise tax of 4% of the amount of
any income or capital gain distributed to shareholders on a basis such that such
income or gain is not taxable to  shareholders in the calendar year in which  it
was earned by the Fund.
 
     Investors  should  consider carefully  the  tax implications  of purchasing
shares of the Fund just prior to the declaration of a dividend or capital  gains
distribution. Although a dividend or distribution paid shortly after shares have
been  purchased is  in effect a  return of investment,  it is subject  to tax as
described above.
 
     The Fund may be subject to state or local tax in certain other states where
it is  deemed to  be doing  business. Furthermore,  in those  states which  have
income  tax laws, the tax treatment of the  Fund and of shareholders of the Fund
with respect to distributions by the Fund may differ from Federal tax treatment.
 
     Dividends of net investment income and net short-term capital gains made to
a nonresident alien individual, a  foreign trust or estate, foreign  corporation
or  foreign partnership not engaged in a  trade or business in the United States
will be subject to U.S. withholding tax at a rate of 30% (or lower treaty  rate)
upon the gross amount of the dividend.
 
     Statements  as  to  the  tax status  of  each  shareholder's  dividends and
distributions are mailed annually by the Fund's transfer agent. Shareholders are
urged to  consult their  own tax  advisers regarding  specific questions  as  to
Federal, state or local taxes.
 
                          DETERMINATION OF PERFORMANCE
 
As  noted  in  the  prospectus, the  Fund,  from  time to  time,  may  quote its
performance, in terms of the Classes' yields and/or total returns, in reports or
other communications to shareholders or  in advertising material. To the  extent
any  advertisement or  sales literature  of the  Fund describes  the expenses or
performance of any Class, it will  also disclose this information for the  other
Classes.
 
     The  30-day yield  figure described in  the Prospectus is  calculated for a
Class according to a formula prescribed by the SEC, expressed as follows:
 
                             YIELD = 2[( a-b +1)'pp'6-1]
                                         ---
                                          cd
 
<TABLE>
<S>     <C>     <C> <C>
Where:   a        =  dividends and interest earned during the period.
         b        =  expenses accrued for the period (net of reimbursement).
         c        =  the average daily number of  shares outstanding during the period  that were entitled to  receive
                     dividends.
         d        =  the maximum offering price per share on the last day of the period.
</TABLE>
 
     For  the purposes of  determining the interest earned  (variable 'a' in the
formula) on debt obligations that  were purchased by the  Fund at a discount  or
premium,  the  formula  generally  calls for  amortization  of  the  discount or
premium; the amortization schedule will  be adjusted monthly to reflect  changes
in the market values of the debt obligations.
 
     Investors should recognize that in periods of declining interest rates, the
Fund's  yield will tend to be somewhat  higher than prevailing market rates, and
in periods of rising interest rates
 
                                       22
 
<PAGE>
will tend to be  somewhat lower. In addition,  when interest rates are  falling,
the  inflow of net new money to the  Fund from the continuous sale of its shares
will likely be invested in instruments  producing lower yields than the  balance
of  its portfolio of securities, thereby reducing the current yield of the Fund.
In periods of rising interest rates the opposite can be expected to occur.
 
     A Class' average annual  total return figures  described in the  prospectus
are  computed according to a  formula prescribed by the  SEC. The formula can be
expressed as follows:
 
                                P(1 + T)'pp'n = ERV
 
Where: P    = a hypothetical initial payment of $1,000;
       T    = average annual total return;
       n    = number of years; and
       ERV = Ending Redeemable Value of a hypothetical $1,000 investment made at
             the beginning of a 1-, 5- or 10-year period at the end of a 1-, 5-,
             or  10-year  period  (or  fractional  portion  thereof),   assuming
             reinvestment of all dividends and distributions.
 
     The  ERV assumes complete redemption of  the hypothetical investment at the
end of the measuring period.
 
     Set forth  below  is  performance information  for  the  periods  indicated
expressed as a percentage:
 
<TABLE>
<CAPTION>
                                                  CLASS A SHARES        CLASS B SHARES*    CLASS C SHARES*
                                              ----------------------    ---------------    ---------------
                                                                      30-DAY YIELD
                                              ------------------------------------------------------------
 
<S>                                                 <C>                    <C>                 <C>
30 Days Ended January 31, 1995.............           6.44%                   6.34%              7.09%
</TABLE>
 
<TABLE>
<CAPTION>
                                                              AVERAGE ANNUAL TOTAL RETURN
                                              ------------------------------------------------------------
                                               MAXIMUM SALES CHARGE
                                              ----------------------
                                              INCLUDED      EXCLUDED
                                              --------      --------
 
<S>                                           <C>           <C>           <C>                <C>
Fiscal Year Ended January 31, 1995.........    (6.09)%       (3.95)%        (4.20)%            (3.49)%
5 Years Ended January 31, 1995.............     5.49          5.97            N/A                N/A
Inception (November 22, 1985) through
  January 31, 1995.........................     6.38          6.65            N/A                N/A
Inception (June 14, 1993) through January
  31, 1994.................................      N/A           N/A          (1.32)             (0.60)
</TABLE>
 
     Each  Class' performance will vary from  time to time depending upon market
conditions, the  composition  of  its  portfolio  and  its  operating  expenses.
Consequently,   any  given  performance  quotation   should  not  be  considered
representative of a Class' performance for  any specified period in the  future.
In  addition, because a Class' performance will  fluctuate, it may not provide a
basis for comparing an investment in a Class with certain bank deposits or other
investments that pay a fixed yield for a stated period of time.
 
                                       23
 
<PAGE>
                              GENERAL INFORMATION
 
The Prospectus and this Statement of  Additional Information do not contain  all
the  information  set  forth  in the  Registration  Statement  and  the exhibits
relating thereto, which the Fund has filed with the SEC under the Securities Act
of 1933 and the Act, to which reference is hereby made.
 
                              FINANCIAL STATEMENTS
 
The Fund's Annual Report to Shareholders  for the fiscal year ended January  31,
1995  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.
 
                                       24

<PAGE>
 
<TABLE>
<S>                                                <C>
---------------------------------------------
Contents
---------------------------------------------
Investment Objective and Policies                      2
---------------------------------------------
Management of the Fund                                11
---------------------------------------------
Principal Shareholders                                17
---------------------------------------------
Portfolio Transactions and Brokerage                  17
---------------------------------------------
Redemption of Shares                                  19
---------------------------------------------
Exchange Privilege                                    20
---------------------------------------------
Determination of Net Asset Value                      20
---------------------------------------------
Taxes                                                 21
---------------------------------------------
Determination of Performance                          22
---------------------------------------------
General Information                                   24
---------------------------------------------
Financial Statements                                  24
---------------------------------------------
</TABLE>
 
                                  Mitchell
                                 Hutchins/
                                   Kidder,
                                   Peabody
                                Government
                                    Income
                                     Fund,
                                      Inc.
Statement of
Additional
Information
 
   May 31, 1995


<PAGE>
PAINEWEBBER AND
MITCHELL HUTCHINS/KIDDER, PEABODY MUTUAL FUNDS
 
PAINEWEBBER OFFERS A FAMILY OF 35 MUTUAL FUNDS WHICH ENCOMPASS A DIVERSIFIED
RANGE OF INVESTMENT GOALS. INVESTORS MAY EXCHANGE THEIR FUND SHARES WITH OTHER
FUNDS WITHIN THE FAMILY.
 
INCOME FUNDS
 
 MH/KP Adjustable Rate Government Fund
 
 MH/KP Global Fixed Income Fund
 
 MH/KP Government Income Fund
 
 MH/KP Intermediate Fixed Income Fund
 
 PW Global Income Fund
 
 PW High Income Fund
 
 PW Investment Grade Income Fund
 
 PW Short-Term U.S. Government Income Fund
 PW Short-Term U.S. Government Income Fund for
    Credit Unions
 
 PW Strategic Income Fund
 
 PW U.S. Government Income Fund
 
TAX-FREE INCOME FUNDS
 
 MH/KP Municipal Bond Fund
 
 PW California Tax-Free Income Fund
 
 PW Municipal High Income Fund
 
 PW National Tax-Free Income Fund
 
 PW New York Tax-Free Income Fund
 
GROWTH FUNDS
 
 MH/KP Emerging Markets Equity Fund
 
 MH/KP Global Equity Fund
 
 MH/KP Small Cap Growth Fund
 
 PW Atlas Global Growth Fund
 
 PW Blue Chip Growth Fund
 
 PW Capital Appreciation Fund
 
 PW Communications & Technology Growth Fund
 
 PW Europe Growth Fund
 
 PW Growth Fund
 
 PW Regional Financial Growth Fund
 
 PW Small Cap Value Fund
 
GROWTH AND INCOME FUNDS
 
 MH/KP Asset Allocation Fund
 
 MH/KP Equity Income Fund
 
 PW Asset Allocation Fund
 
 PW Growth and Income Fund
 
 PW Global Energy Fund
 
 PW Global Growth and Income Fund
 
 PW Utility Income Fund
 
PAINEWEBBER MONEY MARKET FUND
            ------------------
 
'c'1995 PAINEWEBBER INCORPORATED
 
[RECYCLED LOGO]
       Printed on
       Recycled Paper
 
          MITCHELL HUTCHINS/
          KIDDER, PEABODY
          GOVERNMENT
          INCOME FUND, INC.
 
ANNUAL REPORT
January 31, 1995

<PAGE>
--------------------------------------------------------------------------------
 
                                                                  March 15, 1995
 
Dear Shareholder,
 
During  the year  ended January  31, 1995,  the United  States economy exhibited
steady growth. In a series of monetary tightenings that began early in 1994, the
Federal Reserve Board raised  the benchmark Federal Funds  rate, the rate  banks
charge  each  other for  overnight  borrowing, six  times  in 1994  for  a total
increase of 2.5%. These increases,  which were implemented to moderate  economic
expansion  and forestall inflation,  triggered stock and  bond market volatility
throughout most of 1994. The Federal Reserve tightened another 0.5% on  February
1, 1995, increasing the Federal Funds rate to 6.0%.
 
Productivity  gains in the workplace and the increased competitiveness of United
States corporations in the global  marketplace contributed to the low  inflation
and  steady growth which characterized the economy during the year ended January
31, 1995. Unemployment continued  to decline, and  retail sales remained  brisk,
sparked  by strengthened  consumer confidence  and an  upward trend  in personal
income. However, side effects of higher  interest rates, including a decline  in
single family housing starts, crept into economic data during the latter half of
1994.  As we move into the new year,  the economy remains healthy -- although it
is not yet clear what impact higher interest rates will have on economic growth.
 
PORTFOLIO REVIEW
 
During the  year ended  January 31,  1995, domestic  fixed income  markets  were
adversely  affected by the increases in  short-term interest rates. As a result,
the Fund's total return  for the twelve months  ended January 31, 1995,  without
deducting  sales charges  was (3.95)%  for Class A  shares, (4.20)%  for Class B
shares and (3.49)% for Class C shares.  The Fund's total return for this  period
after  deducting the  maximum applicable sales  charges was (6.09)%  for Class A
shares, (4.20)%  for  Class  B  shares  and  (3.49)%  for  Class  C  shares.  In
comparison, the Lehman Brothers Mortgage-Backed Securities Index posted a return
of  (0.49)% for  the same period.  The Fund underperformed  primarily because of
differences in portfolio  weighting and a  decrease in the  underlying value  of
current coupon mortgage investments due to rising interest rates.
 
During  the year ended  January 31, 1995,  the Fund paid  distributions from net
investment income totalling $0.78 for Class  A shares, $0.74 for Class B  shares
and $0.84 for Class C shares. 30-day SEC yields at the end of January were 6.44%
for Class A shares, 6.34% for Class B shares and 7.09% for Class C shares.
 
NEW MANAGEMENT
 
Effective February 13, 1995, as a result of an asset purchase transaction by and
among  Kidder, Peabody  Group Inc.,  its parent,  General Electric  Company, and
Paine Webber Group Inc., the investment management for the Fund was  transferred
to  Mitchell  Hutchins  Asset Management  Inc.  ('Mitchell  Hutchins'). Mitchell
Hutchins,  a  wholly  owned  investment  management  subsidiary  of  PaineWebber
Incorporated,  provides investment advisory and portfolio management services to
individuals, pension and endowment funds, trusts and institutions. As of January
31, 1995,  Mitchell  Hutchins  was  adviser  or  sub-adviser  to  36  investment
companies  with 66 separate portfolios and aggregate assets of approximately $22
billion.
 
--------------------------------------------------------------------------------
 
<PAGE>
--------------------------------------------------------------------------------
 
Although  the  name  has  been  changed  to  Mitchell  Hutchins/Kidder,  Peabody
Government Income Fund, Inc., the investment objective remains the same: to seek
high current income. Dennis L. McCauley and Nirmal Singh are jointly responsible
for  the day-to-day portfolio management of the Fund. Mr. McCauley is a Managing
Director  and  Chief  Investment  Officer-Fixed  Income  of  Mitchell   Hutchins
responsible  for  overseeing  all  active  fixed  income  investments, including
domestic and global  taxable and tax-exempt  mutual funds. Mr.  Singh is a  vice
president  of Mitchell  Hutchins responsible  for overseeing  investments in the
mortgage-backed securities section.
 
We are excited by the addition of  the Kidder, Peabody Funds to the  PaineWebber
Funds.  Together, our expanded capabilities should enable us to provide enhanced
investment services to our clients.
 
PORTFOLIO FOCUS
 
During the year ended January 31,  1995, the Fund continued to invest  primarily
in  triple A rated securities. In response to market conditions, the duration of
the portfolio was lengthened  slightly to bring the  portfolio in line with  the
Lehman Brothers Mortgage-Backed Securities Index. The duration of a fixed income
security  is the weighted average  term to maturity of  the present value of its
cashflows, including interest and repayment of principal.
 
Our near term outlook for fixed income markets remains cautiously neutral.  This
posture  is based  on recent economic  developments, including  the Mexican peso
crisis as well  as the Barings  P.L.C. debacle, that  have reconfirmed a  global
preference for safe havens such as the United States and German capital markets.
While  some economic indicators suggest that  the United States' economic growth
has slowed, further Federal Reserve tightening cannot be ruled out.
 
Thank you  for  your  participation in  the  Mitchell  Hutchins/Kidder,  Peabody
Government  Income Fund, Inc. We value you as  a shareholder and as a client and
welcome any comments or questions you may have.
 
Sincerely,
 
<TABLE>
<S>                                                        <C>
FRANK P.L. MINARD                                          DENNIS L. MCCAULEY
FRANK P.L. MINARD                                          DENNIS L. MCCAULEY
Chairman,                                                  Managing Director and Chief Investment
 Mitchell Hutchins Asset Management Inc.                   Officer-Fixed Income,
                                                           Mitchell Hutchins Asset Management Inc.
 
NIRMAL SINGH
NIRMAL SINGH
Portfolio Manager,
 Mitchell Hutchins/Kidder, Peabody
 Government Income Fund, Inc.
</TABLE>
 
--------------------------------------------------------------------------------
                                       2


<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
--------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE FUND
AND THE LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX
 
The  following graph  depicts the  performance of  the Mitchell Hutchins/Kidder,
Peabody Government Income Fund, Inc. versus the Lehman Brothers  Mortgage-Backed
Securities  Index. It is important to note the Mitchell Hutchins/Kidder, Peabody
Government Income Fund, Inc. is a  professionally managed mutual fund while  the
index  is not available for investment and is unmanaged. The comparison is shown
for illustrative purposes only.

                                    [GRAPH]

<TABLE>
<S>                     <C>          <C>         <C>          <C>          <C>          <C>           <C>          <C> 
                          11/22/85    12/31/85    12/31/86     12/31/87     12/31/88     12/31/89     12/31/90     12/31/91
KIDDER GOVT INCOME; A      $10,000     $10,841     $11,597      $11,913      $12,756      $14,397      $15,217      $17,233
LEHMAN MTGE                $10,000     $10,271     $11,650      $12,150      $13,210      $15,237      $15,871      $19,523

                          12/31/92    12/31/93    12/31/94     01/31/95
KIDDER GOVT INCOME; A      $18,328     $19,457     $18,649      $18,931
LEHMAN MTGE                $20,883     $22,312     $21,952      $22,422
</TABLE>

 
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
THE PERFORMANCE OF THE OTHER CLASSES WILL VARY FROM THE PERFORMANCE OF THE CLASS
SHOWN BASED ON  THE DIFFERENCE IN  SALES CHARGES AND  FEES PAID BY  SHAREHOLDERS
INVESTING IN DIFFERENT CLASSES.
 
                             AVERAGE ANNUAL RETURN
 
<TABLE>
<CAPTION>
                                                                 % RETURN WITHOUT
                                                                     DEDUCTING             % RETURN AFTER DEDUCTING
                                                               MAXIMUM SALES CHARGE          MAXIMUM SALES CHARGE
                                                             -------------------------     -------------------------
                                                                       CLASS                         CLASS
                                                             -------------------------     -------------------------
                                                              A*        B**      C***       A*        B**      C***
<S>                                                          <C>       <C>       <C>       <C>       <C>       <C>
--------------------------------------------------------------------------------------------------------------------
Twelve Months Ended 1/31/95                                  (3.95)%   (4.20)%   (3.49)%   (6.09)%   (4.20)%   (3.49)%
--------------------------------------------------------------------------------------------------------------------
Five Years Ended 1/31/95                                      5.97      N/A       N/A       5.49      N/A       N/A
--------------------------------------------------------------------------------------------------------------------
Commencement of Operations Through 1/31/95`D'                 6.65     (1.32)    (0.60)     6.38     (1.32)    (0.60)
--------------------------------------------------------------------------------------------------------------------
</TABLE>
 
 * Maximum  sales charge  for Class  A shares  is 2.25%  of the  public offering
   price. Class A shares bear ongoing 12b-1 service fees.
 
 ** Class B  shares  are  sold  without initial  or  contingent  deferred  sales
    charges, but bear ongoing 12b-1 distribution and service fees.
 
*** Class C shares are sold without initial or contingent deferred sales charges
    and are available exclusively to PaineWebber employees.
 
 `D' Commencement  of operations was  November 22, 1985, June  14, 1993 and June
     14, 1993 for Class A, Class B and Class C shares, respectively.
--------------------------------------------------------------------------------
 
THE INVESTMENT RETURN  AND PRINCIPAL  VALUE OF AN  INVESTMENT IN  THE FUND  WILL
FLUCTUATE,  SO THAT AN  INVESTOR'S SHARES, WHEN  REDEEMED, MAY BE  WORTH MORE OR
LESS THAN THEIR ORIGINAL COST.
 
                                       3


<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
--------------------------------------------------------------------------------
RECENT PERFORMANCE RESULTS (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                                          TOTAL RETURN (1)
                                         NET ASSET VALUE                        ------------------------------------
                             ----------------------------------------             12 MONTHS              6 MONTHS
                             01/31/95        07/31/94        01/31/94           ENDED 01/31/95        ENDED 01/31/95
<S>                          <C>             <C>             <C>                <C>                   <C>
--------------------------------------------------------------------------------------------------------------------
Class A Shares                $13.58          $13.94          $14.93                 (3.95)%               0.23%
--------------------------------------------------------------------------------------------------------------------
Class B Shares                 13.57           13.93           14.92                 (4.20)                0.11
--------------------------------------------------------------------------------------------------------------------
Class C Shares                 13.57           13.93           14.92                 (3.49)                0.48
--------------------------------------------------------------------------------------------------------------------
</TABLE>
 
PERFORMANCE SUMMARY CLASS A SHARES
 
<TABLE>
<CAPTION>
                               NET ASSET VALUE
                           -----------------------        CAPITAL GAINS                                       TOTAL
PERIOD COVERED             BEGINNING        ENDING         DISTRIBUTED         DIVIDENDS PAID (2)          RETURN (1)
<S>                        <C>              <C>           <C>                  <C>                       <C> 
------------------------------------------------------------------------------------------------------------------------
11/22/85 - 12/31/85         $ 15.00         $15.42           $--                    $  .1310                 3.67%
------------------------------------------------------------------------------------------------------------------------
1986                          15.42         15.11              .1600                  1.1662                 6.98
------------------------------------------------------------------------------------------------------------------------
1987                          15.11         14.28              .0980                  1.1227                 2.73
------------------------------------------------------------------------------------------------------------------------
1988                          14.28         14.12             --                      1.1478                 7.07
------------------------------------------------------------------------------------------------------------------------
1989                          14.12         14.70             --                      1.1679                12.88
------------------------------------------------------------------------------------------------------------------------
1990                          14.70         14.27             --                      1.2135                 5.66
------------------------------------------------------------------------------------------------------------------------
1991                          14.27         14.91             --                      1.1740                13.26
------------------------------------------------------------------------------------------------------------------------
1992                          14.91         14.74             --                      1.0786                 6.35
------------------------------------------------------------------------------------------------------------------------
1993                          14.74         14.82             --                       .8221                 6.23
------------------------------------------------------------------------------------------------------------------------
1994                          14.82         13.45             --                       .7613               (4.15)
------------------------------------------------------------------------------------------------------------------------
01/01/95 - 01/31/95           13.45         13.58             --                       .0449                 1.30
------------------------------------------------------------------------------------------------------------------------
                                                  Totals:    $ .2580                $ 9.8300
------------------------------------------------------------------------------------------------------------------------
                                                          CUMULATIVE TOTAL RETURN AS OF 01/31/95:           80.77%
------------------------------------------------------------------------------------------------------------------------
</TABLE>
 
PERFORMANCE SUMMARY CLASS B SHARES
 
<TABLE>
<CAPTION>
                                NET ASSET VALUE
                            -----------------------        CAPITAL GAINS                                      TOTAL
PERIOD COVERED              BEGINNING        ENDING         DISTRIBUTED         DIVIDENDS PAID(2)          RETURN (1)
<S>                         <C>              <C>           <C>                  <C>                      <C> 
------------------------------------------------------------------------------------------------------------------------
06/14/93 - 12/31/93          $ 15.00         $14.82           $--                    $ .3480                 1.15%
------------------------------------------------------------------------------------------------------------------------
1994                           14.82         13.45             --                      .7245                (4.40)
------------------------------------------------------------------------------------------------------------------------
01/01/95 - 01/31/95            13.45         13.57             --                      .0431                 1.21
------------------------------------------------------------------------------------------------------------------------
                                                   Totals:    $--                    $1.1156
------------------------------------------------------------------------------------------------------------------------
                                                          CUMULATIVE TOTAL RETURN AS OF 01/31/95:           (2.15)%
------------------------------------------------------------------------------------------------------------------------
</TABLE>
 
PERFORMANCE SUMMARY CLASS C SHARES
 
<TABLE>
<CAPTION>
                                NET ASSET VALUE
                            -----------------------        CAPITAL GAINS                                      TOTAL
PERIOD COVERED              BEGINNING        ENDING         DISTRIBUTED         DIVIDENDS PAID(2)          RETURN (1)
<S>                         <C>              <C>           <C>                  <C>                      <C> 
------------------------------------------------------------------------------------------------------------------------
06/14/93 - 12/31/93          $ 15.00         $14.82           $--                    $ .4079                 1.53%
------------------------------------------------------------------------------------------------------------------------
1994                           14.82         13.45             --                      .8293               (3.68)
------------------------------------------------------------------------------------------------------------------------
01/01/95 - 01/31/95            13.45         13.57             --                      .0483                 1.25
------------------------------------------------------------------------------------------------------------------------
                                                   Totals:    $--                    $1.2855
------------------------------------------------------------------------------------------------------------------------
                                                          CUMULATIVE TOTAL RETURN AS OF 01/31/95:           (0.98)%
------------------------------------------------------------------------------------------------------------------------
</TABLE>
 
(1) Figures assume reinvestment of all dividends and capital gains distributions
    at  net asset value on the payable  dates, and do not include sales charges;
    results for Class A would be lower if sales charges were included.
(2) Certain distributions may contain short-term capital gains.
 
                                       4


<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
--------------------------------------------------------------------------------
Portfolio of Investments
January 31, 1995
--------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
 Principal
  Amount                                                                   Maturity           Interest
  (000's)                                                                    Dates             Rates          Value
-----------                                                        -------------------------  --------     -----------
<C>          <S>                                                   <C>                        <C>          <C>
FEDERAL NATIONAL MORTGAGE ASSOCIATION CERTIFICATES -- 37.8%
    $10,089  FNMA................................................    04/01/2017-08/01/2024       7.50%     $ 9,597,576
      9,613  FNMA................................................    03/01/2022-05/01/2024       8.00        9,372,970
                                                                                                           -----------
Total Federal National Mortgage Association Certificates
    (Cost -- $19,580,819)........................................                                           18,970,546
                                                                                                           -----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES -- 48.4%
      9,063  GNMA................................................    12/15/2021-10/15/2024       8.00        8,822,608
     15,120  GNMA................................................    09/15/2024-10/15/2024       8.50       15,110,401
         76  GNMA................................................    09/15/2015-11/15/2019      10.00           81,265
        236  GNMA................................................    09/15/2014-02/15/2016      10.50          255,253
                                                                                                           -----------
Total Government National Mortgage Association Certificates
    (Cost -- $24,301,386)........................................                                           24,269,527
                                                                                                           -----------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 2.2%
     22,296  Donaldson, Lufkin & Jenrette Mtg. Acceptance Corp.
               (Cost -- $1,528,301)..............................         07/25/2023            2.113*       1,086,929
                                                                                                           -----------
REPURCHASE AGREEMENT -- 11.6%
      5,800  Morgan Stanley, dated 01/31/1995, collateralized by
               $5,835,000 U.S. Treasury Notes, 7.875%, due
               7/15/96; proceeds: $5,800,931
               (Cost -- $5,800,000)..............................         02/01/1995             5.78        5,800,000
                                                                                                           -----------
Total Investments (Cost -- $51,210,506) -- 100.0%................                                           50,127,002
 
Liabilities in excess of other assets............................                                              (2,441)
                                                                                                           -----------
Net Assets -- 100.0%.............................................                                          $50,124,561
                                                                                                           -----------
                                                                                                           -----------
</TABLE>
 
------------------
 
* Adjustable  rate interest only security. This  security entitles the holder to
  receive interest  payments from  an  underlying pool  of mortgages.  The  risk
  associated  with this security is related  to the speed of principal paydowns.
  High prepayments would result in a  smaller amount of interest being  received
  and  cause the yield  to decrease. Low  prepayments would result  in a greater
  amount of interest being received and cause the yield to increase.
 
                 See accompanying notes to financial statements
 
                                       5

<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
--------------------------------------------------------------------------------
Statement of Assets and Liabilities
January 31, 1995
--------------------------------------------------------------------------------
 
<TABLE>
<S>                                                                                                    <C>
ASSETS
    Investments in securities, at value (cost -- $51,210,506).......................................   $50,127,002
    Cash............................................................................................        73,649
    Interest receivable.............................................................................       327,073
    Receivable for common stock sold................................................................           500
    Other...........................................................................................        66,338
                                                                                                       -----------
        Total assets................................................................................    50,594,562
                                                                                                       -----------
LIABILITIES
    Payable for common stock repurchased............................................................       274,734
    Dividends payable...............................................................................       107,670
    Payable to affiliate............................................................................        47,489
    Accrued expenses and other......................................................................        40,108
                                                                                                       -----------
        Total liabilities...........................................................................       470,001
                                                                                                       -----------
NET ASSETS
    Aggregate paid-in-capital -- $0.01 par value....................................................   $60,877,775
    Accumulated net realized capital losses from investment activities..............................    (9,669,710)
    Net unrealized depreciation of investments......................................................    (1,083,504)
                                                                                                       -----------
    Net assets applicable to shares outstanding.....................................................   $50,124,561
                                                                                                       -----------
                                                                                                       -----------
CLASS A:
    Net assets......................................................................................   $44,984,779
                                                                                                       -----------
    Shares outstanding..............................................................................     3,313,196
                                                                                                       -----------
    Net asset value and redemption value per share..................................................        $13.58
                                                                                                       -----------
                                                                                                       -----------
    Maximum offering price per share (net asset value plus sales charge
      of 2.25% of offering price)...................................................................        $13.89
                                                                                                       -----------
                                                                                                       -----------
CLASS B:
    Net assets......................................................................................   $ 1,279,684
                                                                                                       -----------
    Shares outstanding..............................................................................        94,291
                                                                                                       -----------
 
    Net asset value, offering price and redemption value per share..................................        $13.57
                                                                                                       -----------
                                                                                                       -----------
CLASS C:
    Net assets......................................................................................   $ 3,860,098
                                                                                                       -----------
    Shares outstanding..............................................................................       284,478
                                                                                                       -----------
 
    Net asset value, offering price and redemption value per share..................................        $13.57
                                                                                                       -----------
                                                                                                       -----------
</TABLE>
 
                 See accompanying notes to financial statements
 
                                       6
 
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
--------------------------------------------------------------------------------
Statement of Operations
For the Year Ended January 31, 1995
--------------------------------------------------------------------------------
 
<TABLE>
<S>                                                                                                     <C>
INVESTMENT INCOME:
    Interest.........................................................................................   $4,612,000
                                                                                                        ----------
EXPENSES:
    Investment advisory and administration...........................................................      407,105
    Service and distribution fees -- Class A.........................................................      295,530
    Service and distribution fees -- Class B.........................................................       11,183
    Transfer agency and service fees.................................................................       54,413
    Federal and state registration fees..............................................................       47,914
    Reports and notices to shareholders..............................................................       44,371
    Custody and accounting fees......................................................................       37,927
    Directors' fees and expenses.....................................................................       22,364
    Legal and audit fees.............................................................................       22,205
    Amortization of organization expenses............................................................       18,441
    Other............................................................................................       12,186
                                                                                                        ----------
    Total expenses...................................................................................      973,639
                                                                                                        ----------
NET INVESTMENT INCOME................................................................................    3,638,361
                                                                                                        ----------
REALIZED AND UNREALIZED LOSSES FROM INVESTMENT ACTIVITIES:
    Net realized losses from investment activities...................................................   (4,973,951)
    Net change in unrealized appreciation/depreciation of investments................................   (1,972,889)
                                                                                                        ----------
NET REALIZED AND UNREALIZED LOSSES FROM INVESTMENT ACTIVITIES........................................   (6,946,840)
                                                                                                        ----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................................   ($3,308,479)
                                                                                                        ----------
                                                                                                        ----------
</TABLE>
 
                 See accompanying notes to financial statements
 
                                       7
 
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
--------------------------------------------------------------------------------
Statements of Changes in Net Assets
--------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                                                               Year Ended       Five Months Ended
                                                                            January 31, 1995    January 31, 1994
                                                                            ----------------    -----------------
<S>                                                                         <C>                 <C>
FROM OPERATIONS:
    Net investment income................................................     $  3,638,361        $   1,420,972
    Net realized gains (losses) on investment activities.................       (4,973,951)             699,037
    Net change in unrealized appreciation/depreciation of investments....       (1,972,889)          (1,104,690)
                                                                            ----------------    -----------------
    Net increase (decrease) in net assets resulting from operations......       (3,308,479)           1,015,319
                                                                            ----------------    -----------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
    Net investment income -- Class A.....................................       (3,309,531)          (1,349,922)
    Net investment income -- Class B.....................................          (79,144)             (22,796)
    Net investment income -- Class C.....................................         (249,686)             (48,254)
                                                                            ----------------    -----------------
    Total distributions from net investment income.......................       (3,638,361)          (1,420,972)
                                                                            ----------------    -----------------
FROM COMMON STOCK TRANSACTIONS:
    Net proceeds from the sale of shares.................................        4,765,260            4,702,768
    Cost of shares repurchased...........................................      (30,984,562)         (13,306,509)
    Proceeds from distributions reinvested...............................        2,706,257            1,047,430
                                                                            ----------------    -----------------
    Net decrease in net assets from common stock transactions............      (23,513,045)          (7,556,311)
                                                                            ----------------    -----------------
    Total decrease in net assets.........................................      (30,459,885)          (7,961,964)
                                                                            ----------------    -----------------
NET ASSETS:
    Beginning of period..................................................       80,584,446           88,546,410
                                                                            ----------------    -----------------
    End of period........................................................     $ 50,124,561        $  80,584,446
                                                                            ----------------    -----------------
                                                                            ----------------    -----------------
</TABLE>
 
                 See accompanying notes to financial statements
 
                                       8


<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
--------------------------------------------------------------------------------
Notes to Financial Statements
--------------------------------------------------------------------------------
 
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
 
     Mitchell  Hutchins/Kidder, Peabody  Government Income  Fund, Inc. (formerly
Kidder, Peabody Government Income Fund,  Inc.) (the 'Fund') is registered  under
the  Investment  Company Act  of 1940,  as amended,  as a  diversified, open-end
investment company.
 
     Effective September 1,  1993, the  Fund changed  its fiscal  year end  from
August 31 to January 31.
 
     Organizational  Matters --  On June  14, 1993  the Fund  adopted the Choice
Pricing System'sm'. Prior to June 14, 1993, the Fund issued only Class A shares;
subsequent  to that date  the Fund issued Class  A, Class B  and Class C shares.
Each class represents interests in the same  assets of the Fund and the  classes
are identical except for differences in their sales charge structure and ongoing
service  and distribution charges. All classes of shares have equal rights as to
voting privileges,  except that  each  class has  exclusive voting  rights  with
respect to its distribution plan.
 
     Valuation  of Investments -- The value of each U.S. Government security for
which quotations are available  is based on  the average of  the quoted bid  and
asked prices. An independent pricing service is used to determine valuations for
normal  institutional-size trading units of securities. Options which are traded
on exchanges  are valued  at their  last sales  price as  of the  close of  such
exchanges.  Futures are valued daily using the  last sales price as of the close
of trading on the Chicago Board of Trade. Short-term obligations with maturities
of 60 days or less are valued at  amortized cost. The ability of the issuers  of
the  debt securities held by the Fund  to meet their obligations may be affected
by economic developments, including those  particular to a specific industry  or
region.
 
     Repurchase   Agreements  --  The  Fund's   custodian  takes  possession  of
securities under  repurchase  agreements  before  releasing  any  money  to  the
counterparty  under such agreement. Eligible collateral for repurchase agreement
transactions are  the instruments  that the  Fund is  allowed to  invest in,  as
stated  in the Prospectus. The value of the collateral underlying the repurchase
agreement is  always at  least  equal to  the  repurchase price,  including  any
accrued  interest earned on the repurchase agreement. If the issuer defaults, or
if bankruptcy  or  regulatory proceedings  are  commenced with  respect  to  the
issuer, the realization of the proceeds may be delayed or limited.
 
     Investment  Transactions and  Investment Income  -- Investment transactions
are recorded as of the trade date.  Realized gains and losses are determined  on
the identified cost basis. Interest income is earned from settlement date and is
recognized  on an accrual basis. Income and Fund-level expenses are allocated to
each class on a pro-rata basis based upon each class' daily settled net  assets.
Class-specific  expenses are charged directly to  each class. Dividends from net
investment income are  calculated daily  based upon the  respective classes  net
investment  income. Distributions  from net  realized gains  are allocated based
upon the outstanding shares of each class.
 
                                       9
 
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
--------------------------------------------------------------------------------
Notes to Financial Statements --  (continued)
--------------------------------------------------------------------------------
 
     Federal Tax Status -- It  is the Fund's policy  to continue to comply  with
the requirements of the Internal Revenue Code applicable to regulated investment
companies  and  to distribute  substantially all  of its  taxable income  to its
shareholders. Accordingly,  no  Federal income  tax  provision is  required.  In
addition, by distributing during each calendar year substantially all of its net
investment  income, capital  gains and certain  other amounts, if  any, the Fund
intends not to be subject to a Federal excise tax.
 
     At January  31, 1995,  the Fund  had  a net  capital loss  carryforward  of
$9,669,710.  The loss  carryforward is available  as a reduction,  to the extent
provided in the  regulations, of  future net  realized capital  gains, and  will
expire between January 31, 1998 and January 31, 2003.
 
     Dividends  and Distributions -- Dividends and distributions to shareholders
are recorded on  the ex-dividend date.  The Fund declares  dividends on a  daily
basis from net investment income. Net capital gains, if any, will be distributed
at  least annually, but  the Fund may  make more frequent  distributions of such
gains, if necessary, to  avoid income or excise  taxes. The amount of  dividends
and   distributions  are  determined  in  accordance  with  federal  income  tax
regulations, which  may differ  from generally  accepted accounting  principles.
These  'book/tax' differences  are considered  either temporary  or permanent in
nature. To the extent  these differences are permanent  in nature, such  amounts
are  reclassified within the  capital accounts based  on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends  and
distributions  that exceed net investment income  and net realized capital gains
for financial  reporting purposes  but  not for  tax  purposes are  reported  as
dividends  in excess of net investment income  or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and  net
realized  capital gains for tax purposes,  they are reported as distributions of
paid-in-capital.
 
     Option Writing/Purchasing -- When the Fund writes a call or put option,  an
amount  equal to  the premium  received is included  in the  Fund's statement of
assets and liabilities as  an asset and an  equivalent liability. The amount  of
the  liability is subsequently 'marked to  market' to reflect the current market
value of the option written. If an option which the Fund has written expires  on
its  stipulated date,  the Fund  realizes a  gain in  the amount  of the premium
originally received, and the liability  related to such option is  extinguished.
If  the Fund enters into  a closing purchase transaction,  it realizes a gain or
loss determined by the difference between  the premium received and the cost  of
the  closing  transaction.  If a  call  option  which the  Fund  has  written is
exercised, the Fund  realizes a gain  or loss  from the sale  of the  underlying
security and the proceeds from such sale are increased by the premium originally
received. If a put option which the Fund has written is exercised, the amount of
the  premium originally received reduces the cost  of the security that the Fund
purchases upon exercise of the option. As the writer of an option, the Fund  may
have  no control  over whether  the underlying  securities are  sold (called) or
purchased (put) and as a result bears  the market risk of an unfavorable  change
in price of the security underlying the written option.
 
                                       10
 
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
--------------------------------------------------------------------------------
Notes to Financial Statements --  (continued)
--------------------------------------------------------------------------------
 
     The  premium paid by the Fund  for the purchase of a  call or put option is
included in the Fund's statement of assets and liabilities as an investment  and
subsequently  'marked  to market'  to reflect  the current  market value  of the
option purchased. If a call or put  option which the Fund has purchased  expires
on the stipulated expiration date, the Fund realizes a loss in the amount of the
cost  of the  option. If  the Fund  enters into  a closing  sale transaction, it
realizes a gain or  loss, depending on  whether the proceeds  from the sale  are
greater or less than the cost of the option. If the Fund exercises a put option,
it  realizes a  gain or loss  from the sale  of the underlying  security and the
proceeds from such  sale are decreased  by the premium  originally paid. If  the
Fund  exercises a call option, the cost  of the security that the Fund purchases
upon exercise is increased by the premium originally paid.
 
     Futures Contracts -- A futures contract is an agreement between two parties
to buy and  sell a security  for a set  price on a  future date. Initial  margin
deposits are made upon entering into futures contracts and can be either cash or
securities. During the period the futures contract is open, changes in the value
of  the contract  are recognized  as unrealized gains  or losses  by 'marking to
market' on a daily basis to reflect the market value of the contract at the  end
of each day's trading. Variation margin payments are made or received, depending
upon  whether  unrealized gains  or losses  are incurred.  When the  contract is
closed, the Fund records a realized gain or loss equal to the difference between
the proceeds from (or cost of) the  closing transaction and the Fund's basis  in
the contract.
 
     The  Fund invests in financial futures  contracts solely for the purpose of
hedging its existing portfolio securities  against fluctuations in value  caused
by  changes  in prevailing  market interest  rates.  Should interest  rates move
unexpectedly, the Fund may not achieve the anticipated benefits of the financial
futures contracts  and may  realize  a loss.  The  use of  futures  transactions
involves  the  risk of  imperfect  correlation in  the  movement of  the futures
contracts and the underlying hedged asset.
 
INVESTMENT ADVISER AND ADMINISTRATOR
 
     The Fund  has  entered  into  an  Investment  Advisory  and  Administration
Agreement  with Kidder Peabody  Asset Management, Inc.  ('KPAM'), a wholly owned
subsidiary of Kidder, Peabody & Co. Incorporated ('KP') (see 'Subsequent Events'
below). General Electric  Capital Services, Inc.,  a wholly-owned subsidiary  of
General  Electric Company ('GE'),  has a 100% interest  in Kidder, Peabody Group
Inc. ('Kidder Group'),  the parent  company of  KP. Fees  paid by  the Fund  for
investment  advisory  and  administration  services  are  payable  monthly,  and
calculated and accrued daily by applying an annual rate of .625 of 1% to the net
assets of the Fund, determined at the close of business each day. At January 31,
1995, the Fund owed KPAM $27,109 for investment advisory fees.
 
     In compliance with applicable state securities laws, the Fund's  investment
adviser  will  reimburse  the Fund  if  and  to the  extent  that  the aggregate
operating expenses in any fiscal year,
 
                                       11
 
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
--------------------------------------------------------------------------------
Notes to Financial Statements --  (continued)
--------------------------------------------------------------------------------
exclusive  of   taxes,  interest,   brokerage   fees,  distribution   fees   and
extraordinary expenses, exceed limitations imposed by various state regulations.
Currently, the most restrictive limitation applicable to the Fund is 2.5% of the
first  $30 million of average daily net assets, 2.0% of the next $70 million and
1.5% of any excess over $100 million. No expense reimbursement was required  for
the year ended January 31, 1995.
 
DISTRIBUTION PLANS
 
     KP  is  the exclusive  distributor of  the  Fund's shares  (see 'Subsequent
Events' below). Under separate  plans of distribution, Class  A shares are  sold
subject to a front-end sales load and bear a distribution fee of 0.25% per annum
and  a service fee of 0.25% per annum of the lesser of (i) aggregate gross sales
of the  Class A  shares  since its  inception  (not including  reinvestments  of
dividends  or  capital gains  distributions),  less aggregate  redemptions since
inception on which a contingent deferred sales charge has been paid or waived or
(ii) the average daily net assets attributable to Class A shares. Class B shares
are sold at net asset value without a sales load and bear a distribution fee  of
0.50%  per annum  and a  service fee  of 0.25%  per annum  of average  class net
assets. The Fund  pays KP  the service and  distribution fees  monthly. KP  also
receives  the proceeds of any front-end sales loads with respect to the purchase
of Class A shares. At January 31, 1995, the Fund owed KP $20,380 in service  and
distribution fees.
 
INVESTMENTS IN SECURITIES
 
     For  federal income tax  purposes, the cost of  securities owned at January
31, 1995 was  substantially the  same as the  cost of  securities for  financial
statement purposes.
 
     At  January 31, 1995, the components  of the net unrealized depreciation of
investments were as follows:
 
<TABLE>
<S>                                                                              <C>
Gross depreciation (investments having an excess of cost over value)..........   $(1,134,409)
Gross appreciation (investments having an excess of value over cost)..........        50,905
                                                                                 -----------
Net unrealized depreciation of investments....................................   $(1,083,504)
                                                                                 -----------
                                                                                 -----------
</TABLE>
 
     For the year ended January 31, 1995, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were as follows:
 
<TABLE>
<S>                                                                     <C>
Purchases............................................................   $245,380,388
Sales................................................................   $263,243,681
</TABLE>
 
                                       12
 
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
--------------------------------------------------------------------------------
Notes to Financial Statements --  (concluded)
--------------------------------------------------------------------------------
 
SHARES OF COMMON STOCK
     At January 31, 1995, there  were 500,000,000 shares, consisting of  several
classes,  of $.01 par  value common stock authorized.  Transactions in shares of
common stock were as follows:
 
<TABLE>
<CAPTION>
                                                  Class A                    Class B                 Class C
                                         --------------------------   ---------------------   ----------------------
                                           Shares         Amount      Shares       Amount      Shares       Amount
                                         ----------    ------------   -------    ----------   --------    ----------
<S>                                      <C>           <C>            <C>        <C>          <C>         <C>
Year ended January 31, 1995:
Shares sold.............................    154,271    $  2,160,857    27,481    $  389,801    158,331    $2,214,602
Shares issued in reinvestment of
  dividends and distributions...........    173,778       2,408,464     5,144        71,137     16,434       226,656
Shares repurchased...................... (2,056,749)    (28,426,526)  (48,732)     (678,196)  (136,770)   (1,879,840)
                                         ----------    ------------   -------    ----------   --------    ----------
    Net increase (decrease)............. (1,728,700)   $(23,857,205)  (16,107)   $ (217,258)    37,995    $  561,418
                                         ----------    ------------   -------    ----------   --------    ----------
                                         ----------    ------------   -------    ----------   --------    ----------
Five months ended January 31, 1994:
Shares sold.............................     81,186    $  1,211,457    80,178    $1,197,599    154,132    $2,293,712
Shares issued in reinvestment of
  dividends and distributions...........     66,104         985,316     1,363        20,300      2,808        41,814
Shares repurchased......................   (804,007)    (11,994,039)  (45,310)     (676,265)   (42,643)     (636,205)
                                         ----------    ------------   -------    ----------   --------    ----------
    Net increase (decrease).............   (656,717)   $ (9,797,266)   36,231    $  541,634    114,297    $1,699,321
                                         ----------    ------------   -------    ----------   --------    ----------
                                         ----------    ------------   -------    ----------   --------    ----------
</TABLE>
 
SUBSEQUENT EVENTS
     Effective February 13, 1995, as a  result of an asset purchase  transaction
by  and among Kidder  Group, its parent,  GE, and Paine  Webber Group Inc., ('PW
Group'), the investment  management for  the Fund  has been  transferred, on  an
interim  basis, from KPAM to Mitchell  Hutchins Asset Management Inc. ('Mitchell
Hutchins'). Mitchell Hutchins is a wholly owned investment management subsidiary
of PaineWebber Incorporated, which  is in turn a  wholly owned subsidiary of  PW
Group.  During  the interim  period, Mitchell  Hutchins will  provide investment
management services to the Fund pursuant to  a contract that has the same  terms
and conditions as the prior investment management agreement between the Fund and
KPAM.  Fees paid  by the  Fund for  investment management  and advisory services
during the interim  period will  be paid  into escrow  and, if  approved by  the
shareholders,  will be paid  over to Mitchell  Hutchins. A special shareholders'
meeting is expected to occur on March 31, 1995.
 
     At the special shareholders' meeting, it is proposed that Mitchell Hutchins
be appointed  as  investment adviser  and  administrator  of the  Fund.  If  the
shareholders  approve Mitchell Hutchins as  investment adviser and administrator
for the Fund,  Mitchell Hutchins  would continue to  manage the  Fund by  making
investment  decisions  based on  the Fund's  investment objective,  policies and
restrictions. During  the interim  period and  thereafter, assuming  shareholder
approval,  Mitchell Hutchins will  receive the same  fees previously received by
KPAM as described in the footnote above.
 
     Also effective February 13,  1995, Mitchell Hutchins  serves as the  Fund's
distributor  pursuant to arrangements described  in the footnote above. Finally,
effective  February  13,  1995,  the  Fund's  name  was  changed  to   'Mitchell
Hutchins/Kidder, Peabody Government Income Fund, Inc.'
 
                                       13

<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
--------------------------------------------------------------------------------
Financial Highlights
--------------------------------------------------------------------------------
 
     Selected data for a share of common stock outstanding is presented below:
 
<TABLE>
<CAPTION>
                                                                          CLASS A
                                     ---------------------------------------------------------------------------------
                                                                                          FIVE MONTHS         YEAR
                                             FOR THE YEARS ENDED AUGUST 31,                  ENDED            ENDED
                                     -----------------------------------------------      JANUARY 31,      JANUARY 31,
                                       1990         1991         1992         1993           1994             1995
                                     --------      -------      -------      -------      -----------      -----------
<S>                                  <C>           <C>          <C>          <C>          <C>              <C>
Net asset value, beginning of
  period........................       $14.43       $14.21       $14.58       $14.88         $15.00           $14.93
                                     --------      -------      -------      -------      ---------        ---------
Net increase (decrease) from
  investment operations:
Net investment income...........         1.20         1.18         1.13         0.97           0.25             0.78
Net realized and unrealized
  gains (losses) on
  investments...................        (0.22)        0.37         0.30         0.12          (0.07)           (1.35)
                                     --------      -------      -------      -------      ---------        ---------
Net increase (decrease) in net
  asset value from investment
  operations....................         0.98         1.55         1.43         1.09           0.18            (0.57)
                                     --------      -------      -------      -------      ---------        ---------
 
Less Distributions:
Dividends from net investment
  income........................        (1.20)       (1.18)       (1.13)       (0.97)         (0.25)           (0.78)
                                     --------      -------      -------      -------      ---------        ---------
Net asset value, end of
  period........................       $14.21       $14.58       $14.88       $15.00         $14.93           $13.58
                                     --------      -------      -------      -------      ---------        ---------
                                     --------      -------      -------      -------      ---------        ---------
Total investment return#........         6.98%       11.41%       10.13%        7.70%          1.20%           (3.95)%
                                     --------      -------      -------      -------      ---------        ---------
                                     --------      -------      -------      -------      ---------        ---------
 
Ratios/Supplemental Data:
Net assets, end of period (in
  thousands)....................     $100,148      $96,920      $91,955      $85,453        $75,260          $44,985
Ratios of expenses to average
  net assets....................         1.40%        1.23%        1.18%        1.23%          1.56%*           1.53%
Ratios of net investment income
  to average net assets.........         8.33%        8.29%        7.67%        6.38%          4.02%*           5.57%
Portfolio turnover..............       142.98%        3.27%       74.95%      138.77%        126.76%          255.76%
</TABLE>
 
------------
 
`D' From June 14, 1993 (commencement of offering of shares) to August 31, 1993.
 
* Annualized
 
# Total  investment return  is calculated  assuming a  $1,000 investment  on the
  first day of each period reported, reinvestment of all dividends at net  asset
  value  on the payable dates, and a sale at  net asset value on the last day of
  each period reported.  The figures do  not include sales  charges; results  of
  Class  A would  be lower  if sales  charges were  included. Total  returns for
  periods of less than one year have not been annualized.
 
                                       14
 
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                 CLASS B                                        CLASS C
------------------------------------------     ------------------------------------------
  PERIOD       FIVE MONTHS        YEAR           PERIOD       FIVE MONTHS        YEAR
  ENDED           ENDED           ENDED          ENDED           ENDED           ENDED
AUGUST 31,     JANUARY 31,     JANUARY 31,     AUGUST 31,     JANUARY 31,     JANUARY 31,
 1993`D'          1994            1995          1993`D'          1994            1995
----------     -----------     -----------     ----------     -----------     -----------
<S>            <C>             <C>             <C>            <C>             <C>
   $15.00         $14.99          $14.92          $15.00         $14.99          $14.92
---------      ---------       ---------       ---------      ---------       ---------
 
     0.17           0.23            0.74            0.20           0.28            0.84

    (0.01)         (0.07)          (1.35)          (0.01)         (0.07)          (1.35)
---------      ---------       ---------       ---------      ---------       ---------
     0.16           0.16           (0.61)           0.19           0.21           (0.51)
---------      ---------       ---------       ---------      ---------       ---------
 
    (0.17)         (0.23)          (0.74)          (0.20)         (0.28)          (0.84)
---------      ---------       ---------       ---------      ---------       ---------
   $14.99         $14.92          $13.57          $14.99         $14.92          $13.57
---------      ---------       ---------       ---------      ---------       ---------
---------      ---------       ---------       ---------      ---------       ---------
     0.79%          1.06%          (4.20)%          1.22%          1.37%          (3.49)%
---------      ---------       ---------       ---------      ---------       ---------
---------      ---------       ---------       ---------      ---------       ---------
 
 $  1,112        $ 1,647         $ 1,280        $  1,981        $ 3,677         $ 3,860
 
     1.59%*         1.87%*          1.78%            .93%*         1.14%*          1.03%
 
     6.02%*         3.70%*          5.32%           6.68%*         4.44%*          6.07%
   138.77%        126.76%         255.76%         138.77%        126.76%         255.76%
</TABLE>
 
                                       15


<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
--------------------------------------------------------------------------------
Report of Independent Auditors
--------------------------------------------------------------------------------
 
The Board of Directors and Shareholders,
Mitchell Hutchins/Kidder, Peabody Government Income Fund, Inc.:
 
We  have audited the accompanying statement of assets and liabilities, including
the schedule  of investments,  of Mitchell  Hutchins/Kidder, Peabody  Government
Income  Fund,  Inc.  as of  January  31,  1995, and  the  related  statements of
operations for  the  year then  ended  and of  changes  in net  assets  and  the
financial  highlights  for  each  of  the  periods  presented.  These  financial
statements and  financial  highlights  are  the  responsibility  of  the  Fund's
management.  Our  responsibility is  to express  an  opinion on  these financial
statements and financial highlights based on our audits.
 
We  conducted  our  audits  in  accordance  with  generally  accepted   auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance  about  whether  the  financial  statements  and  financial
highlights  are free of material misstatement. An audit includes examining, on a
test basis, evidence  supporting the  amounts and disclosures  in the  financial
statements.  Our procedures included confirmation of securities owned at January
31, 1995, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management,  as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
 
In  our  opinion, such  financial  statements and  financial  highlights present
fairly,  in  all   material  respects,  the   financial  position  of   Mitchell
Hutchins/Kidder,  Peabody Government Income  Fund, Inc. as  of January 31, 1995,
the results of its operations, the changes  in its net assets and the  financial
highlights  for  the periods  presented  in conformity  with  generally accepted
accounting principles.
 
DELOITTE & TOUCHE LLP
New York, New York
March 13, 1995
 
                                       16
 
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
--------------------------------------------------------------------------------
Tax Information (unaudited)
--------------------------------------------------------------------------------
 
We are  required by  Subchapter  M of  the Internal  Revenue  Code of  1986,  as
amended, to advise you within 60 days of the Fund's fiscal year end (January 31,
1995)  as to  the federal tax  status of distributions  received by shareholders
during such fiscal year from the Fund. Accordingly, we are advising you that all
of the distributions  paid by the  Mitchell Hutchins/Kidder, Peabody  Government
Income  Fund, Inc. during the period were derived from net investment income and
are taxable as ordinary income.
 
Dividends received by tax-exempt recipients (e.g., IRAs and Keoghs) need not  be
reported  as taxable income. Some retirement  trusts (e.g., corporate, Keogh and
403(b)(7)  plans)  may  need  this  information  for  their  annual  information
reporting.
 
Because  the Fund's fiscal  year is not the  calendar year, another notification
will be sent  in respect  to calendar year  1995. The  notification, which  will
reflect  the amounts  to be  used by  calendar year  taxpayers on  their federal
income tax returns, will be made in  conjunction with Form 1099 DIV and will  be
mailed  in  January 1996.  Shareholders  are advised  to  consult their  own tax
advisers with respect to the tax consequences of their investment in the Fund.
 
                                       17


<PAGE>
------------------------------------------------------
Mitchell Hutchins/Kidder, Peabody
Government Income Fund, Inc.
(formerly Kidder, Peabody
Government Income Fund, Inc.)
1285 Avenue of the Americas
New York, New York 10019
------------------------------------------------------
DIRECTORS
David J. Beaubien
William W. Hewitt, Jr.
Thomas R. Jordan
Carl W. Schafer
------------------------------------------------------
OFFICERS
Frank P.L. Minard
President
 
Dennis L. McCauley
Vice President
 
Nirmal Singh
Vice President
 
Victoria E. Schonfeld
Vice President
 
Dianne E. O'Donnell
Vice President and Secretary
 
Julian F. Sluyters
Vice President and Treasurer
------------------------------------------------------
INVESTMENT ADVISER, ADMINISTRATOR AND DISTRIBUTOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
------------------------------------------------------
This report is not to be used in connection with the offering of shares of the
Fund unless accompanied or preceded by an effective prospectus.
 
A prospectus containing more complete information for any of the funds listed on
the back cover can be obtained from a PaineWebber investment executive or
correspondent firm. Read the prospectus carefully before investing.


<PAGE>
                                     PART C
                               OTHER INFORMATION
 
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
 
  (a) Financial Statements:
 
     The  Financial Statements filed as part  of this Registration Statement are
as follows:
 
     Financial Statements contained in Part A:
 
            Financial Highlights for the period November 22, 1985  (commencement
            of operations) to January 31, 1995.
 
     Financial  Statements included through incorporation by reference in Part B
and filed  with  the Annual  Report  to  Shareholders with  the  Securities  and
Exchange  Commission on or about  March 31, 1995 [File  No. 811-4333], and filed
herewith as an attachment:
 
            Portfolio of Investments at January 31, 1995.
 
            Statement of Assets and Liabilities as of January 31, 1995.
 
            Statement of Operations for the year ended January 31, 1995.
 
            Statements of  Changes  in Net  Assets  for the  five  months  ended
            January 31, 1994 and the year ended January 31, 1995.
 
            Financial  Highlights for the period November 22, 1985 (Commencement
            of Operations) to January 31, 1995.
 
            Report of Deloitte & Touche  LLP, Independent Auditors, dated  March
            13, 1995.
 
  (b) Exhibits:
 
<TABLE>
<CAPTION>
EXHIBIT NUMBER                                               DESCRIPTION
--------------   ----------------------------------------------------------------------------------------------------
<S>            <C>
       (1)       --Articles  of  Amendment  and  Restatement  are  incorporated  by   reference   to   Exhibit  1  of
                   Post-Effective Amendment No.  13 to the  Registration Statement on  Form N-1A, filed  on June  11,
                   1993.
       (2)       --An  amendment  to  the  Registrant's  By-Laws  is  incorporated  by  reference  to  Exhibit  2  of
                   Post-Effective Amendment No. 4  to the Registration  Statement on Form N-1A,  filed on January  8,
                   1988.
       (4)       --Specimen  certificates  for  the  Registrant's  Common  Stock,   par  value  $.01  per  share  are
                   incorporated by reference  to Exhibit 4  of Post-Effective  Amendment No. 14  to the  Registration
                   Statement on Form N-1A, filed on December 29, 1993.
       (5)       --Form of Investment Advisory and Administration Agreement.*
       (6)       --Form of Distribution Agreement.*
      (8a)       --Form  of Custody Agreement with State Street Bank and Trust Company.*
      (8b)       --Safekeeping  Agreement is  incorporated by reference to Exhibit 8b of Post-Effective Amendment No.
                   6 to the Registration Statement on Form N-1A, filed on October 31, 1989.
      (8c)       --Procedural  Agreement is incorporated by reference to Exhibit 8c of Post-Effective Amendment No. 6
                   to the Registration Statement on Form N-1A, filed on October 31, 1989.
       (9)       --Form  of Transfer Agency Agreement with PFPC Inc.*
      (10)       --The  Opinion and consent of Venable, Baetjer and Howard is incorporated by reference to Exhibit 10
                   of Post-Effective Amendment No. 13  to the Registration Statement on  Form N-1A, filed on May  10,
                   1993.
      (11)       --The consent of Deloitte & Touche LLP.
      (13)       --The investment  representation letter is incorporated by reference to Exhibit 13 of Post-Effective
                   Amendment No. 1 to the Registration Statement on Form N-1A, filed on October 7, 1985.
      (15)       --Form of Shareholder Servicing Agreement.*
</TABLE>
 
                                      C-1
 
<PAGE>
 
<TABLE>
<CAPTION>
EXHIBIT NUMBER                                               DESCRIPTION
--------------   ----------------------------------------------------------------------------------------------------
<S>             <C>
      (16)       --Schedule  for  computation  of  performance quotations in  response to  item 22  relating to total
                   return calculations is incorporated by reference to  Exhibit 16 of Post-Effective Amendment No.  7
                   to the Registration Statement on Form N-1A, filed on December 28, 1990.
     (16a)       --Schedule  for  computation  of performance  quotations in response  to item 22  relating to 30-day
                   yield calculation is incorporated by reference to  Exhibit 16a of Post-Effective Amendment No.  15
                   to the Registration Statement on Form N-1A, filed on May 31, 1994.
      (17)       --Powers of Attorney.
</TABLE>
 
------------
 
*  To be supplied by amendment
 
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
 
     No person is controlled by or under common control with the Registrant.
 
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
 
<TABLE>
<CAPTION>
                                                                                          NUMBER OF RECORDHOLDERS
                                  TITLE OF CLASS                                              ON MAY 15, 1995
----------------------------------------------------------------------------------        -----------------------
 
<S>                                                                                             <C>
Common Stock, par value $.01 per share
Class A...........................................................................                 2,055
Class B...........................................................................                    85
Class C...........................................................................                   194
</TABLE>
 
ITEM 27. INDEMNIFICATION.
 
     Reference  is  made to  Section  2-418 of  the  General Corporation  Law of
Maryland, as amended.
 
     Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to  directors, officers and controlling persons of  the
Registrant and the principal underwriter 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 director, officer, or controlling
person of the Registrant  and the principal underwriter  in connection with  the
successful  defense of any  action, suit or proceeding)  is asserted against the
Registrant by  such director,  officer or  controlling person  or the  principal
underwriter in connection with the shares 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 Asset Management  Inc. ('Mitchell Hutchins'), a  Delaware
corporation, is a registered investment adviser and is a wholly owned subsidiary
of PaineWebber Inc. ('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 filed on  April 3, 1995 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 Income Plus Fund, Inc.
 
                                      C-2
 
<PAGE>
        Institutional Series Trust
        Mitchell Hutchins/Kidder, Peabody Equity Income Fund, Inc.
        Mitchell Hutchins/Kidder, Peabody Government Income Fund, Inc.
        Mitchell Hutchins/Kidder, Peabody Investment Trust
        Mitchell Hutchins/Kidder, Peabody Investment Trust II
        Mitchell Hutchins/Kidder, Peabody Investment Trust III
        PaineWebber America Fund
        PaineWebber Atlas Fund
        PaineWebber Investment Series
        PaineWebber Managed Assets Trust
        PaineWebber Managed Investments Trust
        PaineWebber Master Series, Inc.
        PaineWebber Municipal Series
        PaineWebber Mutual Fund Trust
        PaineWebber Olympus Fund
        PaineWebber Premier High Income Trust Inc.
        PaineWebber Premier Insured Municipal Income Fund Inc.
        PaineWebber Premier Tax-Free Income Fund Inc.
        PaineWebber Regional Financial Growth Fund Inc.
        PaineWebber Securities Trust
        PaineWebber Series Trust
        Strategic Global Income Fund, Inc.
        Triple A and Government Series -- 1995, Inc.
        Triple A and Government Series -- 1997, Inc.
        2002 Target Term Trust Inc.
        Global High Income Dollar Fund Inc.
        Global Small Cap Fund Inc.
 
     (b)  Mitchell   Hutchins  is   the  Registrant's   principal   underwriter.
PaineWebber  acts as exclusive dealer of  the Registrant's shares. 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
filed  April 3, 1995  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 filed March 31, 1995 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 directors or officers of the Registrant:
 
<TABLE>
<CAPTION>
                                                                                 POSITION AND OFFICES WITH
 NAME AND PRINCIPAL BUSINESS ADDRESS       POSITION WITH REGISTRANT           UNDERWRITER OR EXCLUSIVE DEALER
-------------------------------------  --------------------------------  -----------------------------------------
<S>                                 <C>                               <C>
Frank P.L. Minard                      Director and President            Director and Chairman of Mitchell
  1285 Avenue of the Americas                                              Hutchins
  New York, New York 10019
Teresa M. Boyle                        Vice President                    First Vice President and
  1285 Avenue of the Americas                                              Manager -- Advisory Administration of
  New York, New York 10019                                                 Mitchell Hutchins
Dennis L. 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
Dianne E. O'Donnell                    Vice President and Secretary      Senior Vice President and Senior
  1285 Avenue of the Americas                                              Associate General Counsel of Mitchell
  New York, New York 10019                                                 Hutchins
</TABLE>
 
                                      C-3
 
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                 POSITION AND OFFICES WITH
 NAME AND PRINCIPAL BUSINESS ADDRESS       POSITION WITH REGISTRANT           UNDERWRITER OR EXCLUSIVE DEALER
-------------------------------------  --------------------------------  -----------------------------------------
<S>                                  <C>                               <C>
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 of Mitchell Hutchins
  1285 Avenue of the Americas            Treasurer
  New York, New York 10019
Nirmal Singh                           Vice President                    Vice President of Mitchell Hutchins
  1285 Avenue of the Americas
  New York, New York 10019
Martha J. Slezak                       Vice President and Assistant      Vice President of Mitchell Hutchins
  1285 Avenue of the Americas            Treasurer
  New York, New York 10019
Julian F. Sluyters                     Vice President and Treasurer      Senior Vice President and Director of
  1285 Avenue of the Americas                                              Mutual Fund Finance Division of
  New York, New York 10019                                                 Mitchell 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
</TABLE>
 
     (c) None.
 
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
 
     All  accounts,  books  and other  documents  required to  be  maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder are
maintained at  the offices  of:  PFPC Inc.,  400 Bellevue  Parkway,  Wilmington,
Delaware  19809, State Street Bank and  Trust Company, One Heritage Drive, North
Quincy, Massachusetts 02171, and  the Registrant, 1285  Avenue of the  Americas,
New York, New York 10019.
 
ITEM 31. MANAGEMENT SERVICES.
 
     Inapplicable.
 
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-4

<PAGE>
                                   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 this City of New  York,
and State of New York, on the 18th day of May, 1995.
 
                                          MITCHELL HUTCHINS/KIDDER, PEABODY
                                            GOVERNMENT INCOME FUND, INC.
 
                                          By         /s/ GREGORY K. TODD
                                             ...................................
                                             (GREGORY K. TODD, VICE PRESIDENT)
 
     Pursuant  to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons  in
the capacities and on the dates indicated:
 
<TABLE>
<CAPTION>
                SIGNATURE                                      TITLE                              DATE
------------------------------------------  --------------------------------------------   -------------------
 
<C>                                         <S>                                            <C>
          /s/ FRANK P.L. MINARD*            President and Director                            May 18, 1995
 .........................................
           (FRANK P.L. MINARD)
 
          /s/ DAVID J. BEAUBIEN*            Director                                          May 18, 1995
 .........................................
           (DAVID J. BEAUBIEN)
 
       /s/ WILLIAM W. HEWITT, JR.*          Director                                          May 18, 1995
 .........................................
         (WILLIAM W. HEWITT, JR.)
 
          /s/ THOMAS R. JORDAN*             Director                                          May 18, 1995
 .........................................
            (THOMAS R. JORDAN)
 
           /s/ CARL W. SCHAFER*             Director                                          May 18, 1995
 .........................................
            (CARL W. SCHAFER)
 
          /s/ JULIAN F. SLUYTERS            Vice President and Treasurer                      May 18, 1995
 .........................................    (Chief Financial and Accounting Officer)
           (JULIAN F. SLUYTERS)
 
       *By:     /S/ GREGORY K. TODD                                                           May 18, 1995
 .........................................
   (GREGORY K. TODD, ATTORNEY-IN-FACT)
</TABLE>
 
                                      C-5
<PAGE>
                         STATEMENT OF DIFFERENCES
          <TABLE>
          <S>                                               <C>
            The service mark shall be expressed as............ 'sm'
            The dagger symbol shall be expressed as...........  'D'
            Superscript characters shall be preceded by....... 'pp'
            The copyright symbol shall be expressed as........ 'c'
           </TABLE>

<PAGE>
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                                                                                                      PAGE NO.
---------                                                                                                    --------
 
<S>        <C>                                                                                              <C>
      (11) -- The consent of Deloitte & Touche LLP........................................................
      (17) -- Powers of Attorney..........................................................................
</TABLE>




<PAGE>
                        CONSENT OF INDEPENDENT AUDITORS
 
Mitchell Hutchins/Kidder, Peabody Government Income Fund, Inc.:
 
     We consent to the incorporation by reference in the Statement of Additional
Information in this  Post-Effective Amendment No.  16 to Registration  Statement
No.  2-98558 of our report dated March  13, 1995, appearing in the annual report
to shareholders for the year ended January 31, 1995, and to the references to us
under  the  captions  'Independent  Auditors'  appearing  in  the  Statement  of
Additional  Information and 'Financial Highlights'  appearing in the Prospectus,
which also are a part of such Registration Statement.
 
Deloitte & Touche LLP
New York, New York
May 23, 1995





                               POWER OF ATTORNEY
 
     I,  Carl W. Schafer,  Director of Mitchell  Hutchins/Kidder, Peabody Equity
Income Fund,  Inc., Mitchell  Hutchins/Kidder, Peabody  Government Income  Fund,
Inc.,  PaineWebber/Kidder, Peabody Cash  Reserve Fund, Inc., PaineWebber/Kidder,
Peabody Government Money Fund, Inc., and PaineWebber/Kidder, Peabody Tax  Exempt
Money  Fund,  Inc. (collectively,  the 'Funds'),  hereby constitute  and appoint
Victoria E. Schonfeld, Dianne E. O'Donnell, Gregory K. Todd and Scott Griff, and
each of them singly, my  true and lawful attorneys, with  full power to them  to
sign  for me, and in my capacity as Director  for each of the Funds, any and all
amendments to each of the particular  registration statements of the Funds,  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.
 
<TABLE>
<CAPTION>
                SIGNATURE                                         TITLE                              DATE
------------------------------------------  -------------------------------------------------   ---------------
 
<S>                                         <C>                                                 <C>
           /s/ CARL W. SCHAFER              Director                                             March 8, 1995
 .........................................
            (CARL W. SCHAFER)
</TABLE>
 
<PAGE>
                               POWER OF ATTORNEY
 
     I, Thomas R. Jordan, Director  of Mitchell Hutchins/Kidder, Peabody  Equity
Income  Fund, Inc.,  Mitchell Hutchins/Kidder,  Peabody Government  Income Fund,
Inc., PaineWebber/Kidder, Peabody Cash  Reserve Fund, Inc.,  PaineWebber/Kidder,
Peabody  Government Money Fund, Inc., and PaineWebber/Kidder, Peabody Tax Exempt
Money Fund,  Inc. (collectively,  the 'Funds'),  hereby constitute  and  appoint
Victoria E. Schonfeld, Dianne E. O'Donnell, Gregory K. Todd and Scott Griff, and
each  of them singly, my  true and lawful attorneys, with  full power to them to
sign for me, and in my capacity as  Director for each of the Funds, any and  all
amendments  to each of the particular  registration statements of the Funds, 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.
 
<TABLE>
<CAPTION>
                SIGNATURE                                         TITLE                              DATE
------------------------------------------  -------------------------------------------------   ---------------
 
<S>                                         <C>                                                 <C>
           /s/ THOMAS R. JORDAN             Director                                             March 8, 1995
 .........................................
            (THOMAS R. JORDAN)
</TABLE>
 
<PAGE>
                               POWER OF ATTORNEY
 
     I,  David J. Beaubien, Director of Mitchell Hutchins/Kidder, Peabody Equity
Income Fund,  Inc., Mitchell  Hutchins/Kidder, Peabody  Government Income  Fund,
Inc.,  PaineWebber/Kidder, Peabody Cash  Reserve Fund, Inc., PaineWebber/Kidder,
Peabody Government Money Fund, Inc., and PaineWebber/Kidder, Peabody Tax  Exempt
Money  Fund,  Inc. (collectively,  the 'Funds'),  hereby constitute  and appoint
Victoria E. Schonfeld, Dianne E. O'Donnell, Gregory K. Todd and Scott Griff, and
each of them singly, my  true and lawful attorneys, with  full power to them  to
sign  for me, and in my capacity as Director  for each of the Funds, any and all
amendments to each of the particular  registration statements of the Funds,  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.
 
<TABLE>
<CAPTION>
                SIGNATURE                                         TITLE                              DATE
------------------------------------------  -------------------------------------------------   ---------------
 
<S>                                       <C>                                                 <C>
          /s/ DAVID J. BEAUBIEN             Director                                             March 8, 1995
 .........................................
           (DAVID J. BEAUBIEN)
</TABLE>
 
<PAGE>
                               POWER OF ATTORNEY
 
     I, William W.  Hewitt, Jr., Director  of Mitchell Hutchins/Kidder,  Peabody
Equity  Income Fund,  Inc., Mitchell Hutchins/Kidder,  Peabody Government Income
Fund,   Inc.,   PaineWebber/Kidder,   Peabody    Cash   Reserve   Fund,    Inc.,
PaineWebber/Kidder, Peabody Government Money Fund, Inc., and PaineWebber/Kidder,
Peabody  Tax  Exempt  Money  Fund,  Inc.  (collectively,  the  'Funds'),  hereby
constitute and appoint Victoria  E. Schonfeld, Dianne  E. O'Donnell, Gregory  K.
Todd  and Scott Griff,  and each of  them singly, my  true and lawful attorneys,
with full power to them to sign for me, and in my capacity as Director for  each
of  the Funds,  any and  all amendments to  each of  the particular registration
statements  of  the  Funds,  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.
 
<TABLE>
<CAPTION>
                SIGNATURE                                         TITLE                              DATE
------------------------------------------  -------------------------------------------------   ---------------
 
<S>                                       <C>                                                  <C>
        /s/ WILLIAM W. HEWITT, JR.          Director                                             March 8, 1995
 .........................................
         (WILLIAM W. HEWITT, JR.)
</TABLE>
 
<PAGE>
                               POWER OF ATTORNEY
 
     I, Frank P.L. Minard, President  and Director of Mitchell  Hutchins/Kidder,
Peabody  Equity Income Fund, Inc.,  Mitchell Hutchins/Kidder, Peabody Government
Income  Fund,  Inc.,  PaineWebber/Kidder,  Peabody  Cash  Reserve  Fund,   Inc.,
PaineWebber/Kidder, Peabody Government Money Fund, Inc., and PaineWebber/Kidder,
Peabody  Tax  Exempt  Money  Fund,  Inc.  (collectively,  the  'Funds'),  hereby
constitute and appoint Victoria  E. Schonfeld, Dianne  E. O'Donnell, Gregory  K.
Todd  and Scott Griff,  and each of  them singly, my  true and lawful attorneys,
with full power  to them to  sign for me,  and in my  capacity as President  and
Director for each of the Funds, any and all amendments to each of the particular
registration statements of the Funds, 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.
 
<TABLE>
<CAPTION>
                SIGNATURE                                         TITLE                              DATE
------------------------------------------  -------------------------------------------------   ---------------
 
<S>                                         <C>                                                 <C>
          /s/ FRANK P.L. MINARD             President and Director                              May 18, 1995
 .........................................
           (FRANK P.L. MINARD)
</TABLE>




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