PAINEWEBBER MUNICIPAL SERIES /NY/, 497, 1996-07-08

PAINEWEBBER MUNICIPAL SERIES /NY/
497, 1996-07-08

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

1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
PROSPECTUS -- JULY 1, 1996
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PaineWebber Tax-Free Bond Funds are designed for investors generally seeking
high current income exempt from federal income tax and, in some cases, certain
state personal income taxes. PaineWebber California Tax-Free Income Fund
invests primarily in investment grade bonds issued by the State of California,
its municipalities and public authorities. PaineWebber National Tax-Free
Income Fund invests primarily in investment grade bonds issued by various
states, municipalities and public authorities. PaineWebber Municipal High
Income Fund invests primarily in high yield, high risk, medium and lower grade
bonds issued by various states, municipalities and public authorities.
PaineWebber New York Tax-Free Income Fund invests primarily in investment
grade bonds issued by the State of New York, its municipalities and public
authorities.

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

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

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

/ / MONEY MARKET FUND for income and stability by investing in high-quality,
short-term investments.

/ / BOND FUNDS for income by investing mainly in bonds.

/ / TAX-FREE BOND FUNDS for income exempt from federal income taxes and, in some
cases, state and local income taxes, by investing in municipal bonds.

/ / ASSET ALLOCATION FUNDS for long-term growth and income by investing in

stocks and bonds.

/ / STOCK FUNDS for long-term growth by investing mainly in equity securities.

/ / GLOBAL FUNDS for long-term growth by investing mainly in foreign stocks or
high current income by investing mainly in global debt instruments.

A complete listing of the PaineWebber Family of Mutual Funds is found on the
back cover of this Prospectus.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
FUNDS OR THEIR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFERING BY THE FUNDS OR THEIR DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.

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

PAINEWEBBER MUNICIPAL HIGH INCOME FUND MAY INVEST PREDOMINANTLY IN LOWER
RATED MUNICIPAL OBLIGATIONS, COMMONLY REFERRED TO AS MUNICIPAL 'JUNK
BONDS.' MUNICIPAL OBLIGATIONS OF THIS TYPE ARE CONSIDERED TO BE
SPECULATIVE WITH RESPECT TO THE PAYMENT OF INTEREST AND RETURN OF
PRINCIPAL. PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THIS FUND.

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Prospectus Page 1

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

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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----

<S> <C>
The Funds at a Glance................... 3

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

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

Investment Objectives & Policies........ 18

Investment Philosophy & Process......... 19

Performance............................. 20

The Funds' Investments.................. 24

Flexible Pricing(Service Mark).......... 29

How to Buy Shares....................... 32

How to Sell Shares...................... 33

Other Services.......................... 34

Management.............................. 34

Determining the Shares' Net Asset
Value................................. 36

Dividends & Taxes....................... 37

General Information..................... 39

Appendix................................ 40
</TABLE>

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Prospectus Page 2

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

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

The Funds offered by this Prospectus are not intended to provide a complete or
balanced investment program, but one or more of them may be appropriate as a
component of an investor's overall portfolio. Some common reasons to invest in
these Funds are to finance college educations, plan for retirement or diversify
a portfolio. The Funds are not suitable for tax-exempt institutions or qualified
retirement plans because those investors cannot take advantage of the tax-exempt
character of the Funds' dividends. When selling shares, investors should be
aware that they may get more or less for their shares than they originally paid
for them. As with any mutual fund, there is no assurance that the Funds will
achieve their goals.

CALIFORNIA TAX-FREE INCOME FUND

GOAL: To provide you with superior current income on your investment that is
exempt from federal income tax and California personal income tax.

INVESTMENT OBJECTIVE: High current income exempt from federal income tax and
California personal income tax, consistent with the preservation of capital and
liquidity within the Fund's quality standards.

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

SIZE: On May 31, 1996, the Fund had over $185.5 million in assets.

NATIONAL TAX-FREE INCOME FUND

GOAL: To provide you with superior current income on your investment that is
exempt from federal income tax.

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

consistent with the preservation of capital and liquidity within the Fund's
quality standards.

SIZE: On May 31, 1996, the Fund had over $411.3 million in assets.

MUNICIPAL HIGH INCOME FUND

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

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

RISKS: The Fund's net asset value fluctuates with movements in interest rates
and, during periods of market uncertainty, the value of municipal securities can
become volatile. The lower rated municipal securities in which the Fund may
invest are subject to greater risks of default and greater volatility than
higher rated securities. In addition, the market for lower rated municipal
securities may be thinner and less active than for higher rated securities. The
Fund may invest without limit in municipal securities that pay interest that is
an item of tax preference for purposes of the federal alternative minimum tax.
The Fund's ability to invest more than

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Prospectus Page 3
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

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THE FUNDS AT A GLANCE
(Continued)
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25% of its total assets in municipal securities, the interest on which is paid
from similar types of projects, may increase the risk of investing in the Fund.
The Fund is non-diversified and may be subject to greater risk and volatility
than a diversified fund because changes in the financial condition of a single
issuer may cause greater fluctuation in the value of the Fund's shares. The Fund
may use derivatives in its investment activities, which may involve additional
risks.

SIZE: On May 31, 1996, the Fund had over $94.2 million in assets.

NEW YORK TAX-FREE INCOME FUND

GOAL: To provide you with superior current income on your investment that is
exempt from federal income tax and New York State and New York City personal
income taxes.

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

RISKS: The Fund's net asset value fluctuates with movements in interest rates
and, during periods of market uncertainty, the values of municipal securities
can become volatile. Certain investment grade municipal securities in which the
Fund may invest have speculative characteristics. The Fund's ability to invest
more than 25% of its total assets in municipal securities, the interest on which
is paid from similar types of projects, may increase the risk of investing in
the Fund. The concentration of the Fund's investments in securities issued by
the State of New York, its municipalities and public authorities may subject the
Fund to greater risks than a fund that has a broader range of investments. The
State of New York and many of its agencies and local governments have been
experiencing, and continue to experience, significant financial difficulties,
and the credit standings of New York and of certain local governments (including
New York City) have been, and could be further, reduced. The Fund is
non-diversified and may be subject to greater risk and volatility than a
diversified fund because changes in the financial condition of a single issuer
may cause greater fluctuation in the value of the Fund's shares. The Fund may
use derivatives in its investment activities, which may involve additional
risks.

SIZE: On May 31, 1996, the Fund had over $53.6 million in assets.

MANAGEMENT

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

MINIMUM INVESTMENT

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

WHO SHOULD INVEST

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

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

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

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Prospectus Page 4
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

- --------------------------------------------------------------------------------
THE FUNDS AT A GLANCE
(Continued)
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who can assume the risks associated with the types of securities in which the
Fund invests.

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

HOW TO PURCHASE SHARES OF THE FUNDS

Investors may select among these classes of shares:

CLASS A SHARES

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

CLASS B SHARES

The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class B shares. As a result, 100% of their purchase is immediately

invested. However, Class B shares have higher ongoing expenses than Class A
shares. Depending upon how long they own the shares, investors may have to pay a
sales charge when they sell Class B shares. This sales charge is called a
'contingent deferred sales charge' and applies when investors sell their Class B
shares within six years after purchase. After six years, Class B shares convert
to Class A shares, which have lower ongoing expenses and no contingent deferred
sales charge.

CLASS C SHARES

The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class C shares. As a result, 100% of their purchase is immediately
invested. However, Class C shares have higher ongoing expenses than Class A
shares. A contingent deferred sales charge of 0.75% is charged on shares sold
within one year of purchase. Class C shares never convert to any other class of
shares.

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Prospectus Page 5
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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EXPENSE TABLE
- --------------------------------------------------------------------------------

The following tables are intended to assist investors in understanding the
expenses associated with investing in Class A, B and C shares of the Funds.
Expenses shown below represent those incurred for the most recent fiscal year.

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge on Purchases of Shares (as a % of
offering price)........................................... 4% None None
Sales Charge on Reinvested Dividends (as a % of offering
price).................................................... None None None
Maximum Contingent Deferred Sales Charge (as a % of net
asset value at the time of purchase or sale, whichever is
less)..................................................... None 5% 0.75%
Exchange Fee................................................ $5.00 $5.00 $5.00
ANNUAL FUND OPERATING EXPENSES (as a % of average net
assets)
CALIFORNIA TAX-FREE INCOME FUND
Management Fees............................................. 0.50% 0.50% 0.50%
12b-1 Fees.................................................. 0.25 1.00 0.75
Other Expenses.............................................. 0.19 0.20 0.21
------- ------- -------

Total Operating Expenses.................................... 0.94% 1.70% 1.46%
------- ------- -------
------- ------- -------
NATIONAL TAX-FREE INCOME FUND
Management Fees............................................. 0.50% 0.50% 0.50%
12b-1 Fees.................................................. 0.25 1.00 0.75
Other Expenses(1)........................................... 0.15 0.15 0.17
------- ------- -------
Total Operating Expenses(1)................................. 0.90% 1.65% 1.42%
------- ------- -------
------- ------- -------
MUNICIPAL HIGH INCOME FUND
Management Fees............................................. 0.60% 0.60% 0.60%
12b-1 Fees.................................................. 0.25 1.00 0.75
Other Expenses.............................................. 0.25 0.25 0.25
------- ------- -------
Total Operating Expenses.................................... 1.10% 1.85% 1.60%
------- ------- -------
------- ------- -------
NEW YORK TAX-FREE INCOME FUND(2)
Management Fees............................................. 0.60% 0.60% 0.60%
12b-1 Fees.................................................. 0.25 1.00 0.75
Other Expenses.............................................. 0.30 0.29 0.29
------- ------- -------
Total Operating Expenses.................................... 1.15% 1.89% 1.64%
------- ------- -------
------- ------- -------
</TABLE>

- ------------------
(1) National Tax-Free Income Fund expenses do not include non-recurring
acquisition expenses of .03%. If these were included, Other Expenses would
be 0.18%, 0.18% and 0.20%, respectively. Total Operating Expenses would be
0.93%, 1.68% and 1.45%, respectively.
(2) All expenses for New York Tax-Free Income Fund are those that would have
been experienced by the Fund for the fiscal year ended February 29, 1996 had
Mitchell Hutchins and PaineWebber not waived a portion of their fees.

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

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

Prospectus Page 6
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

- --------------------------------------------------------------------------------
EXPENSE TABLE
(Continued)
- --------------------------------------------------------------------------------

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

12b-1 fees have two components, as follows:

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

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

EXAMPLES OF EFFECT OF FUND EXPENSES

The following examples should assist investors in understanding various costs
and expenses they would incur as shareholders of a Fund. The assumed 5% annual
return shown in the example is required by regulations of the Securities and
Exchange Commission ('SEC') applicable to all mutual funds. THESE EXAMPLES
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES OF A FUND MAY BE MORE OR LESS THAN THOSE SHOWN.

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

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
CALIFORNIA TAX-FREE INCOME FUND
EXAMPLE
- -------
Class A............................ $ 49 $69 $ 90 $ 151
Class B (Assuming sale of all

shares at end of period)......... $ 67 $84 $112 $ 162
Class B (Assuming no sale of
shares).......................... $ 17 $54 $ 92 $ 162
Class C (Assuming sale of all
shares at end of period)......... $ 22 $46 $ 80 $ 175
Class C (Assuming no sale of
shares).......................... $ 15 $46 $ 80 $ 175
NATIONAL TAX-FREE INCOME FUND
EXAMPLE
- -------
Class A............................ $ 49 $68 $ 88 $ 146
Class B (Assuming sale of all
shares at end of period)......... $ 67 $82 $110 $ 157
Class B (Assuming no sale of
shares).......................... $ 17 $52 $ 90 $ 157
Class C (Assuming sale of all
shares at end of period)......... $ 22 $45 $ 78 $ 170
Class C (Assuming no sale of
shares).......................... $ 14 $45 $ 78 $ 170
MUNICIPAL HIGH INCOME FUND
EXAMPLE
- -------
Class A............................ $ 51 $74 $ 98 $ 169
Class B (Assuming sale of all
shares at end of period)......... $ 69 $88 $120 $ 179
Class B (Assuming no sale of
shares).......................... $ 19 $58 $100 $ 179
Class C (Assuming sale of all
shares at end of period)......... $ 24 $51 $ 87 $ 190
Class C (Assuming no sale of
shares).......................... $ 16 $51 $ 87 $ 190
</TABLE>

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Prospectus Page 7
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

- --------------------------------------------------------------------------------
EXPENSE TABLE
(Continued)
- --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C> <C> <C>
NEW YORK TAX-FREE INCOME FUND
EXAMPLE
- -------
Class A............................ $ 51 $75 $101 $ 174
Class B (Assuming sale of all

shares at end of period)......... $ 69 $89 $122 $ 184
Class B (Assuming no sale of
shares).......................... $ 19 $59 $102 $ 184
Class C (Assuming sale of all
shares at end of period)......... $ 24 $52 $ 89 $ 194
Class C (Assuming no sale of
shares).......................... $ 17 $52 $ 89 $ 194
</TABLE>

ASSUMPTIONS MADE IN THE EXAMPLES
o ALL CLASSES: Reinvestment of all dividends and distributions; percentage
amounts listed under 'Annual Fund Operating Expenses' remain the same for
years shown.
o CLASS A SHARES: Deduction of the maximum 4% initial sales charge at the time
of purchase.
o CLASS B SHARES: Deduction of the maximum applicable contingent deferred
sales charge at the time of redemption, which declines over a period of six
years. Ten-year figures assume that Class B shares convert to Class A shares
at the end of the sixth year.
o CLASS C SHARES: Deduction of a 0.75% contingent deferred sales charge for
sales of shares within one year of purchase.

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Prospectus Page 8
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

[This page intentionally left blank]

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Prospectus Page 9
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

CALIFORNIA TAX-FREE INCOME FUND

incorporated by reference into the Statement of Additional Information. The
financial statements and notes, as well as the financial information in the
table below relating to each of the three fiscal years in the period ended
February 29, 1996, the fiscal period ended February 28, 1993 and each of the two
fiscal years in the period ended November 30, 1992 have been audited by Ernst &
Young LLP. Further information about the Fund's performance is included in the
Annual Report to Shareholders, which may be obtained without charge by calling
1-800-647-1568. The information appearing below for periods prior to the year
ended November 30, 1991 also has been audited by Ernst & Young LLP, whose
reports thereon were unqualified.
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
---------------------------------------------
CLASS A
---------------------------------------------
FOR THE
FOR THE FOR THE THREE
YEAR YEARS MONTHS
ENDED ENDED ENDED
FEBRUARY FEBRUARY 28, FEBRUARY
29, --------------------- 28,
1996 1995 1994 1993
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period........................................... $ 10.68 $ 11.41 $ 11.80 $ 11.39
--------- --------- --------- ----------
Net investment income............................. 0.57 0.58 0.60 0.16
Net realized and unrealized gains
(losses) from investment
transactions..................................... 0.34 (0.63) (0.08) 0.58
--------- --------- --------- ----------
Net increase (decrease) from investment
operations....................................... 0.91 (0.05) 0.52 0.74
--------- --------- --------- ----------
Dividends from net investment
income........................................... (0.57) (0.58) (0.60) (0.16)
Distributions from net realized
gains from investment
transactions..................................... -- (0.10) (0.31) (0.17)
--------- --------- --------- ----------
Total dividends and distributions to
shareholders..................................... (0.57) (0.68) (0.91) (0.33)
--------- --------- --------- ----------
Net asset value, end of period.................... $ 11.02 $ 10.68 $ 11.41 $ 11.80
--------- --------- --------- ----------
--------- --------- --------- ----------
Total investment return (1)....................... 8.68% (0.18)% 4.46% 6.52%
--------- --------- --------- ----------
--------- --------- --------- ----------
Ratios and supplemental data:
Net assets, end of period (000's)................ $151,684 $ 178,234 $ 227,179 $ 247,025
Expenses to average net assets................... 0.94% 0.88% 0.90% 0.99%*

Net investment income to average
net assets..................................... 5.21% 5.55% 5.10% 5.61%*
Portfolio turnover............................... 32% 11% 37% 3%

FOR THE YEARS ENDED NOVEMBER 30,
----------------------------------------------------------------------------

1992 1991 1990 1989 1988 1987 1986

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

<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................................... $ 11.13 $ 10.94 $ 10.95 $ 10.67 $ 10.40 $ 11.23 $ 9.94
--------- --------- --------- --------- --------- --------- ---------
Net investment income............................. 0.66 0.71 0.78 0.74 0.75 0.75 0.79
Net realized and unrealized gains
(losses) from investment
transactions..................................... 0.29 0.22 (0.01) 0.28 0.27 (0.83) 1.29
--------- --------- --------- --------- --------- --------- ---------
Net increase (decrease) from investment
operations....................................... 0.95 0.93 0.77 1.02 1.02 (0.08) 2.08
--------- --------- --------- --------- --------- --------- ---------
Dividends from net investment
income........................................... (0.66) (0.71) (0.78) (0.74) (0.75) (0.75) (0.79)
Distributions from net realized
gains from investment
transactions..................................... (0.03) (0.03) -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total dividends and distributions to
shareholders..................................... (0.69) (0.74) (0.78) (0.74) (0.75) (0.75) (0.79)
--------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period.................... $ 11.39 $ 11.13 $ 10.94 $ 10.95 $ 10.67 $ 10.40 $ 11.23
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Total investment return (1)....................... 8.73% 8.84% 6.89% 9.85% 10.02% (0.74)% 21.69%
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------

Ratios and supplemental data:
Net assets, end of period (000's)................ $ 239,851 $ 231,987 $ 211,701 $ 200,398 $ 163,651 $ 158,272 $ 152,015
Expenses to average net assets................... 0.93% 0.83% 0.68% 0.76% 0.73% 0.71% 0.67%
Net investment income to average
net assets..................................... 5.80% 6.46% 6.78% 6.82% 6.98% 6.96% 7.22%
Portfolio turnover............................... 25% 2% 23% 4% 8% 10% 7%
</TABLE>

- ------------------
* Annualized

+ Commencement of issuance of shares

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

(2) Formerly Class D shares

--------------------
Prospectus Page 10
<PAGE>
- --------------------------------------------------------------------------------

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

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
----------------------------------------------------
CLASS B
----------------------------------------------------
FOR THE
FOR THE PERIOD
FOR THE FOR THE THREE FOR THE JULY 1,
YEAR YEARS MONTHS YEAR 1991+
ENDED ENDED ENDED ENDED THROUGH
FEBRUARY FEBRUARY 28, FEBRUARY NOVEMBER NOVEMBER
29, ------------- 28, 30, 30,
1996 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................................... $ 10.69 $ 11.41 $ 11.81 $ 11.39 $ 11.14 $ 10.95
------- ------- ------- ------- ------- -------
Net investment income............................. 0.48 0.50 0.51 0.14 0.57 0.25
Net realized and unrealized gains
(losses) from investment
transactions..................................... 0.34 (0.62) (0.09) 0.59 0.28 0.19
------- ------- ------- ------- ------- -------
Net increase (decrease) from investment
operations....................................... 0.82 (0.12) 0.42 0.73 0.85 0.44
------- ------- ------- ------- ------- -------
Dividends from net investment
income........................................... (0.48) (0.50) (0.51) (0.14) (0.57) (0.25)
Distributions from net realized
gains from investment

transactions..................................... -- (0.10) (0.31) (0.17) (0.03) --
------- ------- ------- ------- ------- -------
Total dividends and distributions to
shareholders..................................... (0.48) (0.60) (0.82) (0.31) (0.60) (0.25)
------- ------- ------- ------- ------- -------
Net asset value, end of period.................... $ 11.03 $ 10.69 $ 11.41 $ 11.81 $ 11.39 $ 11.14
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Total investment return (1)....................... 7.86% (0.85)% 3.56% 6.50% 7.80% 3.69%
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------

Ratios and supplemental data:
Net assets, end of period (000's)................ $27,175 $33,007 $41,979 $36,693 $30,205 $10,743
Expenses to average net assets................... 1.70% 1.64% 1.65% 1.74%* 1.68% 1.62%*
Net investment income to average
net assets..................................... 4.45% 4.78% 4.32% 4.81%* 4.91% 5.02%*
Portfolio turnover............................... 32% 11% 37% 3% 25% 2%

CLASS C(2)
-------------------------------------------
FOR THE
FOR THE PERIOD
FOR THE FOR THE THREE JULY 2,
YEAR YEARS MONTHS 1992+
ENDED ENDED ENDED THROUGH
FEBRUARY FEBRUARY 28, FEBRUARY NOVEMBER
29, -------------- 28, 30,
1996 1995 1994 1993 1992
------- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................................... $ 10.67 $ 11.40 $ 11.79 $ 11.38 $ 11.41
------- ------- ------- ------- -------
Net investment income............................. 0.51 0.53 0.54 0.14 0.21
Net realized and unrealized gains
(losses) from investment
transactions..................................... 0.35 (0.63) (0.08) 0.58 (0.03)
------- ------- ------- ------- -------
Net increase (decrease) from investment
operations....................................... 0.86 (0.10) 0.46 0.72 0.18
------- ------- ------- ------- -------
Dividends from net investment
income........................................... (0.51) (0.53) (0.54) (0.14) (0.21)
Distributions from net realized -- (0.10) (0.31) (0.17) --
gains from investment ------- ------- ------- ------- -------
transactions..................................... (0.51) (0.63) (0.85) (0.31) (0.21)
------- ------- ------- ------- -------
Total dividends and distributions to
shareholders..................................... $ 11.02 $ 10.67 $ 11.40 $ 11.79 $ 11.38
------- ------- ------- ------- -------
------- ------- ------- ------- -------

Net asset value, end of period.................... 8.22% (0.70)% 3.91% 6.49% 1.28%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Total investment return (1)....................... $22,155 $28,217 $53,874 $39,029 $30,141
Ratios and supplemental data:

Net assets, end of period (000's)................ 1.46% 1.40% 1.39% 1.48%* 1.39%*
Expenses to average net assets................... 4.69% 5.05% 4.55% 5.06%* 4.79%*
Net investment income to average
net assets..................................... 32% 11% 37% 3% 25%
Portfolio turnover...............................
</TABLE>
--------------------
Prospectus Page 11

<PAGE>
- --------------------------------------------------------------------------------

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

The following tables provide investors with data and ratios for one Class A,
Class B and Class C share for each of the periods shown. This information is
supplemented by the financial statements and accompanying notes appearing in
National Tax-Free Income Fund's Annual Report to Shareholders for the fiscal
year ended February 29, 1996, and the report of Ernst & Young LLP, independent
auditors, appearing in the Fund's Annual Report to Shareholders. Both are
incorporated by reference into the Statement of Additional Information. The
financial statements and notes, as well as the financial information in the
table below relating to each of the three fiscal years in the period ended
February 29, 1996, the fiscal period ended February 28, 1993 and each of the two
fiscal years in the period ended November 30, 1992 have been audited by Ernst &
Young LLP. Further information about the Fund's performance is included in the
Annual Report to Shareholders, which may be obtained without charge by calling
1-800-647-1568. The information appearing below for periods prior to the year
ended November 30, 1991 also has been audited by Ernst & Young LLP, whose
reports thereon were unqualified.
<TABLE>
<CAPTION>
NATIONAL TAX-FREE INCOME FUND
--------------------------------------------
CLASS A
--------------------------------------------

FOR THE
FOR THE FOR THE YEARS THREE
YEAR ENDED MONTHS

ENDED FEBRUARY 28, ENDED
FEBRUARY 29, -------------------- FEBRUARY 28,
1996 1995 1994 1993
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.............. $ 11.26 $ 12.00 $ 12.09 $ 11.67
--------- --------- --------- ----------
Net investment income............................. 0.58 0.63 0.64 0.17
Net realized and unrealized gains
(losses) from investment
transactions..................................... 0.39 (0.73) 0.03 0.55
--------- --------- --------- ----------
Net increase (decrease) from investment
operations....................................... 0.97 (0.10) 0.67 0.72
--------- --------- --------- ----------
Dividends from net investment income.............. (0.59) (0.63) (0.64) (0.17)
Distributions from net realized gains
from investment transactions..................... -- (0.01) (0.12) (0.13)
--------- --------- --------- ----------
Total dividends and distributions to
shareholders..................................... (0.59) (0.64) (0.76) (0.30)
--------- --------- --------- ----------
Net asset value, end of period.................... $ 11.64 $ 11.26 $ 12.00 $ 12.09
--------- --------- --------- ----------
--------- --------- --------- ----------
Total investment return (1)....................... 8.75% (0.63)% 5.65% 6.31%
--------- --------- --------- ----------
--------- --------- --------- ----------
Ratios and supplemental data:
Net assets, end of period (000's)................ $315,899 $ 346,579 $ 432,825 $ 419,596
Expenses to average net assets................... 0.93(2) 0.88% 0.89% 0.88%*
Net investment income to average
net assets..................................... 5.06(2) 5.62% 5.28% 5.86%*
Portfolio turnover............................... 74% 60% 16% 5%

FOR THE YEARS ENDED NOVEMBER 30,
----------------------------------------------------------------------------

1992 1991 1990 1989 1988 1987 1986
--------- --------- --------- --------- --------- --------- ---------

<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.............. $ 11.40 $ 11.20 $ 11.21 $ 10.98 $ 10.64 $ 11.48 $ 10.28
--------- --------- --------- --------- --------- --------- ---------
Net investment income............................. 0.71 0.76 0.78 0.81 0.79 0.78 0.63
Net realized and unrealized gains
(losses) from investment
transactions..................................... 0.31 0.20 (0.01) 0.23 0.34 (0.84) 1.20
--------- --------- --------- --------- --------- --------- ---------
Net increase (decrease) from investment
operations....................................... 1.02 0.96 0.77 1.04 1.13 (0.06) 2.03
--------- --------- --------- --------- --------- --------- ---------

Dividends from net investment income.............. (0.71) (0.76) (0.78) (0.81) (0.79) (0.78) (0.63)
Distributions from net realized gains
from investment transactions..................... (0.04) -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total dividends and distributions to
shareholders..................................... (0.75) (0.76) (0.78) (0.81) (0.79) (0.78) (0.63)
--------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period.................... $ 11.67 $ 11.40 $ 11.20 $ 11.21 $ 10.98 $ 10.64 $ 11.48
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Total investment return (1)....................... 9.21% 8.85% 7.17% 9.77% 10.85% (0.50)% 20.49%
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Ratios and supplemental data:
Net assets, end of period (000's)................ $396,587 $366,300 $343,539 $333,314 $307,954 $322,325 $359,439
Expenses to average net assets................... 0.91% 0.83% 0.69% 0.62% 0.75% 0.78% 0.72%
Net investment income to average
net assets..................................... 6.13% 6.66% 7.08% 7.32% 7.14% 7.07% 7.39%
Portfolio turnover............................... 21% 27% 24% 11% 1% 16% 5%
</TABLE>
------------------
* Annualized

+ Commencement of issuance of shares

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

(2) These ratios include non-recurring acquisition expenses of 0.03% for each
class of shares.

(3) Formerly Class D shares

----------------------
Prospectus Page 12
<PAGE>
- --------------------------------------------------------------------------------

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

--------------------------------------------------------
CLASS B
---------------------------------------------------------
FOR THE
FOR THE PERIOD
FOR THE THREE FOR THE JULY 1,
YEAR MONTHS YEAR 1991+
ENDED FOR THE YEARS ENDED ENDED THROUGH
FEBRUARY ENDED FEBRUARY NOVEMBER NOVEMBER
29, FEBRUARY 28, 28, 30, 30,
------- ----------------- ------- ------- -------
1996 1995 1994 1993 1992 1991
------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.............. $ 11.26 $ 11.99 $ 12.08 $ 11.67 $ 11.40 $ 11.19
------- ------- ------- ------- ------- -------
Net investment income............................. 0.49 0.54 0.55 0.15 0.62 0.27
Net realized and unrealized gains
(losses) from investment
transactions..................................... 0.39 (0.72) 0.03 0.54 0.31 0.21
------- ------- ------- ------- ------- -------
Net increase (decrease) from investment
operations....................................... 0.88 (0.18) 0.58 0.69 0.93 0.48
------- ------- ------- ------- ------- -------
Dividends from net investment income.............. (0.50) (0.54) (0.55) (0.15) (0.62) (0.27)
Distributions from net realized gains
from investment transactions..................... -- (0.01) (0.12) (0.13) (0.04) --
------- ------- ------- ------- ------- -------
Total dividends and distributions to
shareholders..................................... (0.50) (0.55) (0.67) (0.28) (0.66) (0.27)
------- ------- ------- ------- ------- -------
Net asset value, end of period.................... $ 11.64 $ 11.26 $ 11.99 $ 12.08 $ 11.67 $ 11.40
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Total investment return (1)....................... 7.94% (1.29)% 4.87% 6.02% 8.36% 4.06%
------- ------- ------- ------- ------- -------
Ratios and supplemental data: ------- ------- ------- ------- ------- -------
Net assets, end of period (000's)................ $51,546 $58,958 $70,988 $50,064 $39,564 $8,620
Expenses to average net assets................... 1.68(2) 1.64% 1.63% 1.63%* 1.65% 1.65%*
Net investment income to average
net assets..................................... 4.31(2) 4.86% 4.50% 5.08%* 5.16% 5.26%*
Portfolio turnover............................... 74% 60% 16% 5% 21% 27%
<CAPTION>
CLASS C(3)
-------------------------------------------------
FOR THE
PERIOD
FOR THE THREE JULY 2,
YEAR MONTHS 1992+
ENDED FOR THE YEARS ENDED THROUGH
FEBRUARY ENDED FEBRUARY NOVEMBER
29, FEBRUARY 28, 28, 30,
------- ------------------- ------- -------

1996 1995 1994 1993 1992
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.............. $ 11.26 $ 12.00 $ 12.09 $ 11.67 $ 11.71
------- -------- ------- ------- -------
Net investment income............................. 0.52 0.57 0.58 0.15 0.23
Net realized and unrealized gains
(losses) from investment
transactions..................................... 0.39 (0.73) 0.03 0.55 (0.04)
------- -------- ------- ------- -------
Net increase (decrease) from investment
operations....................................... 0.91 (0.16) 0.61 0.70 0.19
------- -------- ------- ------- -------
Dividends from net investment income.............. (0.53) (0.57) (0.58) (0.15) (0.23)
Distributions from net realized gains
from investment transactions..................... -- (0.01) (0.12) (0.13) --
------- -------- ------- ------- -------
Total dividends and distributions to
shareholders..................................... (0.53) (0.58) (0.70) (0.28) (0.23)
------- -------- ------- ------- -------
Net asset value, end of period.................... $ 11.64 $ 11.26 $ 12.00 $ 12.09 $ 11.67
------- -------- ------- ------- -------
------- -------- ------- ------- -------
Total investment return (1)....................... 8.19% (1.13)% 5.13% 6.18% 1.41%
------- -------- ------- ------- -------
Ratios and supplemental data: ------- -------- ------- ------- -------
Net assets, end of period (000's)................ $75,076 $101,642 $187,778 $138,989 $105,854
Expenses to average net assets................... 1.45(2) 1.40% 1.37% 1.37%* 1.42%*
Net investment income to average
net assets..................................... 4.57(2) 5.13% 4.75% 5.30%* 5.17%*
Portfolio turnover............................... 74% 60% 16% 5% 21%

----------------------
Prospectus Page 13
<PAGE>
- --------------------------------------------------------------------------------

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

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

MUNICIPAL HIGH INCOME FUND

auditors, appearing in the Fund's Annual Report to Shareholders. Both are
incorporated by reference into the Statement of Additional Information. The
financial statements and notes, as well as the financial information in the
table below relating to each of the five fiscal years in the period ended
February 29, 1996 have been audited by Ernst & Young LLP. Further information
about the Fund's performance is included in the Annual Report to Shareholders,
which may be obtained without charge by calling 1-800-647-1568. The information
appearing below for periods prior to the year ended February 29, 1992 also has
been audited by Ernst & Young LLP, whose reports thereon were unqualified.

</TABLE>
<TABLE>
<CAPTION>
MUNICIPAL HIGH INCOME FUND
-----------------------------------------------------------------------------------------
CLASS A
-----------------------------------------------------------------------------------------
FOR THE YEARS ENDED
-----------------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28,
FEBRUARY 29, ------------------------------- FEBRUARY 29, -------------------
1996 1995 1994 1993 1992 1991 1990
------------ ------- ------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $ 9.92 $ 10.77 $ 10.96 $ 10.29 $ 9.92 $ 10.00 $ 9.91
------ ------- ------- ------- ------ ------- -------
Net investment income.......... 0.62 0.59 0.61 0.67 0.71 0.72 0.74
Net realized and unrealized
gains (losses) from investment
transactions.................. 0.37 (0.82) 0.01 0.81 0.44 (0.08) 0.09
------ ------- ------- ------- ------ ------- -------
Net increase (decrease) from
investment operations......... 0.99 (0.23) 0.62 1.48 1.15 0.64 0.83
------ ------- ------- ------- ------ ------- -------
Dividends from net investment
income........................ (0.62) (0.59) (0.61) (0.67) (0.71) (0.72) (0.74)
Distributions from net realized
gains from investment
transactions.................. -- (0.03) (0.20) (0.14) (0.07) -- --
------ ------- ------- ------- ------ ------- -------
Total dividends and
distributions to
shareholders.................. (0.62) (0.62) (0.81) (0.81) (0.78) (0.72) (0.74)
------ ------- ------- ------- ------ ------- -------
Net asset value, end of
period........................ $ 10.29 $ 9.92 $ 10.77 $ 10.96 $ 10.29 $ 9.92 $ 10.00
------ ------- ------- ------- ------ ------- -------
------ ------- ------- ------- ------ ------- -------
Total investment return (1).... 10.18% (2.03)% 5.77% 15.05% 11.94% 6.69% 8.74%
------ ------- ------- ------- ------ ------- -------
------ ------- ------- ------- ------ ------- -------
Ratios and supplemental data:
Net assets, end of period
(000's)..................... $ 57,280 $63,287 $82,248 $82,251 $ 68,830 $62,559 $61,067
Expenses, net of waivers from

adviser, to average net
assets...................... 1.10% 1.13% 1.03% 0.87% 0.75% 0.69% 0.65%
Expenses, before waivers from
adviser, to average net
assets...................... 1.10% 1.13% 1.16% 1.29% 1.25% 1.54% 1.49%
Net investment income, net of
waivers from adviser, to
average net assets.......... 5.94% 5.96% 5.52% 6.31% 6.99% 7.32% 7.35%
Net investment income, before
waivers from adviser, to
average net assets.......... 5.94% 5.96% 5.39% 5.89% 6.49% 6.47% 6.51%
Portfolio turnover............ 48% 28% 23% 10% 45% 20% 17%

FOR THE PERIOD
JUNE 23, 1987+
TO
FEBRUARY 29,
1989 1988
------- ---------------
<S> <C> <C>
Net asset value, beginning of
period........................ $ 9.80 $ 9.58
------- ------
Net investment income.......... 0.75 0.50
Net realized and unrealized
gains (losses) from investment
transactions.................. 0.11 0.22
------- ------
Net increase (decrease) from
investment operations......... 0.86 0.72
------- ------
Dividends from net investment
income........................ (0.75) (0.50)
Distributions from net realized
gains from investment
transactions.................. -- --
------- ------
Total dividends and
distributions to
shareholders.................. (0.75) (0.50)
------- ------
Net asset value, end of
period........................ $ 9.91 $ 9.80
------- ------
------- ------
Total investment return (1).... 9.11% 7.23%
------- ------
------- ------
Ratios and supplemental data:
Net assets, end of period
(000's)..................... $54,512 $48,515
Expenses, net of waivers from

adviser, to average net
assets...................... 0.60% 0.12%*
Expenses, before waivers from
adviser, to average net
assets...................... 1.46% 1.40%*
Net investment income, net of
waivers from adviser, to
average net assets.......... 7.64% 7.63%*
Net investment income, before
waivers from adviser, to
average net assets.......... 6.78% 6.35%*
Portfolio turnover............ 14% 0%
</TABLE>

- ------------------
* Annualized

+ Commencement of issuance of shares

(2) Formerly Class D shares

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

<PAGE>
- --------------------------------------------------------------------------------

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

FOR THE
PERIOD
JULY 1,
1991+

FOR THE YEAR THROUGH
ENDED FOR THE YEARS FEBRUARY
FEBRUARY 29, ENDED FEBRUARY 28, 29,
------------- ------------------------------ --------
1996 1995 1994 1993 1992
------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $ 9.92 $ 10.76 $ 10.96 $ 10.29 $10.05
------ -------- -------- -------- --------
Net investment income.......... 0.54 0.52 0.52 0.59 0.42
Net realized and unrealized
gains (losses) from investment
transactions.................. 0.37 (0.81) -- 0.81 0.31
------ -------- -------- -------- --------
Net increase (decrease) from
investment operations......... 0.91 (0.29) 0.52 1.40 0.73
------ -------- -------- -------- --------
Dividends from net investment
income........................ (0.54) (0.52) (0.52) (0.59) (0.42)
Distributions from net realized
gains from investment
transactions.................. -- (0.03) (0.20) (0.14) (0.07)
------ -------- -------- -------- --------
Total dividends and
distributions to
shareholders.................. (0.54) (0.55) (0.72) (0.73) (0.49)
Net asset value, end of ------ -------- -------- -------- ------
period........................ $10.29 $ 9.92 $ 10.76 $ 10.96 $10.29
------ -------- -------- -------- ------
------ -------- -------- -------- ------
Total investment return (1).... 9.36% (2.67)% 4.88% 14.81% 6.89%
Ratios and supplemental data: ------ -------- -------- -------- ------
Net assets, end of period ------ -------- -------- -------- ------
(000's)..................... $23,868 $ 25,823 $ 32,287 $ 22,922 $8,176
Expenses, net of waivers from
adviser, to average net
assets...................... 1.85% 1.87% 1.79% 1.63% 1.50%*
Expenses, before waivers from
adviser, to average net
assets...................... 1.85% 1.87% 1.90% 2.01% 1.98%*
Net investment income, net of
waivers from adviser, to
average net assets.......... 5.19% 5.21% 4.72% 5.48% 5.80%*
Net investment income, before
waivers from adviser, to
average net assets.......... 5.19% 5.21% 4.61% 5.10% 5.32%*
Portfolio turnover............ 48% 28% 23% 10% 46%

CLASS C(2)
-------------------------------------------
FOR THE
PERIOD
FOR THE JULY 2,

YEAR 1992+
ENDED FOR THE YEARS THROUGH
FEBRUARY ENDED FEBRUARY
29, FEBRUARY 28, 28,
-------- ------------------- --------
1996 1995 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>

Net asset value, beginning of
period........................ $ 9.92 $ 10.77 $ 10.96 $10.50
-------- -------- --------
Net investment income.......... 0.56 0.55 0.55 0.36
Net realized and unrealized
gains (losses) from investment
transactions.................. 0.37 (0.82) 0.01 0.47
-------- -------- --------
Net increase (decrease) from
investment operations......... 0.93 (0.27) 0.56 0.83
-------- -------- --------
Dividends from net investment
income........................ (0.56) (0.55) (0.55) (0.36)
Distributions from net realized
gains from investment
transactions.................. -- (0.03) (0.20) (0.01)
Total dividends and -------- -------- --------
distributions to
shareholders.................. (0.56) (0.58) (0.75) (0.37)
Net asset value, end of -------- -------- --------
period........................ $ 10.29 $ 9.92 $ 10.77 $10.96
-------- -------- --------
-------- -------- --------
Total investment return (1).... 9.64% (2.51)% 5.24% 7.72%
Ratios and supplemental data: -------- -------- --------
Net assets, end of period -------- -------- --------
(000's)..................... $20,700 $ 23,158 $ 35,872 $21,638
Expenses, net of waivers from
adviser, to average net
assets...................... 1.60% 1.63% 1.54% 1.40%*
Expenses, before waivers from
adviser, to average net
assets...................... 1.60% 1.63% 1.64% 1.69%*
Net investment income, net of
waivers from adviser, to
average net assets.......... 5.45% 5.48% 4.95% 5.26%*
Net investment income, before
waivers from adviser, to
average net assets.......... 5.45% 5.48% 4.85% 4.97%*
Portfolio turnover............ 48% 28% 23% 10%
</TABLE>
--------------------
Prospectus Page 15

<PAGE>
- --------------------------------------------------------------------------------

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

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

NEW YORK TAX-FREE INCOME FUND

The following tables provide investors with data and ratios for one Class A,
Class B and Class C share for each of the periods shown. This information is
supplemented by the financial statements and accompanying notes appearing in New
York Tax-Free Income Fund's Annual Report to Shareholders for the fiscal year
ended February 29, 1996, and the report of Ernst & Young LLP, independent
auditors, appearing in the Fund's Annual Report to Shareholders. Both are
incorporated by reference into the Statement of Additional Information. The
financial statements and notes, as well as the financial information in the
table below relating to each of the five fiscal years in the period ended
February 29, 1996 have been audited by Ernst & Young LLP. Further information
about the Fund's performance is included in the Annual Report to Shareholders,
which may be obtained without charge by calling 1-800-647-1568. The information
appearing below for periods prior to the year ended February 29, 1992 also has
been audited by Ernst & Young LLP, whose reports thereon were unqualified.

<TABLE>
<CAPTION>
NEW YORK TAX-FREE INCOME FUND
--------------------------------------------------------------------------------------------------
CLASS A
--------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED
------------------------------------------------------------------------- FOR THE PERIOD
FEBRUARY 28, FEBRUARY 28, SEPTEMBER 30, 1988+
FEBRUARY 29, ----------------------------- FEBRUARY 29, --------------- TO FEBRUARY 28,
1996 1995 1994 1993 1992 1991 1990 1989
------------ ------- ------- ------- ------------- ------- ------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $10.27 $ 11.03 $ 10.99 $ 10.12 $ 9.76 $ 9.72 $ 9.59 $ 9.60
------ ------- ------- ------- ------ ------- ------- ------
Net investment income.......... 0.54 0.54 0.57 0.63 0.66 0.67 0.70 0.28
Net realized and unrealized
gains (losses) from
investment transactions....... 0.45 (0.66) 0.07 0.87 0.36 0.04 0.13 (0.01)
------ ------- ------- ------- ------ ------- ------- ------
Total increase (decrease) from
investment operations......... 0.99 (0.12) 0.64 1.50 1.02 0.71 0.83 0.27
------ ------- ------- ------- ------ ------- ------- ------
Dividends from net investment

income........................ (0.55) (0.54) (0.57) (0.63) (0.66) (0.67) (0.70) (0.28)
Distributions from net realized
gains from investment
transactions.................. -- (0.10) (0.03) -- -- -- -- --
------ ------- ------- ------- ------ ------- ------- ------
Total dividends and
distributions to
shareholders.................. (0.55) (0.64) (0.60) (0.63) (0.66) (0.67) (0.70) (0.28)
------ ------- ------- ------- ------ ------- ------- ------
Net asset value, end of
period........................ $10.71 $ 10.27 $ 11.03 $ 10.99 $ 10.12 $ 9.76 $ 9.72 $ 9.59
------ ------- ------- ------- ------ ------- ------- ------
------ ------- ------- ------- ------ ------- ------- ------
Total investment return (1).... 9.83% (0.83)% 5.89% 15.44% 10.80% 7.59% 8.94% 2.25%
------ ------- ------- ------- ------ ------- ------- ------
------ ------- ------- ------- ------ ------- ------- ------
Ratios and supplemental data:
Net assets, end of period
(000's)..................... $28,734 $32,475 $45,033 $43,443 $ 35,961 $30,173 $21,999 $11,222
Expenses, net of waivers from
adviser, to average
net assets....... 1.02% 1.01% 0.75% 0.34% 0.25% 0.21% 0.00% 0.00%*
Expenses, before waivers from
adviser, to average
net assets....... 1.15% 1.26% 1.25% 1.47% 1.53% 1.84% 2.20% 3.04%*
Net investment income, net of
waivers from adviser,
to average net assets....... 5.11% 5.38% 5.13% 6.07% 6.65% 6.93% 7.07% 6.96%*
Net investment income, before
waivers from adviser,
to average net assets....... 4.98% 5.13% 4.63% 4.94% 5.37% 5.30% 4.87% 3.92%*
Portfolio turnover............ 13% 6% 8% 6% 6% 3% 0% 0.00%*
</TABLE>

- ------------------
* Annualized

+ Commencement of issuance of shares

(2) Formerly Class D shares

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

<PAGE>
- --------------------------------------------------------------------------------

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

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW YORK TAX-FREE INCOME FUND
-----------------------------------------------------
CLASS B
-----------------------------------------------------
FOR THE
PERIOD
JULY 1,
FOR THE YEAR 1991+
ENDED FOR THE YEARS THROUGH
FEBRUARY 29, ENDED FEBRUARY 28, FEBRUARY 29,
------------ ------------------------- ------------
1996 1995 1994 1993 1992
------------ ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $ 10.27 $ 11.03 $ 10.98 $ 10.12 $9.81
------- ------- ------ ------ ------
Net investment income.......... 0.47 0.47 0.49 0.56 0.39
Net realized and unrealized
gains (losses) from investment
transactions.................. 0.44 (0.66) 0.08 0.86 0.31
------- ------- ------ ------ ------
Total increase (decrease) from
investment operations......... 0.91 (0.19) 0.57 1.42 0.70
------- ------- ------ ------ ------
Dividends from net investment
income........................ (0.47) (0.47) (0.49) (0.56) (0.39)
Distributions from net realized
gains from investment
transactions.................. -- (0.10) (0.03) -- --
------- ------- ------ ------ ------
Total dividends and
distributions to
shareholders.................. (0.47) (0.57) (0.52) (0.56) (0.39)
------- ------- ------ ------ ------
Net asset value, end of
period........................ $ 10.71 $ 10.27 $ 11.03 $ 10.98 $10.12
------- ------- ------ ------ ------
------- ------- ------ ------ ------
Total investment return (1).... 9.01% (1.57)% 5.19% 14.35% 6.80%
------- ------- ------ ------ ------
------- ------- ------ ------ ------
Ratios and supplemental data:

Net assets, end of period
(000's)..................... $11,862 $14,660 $19,193 $13,776 $6,026
Expenses, net of waivers from
adviser, to average
net assets.................. 1.77% 1.76% 1.51% 1.10% 1.00%*
Expenses, before waivers from
adviser, to average
net assets....... 1.89% 2.01% 1.99% 2.19% 2.20%*
Net investment income, net of
waivers from adviser,
to average net assets....... 4.36% 4.63% 4.34% 5.22% 5.59%*
Net investment income, before
waivers from adviser,
to average net assets....... 4.24% 4.83% 3.86% 4.13% 4.39%*
Portfolio turnover............ 13% 6% 8% 6% 6%

<CAPTION>
CLASS C(2)
-----------------------------------------------
FOR THE
PERIOD
FOR THE JULY 2,
YEAR FOR THE YEARS 1992+
ENDED ENDED THROUGH
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
----------- ---------------- ------------
1996 1995 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $10.28 $ 11.03 $ 10.99 $ 10.45
------ ------- ------- -------
Net investment income.......... 0.49 0.49 0.51 0.36
Net realized and unrealized
gains (losses) from investment
transactions.................. 0.43 (0.65) 0.07 0.54
------ ------- ------- -------
Total increase (decrease) from
investment operations......... 0.92 (0.16) 0.58 0.90
------ ------- ------- -------
Dividends from net investment
income........................ (0.49) (0.49) (0.51) (0.36)
Distributions from net realized
gains from investment
transactions.................. -- (0.10) (0.03) --
------ ------- ------- -------
Total dividends and
distributions to
shareholders.................. (0.49) (0.59) (0.54) (0.36)
------ ------- ------- -------
Net asset value, end of
period........................ $10.71 $ 10.28 $ 11.03 $ 10.99
------ ------- ------- -------
------ ------- ------- -------

Total investment return (1).... 9.17% (1.20)% 5.35% 8.38%
------ ------- ------- -------
------ ------- ------- -------
Ratios and supplemental data:
Net assets, end of period
(000's)..................... $17,849 $21,095 $38,165 $19,553
Expenses, net of waivers from
adviser, to average
net assets.................. 1.52% 1.52% 1.27% 0.90%*
Expenses, before waivers from
adviser, to average
net assets....... 1.64% 1.75% 1.72% 1.83%*
Net investment income, net of
waivers from adviser,
to average net assets....... 4.61% 4.89% 4.55% 5.04%*
Net investment income, before
waivers from adviser,
to average net assets....... 4.50% 4.65% 4.10% 4.11%*
Portfolio turnover............ 13% 6% 8% 6%

</TABLE>

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

<PAGE>
- --------------------------------------------------------------------------------

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

- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES & POLICIES
- --------------------------------------------------------------------------------

The Funds' investment objectives may not be changed without shareholder
approval. Their other investment policies, except where noted, are not
fundamental and may be changed by the Funds' boards of trustees.

CALIFORNIA TAX-FREE INCOME FUND

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

NATIONAL TAX-FREE INCOME FUND

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

MUNICIPAL HIGH INCOME FUND

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

NEW YORK TAX-FREE INCOME FUND

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

* * * *

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

--------------------
Prospectus Page 18
<PAGE>
- --------------------------------------------------------------------------------

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

- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY & PROCESS
- --------------------------------------------------------------------------------

In selecting municipal securities for the Funds that will provide investors with
high current income exempt from federal and/or state income tax, Mitchell
Hutchins relies on the expertise of its team of analysts and portfolio managers.

The Municipal Investment Team's investment process for each Fund employs a
'top-down' investment process. This process consists of analyzing three
fundamental factors: to determine duration, sector and security. Duration is set
based on the direction of interest rates and the shape of the yield curve.
Sector is determined by analyzing the spread between the prevailing yields of
municipal and U.S. Treasury securities, investment opportunities within the
municipal market and state tax exemption. Finally, security selection is
established by performing an analysis of both credit quality and structure of
individual issues.

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

--------------------
Prospectus Page 19
<PAGE>
- --------------------------------------------------------------------------------

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

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

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

These charts show the total returns for the Funds. Sales charges have not been
deducted from total returns. Returns would be lower if sales charges were
deducted. Past results are not a guarantee of future results. Total returns both
before and after deducting the maximum sales charges are shown below in the
tables that follow the performance charts.

CALIFORNIA TAX-FREE INCOME FUND

[CHART]

Class A Class B Class C
09/16/85 - 7.41%
1986 19.18%
1987 0.65%
1988 10.20%
1989 9.11%
1990 6.68%
1991 10.84% 6.20%
1992 7.49% 6.67% 2.68%
1993 11.96% 11.11% 11.40%
1994 -8.07% -8.69% -8.47%
1995 16.80% 15.91% 16.09%

As Class A shares commenced operations on September 16, 1985, the 1985 return
represents the period from September 16, 1985 through December 31, 1985. The
inception date of Class B shares was July 1, 1991; thus, the 1991 return for
Class B shares represents the period from July 1, 1991 through December 31,
1991. The inception date of Class C shares was July 2, 1992; thus, the 1992
return for Class C shares represents the period from July 2, 1992 through
December 31, 1992.

<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
As of February 29, 1996
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Inception Date..................... 9/16/85 7/1/91 7/2/92
ONE YEAR
Without deducting maximum sales
charges....................... 8.68% 7.86% 8.22%
After deducting maximum sales
charges....................... 4.29% 2.86% 7.47%
FIVE YEARS
Without deducting maximum sales
charges....................... 6.96% N/A N/A
After deducting maximum sales
charges....................... 6.08% N/A N/A
TEN YEARS (OR LIFE OF CLASS)

Without deducting maximum sales
charges....................... 7.17% 6.10% 5.20%
After deducting maximum sales
charges....................... 6.74% 5.75% 5.20%
</TABLE>

--------------------
Prospectus Page 20
<PAGE>
- --------------------------------------------------------------------------------

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

NATIONAL TAX-FREE INCOME FUND

[CHART]

Class A Class B Class C
12/03/84 - 0.31%
1985 19.00%
1986 17.38%
1987 1.30%
1988 10.98%
1989 9.11%
1990 6.55%
1991 11.12% 6.50%
1992 8.01% 7.27% 2.78%
1993 12.32% 11.49% 11.77%
1994 -7.14% -7.84% -7.60%
1995 16.01% 15.05% 15.42%

As Class A shares commenced operations on December 3, 1984, the 1984 return
represents the period from December 3, 1984 through December 31, 1984. The
inception date of Class B shares is July 1, 1991; thus, the 1991 return for
Class B shares represents the period from July 1, 1991 through December 31,
1991. The inception date of Class C shares was July 2, 1992; thus, the 1992
return for Class C shares represents the period from July 2, 1992 through
December 31, 1992.

charges....................... 4.39% 2.94% 7.44%
FIVE YEARS
Without deducting maximum sales
charges....................... 7.18% N/A N/A
After deducting maximum sales
charges....................... 6.30% N/A N/A
TEN YEARS (OR LIFE OF CLASS)
Without deducting maximum sales
charges....................... 7.16% 6.39% 5.36%
After deducting maximum sales
charges....................... 6.72% 6.05% 5.36%
</TABLE>

--------------------
Prospectus Page 21
<PAGE>
- --------------------------------------------------------------------------------

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

MUNICIPAL HIGH INCOME FUND
[CHART]

Class A Class B Class C
06/23/87 - 1.46%
1988 14.45%
1989 9.66%
1990 5.52%
1991 13.32% 7.21%
1992 9.79% 8.95% 3.06%
1993 12.14% 11.30% 11.57%
1994 -7.77% -8.47% -8.23%
1995 15.55% 14.59% 14.88%

As Class A shares commenced operations on June 23, 1987, the 1987 return
represents the period from June 23, 1987 through December 31, 1987. The
inception date of Class B shares is July 1, 1991; thus, the 1991 return for
Class B shares represents the period from July 1, 1991 through December 31,
1991. The inception date of Class C shares was July 2, 1992; thus, the 1992
return for Class C shares represents the period from July 2, 1992 through
December 31, 1992.

<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
As of February 29, 1996

CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Inception Date..................... 6/23/87 7/1/91 7/2/92
ONE YEAR

Without deducting maximum sales
charges....................... 10.18% 9.36% 9.64%
After deducting maximum sales
charges....................... 5.81% 4.36% 8.89%
FIVE YEARS
Without deducting maximum sales
charges....................... 8.01% N/A N/A
After deducting maximum sales
charges....................... 7.14% N/A N/A
LIFE
Without deducting maximum sales
charges....................... 8.27% 6.85% 5.38%
After deducting maximum sales
charges....................... 7.77% 6.51% 5.38%
</TABLE>

--------------------
Prospectus Page 22
<PAGE>
- --------------------------------------------------------------------------------

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

NEW YORK TAX-FREE INCOME FUND

[CHART]

Class A Class B Class C
09/23/88 - 1.82%
1989 9.90%
1990 5.53%
1991 12.85% 7.25%
1992 9.85% 9.02% 3.65%
1993 12.72% 11.78% 12.04%
1994 -8.48% -9.07% -8.81%
1995 17.57% 15.03% 16.87%

As Class A shares commenced operations on September 23, 1988, the 1988 return
represents the period from September 23, 1988 through December 31, 1988. The
inception date of Class B shares is July 1, 1991; thus, the 1991 return for
Class B shares represents the period from July 1, 1991 through December 31,
1991. The inception date of Class C shares was July 2, 1992; thus, the 1992
return for Class C shares represents the period from July 2, 1992 through
December 31, 1992.

<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
As of February 29, 1996

CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------

<S> <C> <C> <C>
Inception Date..................... 9/23/88 7/1/91 7/2/92
ONE YEAR
Without deducting maximum sales
charges....................... 9.83% 9.01% 9.17%
After deducting maximum sales
charges....................... 5.44% 4.01% 8.42%
FIVE YEARS
Without deducting maximum sales
charges....................... 8.08% N/A N/A
After deducting maximum sales
charges....................... 7.20% N/A N/A
LIFE
Without deducting maximum sales
charges....................... 7.96% 7.14% 5.85%
After deducting maximum sales
charges....................... 7.37% 6.80% 5.85%
</TABLE>

--------------------
Prospectus Page 23
<PAGE>
- --------------------------------------------------------------------------------

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

PERFORMANCE INFORMATION

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

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

performance is contained in its Annual Report, which may be obtained without
charge by contacting the Fund, your PaineWebber investment executive or
PaineWebber's correspondent firms or by calling toll-free 1-800-647-1568.

- --------------------------------------------------------------------------------
THE FUNDS' INVESTMENTS
- --------------------------------------------------------------------------------

MUNICIPAL SECURITIES

Each Fund may invest in a variety of municipal securities, as described below:

MUNICIPAL BONDS. Municipal bonds are debt obligations issued to obtain funds for
various public purposes that pay interest that is exempt from federal income tax
in the opinion of bond issuer's counsel, and include general obligation bonds,
revenue bonds and 'moral obligation' issues. Municipal bonds also include
municipal lease obligations, which are issued by state and local governments and
authorities to purchase land and various types of equipment or facilities.

INDUSTRIAL DEVELOPMENT BONDS ('IDBS') AND PRIVATE ACTIVITY BONDS ('PABS'). IDBs
and PABs are issued by or on behalf of public authorities to finance various
privately operated facilities, such as airport or pollution control facilities,
and are included within the term 'municipal bonds' if the interest paid on the
bond is exempt from federal income tax in the opinion of bond issuer's counsel.

FLOATING RATE AND VARIABLE RATE OBLIGATIONS. Floating rate and variable rate
obligations bear interest at rates that are not fixed, but that vary with
changes in specified market rates or indices. These obligations typically permit
the holder to demand payment of principal from the issuer at par value prior to
maturity and may permit the issuer to prepay principal plus accrued interest.

PARTICIPATION INTERESTS. Participation interests are interests in municipal
bonds that are owned by banks, and carry a demand feature permitting the holder
to sell them back to the bank.

TENDER OPTION BONDS. Tender option bonds are long-term municipal securities sold
by a bank subject to a 'tender option' that gives the purchaser the right to
sell them to the bank at par plus accrued interest at designated times.

PUT BONDS. A put bond is a municipal bond that gives the holder the
unconditional right to sell the bond back to the issuer at a specified price and
exercise date, which is typically well in advance of the bond's maturity date.

TAX-EXEMPT COMMERCIAL PAPER AND SHORT-TERM MUNICIPAL NOTES. Tax-exempt
commercial paper and short-term municipal notes are issued with a

--------------------
Prospectus Page 24
<PAGE>
- --------------------------------------------------------------------------------

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

short-term maturity in anticipation of the receipt of tax funds, the proceeds of
bond placements and other revenues.

INVERSE FLOATERS. Inverse floaters are municipal obligations on which the rate
of interest varies inversely with interest rates on other municipal obligations
or an index. The interest rate paid to holders of inverse floaters will decrease
as market rates increase and increase as market rates decrease. The market value
of an inverse floater will be more volatile than that of a fixed rate
obligation. Because of the market volatility associated with inverse floaters,
no Fund will invest more than 10% of its total assets in inverse floaters.

RISKS

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

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

Credit ratings attempt to evaluate the safety of principal and interest
payments, do not evaluate the volatility of the municipal security's value or
its liquidity and do not guarantee the performance of the issuer. The rating
agencies also may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial condition may be better
or worse than the rating indicates. There is a risk that rating agencies will
downgrade municipal securities. Mitchell Hutchins is not required to dispose of
a security that receives a credit downgrade. In the event of a downgrade that
results in greater than 5% of the net assets of California Tax-Free Income Fund,
National Tax-Free Income Fund or New York Tax-Free Income Fund being held in
securities rated below investment grade, Mitchell Hutchins will engage in an
orderly disposition of such securities to the extent necessary. The Appendix to
this Prospectus contains further information about Moody's and S&P ratings.

YIELD AND INTEREST RATES. The yield of a municipal security depends on a
variety of factors, including general municipal and fixed-income security market
conditions, the financial condition of the issuer, the size of the particular
offering, the maturity, credit quality and rating of the issue and expectations
regarding changes in tax rates. Generally, the longer the maturity of a
municipal security, the higher the rate of interest paid and the greater the
volatility. Further, if general market interest rates are increasing, the prices
of municipal obligations ordinarily will decrease and, if rates decrease, the
opposite generally will be true. During periods of market uncertainty, the
market values of municipal securities can become volatile.

Each Fund may invest in municipal securities with a broad range of maturities,
based on Mitchell Hutchins' judgment of current and future market conditions as
well as other factors, such as the Fund's liquidity needs. In selecting
investments for the Funds' portfolios, Mitchell Hutchins uses 'duration,' rather
than the more traditional measure of 'term to maturity.' 'Duration' is a measure
of the sensitivity of bonds to changes in market interest rates, based on the
entire cash flow associated with the bonds, including payments occurring before
the final repayment of principal. 'Term to maturity' does not take into account
the pattern of a security's payment prior to maturity. Duration, therefore,
provides a more accurate measurement of a bond's likely price change in response
to a given change in market interest rates; the longer the duration, the greater
a bond's price movement will be as interest rates change.

DERIVATIVES. Some of the instruments in which the Funds may invest may be
referred to as 'derivatives,' because their value depends on (or 'derives' from)
the value of an underlying asset, reference rate or index. These instruments
include options, futures contracts and similar instruments that may be used in
hedging strategies. There is only limited consensus as to what constitutes a
'derivative' security. However, in Mitchell Hutchins' view, derivative
securities also include inverse floaters. The market value of derivative
instruments and securities sometimes is more volatile than that

--------------------
Prospectus Page 25
<PAGE>
- --------------------------------------------------------------------------------

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

of other investments, and each type of derivative instrument may pose its own
special risks. Mitchell Hutchins takes these risks into account in its
management of the Funds.

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

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

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

CALIFORNIA TAX-FREE INCOME FUND

RISKS OF CALIFORNIA OBLIGATIONS. California Tax-Free Income Fund's investment
concentration in California Obligations involves greater risks than if it
invested in the securities of a broader range of issuers. The Fund's yield
and net asset value per share can be affected by political and economic
developments within California, and by the financial condition of California,
its public authorities and political subdivisions. California suffered a
severe recession between 1990-1993, resulting in significant revenue
shortfalls for both the State and local government, and increased social
service expenses. However, since the start of 1994, California's economy has
rebounded strongly, with corresponding improvements in tax revenues. Further,
in the past California voters have passed amendments to the California
Constitution and other measures that limit the taxing and spending authority
of California governmental entities, and future voter initiatives could
result in adverse consequences affecting California Obligations. A more
detailed discussion of the risks of investing in California Obligations is
included in the Statement of Additional Information.

NEW YORK TAX-FREE INCOME FUND

RISKS OF NEW YORK OBLIGATIONS. New York Tax-Free Income Fund's investment
concentration in New York Obligations involves greater risks than if it
invested in the securities of a broader range of issuers. The Fund's yield
and net asset value per share can be affected by political and economic
developments within the State of New York, its public authorities and political
subdivisions, particularly New York City. Although New York State reduced its
accumulated general fund deficits and experienced operating surpluses in fiscal
years 1991-92 through 1993-94, it continues to experience substantial financial
difficulties related to the recent recession, and an estimated budget gap of
approximately $3.9 billion is projected for fiscal year 1996-97 unless numerous
and substantial corrective measures are successfully implemented. New York City
and most suburban county governments are also experiencing serious fiscal
problems related to the sluggish performance of the regional economy, which
has caused substantial, broad-based and recurring revenue shortfalls. The
credit standings of New York State and New York City have been, and could be
further, reduced, and their ability to provide assistance to its public
authorities and political subdivisions has been, and could be further,
impaired. A more detailed discussion of the risks of investing in New York
Obligations is included in the Statement of Additional Information.

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

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

Prospectus Page 26
<PAGE>
- --------------------------------------------------------------------------------

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

MUNICIPAL HIGH INCOME FUND

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

Lower rated municipal securities generally offer a higher current yield than
higher grade issues but they involve higher risks, since they are especially
subject to adverse changes in general economic conditions, in economic
conditions of the issuer's geographic area and in the industries or activities
in which the issuer is engaged, to changes in the financial condition of the
issuers, and to price fluctuations in response to changes in interest rates.
During periods of economic downturn or rising interest rates, municipal issuers
may experience financial stress which could adversely affect their ability to
make payments of principal and interest and increase the possibility of default.

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

During the 1996 fiscal year, the Fund had 100% of its average annual net assets
in municipal securities that received a rating from Moody's or S&P. The Fund had
the following percentages of its average annual net assets invested in rated
securities: AAA/Aaa (including cash items and repurchase agreements)--2.25%,
AA/Aa--1.13%, A/A--8.09%, BBB/Baa--64.87%, BB/Ba--19.37%, B/B--4.29%,
CCC/Caa--0%, CC/Ca--0%, C/C--0% and D--0%. Municipal securities that received
different ratings from Moody's and S&P were assigned to the higher rating
category. It should be noted that this information reflects the average

composition of the Fund's assets during the fiscal year ended February 29, 1996,
and is not necessarily representative of the Fund's assets at the end of that
fiscal year, in the current fiscal year or at any time in the future.

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

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

INVESTMENT TECHNIQUES AND STRATEGIES

HEDGING AND RELATED INCOME STRATEGIES. Each Fund may use options (both
exchange-traded and over-the-counter) and futures contracts to attempt to
enhance income and to reduce the overall risk of its

--------------------
Prospectus Page 27
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

investments (hedge). These strategies may generate taxable income. In addition,
new financial products and risk management techniques continue to be developed
and may be used if consistent with a Fund's investment objective and policies. A
Fund's ability to use these strategies may be limited by market conditions,
regulatory limits and tax considerations. The use of options and futures solely
to enhance income may be considered a form of speculation. The Statement of
Additional Information for the Funds contains further information on these
strategies.

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

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

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

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

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

TEMPORARY OR DEFENSIVE POSITIONS. During unusual market conditions, including
when, in the opinion of Mitchell Hutchins, there are not enough suitable
municipal obligations available for investment, each Fund may hold cash and
invest in money market instruments that pay taxable interest, including
repurchase agreements, for temporary or defensive purposes and without
percentage limit. If a Fund held cash, the cash would not earn income and would
reduce the Fund's yield. In addition, for temporary or defensive purposes, each
of California Tax-Free Income Fund, National Tax-Free Income Fund and New York
Tax-Free Income Fund may invest more than 20% of its net assets in municipal
obligations that pay interest that is exempt from federal income tax but is
subject to California personal income tax (in the case of California Tax-Free
Income Fund), New York personal income tax (in the case of New York Tax-Free
Income Fund) or is not AMT exempt interest.

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

LENDING PORTFOLIO SECURITIES. Each Fund is authorized to lend up to 33 1/3% of
the total value of its portfolio securities to broker-dealers or institutional
investors that Mitchell Hutchins deems qualified. Lending securities enables a
Fund to earn additional income, but could result in a loss or delay in
recovering securities. Because the income generated by securities lending
activities is taxable, the Funds do not expect to engage in securities lending
except under unusual circumstances.

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

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

Prospectus Page 28
<PAGE>
- --------------------------------------------------------------------------------

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

- --------------------------------------------------------------------------------
FLEXIBLE PRICING(Service Mark)
- --------------------------------------------------------------------------------

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

CLASS A SHARES

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

<TABLE>
<CAPTION>
SALES CHARGE AS A
PERCENTAGE OF
----------------------- DISCOUNT TO
NET SELECTED DEALERS
OFFERING AMOUNT AS PERCENTAGE
AMOUNT OF INVESTMENT PRICE INVESTED OF OFFERING PRICE
- ----------------------------------- -------- -------- -----------------

<S> <C> <C> <C>
Less than $100,000 4.00% 4.17% 3.75%

$100,000 to $249,999 3.00 3.09 2.75

$250,000 to $499,999 2.25 2.30 2.00

$500,000 to $999,999 1.75 1.78 1.50

$1,000,000 and over(1) None None 1.00(2)
</TABLE>

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

(1) A contingent deferred sales charge of 1% of the shares' net asset value at
the time of their purchase or their sale, whichever is less, is charged on
sales of shares made within one year of the purchase date. However, Class A
shares representing reinvestment of any dividends or other distributions are

not subject to the 1% charge. Withdrawals under the Systematic Withdrawal
Plan are not subject to this charge. However, investors may not withdraw
annually more than 12% of the value of the Fund account under the Plan in
the first year after purchase. This charge does not apply to Class A shares
bought before November 10, 1995.

(2) Mitchell Hutchins pays 1% to PaineWebber.

SALES CHARGE REDUCTIONS & WAIVERS

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

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

o their spouses, parents or children under age 21;

o their Individual Retirement Accounts (IRAs);

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

o any company controlled by the investor;

o trusts created by the investor;

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

o accounts with the same adviser.

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

--------------------
Prospectus Page 29
<PAGE>
- --------------------------------------------------------------------------------

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

The sales charge will not apply when the investor:

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

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

Mitchell Hutchins;

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

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

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

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

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

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

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

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

CLASS B SHARES

HOW PRICE IS CALCULATED: The price is the net asset value next calculated after
PaineWebber's New York City headquarters or the Transfer Agent receives the
purchase order. The ongoing expenses investors pay for Class B shares are higher
than those of Class A shares. Because investors do not pay an initial sales
charge when they buy Class B shares, 100% of their purchase is immediately
invested.

Depending on how long they own their Fund investment, investors may have to pay
a sales charge when they sell their Fund shares. This sales charge is called a
'contingent deferred sales charge.' The amount of the charge depends on how long
the investor owned the shares. The sales charge is calculated by multiplying the
net asset value of the shares at the time of sale or purchase, whichever is

less, by the percentage shown on the following table. Investors who own shares
for more than six years do not have to pay a sales charge when selling those
shares.

<TABLE>
<CAPTION>
PERCENTAGE BY WHICH
THE SHARES' NET
ASSET
IF THE INVESTOR VALUE IS
SELLS SHARES WITHIN: MULTIPLIED:
- ----------------------------------- -------------------

<S> <C>
1st year since purchase 5%

2nd year since purchase 4

3rd year since purchase 3

4th year since purchase 2

5th year since purchase 2

6th year since purchase 1

7th year since purchase None
</TABLE>

--------------------
Prospectus Page 30
<PAGE>
- --------------------------------------------------------------------------------

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

CONVERSION OF CLASS B SHARES

Class B shares automatically convert to the appropriate number of Class A shares
of equal dollar value after the investor has owned them for six years. Dividends
and other distributions paid to the investor by the Fund in the form of
additional Class B shares will also convert to Class A shares on a pro-rata
basis. This benefits shareholders because Class A shares have lower ongoing
expenses than Class B shares. If the investor has exchanged Class B shares
between PaineWebber funds, the Fund uses the purchase date at which the initial
investment was made to determine the conversion date.

MINIMIZING THE CONTINGENT DEFERRED SALES CHARGE

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

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

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

WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGE

The contingent deferred sales charge will not apply to:

o redemptions under the Fund's 'Systematic Withdrawal Plan' (investors may not
withdraw annually more than 12% of the value of the Fund account under the
Plan);

o a distribution from an IRA, a self-employed individual retirement plan ('Keogh
Plan') or a custodial account under Section 403(b) of the Internal Revenue
Code (after the investor reaches age 59 1/2);

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

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

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

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

CLASS C SHARES

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

A contingent deferred sales charge of 0.75% of the net asset value of the shares
at the time of purchase or sale, whichever is less, is charged on sales of
shares made within one year of the purchase date. Other PaineWebber mutual funds
may impose a different contingent deferred sales charge on Class C shares sold
within one year of the purchase date. A sale of Class C shares acquired through
an exchange and held less than one year will be subject to the same contingent
deferred sales charge that would have been imposed on the Class C shares of the
PaineWebber mutual fund originally purchased. Class C shares representing
reinvestment of any dividends or capital gains are not subject to the 0.75%
charge. Withdrawals under the Systematic Withdrawal Plan also are not subject to
this charge. However, investors may not withdraw annually more than 12% of the
value of the Fund account under the Plan in the first year after purchase. This
charge does not apply to Class C shares bought before November 10, 1995.

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

<PAGE>
- --------------------------------------------------------------------------------

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

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

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

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

PAINEWEBBER CLIENTS

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

Investors may pay for their purchases with checks drawn on U.S. banks or with
funds they have in their brokerage accounts at PaineWebber or its correspondent
firms. Payment is due on the third Business Day after PaineWebber's New York
City headquarters office receives the purchase order.

OTHER INVESTORS

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

Investors who already have money invested in a PaineWebber mutual fund, and want
to invest in another PaineWebber mutual fund, can:

o mail an application with a check; or

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

Investors do not have to send an application when making additional investments

in the Fund.

MINIMUM INVESTMENTS

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

A Fund may waive or reduce these minimums for:

o employees of PaineWebber or its affiliates; or

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

HOW TO EXCHANGE SHARES

As shareholders, investors have the privilege of exchanging Fund shares for the
same class of other PaineWebber mutual fund shares. In classes of shares where
no initial sales charge is imposed, a contingent deferred sales charge may apply
if the investor sells the shares acquired through the exchange. Exchanges may be
subject to minimum investment requirements of the fund into which exchanges are
made. A $5 fee is imposed on each exchange.

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

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

o the investor's name and address;

o the Fund's name;

o the Fund account number;

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

--------------------
Prospectus Page 32
<PAGE>
- --------------------------------------------------------------------------------

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

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

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

No contingent deferred sales charge is imposed when shares are exchanged for the
corresponding class of shares of other PaineWebber mutual funds. A Fund will use
the purchase date of the initial investment to determine any contingent deferred
sales charge due when the shares are sold. Fund shares may be exchanged only
after the settlement date has passed and payment for the shares has been made.
The exchange privilege is available only in those jurisdictions where the sale
of the fund shares to be acquired are authorized. This exchange privilege may be
modified or terminated at any time and, when required by SEC rules, upon 60
days' notice. See the back cover of this Prospectus for a listing of other
PaineWebber funds.

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

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

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

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

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

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

REINSTATEMENT PRIVILEGE

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

--------------------
Prospectus Page 33
<PAGE>
- --------------------------------------------------------------------------------

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

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

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

AUTOMATIC INVESTMENT PLAN

Investing on a regular basis helps investors meet their financial goals.
PaineWebber offers an Automatic Investment Plan with a minimum initial
investment of $1,000 through which a Fund will deduct $50 or more each month
from the investor's bank account to invest directly in the Fund. In addition to
providing a convenient and disciplined manner of investing, participation in the
Automatic Investment Plan enables the investor to use the technique of 'dollar
cost averaging.'

SYSTEMATIC WITHDRAWAL PLAN

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

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

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

Withdrawals under the Systematic Withdrawal Plan will not be subject to a
contingent deferred sales charge. Investors may not withdraw annually more than
12% of the value of the Fund account when the investor signed up for the Plan.
Shareholders who elect to receive dividends or other distributions in cash may
not participate in the Plan.

TRANSFER OF ACCOUNTS

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

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

Each Fund is governed by the board of trustees, which oversees its operations.
Each Fund has appointed Mitchell Hutchins as investment adviser and
administrator responsible for its operations (subject to the authority of the
board).

The board of trustees, as part of its overall management responsibility,
oversees various organizations responsible for the day-to-day management of each
Fund.

The boards have determined that brokerage transactions for the Funds may be
conducted through PaineWebber or its affiliates in accordance with procedures
adopted by the board.

ABOUT THE INVESTMENT ADVISER

Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, is the asset management subsidiary of PaineWebber Incorporated, which is
wholly owned by Paine Webber Group Inc., a publicly owned financial services
holding company. On May 31, 1996, Mitchell Hutchins was adviser or sub-adviser
of 31 investment companies with 65 separate portfolios and aggregate assets of
approximately $30.4 billion.

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Prospectus Page 34
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

As investment adviser and administrator of each Fund, Mitchell Hutchins makes
and implements all investment decisions and supervises all aspects of each
Fund's operations.

Dennis L. McCauley is a managing director and chief investment officer of fixed
income of Mitchell Hutchins responsible for overseeing all active fixed income
investments, including domestic and global taxable and tax-exempt mutual funds.
Prior to joining Mitchell Hutchins in 1994, Mr. McCauley worked for IBM
Corporation, where he was director of fixed income investments responsible for
developing and managing investment strategy for all fixed income and cash
management investments of IBM's pension fund and self-insured medical funds. Mr.
McCauley has also served as vice president of IBM Credit Corporation's mutual
funds and as a member of the retirement fund investment committee.

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

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

Other members of Mitchell Hutchins' municipal investments group provide input on
market outlook, interest rate forecasts, and other considerations pertaining to
municipal investments. This group, together with the municipal portfolio
managers, comprise the Municipal Investment Team that sets the strategy for the
management of PaineWebber municipal bond funds. The Municipal Investment Term is
complemented by a team of research analysts specializing in economic, credit,
quantitative and market research.

Mitchell Hutchins personnel may engage in securities transactions for their own
accounts pursuant to a code of ethics that establishes procedures for personal
investing and restricts certain transactions.

MANAGEMENT FEES & OTHER EXPENSES

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

Each Fund pays PaineWebber an annual fee of $4.00 per active shareholder account
held at PaineWebber for services not provided by the Transfer Agent.

DISTRIBUTION ARRANGEMENTS

Mitchell Hutchins is the distributor of each Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. Under

distribution plans for Class A, Class B and Class C shares ('Class A Plan,'
'Class B Plan' and 'Class C

--------------------
Prospectus Page 35
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

Plan,' collectively, 'Plans'), each Fund pays Mitchell Hutchins:

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

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

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

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

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

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

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

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

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

expenses are less than such fees, it will retain its full fees and realize a
profit. Expenses in excess of service and distribution fees received or accrued
through the termination date of any Plan will be Mitchell Hutchins' sole
responsibility and not that of the Funds. Annually, the board of each Fund
reviews the Plans and Mitchell Hutchins' corresponding expenses for each class
separately from the Plans and expenses of the other classes.

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

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

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

--------------------
Prospectus Page 36
<PAGE>
- --------------------------------------------------------------------------------

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

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

DIVIDENDS

Dividends from each Fund's net investment income are declared daily and paid
monthly.

o California Tax-Free Income Fund pays dividends about the fifth day of each
month.

o National Tax-Free Income Fund pays dividends about the fifteenth day of each
month.

o Municipal High Income Fund and New York Tax-Free Income Fund pay dividends on
or about the first Wednesday of each month.

Net investment income includes accrued interest and discount, less amortization
of premium and accrued expenses, with respect to municipal securities. Each Fund

distributes annually substantially all of its net capital gain (the excess of
net long-term capital gain over net short-term capital loss), if any, together
with any other taxable income (including any net short-term capital gain). A
Fund may make additional distributions if necessary to avoid a 4% excise tax on
certain undistributed income and capital gain.

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

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

TAXES

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

Fund shareholders generally may exclude from gross income for federal income tax
purposes distributions by a Fund that it designates as 'exempt-interest
dividends.' In order to pay exempt-interest dividends to its shareholders, a
Fund must (and each Fund intends to continue to) satisfy the requirement that,
at the close of each quarter of its taxable year, at least 50% of the value of
its total assets consists of municipal securities. Corporate shareholders must
include all of their exempt-interest dividends in calculating their liability
for that tax.

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

Shareholders may not deduct interest on indebtedness they incur or continue in
order to purchase or carry Fund shares. If a Fund invests in certain private
activity bonds, shareholders must include a portion of their exempt-interest
dividends from that Fund in calculating their liability for the federal
alternative minimum tax.

YEAR-END TAX REPORTING

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

WITHHOLDING REQUIREMENTS

Each Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to individuals and certain other
non-corporate shareholders who do not provide the

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Prospectus Page 37
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

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

TAXES ON THE SALE OR EXCHANGE OF FUND SHARES

When shareholders sell (redeem) shares, it may result in a taxable gain or loss.
This depends upon whether the shareholders receive more or less than their
adjusted basis for the shares (which normally takes into account any initial
sales charge paid on Class A shares). An exchange of any Fund's shares for
shares of another PaineWebber mutual fund generally will have similar tax
consequences. In addition, if a Fund's shares are bought within 30 days before
or after selling other shares of the Fund (regardless of class) at a loss, all
or a portion of that loss will not be deductible and will increase the basis of
the newly purchased shares.

SPECIAL TAX RULES FOR CLASS A SHAREHOLDERS

Special tax rules apply when a shareholder sells (redeems) or exchanges Class A
shares within 90 days of purchase, and subsequently acquires Class A shares of a
PaineWebber fund without paying a sales charge due to the 365-day reinstatement
privilege or the exchange privilege. In these cases, any gain on the sale or
exchange of the original Class A shares would be increased or, in the case of a
loss, decreased by the amount of the sales charge paid when those shares were
bought, and that amount will increase the basis of the PaineWebber mutual fund
shares subsequently acquired.

CALIFORNIA TAXES

personal income tax purposes. Shareholders receive annual notification of the
portion of the Fund's tax-exempt income attributable to issuers in California
and other states. California exempt-interest dividends may affect the
calculation of certain adjustments to alternative minimum taxable income for
corporate shareholders. The Fund itself will not be subject to California
franchise or corporate income tax on interest income or net capital gain
distributed to its shareholders.

NEW YORK STATE AND
NEW YORK CITY TAXES

If New York Tax-Free Income Fund continues to qualify as a RIC
under the Code and at the end of each quarter of its taxable
year at least 50% of the value of its total assets consists of New York
Obligations, the exempt-interest dividends it pays that are derived from
interest on qualifying New York Obligations will be exempt from New York State
and New York City personal income taxes, but not corporate franchise taxes.
Dividends and other distributions derived from taxable income and capital gains
are not exempt from New York State and New York City taxes. Shareholders may not
deduct interest on indebtedness they incur or continue in order to purchase or
carry shares of the Fund for New York State or New York City personal income tax
purposes. Shareholders receive annual notification of the portion of the Fund's
tax-exempt income attributable to issuers in New York State and other states.
The Fund's interest income that is distributed to shareholders will generally
not be taxable to the Fund for purposes of the New York State corporation
franchise tax or the New York City general corporation tax.

* * * *

Because the foregoing only summarizes some of the important federal income tax
and California, New York State and New York City personal income tax
considerations generally affecting each Fund and its shareholders, the Statement
of Additional Information contains more details. There may be other federal,
state or local tax considerations applicable to a particular investor.
Prospective shareholders are urged to consult their tax advisers.

--------------------
Prospectus Page 38
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

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

ORGANIZATION

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

Series (each a 'Trust').

Both PaineWebber Municipal Series and PaineWebber Mutual Fund Trust are business
trusts under the laws of the Commonwealth of Massachusetts which are registered
with the SEC as open-end management investment companies. PaineWebber Municipal
Series was organized under a Declaration of Trust dated January 28, 1987 and
PaineWebber Mutual Fund Trust was organized under a Declaration of Trust dated
November 21, 1986. The trustees of each Trust have authority to issue an
unlimited number of shares of beneficial interest of separate series, par value
$.001 per share.

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

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

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

Although each Trust is offering only the shares of its Funds, it is possible
that a Trust could become liable for misstatement in this Prospectus about a
Fund of the other Trust. The trustees of each Trust have considered this factor
in approving the use of a combined Prospectus.

VOTING RIGHTS

Shareholders of each Fund are entitled to one vote for each full share held and
fractional votes for fractional shares held. Voting rights are not cumulative
and, as a result, the holders of more than 50% of all the shares of any Fund (or
Trust if there is more than one series) may elect all of the trustees of that
Fund. The shares of the Funds will be voted separately except when an aggregate
vote of all series in a Trust is required by law and except that only the
shareholders of a particular class of a Fund are required to vote on matters
affecting only that class, such as the terms of a Plan as it relates to the
class.

SHAREHOLDER MEETINGS

The Funds do not intend to hold annual meetings.

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

REPORTS TO SHAREHOLDERS

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

CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND AGENT

State Street Bank and Trust Company, located at One Heritage Drive, North
Quincy, Massachusetts 02171, serves as each Fund's custodian and recordkeeping
agent. PFPC Inc., a subsidiary of PNC Bank, N.A., serves as the Funds' transfer
and dividend disbursing agent. It is located at 400 Bellevue Parkway,
Wilmington, DE 19809.

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

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

APPENDIX

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

DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS:

Aaa. Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.

Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
They are rated lower than the Aaa bonds because margins of protection may not be
as large as in Aaa securities, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which made the
long-term risks appear somewhat larger than in Aaa securities.

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

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

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

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

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

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

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

DESCRIPTION OF S&P'S MUNICIPAL BOND RATINGS:

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

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

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

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

BB, B, CCC, CC AND C. Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective

characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.

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

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Prospectus Page 40
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

during such grace period. The D rating also will be used upon the filing of a
bankruptcy petition if debt service payments are continued.

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

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

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

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

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

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

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

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

LOANS:

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

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

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

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

DESCRIPTION OF COMMERCIAL PAPER RATINGS

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

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

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

<PAGE>
- --------------------------------------------------------------------------------

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

PROSPECTUS -- JULY 1, 1996

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

/ / PAINEWEBBER BOND FUNDS / / PAINEWEBBER STOCK FUNDS
High Income Fund Capital Appreciation Fund
Investment Grade Income Fund Financial Services Growth Fund
Low Duration U.S. Government Growth Fund
Income Fund Growth and Income Fund
Strategic Income Fund Small Cap Value Fund
U.S. Government Income Fund Utility Income Fund

/ / PAINEWEBBER TAX-FREE BOND FUNDS / / PAINEWEBBER GLOBAL FUNDS
California Tax-Free Income Fund Emerging Markets Equity Fund
Municipal High Income Fund Global Equity Fund
National Tax-Free Income Fund Global Income Fund
New York Tax-Free Income Fund
/ / PAINEWEBBER MONEY MARKET FUND
/ / PAINEWEBBER ASSET
ALLOCATION FUNDS
Balanced Fund
Tactical Allocation Fund

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

(Copyright) 1996 PaineWebber Incorporated

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

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

The Class Y shares described in this Prospectus are currently offered for sale
primarily to participants in the INSIGHT Investment Advisory Program
('INSIGHT'), when purchased through that program. See 'How to Buy Shares.'

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

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

PAINEWEBBER MUNICIPAL HIGH INCOME FUND MAY INVEST PREDOMINANTLY IN LOWER RATED
MUNICIPAL OBLIGATIONS, COMMONLY REFERRED TO AS MUNICIPAL 'JUNK BONDS.' MUNICIPAL
OBLIGATIONS OF THIS TYPE ARE CONSIDERED TO BE SPECULATIVE WITH RESPECT TO THE
PAYMENT OF INTEREST AND RETURN OF PRINCIPAL. PURCHASERS SHOULD CAREFULLY ASSESS
THE RISKS ASSOCIATED WITH AN INVESTMENT IN THIS FUND.

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

<PAGE>
- --------------------------------------------------------------------------------

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

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

<TABLE>
<CAPTION>
PAGE
----

<S> <C>
The Funds at a Glance............................. 3

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

Financial Highlights.............................. 8

Investment Objectives & Policies.................. 9

Investment Philosophy & Process................... 10

Performance....................................... 11

The Funds' Investments............................ 12

How to Buy Shares................................. 17

How to Sell Shares................................ 18

Management........................................ 19

Determining the Shares' Net Asset Value........... 20

Dividends & Taxes................................. 20

General Information............................... 22

Appendix.......................................... 24
</TABLE>

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

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

MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

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

The Funds offered by this Prospectus are not intended to provide a complete or
balanced investment program, but one or more of them may be appropriate as a
component of an investor's overall portfolio. Some common reasons to invest in
these Funds are to finance college educations, plan for retirement or diversify
a portfolio. The Funds are not suitable for tax-exempt institutions or qualified
retirement plans because those investors cannot take advantage of the tax-exempt
character of the Funds' dividends. When selling shares, investors should be
aware that they may get more or less for their shares than they originally paid
for them. As with any mutual fund there is no assurance that the Funds will
achieve their goals.

CALIFORNIA TAX-FREE INCOME FUND

GOAL: To provide you with superior current income on your investment that is
exempt from federal income tax and California personal income tax.

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

SIZE: On May 31, 1996, the Fund had over $185.5 million in assets.

NATIONAL TAX-FREE INCOME FUND

GOAL: To provide you with superior current income on your investment that is
exempt from federal income tax.

INVESTMENT OBJECTIVE: High current income exempt from federal income tax,
consistent with the preservation of capital and liquidity within the Fund's
quality standards.

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

and, during periods of market uncertainty, the values of municipal securities
can become volatile. Certain investment grade municipal securities in which the
Fund may invest have speculative characteristics. The Fund's ability to invest
more than 25% of its total assets in municipal securities, the interest on which
is paid from similar types of projects, may increase the risk of investing in
the Fund. The Fund may use derivatives in its investment activities, which may
involve additional risks.

SIZE: On May 31, 1996, the Fund had over $411.3 million in assets.

MUNICIPAL HIGH INCOME FUND

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

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

--------------------
Prospectus Page 3
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

- --------------------------------------------------------------------------------
THE FUNDS AT A GLANCE
(Continued)
- --------------------------------------------------------------------------------

The Fund's ability to invest more than 25% of its total assets in municipal
securities, the interest on which is paid from similar types of projects, may
increase the risk of investing in the Fund. The Fund is non-diversified and may
be subject to greater risk and volatility than a diversified fund because
changes in the financial condition of a single issuer may cause greater
fluctuation in the value of the Fund's shares. The Fund may use derivatives in
its investment activities, which may involve additional risks.

SIZE: On May 31, 1996, the Fund had over $94.2 million in assets.

NEW YORK TAX-FREE INCOME FUND

GOAL: To provide you with superior current income on your investment that is
exempt from federal income tax and New York State and New York City personal
income taxes.

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

RISKS: The Fund's net asset value fluctuates with movements in interest rates
and, during periods of market uncertainty, the values of municipal securities
can become volatile. Certain investment grade municipal securities in which the
Fund may invest have speculative characteristics. The Fund's ability to invest
more than 25% of its total assets in municipal securities, the interest on which
is paid from similar types of projects, may increase the risk of investing in
the Fund. The concentration of the Fund's investments in securities issued by
the State of New York, its municipalities and public authorities may subject the
Fund to greater risks than a fund that has a broader range of investments. The
State of New York and many of its agencies and local governments have been
experiencing, and continue to experience, significant financial difficulties,
and the credit standings of New York and of certain local governments (including
New York City) have been, and could be further, reduced. The Fund is non-
diversified and may be subject to greater risk and volatility than a diversified
fund because changes in the financial condition of a single issuer may cause
greater fluctuation in the value of the Fund's shares. The Fund may use
derivatives in its investment activities, which may involve additional risks.

SIZE: On May 31, 1996, the Fund had over $53.6 million in assets.

MANAGEMENT

WHO SHOULD INVEST

Accordingly, the Fund is designed for investors seeking income that is exempt
from federal income tax.

MUNICIPAL HIGH INCOME FUND is for investors who want high current income through

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

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

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

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

- ------------------------------------------------------------------------------
THE FUNDS AT A GLANCE
(Continued)
- ------------------------------------------------------------------------------

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

HOW TO PURCHASE CLASS Y SHARES

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

The price is the net asset value next calculated after PaineWebber's New York
City headquarters or the Transfer Agent receives the purchase order.
Investors do not pay an initial sales charge when they buy Class Y shares.
100% of their purchase is immediately invested. Investors also do not pay a
redemption fee or contingent deferred sales charge when they sell Class Y
shares.

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

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

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

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

EXPENSE TABLE
- ------------------------------------------------------------------------------

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

SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge on Purchases of Shares....... None
Sales Charge on Reinvested Dividends.............. None
Maximum Contingent Deferred Sales Charge.......... None
Maximum Annual Investment Advisory Fee Payable by
Shareholders through INSIGHT (as a percentage
of average daily value of shares held)(1)....... 1.50%

ANNUAL FUND OPERATING EXPENSES* (as a % of average
net assets)(2)
CALIFORNIA TAX-FREE INCOME FUND
Management Fees................................. 0.50%
12b-1 Fees...................................... 0.00
Other Expenses.................................. 0.19
-----------
Total Operating Expenses..................... 0.69%
-----------
-----------
NATIONAL TAX-FREE INCOME FUND
Management Fees................................. 0.50%
12b-1 Fees...................................... 0.00
Other Expenses(3)............................... 0.11
-----------
Total Operating Expenses(3).................. 0.61%
-----------
-----------
MUNICIPAL HIGH INCOME FUND
Management Fees................................. 0.60%
12b-1 Fees...................................... 0.00
Other Expenses.................................. 0.25
-----------
Total Operating Expenses..................... 0.85%
-----------
-----------
NEW YORK TAX-FREE INCOME FUND
Management Fees................................. 0.60%
12b-1 Fees...................................... 0.00
Other Expenses.................................. 0.30
-----------
Total Operating Expenses..................... 0.90%
-----------
-----------

- ------------------
(1) Participation in INSIGHT is subject to payment of an advisory fee at the
maximum annual rate of 1.50% of assets held through INSIGHT (generally
charged quarterly in advance), which may be charged to the INSIGHT

participant's PaineWebber account. This account charge is not included in
the table because non-INSIGHT participants are permitted to purchase Class

Y shares of the Funds.

(2) See 'Management' for additional information. The fees and expenses are
those actually incurred for the fiscal year ended February 29, 1996,
except that 'Other Expenses' for all Funds except National Tax-Free Income
Fund are estimated based on the expenses incurred by the Class A shares of
those Funds for the fiscal year ended February 29, 1996.

(3) Excludes non-recurring acquisition expenses of 0.03%. If these expenses
were included, other expenses and total operating expenses would have been
0.14% and 0.64%, respectively.

--------------------
Prospectus Page 6
<PAGE>
- --------------------------------------------------------------------------------

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

- --------------------------------------------------------------------------------
EXPENSE TABLE
(Continued)
- --------------------------------------------------------------------------------

EXAMPLES OF EFFECT OF FUND EXPENSES

The following examples should assist investors in understanding various costs
and expenses they would incur as Class Y shareholders of a Fund. The assumed 5%
annual return shown in the example is required by regulations of the Securities
and Exchange Commission ('SEC') applicable to all mutual funds. THESE EXAMPLES
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES OF A FUND MAY BE MORE OR LESS THAN THOSE SHOWN.

An investor would, directly or indirectly, pay the following expenses (including
the 1.50% annual INSIGHT fee) on a $1,000 investment in each Fund, assuming (1)
a 5% annual return, (2) reinvestment of all dividends and distributions and (3)
percentage amounts listed under 'Annual Fund Operating Expenses' remain the same
for years shown:

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------

<S> <C> <C> <C> <C>
CALIFORNIA TAX-FREE INCOME
FUND........................... $ 22 $69 $117 $ 252

NATIONAL TAX-FREE INCOME FUND.... $ 21 $66 $113 $ 244

MUNICIPAL HIGH INCOME FUND....... $ 24 $73 $126 $ 269

NEW YORK TAX-FREE INCOME FUND.... $ 24 $75 $128 $ 274
</TABLE>

--------------------
Prospectus Page 7
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

The following table provides investors with data and ratios for one Class Y
share of National Tax-Free Income Fund for the period shown. This information is
supplemented by the financial statements and accompanying notes appearing in the
Fund's Annual Report to Shareholders for the fiscal period ended February 29,
1996, and the report of Ernst & Young LLP, independent auditors, appearing in
the Fund's Annual Report to Shareholders. Both are incorporated by reference
into the Statement of Additional Information. The financial statements and
notes, as well as the financial information in the table below relating to the
fiscal period ended February 29, 1996, have been audited by Ernst & Young LLP.
Further information about the Fund's performance is included in the Fund's
Annual Report to Shareholders, which may be obtained without charge by calling
1-800-647-1568. As of February 29, 1996, Class Y Shares for California Tax-Free
Income Fund, Municipal High Income Fund and New York Tax-Free Income Fund had
not yet commenced operations and, therefore, no financial information was
available.

<TABLE>
<CAPTION>
NATIONAL TAX-FREE
INCOME FUND
--------------------
CLASS Y
--------------------
FOR THE PERIOD
NOVEMBER 3, 1995+
THROUGH FEBRUARY 29,
1996
--------------------
<S> <C>
Net asset value, beginning of period......... $11.62
-----------
Net investment income........................ 0.19
Net realized and unrealized gains from
investment transactions.................... 0.01
-----------
Total from investment operations............. 0.20

-----------

Dividends from net investment income......... (0.17)
Distributions from net realized gains from
investment transactions.................... --
-----------
Total dividends and distributions to
shareholders............................... (0.17)
-----------
Net asset value, end of period............... $11.65
-----------
-----------
Total investment return (1).................. 1.70%
-----------
-----------
Ratios and supplemental data:
Net assets, end of period (000's).......... $ 341
Expenses to average net assets............. 0.64%(2)*
Net investment income to average net
assets.................................. 5.19%(2)*
Portfolio turnover........................... 74%(3)
</TABLE>

- ------------------
* Annualized

+ Commencement of offering of shares

(1) Total investment return is calculated assuming a $1,000 investment in Fund
shares on the first day of each period reported, reinvestment of all
dividends and capital gain distributions at net asset value on the payable
date, and a sale at net asset value on the last day of each period reported.
Total investment return for the period of less than one year has not been
annualized.

(2) These ratios include non-recurring acquisition expenses of 0.03%.

(3) Portfolio turnover ratio is for the Fund's fiscal year ended February 29,
1996.

--------------------
Prospectus Page 8
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES & POLICIES
- --------------------------------------------------------------------------------

The Funds' investment objectives may not be changed without shareholder
approval. The other investment policies, except where noted, are not fundamental

and may be changed by the Funds' boards of trustees.

CALIFORNIA TAX-FREE INCOME FUND

NATIONAL TAX-FREE INCOME FUND

MUNICIPAL HIGH INCOME FUND

NEW YORK TAX-FREE INCOME FUND

* * * *

--------------------
Prospectus Page 9
<PAGE>
- --------------------------------------------------------------------------------

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

MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY & PROCESS
- --------------------------------------------------------------------------------

The Municipal Investment Team's investment process for each Fund employs a
'top-down' investment process. This process consists of three fundamental steps:
to determine duration, sector and security. Duration is set based on the
direction of interest rates and the shape of the yield curve. Sector is
determined by analyzing the spread between the prevailing yields of municipal
and U.S. Treasury securities, investment opportunities within the municipal
market and state tax exemption. Finally, security selection is established by
performing an analysis of both credit quality and structure of individual
issues.

--------------------
Prospectus Page 10
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

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

This chart shows the total returns for Class Y shares of National Tax-Free
Income Fund. Past results are not a guarantee of future results. No Class Y
shares for California Tax-Free Income Fund, Municipal High Income Fund and New
York Tax-Free Income Fund were outstanding during 1995 so no performance is
presented for those Funds.

NATIONAL TAX-FREE INCOME FUND

[GRAPH] As Class Y shares commenced operations on November
3, 1995, the 1995 return represents the period from

November 3, 1995 through December 31, 1995.

AVERAGE ANNUAL RETURNS
As of February 29, 1996
<TABLE>
<CAPTION>
CLASS Y SHARES
--------------
<S> <C>
Inception Date.............................. 11/3/95

Life........................................ 1.70%
</TABLE>

PERFORMANCE INFORMATION

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

--------------------
Prospectus Page 11
<PAGE>
- --------------------------------------------------------------------------------

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

- --------------------------------------------------------------------------------
THE FUNDS' INVESTMENTS
- --------------------------------------------------------------------------------

MUNICIPAL SECURITIES

Each Fund may invest in a variety of municipal securities, as described below:

MUNICIPAL BONDS. Municipal bonds are debt obligations issued to obtain funds
for various public purposes that pay interest that is exempt from federal income
tax in the opinion of bond issuer's counsel, and include general obligation
bonds, revenue bonds and 'moral obligation' issues. Municipal bonds also include
municipal lease obligations, which are issued by state and local governments and
authorities to purchase land and various types of equipment or facilities.

INDUSTRIAL DEVELOPMENT BONDS ('IDBs') AND PRIVATE ACTIVITY BONDS ('PABs'). IDBs
and PABs are issued by or on behalf of public authorities to finance various
privately operated facilities, such as airport or pollution control facilities,
and are included within the term 'municipal bonds' if the interest paid on the
bond is exempt from federal income tax in the opinion of bond issuer's counsel.

PARTICIPATION INTERESTS. Participation interests are interests in municipal
bonds that are owned by banks, and carry a demand feature permitting the holder
to sell them back to the bank.

TENDER OPTION BONDS. Tender option bonds are long-term municipal securities
sold by a bank subject to a 'tender option' that gives the purchaser the right
to sell them to the bank at par plus accrued interest at designated times.

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

RISKS

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

CREDIT QUALITY. Each Fund invests only in municipal securities that present
acceptable credit risks in the judgment of Mitchell Hutchins and, with the

exception of Municipal High Income Fund, that at the time of purchase are rated
at least Baa or MIG-2 by Moody's Investors Service, Inc. ('Moody's'), BBB or
SP-2 by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.

('S&P'), have been assigned an equivalent rating by another nationally
recognized statistical rating organization ('NRSRO') or, if unrated, are
determined by Mitchell Hutchins to be of comparable quality. Moody's fourth
highest category (Baa) includes securities which, in its opinion, have
speculative features. Changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case for higher rated debt instruments.

--------------------
Prospectus Page 12
<PAGE>
- --------------------------------------------------------------------------------

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

timely changes in credit ratings in response to subsequent events, so that an
issuer's current financial condition may be better or worse than the rating
indicates. There is a risk that rating agencies will downgrade municipal
securities. Mitchell Hutchins is not required to dispose of a security that
receives a credit downgrade. In the event of a downgrade that results in greater
than 5% of the net assets of California Tax-Free Income Fund, National Tax-Free
Income Fund or New York Tax-Free Income Fund being held in securities rated
below investment grade, Mitchell Hutchins will engage in an orderly disposition
of such securities to the extent necessary. The Appendix to this Prospectus
contains further information about Moody's and S&P ratings.

entire cash flow associated with the bonds, including payments occurring before
the final repayment of principal. 'Term to Maturity' does not take into account
the pattern of a security's payment prior to maturity. Duration, therefore,
provides a more accurate measurement of a bond's likely price change in response

to a given change in market interest rates; the longer the duration, the greater
a bond's price movement will be as interest rates change.

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

CALIFORNIA TAX-FREE INCOME FUND

RISKS OF CALIFORNIA OBLIGATIONS. California Tax-Free Income Fund's investment
concentration in California Obligations involves greater risks than if it
invested in the securities of a broader range of issuers. The Fund's yield
and net asset value per share can be affected by political and economic
developments within California, and by the financial condition of California,
its public authorities and political subdivisions. California suffered a
severe recession between 1990-1993, resulting in significant revenue
shortfalls for both the State and local government, and increased social
service expenses. However, since the start of 1994, California's economy
has rebounded strongly, with corresponding improvements in tax revenues.
Further, in the past California voters have passed amendments to the
California Constitution and other measures that limit the taxing and spending
authority of California governmental entities, and

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

<PAGE>
- --------------------------------------------------------------------------------

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

MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

future voter initiatives could result in adverse consequences affecting
California Obligations. A more detailed discussion of the risks of investing in
California Obligations is included in the Statement of Additional Information.

NEW YORK TAX-FREE INCOME FUND

RISKS OF NEW YORK OBLIGATIONS. New York Tax-Free Income Fund's investment
concentration in New York Obligations involves greater risks than if it
invested in the securities of a broader range of issuers. The Fund's yield
and net asset value per share can be affected by political and economic
developments within the State of New York, its public authorities
and political subdivisions, particularly New York City. Although New
York State reduced its accumulated general fund deficits and experienced
operating surpluses in fiscal years 1991-92 through 1993-94, it continues to
experience substantial financial difficulties related to the recent recession,
and an estimated budget gap of approximately $3.9 billion is projected for
fiscal year 1996-97 unless numerous and substantial corrective measures are
successfully implemented. New York City and most suburban county governments are
also experiencing serious fiscal problems related to the sluggish performance of
the regional economy, which has caused substantial, broad-based and recurring
revenue shortfalls. The credit standings of New York State and New York City
have been, and could be further, reduced, and their ability to provide
assistance to its public authorities and political subdivisions has been, and
could be further, impaired. A more detailed discussion of the risks of investing
in New York Obligations is included in the Statement of Additional Information.

MUNICIPAL HIGH INCOME FUND

LOWER RATED SECURITIES. Municipal High Income Fund invests at least 65% of its
assets, and seeks to invest substantially all of its assets, in medium and lower
grade municipal securities. Medium grade municipal securities are of investment
grade quality and are rated A, Baa or MIG-2 by Moody's, A, BBB or SP-2 by S&P,

have been assigned an equivalent rating from another NRSRO or, if unrated, are
determined by Mitchell Hutchins to be of comparable quality. Lower grade
municipal securities are those rated Ba, B, MIG-3 or MIG-4 by Moody's, BB, B or
SP-3 by S&P, have an equivalent rating from another NRSRO or, if unrated, are
determined by Mitchell Hutchins to be of comparable quality. Municipal
securities rated below investment grade are deemed by Moody's and S&P to be

predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal and may involve major risk exposure to adverse conditions.
Such securities are commonly referred to as municipal 'junk bonds.' The Fund's
policy of investing a portion of its assets in lower rated securities thus
entails greater risks than those associated with investment in higher rated
securities.

Lower rated municipal securities generally offer a higher current yield than
higher grade issues, but they involve higher risks since they are especially
subject to adverse changes in general economic conditions, in economic
conditions of the issuer's geographic area and in the industries or activities
in which the issuer is engaged, to changes in the financial condition of the
issuers, and to price fluctuations in response to changes in interest rates.
During periods of economic downturn or rising interest rates, municipal issuers
may experience financial stress which could adversely affect their ability to
make payments of principal and interest and increase the possibility of default.

--------------------
Prospectus Page 14
<PAGE>
- --------------------------------------------------------------------------------

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

the values and liquidity of lower rated securities, especially in thinly traded
markets.

During the 1996 fiscal year, Municipal High Income Fund had 100% of its average
annual net assets in municipal securities that received a rating from Moody's or
S&P. The Fund had the following percentages of its average annual net assets
invested in rated securities: AAA/Aaa (including cash items and repurchase
agreements)--2.25%, AA/Aa--1.13%, A/A--8.09%, BBB/Baa--64.87%, BB/Ba--19.37%,
B/B--4.29%, CCC/Caa--0%, CC/Ca--0%, C/C--0% and D--0%. Municipal securities that
received different ratings from Moody's and S&P were assigned to the higher
rating category. It should be noted that this information reflects the average
composition of the Fund's assets during the fiscal year ended February 29, 1996,
and is not necessarily representative of the Fund's assets at the end of that

fiscal year, in the current fiscal year or at any time in the future.

before making an investment.

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

INVESTMENT TECHNIQUES AND STRATEGIES

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

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

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

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

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

TEMPORARY OR DEFENSIVE POSITIONS. During unusual market conditions, including
when, in the opinion of Mitchell Hutchins, there are not enough suitable
municipal obligations available, each Fund may hold cash and invest in money
market instruments that pay taxable interest, including repurchase agreements,
for temporary or defensive purposes and without percentage limit. If a Fund held
cash, the cash would not earn income and would reduce the Fund's yield. In
addition, for temporary or defensive purposes, each of California Tax-Free
Income Fund, National Tax-Free Income Fund and New York Tax-Free Income Fund may
invest more than 20% of its net assets in municipal obligations that pay
interest that is exempt from federal income tax but is subject to California
personal income tax (in the case of California Tax-

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Prospectus Page 15
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

Free Income Fund), New York personal income tax (in the case of New York
Tax-Free Income Fund) or is not AMT exempt interest.

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

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Prospectus Page 16
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

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

Class Y shares are sold to eligible investors at the net asset value next
determined after the purchase order is received at PaineWebber's New York City
headquarters or by PFPC Inc., the Funds' Transfer Agent ('Transfer Agent'). No
initial or contingent deferred sales charge is imposed, nor are Class Y shares
subject to rule 12b-1 distribution or service fees. The Funds and Mitchell
Hutchins reserve the right to reject any purchase order and to suspend the
offering of Class Y shares for a period of time. Mitchell Hutchins, the
distributor for each Fund's Class Y shares, has appointed PaineWebber to serve
as the exclusive dealer for each Fund's Class Y shares.

INSIGHT

An investor who purchases $50,000 or more of shares of the mutual funds that are
available to INSIGHT participants (which include the PaineWebber mutual funds in
the Flexible Pricing(Service Mark) System and certain other specified mutual
funds) may take part in INSIGHT, a total portfolio asset allocation program
sponsored by PaineWebber, and thus become eligible to purchase Class Y shares.
INSIGHT offers comprehensive investment services, including a personalized asset
allocation investment strategy using an appropriate combination of funds,
monitoring of investment performance and comprehensive quarterly reports that
cover market trends, portfolio summaries and personalized account information.

Participation in INSIGHT is subject to payment of an advisory fee to PaineWebber
at the maximum annual rate of 1.5% of assets held through the program (generally
charged quarterly in advance), which covers all INSIGHT investment advisory
services and program administration fees. Employees of PaineWebber and its
affiliates are entitled to a 50% reduction in the fee otherwise payable for
participation in INSIGHT. INSIGHT clients may elect to have their INSIGHT fees
charged to their PaineWebber accounts (by the automatic redemption of money
market fund shares) or, if a qualified plan, invoiced.

Please contact your PaineWebber investment executive or PaineWebber
correspondent firm or call 1-800-647-1568 for more information concerning mutual
funds that are available to INSIGHT participants or for other INSIGHT program
information.

ACQUISITION OF CLASS Y SHARES BY OTHERS

Present holders of Class Y shares of a former Mitchell Hutchins/Kidder, Peabody
('MH/KP') mutual fund who are not current INSIGHT participants may acquire Class
Y shares of a Fund only when those shares are issued in connection with the
reorganization of the MH/KP mutual fund into that Fund. This category includes
former employees of Kidder, Peabody & Co., Incorporated ('Kidder, Peabody'),
their associated accounts, present and former directors and trustees of the

MH/KP mutual funds.

Dividends and other distributions on Class Y shares of a Fund issued in
connection with the reorganization will be paid in additional Class Y shares at
net asset value, unless the shareholder has requested cash payments. These
holders may not otherwise purchase additional Class Y shares.

Each Fund is authorized to offer Class Y shares to certain other investment
advisory programs that are sponsored by PaineWebber and that may invest in
PaineWebber mutual funds. At present, however, INSIGHT participants are the only
purchasers in this category.

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Prospectus Page 17
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

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

Class Y shares may be sold (redeemed) at their net asset value and proceeds from
the sales of shares will be paid after receipt of a request to sell shares, as
described below.

SALES THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS

INSIGHT participants who are Class Y shareholders may submit requests to sell
shares to their investment executives or correspondent firms in person or by
telephone, mail or wire. As agent for the Funds, PaineWebber may honor a request
to sell shares by repurchasing Class Y shares from a selling shareholder at the
shares' net asset value next determined after receipt of the request by
PaineWebber's New York City headquarters. Within three Business Days after
receipt of the request, repurchase proceeds will be paid by check or credited to
the shareholder's brokerage account at the election of the shareholder.
PaineWebber investment executives and correspondent firms are responsible for
promptly forwarding requests to sell shares to PaineWebber's New York City
headquarters. A 'Business Day' is any day, Monday through Friday, on which the
New York Stock Exchange is open for business.

PaineWebber reserves the right not to honor any request to sell shares, in which
case PaineWebber promptly will forward the request to the Transfer Agent for
treatment as described below.

SALES THROUGH THE TRANSFER AGENT

Shareholders also may sell Fund shares through the Transfer Agent. Shareholders
should mail requests to sell shares directly to the Transfer Agent: PFPC Inc.,
Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington, Delaware 19899. A

request to sell shares will be executed at the net asset value next computed
after it is received in 'good order,' and proceeds from the sale will be paid
within seven days of the receipt of the request.

'Good order' means that the request must be accompanied by the following: (1) a
letter of instruction or a stock assignment specifying the number of shares or
amount of investment to be sold (or that all shares credited to the Fund account
be sold), signed by all registered owners of the shares in the exact names in
which they are registered, (2) a guarantee of the signature of each registered
owner by an eligible institution acceptable to the Transfer Agent and in
accordance with SEC rules, such as a commercial bank, trust company or member of

a recognized stock exchange, (3) other supporting legal documents for estates,
trusts, guardianships, custodianships, partnerships and corporations and (4)
duly endorsed share certificates, if any. Shareholders are responsible for
ensuring that a request to sell shares is received in 'good order.'

ADDITIONAL INFORMATION ON SALES

A shareholder may have proceeds from the sale of shares of $1 million or more
wired to the shareholder's PaineWebber brokerage account or a commercial bank
account designated by the shareholder. Questions about this option, or sale
requirements generally, should be referred to the shareholder's investment
executive at PaineWebber or one of its correspondent firms. If a shareholder
wants to sell shares which were purchased recently, a Fund may delay payment
until it is assured that good payment has been received. In the case of
purchases by check, this can take up to 15 days.

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Prospectus Page 18
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

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

Each Fund is governed by a board of trustees, which oversees its operations.
Each Fund has appointed Mitchell Hutchins as investment adviser and
administrator responsible for its operations (subject to the authority of the
board of trustees).

The board of trustees, as part of its overall management responsibility,
oversees various organizations responsible for the day-to-day management of each
Fund.

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

ABOUT THE INVESTMENT ADVISER

Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, is the asset management subsidiary of PaineWebber Incorporated, which is

wholly owned by Paine Webber Group Inc., a publicly owned financial services
holding company. On May 31, 1996, Mitchell Hutchins was adviser or sub-adviser
of 31 investment companies with 65 separate portfolios and aggregate assets of
approximately $30.4 billion.

As investment adviser and administrator of each Fund, Mitchell Hutchins makes
and implements all investment decisions and supervises all aspects of each
Fund's operations.

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

assets, including several municipal bond funds. Ms. Bow has been with Mitchell
Hutchins since 1982. Mr. Murphy has been with Mitchell Hutchins since April
1994. From 1990 to March 1994, he was a vice president at American International
Group, where he managed the municipal bond portfolio. Mr. Veronda has been with
Mitchell Hutchins since September 1995. From 1984 to August 1995, he was a
senior vice president and general manager at Invesco Funds Group, where he
managed municipal bond and high yield corporate bond portfolios.

Other members of Mitchell Hutchins' municipal investments group provide input on
market outlook, interest rate forecasts, and other considerations pertaining to
municipal investments. This group,

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Prospectus Page 19
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

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

MANAGEMENT FEES & OTHER EXPENSES

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

Each Fund also pays PaineWebber an annual fee of $4.00 per active shareholder
account held at PaineWebber for certain services not provided by the Transfer
Agent. The Funds incur other expenses, such as custody and transfer agency fees
and professional fees.

Fund's net asset value per share is determined by dividing the value of the
securities held by the Fund, plus any cash or other assets, minus all
liabilities, by the total number of Fund shares outstanding.

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

DIVIDENDS

Dividends from each Fund's net investment income are declared daily and paid
monthly.

o California Tax-Free Income Fund pays dividends about the fifth day of each
month.

o National Tax-Free Income Fund pays dividends about the fifteenth day of each
month.

o Municipal High Income Fund and New York Tax-Free Income Fund pay dividends on
or about the first Wednesday of each month.

Net investment income includes accrued interest and discount, less amortization
of premium and accrued expenses, with respect to municipal securities. Each Fund
distributes annually substantially all of its net capital gain (the excess of
net long-term capital gain over net short-term capital loss), if any, together
with any other taxable income (including any net short-term capital gain). A
Fund may make additional distributions if necessary to avoid a 4% excise tax on
certain undistributed income and capital gain.

Dividends and other distributions paid on Class Y shares of each Fund are
calculated at the same time and in the same manner as dividends and
distributions on other classes of shares.

The Funds' dividends and other distributions are paid in additional Fund shares
of the same class at

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Prospectus Page 20
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

net asset value, unless the shareholder has requested cash payments.
Shareholders who wish to receive dividends and/or other distributions in cash,
either mailed to the shareholder by check or credited to the shareholder's
PaineWebber account, should contact their investment executive at PaineWebber or
one of its correspondent firms.

TAXES

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

YEAR-END TAX REPORTING

WITHHOLDING REQUIREMENTS

Each Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to individuals and certain other
non-corporate shareholders who do not provide the Fund with a correct taxpayer
identification number. Withholding at that rate from dividends and capital gain
distributions is also required for shareholders who otherwise are subject to
backup withholding.

TAXES ON THE SALE OR EXCHANGE OF FUND SHARES

30 days before or after selling other shares of the Fund at a loss, all or a
portion of that loss will not be deductible and will increase the basis of the
newly purchased shares.

CALIFORNIA TAXES

If California Tax-Free Income Fund continues to qualify as a RIC under the Code
and at the end of each quarter of its taxable year at least 50% of the value of
its total assets consists of California Obligations, the exempt-interest
dividends it pays that are derived from interest on qualifying California
Obligations will be exempt from California personal income tax ('California
exempt-interest dividends'), but not California franchise tax. Dividends and
other distributions derived from interest on other municipal securities, taxable
income and capital gains are taxable under California law at ordinary income
rates. Shareholders may not deduct interest on indebtedness they incur to
purchase or carry shares of the Fund for California personal income tax
purposes. Shareholders receive annual notification of the portion of the Fund's
tax-exempt income attributable to issuers in California and other states.
California exempt-interest dividends may affect the calculation of certain
adjustments to alternative minimum taxable income for corporate shareholders.
The Fund itself will not be subject to California franchise or corporate income
tax on interest income or net capital gain distributed to its shareholders.

NEW YORK STATE AND
NEW YORK CITY TAXES

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Prospectus Page 21
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

York Obligations will be exempt from New York State and New York City personal
income taxes, but not corporate franchise taxes. Dividends and other
distributions derived from taxable income and capital gains are not exempt from
New York State and New York City taxes. Shareholders may not deduct interest on
indebtedness they incur or continue in order to purchase or carry shares of the
Fund for New York State or New York City personal income tax purposes.
Shareholders receive annual notification of the portion of the Fund's tax-exempt
income attributable to issuers in New York State and other states. The Fund's
interest income that is distributed to shareholders will generally not be
taxable to the Fund for purposes of the New York State corporation franchise tax
or the New York City general corporation tax.

* * * *

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

ORGANIZATION

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

PaineWebber Municipal Series (each a 'Trust').

Both PaineWebber Municipal Series and PaineWebber Mutual Fund Trust are
Massachusetts business trusts that are registered with the SEC as open-end
management investment companies. PaineWebber Municipal Series was organized
under a Declaration of Trust dated January 28, 1987 and PaineWebber Mutual Fund
Trust was organized under a Declaration of Trust dated November 21, 1986. The
trustees of each Trust have authority to issue an unlimited number of shares of
beneficial interest of separate series, par value $.001 per share.

More information concerning Class A, Class B and Class C shares may be obtained
from an investment executive at PaineWebber or one of its correspondent firms or
by calling toll-free 1-800-647-1568.

Although each Trust is offering only the shares of its Funds, it is possible
that a Trust could become liable for misstatements in this Prospectus about a
Fund of the other Trust. The trustees of each Trust have considered this factor
in approving the use of a combined Prospectus.

VOTING RIGHTS

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Prospectus Page 22
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND

only the shareholders of a particular class of a Fund are required to vote on
matters affecting only that class, such as the terms of a Plan as it relates to
the class.

SHAREHOLDER MEETINGS

The Funds do not intend to hold annual meetings.

REPORTS TO SHAREHOLDERS

CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND AGENT

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Prospectus Page 23

<PAGE>

APPENDIX

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

DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS:

Aaa. Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.

Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. They are rated lower than the Aaa bonds because margins of protection
may not be as large as in Aaa securities, fluctuation of protective elements may
be of greater amplitude, or there may be other elements present which made the

long-term risks appear somewhat larger than in Aaa securities.

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

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.

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

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

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

any real investment standing.

DESCRIPTION OF S&P'S MUNICIPAL BOND RATINGS:

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

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

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

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

Prospectus Page 24
<PAGE>
CI. This rating is reserved for income bonds on which no interest is being
paid.

D. Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are continued.

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

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

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

MIG-1/VMIG-1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or

demonstrated broad-based access to the market for refinancing.

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

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

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

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

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

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

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

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

DESCRIPTION OF COMMERCIAL PAPER RATINGS

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

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

Prospectus Page 25

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

PROSPECTUS -- JULY 1, 1996

/ / PAINEWEBBER ASSET ALLOCATION FUNDS
Balanced Fund
Tactical Allocation Fund

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