PAINEWEBBER INVESTMENT SERIES, 497, 1996-03-12

PAINEWEBBER INVESTMENT SERIES
497, 1996-03-12

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PAINEWEBBER GLOBAL INCOME FUND

1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019

STATEMENT OF ADDITIONAL INFORMATION

PaineWebber Global Income Fund ("Fund") is a non-diversified series of
PaineWebber Investment Series ("Trust"), a professionally managed mutual fund.
The Fund seeks high current income consistent with prudent investment risk,
with capital appreciation as a secondary objective; it invests principally in
high quality debt securities issued or guaranteed by foreign governments, by
the U.S. government, by their respective agencies or instrumentalities or by
supranational organizations, or issued by foreign or U.S. companies. The
Fund's investment adviser, administrator and distributor is Mitchell Hutchins
Asset Management Inc. ("Mitchell Hutchins"), a wholly owned subsidiary of
PaineWebber Incorporated ("PaineWebber"). As distributor for the Fund,
Mitchell Hutchins has appointed PaineWebber to serve as the exclusive dealer
for the sale of Fund shares. This Statement of Additional Information is not a
prospectus and should be read only in conjunction with the Fund's current
Prospectus, dated February 26, 1996. A copy of the Prospectus may be obtained
by calling any PaineWebber investment executive or correspondent firm or by
calling toll-free 1-800-647-1568. This Statement of Additional Information is
dated February 26, 1996, as revised March 1, 1996.

INVESTMENT POLICIES AND RESTRICTIONS

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

SPECIAL CONSIDERATIONS RELATING TO FOREIGN SECURITIES. Many of the foreign
securities held by the Fund are not registered with the Securities and
Exchange Commission ("SEC"), nor are the issuers thereof subject to its
reporting requirements. Accordingly, there may be less publicly available
information concerning foreign issuers of securities held by the Fund than is
available concerning U.S. companies. Foreign companies are not generally
subject to uniform accounting, auditing and financial reporting standards or
to other regulatory requirements comparable to those applicable to U.S.
companies.

In addition to purchasing securities of foreign issuers in foreign markets,
the Fund may invest in American Depository Receipts ("ADRs"), European
Depository Receipts ("EDRs") or other securities convertible into securities
of corporations based in foreign countries. These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. Generally, ADRs, in registered form, are denominated in
U.S. dollars and are designed for use in the U.S. securities markets and EDRs,
in bearer form, may be denominated in other currencies and are designed for
use in European securities markets. ADRs are receipts typically issued by a
U.S. bank or trust company evidencing ownership of the underlying securities.
EDRs are European receipts evidencing a similar arrangement. For purposes of
the Fund's investment policies, ADRs and EDRs are deemed to have the same
classification as the underlying securities they represent. Thus, an ADR or
EDR evidencing ownership of common stock will be treated as common stock.

countries. Foreign security trading practices, including those involving
securities settlement where Fund assets may be released prior to receipt of
payment, may expose a Fund to increased risk in the event of a failed trade or
the insolvency of a foreign broker-dealer. Transactions on foreign exchanges
are usually subject to fixed commissions that are generally higher than
negotiated commissions on U.S. transactions, although the Fund will endeavor
to achieve the best net results in effecting its portfolio transactions. There
is generally less government supervision and regulation of exchanges and
brokers in foreign countries than in the United States.

Investment income on certain foreign securities in which the Fund may invest
may be subject to foreign withholding or other taxes that could reduce the
return on these securities. Tax treaties between the United States and foreign
countries, however, may reduce or eliminate the amount of foreign taxes to
which the Fund would be subject.

SOVEREIGN DEBT. Investment by the Fund in debt securities issued by foreign
governments and their political subdivisions or agencies ("Sovereign Debt")
involves special risks. The issuer of the debt or the governmental authorities
that control the repayment of the debt may be unable or unwilling to repay
principal and/or interest when due in accordance with the terms of such debt,
and the Fund may have limited legal recourse in the event of a default.

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

A sovereign debtor's willingness or ability to repay principal and interest
due in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
principal international lenders and the political constraints to which a
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could
also adversely affect its exports. Such events could diminish a country's
trade account surplus, if any, or the credit standing of a particular local
government or agency.

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

FOREIGN CURRENCY TRANSACTIONS. Although the Fund values its assets daily in
U.S. dollars, it does not intend to convert its holdings of foreign currencies
to U.S. dollars on a daily basis. The Fund's foreign currencies may be held as
"foreign currency call accounts" at foreign branches of foreign or domestic
banks. These accounts bear interest at negotiated rates and are payable upon
relatively short demand periods. If a bank became insolvent, the Fund could
suffer a loss of some or all of the amounts deposited. The Fund may convert
foreign currency to U.S. dollars from time to time. Although foreign exchange
dealers generally do

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not charge a stated commission or fee for conversion, the prices posted
generally include a "spread," which is the difference between the prices at
which the dealers are buying and selling foreign currencies.

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

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

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

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make a market in the security, (4) the number of other potential purchasers
and (5) the nature of the security and how trading is effected (e.g., the time
needed to sell the security, how bids are solicited and the mechanics of
transfer). Mitchell Hutchins monitors the liquidity of restricted securities
in the Fund's portfolio and reports periodically on such decisions to the
board of trustees.

YIELD FACTORS AND RATINGS. Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's, a division of The McGraw Hill Companies, Inc. ("S&P") and
other nationally recognized statistical rating organizations ("NRSROs") are
private services that provide ratings of the credit quality of fixed income
obligations. A description of ratings assigned to corporate debt obligations
and preferred stock by Moody's and S&P is included in the Appendix to this
Statement of Additional Information. The Fund may use these ratings in
determining whether to purchase, sell or hold a security. It should be
emphasized, however, that ratings are general and are not absolute standards
of quality. Consequently, securities with the same maturity, interest rate and
rating may have different market prices. Credit ratings attempt to evaluate
the safety of principal and interest payments and do not evaluate the risks of
fluctuations in market value or the risks of changes in foreign currency
exchange rates. Also, NRSROs may fail to make timely changes in credit ratings
in response to subsequent events, so that an issuer's current financial
condition may be better or worse than the rating indicates. The rating
assigned to a security by a NRSRO does not reflect an assessment of the
security's market value or of the liquidity of an investment in the security.
Subsequent to its purchase by the Fund, an issue of debt obligations may cease
to be rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. Mitchell Hutchins will consider such an event in
determining whether the Fund should continue to hold the obligation but is not
required to dispose of it.

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

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

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only with banks and dealers in transactions believed by Mitchell Hutchins to
present minimum credit risks in accordance with guidelines established by the
Trust's board of trustees. Mitchell Hutchins will review and monitor the
creditworthiness of those institutions under the board's general supervision.

REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements with banks and securities dealers up to an aggregate value of not
more than 10% of its total assets. Such agreements involve the sale of
securities held by the Fund subject to the Fund's agreement to repurchase the
securities at an agreed-upon date and price reflecting a market rate of
interest. Such agreements are considered to be borrowings and may be entered
into only for temporary or emergency purposes. While a reverse repurchase
agreement is outstanding, the Fund's custodian segregates assets to cover the
amount of the Fund's obligations under the reverse repurchase agreement. See
"Investment Policies and Restrictions--Segregated Accounts." The Fund will not
purchase securities while borrowings (including reverse repurchase agreements)
in excess of 5% of the value of its total assets are outstanding.

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

LENDING OF PORTFOLIO SECURITIES. As indicated in the Prospectus, the Fund is
authorized to lend up to 10% of the total value of its portfolio securities to
broker-dealers or institutional investors that Mitchell Hutchins deems
qualified, but only when the borrower maintains acceptable collateral with the
Fund's custodian bank, marked to market daily, in an amount at least equal to
the market value of the securities loaned, plus accrued interest. Acceptable
collateral is limited to cash, U.S. government securities and irrevocable
letters of credit that meet certain guidelines established by Mitchell
Hutchins. In determining whether to lend securities to a particular broker-
dealer or institutional investor, Mitchell Hutchins will consider, and during
the period of the loan will monitor, all relevant facts and circumstances,
including the creditworthiness of the borrower. The Fund will retain authority
to terminate any loans at any time. The Fund may pay reasonable administrative
and custodial fees in connection with a loan and may pay a negotiated portion
of the interest earned on the collateral to the borrower or placing broker.
The Fund will receive reasonable interest on the loan or a flat fee from the
borrower and amounts equivalent to any interest or other distributions on the
securities loaned. The Fund will regain record ownership of loaned securities
to exercise beneficial rights, such as voting and subscription rights and
rights to interest or other distributions, when regaining such rights is
considered to be in the Fund's interest.

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market value, however, which is likely to vary inversely with fluctuations in
interest rates, and the guarantees do not extend to the yield or value of the
Fund's shares. These securities are "pass-through" instruments through which
the holders receive a share of the interest and principal payments from the
mortgages underlying the securities, net of certain fees. The principal
amounts of such underlying mortgages generally may be prepaid in whole or in
part by the mortgagees at any time without penalty, and the prepayment
characteristics of the underlying mortgages may vary. During periods of
declining interest rates, prepayment of mortgages underlying mortgage-backed
securities can be expected to accelerate. The Fund will reinvest prepaid
amounts in other income producing securities, the yields of which will reflect
interest rates prevailing at the time. Accelerated prepayments adversely
affect yields for mortgage-backed securities purchased by the Fund at a
premium and may involve additional risk of loss of principal because the
premium may not have been fully amortized at the time the obligation is
prepaid. The opposite is true for mortgage-backed securities purchased by the
Fund at a discount.

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

INVESTMENT LIMITATIONS OF THE FUND

The Fund may not (1) issue senior securities or borrow money, except from
banks or through reverse repurchase agreements for emergency or temporary
purposes, and then in an aggregate amount not in excess of 10% of the value of
the Fund's total assets at the time of such borrowing; provided that the Fund
will not purchase securities while borrowings (including reverse repurchase
agreements) in excess of 5% of the value of the Fund's total assets are
outstanding; (2) purchase securities of any one issuer if as a result more
than 5% of the Fund's total assets would be invested in such issuer or the
Fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 50% of the Fund's total assets may be invested
without regard to this limitation and provided that this limitation does not
apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities; (3) make an investment in any one industry if the
investment would cause the value of such investments at the time of purchase
in such industry to be 25% or more of the total assets of the Fund taken at
market value; (4) purchase securities on margin, except for short-term credits
necessary for clearance of portfolio transactions, and except that the Fund
may make margin deposits in connection with its use of options, futures
contracts and options on futures contracts; (5) underwrite securities of other
issuers, except to the extent that, in connection with the disposition of
portfolio securities, the Fund may be deemed an underwriter under federal
securities laws; (6) make short sales of securities or maintain a short
position, except that the Fund may (a) make short sales and maintain short
positions in connection with its use of options, futures contracts and options
on futures contracts and (b) sell short "against the box"; (7) purchase or
sell real estate, provided that the Fund may invest in securities secured by
real estate or interests therein or issued by companies which invest in real
estate or interests therein; (8) purchase or sell commodities or commodity
contracts, except that the Fund may purchase or sell interest rate and foreign
currency futures contracts and options thereon, may engage in transactions in
foreign currency and may purchase or sell options on foreign currencies for
hedging purposes; (9) invest in oil, gas or mineral-related programs or
leases; (10) make loans, except through loans of portfolio securities as
described in this Statement of Additional Information and except through
repurchase agreements, provided that for

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purposes of this restriction the acquisition of publicly distributed bonds,
debentures or other corporate debt securities and investment in government
obligations, short-term commercial paper, certificates of deposit and bankers'
acceptances shall not be deemed to be the making of a loan; or (11) purchase
any securities issued by any other investment company, except in connection
with the merger, consolidation or acquisition of all the securities or assets
of such an issuer.

The foregoing fundamental investment limitations cannot be changed without
the affirmative vote of the lesser of (1) more than 50% of the outstanding
shares of the Fund or (2) 67% or more of the shares present at a shareholders'
meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy. If a percentage restriction is adhered to at
the time of an investment or transaction, a later increase or decrease in
percentage resulting from a change in values of portfolio securities or amount
of total assets will not be considered a violation of any of the foregoing
limitations. The Fund will continue to interpret fundamental investment
limitation (7) to prohibit investment in real estate limited partnerships.

The following investment restrictions may be changed by the vote of the
Trust's board of trustees without shareholder approval. The Fund may not (1)
purchase or retain the securities of any issuer if the officers and trustees
of the Trust and the officers and directors of Mitchell Hutchins (each owning
beneficially more than 0.5% of the outstanding securities of the issuer) own
in the aggregate more than 5% of the securities of the issuer; (2) invest more
than 10% of its net assets in illiquid securities, a term that means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which it has valued the securities
and includes, among other things, repurchase agreements maturing in more than
seven days; (3) make investments in warrants, if such investments, valued at
the lower of cost or market, exceed 5% of the value of its net assets, which
amount may include warrants that are not listed on the New York or American
Stock Exchange, provided that such unlisted warrants, valued at the lower of
cost or market, do not exceed 2% of its net assets, and further provided that
this restriction does not apply to warrants attached to, or sold as a unit
with, other securities; (4) purchase any security if as a result it would have
more than 5% of its total assets invested in securities of companies which
together with any predecessors have been in continuous operation for less than
three years; or (5) invest more than 35% of its total assets in debt
securities rated Ba or lower by Moody's or BB or lower by S&P, comparably
rated by another NRSRO or determined by Mitchell Hutchins to be of comparable
quality. This non-fundamental policy (5) can be changed only upon 30 days'
advance notice to shareholders.

PROPOSED CHANGES TO INVESTMENT LIMITATIONS OF THE FUND

At a special meeting of shareholders scheduled for April 10, 1996,
shareholders of the Fund will be asked to approve changes to the Fund's
fundamental investment limitations. If approved, the following investment
limitations will supersede and replace those listed in the first paragraph of
the preceding section titled "Investment Limitations of the Fund":

The Fund will not:

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

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except that the Fund may borrow up to an additional 5% of its total
assets (not including the amount borrowed) for temporary or emergency
purposes.

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

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

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

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

If the foregoing fundamental investment limitations are approved by the
Fund's shareholders, the Fund would become subject to the non-fundamental
restrictions listed below, which would replace certain of the Fund's current
fundamental limitations. These non-fundamental investment restrictions may be
changed by the Trust's board of trustees without shareholder approval.

The Fund will not:

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

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

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

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

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HEDGING AND RELATED INCOME STRATEGIES

GENERAL DESCRIPTION OF HEDGING STRATEGIES. As discussed in the Prospectus,
Mitchell Hutchins may use a variety of financial instruments ("Hedging
Instruments"), including certain options, futures contracts (sometimes
referred to as "futures"), options on futures contracts and forward currency
contracts and enter into interest rate protection transactions to attempt to
hedge the Fund's portfolio and to enhance income. Although it has no intention
of doing so during the coming year, Mitchell Hutchins also may attempt to
hedge the Fund's portfolio through the use of interest rate futures and
options thereon. The particular Hedging Instruments are described in the
Appendix to the Prospectus.

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

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

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

Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that the Fund owns or
intends to acquire. Hedging Instruments on stock indices, in contrast,
generally are used to hedge against price movements in broad equity market
sectors in which the Fund has invested or expects to invest. Hedging
Instruments on debt securities may be used to hedge either individual
securities or broad fixed income market sectors.

The use of Hedging Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded, the
Commodity Futures Trading Commission ("CFTC") and

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various state regulatory authorities. In addition, the Fund's ability to use
Hedging Instruments will be limited by tax considerations. See "Taxes."

In addition to the products, strategies and risks described below and in the
Prospectus, Mitchell Hutchins expects to discover additional opportunities in
connection with options, futures contracts, forward currency contracts and
other hedging techniques. These new opportunities may become available as
Mitchell Hutchins develops new techniques, as regulatory authorities broaden
the range of permitted transactions and as new options, futures contracts,
forward currency contracts or other techniques are developed. Mitchell
Hutchins may utilize these opportunities to the extent that they are
consistent with the Fund's investment objectives and permitted by the Fund's
investment limitations and applicable regulatory authorities. The Fund's
Prospectus or Statement of Additional Information will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.

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

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

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

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

(4) As described below, the Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If the Fund were unable to
close out its positions in such Hedging Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. These requirements might impair the Fund's
ability to sell a portfolio security or make an investment at a time when it
would otherwise be favorable to do so, or require that the Fund sell a
portfolio security at a disadvantageous time. The Fund's ability to close out

10
<PAGE>

a position in a Hedging Instrument prior to expiration or maturity depends on
the existence of a liquid secondary market or, in the absence of such a
market, the ability and willingness of a contra party to enter into a
transaction closing out the position. Therefore, there is no assurance that
any hedging position can be closed out at a time and price that is favorable
to the Fund.

COVER FOR HEDGING STRATEGIES. Transactions using Hedging Instruments, other
than purchased options, expose the Fund to an obligation to another party. The
Fund will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities, currencies or other options,
futures contracts or forward currency contracts or (2) cash and short-term
liquid debt securities, with a value sufficient at all times to cover its
potential obligations to the extent not covered as provided in (1) above. The
Fund will comply with SEC guidelines regarding cover for hedging transactions
and will, if the guidelines so require, set aside cash, U.S. government
securities or other liquid, high-grade debt securities in a segregated account
with its custodian in the prescribed amount.

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

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

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

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

11
<PAGE>

known as a closing sale transaction. Closing transactions permit the Fund to
realize profits or limit losses on an option position prior to its exercise or
expiration.

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

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

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

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

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

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

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

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

12
<PAGE>

FUTURES. The purchase of futures or call options thereon can serve as a long
hedge, and the sale of futures or the purchase of put options thereon can
serve as a short hedge. Writing covered call options on futures contracts can
serve as a limited short hedge, using a strategy similar to that used for
writing covered call options on securities or indices. Similarly, writing
covered put options on futures contracts can serve as a limited long hedge.

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

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

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

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

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

13
<PAGE>

prices could move to the daily limit for several consecutive days with little
or no trading, thereby preventing liquidation of unfavorable positions.

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

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

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

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

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

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

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

14
<PAGE>

other Hedging Instruments. In such cases, the Fund may hedge against price
movements in that currency by entering into transactions using Hedging
Instruments on another foreign currency or a basket of currencies, the values
of which Mitchell Hutchins believes will have a positive correlation to the
value of the currency being hedged. The risk that movements in the price of
the Hedging Instrument will not correlate perfectly with movements in the
price of the currency being hedged is magnified when this strategy is used.

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

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

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

FORWARD CURRENCY CONTRACTS. The Fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. Such transactions may serve as long
hedges--for example, the Fund may purchase a forward currency contract to lock
in the U.S. dollar price of a security denominated in a foreign currency that
the Fund intends to acquire. Forward currency contract transactions may also
serve as short hedges--for example, the Fund may sell a forward currency
contract to lock in the U.S. dollar equivalent of the proceeds from the
anticipated sale of a security denominated in a foreign currency.

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

15
<PAGE>

currency contracts are usually entered into on a principal basis, no fees or
commissions are involved. When the Fund enters into a forward currency
contract, it relies on the contra party to make or take delivery of the
underlying currency at the maturity of the contract. Failure by the contra
party to do so would result in the loss of any expected benefit of the
transaction.

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

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

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

INTEREST RATE PROTECTION TRANSACTIONS. The Fund may enter into interest rate
protection transactions, including interest rate swaps and interest rate caps,
collars and floors. Interest rate swap transactions involve an agreement
between two parties to exchange payments that are based, for example, on
variable and fixed rates of interest and that are calculated on the basis of a
specified amount of principal (the "notional principal amount") for a
specified period of time. Interest rate cap and floor transactions involve an
agreement between two parties in which the first party agrees to make payments
to the counterparty when a designated market interest rate goes above (in the
case of a cap) or below (in the case of a floor) a designated level on
predetermined dates or during a specified time period. Interest rate collar
transactions involve an agreement between two parties in which the payments
are made when a designated market interest rate either goes above a designated
ceiling level or goes below a designated floor on predetermined dates or
during a specified time period.

The Fund expects to enter into interest rate protection transactions to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities it
anticipates purchasing at a later date. The Fund intends to use these
transactions as a hedge and not as a speculative investment. Interest rate
protection transactions are subject to risks comparable to those described
above with respect to other hedging strategies.

16
<PAGE>

The Fund may enter into interest rate swaps, caps, collars and floors on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest
rate swaps on a net basis, i.e., the two payment streams are netted out, with
the Fund receiving or paying, as the case may be, only the net amount of the
two payments. Inasmuch as these interest rate protection transactions are
entered into for good faith hedging purposes, and inasmuch as segregated
accounts will be established with respect to such transactions, Mitchell
Hutchins and the Fund believe such obligations do not constitute senior
securities and, accordingly, will not treat them as being subject to the
Fund's borrowing restrictions. The net amount of the excess, if any, of the
Fund's obligations over its entitlements with respect to each interest rate
swap will be accrued on a daily basis and an amount of cash, U.S. government
securities or other liquid high grade debt obligations having an aggregate net
asset value at least equal to the accrued excess will be maintained in a
segregated account by a custodian that satisfies the requirements of the
Investment Company Act of 1940 ("1940 Act"). The Fund also will establish and
maintain such segregated accounts with respect to its total obligations under
any interest rate swaps that are not entered into on a net basis and with
respect to any interest rate caps, collars and floors that are entered into by
the Fund.

The Fund will enter into interest rate protection transactions only with
banks and recognized securities dealers believed by Mitchell Hutchins to
present minimal credit risks in accordance with guidelines established by the
Trust's board of trustees. If there is a default by the other party to such a
transaction, the Fund will have to rely on its contractual remedies (which may
be limited by bankruptcy, insolvency or similar laws) pursuant to the
agreements related to the transaction.

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

TRUSTEES AND OFFICERS

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

<TABLE>
<CAPTION>
NAME AND ADDRESS*; BUSINESS EXPERIENCE;
AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ------------------ ------------------- --------------------
<S> <C> <C>
E. Garrett Bewkes, Trustee and Mr. Bewkes is a director of and a
Jr.**; 69 Chairman of the consultant to, Paine Webber Group
Board of Trustees Inc. ("PW Group") (holding company
of PaineWebber and Mitchell
Hutchins). Prior to 1988, he was
chairman of the board, president
and chief executive officer of
American Bakeries Company. Mr.
Bewkes is also a director of Inter-
state Bakeries Corporation, NaPro
BioTherapeutics, Inc. and a direc-
tor or trustee of 24 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>

17
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
---------------------- ------------------- --------------------
<S> <C> <C>
Meyer Feldberg; 53 Trustee Mr. Feldberg is Dean and Professor
Columbia University of Management of the Graduate
101 Uris Hall School of Business, Columbia Uni-
New York, New York 10027 versity. Prior to 1989, he was
president of the Illinois Institute
of Technology. Dean Feldberg is
also a director of AMSCO Interna-
tional Inc., Federated Department
Stores, Inc., and New World Commu-
nications Group Incorporated and a
director or trustee of 16 other in-
vestment companies for which Mitch-
ell Hutchins or PaineWebber serves
as investment adviser.
George W. Gowen; 66 Trustee Mr. Gowen is a partner in the law
666 Third Avenue firm of Dunnington, Bartholow &
New York, New York 10017 Miller. Prior to May 1994, he was a
partner in the law firm of Fryer,
Ross & Gowen. Mr. Gowen is also a
director of Columbia Real Estate
Investments, Inc. and a director or
trustee of 14 other investment com-
panies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
Frederic V. Malek; 59 Trustee Mr. Malek is chairman of Thayer Cap-
901 15th Street, N.W. ital Partners (investment bank) and
Suite 300 a co-chairman and director of CB
Washington, D.C. 20005 Commercial Group Inc. (real es-
tate). From January 1992 to Novem-
ber 1992, he was campaign manager
of Bush-Quayle '92. From 1990 to
1992, he was vice chairman, and
from 1989 to 1990, he was president
of Northwest Airlines Inc., NWA
Inc. (holding company of Northwest
Airlines Inc.) and Wings Holdings
Inc. (holding company of NWA Inc.)
Prior to 1989, he was employed by
the Marriott Corporation (hotels,
restaurants, airline catering and
contract feeding), where he most
recently was an executive vice
president and president of Marriott
Hotels and Resorts. Mr. Malek is
also a director of American Manage-
ment Systems, Inc., Automatic Data
Processing, Inc., Avis, Inc., FPL
Group, Inc., ICF International,
Manor Care, Inc., National Educa-
tion Corporation and Northwest Air-
lines Inc. and a director or
trustee of 14 other investment
</TABLE>

18
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
---------------------- ------------------- --------------------
<S> <C> <C>
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Judith Davidson Moyers; Trustee Mrs. Moyers is president of Public
60 Affairs Television, Inc., an educa-
Public Affairs Televi- tional consultant and a home econo-
sion mist. Mrs. Moyers is also a direc-
356 W. 58th Street tor of Ogden Corporation and a di-
New York, New York 10019 rector or trustee of 14 other in-
vestment companies for which Mitch-
ell Hutchins or PaineWebber serves
as investment adviser.
Margo N. Alexander; 49 President Mrs. Alexander is president, chief
executive officer and a director of
Mitchell Hutchins and an executive
vice president and a director of
PaineWebber. Mrs. Alexander is also
a director or trustee of eight in-
vestment companies and president of
29 other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Teresa M. Boyle; 37 Vice President Ms. Boyle is a first vice president
and manager--advisory administra-
tion of Mitchell Hutchins. Prior to
November 1993, she was compliance
manager of Hyperion Capital Manage-
ment, Inc., an investment advisory
firm. Prior to April 1993, Ms.
Boyle was a vice president and man-
ager--legal administration of
Mitchell Hutchins. Ms. Boyle is
also a vice president of 29 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Joan L. Cohen; 31 Vice President and Ms. Cohen is a vice president and
Assistant Secretary attorney of Mitchell Hutchins.
Prior to December 1993, she was an
associate at the law firm of Seward
& Kissel. Ms. Cohen is also a vice
president and assistant secretary
of 24 other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>

19
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
---------------------- ------------------- --------------------
<S> <C> <C>
C. William Maher; 34 Vice President and Mr. Maher is a first vice president
Assistant Treasurer and a senior manager of the mutual
fund fi-
nance division of Mitchell
Hutchins. Mr. Maher is also a vice
president and assistant treasurer
of 29 other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Dennis McCauley; 48 Vice President Mr. McCauley is a managing director
and chief investment officer--fixed
income of Mitchell Hutchins. Prior
to December 1994, he was Director
of Fixed Income Investments of IBM
Corporation. Mr. McCauley is also a
vice president of 17 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Ann E. Moran; 38 Vice President and Ms. Moran is a vice president of
Assistant Treasurer Mitchell Hutchins. Ms. Moran is
also a vice president and assistant
treasurer of 29 other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Dianne E. O'Donnell; 43 Vice President and Ms. O'Donnell is a senior vice pres-
Secretary ident and deputy general counsel of
Mitchell Hutchins. Ms. O'Donnell is
also a vice president and secretary
of 29 other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Victoria E. Schonfeld; Vice President Ms. Schonfeld is a managing director
45 and general counsel of Mitchell
Hutchins. From April 1990 to May
1994, she was a partner in the law
firm of Arnold & Porter. Ms. Schon-
feld is also a vice president of 29
other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Paul H. Schubert; 33 Vice President and Mr. Schubert is a first vice presi-
Assistant Treasurer dent and a senior manager of the
mutual fund finance division of
Mitchell Hutchins. From August 1992
to August 1994, he was a vice pres-
ident at BlackRock Financial Man-
agement, Inc. Prior to August
</TABLE>

20
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ------------------- --------------------
<S> <C> <C>
1992, he was an audit manager with
Ernst & Young LLP. Mr. Schubert is
also a vice president and assistant
treasurer of 29 other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Julian F. Sluyters; 35 Vice President and Mr. Sluyters is a senior vice presi-
Treasurer dent and the director of the mutual
fund finance division of Mitchell
Hutchins. Prior to 1991, he was an
audit senior manager with Ernst &
Young LLP. Mr. Sluyters is also a
vice president and treasurer of 29
other investment companies for
which Mitchell Hutchins or Paine-
Webber serves as investment advis-
er.
Gregory K. Todd; 39 Vice President and Mr. Todd is a first vice president
Assistant Secretary and associate general counsel of
Mitchell Hutchins. Prior to 1993,
he was a partner in the law firm of
Shereff, Friedman, Hoffman &
Goodman. Mr. Todd is also a vice
president and assistant secretary
of 29 other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Stuart Waugh; 40 Vice President Mr. Waugh is a managing director and
a portfolio manager of Mitchell
Hutchins responsible for global
fixed income investments and cur-
rency trading. Mr. Waugh is also a
vice president of four other in-
vestment companies for which
Mitchell Hutchins serves as invest-
ment adviser.
Keith A. Weller; 34 Vice President and Mr. Weller is a first vice president
Assistant Secretary and associate general counsel of
Mitchell Hutchins. From September
1987 to May 1995, he was an attor-
ney in private practice. Mr. Weller
is also a vice president and assis-
tant secretary of 24 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
- --------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mr. Bewkes is an "interested person" of the Trust as defined in the 1940 Act
by virtue of his position with PW Group.

21
<PAGE>

The Trust pays trustees who are not "interested persons" of the Trust $3,000
annually and $250 per meeting of the board or any committee thereof. Trustees
are reimbursed for any expenses incurred in attending meetings. Trustees and
officers of the Trust own in the aggregate less than 1% of the shares of the
Fund. Because Mitchell Hutchins and PaineWebber perform substantially all of
the services necessary for the operation of the Trust, the Trust requires no
employees. No officer, director or employee of Mitchell Hutchins or
PaineWebber presently receives any compensation from the Trust for acting as a
trustee or officer.

The table below includes certain information relating to the compensation of
the Trust's current trustees who held office during the fiscal year ended
October 31, 1995.

COMPENSATION TABLE

<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED FROM THE TRUST AND
COMPENSATION ACCRUED AS PART OF ANNUAL BENEFITS THE FUND COMPLEX
NAME OF PERSON, POSITION FROM THE TRUST* A FUND'S EXPENSES UPON RETIREMENT PAID TO TRUSTEES**
- ------------------------ --------------- ------------------- --------------- ------------------
<S> <C> <C> <C> <C>
E. Garrett Bewkes, Jr.,
Trustee and chairman of
the board of trustees.. -- -- -- --
Meyer Feldberg,
Trustee................ $7,000 -- -- $106,375
George W. Gowen,
Trustee................ 7,000 -- -- 99,750
Frederic V. Malek,
Trustee................ 7,000 -- -- 99,750
Judith Davidson Moyers,
Trustee................ 7,000 -- -- 98,500
</TABLE>
- --------
* Represents fees paid to each trustee during the fiscal year ended
October 31, 1995.
** Represents total compensation paid to each trustee during the calendar year
ended December 31, 1995.

22
<PAGE>

INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS

INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of the Fund pursuant to a contract with the Trust
dated April 21, 1988 ("Advisory Contract"). Under the Advisory Contract the
Fund pays Mitchell Hutchins an annual fee, computed daily and paid monthly,
according to the following schedule:

<TABLE>
<CAPTION>
ANNUAL
AVERAGE DAILY NET ASSETS RATE
------------------------ ------
<S> <C>
Up to $500 million................ 0.750%
In excess of $500 million
up to $1.0 billion............... 0.725
In excess of $1.0 billion
up to $1.5 billion............... 0.700
In excess of $1.5 billion
up to $2.0 billion............... 0.675
Over $2.0 billion................. 0.650
</TABLE>

For the fiscal years ended October 31, 1995, October 31, 1994 and October
31, 1993, the Fund paid (or accrued) to Mitchell Hutchins advisory and
administrative fees of $9,229,318, $12,723,592 and $11,643,58, respectively.

Under a service agreement pursuant to which PaineWebber provides certain
services to the Fund not otherwise provided by the Fund's transfer agent,
which agreement is reviewed by the Trust's board of trustees annually, during
the fiscal years ended October 31, 1995, October 31, 1994 and October 31,
1993, PaineWebber earned service fees of $376,299, $487,859 and $467,885,
respectively.

Under the terms of the Advisory Contract, the Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Trust not readily identifiable as belonging
to the Fund or the Trust's other series are allocated among series by or under
the direction of the board of trustees in such manner as the board deems to be
fair and equitable. Expenses borne by the Fund include the following (or the
Fund's share of the following): (1) the cost (including brokerage commissions)
of securities purchased or sold by the Fund and any losses incurred in
connection therewith, (2) fees payable to and expenses incurred on behalf of
the Fund by Mitchell Hutchins, (3) organizational expenses, (4) filing fees
and expenses relating to the registration and qualification of the Fund's
shares and the Trust under federal and state securities laws and maintenance
of such registrations and qualifications, (5) fees and salaries payable to
trustees who are not interested persons (as defined in the 1940 Act) of the
Trust or Mitchell Hutchins, (6) all expenses incurred in connection with the
trustees' services, including travel expenses, (7) taxes (including any income
or franchise taxes) and governmental fees, (8) costs of any liability,
uncollectible items of deposit and other insurance or fidelity bonds, (9) any
costs, expenses or losses arising out of a liability of or claim for damages
or other relief asserted against the Trust or the Fund for violation of any
law, (10) legal, accounting and auditing expenses, including legal fees of
special counsel for the independent trustees, (11) charges of custodians,
transfer agents and other agents, (12) costs of preparing share certificates,
(13) expenses of setting in type and printing prospectuses and supplements
thereto, statements of additional information and supplements thereto, reports
and proxy materials for existing shareholders, and costs of mailing such
materials to existing shareholders, (14) any extraordinary expenses (including
fees and disbursements of counsel) incurred by the Trust or the Fund, (15)
fees, voluntary assessments and other expenses incurred in connection with
membership in investment company organizations, (16) costs of mailing and
tabulating proxies and costs

23
<PAGE>

of meetings of shareholders, the board and any committees thereof, (17) the
cost of investment company literature and other publications provided to
trustees and officers and (18) costs of mailing, stationery and communications
equipment.

As required by state regulation, Mitchell Hutchins will reimburse the Fund
if and to the extent that the aggregate operating expenses of the Fund exceed
applicable limits in any fiscal year. Currently, the most restrictive such
limit applicable to the Fund is 2.5% of the first $30 million of the Fund's
average daily net assets, 2.0% of the next $70 million of its average daily
net assets and 1.5% of its average daily net assets in excess of $100 million.
Certain expenses, such as brokerage commissions, taxes, interest, distribution
fees, certain expenses attributable to investing outside the United States and
extraordinary items, are excluded from this limitation. For the fiscal years
ended October 31, 1995, October 31, 1994 and October 31, 1993, no
reimbursements were made pursuant to such limitation.

Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error or judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. The Advisory Contract
terminates automatically upon its assignment and is terminable at any time
without penalty by the Trust's board of trustees or by vote of the holders of
a majority of the Fund's outstanding voting securities, on 60 days' written
notice to Mitchell Hutchins or by Mitchell Hutchins on 60 days' written notice
to the Fund.

The following table shows the approximate net assets as of January 31, 1996,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment
company may fall into more than one of the categories below.

<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($ MIL)
------------------- ----------
<S> <C>
Domestic (excluding Money Market).............................. $ 5,694.9
Global......................................................... 2,879.2
Equity/Balanced................................................ 2,858.1
Fixed Income (excluding Money Market).......................... 5,716.0
Taxable Fixed Income......................................... 3,965.6
Tax-Free Fixed Income........................................ 1,750.4
Money Market Funds............................................. 21,810.3
</TABLE>

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

DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
Class A, Class B and Class C shares of the Fund under separate distribution
contracts with the Trust dated July 7, 1993 and November 10, 1995
(collectively, "Distribution Contracts"), that require Mitchell Hutchins to
use its best

24
<PAGE>

efforts, consistent with its other businesses, to sell shares of the Fund.
Shares of the Fund are offered continuously. Under separate exclusive dealer
agreements between Mitchell Hutchins and PaineWebber dated July 7, 1993 and
November 10, 1995, relating to the Class A, Class B and Class C shares of the
Fund (collectively, "Exclusive Dealer Agreements"), Paine Webber and its
correspondent firms sell the Fund's shares.

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

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

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

For the fiscal year ended October 31, 1995, the Fund paid (or accrued) the
following fees to Mitchell Hutchins under the Class A, Class B and Class C
Plans:

<TABLE>
<S> <C>
Class A.............................................................. $1,499,377
Class B.............................................................. 5,822,394
Class C.............................................................. 538,004
</TABLE>

Mitchell Hutchins estimates that it and its parent corporation, PaineWebber,
incurred the following shareholder service-related and distribution-related
expenses with respect to the Fund during the fiscal year ended October 31,
1995:

CLASS A

<TABLE>
<S> <C>
Marketing and advertising........................................... $ 335,668
Printing of prospectuses and statements of additional information... 2,061
Branch network costs allocated and interest expense................. 3,764,453
Service fees paid to PaineWebber investment executives.............. 674,720
</TABLE>

25
<PAGE>

CLASS B

<TABLE>
<S> <C>
Marketing and advertising........................................... $ 203,843
Amortization of commissions......................................... 2,756,777
Printing of prospectuses and statements of additional information... 1,252
Branch network costs allocated and interest expense................. 3,047,478
Service fees paid to PaineWebber investment executives.............. 655,020

CLASS C

Marketing and advertising........................................... $ 89,803
Amortization of commissions......................................... 158,675
Printing of prospectuses and statements of additional information... 551
Branch network costs allocated and interest expense................. 1,110,149
Service fees paid to PaineWebber investment executives.............. 80,701
</TABLE>

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

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

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

In approving the Class B Plan, the trustees considered all the features of
the distribution system, including (1) the conditions under which contingent
deferred sales charges would be imposed and the amount of such charges, (2)
the advantage to investors in having no initial sales charges deducted from
Fund purchase payments and instead having the entire amount of their purchase
payments immediately invested in Fund shares, (3) Mitchell Hutchins' belief
that the ability of PaineWebber investment executives and correspondent firms
to receive sales commissions when Class B shares are sold and continuing
service fees thereafter while their customers invest their entire purchase
payments immediately in Class B shares would prove attractive to

26
<PAGE>

the investment executives and correspondent firms, resulting in greater growth
of the Fund than might otherwise be the case, (4) the advantages to the
shareholders of economies of scale resulting from growth in the Fund's assets
and potential continued growth, (5) the services provided to the Fund and its
shareholders by Mitchell Hutchins, (6) the services provided by PaineWebber
pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins and (7)
Mitchell Hutchins' shareholder service- and distribution-related expenses and
costs. The trustees also recognized that Mitchell Hutchins' willingness to
compensate PaineWebber and its investment executives, without the concomitant
receipt by Mitchell Hutchins of initial sales charges, was conditioned upon
its expectation of being compensated under the Class B Plan.

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

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

Under the Distribution Contract for the Class A shares and similar prior
distribution contracts, for the periods set forth below, Mitchell Hutchins
earned the following approximate amounts of sales charges and retained the
following approximate amounts, net of concessions to PaineWebber as exclusive
dealer:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
OCTOBER 31,
-------------------------
1995 1994 1993
------- -------- --------
<S> <C> <C> <C>
Earned............................................. $43,136 $193,492 $560,223
Retained........................................... 26,258 15,764 11,464
</TABLE>

For the fiscal year ended October 31, 1995, Mitchell Hutchins earned and
retained $2,395,994 in contingent deferred sales charges paid upon certain
redemptions of Class B shares.

27
<PAGE>

PORTFOLIO TRANSACTIONS

Subject to policies established by the Trust's board of trustees, Mitchell
Hutchins is responsible for the execution of the Fund's portfolio transactions
and the allocation of brokerage transactions. In executing portfolio
transactions, Mitchell Hutchins seeks to obtain the best net results for the
Fund, taking into account such factors as the price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution
and operational facilities of the firm involved. Prices paid to dealers in
principal transactions, through which most debt securities are traded,
generally include a "spread," which is the difference between the prices at
which the dealer is willing to purchase and sell a specific security at the
time. The Fund may invest in securities traded in the OTC market and will
engage primarily in transactions with the dealers who make markets in such
securities, unless a better price or execution could be obtained by using a
broker. While Mitchell Hutchins generally seeks reasonably competitive
commission rates and dealer spreads, payment of the lowest commission or
spread is not necessarily consistent with obtaining the best net results. For
the fiscal years ended October 31, 1995, October 31, 1994 and October 31,
1993, the Fund did not pay any brokerage commissions.

The Fund has no obligation to deal with any broker or group of brokers in
the execution of portfolio transactions. The Fund contemplates that,
consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through Mitchell Hutchins or its affiliates,
including PaineWebber. The Trust's board of trustees has adopted procedures in
conformity with Rule 17e-1 under the 1940 Act to ensure that all brokerage
commissions paid to Mitchell Hutchins and its affiliates are reasonable and
fair. Specific provisions in the Advisory Contract authorize Mitchell Hutchins
and any of its affiliates that are members of a national securities exchange
to effect portfolio transactions for the Fund on such exchange and to retain
compensation in connection with such transactions. Any such transactions will
be effected and related compensation paid only in accordance with applicable
SEC regulations. During the last three fiscal years, the Fund paid no
brokerage commissions to Mitchell Hutchins or any of its affiliates.

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

Consistent with the interests of the Fund and subject to the review of the
Trust's board of trustees, Mitchell Hutchins may cause the Fund to purchase
and sell portfolio securities through brokers who 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 the
fiscal year ended October 31, 1995, Mitchell Hutchins directed no portfolio
transactions to brokers chosen for research services.

28
<PAGE>

purchased for hard dollars. Mitchell Hutchins may engage in agency
transactions in OTC equity and debt securities in return for research and
execution services. These transactions are entered into only in compliance
with procedures ensuring that the transaction (including commissions) is at
least as favorable as it would have been if effected directly with a market-
maker that did not provide research or execution services. These procedures
include Mitchell Hutchins receiving multiple quotes from dealers before
executing the transaction on an agency basis.

Information and research services furnished by brokers or dealers through
which or with which 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 by brokers or dealers 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 brokers or dealers will be in addition to, and not in lieu of, the
services required to be performed by Mitchell Hutchins under the Advisory
Contract.

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

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

PORTFOLIO TURNOVER. The annual portfolio turnover rate is calculated by
dividing the lesser of the Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
securities in the portfolio during the year. For the fiscal years ended
October 31, 1995 and October 31, 1994, the portfolio turnover rates for the
Fund were: 113% and 108%, respectively.

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

COMBINED PURCHASE PRIVILEGE--CLASS A SHARES. Investors and eligible groups
of related Fund investors may combine purchases of Class A shares of the Fund
with concurrent purchases of Class A shares of any other PaineWebber mutual
fund and thus take advantage of the reduced sales charges for Class A shares
indicated in the tables of sales charges in the Prospectus. The sales charge
payable on the purchase of

29
<PAGE>

Class A shares of the Fund and Class A shares of such other funds will be at
the rates applicable to the total amount of the combined concurrent purchases.

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

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

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

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

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

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

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

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

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

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

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

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

30
<PAGE>

reduction of the contingent deferred sales charge that applied to the Class B
shares of the CDSC Fund will apply to the Class B shares of the Fund acquired
through the exchange.

ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of the Fund may be exchanged for shares of the
corresponding class of most other PaineWebber mutual funds. Shareholders will
receive at least 60 days' notice of any termination or material modification
of the exchange offer, except no notice need be given of an amendment whose
only material effect is to reduce the exchange fee, and no notice need be
given if, under extraordinary circumstances, either redemptions are suspended
under the circumstances described below or 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 objectives, policies and
restrictions.

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

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

REINSTATEMENT PRIVILEGE--CLASS A SHARES. As described in the Prospectus,
shareholders who have redeemed their Class A shares may reinstate their
account in the Fund without a sales charge. Shareholders may exercise the
reinstatement privilege by notifying the Transfer Agent of such desire and
forwarding a check for the amount to be purchased within 365 days after the
date of redemption. The reinstatement will be made at the net asset value per
share next computed after the notice of reinstatement and check are received.
The amount of a purchase under this reinstatement privilege cannot exceed the
amount of the

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<PAGE>

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

PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN(SM);
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(R) (RMA(R))

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

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

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

PERIODIC INVESTING AND DOLLAR COST AVERAGING.

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

32
<PAGE>

PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT.

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

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

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

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

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

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

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

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

. automatic direct deposit of checks into your RMA account and automatic
withdrawals from the account.

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

CONVERSION OF CLASS B SHARES

Class B shares will automatically convert to Class A shares, based on the
relative net asset values per share of each of the two Classes, as of the
close of business on the first Business Day (as defined below) of the month in
which the sixth anniversary of the initial issuance of such Class B shares
occurs. For the purpose of calculating the holding period required for
conversion of Class B shares, the date of initial issuance shall mean (1) the
date on which such Class B shares were issued, or (2) for Class B shares
obtained through an exchange, or a series of exchanges, the date on which the
original Class B shares were issued. If the shareholder acquired Class B
shares of the Fund through an exchange of Class B shares of a CDSC Fund

33
<PAGE>

that were acquired prior to July 1, 1991, the shareholder's holding period for
purposes of conversion will be determined based on the date the CDSC Fund
shares were initially issued. For purposes of conversion to Class A, Class B
shares purchased through the reinvestment of dividends and other distributions
paid in respect of Class B shares will be held in a separate sub-account. Each
time any Class B shares in the shareholder's regular account (other than those
in the sub-account) convert to Class A, a pro rata portion of the Class B
shares in the sub-account will also convert to Class A. The portion will be
determined by the ratio that the shareholder's Class B shares converting to
Class A bears to the shareholder's total Class B shares not acquired through
dividends and other distributions.

The availability of the conversion feature is subject to (1) the continuing
applicability of a ruling of the Internal Revenue Service that the dividends
and other distributions paid on Class A and Class B shares will not result in
"preferential dividends" under the Internal Revenue Code and (2) the
continuing availability of an opinion of counsel to the effect that the
conversion of shares does not constitute a taxable event. If the conversion
feature ceased to be available, the Class B shares would not be converted and
would continue to be subject to the higher ongoing expenses of the Class B
shares beyond six years from the date of purchase. Mitchell Hutchins has no
reason to believe that these conditions for the availability of the conversion
feature will not continue to be met.

VALUATION OF SHARES

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

Securities that are listed on U.S. and foreign stock exchanges are valued at
the last sale price on the day the securities are being valued or, lacking any
sales on such day, at the last available bid price. In cases where securities
are traded on more than one exchange, the securities are generally valued on
the exchange considered by Mitchell Hutchins as the primary market. Securities
traded in the OTC market and listed on Nasdaq are valued at the last available
sale price on Nasdaq at 4:00 p.m., Eastern time; other OTC securities are
valued at the last bid price available prior to valuation. Securities and
assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the
Trust's board of trustees. It should be recognized that judgment often plays a
greater role in valuing non-investment grade debt securities than is the case
with respect to securities for which a broader range of dealer quotations and
last-sale information is available. All investments quoted in foreign currency
are valued daily in U.S. dollars on the basis of the foreign currency exchange
rate prevailing at the time such valuation is determined by the Fund's
custodian. The amortized cost method of valuation generally is used to value
debt obligations with 60 days or less remaining until maturity, unless the
board of trustees determines that this does not represent fair value.

Foreign currency exchange rates are generally determined prior to the close
of trading on the NYSE. Occasionally events affecting the value of foreign
investments and such exchange rates occur between the time at which they are
determined and the close of trading on the NYSE, which events will not be
reflected in a computation of the Fund's net asset value on that day. If
events materially affecting the value of such investments or currency exchange
rates occur during such time period, the investments will be valued at their
fair value as determined in good faith by or under the direction of the
Trust's board of trustees. The foreign currency exchange transactions of the
Fund conducted on a spot (that is, cash) basis are valued at the spot

34
<PAGE>

rate for purchasing or selling currency prevailing on the foreign exchange
market. This rate under normal market conditions differs from the prevailing
exchange rate in an amount generally less than one-tenth of one percent due to
the costs of converting from one currency to another.

PERFORMANCE INFORMATION

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

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

P(1 + T)/n/ = ERV

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

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

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

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

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<PAGE>

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

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Fiscal year ended October 31, 1995:
Standardized Return*.................................. 6.61% 5.24% 10.49%
Non-Standardized Return............................... 11.09% 10.24% 9.74%
Five years ended October 31, 1995:
Standardized Return*.................................. NA 5.75% NA
Non-Standardized Return............................... NA 6.07% NA
Inception** to October 31, 1995:
Standardized Return................................... 6.45% 9.63% 5.55%
Non-Standardized Return............................... 7.45% 9.63% 5.55%
</TABLE>
- --------
*All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charge imposed on a redemption of shares held for the period.
**The inception date for each Class is as follows: Class A--July 1, 1991,
Class B--March 20, 1987 and Class C--July 2, 1992.

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

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

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

36
<PAGE>

calculations, the maturity of an obligation with one or more call provisions
is assumed to be the next date on which the obligation reasonably can be
expected to be called or, if none, the maturity date. With respect to Class A
shares, in calculating the maximum offering price per share at the end of the
Period (variable "d" in the above formula) the Fund's current maximum 4%
initial sales charge on Class A shares is included. For the 30-day period
ended October 31, 1995, the yields for its Class A shares, Class B shares and
Class C shares were 5.83%, 4.71% and 4.96%, respectively.

OTHER INFORMATION. In Performance Advertisements, the Fund may compare its
Standardized Return and/or its Non-Standardized Return with data published by
Lipper Analytical Services, Inc. ("Lipper") for world income funds, CDA
Investment Technologies, Inc. ("CDA"), Wiesenberger Investment Companies
Service ("Wiesenberger"), Investment Company Data, Inc. ("ICD"), or
Morningstar Mutual Funds ("Morningstar") or with the performance of recognized
stock and other indices, including the Standard & Poor's 500 Composite Stock
Price Index, the Dow Jones Industrial Average, the Wilshire 5000 Index, the
Morgan Stanley Capital International Perspective Indices, the Salomon Brothers
World Government Index, the Morgan Stanley Capital International Energy
Sources Index, the Standard & Poor's Oil Composite Index, the Salomon Brothers
Non-U.S. Dollar Index, the Lehman Bond Index, 30-year and 10-year U.S.
Treasury Bonds and changes in the Consumer Price Index as published by the
U.S. Department of Commerce. Each Fund also may refer in such materials to
mutual fund performance rankings and other data, such as comparative asset,
expense and fee levels, published by Lipper, CDA, Wiesenberger, ICD or
Morningstar. Performance Advertisements also may refer to discussions of a
Fund and comparative mutual fund data and ratings reported in independent
periodicals, including (but not limited to) THE WALL STREET JOURNAL, MONEY
Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW
YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER
LETTERS.

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

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

37
<PAGE>

TAXES

In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code, the Fund must distribute to
its shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-term
capital gain and net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements.
These requirements include the following: (1) the Fund must derive at least
90% of its gross income each taxable year from dividends, interest, payments
with respect to securities loans and gains from the sale or other disposition
of securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in securities or those currencies ("Income Requirement"); (2) the
Fund must derive less than 30% of its gross income each taxable year from the
sale or other disposition of securities, or any of the following, that were
held for less than three months--options, futures or forward contracts (other
than those on foreign currencies), or foreign currencies (or options, futures
or forward contracts thereon) that are not directly related to the Fund's
principal business of investing in securities (or options and futures with
respect to securities) ("Short-Short Limitation"); (3) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities,
securities of other RICs and other securities, with these other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets and that does not represent more than 10%
of the issuer's outstanding voting securities; and (4) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its
total assets may be invested in securities (other than U.S. government
securities or the securities of other RICs) of any one issuer.

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

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

Interest received by the Fund may be subject to income, withholding or other
taxes imposed by foreign countries and U.S. possessions that would reduce the
yield on its securities. Tax conventions between certain countries and the
United States may reduce or eliminate these foreign taxes, however, and many
foreign countries do not impose taxes on capital gains in respect of
investments by foreign investors. If more than 50% of the value of the Fund's
total assets at the close of its taxable year consists of securities of
foreign corporations, the Fund will be eligible to, and may, file an election
with the Internal Revenue Service that will enable its shareholders, in
effect, to receive the benefit of the foreign tax credit with respect to any
foreign and U.S. possessions income taxes paid by it. Pursuant to the
election, the Fund would treat those taxes as dividends paid to its
shareholders and each shareholder would be required to (1) include in gross
income, and treat as paid by him or her, his or her proportionate share of
those taxes, (2) treat his or her share of those taxes and of any dividend
paid by the Fund that represents income from foreign or U.S. possessions
sources as his or her own income from those sources and (3) either deduct the
taxes deemed paid by him or her in computing his or her taxable income or,
alternatively, use the foregoing information in calculating the foreign

38
<PAGE>

tax credit against his or her federal income tax. The Fund will report to its
shareholders shortly after each taxable year their respective shares of the
Fund's income from sources within, and taxes paid to, foreign countries and
U.S. possessions if it makes this election.

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

The Fund may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation that, in general, meets either of
the following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, the Fund will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock of a PFIC or of any gain on disposition of the stock (collectively "PFIC
income"), plus interest thereon, even if the Fund distributes the PFIC income
as a taxable dividend to its shareholders. The balance of the PFIC income will
be included in the Fund's investment company taxable income and, accordingly,
will not be taxable to it to the extent that income is distributed to its
shareholders. If the Fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Fund will be required to include in income each year its pro
rata share of the qualified electing fund's annual ordinary earnings and net
capital gain (the excess of net long-term capital gain over net short-term
capital loss)--which the Fund probably would have to distribute to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax--even if those
earnings and gain are not distributed to the Fund by the PFIC. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.

Pursuant to proposed regulations, open-end RICs, such as the Fund, would be
entitled to elect to "mark-to-market" their stock in certain PFICs. "Marking-
to-market," in this context, means recognizing as gain for each taxable year
the excess, as of the end of that year, of the fair market value of each such
PFIC's stock over the owner's adjusted basis in that stock (including mark-to-
market gain for each prior year for which an election was in effect).

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

39
<PAGE>

purposes of that limitation. The Fund will consider whether it should seek to
qualify for this treatment for its hedging transactions. To the extent the
Fund does not qualify for this treatment, it may be forced to defer the
closing out of certain options, futures, forward currency contracts and
foreign currency positions beyond the time when it otherwise would be
advantageous to do so, in order for the Fund to continue to qualify as a RIC.

The Fund may acquire zero coupon Treasury securities issued with original
issue discount. As a holder of such securities, the Fund must include in its
gross income the original issue discount that accrues on the securities during
the taxable year, even if the Fund receives no corresponding payment on them
during the year. Because the Fund annually must distribute substantially all
of its investment company taxable income, including any accrued original issue
discount, to satisfy the Distribution Requirement and avoid imposition of the
Excise Tax, it may be required in a particular year to distribute as a
dividend an amount that is greater than the total amount of cash it actually
receives. Those distributions will be made from the Fund's cash assets or from
the proceeds of sales of portfolio securities, if necessary. The Fund may
realize capital gains or losses from those sales, which would increase or
decrease its investment company taxable income and/or net capital gain. In
addition, any such gains may be realized on the disposition of securities held
for less than three months. Because of the Short-Short Limitation, any such
gains would reduce the Fund's ability to sell other securities, or certain
options, futures, forward currency contracts or foreign currency position,
held for less than three months that it might wish to sell in the ordinary
course of its portfolio management.

OTHER INFORMATION

PAINEWEBBER INVESTMENT SERIES. Prior to July 1, 1991, the name of the Fund
was "PaineWebber Master Global Income Fund." Prior to November 10, 1995, the
Fund's Class C shares were known as "Class D" shares.

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

CLASS-SPECIFIC EXPENSES. The Fund might determine to allocate certain of its
expenses (in addition to distribution fees) to the specific Classes of the
Fund's shares to which those expenses are attributable. For example, Class B
shares bear higher transfer agency fees per shareholder account than those
borne by Class A or Class C shares. The higher fee is imposed due to the
higher costs incurred by the Transfer Agent in tracking

40
<PAGE>

shares subject to a contingent deferred sales charge because, upon redemption,
the duration of the shareholder's investment must be determined in order to
determine the applicable charge. Moreover, the tracking and calculations
required by the automatic conversion feature of the Class B shares will cause
the Transfer Agent to incur additional costs. Although the transfer agency fee
will differ on a per account basis as stated above, the specific extent to
which the transfer agency fees will differ between the Classes as a percentage
of net assets is not certain, because the fee as a percentage of net assets
will be affected by the number of shareholder accounts in each Class and the
relative amounts of net assets in each Class.

COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, counsel to the Fund, has passed
upon the legality of the shares offered by the Prospectus. Kirkpatrick &
Lockhart LLP also acts as counsel to Mitchell Hutchins and PaineWebber in
connection with other matters.

INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 1177 Avenue of the Americas,
New York, New York 10036, serves as the Trust's independent accountants.

FINANCIAL STATEMENTS

The Fund's Annual Report to Shareholders for the fiscal year ended October
31, 1995 is a separate document supplied with this Statement of Additional
Information and the financial statements, accompanying notes and report of
independent accountants appearing therein are incorporated by reference in
this Statement of Additional Information.

41
<PAGE>

APPENDIX

DESCRIPTION OF MOODY'S LONG-TERM DEBT RATINGS

Aaa. Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues; Aa. Bonds which are
rated "Aa" are judged to be of high quality by all standards. Together with
the "Aaa" group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in "Aaa" securities or fluctuation of protective elements may
be of greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat greater than the "Aaa" securities; A. Bonds
which are rated "A" possess many favorable investment attributes and are
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future; Baa.
Bonds which are rated "Baa" are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well; Ba. Bonds which are rated "Ba"
are judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate, and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class; B.
Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from "Aa" through "B" in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.

DESCRIPTION OF S&P'S CORPORATE DEBT RATINGS

AAA. Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong; AA. Debt rated "AA" has
a very strong capacity to pay interest and repay principal and differs from
the higher rated issues only in small degree; A. Debt rated "A" has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories; BBB. Debt rated "BBB" is
regarded as having an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than in
higher rated categories; BB, B. Debt rated "BB" and "B" is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions; BB. Debt rated
"BB" has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to inadequate
capacity to meet timely interest and principal payments. The "BB" rating
category is also

42
<PAGE>

used for debt subordinated to senior debt that is assigned an actual or implied
"BBB-" rating; B. Debt rated "B" has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.

Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.

NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as matter of policy.

DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS

PRIME-1. Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior capacity for repayment of short-term promissory obligations. P-1
repayment capacity will normally be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; well-
established access to a range of financial markets and assured sources of
alternate liquidity. PRIME-2. Issuers (or supporting institutions) rated Prime-
2 (P-2) have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above, but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.

DESCRIPTION OF S&P'S COMMERCIAL PAPER RATINGS

A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety. A-1. This
designation indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics are denoted with a plus (+) sign
designation. A-2. Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as high as for issues
designated "A-1". A-3. Issues carrying this designation have a satisfactory
capacity for timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying the
higher designations. B. Issues rated "B" are regarded as having only an
adequate capacity for timely payment. However, such capacity may be damaged by
changing conditions or short-term adversities.

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<PAGE>

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

----------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions..................................... 1
Hedging and Related Income Strategies.................................... 9
Trustees and Officers.................................................... 17
Investment Advisory and Distribution Arrangements........................ 23
Portfolio Transactions................................................... 28
Reduced Sales Charges, Additional Exchange and Redemption Information and
Other Services.......................................................... 29
Conversion of Class B Shares............................................. 33
Valuation of Shares...................................................... 34
Performance Information.................................................. 35
Taxes.................................................................... 38
Other Information........................................................ 40
Financial Statements..................................................... 41
Appendix................................................................. 42
</TABLE>

PaineWebber
Global Income Fund

- --------------------------------------------------------------------------------
Statement of Additional Information February 26, 1996, as revised March 1, 1996

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

[LOGO OF PAINE WEBBER APPEARS HERE]
<PAGE>

PAINEWEBBER GLOBAL INCOME FUND
CLASS Y SHARES
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019

STATEMENT OF ADDITIONAL INFORMATION

PaineWebber Global Income Fund ("Fund") is a non-diversified series of
PaineWebber Investment Series ("Trust"), a professionally managed mutual fund.
The Fund seeks high current income consistent with prudent investment risk,
with capital appreciation as a secondary objective; it invests principally in
high quality debt securities issued or guaranteed by foreign governments, by
the U.S. government, by their respective agencies or instrumentalities or by
supranational organizations, or issued by foreign or U.S. companies. The Fund's
investment adviser, administrator and distributor is Mitchell Hutchins Asset
Management Inc. ("Mitchell Hutchins"), a wholly owned subsidiary of PaineWebber
Incorporated ("PaineWebber"). As distributor for the Fund, Mitchell Hutchins
has appointed PaineWebber to serve as the exclusive dealer for the sale of Fund
shares. This Statement of Additional Information is not a prospectus and should
be read only in conjunction with the Fund's current Prospectus, dated February
26, 1996. A copy of the Prospectus may be obtained by calling any PaineWebber
investment executive or correspondent firm or by calling toll-free 1-800-647-
1568. Participants in the PaineWebber Savings Investment Plan may obtain a copy
of the Prospectus by contacting the PaineWebber Incorporated Benefits
Department, 1000 Harbor Boulevard, 10th Floor, Weehawken, New Jersey 07087, or
by calling 1-201-902-4444. This Statement of Additional Information is dated
February 26, 1996 as revised March 1, 1996.

INVESTMENT POLICIES AND RESTRICTIONS

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

SPECIAL CONSIDERATIONS RELATING TO FOREIGN SECURITIES. Many of the foreign
securities held by the Fund are not registered with the Securities and Exchange
Commission ("SEC"), nor are the issuers thereof subject to its reporting
requirements. Accordingly, there may be less publicly available information
concerning foreign issuers of securities held by the Fund than is available
concerning U.S. companies. Foreign companies are not generally subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory requirements comparable to those applicable to U.S. companies.

converted. Generally, ADRs, in registered form, are denominated in U.S. dollars
and are designed for use in the U.S. securities markets. EDRs, in bearer form,
may be denominated in other currencies and are designed for use in European
securities markets. ADRs are receipts typically issued by a U.S. bank or trust
company evidencing ownership of the underlying securities. EDRs are European
receipts evidencing a similar arrangement. For purposes of the Fund's
investment policies, ADRs and EDRs are deemed to have the same classification
as the underlying securities they represent. Thus, an ADR or EDR evidencing
ownership of common stock will be treated as common stock.

The Fund anticipates that its brokerage transactions involving securities of
companies headquartered in countries other than the United States will be
conducted primarily on the principal exchanges of such countries. Foreign
security trading practices, including those involving securities settlement
where Fund assets may be released prior to receipt of payment, may expose a
Fund to increased risk in the event of a failed trade or the insolvency of a
foreign broker-dealer. Transactions on foreign exchanges are usually subject to
fixed commissions that are generally higher than negotiated commissions on U.S.
transactions, although the Fund will endeavor to achieve the best net results
in effecting its portfolio transactions. There is generally less government
supervision and regulation of exchanges and brokers in foreign countries than
in the United States.

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

A sovereign debtor's willingness or ability to repay principal and interest
due in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
principal international lenders and the political constraints to which a
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local
government or agency.

2
<PAGE>

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

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

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

3
<PAGE>

a demand for repayment. Therefore, the fact that there are contractual or legal
restrictions on resale to the general public or certain institutions is not
dispositive of the liquidity of such investments.

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

The Trust's board of trustees has delegated the function of making day-to-day
determinations of liquidity to Mitchell Hutchins, pursuant to guidelines
approved by the board. Mitchell Hutchins takes into account a number of factors
in reaching liquidity decisions, including (1) the frequency of trades for the
security, (2) the number of dealers that make quotes for the security, (3) the
number of dealers that have undertaken to make a market in the security, (4)
the number of other potential purchasers and (5) the nature of the security and
how trading is effected (e.g., the time needed to sell the security, how offers
are solicited and the mechanics of transfer). Mitchell Hutchins monitors the
liquidity of restricted securities in the Fund's portfolio and reports
periodically on such decisions to the board of trustees.

YIELD FACTORS AND RATINGS. Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's, a division of The McGraw Hill Companies, Inc. ("S&P") and
other nationally recognized statistical rating organizations ("NRSROs") are
private services that provide ratings of the credit quality of fixed income
obligations. A description of ratings assigned to corporate debt obligations
and preferred stock by Moody's and S&P is included in the Appendix to this
Statement of Additional Information. The Fund may use these ratings in
determining whether to purchase, sell or hold a security. It should be
emphasized, however, that ratings are general and are not absolute standards of
quality. Consequently, securities with the same maturity, interest rate and
rating may have different market prices. Credit ratings attempt to evaluate the
safety of principal and interest payments and do not evaluate the risks of
fluctuations in market value or the risks of changes in foreign currency
exchange rates. Also, NRSROs may fail to make timely changes in credit ratings
in response to subsequent events, so that an issuer's current financial
condition may be better or worse than the rating indicates. The rating assigned
to a security by a NRSRO does not reflect an assessment of the security's
market value or of the liquidity of an investment in the security. Subsequent
to its purchase by the Fund, an issue of debt obligations may cease to be rated
or its rating may be reduced below the minimum rating required for purchase.
Mitchell Hutchins will consider such an event in determining whether the Fund
should continue to hold the obligation but is not required to dispose of it.

4
<PAGE>

conditions in the bond market, the financial condition of the issuer, the size
of the offering, the maturity of the obligation and its rating. There is a wide
variation in the quality of bonds, both within a particular classification and
between classifications. An issuer's obligations under its bonds are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of bond holders or other creditors of an issuer; litigation or
other conditions may also adversely affect the power or ability of issuers to
meet their obligations for the payment of interest and principal on their
bonds.

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

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

5
<PAGE>

segregates assets to cover the amount of the commitment. See "Investment
Policies and Restrictions--Segregated Accounts." The Fund purchases when-issued
securities only with the intention of taking delivery, but may sell the right
to acquire the security prior to delivery if Mitchell Hutchins deems it
advantageous to do so, which may result in capital gain or loss to the Fund.

LENDING OF PORTFOLIO SECURITIES. As indicated in the Prospectus, the Fund is
authorized to lend up to 10% of the total value of its portfolio securities to
broker-dealers or institutional investors that Mitchell Hutchins deems
qualified, but only when the borrower maintains acceptable collateral with the
Fund's custodian bank, marked to market daily, in an amount at least equal to
the market value of the securities loaned, plus accrued interest. Acceptable
collateral is limited to cash, U.S. government securities and irrevocable
letters of credit that meet certain guidelines established by Mitchell
Hutchins. In determining whether to lend securities to a particular broker-
dealer or institutional investor, Mitchell Hutchins will consider, and during
the period of the loan will monitor, all relevant facts and circumstances,
including the creditworthiness of the borrower. The Fund will retain authority
to terminate any loans at any time. The Fund may pay reasonable administrative
and custodial fees in connection with a loan and may pay a negotiated portion
of the interest earned on the collateral to the borrower or placing broker. The
Fund will receive reasonable interest on the loan or a flat fee from the
borrower and amounts equivalent to any interest or other distributions on the
securities loaned. The Fund will regain record ownership of loaned securities
to exercise beneficial rights, such as voting and subscription rights and
rights to interest or other distributions, when regaining such rights is
considered to be in the Fund's interest.

U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES. The U.S. government securities in
which the Fund may invest include mortgage-backed securities issued or
guaranteed by the Government National Mortgage Association, the Federal
National Mortgage Association or the Federal Home Loan Mortgage Corporation,
which represent undivided ownership interests in pools of mortgages. The
mortgages backing these securities include both fixed and adjustable rate
mortgages. The U.S. government or the issuing agency guarantees the payment of
the interest on and principal of these securities. The guarantees do not extend
to the securities' value, however, which is likely to vary inversely with
fluctuations in interest rates, and the guarantees do not extend to the yield
or value of the Fund's shares. These securities are "pass-through" instruments
through which the holders receive a share of the interest and principal
payments from the mortgages underlying the securities, net of certain fees. The
principal amounts of such underlying mortgages generally may be prepaid in
whole or in part by the mortgagees at any time without penalty, and the
prepayment characteristics of the underlying mortgages may vary. During periods
of declining interest rates, prepayment of mortgages underlying mortgage-backed
securities can be expected to accelerate. The Fund will reinvest prepaid
amounts in other income producing securities, the yields of which will reflect
interest rates prevailing at the time. Accelerated prepayments adversely affect
yields for mortgage-backed securities purchased by the Fund at a premium and
may involve additional risk of loss of principal because the premium may not
have been fully amortized at the time the obligation is prepaid. The opposite
is true for mortgage-backed securities purchased by the Fund at a discount.

6
<PAGE>

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

INVESTMENT LIMITATIONS OF THE FUND

The Fund may not (1) issue senior securities or borrow money, except from
banks or through reverse repurchase agreements for emergency or temporary
purposes, and then in an aggregate amount not in excess of 10% of the value of
the Fund's total assets at the time of such borrowing; provided that the Fund
will not purchase securities while borrowings (including reverse repurchase
agreements) in excess of 5% of the value of the Fund's total assets are
outstanding; (2) purchase securities of any one issuer if as a result more than
5% of the Fund's total assets would be invested in such issuer or the Fund
would own or hold more than 10% of the outstanding voting securities of that
issuer, except that up to 50% of the Fund's total assets may be invested
without regard to this limitation and provided that this limitation does not
apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities; (3) make an investment in any one industry if the
investment would cause the value of such investments at the time of purchase in
such industry to be 25% or more of the total assets of the Fund taken at market
value; (4) purchase securities on margin, except for short-term credits
necessary for clearance of portfolio transactions, and except that the Fund may
make margin deposits in connection with its use of options, futures contracts
and options on futures contracts; (5) underwrite securities of other issuers,
except to the extent that, in connection with the disposition of portfolio
securities, the Fund may be deemed an underwriter under federal securities
laws; (6) make short sales of securities or maintain a short position, except
that the Fund may (a) make short sales and maintain short positions in
connection with its use of options, futures contracts and options on futures
contracts and (b) sell short "against the box"; (7) purchase or sell real
estate, provided that the Fund may invest in securities secured by real estate
or interests therein or issued by companies which invest in real estate or
interests therein; (8) purchase or sell commodities or commodity contracts,
except that the Fund may purchase or sell interest rate and foreign currency
futures contracts and options thereon, may engage in transactions in foreign
currency and may purchase or sell options on foreign currencies for hedging
purposes; (9) invest in oil, gas or mineral-related programs or leases; (10)
make loans, except through loans of portfolio securities as described in this
Statement of Additional Information and except through repurchase agreements,
provided that for purposes of this restriction the acquisition of publicly
distributed bonds, debentures or other corporate debt securities and investment
in government obligations, short-term commercial paper, certificates of deposit
and bankers' acceptances shall not be deemed to be the making of a loan; or
(11) purchase any securities issued by any other investment company, except in
connection with the merger, consolidation or acquisition of all the securities
or assets of such an issuer.

7
<PAGE>

time of an investment or transaction, a later increase or decrease in
percentage resulting from a change in values of portfolio securities or amount
of total assets will not be considered a violation of any of the foregoing
limitations. The Fund will continue to interpret fundamental investment
limitation (7) to prohibit investment in real estate limited partnerships.

The following investment restrictions may be changed by the vote of the
Trust's board of trustees without shareholder approval. The Fund may not (1)
purchase or retain the securities of any issuer if the officers and trustees of
the Trust and the officers and directors of PaineWebber and Mitchell Hutchins
(each owning beneficially more than 0.5% of the outstanding securities of the
issuer) own in the aggregate more than 5% of the securities of the issuer; (2)
invest more than 10% of its net assets in illiquid securities, a term that
means securities that cannot be disposed of within seven days in the ordinary
course of business at approximately the amount at which it has valued the
securities and includes, among other things, repurchase agreements maturing in
more than seven days; (3) make investments in warrants, if such investments,
valued at the lower of cost or market, exceed 5% of the value of its net
assets, which amount may include warrants that are not listed on the New York
Stock Exchange, Inc. ("NYSE") or American Stock Exchange, Inc. ("AMEX"),
provided that such unlisted warrants, valued at the lower of cost or market, do
not exceed 2% of its net assets, and further provided that this restriction
does not apply to warrants attached to, or sold as a unit with, other
securities; (4) purchase any security if as a result it would have more than 5%
of its total assets invested in securities of companies that, together with any
predecessors, have been in continuous operation for less than three years; and
(5) invest more than 35% of its total assets in debt securities rated Ba or
lower by Moody's or BB or lower by S&P, comparably rated by another NRSRO or
determined by Mitchell Hutchins to be of comparable quality. This non-
fundamental policy (5) can be changed only upon 30 days' advance notice to
shareholders.

PROPOSED CHANGES TO INVESTMENT LIMITATIONS OF THE FUND

The Fund will not:

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

(3) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction,
the acquisition of bonds, debentures or other

8
<PAGE>

debt securities and investments in government obligations, commercial
paper, certificates of deposit, bankers' acceptances or similar
instruments will not be considered the making of a loan.

The Fund will not:

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

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

HEDGING AND RELATED INCOME STRATEGIES

9
<PAGE>

currency contracts, and enter into interest rate protection transactions, to
attempt to hedge the Fund's portfolio and to enhance income. Although it has no
intention of doing so during the coming year, Mitchell Hutchins also may
attempt to hedge the Fund's portfolio through the use of interest rate futures
and options thereon. The particular Hedging Instruments used by the Fund are
described in the Appendix to the Prospectus.

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

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

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

The use of Hedging Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded, the
Commodity Futures Trading

10
<PAGE>

Commission ("CFTC") and various state regulatory authorities. In addition, the
Fund's ability to use Hedging Instruments will be limited by tax
considerations. See "Taxes."

In addition to the products, strategies and risks described below and in the
Prospectus, Mitchell Hutchins expects to discover additional opportunities in
connection with options, futures contracts, forward currency contracts and
other hedging techniques. These new opportunities may become available as
Mitchell Hutchins develops new techniques, as regulatory authorities broaden
the range of permitted transactions and as new options, futures contracts,
forward currency contracts or other techniques are developed. Mitchell Hutchins
may utilize these opportunities to the extent that they are consistent with the
Fund's investment objectives and permitted by the Fund's investment limitations
and applicable regulatory authorities. The Fund's Prospectus or Statement of
Additional Information will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or in
the Prospectus.

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

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

11
<PAGE>

investment at a time when it would otherwise be favorable to do so, or require
that the Fund sell a portfolio security at a disadvantageous time. The Fund's
ability to close out a position in a Hedging Instrument prior to expiration or
maturity depends on the existence of a liquid secondary market or, in the
absence of such a market, the ability and willingness of a contra party to
enter into a transaction closing out the position. Therefore, there is no
assurance that any hedging position can be closed out at a time and price that
is favorable to the Fund.

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

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

The value of an option position will reflect, among other things, the current
market value of the underlying investment, the time remaining until expiration,
the relationship of the exercise price to the market price of the underlying
investment, the historical price volatility of the underlying investment and
general market conditions. Options normally have expiration dates of up to nine
months. Generally, the OTC debt and foreign currency options used by the Fund
are European-style options. This means that the option is only exercisable
immediately prior to its

12
<PAGE>

expiration. This is in contrast to American-style options, which are
exercisable at any time prior to the expiration date of the option. Options
that expire unexercised have no value.

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

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

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

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

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

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

13
<PAGE>

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

FUTURES. The Fund may purchase and sell foreign currency futures contracts
and interest rate futures contracts, although the Fund does not intend to use
interest rate futures contracts during the coming year. The Fund may also
purchase put and call options, and write covered put and call options, on
futures in which it is allowed to invest. The purchase of futures or call
options thereon can serve as a long hedge, and the sale of futures or the
purchase of put options thereon can serve as a short hedge. Writing covered
call options on futures contracts can serve as a limited short hedge, using a
strategy similar to that used for writing covered call options on securities or
indices. Similarly, writing covered put options on futures contracts can serve
as a limited long hedge.

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

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

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

14
<PAGE>

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

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

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

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

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

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

15
<PAGE>

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

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

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

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

16
<PAGE>

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

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

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

17
<PAGE>

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

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

INTEREST RATE PROTECTION TRANSACTIONS. The Fund may enter into interest rate
protection transactions, including interest rate swaps and interest rate caps,
collars and floors. Interest rate swap transactions involve an agreement
between two parties to exchange payments that are based, for example, on
variable and fixed rates of interest and that are calculated on the basis of a
specified amount of principal (the "notional principal amount") for a specified
period of time. Interest rate cap and floor transactions involve an agreement
between two parties in which the first party agrees to make payments to the
counterparty when a designated market interest rate goes above (in the case of
a cap) or below (in the case of a floor) a designated level on predetermined
dates or during a specified time period. Interest rate collar transactions
involve an agreement between two parties in which the payments are made when a
designated market interest rate either goes above a designated ceiling level or
goes below a designated floor on predetermined dates or during a specified time
period.

The Fund may enter into interest rate swaps, caps, collars and floors on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest
rate swaps on a net basis, i.e., the two payment streams are netted out, with
the Fund receiving or paying, as the case may be, only the net amount of the
two payments. Inasmuch as these interest rate protection transactions are
entered into for good faith hedging purposes, and inasmuch as segregated
accounts will be established with respect to such transactions, Mitchell
Hutchins and the Fund believe such obligations do not constitute senior
securities and, accordingly, will not treat them as being subject to the Fund's
borrowing restrictions. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and an amount of cash, U.S. government securities
or other liquid, high-grade debt obligations having an aggregate net asset
value at least equal to the accrued excess will be maintained in a segregated
account by a custodian that satisfies the requirements of the Investment
Company Act of 1940 ("1940 Act"). The Fund also will establish and maintain
such segregated accounts with respect to its total obligations under any
interest rate swaps that are not entered into on a net basis and with respect
to any interest rate caps, collars and floors that are entered into by the
Fund.

18
<PAGE>

TRUSTEES AND OFFICERS

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

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ---------- --------------------
<S> <C> <C>
E. Garrett Bewkes, Trustee and Chairman of Mr. Bewkes is a director and a
Jr.**; 69 the Board of Trustees consultant to Paine Webber Group
Inc. ("PW Group") (holding com-
pany of PaineWebber and Mitchell
Hutchins). Prior to 1988, he was
chairman of the board, president
and chief executive officer of
American Bakeries Company.
Mr. Bewkes is also a director of
Interstate Bakeries Corporation,
NaPro BioTherapeutics, Inc. and a
director or trustee of 24 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Meyer Feldberg; 53 Trustee Mr. Feldberg is Dean and Professor
Columbia University of Management of the Graduate
101 Uris Hall School of Business, Columbia Uni-
New York, New York 10027 versity. Prior to July 1989, he
was president of the Illinois In-
stitute of Technology. Dean
Feldberg is also a director of
AMSCO International Inc., Feder-
ated Department Stores, Inc., and
New World Communications Group
Incorporated and a director or
trustee of 16 other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
an investment adviser.
</TABLE>

19
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ---------- --------------------
<S> <C> <C>
George W. Gowen; 66 Trustee Mr. Gowen is a partner in the law
666 Third Avenue firm of Dunnington, Bartholow &
New York, New York 10017 Miller. Prior to May 1994, he was
a partner in the law firm of Fry-
er, Ross & Gowen. Mr. Gowen is
also a director of Columbia Real
Estate Investments, Inc. and a
director or trustee of 14 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Frederic V. Malek; 59 Trustee Mr. Malek is chairman of Thayer
901 15th Street, N.W. Capital Partners (investment
Suite 300 bank) and a co-chairman and di-
Washington, D.C. 20005 rector of CB Commercial Group
Inc. (real estate). From January
1992 to November 1992, he was
campaign manager of Bush-Quayle
'92. From 1990 to 1992, he was
vice chairman, and from 1989 to
1990, he was president of North-
west Airlines Inc., NWA Inc.
(holding company of Northwest
Airlines Inc.) and Wings Holdings
Inc. (holding company of NWA
Inc.). Prior to 1989, he was em-
ployed by the Marriott Corpora-
tion (hotels, restaurants, air-
line catering and contract feed-
ing), where he most recently was
an executive vice president and
president of Marriott Hotels and
Resorts. Mr. Malek is also a di-
rector of American Management
Systems, Inc., Automatic Data
Processing, Inc., Avis, Inc., FPL
Group, Inc., ICF International,
Manor Care, Inc., National Educa-
tion Corporation and Northwest
Airlines Inc. and a director or
trustee of 14 other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>

20
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ---------- --------------------
<S> <C> <C>
Judith Davidson Moyers; Trustee Mrs. Moyers is president of Public
60 Affairs Television, Inc., an edu-
Public Affairs Televi- cational consultant and a home
sion economist. Mrs. Moyers is also a
356 W. 58th Street director of Ogden Corporation and
New York, New York 10019 a director or trustee of 14 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Margo N. Alexander; 49 President Mrs. Alexander is president, chief
executive officer and a director
of Mitchell Hutchins and an exec-
utive vice president and a direc-
tor of PaineWebber. Mrs. Alexan-
der is also a director or trustee
of eight investment companies and
president of 29 other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Teresa M. Boyle; 37 Vice President Ms. Boyle is a first vice presi-
dent and manager--advisory admin-
istration of Mitchell Hutchins.
Prior to November 1993, she was
compliance manager of Hyperion
Capital Management, Inc., an in-
vestment advisory firm. Prior to
April 1993, Ms. Boyle was a vice
president and manager--legal ad-
ministration of Mitchell
Hutchins. Ms. Boyle is also a
vice president of 29 other in-
vestment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Joan L. Cohen; 31 Vice President and Ms. Cohen is a vice president and
Assistant Secretary attorney of Mitchell Hutchins.
Prior to December 1993, she was
an associate at the law firm of
Seward & Kissel. Ms. Cohen is
also a vice president and assis-
tant secretary of 24 other in-
vestment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>

21
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ---------- --------------------
<S> <C> <C>
C. William Maher; 34 Vice President and Mr. Maher is a first vice presi-
Assistant Treasurer dent and a senior manager of the
mutual fund finance division of
Mitchell Hutchins. Mr. Maher is
also a vice president and assis-
tant treasurer of 29 other in-
vestment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Dennis McCauley; 48 Vice President Mr. McCauley is a managing direc-
tor and chief investment offi-
cer--fixed income of Mitchell
Hutchins. Prior to December 1994,
he was Director of Fixed Income
Investments of IBM Corporation.
Mr. McCauley is also a vice pres-
ident of 17 other investment com-
panies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Ann E. Moran; 38 Vice President and Ms. Moran is a vice president of
Assistant Treasurer Mitchell Hutchins. Ms. Moran is
also a vice president and assis-
tant treasurer of 29 other in-
vestment compa- nies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Dianne E. O'Donnell; 43 Vice President and Ms. O'Donnell is a senior vice
Secretary president and deputy general
counsel of Mitchell Hutchins. Ms.
O'Donnell is also a vice presi-
dent and secretary of 29 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>

22
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ---------- --------------------
<S> <C> <C>
Victoria E. Schonfeld; Vice President Ms. Schonfeld is a managing direc-
45 tor and general counsel of Mitch-
ell Hutchins. From April 1990 to
May 1994, she was a partner in
the law firm of Arnold & Porter.
Ms. Schonfeld is also a vice
president of 29 other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Paul H. Schubert; 33 Vice President and Mr. Schubert is a first vice pres-
Assistant Treasurer ident and a senior manager of the
mutual fund finance division of
Mitchell Hutchins. From August
1992 to August 1994, he was a
vice president at BlackRock Fi-
nancial Management, Inc. Prior to
August 1992, he was an audit man-
ager with Ernst & Young LLP. Mr.
Schubert is also a vice president
and assistant treasurer of 29
other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Julian F. Sluyters; 35 Vice President and Mr. Sluyters is a senior vice
Treasurer president and the director of the
mutual fund finance division of
Mitchell Hutchins. Prior to 1991,
he was an audit senior manager
with Ernst & Young LLP. Mr.
Sluyters is also a vice president
and treasurer of 29 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>

23
<PAGE>

<TABLE>
<CAPTION>
NAME AND ADDRESS*; POSITION BUSINESS EXPERIENCE;
AGE WITH TRUST OTHER DIRECTORSHIPS
- ------------------ ---------- --------------------
<S> <C> <C>
Gregory K. Todd; 39 Vice President and Mr. Todd is a first vice president
Assistant Secretary and associate general counsel of
Mitchell Hutchins. Prior to 1993,
he was a partner in the law firm
of Shereff, Friedman, Hoffman &
Goodman. Mr. Todd is also a vice
president and assistant secretary
of 29 other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Stuart Waugh; 40 Vice President Mr. Waugh is a first vice presi-
dent and a portfolio manager of
Mitchell Hutchins responsible for
global fixed income investments
and currency trading. Mr. Waugh
is also a vice president of four
other investment companies for
which Mitchell Hutchins serves as
investment adviser.
Keith A. Weller; 34 Vice President and Mr. Weller is a first vice presi-
Assistant Secretary dent and associate general coun-
sel of Mitchell Hutchins. From
September 1987 to May 1995, he
was an attorney in private prac-
tice. Mr. Weller is also a vice-
president and assistant secretary
of 24 other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>
- -------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mr. Bewkes is an "interested person" of the Trust as defined in the 1940 Act
by virtue of his position with PW Group.

The Trust pays trustees who are not "interested persons" of the Trust $3,000
annually and $250 per meeting of the board or any committee thereof. Trustees
are reimbursed for any expenses incurred in attending meetings. Trustees and
officers of the Trust own in the aggregate less than 1% of the shares of the
Fund. Because Mitchell Hutchins and PaineWebber perform substantially all of
the services necessary for the operation of the Trust, the Trust requires no
employees. No officer, director or employee of Mitchell Hutchins or PaineWebber
presently receives any compensation from the Trust for acting as a trustee or
officer.

24
<PAGE>

The table below includes certain information relating to the compensation of
the Trust's current trustees who held office during the fiscal year ended
October 31, 1995.

COMPENSATION TABLE

<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS FROM THE
AGGREGATE ACCRUED AS ESTIMATED TRUST AND THE
COMPENSATION PART OF A ANNUAL FUND COMPLEX
FROM FUND'S BENEFITS UPON PAID TO
NAME OF PERSON, POSITION THE TRUST* EXPENSES RETIREMENT TRUSTEES**
------------------------ ------------ ---------- ------------- -------------
<S> <C> <C> <C> <C>
E. Garrett Bewkes, Jr.,
Trustee and chairman of
the board
of trustees............... -- -- -- --
Meyer Feldberg,
Trustee................... $7,000 -- -- $106,375
George W. Gowen,
Trustee................... 7,000 -- -- 99,750
Frederic V. Malek,
Trustee................... 7,000 -- -- 99,750
Judith Davidson Moyers,
Trustee................... 7,000 -- -- 98,500
</TABLE>
- -------
*Represents fees paid to each trustee during the fiscal year ended October 31,
1995.
** Represents total compensation paid to each trustee during the calendar year
ended December 31, 1995.

25
<PAGE>

INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS

INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of the Fund pursuant to a contract with the Trust
dated April 21, 1988 ("Advisory Contract"). Under the Advisory Contract, the
Fund pays Mitchell Hutchins an annual fee, computed daily and paid monthly,
according to the following schedule:

<TABLE>
<CAPTION>
ANNUAL
AVERAGE DAILY NET ASSETS RATE
------------------------ ------
<S> <C>
Up to $500 million................................................. 0.750%
In excess of $500 million up to $1.0 billion....................... 0.725
In excess of $1.0 billion up to $1.5 billion....................... 0.700
In excess of $1.5 billion up to $2.0 billion....................... 0.675
Over $2.0 billion.................................................. 0.650
</TABLE>

For the fiscal years ended October 31, 1995, October 31, 1994 and October 31,
1993, the Fund paid (or accrued) to Mitchell Hutchins advisory and
administrative fees of $9,229,318, $12,723,592 and $11,643,584, respectively.

In addition, under a service agreement pursuant to which PaineWebber provides
certain services to the Fund not otherwise provided by the Fund's transfer
agent, which agreement is reviewed by the Trust's board of trustees annually,
during the fiscal years ended October 31, 1995, October 31, 1994 and October
31, 1993, PaineWebber earned fees in the approximate amounts of $376,299,
$487,859 and $467,885, respectively.

Under the terms of the Advisory Contract, the Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Trust not readily identifiable as belonging
to the Fund or to the Trust's other series are allocated among series by or
under the direction of the board of trustees in such manner as the board deems
to be fair and equitable. Expenses borne by the Fund include the following (or
the Fund's share of the following): (1) the cost (including brokerage
commissions) of securities purchased or sold by the Fund and any losses
incurred in connection therewith, (2) fees payable to and expenses incurred on
behalf of the Fund by Mitchell Hutchins, (3) organizational expenses, (4)
filing fees and expenses relating to the registration and qualification of the
Fund's shares and the Trust under federal and state securities laws and
maintenance of such registrations and qualifications, (5) fees and salaries
payable to trustees who are not interested persons (as defined in the 1940 Act)
of the Trust or Mitchell Hutchins, (6) all expenses incurred in connection with
the trustees' services, including travel expenses, (7) taxes (including any
income or franchise taxes) and governmental fees, (8) costs of any liability,
uncollectible items of deposit and other insurance or fidelity bonds, (9) any
costs, expenses or losses arising out of a liability of or claim for damages or
other relief asserted against the Trust or the Fund for violation of any law,
(10) legal, accounting and auditing expenses, including legal fees of special
counsel for the independent trustees, (11) charges of custodians, transfer
agents and other agents, (12) costs of preparing share certificates, (13)
expenses of setting in type and printing prospectuses and supplements thereto,
statements of additional information and supplements thereto, reports and proxy
materials for existing shareholders, and costs of mailing such materials to
existing shareholders, (14) any extraordinary expenses (including fees and
disbursements of counsel) incurred by the Trust or the Fund, (15) fees,
voluntary assessments and other expenses incurred in

26
<PAGE>

connection with membership in investment company organizations, (16) costs of
mailing and tabulating proxies and costs of meetings of shareholders, the board
and any committees thereof, (17) the cost of investment company literature and
other publications provided to trustees and officers and (18) costs of mailing,
stationery and communications equipment.

As required by state regulation, Mitchell Hutchins will reimburse the Fund if
and to the extent that the aggregate operating expenses of the Fund exceed
applicable limits in any fiscal year. Currently, the most restrictive such
limit applicable to the Fund is 2.5% of the first $30 million of the Fund's
average daily net assets, 2.0% of the next $70 million of its average daily net
assets and 1.5% of its average daily net assets in excess of $100 million.
Certain expenses, such as brokerage commissions, taxes, interest, distribution
fees, certain expenses attributable to investing outside the United States and
extraordinary items, are excluded from this limitation. For the fiscal years
ended October 31, 1995, October 31, 1994 and October 31, 1993 no reimbursements
were made pursuant to such limitation.

Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error or judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the Contract, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of Mitchell
Hutchins in the performance of its duties or from reckless disregard of its
duties and obligations thereunder. The Advisory Contract terminates
automatically upon its assignment and is terminable at any time without penalty
by the Trust's board of trustees or by vote of the holders of a majority of the
Fund's outstanding voting securities, on 60 days' written notice to Mitchell
Hutchins or by Mitchell Hutchins on 60 days' written notice to the Fund.

The following table shows the approximate net assets as of January 31, 1996,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment company
may fall into more than one of the categories below.

<TABLE>
<CAPTION>
INVESTMENT NET
CATEGORY ASSETS
---------- ---------
($ MIL)
<S> <C>
Domestic (excluding Money Market)............................... $ 5,694.9
Global.......................................................... 2,879.2
Equity/Balanced................................................. 2,858.1
Fixed Income (excluding Money Market)........................... 5,716.0
Taxable Fixed Income.......................................... 3,965.6
Tax-Free Fixed Income......................................... 1,750.4
Money Market Funds.............................................. 21,810.3
</TABLE>

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

27
<PAGE>

DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
Class Y shares of the Fund under a distribution contract with the Trust dated
July 1, 1991, as amended November 10, 1995 ("Distribution Contract") that
requires Mitchell Hutchins to use its best efforts, consistent with its other
business, to sell shares of the Fund. Class Y shares of the Fund are offered
continuously. Under an exclusive dealer contract between Mitchell Hutchins and
PaineWebber dated July 1, 1991, as amended November 10, 1995 ("Exclusive Dealer
Contract"), PaineWebber sells the Fund's Class Y shares.

PORTFOLIO TRANSACTIONS

Subject to policies established by the Trust's board of trustees, Mitchell
Hutchins is responsible for the execution of the Fund's portfolio transactions
and the allocation of brokerage transactions. In executing portfolio
transactions, Mitchell Hutchins seeks to obtain the best net results for the
Fund, taking into account such factors as the price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution
and operational facilities of the firm involved. Prices paid to dealers in
principal transactions, through which most debt securities are traded,
generally include a "spread," which is the difference between the prices at
which the dealer is willing to purchase and sell a specific security at the
time. The Fund may invest in securities traded in the OTC market and will
engage primarily in transactions with the dealers who make markets in such
securities, unless a better price or execution could be obtained by using a
broker. While Mitchell Hutchins generally seeks reasonably competitive
commission rates and dealer spreads, payment of the lowest commission or spread
is not necessarily consistent with obtaining the best net results. For the
fiscal years ended October 31, 1995, October 31, 1994 and October 31, 1993, the
Fund did not pay any brokerage commissions.

The Fund has no obligation to deal with any broker or group of brokers in the
execution of portfolio transactions. The Fund contemplates that, consistent
with the policy of obtaining the best net results, brokerage transactions may
be conducted through Mitchell Hutchins or its affiliates, including
PaineWebber. The Trust's board of trustees has adopted procedures in conformity
with Rule 17e-1 under the 1940 Act to ensure that all brokerage commissions
paid to Mitchell Hutchins and its affiliates are reasonable and fair. Specific
provisions in the Advisory Contract authorize Mitchell Hutchins and any of its
affiliates that are members of a national securities exchange to effect
portfolio transactions for the Fund on such exchange and to retain compensation
in connection with such transactions. Any such transactions will be effected
and related compensation paid only in accordance with applicable SEC
regulations. During the last three fiscal years, the Fund has not paid
brokerage commissions to Mitchell Hutchins or any of its affiliates.

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

28
<PAGE>

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. During
the fiscal year ended October 31, 1994, the Fund did not direct any portfolio
transactions to brokers chosen because they provide research services.

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 equity and debt securities in return for
research and execution services. These transactions are entered into only in
compliance with procedures ensuring that the transaction (including
commissions) is at least as favorable as it would have been if effected
directly with a market-maker that did not provide research or execution
services. These procedures include Mitchell Hutchins receiving multiple quotes
from dealers before executing the transaction on an agency basis.

Information and research services furnished by brokers or dealers through
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 by brokers or dealers 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 brokers or dealers
will be in addition to, and not in lieu of, the services required to be
performed by Mitchell Hutchins under the Advisory Contract.

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

29
<PAGE>

offering price prior to the end of the first business day after the date of the
public offering and that Mitchell Hutchins or any affiliate thereof not
participate in or benefit from the sale to the Fund.

PORTFOLIO TURNOVER. The Fund's annual portfolio turnover rate may vary
greatly from year to year, but it will not be a limiting factor when management
deems portfolio changes appropriate. The portfolio turnover rate is calculated
by dividing the lesser of the Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
securities in the portfolio during the year. For the fiscal years ended October
31, 1995 and October 31, 1994, the portfolio turnover rates for the Fund were
113% and 108%, respectively.

VALUATION OF SHARES

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

Securities that are listed on U.S. and foreign stock exchanges are valued at
the last sale price on the day the securities are being valued or, lacking any
sales on such day, at the last available bid price. In cases where securities
are traded on more than one exchange, the securities are generally valued on
the exchange considered by Mitchell Hutchins as the primary market. Securities
traded in the OTC market and listed on Nasdaq are valued at the last available
sale price on Nasdaq at 4:00 p.m., Eastern time; other OTC securities are
valued at the last bid price available prior to valuation. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Trust's
board of trustees. All investments quoted in foreign currency are valued daily
in U.S. dollars on the basis of the foreign currency exchange rate prevailing
at the time such valuation is determined by the Fund's custodian. The amortized
cost method of valuation generally is used to value debt obligations with 60
days or less remaining until maturity, unless the board of trustees determines
that this does not represent fair value.

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

30
<PAGE>

PERFORMANCE INFORMATION

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

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

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

Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. All dividends and other distributions are assumed to have been
reinvested at net asset value. The Fund also may refer in Performance
Advertisements to total return performance data that are not calculated
according to the formula set forth above ("Non-Standardized Return"). The Fund
calculates Non-Standardized Return for specified periods of time by assuming an
investment of $1,000 in Fund shares and assuming the reinvestment of all
dividends and other distributions. The rate of return is determined by
subtracting the initial value of the investment from the ending value and then
dividing the remainder by the initial value.

The following table shows performance information for the Class Y shares
(formerly Class C shares) of the Fund for the periods indicated. All returns
for periods of more than one year are expressed as an average annual return.

<TABLE>
<CAPTION>
CLASS Y
-------
<S> <C>
Fiscal year ended October 31, 1995:
Standardized Return................................................... 11.39%
Non-Standardized Return............................................... 11.39
Five years ended October 31, 1995:
Standardized Return*.................................................. NA
Non-Standardized Return............................................... NA
Inception (August 26, 1991) to October 31, 1995:
Standardized Return*.................................................. 7.69%
Non-Standardized Return............................................... 7.69
</TABLE>
- -------
NOTE: Class Y shares do not impose an initial or a contingent deferred sales
charge; therefore, Non-Standardized Return is identical to Standardized
Return.

YIELD. Yields used in the Fund's Performance Advertisements are calculated by
dividing the Fund's interest income attributable to a Class of shares for a
thirty-day period ("Period"), net of

31
<PAGE>

expenses attributable to such Class, by the average number of shares of such
Class entitled to receive dividends during the Period and expressing the result
as an annualized percentage (assuming semi-annual compounding) of the net asset
value per share at the end of the Period. Yield quotations are calculated
according to the following formula:

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

where: a = interest earned during the Period attributable to a Class of
shares

b = expenses accrued for the Period attributable to a Class of
shares (net of reimbursements)

c = the average daily number of shares of the Class outstanding
during the Period that were entitled to receive dividends

d = the net asset value per share on the last day of the Period.

Except as noted below, in determining interest income earned during the
Period (variable "a" in the above formula), the Fund calculates interest earned
on each debt obligation held by it during the Period by (1) computing the
obligation's yield to maturity, based on the market value of the obligation
(including actual accrued interest) on the last business day of the Period or,
if the obligation was purchased during the Period, the purchase price plus
accrued interest and (2) dividing the yield to maturity by 360, and multiplying
the resulting quotient by the market value of the obligation (including actual
accrued interest) to determine the interest income on the obligation for each
day of the period that the obligation is in the portfolio. Once interest earned
is calculated in this fashion for each debt obligation held by the Fund,
interest earned during the Period is then determined by totalling the interest
earned on all debt obligations. For purposes of these calculations, the
maturity of an obligation with one or more call provisions is assumed to be the
next date on which the obligation reasonably can be expected to be called or,
if none, the maturity date. With respect to Class A shares, in calculating the
maximum offering price per share at the end of the period (variable "d" in the
above formula), the Fund's current maximum 4% sales charge on Class A shares is
included. The yield of the Fund's Class Y shares for the 30-day period ended
October 31, 1995 was 5.74%.

OTHER INFORMATION. In Performance Advertisements, the Fund may compare its
Standardized Return and/or its Non-Standardized Return with data published by
Lipper Analytical Services, Inc. ("Lipper") for world income funds, CDA
Investment Technologies, Inc. ("CDA"), Wiesenberger Investment Companies
Service ("Wiesenberger"), Investment Company Data, Inc. ("ICD") or Morningstar
Mutual Funds ("Morningstar"), or with the performance of recognized stock and
other indices, including the Standard & Poor's 500 Composite Stock Price Index,
the Dow Jones Industrial Average, the Wilshire 5000 Index, the Morgan Stanley
Capital International Perspective Indices, the Solomon Brothers World
Government Index, the Solomon Brothers Non-U.S. Dollar Index, the Lehman Bond
Index, 30-year and 10-year U.S. Treasury Bonds and changes in the Consumer
Price Index as published by the U.S. Department of Commerce. The Fund also may
refer in such materials to mutual fund performance rankings and other data,
such as comparative asset, expense and fee levels, published by Lipper, CDA,
Wiesenberger, ICD or Morningstar. Performance Advertisements also may refer to
discussions of the Fund and comparative mutual fund data and

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ratings reported in independent periodicals, including (but not limited to) THE
WALL STREET JOURNAL, MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD,
BARRON'S, FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST
and THE KIPLINGER LETTERS.

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

TAXES

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

33
<PAGE>

limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets and that does not represent more than 10%
of the issuer's outstanding voting securities; and (4) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. government securities or
the securities of other RICs) of any one issuer.

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

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

Interest received by the Fund may be subject to income, withholding or other
taxes imposed by foreign countries and U.S. possessions that would reduce the
yield on its securities. Tax conventions between certain countries and the
United States may reduce or eliminate these foreign taxes, however, and many
foreign countries do not impose taxes on capital gains in respect of
investments by foreign investors. If more than 50% of the value of the Fund's
total assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible to, and may, file an election with the
Internal Revenue Service that will enable its shareholders, in effect, to
receive the benefit of the foreign tax credit with respect to any foreign and
U.S. possessions income taxes paid by it. Pursuant to the election, the Fund
would treat those taxes as dividends paid to its shareholders and each
shareholder would be required to (1) include in gross income, and treat as paid
by him or her, his or her proportionate share of those taxes, (2) treat his or
her share of those taxes and of any dividend paid by the Fund that represents
income from foreign or U.S. possessions sources as his or her own income from
those sources and (3) either deduct the taxes deemed paid by him or her in
computing his or her taxable income or, alternatively, use the foregoing
information in calculating the foreign tax credit against his or her federal
income tax. The Fund will report to its shareholders shortly after each taxable
year their respective shares of the Fund's income from sources within, and
taxes paid to, foreign countries and U.S. possessions if it makes this
election.

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

34
<PAGE>

income tax on a portion of any "excess distribution" received on the stock of a
PFIC or of any gain on disposition of the stock (collectively "PFIC income"),
plus interest thereon, even if the Fund distributes the PFIC income as a
taxable dividend to its shareholders. The balance of the PFIC income will be
included in the Fund's investment company taxable income and, accordingly, will
not be taxable to it to the extent that income is distributed to its
shareholders. If the Fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Fund will be required to include in income each year its pro
rata share of the qualified electing fund's annual ordinary earnings and net
capital gain (the excess of net long-term capital gain over net short-term
capital loss)--which the Fund probably would have to be distributed to satisfy
the Distribution Requirement and avoid imposition of the Excise Tax--even if
those earnings and gain are not distributed to the Fund by the PFIC. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.

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

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

The Fund may acquire zero coupon Treasury securities issued with original
issue discount. As the holder of such securities, the Fund must include in its
gross income the original issue discount

35
<PAGE>

that accrues on the securities during the taxable year, even if the Fund
receives no corresponding payment on them during the year. Because the Fund
annually must distribute substantially all of its investment company taxable
income, including any accrued original issue discount, to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax, it may be
required in a particular year to distribute as a dividend an amount that is
greater than the total amount of cash it actually receives. Those distributions
will be made from the Fund's cash assets or from the proceeds of sales of
portfolio securities, if necessary. The Fund may realize capital gains or
losses from those sales, which would increase or decrease its investment
company taxable income and/or net capital gain. In addition, any such gains may
be realized on the disposition of securities held for less than three months.
Because of the Short-Short Limitation, any such gains would reduce the Fund's
ability to sell other securities, or certain options, futures, forward
currency, foreign currency position contracts, held for less than three months
that it might wish to sell in the ordinary course of its portfolio management.

OTHER INFORMATION

PAINEWEBBER INVESTMENT SERIES. Prior to July 1, 1991, the name of the Fund
was "PaineWebber Master Global Income Fund." Prior to November 10, 1995, the
Fund's Class Y shares were known as "Class C" shares.

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

COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, counsel to the Fund, has passed upon
the legality of the shares offered by the Fund's Prospectus. Kirkpatrick &
Lockhart LLP also acts as counsel to Mitchell Hutchins and PaineWebber in
connection with other matters.

INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 1177 Avenue of the Americas,
New York, New York 10036, serves as the Trust's independent accountants.

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<PAGE>

FINANCIAL STATEMENTS

37
<PAGE>

APPENDIX

DESCRIPTION OF MOODY'S LONG-TERM DEBT RATINGS

AAA. Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues; AA. Bonds which are
rated "Aa" are judged to be of high quality by all standards. Together with the
"Aaa" group they comprise what are generally known as high-grade bonds. They
are rated lower than the best bonds because margins of protection may not be as
large as in "Aaa" securities or fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the long-
term risks appear somewhat greater than the "Aaa" securities; A. Bonds which
are rated "A" possess many favorable investment attributes and are considered
as upper-medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment some time in the future; BAA. Bonds which are
rated "Baa" are considered as medium-grade obligations (i.e., they are neither
highly protected nor poorly secured). Interest payments and principal security
appear adequate for the present, but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well; BA. Bonds which are rated "Ba" are judged to have
speculative elements; their future cannot be considered as well-assured. Often
the protection of interest and principal payments may be very moderate, and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class; B. Bonds which are
rated "B" generally lack characteristics of the desirable investment. Assurance
of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.

Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from "AA" through "B" in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.

DESCRIPTION OF S&P'S CORPORATE DEBT RATINGS

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accordance with the terms of the obligation. "BB" indicates the lowest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions; BB. Debt rated "BB" has less near-term
vulnerability to default than other speculative issues. However, it faces major
ongoing uncertainties or exposure to adverse business, financial, or economic
conditions which could lead to inadequate capacity to meet timely interest and
principal payments. The "BB" rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied "BBB-" rating; B. Debt
rated "B" has a greater vulnerability to default but currently has the capacity
to meet interest payments and principal repayments. Adverse business, financial
or economic conditions will likely impair capacity or willingness to pay
interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.

Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.

DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS

DESCRIPTION OF S&P'S COMMERCIAL PAPER RATINGS

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<PAGE>

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

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions................................... 1
Hedging and Related Income Strategies.................................. 8
Trustees and Officers.................................................. 18
Investment Advisory and Distribution Arrangements...................... 25
Portfolio Transactions................................................. 27
Valuation of Shares.................................................... 29
Performance Information................................................ 30
Taxes.................................................................. 32
Other Information...................................................... 34
Financial Statements................................................... 35
Appendix............................................................... 36
</TABLE>

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PAINEWEBBER

GLOBAL INCOME FUND

CLASS Y SHARES

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STATEMENT OF ADDITIONAL INFORMATION

FEBRUARY , 1996

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PAINEWEBBER