ALL AMERICAN TERM TRUST INC, POS AMI, 1995-04-04

ALL AMERICAN TERM TRUST INC
POS AMI, 1995-04-04

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<PAGE>

As filed with the Securities and Exchange Commission on April 4, 1995

Securities Act File No. 33-64496
Investment Company Act File No. 811-7352
==========================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM N-2 ___
Registration Statement Under the Securities Act of 1933 /_X_/
___
Pre-Effective Amendment No. /_ _/

___
Post-Effective Amendment No. 2 /_X_/
and ___
Registration Statement Under the Investment Company Act of 1940 /_X_/
___
Amendment No. 6 /_X_/
(Check appropriate box or boxes)

_____________________
ALL-AMERICAN TERM TRUST INC.
(Exact name of Registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code: (212) 713-2000
_____________________
DIANNE E. O'DONNELL, ESQ.
Vice President and Secretary
All-American Term Trust Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
_____________________
Copies to:

ROBERT A. WITTIE, ESQ. GREGORY K. TODD, ESQ.
GREGORY L. BYRNES, ESQ. Mitchell Hutchins Asset
Kirkpatrick & Lockhart Management Inc.
1800 M Street, N.W. 1285 Avenue of the Americas
Washington, D.C. 20036 New York, New York 10019
___________

If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: [ X ]

It is proposed that this filing will become effective (check appropriate

box) [ x ] when declared effective pursuant to Section 8(c)

This Registration Statement relates to the registration of an
indeterminate number of shares solely for market-making transactions.
Pursuant to Rule 429, this Registration Statement relates to shares
previously registered on Form N-2 (File No. 33-23068).

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All-American Term Trust Inc.
Form N-2 Cross Reference Sheet

<S> <C> <C>
Part A
Item Number Caption Prospectus Caption
----------- ------- ------------------

1 Outside Front Cover . . . . . . . . . . . . . Outside Cover of Prospectus
2 Inside Front and Outside Back Cover Page . . Inside Front and Outside Back Cover Page of
Prospectus
3 Fee Table and Synopsis . . . . . . . . . . . Prospectus Summary; Trust Expenses
4 Financial Highlights . . . . . . . . . . . . Financial Highlights
5 Plan of Distribution . . . . . . . . . . . . Outside Front Cover; The Offering
6 Selling Shareholders . . . . . . . . . . . . Not Applicable
7 Use of Proceeds . . . . . . . . . . . . . . . Use of Proceeds
8 General Description of Registrant . . . . . . Trading History; The Trust; Investment
Objective and Policies; Risk Factors and
Other Investment Practices; Description of
the Shares
9 Management . . . . . . . . . . . . . . . . . Management of the Trust; Custodian, Transfer
and Dividend Disbursing Agent and Registrar;
Description of the Shares
10 Capital Stock, Long-Term Debt and Other
Securities . . . . . . . . . . . . . . . . . Risk Factors and Other Investment Practices;
Dividends and Other Distributions; Dividend
Reinvestment Plan; Description of the
Shares; Taxation
11 Defaults and Arrears on Senior Securities . . Not Applicable
12 Legal Proceedings . . . . . . . . . . . . . . Not Applicable
13 Table of Contents of the Statement of
Additional Information . . . . . . . . . . . Table of Contents of Statement of Additional
Information

Part B Statement of
Item Number Caption Additional Information
----------- ------- ----------------------
14 Cover Page . . . . . . . . . . . . . . . . . Cover Page of Statement of Additional
Information
15 Table of Contents . . . . . . . . . . . . . . Outside Back Cover Page of Statement of
Additional Information
16 General Information and History . . . . . . . Not Applicable
17 Investment Objectives and Policies . . . . . Investment Policies and Restrictions;
Strategic Transactions; Portfolio
Transactions
18 Management . . . . . . . . . . . . . . . . . Directors and Officers
19 Control Persons and Principal Holders of
Securities . . . . . . . . . . . . . . . . . Control Persons and Principal Holders of
Securities
20 Investment Advisory and Other Services . . . Investment Advisory Arrangements;

Independent Public Accountants
21 Practices . . . . . . . . . . . . . . . . . . Portfolio Transactions
22 Tax Status . . . . . . . . . . . . . . . . . Taxation
23 Financial Statements . . . . . . . . . . . . Financial Statements
</TABLE>

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All-American Term Trust Inc.
Common Stock

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

All-American Term Trust Inc. ('Trust') is a diversified, closed-end
management investment company. The Trust's investment objective is to provide a
high level of current income, consistent with the preservation of capital. The
Trust will terminate on or about January 31, 2003 and, in connection therewith,
will liquidate all of its assets and distribute the net proceeds to
shareholders. No assurance can be given that the Trust will achieve its
investment objective.

Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), the Trust's
investment adviser, seeks to achieve the Trust's investment objective of high
current income by carefully selecting and managing a diversified portfolio
consisting primarily of investment grade and lower grade Corporate Debt
Securities not subject to optional redemption by the issuer ('calls') or having
some form of call protection, Mortgage-Backed Securities with terms (which could
include, for example, a planned amortization structure) that are expected by
Mitchell Hutchins to reduce the Trust's exposure to prepayment risks, and
Asset-Backed Securities. The Trust may invest up to 35% of its total assets in
lower grade securities, commonly referred to as 'junk bonds,' which involve a
high degree of risk and are predominantly speculative. Mitchell Hutchins manages
the Trust's portfolio to seek to preserve capital by (1) careful selection and
management of a diversified portfolio of investment grade and lower grade
securities; (2) investing a substantial portion of the Trust's assets in
securities that have a stated maturity or expected life prior to or about the
termination date of the Trust; and (3) retaining income on Zero Coupon Municipal
Securities. To the extent capital losses realized by the Trust on dispositions
of securities are not offset by capital gains realized in the same or in
subsequent years and by the retention of income on Zero Coupon Municipal
Securities (and other retained income, if any), the Trust would be unable to
return $15.00 per Share to its shareholders at the end of the Trust's term. See
'RISK FACTORS AND OTHER INVESTMENT PRACTICES--RETURN OF $15.00 PER SHARE.'

The Trust may engage in leverage through reverse repurchase agreements and
dollar rolls. The use of leverage creates the opportunity for increased net
income but, at the same time, will involve special risks. See 'RISK FACTORS AND
OTHER INVESTMENT PRACTICES--LEVERAGE.'

The Trust's shares are listed and traded on the New York Stock Exchange,
Inc. ('NYSE') under the symbol 'AAT.' The Shares may be offered pursuant to this
prospectus from time to time in order to effect over-the-counter secondary
market sales by PaineWebber Incorporated ('PaineWebber') in its capacity as a
dealer and secondary market-maker at negotiated prices related to prevailing
market prices on the NYSE at the time of sale. The closing price for the Shares
on the NYSE on , 1995 was $ . See 'TRADING HISTORY.' The

Trust will not receive any proceeds from the sale of any Shares offered pursuant
to this Prospectus.

This Prospectus concisely sets forth certain information an investor should
know before investing and should be retained for future reference. A Statement
of Additional Information ('SAI') dated June , 1995 has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into this Prospectus. A table of contents for the SAI is set forth as
the last section of this Prospectus. A copy of the SAI can be obtained without
charge by writing to the Trust, by contacting your PaineWebber investment
executive or PaineWebber's correspondent firms or by calling toll-free
1-800-852-4750.

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

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

THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED
ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

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

PaineWebber Incorporated

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

The date of this Prospectus is June , 1995.

<PAGE>
TRUST EXPENSES

The following tables are intended to assist investors in understanding the
various direct or indirect costs and expenses associated with investing in the
Trust.

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SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of
offering price).................... None(1)
Dividend Reinvestment and Cash
Purchase Plan Fees................. None
ANNUAL EXPENSES (AS A PERCENTAGE OF NET
ASSETS ATTRIBUTABLE TO COMMON

STOCK)(2)
Investment Advisory and Administration
Fees............................... 0.90%
Interest Payments on Borrowed Funds
(3)................................ 2.31%
Other Expenses........................ 0.15%
----
Total Annual Expenses.............. 3.36%
----
----
</TABLE>

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

(1) Prices for Shares traded in the over-the-counter market will reflect
ordinary dealer mark ups.

(2) See 'Management of the Trust' for additional information. 'Other Expenses'
have been estimated based upon expenses actually incurred during the Trust's
last fiscal year. The investment advisory and administration fee payable to
Mitchell Hutchins is higher than that paid by most funds.

(3) Imputed from the difference between the forgone coupon interest on dollar
rolls and the fee income collected on the average amount of dollar rolls
outstanding as of the last day of each month during the fiscal year ended
January 31, 1995.

EXAMPLE

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

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One Year Three Years Five Years Ten Years
- -------- ----------- ---------- ---------
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$34 $103 $175 $365
</TABLE>

This Example assumes that all dividends and other distributions are
reinvested at net asset value and that the percentage amounts listed under
Annual Expenses remain the same in the years shown (except that Annual Expenses
have been reduced to reflect the completion of organization expense amortization
after five years from the commencement of investment operations). The above
tables and the assumptions in the Example of a 5% annual return and reinvestment

at net asset value are required by regulations of the Securities and Exchange
Commission ('SEC') applicable to all closed-end investment companies; the
assumed 5% annual return is not a prediction of, and does not represent, the
projected or actual performance of the Shares. In addition, while this Example
assumes reinvestment of all dividends and other distributions at net asset
value, participants in the Trust's Dividend Reinvestment Plan ('Plan') will
receive Shares purchased by the Plan agent at the market price in effect at that
time, which may be at, above, or below net asset value.

THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND THE TRUST'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.

2
<PAGE>
PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.

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The Trust........... All-American Term Trust Inc. ('Trust') is a diversified,
closed-end management investment company. See 'The
Trust.'
The Offering........ Shares of the Trust's common stock ('Shares') may be
offered pursuant to this prospectus from time to time in
order to effect over-the-counter ('OTC') secondary market
sales by PaineWebber Incorporated ('PaineWebber') in its
capacity as a dealer and secondary market-maker at
negotiated prices related to prevailing market prices on
the New York Stock Exchange, Inc. ('NYSE') at the time of
sale. The Shares are listed and traded on the NYSE under
the symbol 'AAT.' See 'The Offering' and 'Trading
History.'
Investment Objective
and
Policies.......... The Trust's investment objective is to provide a high
level of current income, consistent with the preservation
of capital. The Trust will terminate on or about January
31, 2003 and, in connection therewith, will liquidate all
of its assets and distribute the net proceeds to
shareholders. No assurance can be given that the Trust
will achieve its investment objective.
Mitchell Hutchins Asset Management Inc. ('Mitchell
Hutchins'), the Trust's investment adviser, seeks to
achieve the Trust's investment objective of high current
income by carefully selecting and managing a diversified
portfolio consisting primarily of investment grade and
lower grade Corporate Debt Securities not subject to
optional redemption by the issuer ('calls') or having
some form of call protection, Mortgage-Backed Securities
with terms (which could include, for example, a planned

amortization structure) that are expected by Mitchell
Hutchins to reduce the Trust's exposure to prepayment
risks, and Asset-Backed Securities. Investment in such
securities should assist the Trust in preserving the
level of income earned by the Trust in a decreasing
interest rate environment by reducing the likelihood that
the securities will be called or prepaid and the proceeds
thereof reinvested by the Trust in lower-yielding
securities. Lower grade securities tend to produce a high
level of current income, although they involve greater
risk than investment grade securities. Mortgage-Backed
Securities and Asset-Backed Securities also tend to
produce a high level of current income, although they are
subject to the risks of prepayment.
Mitchell Hutchins manages the Trust's portfolio to seek
to preserve capital by (1) careful selection and
management of a diversified portfolio of investment grade
and lower grade securities; (2) investing a substantial
portion of the Trust's assets in securities that have a
stated maturity or expected life prior to or about the
termination date of the Trust; and (3) retaining income
on Zero Coupon Municipal Securities. No more than 20% of
the Trust's net assets will be invested in securities
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3
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having an expected life beyond the remaining term of the
Trust, and the Trust will not invest in securities having
an expected life later than three years after the
remaining term of the Trust. Mitchell Hutchins believes
that lower grade securities, in addition to providing a
high level of current income, may provide some
opportunity for capital appreciation.
Under normal market conditions, the Trust invests at
least 65% of its total assets in a diversified portfolio
of: (1) Corporate Debt Securities of U.S. companies that,
at the time of investment, are rated at least BBB by
Standard & Poor's Ratings Group ('S&P'), Baa by Moody's
Investors Service, Inc. ('Moody's') or have an equivalent
rating from another nationally recognized statistical
rating organization ('NRSRO') or, with respect to up to
20% of the Trust's total assets, that are unrated but
have been determined by Mitchell Hutchins to be of
comparable quality to securities rated at least BBB by
S&P or Baa by Moody's ('investment grade' securities);
(2) Mortgage-Backed Securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities;
(3) other Mortgage-Backed Securities and Asset-Backed

Securities that, at the time of investment, are rated at
least AA by S&P or Aa by Moody's or have an equivalent
rating from another NRSRO; (4) Zero Coupon Municipal
Securities that, at the time of investment, are rated AAA
by S&P or Aaa by Moody's; and (5) other securities issued
or guaranteed by the U.S. government, its agencies or
instrumentalities. The Trust may invest up to 35% of its
total assets in Corporate Debt Securities of U.S.
companies other than investment grade Corporate Debt
Securities ('lower grade' securities), and certain other
securities described herein. Such lower grade securities
are commonly referred to as 'junk bonds' and are rated
below BBB by S&P or Baa by Moody's or have an equivalent
rating from another NRSRO or, if unrated, have been
determined by Mitchell Hutchins to be of comparable
quality to securities rated below BBB by S&P or Baa by
Moody's. 'Junk bonds' involve a high degree of risk and
are predominantly speculative. A Corporate Debt Security
that receives an investment grade rating from at least
one NRSRO will be considered to be an investment grade
Corporate Debt Security, notwithstanding that such
security is rated below investment grade by one or more
other NRSROs.
A security rated BBB by S&P is regarded by S&P as having
adequate capacity to pay interest and repay principal;
whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing
circumstances are more likely, in the view of S&P, to
lead to a weakened capacity to pay interest and repay
principal as compared with securities in higher rating
categories. Securities rated Baa by Moody's are
considered by Moody's as medium grade obligations; they
are neither highly protected nor poorly secured, lack
outstanding investment characteristics and are considered
by Moody's to have speculative characteristics as well.
Securities rated below investment grade are generally
regarded by NRSROs, on balance, as predominantly
speculative with respect to capacity to pay interest and
repay principal,
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4
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and, in the view of S&P, involve major risk exposures to
adverse conditions. The Trust will not invest in excess
of 5% of its total assets in securities that, at the time
of investment, are rated below B by S&P or Moody's or
that have an equivalent rating from another NRSRO or, if
unrated, have been determined by Mitchell Hutchins to be

of comparable quality to securities rated below B by S&P
or Moody's. Such lower grade securities are considered by
NRSROs to be highly speculative, and may be in default. A
Corporate Debt Security that receives a rating of at
least B from at least one NRSRO will not be considered to
be rated below B, notwithstanding that such security is
rated below B by one or more other NRSROs.

The Trust may invest up to 10% of its total assets in
zero coupon securities that are issued for various public
purposes by or on behalf of state or local governments or
political subdivisions or instrumentalities thereof
('Municipal Issuers') or that are created by investment
banks or other private parties that separate the interest
and principal components of an interest-paying security
that has been previously issued by or on behalf of a
Municipal Issuer (collectively, 'Zero Coupon Municipal
Securities'). While Zero Coupon Municipal Securities do
not contribute to the cash available to the Trust for
purposes of paying dividends to shareholders, it is
anticipated that the income retained by the Trust from
the accrual of original issue discount on such securities
will facilitate the Trust's effort to preserve capital.
The Trust will only invest in Zero Coupon Municipal
Securities that, at the time of investment, are rated AAA
by S&P or Aaa by Moody's.

The Trust may engage in leverage, a speculative
technique, through mortgage dollar rolls and reverse
repurchase agreements. The Trust is authorized to borrow
money for investment purposes in an amount up to 33 1/3%
of its total assets (including the amount of the
borrowing and any other indebtedness representing 'senior
securities' under the Investment Company Act of 1940
('1940 Act') but reduced by any liabilities and
indebtedness other than senior securities).

The Trust may also engage in when-issued and delayed
delivery transactions, purchase preferred stock, purchase
restricted or illiquid securities, enter into repurchase
agreements, lend portfolio securities and enter into
certain Strategic Transactions, such as options, futures
and interest rate protection transactions. The Trust may
enter into Strategic Transactions under which up to 100%
of the Trust's portfolio assets are at risk. In order to
invest cash reserves or, on a temporary basis, during
defensive periods or when, in the opinion of Mitchell
Hutchins, no suitable longer-term securities are
available, the Trust may invest in money market
instruments of various types.

See 'Investment Objective and Policies,' 'Risk Factors
and Other Investment Practices,' 'Description of the
Shares' and 'Appendix A.'

</TABLE>

5
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Investment Adviser
and
Administrator..... Mitchell Hutchins, a wholly owned subsidiary of
PaineWebber, serves as the Trust's investment adviser and
administrator. Mitchell Hutchins provides investment
advisory and portfolio management services to investment
companies, pension funds and other institutional,
corporate and individual clients. The Trust pays Mitchell
Hutchins, as investment adviser and administrator, a fee
in an amount equal to an annual rate of 0.90% of the
Trust's average weekly net assets, computed weekly and
payable monthly. This fee is higher than the advisory and
administrative fees paid by most funds.
Dividends and Other
Distributions..... The Trust declares and pays monthly dividends from its
net investment income. The Trust currently intends to
retain, until its final liquidating distribution, an
amount approximately equal to the tax-exempt income
attributable to its Zero Coupon Municipal Securities, but
in no event greater than 10% of its net investment income
in any year. The Trust expects to distribute annually all
or a portion of any net capital gains realized by the
Trust.
Various factors may affect the level of the dividends and
other distributions paid by the Trust, including the
asset mix, interest rates and remaining term of the
Trust, the amount of leverage utilized by the Trust and
the Trust's use of Strategic Transactions. A significant
decline in market rates of interest could lead to a
significant decline in the income earned and dividends
paid by the Trust, while a significant increase in
interest rates might lead to only a modest or no increase
in the income earned and dividends paid by the Trust. The
Trust's income and dividends may decline in the later
years of the Trust as the dollar-weighted average life of
the Trust is shortened in anticipation of its termination
date. In addition, the Trust's investment in lower grade
securities increases the risk of non-payment or a
significant delay in payment on such securities, which
non-payment or delay would have an adverse effect on the
Trust's income and dividends. See 'Dividends and Other
Distributions; Dividend Reinvestment Plan.'
Dividend
Reinvestment
Plan.............. The Trust has established a Dividend Reinvestment Plan

('Plan') under which all shareholders whose Shares are
registered in their own names, or in the name of
PaineWebber (or its nominee), have all dividends and
capital gain distributions automatically reinvested in
additional Shares, unless such shareholders elect to
receive cash. Shareholders who hold their Shares in the
name of a broker or nominee other than PaineWebber (or
its nominee) should contact such broker or nominee to
determine whether, or how, they may participate in the
Plan. Shares acquired under the Plan are purchased in the
open market, on the NYSE or otherwise, at prices that may
be higher or lower than the net asset value per Share at
the time of the purchase. The Trust will not issue any
new Shares in connection with the Plan. See 'Dividends
and Other Distributions; Dividend Reinvestment Plan.'
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6
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Share Repurchases
and Tender
Offers............ In recognition of the possibility that the Shares may
trade at a discount from net asset value, the Trust's
board of directors, in consultation with Mitchell
Hutchins, currently intends at least annually to consider
the possibility of making open market Share repurchases
or tender offers. There can be no assurance that the
board of directors will decide to undertake either of
these actions or that, if undertaken, such actions will
result in the Shares trading at a price that is equal or
close to net asset value per Share. The Trust may borrow
to finance such repurchases and tender offers. See
'Description of the Shares--Share Repurchases and Tender
Offers.'
Custodian, Transfer
and Dividend
Disbursing Agent
and Registrar..... State Street Bank and Trust Company serves as custodian
of the Trust's assets. PNC Bank, National Association,
serves as transfer and dividend disbursing agent and as
registrar of the Trust. See 'Custodian, Transfer and
Dividend Disbursing Agent and Registrar.'
Risk Factors and
Other Investment
Policies.......... Return of $15.00 Per Share. Mitchell Hutchins manages
the Trust's portfolio in an effort to return $15.00 per
Share to investors on or about the Trust's termination
date of January 31, 2003. To the extent capital losses
realized by the Trust on dispositions of securities are

not offset by capital gains realized in the same or in
subsequent years (subject to the eight year limit on
capital loss carryforwards under the federal tax law) and
by the retention of income on Zero Coupon Municipal
Securities (and other retained income, if any), the Trust
would be unable to distribute $15.00 per Share to its
shareholders at the end of the Trust's term. Also, in
order to avoid the imposition of federal income tax on
undistributed gains and the imposition of a 4% federal
excise tax on certain undistributed income and gains, the
Trust would need to distribute all or a substantial
portion of any net capital gains (in excess of any
available capital loss carryforwards) in the year in
which they are realized. Consequently, the Trust may not
be able to use net capital gains to offset any net
capital losses that are realized in years subsequent to
the years in which such net capital gains are realized.
The Trust's ability to return $15.00 per Share to
investors on the Trust's termination date also is a
function of, among other things, the ability of the
issuers of the Corporate Debt Securities in which the
Trust invests to make timely payments of interest and
principal, and the ability of Mitchell Hutchins to select
and monitor such securities so as to avoid or minimize
the potential impact of adverse financial developments
affecting such issuers. These risks are increased by the
Trust's investments in lower grade Corporate Debt
Securities. Interest Rate Sensitivity. The yield on debt
securities depends on a variety of factors, including
general market conditions for such securities, the
financial condition of the issuer, the size of the
particular

</TABLE>

7
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offering, the effective maturity, credit quality and
rating of the security and, in the case of securities of
Municipal Issuers, expectations regarding changes in
income tax rates. Generally, the longer the effective
maturity of such a security, the higher its yield and the
greater its price sensitivity in response to changes in
interest rates. The market value of debt securities, and
accordingly the Trust's net asset value, normally will
vary inversely with changes in interest rates. Such
changes in the values of the securities held by the Trust
will not affect the interest income derived from them but
will affect the net asset value of Shares. Neither the

issuance by, nor the guarantee of, a U.S. government
agency, nor an investment grade rating for a security,
constitutes assurance that the security will not
fluctuate in value or that the Trust will receive the
originally anticipated yield on the security. A
significant decline in market rates of interest may have
an adverse effect on the income earned and dividends paid
by the Trust. In addition, the Trust's income and
dividends may decline in the later years of the Trust.
Cetain types of Mortgaged-Backed Securities, commonly
known as CMOs, may be specifically structured in a manner
that provides any of a wide variety of investment
characteristics, such as yield, effective maturity and
interest rate sensitivity. As market conditions change,
however, and particularly during periods of rapid or
unanticipated changes in market interest rates, the
attractiveness of the CMO classes and the ability of the
structure to provide the anticipated investment
characteristics may be significantly reduced. These
changes can result in volatility in the market value, and
in some instances reduced liquidity, of the CMO class.
The yields on Specified Mortgage-Backed Securities (as
defined in 'Appendix A'), in which the Trust may invest
up to 5% of its total assets, and on Zero Coupon
Municipal Securities generally are more sensitive to
changes in interest rates than other Mortgage-Backed
Securities. The market value of Specified Mortgage Backed
Securities can be extremely volatile and such securities
may become illiquid. In addition, the yields on most
interest-only ('IO') and principal-only ('PO') classes of
Mortgage-Backed Securities are extremely sensitive to the
rate of principal payments (including prepayments), which
can result in price volatility and, in the case of IOs,
can result in the Trust failing to recoup fully its
initial investment in such securities even though the
securities may be issued or guaranteed by a U.S.
government agency or be rated in the highest rating
category. The Trust is not limited in its ability to
invest in IOs and POs that are Planned Amortization Class
Mortgage-Backed Securities ('PAC Bonds'). While Mitchell
Hutchins seeks to limit the impact of these factors on
the Trust, no assurance can be given that it will achieve
this result.
Lower Grade Securities. The Trust may invest up to 35%
of its total assets in Corporate Debt Securities rated
below investment grade. Investment in such securities
involves a greater risk of non-payment or
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8
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significant delay in payment, which non-payment or delay
would have an adverse effect on income and dividends and
may have an adverse effect on the ability of the Trust to
preserve capital or return $15.00 per Share to
shareholders on or about the Trust's termination date of
January 31, 2003. Changes in economic conditions or other
circumstances are more likely to lead to a weakened
capacity for the issuers of such securities to make
interest and principal payments than is the case for
higher grade Corporate Debt Securities. Corporate Debt
Securities rated below investment grade are deemed by S&P
and Moody's to be predominantly speculative with respect
to the issuer's capacity to pay interest and repay
principal and to involve major risk exposures to adverse
conditions. The Trust may invest up to 5% of its total
assets in securities that, at the time of investment, are
rated below B by S&P or Moody's or that have an
equivalent rating from another NRSRO or, if unrated, have
been determined by Mitchell Hutchins to be of comparable
quality to securities rated below B by S&P or Moody's.
Such securities are considered by NRSROs to be highly
speculative, and may be in default. In the event that,
due to fluctuations in the market value of the Trust's
assets, downgrades or otherwise, an amount in excess of
10% of the Trust's total assets are invested in such
securities, Mitchell Hutchins will seek to engage in an
orderly disposition of such securities to the extent
necessary to ensure that the Trust's holdings of such
securities do not exceed 10% of the Trust's total assets.
Lower grade Corporate Debt Securities generally offer a
higher current yield than that available from higher
grade issues. However, lower grade Corporate Debt
Securities involve higher risks, in that they are
especially subject to adverse changes in general economic
conditions and in the industries in which the issuers are
engaged, to changes in the financial condition of the
issuers and to price fluctuation in response to changes
in interest rates. During periods of economic downturn or
rising interest rates, highly leveraged issuers may
experience financial stress, which could adversely affect
their ability to make payments of principal and interest
on, and increase the possibility of default of, such
Corporate Debt Securities. In addition, the market for
lower grade Corporate Debt Securities has expanded
rapidly in recent years, and its growth paralleled a long
economic expansion. In the past, the prices of many lower
grade Corporate Debt Securities declined substantially,
reflecting an expectation that many issuers of such
securities might experience financial difficulties. As a
result, the yields on lower grade Corporate Debt
Securities rose dramatically, but such higher yields did
not reflect the value of the income stream that holders

of such securities expected, but rather the risk that
holders of such securities could lose a substantial
portion of their value as a result of the issuers'
financial restructuring or default. There can be no
assurance that such declines will not recur. The market
for lower grade Corporate Debt Securities generally is
thinner and less active than that for higher quality
securities, which may limit the Trust's ability to sell
such securities at fair value in response to
</TABLE>

9
<PAGE>

<TABLE>
<S> <C>
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 grade securities, especially in a
thinly traded market.

Special Characteristics of Mortgage-Backed Securities and
Asset-Backed Securities. Mortgage-Backed Securities and
Asset-Backed Securities differ from investments in
traditional debt securities in that, among other things,
principal may be prepaid at any time due to prepayments
by the obligors on the underlying loans or other
obligations. Such prepayments may reduce the yield to the
Trust on Mortgage-Backed Securities and Asset-Backed
Securities held in its portfolio and may result in
reinvestment of the proceeds of such prepayments at
yields that are lower than on the prepaid securities.
Prepayments are influenced by a variety of economic,
geographic, social and other factors. Generally, however,
prepayments will increase during periods of declining
interest rates and decrease during periods of rising
interest rates. Asset-Backed Securities present certain
risks that are not presented by Mortgage-Backed
Securities. Primarily, these securities do not have the
benefit of a security interest in collateral that is
comparable to first lien mortgage loans. In some cases,
the underlying assets may be unsecured or be subject to
superior claims.

Leverage. The use of leverage is a speculative technique
that provides the Trust the opportunity for increased net
income but, at the same time, involves special risks. The
Trust only uses leverage when Mitchell Hutchins believes
that such leverage will benefit the Trust after taking
such risks into consideration. For example, leveraging
will exaggerate changes in the net asset value of the
Shares and in the yield on the Trust's portfolio which

may, in turn, result in increased volatility of the
market price of the Shares. To the extent the income
derived from leverage exceeds the interest and other
expenses that the Trust will have to pay in connection
with such leverage, the Trust's net income will be
greater than if leverage were not used. Conversely, if
the income obtained is not sufficient to cover the cost
of the leverage, the net income of the Trust will be less
than if leverage were not used, and therefore the amount
available for distribution to shareholders will be
reduced. The requirement that the Trust segregate a
specified amount of cash or liquid, high grade debt
securities with its Custodian in connection with the use
of certain types of leverage could have an adverse effect
on the income earned and dividends paid by the Trust.

Other Investment Risks. Certain investment practices in
which the Trust may engage would expose the Trust to
additional risks. These practices include investing in
illiquid securities, entering into securities
transactions on a when-issued or delayed delivery basis,
entering into repurchase agreements, lending portfolio
securities and engaging in Strategic Transactions.
</TABLE>

10
<PAGE>

<TABLE>
<S> <C>
Market Price of Shares. Shares of the Trust and of other
closed-end investment companies frequently trade at a
discount from net asset value. This market risk is
separate and distinct from the risk that the Trust's net
asset value may decrease. Accordingly, the Shares are
designed primarily for long-term investors and should not
be viewed as a vehicle for trading purposes. In addition,
net asset value and market price of the Shares may be
more volatile than for a fund that invests exclusively in
higher grade securities, due to the Trust's investment in
lower grade securities.
Illiquid and Non-Rated Securities. The Trust may invest
in securities for which a secondary trading market is not
fully developed or that are otherwise considered
illiquid. Liquidity relates to the ability of the Trust
to readily dispose of securities and the price to be paid
therefor, but does not generally relate to credit risk or
the likelihood of receipt of cash at maturity. The Trust
may not be able to sell these securities when Mitchell
Hutchins considers it desirable to do so or may have to
sell them at a price lower than could be obtained if they
were more liquid. Illiquid securities may be more
difficult to value due to the unavailability of reliable

market quotations and investment in such securities may
have an adverse impact on net asset value.
The Trust may invest in non-rated securities determined
by Mitchell Hutchins, at the time of investment, to be of
comparable quality to rated securities in which the Trust
may invest. The Trust will be more dependent upon
Mitchell Hutchins' investment analysis of such non-rated
securities than in the case of rated securities.
Anti-Takeover Provisions. The Trust's Articles of
Incorporation contain provisions limiting: (1) the
ability of other entities or persons to acquire control
of the Trust; (2) the Trust's freedom to engage in
certain transactions; and (3) the ability of the Trust's
directors or shareholders to amend the Articles of
Incorporation. These provisions of the Articles of
Incorporation may be regarded as 'anti-takeover'
provisions.
See 'Trading History,' 'Investment Objective and
Policies,' 'Risk Factors and Other Investment Practices,'
'Description of the Shares' and 'Appendix A.'
</TABLE>

11
<PAGE>
FINANCIAL HIGHLIGHTS

The table below provides audited selected per share data and ratios for one
Share for each of the periods shown. This information is supplemented by the
audited financial statements and accompanying notes appearing in the Trust's
SAI, which can be obtained by shareholders upon request. The financial
statements and notes and the financial information in the table below have been
audited by Ernst & Young, LLP, independent auditors, whose report thereon also
is included in the Trust's SAI.

<TABLE>
<CAPTION>
FOR THE PERIOD
MARCH 1, 1993
FISCAL YEAR (COMMENCEMENT OF
ENDED OPERATIONS)
JANUARY 31, 1995 TO JANUARY 31, 1994
---------------- -------------------
<S> <C> <C>
Net asset value, beginning of period...................................... $15.30 $ 15.00
------- -------
Net investment income..................................................... 1.24 1.11
Net realized and unrealized gains (losses) on investment transactions..... (2.01) 0.27
------- -------
Net increase (decrease) in net asset value resulting from operations...... (0.77) 1.38
------- -------

Less dividends and distributions:
Dividends from net investment income...................................... (1.22) (1.06)
Distributions from net realized gains from investment transactions........ -- (0.02)
------- -------
Total dividends and distributions......................................... (1.22) (1.08)
------- -------
------- -------
Net asset value, end of period............................................ $13.31 $ 15.30
------- -------
------- -------
Per share market value, end of period..................................... $12.13 $ 14.38
------- -------
------- -------
Total investment return (1)............................................... (7.13)% 3.04%
------- -------
------- -------
Ratios/Supplemental Data:
Net assets, end of period (000 omitted)................................. $182,437 $209,775
Expenses to average net assets.......................................... 1.05% 1.04%*
Net investment income to average net assets............................. 8.95% 8.02%*
Portfolio turnover rate................................................... 382.55% 416.05%
</TABLE>

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

* Annualized

(1) Total investment return is calculated assuming a purchase of one share of
common stock at the current market price on the first day of each period
reported and a sale at the current market price on the last day of each
period reported and assuming reinvestment of dividends to common
stockholders at prices obtained under the Trust's Dividend Reinvestment
Plan. Total investment return does not reflect brokerage commissions and has
not been annualized for periods of less than one year.

12
<PAGE>

The following information relates to the Trust's 'senior securities,' as
defined under the 1940 Act outstanding as of the end of the periods indicated.

<TABLE>
<CAPTION>
TOTAL AMOUNT ASSET COVERAGE PER
OUTSTANDING $1,000 OF INDEBTEDNESS AVERAGE MARKET VALUE PER
AS OF END OF AS OF END OF $1,000 OF
SENIOR SECURITIES PERIOD ENDED FISCAL YEAR FISCAL YEAR INDEBTEDNESS*
- ------------------------ ------------------------ ------------ ---------------------- ------------------------

<S> <C> <C> <C> <C>
Dollar Rolls............ +January 31, 1994 $94,534,074 $3,219 $2,060
January 31, 1995 $85,609,109 $3,131 $1,895
</TABLE>

- ------------------
+ Data reflects period from March 1, 1993 (commencement of operations) to
January 31, 1994.

* Calculated by multiplying $1,000 by the result obtained by dividing: (a) the
average market value of the Shares on the last day of each month during the
period indicated in which the Trust had outstanding indebtedness; by (b) the
average amount of indebtedness outstanding on the last day of each such month.

13
<PAGE>
THE TRUST

The Trust is a diversified, closed-end management investment company and
has registered as such under the 1940 Act. The Trust was incorporated under the
laws of the State of Maryland on November 19, 1992 and commenced investment
operations on March 1, 1993. The Trust will terminate and distribute
substantially all of its net assets on or about January 31, 2003. The Trust's
principal office is located at 1285 Avenue of the Americas, New York, New York
10019, and its telephone number is (212) 713-2000.

THE OFFERING

The Shares may be offered pursuant to this Prospectus from time to time in
order to effect OTC secondary market sales by PaineWebber in its capacity as a
dealer and secondary market-maker at negotiated prices related to prevailing
market prices on the NYSE at the time of sale. Costs incurred in connection with
this offering will be paid by PaineWebber. PaineWebber's principal offices are
located at 1285 Avenue of the Americas, New York, New York 10019. Mitchell
Hutchins is a wholly owned subsidiary of PaineWebber.

USE OF PROCEEDS

The Trust will not receive any proceeds from the sale of any Shares offered
pursuant to this Prospectus. Proceeds received by PaineWebber as a result of its
OTC secondary market sales of the Shares will be utilized by PaineWebber in
connection with its secondary market operations and for general corporate
purposes.

TRADING HISTORY

The Shares are listed and traded on the NYSE under the symbol 'AAT.' The
following table sets forth for each quarterly period since the Trust commenced
operations: (a) the per Share high and low sales prices as reported by the NYSE;
(b) the per Share net asset values, based on the Trust's computation as of 4:00
p.m. on the second to last NYSE business day for the week corresponding to the
dates on which the respective high and low sales prices were recorded; and (c)
the discount or premium to net asset value represented by the high and low sales
prices shown. THE RANGE OF NET ASSET VALUES AND OF PREMIUMS AND DISCOUNTS FOR
THE SHARES DURING THE PERIODS SHOWN MAY BE BROADER THAN IS SHOWN IN THIS TABLE.
On 1995, the closing price per Share on the NYSE was $ , the
Trust's net asset value per Share was $ and the discount to net asset value
per Share was ( )%.

<TABLE>
<CAPTION>
(DISCOUNT) OR
NET ASSET PREMIUM TO
SALES PRICES VALUES NET ASSET VALUE
------------------ ---------------- ------------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- ----------------------------- ------- ------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
04/30/93*.................... $15.250 $14.125 $15.02 $14.90 1.53% (5.20)%
07/31/93..................... 15.125 14.250 14.89 14.96 1.58 (4.75)
10/31/93..................... 15.125 14.625 15.15 15.13 (0.17) (3.34)
01/31/94..................... 15.125 14.000 15.25 15.15 (0.82) (7.59)
04/30/94..................... 14.500 12.250 15.30 14.46 (5.23) (15.28)
07/31/94..................... 13.630 12.500 14.08 14.03 (3.20) (10.91)
10/31/94..................... 12.880 11.500 13.95 13.60 (7.67) (15.44)
01/31/95..................... 12.250 11.500 13.23 13.43 (7.41) (14.37)
04/30/95.....................
</TABLE>

- ------------
* For the period from March 1, 1993 (commencement of operations) to April 30,
1993.

14
<PAGE>
See 'Description of Shares--Share Repurchases and Tender Offers' as to
methods that may be undertaken by the Trust to reduce any discount.

INVESTMENT OBJECTIVE AND POLICIES

GENERAL

The Trust's investment objective is to provide a high level of current
income, consistent with the preservation of capital. The Trust will terminate on
or about January 31, 2003 and, in connection therewith, will liquidate all of
its assets and distribute the net proceeds to shareholders. No assurance can be
given that the Trust will achieve its investment objective.

Under normal market conditions, the Trust invests at least 65% of its total
assets in a diversified portfolio of: (1) Corporate Debt Securities of U.S.
companies that, at the time of investment, are rated at least BBB by S&P, Baa by
Moody's or have an equivalent rating from another NRSRO or, with respect to up
to 20% of the Trust's total assets, that are unrated but have been determined by
Mitchell Hutchins to be of comparable quality to securities rated at least BBB
by S&P or Baa by Moody's ('investment grade' securities); (2) Mortgage-Backed
Securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities; (3) other Mortgage-Backed Securities and Asset-Backed
Securities that, at the time of investment, are rated at least AA by S&P or Aa
by Moody's or have an equivalent rating from another NRSRO; (4) Zero Coupon
Municipal Securities that, at the time of investment, are rated AAA by S&P or
Aaa by Moody's; and (5) other securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities. The Trust may invest up to 35% of
its total assets in Corporate Debt Securities of U.S. companies other than
investment grade Corporate Debt Securities ('lower grade' securities), and
certain other securities described herein. Such lower grade securities, commonly
referred to as 'junk bonds,' involve a high degree of risk and are predominantly
speculative. U.S. companies are companies that are organized under the laws of a
United States jurisdiction or whose securities are principally traded in the
United States securities markets, or which derive a majority of their revenues
from activities within the United States. A security rated BBB by S&P is
regarded by S&P as having adequate capacity to pay interest and repay principal;
whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely, in the view of S&P, to
lead to a weakened capacity to pay interest and repay principal as compared with
securities in higher rating categories. Securities rated Baa by Moody's are
considered by Moody's as medium grade obligations; they are neither highly
protected nor poorly secured, lack outstanding investment characteristics and
are considered by Moody's to have speculative characteristics as well. Lower
grade securities are rated below BBB by S&P or Baa by Moody's or have an
equivalent rating from another NRSRO or, if unrated, have been determined by
Mitchell Hutchins to be of comparable quality to securities rated below BBB by
S&P or Baa by Moody's. A Corporate Debt Security that receives an investment
grade rating from at least one NRSRO will be considered to be an investment
grade Corporate Debt Security, notwithstanding that such security is rated below
investment grade by one or more other NRSROs.

The Trust will not invest more than 5% of its total assets in Corporate
Debt Securities that, at the time of investment, are rated below B by S&P or
Moody's or that have an equivalent rating from another NRSRO or, if unrated,
that have been determined by Mitchell Hutchins to be of comparable quality to
securities rated below B by S&P or Moody's. A Corporate Debt Security that
receives a rating of at least B from at least one NRSRO will not be considered
to be rated below B, notwithstanding that such security is rated below B by one
or more other NRSROs. S&P may modify its ratings with a plus (+) or minus (-) to
indicate relative standing within major rating categories; similarly, Moody's
may apply the numerical modifiers 1, 2 and 3 in

15
<PAGE>
each major ratings category from Aa through B. In calculating the Trust's
compliance with percentage limitations based on ratings, each Corporate Debt

Security will be classified based on its major rating category, without regard
to these modifiers. See Appendix A to the SAI for a more complete description of
S&P and Moody's ratings.

Moody's, S&P and other NRSROs are private services that provide ratings of
the credit quality of debt obligations. Ratings of Corporate Debt Securities
represent the NRSROs' opinions regarding their quality and are not a guarantee
of quality. It should be emphasized that ratings are general and not absolute
standards of quality. Consequently, securities with the same maturity, interest
rate and rating may have different market prices. Credit ratings attempt to
evaluate the safety of principal and interest payments and do not evaluate the
risks of fluctuations in market value. Also, NRSROs may fail to make timely
changes in credit ratings in response to subsequent events, so that an issuer's
financial condition may be better or worse than is indicated by the rating.
Subsequent to its purchase by the Trust, an issue of securities may cease to be
rated or its rating may be reduced below the rating that applied when the
security was purchased. Mitchell Hutchins will consider such an event in
determining whether the Trust should continue to hold an obligation, but, except
as described herein, it is not required to dispose of the security. See 'Risk
Factors and Other Investment Practices--Lower Grade Securities.'

Mitchell Hutchins seeks to achieve the Trust's investment objective of high
current income by carefully selecting and managing a diversified portfolio
consisting primarily of investment grade and lower grade Corporate Debt
Securities not subject to calls or having some form of call protection,
Mortgage-Backed Securities with terms (which could include, for example, a
planned amortization structure) that are expected by Mitchell Hutchins to reduce
the Trust's exposure to prepayment risks, and Asset-Backed Securities. See
'Appendix A--Types of Mortgage-Backed Securities--Collateralized Mortgage
Obligations and Multi-Class Mortgage Pass-Throughs' and '--ARM and Floating Rate
Mortgage-Backed Securities.' Such securities should assist the Trust in
preserving the level of income earned by the Trust in a decreasing interest rate
environment by reducing the likelihood that the securities will be called or
prepaid and the proceeds thereof reinvested by the Trust in lower-yielding
securities. Lower grade securities tend to produce a high level of current
income, although they involve greater risk than investment grade securities.
Mortgage-Backed Securities and Asset-Backed Securities also tend to produce a
high level of current income, although they are subject to the risks of
prepayment.

Mitchell Hutchins manages the Trust's portfolio to seek to preserve capital
by (1) careful selection and management of a diversified portfolio of investment
grade and lower grade securities; (2) investing a substantial portion of the
Trust's assets in securities that have a stated maturity or expected life prior
to or about the termination date of the Trust; and (3) retaining income on Zero
Coupon Municipal Securities. No more than 20% of the Trust's net assets will be
invested in securities having an expected life beyond the remaining term of the
Trust, and the Trust will not invest in securities having an expected life later
than three years after the remaining term of the Trust. Mitchell Hutchins
believes that lower grade securities, in addition to providing a high level of
current income, may provide some opportunity for capital appreciation. See 'Risk
Factors and Other Investment Practices--Return of $15.00 Per Share.'

During the year ended January 31, 1995, the Trust had % of its dollar
weighted average portfolio in debt securities that received a rating from S&P,
and % of its dollar weighted average portfolio in debt securities that were
not so rated. The Trust had the following percentages of its dollar weighted
average portfolio invested in securities having the following S&P ratings: AAA
(including cash items)-- %, AA-- %, A-- %, BBB-- %, BB-- %,
B-- %, CCC-- %, CC-- %, C-- %, and D-- %. It should be noted
that this information reflects the average composition of the Trust's assets

16
<PAGE>

during the fiscal period ended January 31, 1995 and is not necessarily
representative of the Trust's assets as of the end of that fiscal period, the
current fiscal year or at any time in the future.

CORPORATE DEBT SECURITIES

Corporations issue debt securities of various types, including bonds and
debentures (which are long-term), notes (which may be short- or long-term),
certificates of deposit (unsecured borrowings by banks), bankers acceptances
(indirectly secured borrowings to facilitate commercial transactions) and
commercial paper (short-term unsecured notes). These securities typically
provide for periodic payments of interest, which may be at a fixed or adjustable
or floating rate, with payment of principal upon maturity and are generally not
secured by assets of the issuer or otherwise guaranteed. Because the interest
rate on adjustable or floating rate Corporate Debt Securities fluctuates in
response to changes in a specified market index, the values of such securities
tend to be less sensitive to interest rate fluctuations than the values of
fixed-rate securities. Adjustable or floating rate Corporate Debt Securities
generally provide that the interest rate may not be adjusted above a specified
lifetime maximum rate or, in some cases, below a minimum lifetime rate.

Corporate Debt Securities may be callable prior to maturity. Certain
Corporate Debt Securities are non-callable or include various forms of call
protection, including call provisions that are not exercisable for a specified
period of years and/or that are exercisable only upon payment of a substantial
prepayment penalty. Corporate Debt Securities also may be subject to sinking
fund schedules that provide for the periodic repayment of all or a portion of an
issue's principal. Sinking fund Corporate Debt Securities may contain call
provisions that allow an issuer to redeem the security when principal is reduced
to a certain percentage of the overall issue.

MORTGAGE-BACKED SECURITIES

Mortgage-Backed Securities represent direct or indirect participations in,
or are secured by and payable from, mortgage loans secured by real property.
Mortgage-Backed Securities include single- and multi-class mortgage pass-through
securities and collateralized mortgage obligations and are: (1) issued or

guaranteed as to the payment of principal and interest (but not as to market
value) by U.S. government agencies or instrumentalities, such as the Government
National Mortgage Association ('Ginnie Mae'), the Federal National Mortgage
Association ('Fannie Mae') or the Federal Home Loan Mortgage Corporation
('Freddie Mac'); (2) issued by private issuers (generally originators of and
investors in mortgage loans, including savings associations, mortgage bankers,
commercial banks, investment bankers and special purpose entities (collectively,
'Private Mortgage Lenders')) but supported by pools of mortgage loans or other
Mortgage-Backed Securities that are guaranteed, directly or indirectly, by the
U.S. government or one of its agencies or instrumentalities; or (3) issued by
Private Mortgage Lenders without any government guarantee of the underlying
mortgage assets, but usually with some form of non-governmental credit
enhancement. Multi-class pass-through securities and collateralized mortgage
obligations are collectively referred to herein as CMOs. The types of
Mortgage-Backed Securities in which the Trust may invest are described in
Appendix A to this Prospectus.

The Trust may invest no more than an aggregate of 5% of its total assets in
Mortgage-Backed Securities constituting IOs, POs (other than IOs and POs that
are PAC Bonds) or inverse floating rate obligations or other types of
Mortgage-Backed Securities that may be developed in the future and that are
determined by Mitchell Hutchins to present types and levels of risk that are
comparable to such IOs, POs and inverse floating rate obligations ('Specified
Mortgage-Backed Securities'). The Trust invests in Specified Mortgage-Backed
Securities only when Mitchell Hutchins believes that such securities, when
combined with the Trust's other

17
<PAGE>

investments, would enable the Trust to achieve its investment objective. See
'Risk Factors and Other Investment Practices--Interest Rate Sensitivity.'

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

OTHER PORTFOLIO SECURITIES

Zero Coupon Municipal Securities. The Trust may also invest up to 10% of
its total assets in Zero Coupon Municipal Securities. While Zero Coupon

Municipal Securities do not contribute to the cash available to the Trust for
purposes of paying dividends to shareholders, it is anticipated that the income
retained by the Trust from the accrual of original issue discount on such
securities will facilitate the Trust's effort to preserve capital. The Trust
will only invest in Zero Coupon Municipal Securities that, at the time of
investment, are rated AAA by S&P or Aaa by Moody's.

Because accrued income on Zero Coupon Municipal Securities is generally not
taxable to holders, Zero Coupon Municipal Securities have lower yields than
other zero coupon securities. The accrued income on Zero Coupon Municipal
Securities in which the Trust intends to invest will generally not be taxable to
the Trust; however, when distributed to shareholders, that accrued income will
be treated for tax purposes in the same manner as other dividend distributions.
Any accrued income from Zero Coupon Municipal Securities which is not
distributed will increase the net asset value of the Shares. Tax-exempt income
attributable to Zero Coupon Municipal Securities and retained by the Trust is
expected to constitute a portion of the liquidating distribution returned to
investors at the end of the Trust's term. See 'Dividends and Other
Distributions; Dividend Reinvestment Plan' and 'Taxation.'

The Internal Revenue Code requires that companies such as the Trust which
seek to qualify for federal income tax treatment as regulated investment
companies distribute at least 90% of their net investment income each year,
including tax-exempt and non-cash income. Accordingly, although the Trust will
receive no payments on Zero Coupon Municipal Securities prior to their maturity,
it would be required, in order to maintain its desired tax treatment, to include
in its distributions to shareholders in each year any income attributable to
Zero Coupon Municipal Securities that was in excess of 10% of the Trust's net
investment income in that year. The Trust might be required to borrow or to
liquidate portfolio securities at a time that it otherwise would not have done
so in order to make such distributions. See 'Dividends and Other Distributions;
Dividend Reinvestment Plan' herein and 'Taxation' herein and in the SAI.

Asset-Backed Securities. Asset-Backed Securities have structural
characteristics similar to Mortgage-Backed Securities but relate to assets other
than Mortgage Assets. Asset-Backed Securities represent participations in, or
are secured by and payable from, assets such as motor vehicle installment sales
contracts, other installment loan contracts, leases of various types of real and
personal property and receivables from revolving credit (credit card)
agreements. Such assets are securitized through the use of trusts and special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the issuer or other credit enhancements may be present. In general, the
collateral supporting Asset-Backed Securities has a shorter effective term to
maturity than mortgage assets and,

18
<PAGE>
accordingly, such securities may be less likely to experience substantial
prepayments. New types of Asset-Backed Securities are developed and marketed
from time to time by a variety of new and existing issuers, and consistent with
its investment limitations, the Trust expects to invest in those new types of

Asset-Backed Securities that Mitchell Hutchins believes may assist the Trust in
achieving its investment objective.

Convertible Securities. The Corporate Debt Securities and preferred stock
in which the Trust may invest include convertible securities. A convertible
security is a bond, debenture, note, preferred stock or other security that may
be converted into or exchanged for a prescribed amount of common stock of the
same or a different issuer within a particular period of time at a specified
price or formula. A convertible security entitles the holder to receive interest
paid or accrued on debt or the dividend paid on preferred stock until the
convertible security matures or is redeemed, converted or exchanged. Before
conversion, convertible securities have characteristics similar to
nonconvertible debt securities in that they ordinarily provide a stable stream
of income with generally higher yields than those of common stocks of the same
or similar issuers. Convertible securities rank senior to common stock in a
corporation's capital structure but are usually subordinated to comparable
nonconvertible securities. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than the
issuer's common stock, although the extent to which such risk is reduced depends
in large measure upon the degree to which the convertible security sells above
its value as a fixed income security. Convertible securities have unique
investment characteristics in that they generally (1) have higher yields than
common stocks, but lower yields than comparable nonconvertible securities, (2)
are less subject to fluctuation in value than the underlying stock since they
have fixed income characteristics and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases.

Other U.S. Government Securities. The Trust also may invest in U.S.
government securities other than U.S. government issued or guaranteed
Mortgage-Backed Securities. Such securities include direct obligations of the
U.S. Treasury, such as U.S. Treasury bills, notes and bonds, and obligations of
agencies or instrumentalities of the United States. Such agency securities
include securities backed by the full faith and credit of the U.S. government
and securities that are supported primarily or solely by the creditworthiness of
the issuer, such as securities issued by the Tennessee Valley Authority.

Preferred Stock and Other Equity Securities. The Trust may invest up to 5%
of its total assets in preferred stock of U.S. companies. The Trust may acquire
equity securities. Preferred stock generally has a preference as to dividends
and upon liquidation over an issuer's common stock but ranks junior to debt
securities in an issuer's capital structure. Preferred stock generally pays
dividends in cash (or other shares of preferred stock) at a defined rate but,
unlike interest payments on debt securities, preferred stock dividends are
payable only if declared by the issuer's board of directors. Dividends on
preferred stock may be cumulative, meaning that, in the event the issuer fails
to make one or more dividend payments on the preferred stock, no dividends may
be paid on the issuer's common stock until all unpaid preferred stock dividends
have been paid. Preferred stock also may provide that, in the event the issuer
fails to make a specified number of dividend payments, the holders of the
preferred stock will have the right to elect a specified number of directors to
the issuer's board. Preferred stock also may be subject to optional or mandatory
redemption provisions. The Trust also may acquire warrants to purchase equity
securities that are attached to, or sold as a unit with, Corporate Debt
Securities or preferred stock in which the Trust may otherwise invest. Such

equity securities or warrants will not be subject to the Trust's 5% limitation
on investment in preferred stock.

Short-Term and Defensive Investments. In order to invest cash reserves or,
on a temporary basis, during defensive periods or when, in the opinion of
Mitchell Hutchins, no suitable longer-term securities are

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<PAGE>
available, the Trust may invest in money market instruments of various types,
including: (1) U.S. government securities; (2) notes and commercial paper of
U.S. companies that are rated at least AA or A-2 by S&P or Aa or Prime-2 by
Moody's or that have an equivalent rating from another NRSRO or that are unrated
but that, at the time of investment, have been determined by Mitchell Hutchins
to be of comparable quality to those that are so rated; (3) bank obligations
(including certificates of deposit, time deposits and bankers' acceptances) of
domestic banks; and (4) repurchase agreements with respect to any of the
foregoing. Repurchase agreements are transactions in which the Trust purchares
securities from a bank or recognized securities dealer and simultaneously
commits to resell the securities to the bank or dealer at an agreed-upon date
and price reflecting a market rate of interest unrelated to the coupon rate or
maturity of the purchased securities. The Trust maintains custody of the
underlying securities prior to their repurchase; thus, the obligation of the
bank or dealer to pay the repurchase price on the date agreed to is, in effect,
secured by such securities. If the value of such securities were less than the
repurchase price, plus any agreed-upon additional amount, the other party to the
agreement would be required to provide additional collateral so that at all
times the collateral is at least equal to the repurchase price plus any
agreed-upon additional amount. Repurchase agreements carry certain risks not
associated with direct investments in securities, including possible declines in
the market value of the underlying securities and delays and costs to the Trust
if the other party to a repurchase agreement becomes bankrupt. The Trust intends
to enter into repurchase agreements only with banks and dealers in transactions
believed by Mitchell Hutchins to present minimal credit risks in accordance with
guidelines established by the Trust's board of directors. Mitchell Hutchins
reviews and monitors the creditworthiness of such institutions under the board's
general supervision.

RISK FACTORS AND OTHER INVESTMENT PRACTICES

RETURN OF $15.00 PER SHARE

Mitchell Hutchins manages the Trust's portfolio in an effort to return
$15.00 per Share to investors on or about the Trust's termination date of
January 31, 2003. To the extent capital losses realized by the Trust on
dispositions of securities are not offset by capital gains realized in the same
or in subsequent years (subject to the eight year limit on capital loss
carryforwards under the federal tax law) and by the retention of income on Zero
Coupon Municipal Securities (and other retained income, if any), the Trust would
be unable to distribute $15.00 per Share to its shareholders at the end of the
Trust's term. Also, in order to avoid the imposition of federal income tax on
undistributed gains and the imposition of a 4% federal excise tax on certain
undistributed income and gains, the Trust would need to distribute all or a

substantial portion of any net capital gains (in excess of any available capital
loss carryforwards) in the year in which they are realized. Consequently, the
Trust may not be able to use net capital gains to offset any net capital losses
that are realized in years subsequent to the years in which such net capital
gains are realized.

The Trust's ability to return $15.00 per Share to investors on the Trust's
termination date also is a function of, among other things, the ability of the
issuers of the Corporate Debt Securities in which the Trust invests to make
timely payments of interest and principal, and the ability of Mitchell Hutchins
to select and monitor such securities so as to avoid or minimize the potential
impact of adverse financial developments affecting such issuers. These risks are
increased by the Trust's investments in lower grade Corporate Debt Securities.
See '--Lower Grade Securities.'

Mitchell Hutchins seeks to manage the Trust's assets so that the Trust will
not realize capital losses that are not offset by capital gains on the
disposition of other securities and by retained income on Zero Coupon Municipal
Securities over the life of the Trust. The Trust expects to retain an amount
approximately equal to

20
<PAGE>
its income on the Zero Coupon Municipal Securities in its portfolio, provided
that such retention is consistent with the maintenance of the Trust's continued
qualification for treatment as a regulated investment company for federal income
tax purposes. Such retained income will serve to increase the net asset value of
the Trust, and such increase will be available to offset net capital losses, if
any. See 'Investment Objective and Policies.' No assurance can be given that
such results will be achieved. Legal proceedings or negotiations to recover any
defaulted principal or interest on securities may extend beyond the termination
date of the Trust, and, in such case, shareholders would receive the net
proceeds, if any, of such recoveries at a date following the termination date of
the Trust.

INTEREST RATE SENSITIVITY

The yield on debt securities depends on a variety of factors, including
general market conditions for such securities, the financial condition of the
issuer, the size of the particular offering, the maturity, credit quality and
rating of the security and, in the case of securities of Municipal Issuers,
expectations regarding changes in income tax rates. Generally, the longer the
maturity of such a security, the higher its yield and the greater its price
sensitivity in response to changes in interest rates. The market value of debt
securities, and accordingly the Trust's net asset value, normally will vary
inversely with changes in interest rates. Such changes in the values of the
securities held by the Trust will not affect the interest income derived from
them but will affect the net asset value of Shares. Neither the issuance by, nor

the guarantee of a U.S. government agency, nor an investment grade rating for a
security constitutes assurance that the security will not fluctuate in value or
that the Trust will receive the originally anticipated yield on the security.

The yields on Specified Mortgage-Backed Securities (including IOs, POs
(other than IOs and POs that are PAC Bonds) and inverse floating rate
obligations), in which the Trust may invest up to 5% of its total assets, and on
Zero Coupon Municipal Securities generally are more sensitive to changes in
interest rates than most Mortgage-Backed Securities. The market value of
Specified Mortgage-Backed Securities can be extremely volatile and such
securities may become illiquid. In addition, the yields on most IOs and POs are
extremely sensitive to the rate of principal payments (including prepayments),
which can result in price volatility and, in the case of IOs, can result in the
Trust failing to recoup fully its initial investment in such securities even
though the securities may be issued or guaranteed by a U.S. government agency or
be rated in the highest rating category. Due to their planned amortization
structure, yields on IOs and POs that are PAC Bonds generally do not have the
same sensitivity to prepayments as other IOs and POs unless, among other things,
the actual prepayment experience on the underlying mortgage loans fails to fall
within the range contemplated when the PAC Bonds were created. The Trust is not
limited in its ability to invest in IOs and POs that are PAC Bonds. While
Mitchell Hutchins will seek to limit the impact of these factors on the Trust,
no assurance can be given that it will achieve this result.

LOWER GRADE SECURITIES

The Trust may invest up to 35% of its total assets in lower grade Corporate
Debt Securities. Investment in such securities involves a greater risk of
non-payment or significant delay in payment, which non-payment or delay would
have an adverse effect on income and dividends and may have an adverse effect on
the ability of the Trust to preserve capital and to return $15.00 per Share to
shareholders on or about the Trust's termination date of January 31, 2003.
Changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity for the issuers of such securities to make interest and
principal payments than is the case for higher grade Corporate Debt Securities.
Lower grade Corporate Debt Securities are deemed by S&P and Moody's to be
predominantly speculative with respect to the issuer's capacity to pay interest
and

21
<PAGE>

repay principal and to involve major risk exposures to adverse conditions. The
Trust may invest up to 5% of its total assets in securities that, at the time of
investment, are rated below B by S&P or Moody's or that have an equivalent
rating from another NRSRO or, if unrated, have been determined by Mitchell
Hutchins to be of comparable quality to securities rated below B by S&P or
Moody's. Such securities are considered by NRSROs to be highly speculative and
may be in default. In the event that, due to fluctuation in the market value of

the Trust's assets, downgrades or otherwise, an amount in excess of 10% of the
Trust's total assets is invested in such securities, Mitchell Hutchins will seek
to engage in an orderly disposition of such securities to the extent necessary
to ensure that the Trust's holdings of such securities do not exceed 10% of the
Trust's total assets. In addition, the Trust will not purchase a lower grade
Corporate Debt Security of any one issuer if as a result more than 3% of its
total assets would be invested in such lower grade Corporate Debt Securities of
that issuer.

Lower grade Corporate Debt Securities generally offer a higher current
yield than that available from higher grade issues. However, lower grade
Corporate Debt Securities involve higher risks, in that they are especially
subject to adverse changes in general economic conditions and in the industries
in which the issuers are engaged, to changes in the financial condition of the
issuers and to price fluctuation in response to changes in interest rates.
During periods of economic downturn or rising interest rates, highly leveraged
issuers may experience financial stress, which could adversely affect their
ability to make payments of principal and interest on, and increase the
possibility of default of, such Corporate Debt Securities. In addition, the
market for lower grade Corporate Debt Securities has expanded rapidly in recent
years, and its growth paralleled a long economic expansion. In the past, the
prices of many lower grade Corporate Debt Securities declined substantially,
reflecting an expectation that many issuers of such securities might experience
financial difficulties. As a result, the yields on lower grade Corporate Debt
Securities rose dramatically, but such higher yields did not reflect the value
of the income stream that holders of such securities expected, but rather the
risk that holders of such securities could lose a substantial portion of their
value as a result of the issuers' financial restructuring or default. There can
be no assurance that such declines will not recur. The market for lower grade
Corporate Debt Securities generally is thinner and less active than that for
higher quality securities, which may limit the Trust's ability to sell such
securities at 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 grade
securities, especially in a thinly traded market.

MARKET PRICE OF SHARES

Shares of the Trust and of other closed-end investment companies frequently
trade at a discount from net asset value. See 'Trading History.' Accordingly,
there is a risk that, for example, a shareholder who sells Shares of the Trust
at a time when they are trading at a discount could incur a loss of capital even
if the Trust's net asset value has not declined since the shareholder purchased
the Shares. This market risk is separate and distinct from the risk that the
Trust's net asset value may decrease. Accordingly, the Shares are designed
primarily for long-term investors and should not be viewed as a vehicle for
trading purposes. In addition, net asset value and market price of the Shares
may be more volatile than for a fund that invests exclusively in higher grade
securities.

<PAGE>
LEVERAGE

The Trust may engage in leverage. Leveraging exaggerates changes in the net
asset value of the Shares and in the yield on the Trust's portfolio, which may,
in turn, result in increased volatility of the market price of the Shares.
Leverage also creates interest expenses for the Trust, which can exceed the
income from the assets obtained with the proceeds. To the extent the income
derived from securities purchased with funds obtained through leverage exceeds
the interest and other expenses that the Trust will have to pay in connection
with such leverage, the Trust's net income will be greater than if leverage were
not used. Conversely, if the income from the assets obtained through leverage is
not sufficient to cover the cost of leverage, the net income of the Trust will
be less than if leverage were not used, and therefore the amount available for
distribution to shareholders will be reduced. The requirement that the Trust
segregate a specified amount of cash or liquid, high grade debt securities with
its Custodian in connection with the use of certain types of leverage could have
an adverse effect on the income earned and dividends paid by the Trust. Because
of the short-term nature of the funding available in the dollar roll and reverse
repurchase markets, relatively low transactions costs, wide availability of
funds at favorable terms and the ability to increase or decrease the amount of
outstanding borrowing in a relatively short period of time, the Trust expects
that substantially all of its leverage will be in the form of dollar rolls and
reverse repurchase agreements.

The Trust is authorized to borrow money for investment purposes in an
amount up to 33 1/3% of its total assets (including the amount of the borrowing
and any other indebtedness representing 'senior securities' under the 1940 Act
but reduced by any liabilities and indebtedness other than senior securities).
The Trust is also authorized to borrow an additional 5% of its total assets
without regard to the foregoing limitation for temporary purposes such as
clearance of portfolio transactions, the payment of dividends and Share
repurchases. Borrowing constitutes leverage, a speculative technique. The use of
leverage will provide the opportunity for increased net income but, at the same
time, will involve special risks. The Trust will only use leverage when Mitchell
Hutchins believes that such leverage will benefit the Trust after taking such
risks into consideration.

Dollar Rolls. Dollar rolls are transactions in which the Trust sells
Mortgage-Backed Securities or other securities for delivery in the current month
and simultaneously contracts to purchase substantially similar (same type,
coupon and maturity) securities on a specified future date. During the roll
period, the Trust forgoes principal and interest paid on the securities. The
Trust is compensated by the difference between the current sales price and the
lower forward price for the future purchase (often referred to as the 'drop') as
well as by the interest earned on the cash proceeds of the initial sale. The
Trust also may be compensated through the receipt of fee income equivalent to a
lower forward price. Unless such benefits exceed the income, capital
appreciation and gain or loss due to prepayments that would have been realized
on the securities sold as part of the dollar roll, the use of this technique
will diminish the investment performance of the Trust compared with what such

performance would have been without the use of dollar rolls. At the time the
Trust enters into a dollar roll, if required under policies of the SEC, the
Trust's custodian segregates cash or liquid, high-grade debt securities having a
value not less than the forward purchase price. Dollar rolls will be considered
borrowings and, accordingly, will be subject to the Trust's 33 1/3% limitation
on borrowings.

Dollar rolls involve certain risks including the risk that the
broker-dealer to whom the Trust sells the security becomes insolvent, the
Trust's right to purchase or repurchase the securities subject to the dollar
roll may be restricted, and the instrument which the Trust is required to
repurchase may be worth less than an instrument which the Trust originally held.
Successful use of mortgage dollar rolls will depend upon Mitchell Hutchins'
ability to predict correctly interest rates and mortgage prepayments. For these
reasons, there is no assurance that dollar rolls can be successfully employed.

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<PAGE>
Reverse Repurchase Agreements. The Trust may also engage in leverage by
entering into reverse repurchase agreements with the same parties with whom it
may enter into repurchase agreements. Under a reverse repurchase agreement, the
Trust sells securities and agrees to repurchase them at a mutually agreed date
and price. At the time the Trust enters into a reverse repurchase agreement, an
approved custodian segregates cash or liquid, high grade debt securities having
a value not less than the repurchase price (including accrued interest). The
market value of securities sold under reverse repurchase agreements typically is
greater than the proceeds of the sale, and accordingly, the market value of the
securities sold is likely to be greater than the value of the securities in
which the Trust invests those proceeds. Reverse repurchase agreements involve
the risk that the buyer of the securities sold by the Trust might be unable to
deliver them when the Trust seeks to repurchase. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, such buyer or its trustee or receiver may receive an extension of
time to determine whether to enforce the Trust's obligation to repurchase the
securities and the Trust's use of the proceeds of the reverse repurchase
agreement may effectively be restricted pending such decision. Reverse
repurchase agreements will be considered borrowings and, accordingly, will be
subject to the Trust's 33 1/3% limitation on borrowings.

Effect of Leverage. Based on the Trust's senior securities outstanding as
of January 31, 1995, the Trust's portfolio would need to experience an annual
return of 1.49% in order to cover the 4.68% annualized rate of interest on such
senior securities. Such rate of interest is imputed from the difference between
the forgone coupon interest on dollar rolls and the fee income collected on the
dollar rolls. Such percentages are not necessarily indicative of the annualized
rate of interest on the Trust's outstanding senior securities, or of the annual
return necessary to cover such rate of interest, as of other dates. The
following table may assist the investor in understanding the effects of leverage
by illustrating the effect of leverage on return to a shareholder. The figures
appearing in the table are hypothetical and actual returns may be greater or

less than those appearing in the table.

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Assumed Return on Portfolio
(Net of Expenses).................... -10% -5% 0% 1.49% 5 % 10%
Corresponding Return to Shareholder.... -17.79% -10.05% -2.31% 0 % 5.42% 13.16%
</TABLE>

STRATEGIC TRANSACTIONS

The Trust may use the investment strategies described below to hedge
various market risks (such as the risk of changes in interest rates), to manage
the effective maturity or interest rate sensitivity of its portfolio or to
enhance income. New financial products and risk management techniques continue
to be developed, and the Trust may use these products and techniques to the
extent consistent with its investment objective and regulatory and tax
considerations.

In pursuing these investment strategies, the Trust may purchase and sell
exchange-listed and OTC put and call options (including straddles and spreads)
on securities, financial futures, interest rate indices and other financial
instruments, purchase and sell financial futures contracts and enter into
interest rate protection transactions, including interest swaps, caps, collars
and floors (all of the foregoing transactions are referred to collectively as
'Strategic Transactions'). Strategic Transactions may be used to attempt to
protect against possible changes in the market value of securities held in or to
be purchased for the Trust's portfolio, to protect the Trust's unrealized gains
in the value of its portfolio securities, to facilitate the sale of such
securities, to manage the effective maturity or interest rate sensitivity of the
Trust's portfolio or to establish a position as a temporary substitute for
purchasing or selling particular securities. Some Strategic Transactions

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<PAGE>
may also be used to enhance income. The Trust may enter into Strategic
Transactions under which up to 100% of the Trust's portfolio assets are at risk.

The Trust might not employ any Strategic Transactions, and there can be no
assurance that any Strategic Transactions used will succeed. The use of
Strategic Transactions involves certain risks, including: (1) the fact that
skills needed to use Strategic Transactions are different from those needed to
select the Trust's securities; (2) possible imperfect correlation, or even no
correlation, between price movements of Strategic Transactions and price
movements of related portfolio positions; (3) the fact that, while Strategic
Transactions can reduce risk of loss, they can also reduce the opportunity for
gain, or even result in losses, by offsetting favorable price movements in
related portfolio positions; and (4) the possible inability of the Trust to
purchase or sell a portfolio security at a time that otherwise would be
favorable for it to do so, or the possible need for the Trust to sell a
portfolio position at a disadvantageous time, due to the need for the Trust to

maintain 'cover' or segregate assets in connection with Strategic Transactions
and the possible inability of the Trust to close out or to liquidate its related
portfolio position. Strategic Transactions also are subject to the risk that, if
Mitchell Hutchins is incorrect in its forecast of interest rates, market values
or other economic factors affecting such a transaction, the Trust would have
been better off if it had not entered into the Strategic Transaction. See the
SAI for additional information on Strategic Transactions.

ILLIQUID SECURITIES

The Trust may invest up to 25% of its total assets (determined at the time
of investment) in illiquid securities. Liquidity relates to the ability of the
Trust to readily dispose of securities and the price to be paid therefor, but
does not generally relate to credit risk or the likelihood of receipt of cash at
maturity. The Trust may not be able to sell these securities when Mitchell
Hutchins considers it desirable to do so or may have to sell them at a price
lower than could be obtained if they were more liquid. Illiquid securities may
be more difficult to value due to the unavailability of reliable market
quotations and investment in such securities may have an adverse impact on net
asset value.

The illiquidity of securities often results from the absence of
registration under the Securities Act of 1933 ('1933 Act'), from contractual
restrictions on transfer, from the small size of an issue (relative to issues of
comparable securities) or, particularly in the case of recently developed
instruments, from undeveloped or partially developed trading markets. 'Illiquid
securities' for this purpose are securities that cannot be disposed of within
seven days at approximately the amount at which the Trust has valued the
securities and includes, among other things, certain Zero Coupon Municipal
Securities, purchased OTC options, repurchase agreements maturing in more than
seven days and restricted securities other than Rule 144A securities and
commercial paper that Mitchell Hutchins has determined to be liquid pursuant to
guidelines established by the Trust's board of directors. Under current
guidelines of the staff of the SEC, IOs and POs are considered illiquid.
However, IO and PO classes of fixed-rate Mortgage-Backed Securities issued by
the U.S. government or one of its agencies or instrumentalities will not be
considered illiquid if Mitchell Hutchins has determined that they are liquid
pursuant to guidelines established by the Trust's board of directors. All or a
portion of the assets used as cover for OTC options also may be considered
illiquid.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

The Trust may purchase debt securities on a when-issued basis or may
purchase or sell debt securities for delayed delivery. A security purchased on a
when-issued or delayed delivery basis is recorded as an asset on the commitment
date and is subject to changes in market value, generally based upon changes in
the level of interest rates. Thus, fluctuations in the value of the security
from the time of the commitment date will affect

25
<PAGE>

the Trust's net asset value. When the Trust commits to purchase securities on a

when-issued or delayed delivery basis, its custodian will set aside in a
segregated account cash, U.S. government securities or other liquid, high-grade
debt securities with a market value equal to the amount of the commitment. If
necessary, additional assets will be placed in the account daily so that the
value of the account will equal or exceed the amount of the Trust's purchase
commitment. Depending on market conditions, the Trust's when-issued and delayed
delivery purchase commitments could cause its net asset value per Share to be
more volatile because such securities may increase the amount by which the
Trust's total assets, including the value of when-issued and delayed delivery
securities held by the Trust, exceed its net assets.

PORTFOLIO TURNOVER

For the fiscal year ended January 31, 1995 and for the fiscal period March
1, 1993 (commencement of operations) to January 31, 1994, the Trust's portfolio
turnover rate was 382.55% and 416.05%, respectively, which includes the effect
of dollar rolls. Portfolio turnover may vary from year to year and will not be a
limiting factor when Mitchell Hutchins deems portfolio changes appropriate.
Higher portfolio turnover results in higher Trust expenses, including brokerage
commissions, dealer mark-ups and other transaction costs on the sale of
securities and on reinvestment in other securities. The portfolio turnover rate
is calculated by dividing the lesser of the Trust's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of the securities in the portfolio during the year.

LENDING OF PORTFOLIO SECURITIES

Although it has no current intention to do so, the Trust also may engage in
securities lending.

OTHER INFORMATION

The Trust's investment objective and certain investment limitations as
described in the SAI are fundamental policies that may not be changed without
shareholder approval. All other investment policies may be changed by the
Trust's board of directors without shareholder approval.

MANAGEMENT OF THE TRUST

INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS

Subject to the supervision of the Trust's board of directors, investment
advisory and administration services are provided to the Trust by Mitchell
Hutchins pursuant to an Investment Advisory and Administration Contract dated as
of February 12, 1993 ('Mitchell Hutchins Contract'). Mitchell Hutchins'
principal business address is 1285 Avenue of the Americas, New York, New York
10019. Mitchell Hutchins is a wholly owned subsidiary of PaineWebber, which is a
wholly owned subsidiary of Paine Webber Group Inc., a publicly held financial
services holding company. Mitchell Hutchins provides investment advisory and

portfolio management services to investment companies, pension funds and other
institutional, corporate and individual clients. As of , 1995,
total assets under Mitchell Hutchins' management exceeded $ billion. As of
that date, Mitchell Hutchins served as investment adviser or sub-adviser to
registered investment companies with separate portfolios having aggregate
assets of approximately $ billion.

Pursuant to the Mitchell Hutchins Contract, Mitchell Hutchins provides a
continuous investment program for the Trust and makes investment decisions and
places orders to buy, sell or hold particular

26
<PAGE>

securities. As administrator, Mitchell Hutchins supervises all matters relating
to the operation of the Trust and obtains for it corporate, administrative and
clerical personnel, office space, equipment and services, including arranging
for the periodic preparation, updating, filing and dissemination of proxy
materials, tax returns and reports to the Trust's board of directors,
shareholders and regulatory authorities. The Trust pays Mitchell Hutchins, as
investment adviser and administrator, a fee in an amount equal to an annual fee
of 0.90% of the Trust's average weekly net assets, computed weekly and payable
monthly. This fee is greater than the advisory and administration fees paid by
most funds.

The Trust incurs various other expenses in its operations, such as custody
and transfer agency fees, brokerage commissions, professional fees, expenses of
board and shareholder meetings, fees and expenses relating to registration of
its Shares, taxes and governmental fees, fees and expenses of the directors,
costs of obtaining insurance, expenses of printing and distributing shareholder
materials, organizational expenses, including costs or losses to any litigation.
For the fiscal year ended January 31, 1995, the Trust's total expenses, stated
as a percentage of average net assets, were 1.05%. When adjusted to reflect
imputed interest expenses attributable to forgone coupon interest on dollar
rolls and the fee income collected on the average amount of dollar rolls
outstanding as of the last day of each month during the fiscal year ended
January 31, 1995, the Trust's total expenses during that period were 3.36% of
average net assets.

Thomas J. Libassi, and Mary B. King are responsible for the day-to-day
management of the Trust's portfolio. Mr. Libassi is a senior vice president of
Mitchell Hutchins. From June 1986 to May 1994, he was a vice president of
Keystone Custodian Funds with portfolio management responsibility for high yield
debt securities. Mrs. King is a first vice president and portfolio manager for
Mitchell Hutchins. She also is a vice president of the Trust and of other
investment companies for which Mitchell Hutchins or PaineWebber serves as
investment adviser. Mrs. King has been employed by Mitchell Hutchins as a
portfolio manager for the last five years. Mrs. King has held her Trust
responsibilities since its inception. Mr. Libassi has held his Trust

responsibility since May 1994.

Other members of Mitchell Hutchins' fixed income group provide input on
market outlook, interest rate forecasts, investment research and other
considerations pertaining to the Trust's investments.

DIVIDENDS AND OTHER DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN

DIVIDENDS AND OTHER DISTRIBUTIONS

The Trust declares and pays monthly dividends from its net investment
income. The Trust currently intends to retain, until its final liquidating
distribution, an amount approximately equal to the tax-exempt income
attributable to its Zero Coupon Municipal Securities, but in no event greater
than 10% of the Trust's net investment income in any year. For federal income
tax purposes, the Trust is required to distribute at least 90% of its net
investment income for each calendar year. The Trust expects that all or a
portion of its net capital gain (i.e., the excess of net long-term capital gain
over net short-term capital loss), if any, will be distributed at least
annually. 'Net investment income,' as used herein, includes all interest
(including tax-exempt interest and accrued income on Zero Coupon Municipal
Securities) and other ordinary income earned by the Trust on its portfolio
holdings and net short-term capital gains, net of the Trust's expenses.

Various factors may affect the level of the dividends and other
distributions paid by the Trust, including the asset mix, interest rates and
remaining term of the Trust, the amount of leverage utilized by the Trust and
the Trust's use of Strategic Transactions. A significant decline in market rates
of interest could lead to a significant decline in the income earned and
dividends paid by the Trust, while a significant increase in

27
<PAGE>
interest rates might lead to only a modest or no increase in the income earned
and dividends paid by the Trust. The Trust's income and dividends may decline in
the later years of the Trust as the dollar-weighted average life of the Trust is
shortened in anticipation of its termination date. In addition, the Trust's
investment in lower grade securities increases the risk of non-payment or a
significant delay in payment on such securities, which non-payment or delay
would have an adverse effect on the Trust's income and dividends. The Trust
expects that a final liquidating distribution to shareholders of the net assets
of the Trust will be made on or about the termination of the Trust.

The Trust may not declare any dividend (other than a dividend payable in
Shares), or any other distribution on the Shares, and may not purchase any of
the Shares unless at the time of such declaration or purchase the amount of the
Trust's obligations constituting senior securities does not exceed 33 1/3% of
the Trust's total assets (computed as specified in the 1940 Act) after deducting
the amount of such dividend distribution or purchase. See 'Description of the
Shares--Share Repurchases and Tender Offers.'

DIVIDEND REINVESTMENT PLAN

Under the Plan, which all shareholders whose Shares are registered in their
own names, or in the name of PaineWebber (or its nominee), have all dividends
and other distributions on their Shares automatically reinvested in additional
Shares, unless such shareholders elect to receive cash. Shareholders may
affirmatively elect to receive all dividends and other distributions in cash
paid by check mailed directly to them by PNC Bank, National Association
('Transfer Agent'), as dividend disbursing agent. Shareholders who hold their
Shares in the name of a broker or nominee other than PaineWebber (or its
nominee) should contact such broker or nominee to determine whether, or how,
they may participate in the Plan. The ability of such shareholders to
participate in the Plan may change if their Shares are transferred into the name
of another broker or nominee.

The Transfer Agent serves as agent for the shareholders in administering
the Plan. After the Trust declares a dividend or determines to make a capital
gain distribution, the Transfer Agent, as agent for the participants, receives
the cash payment and uses it to buy Shares in the open market, on the NYSE or
otherwise, for the participants' accounts. Such Shares may be purchased at
prices that are higher or lower than the net asset value per Share at the time
of purchase. The number of shares purchased with each dividend for a particular
shareholder equals the result obtained by dividing the amount of the dividend
payable to that shareholder by the average price per share (including applicable
brokerage commissions) that the Transfer Agent was able to obtain in the open
market. The Trust will not issue any new Shares in connection with the Plan. The
Transfer Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in the accounts, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant are held by the Transfer Agent in non-certificated form in
the name of the participant, and each shareholder's proxy will include those
Shares purchased pursuant to the Plan.

There is no charge to participants for reinvesting dividends or other
distributions. The Transfer Agent's fees for the handling of reinvestment of
distributions are paid by the Trust. However, each participant pays a pro rata
share of brokerage commissions incurred with respect to the Transfer Agent's
open market purchases of Shares in connection with the reinvestment of
distributions.

The automatic reinvestment of dividends and other distributions does not
relieve participants of any income tax that may be payable on such
distributions. See 'Taxation.'

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<PAGE>
A shareholder who has elected to participate in the Plan may terminate
participation in the Plan at any time without penalty, and shareholders who have
previously terminated participation in the Plan may rejoin it at any time.
Changes in elections must be made in writing to the Transfer Agent and should

include the shareholder's name and address as they appear on the Share
certificate. An election to terminate participation in the Plan, until such
election is changed, will be deemed to be an election by a shareholder to take
all subsequent distributions in cash. An election will be effective only for
distributions declared and having a record date at least ten days after the date
on which the election is received.

Experience under the Plan may indicate that changes are desirable.
Accordingly, the Trust reserves the right to amend or terminate the Plan with
respect to any dividend or other distribution if notice of the change is sent to
Plan participants at least 30 days before the record date for such distribution.
The Plan also may be amended or terminated by the Transfer Agent by at least 30
days' written notice to all Plan participants. All correspondence concerning the
Plan should be directed to the Transfer Agent at PNC Bank, National Association,
c/o PFPC Inc., P.O. Box 8950, Wilmington, Delaware 19899.

TAXATION

The Trust intends to continue to qualify for treatment as a regulated
investment company ('RIC') under the Internal Revenue Code. For each taxable
year that the Trust so qualifies, it (but not its shareholders) will be relieved
of federal income tax on that part of its investment company taxable income
(consisting generally of taxable net investment income and net short-term
capital gain) and net capital gain that is distributed to its shareholders.

Dividends from the Trust's net investment income (including dividends
attributable to any tax-exempt interest income or original issue discount and
net short-term capital gain, if any) are taxable to its shareholders as ordinary
income to the extent of its earnings and profits, whether received in cash or
reinvested in additional Shares. Shareholders who are not liable for tax on
their income and whose shares are not debt-financed will not be required to pay
tax on dividends or other distributions that they receive from the Trust.

Distributions of the Trust's net capital gain, if any, are taxable to its
shareholders as long-term capital gains, regardless of the length of time they
have held their Shares. The Trust may decide, however, to retain for
reinvestment all or a portion of its net capital gain and to pay tax on the
undistributed portion. If the Trust did so, it would designate that portion as
undistributed capital gains by notice to its shareholders. In that event, each
person who was a shareholder of record on the last day of the Trust's taxable
year would be required to include his proportionate share of the designated
gains in calculating his own long-term capital gains. Each such shareholder
would be allowed, however, to credit against his federal income tax liability
his proportionate share of the income tax imposed on the Trust with respect to
the undistributed capital gains and to increase the basis of his Shares by 66%
of his proportionate share of those gains.

An investor should be aware that if Shares are purchased shortly before the
record date for any dividend or other distribution, the investor will pay full

price for the Shares and could receive some portion of the price back as a
taxable distribution.

The Trust notifies its shareholders following the end of each calendar year
of the amounts of dividends and capital gain distributions paid (or deemed paid)
that year. Dividends and other distributions declared by the Trust in October,
November or December of any year and payable to shareholders of record on a date
in any of those months will be deemed to have been paid by the Trust and
received by the shareholders on

29
<PAGE>
December 31 of that year if the distributions are paid by the Trust during the
following January. Accordingly, those distributions will be taxed to
shareholders for the year in which that December 31 falls.

Upon a sale or exchange of Shares (including a sale pursuant to a Share
repurchase or tender offer by the Trust) or upon receiving a distribution in
liquidation of the Trust, a shareholder generally will recognize a taxable gain
or loss (equal to the difference between his adjusted basis for the Shares and
the amount realized), which will be treated as a capital gain or loss if the
Shares are capital assets in the shareholder's hands and will be a long-term
capital gain or loss if the Shares have been held for more than one year.
Notwithstanding this general rule, however, any loss realized on a sale or
exchange of Shares (1) will be treated as a long-term, rather than as a
short-term, capital loss to the extent of any capital gain distributions
received thereon, if the shares were held for six months or less, and (2) will
be disallowed to the extent those Shares are replaced by other Shares within a
period of 61 days beginning 30 days before and ending 30 days after the date of
disposition of the Shares (which could occur, for example, as the result of
participation in the Plan), in which event the replacement Shares' basis would
be adjusted to reflect the disallowed loss.

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

The Trust is not intended to be an investment for non-U.S. persons.

The foregoing is only a summary of some of the important federal tax
considerations affecting the Trust and its shareholders; see the SAI for a
further discussion. There may be other federal, state or local tax
considerations applicable to a particular investor. Prospective shareholders are
therefore urged to consult their tax advisers.

DESCRIPTION OF THE SHARES

The Trust is authorized to issue 100 million shares of common stock, $.001

par value. The information contained under this heading is subject to the
provisions contained in the Trust's Articles of Incorporation ('Articles') and
By-Laws.

THE SHARES

Shares of the Trust have no preemptive, conversion, exchange or redemption
rights. Each Share has equal voting, dividend, distribution and liquidation
rights. The Shares are fully paid and nonassessable. Shareholders are entitled
to one vote per Share. All voting rights for the election of directors are
noncumulative, which means that the holders of more than 50% of the shares can
elect 100% of the directors then nominated for election if they choose to do so
and, in such event, the holders of the remaining Shares will not be able to
elect any directors.

Under the Articles, the Trust will terminate on or about January 31, 2003,
without shareholder approval. In connection with such termination, the Trust
will liquidate all of its assets and distribute to shareholders the net proceeds
therefrom after making appropriate provision for any liabilities of the Trust.
Prior to such termination, however, the board of directors of the Trust will
consider whether it is in the best interests of the shareholders to terminate
and liquidate the Trust without shareholder approval notwithstanding the
provision of the Articles. In considering the matter, the board of directors
will take into account, among other factors, the adverse effect which capital
losses realized upon disposition of securities in connection with liquidation
(if

30
<PAGE>
any such losses are anticipated) would have on the Trust and its shareholders.
In the event that the board of directors determines that under the
circumstances, termination and liquidation of the Trust on or about January 31,
2003, without a shareholder vote would not be in the best interests of
shareholders, the board of directors will call a special meeting of shareholders
to consider an appropriate amendment to the Articles. The Articles require the
affirmative vote of the holders of at least 66 2/3% of outstanding Shares to
approve such an amendment. The foregoing provisions of the Articles are governed
by the laws of the State of Maryland and not the 1940 Act. Under the rules of
the NYSE applicable to listed companies, the Trust will be required to hold an
annual meeting of shareholders in each year. If for any reason the Shares are no
longer listed on the NYSE (or any other national securities exchange the rules
of which require annual meetings of shareholders), the Trust may decide not to
hold annual meetings of shareholders.

Any additional offerings of the Shares, if made, will require approval of
its board of directors and will be subject to the requirement of the 1940 Act
that Shares may not be sold at a price below the then current net asset value,
exclusive of underwriting discounts and commissions, except, among other things,
in connection with an offering to existing shareholders or with the consent of
the holders of at least a majority of the Trust's outstanding voting securities.

The following chart indicates the Shares outstanding as of May 31, 1995.

<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
AMOUNT HELD BY EXCLUSIVE OF AMOUNT HELD
REGISTRANT OR FOR ITS BY REGISTRANT OR FOR ITS
TITLE OF CLASS AMOUNT AUTHORIZED ACCOUNT ACCOUNT
- --------------------------------- ----------------- --------------------- ------------------------
<S> <C> <C> <C>
Common Stock..................... 100,000,000 0 13,706,667
</TABLE>

SHARE REPURCHASES AND TENDER OFFERS

In recognition of the possibility that the Shares might trade at a discount
from net asset value and that any such discount may not be in the interest of
shareholders, the Trust's board of directors has determined that it will
consider taking action to attempt to reduce or eliminate any discount. To that
end, the board of directors may from time to time consider action either to
repurchase Shares in the open market or to make a tender offer for the Shares at
their net asset value. The board of directors currently intends at least
annually to consider, in consultation with Mitchell Hutchins, the possibility of
making such open market Share repurchases or tender offers, and at such times
may consider such factors as the market price of the Shares, the net asset value
of the Shares, the liquidity of the assets of the Trust, whether such
transactions would impair the Trust's status as a RIC, general economic
conditions and such other events or conditions that the board believes may have
a material effect of the Trust's ability to consummate such transactions. Under
certain circumstances, it is possible that open market repurchases or tender
offers may constitute a distribution under the Internal Revenue Code to the
remaining shareholders of the Trust. The Trust may borrow to finance repurchases
and tender offers. Interest on any such borrowings will reduce the Trust's net
income.

There can be no assurance that the board of directors will decide to
undertake either Share repurchases or tender offers or that, if undertaken, such
acts will result in the Shares trading at a price that is equal or close to net
asset value per Share. The market price of Shares will be determined by, among
other things, the relative demand for and supply of such Shares in the market,
the Trust's investment performance, the Trust's dividends and yield and investor
perception of the Trust's overall attractiveness as an investment as compared
with other investment alternatives. Nevertheless, the fact that the Shares may
be the subject of tender offers at net asset value from time to time may reduce
the spread that might otherwise exist between the market price

31
<PAGE>
of the Shares and net asset value per share. In the opinion of Mitchell
Hutchins, sellers may be less inclined to accept a significant discount if they
have a reasonable expectation of being able to recover net asset value in

conjunction with a possible tender offer.

Although the board of directors believes that Share repurchases and tender
offers generally would have a favorable effect on the market price of the
Shares, it should be recognized that the Trust's acquisition of Shares would
decrease the Trust's total assets and therefore have the effect of increasing
the Trust's expense ratio and decreasing the asset coverage with respect to any
outstanding borrowings. Because of the nature of the Trust's investment
objective, policies and portfolio, under current market conditions Mitchell
Hutchins anticipates that repurchases and tender offers generally should not
have a material adverse effect on the Trust's investment performance and that
Mitchell Hutchins generally should not have any material difficulty in disposing
of portfolio securities in order to consummate Share repurchases and tender
offers; however, this may not always be the case.

Any tender offer made by the Trust for its Shares generally would be at a
price based on the net asset value of the Shares on a date subsequent to the
Trust's receipt of all tenders. Each offer would be made, and the shareholders
would be notified, in accordance with the requirements of the Securities
Exchange Act of 1934 and the 1940 Act, either by publication or mailing or both.
Each offering document would contain such information as is prescribed by such
laws and the rules and regulations promulgated thereunder. Each person tendering
Shares would pay to the Trust's transfer agent a service charge to help defray
certain costs, including the processing of tender forms, effecting payment,
postage and handling. Any such service charge would be paid directly by the
tendering shareholder and would not be deducted from the proceeds of the
purchase. The Transfer Agent would receive the fee as an offset to these costs.
The Trust expects that the costs of effecting a tender offer would exceed the
aggregate of all service charges received from those who tender their Shares.
Costs associated with the tender would be charged against capital.

Tendered Shares that have been accepted and purchased by the Trust will be
held in the Trust's treasury until retired by the board of directors. If
treasury Shares are retired, Shares issued and outstanding and capital in excess
of par will be reduced. If tendered Shares are not retired, the Trust may hold,
sell or otherwise dispose of the Shares for any lawful corporate purpose as
determined by the board of directors.

CERTAIN ANTI-TAKEOVER PROVISIONS OF THE ARTICLES OF INCORPORATION

The Trust's Articles contain provisions that have the effect of limiting:
(1) the ability of other entities or persons to acquire control of the Trust;
(2) the Trust's freedom to engage in certain transactions; and (3) the ability
of the Trust's directors or shareholders to amend the Articles. These provisions
of the Articles may be regarded as 'anti-takeover' provisions. Under Maryland
law and the Trust's Articles, the affirmative vote of the holders of at least a
majority of the votes entitled to be cast is required for the consolidation of
the Trust with another corporation, a merger of the Trust with or into another
corporation (except for certain mergers in which the Trust is the successor), a
statutory share exchange in which the Trust is not the successor, a sale or
transfer of all or substantially all of the Trust's assets, the dissolution of
the Trust and any amendment to the Trust's Articles of Incorporation. In
addition, the affirmative vote of the holders of at least 66 2/3% (which is
higher than that required under Maryland law or the 1940 Act) of the outstanding

Shares of the Trust's capital stock is required generally to authorize any of
the following transactions or to amend the provisions of the Articles relating
to such transactions:

(1) merger, consolidation or statutory share exchange of the Trust with or
into any other corporation;

(2) issuance of any securities of the Trust to any person or entity for
cash;

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<PAGE>
(3) sale, lease or exchange of all or any substantial part of the assets of
the Trust to any entity or person (except assets having an aggregate
market value of less than $1,000,000); or

(4) sale, lease or exchange to the Trust, in exchange for securities of the
Trust, of any assets of any entity or person (except assets having an
aggregate fair market value of less than $1,000,000)

if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of more than 5% of the outstanding shares of
the Trust (a 'Principal Shareholder'). A similar vote also would be required for
any amendment of the Articles to convert the Trust to an open-end investment
company by making any class of the Trust's capital stock a 'redeemable
security,' as that term is defined in the 1940 Act. Such vote would not be
required with respect to any of the foregoing transactions, however, when, under
certain conditions, the board of directors approves the transaction, although in
certain cases involving merger, consolidation or statutory share exchange or
sale of all or substantially all of the Trust's assets or the conversion of the
Trust to an open-end investment company, the affirmative vote of the holders of
a majority of the outstanding Shares would nevertheless be required. Reference
is made to the Articles, on file with the SEC, for the full text of these
provisions.

The provisions of the Articles described above and the Trust's right to
repurchase or make a tender offer for its Shares could have the effect of
depriving the shareholders of opportunities to sell their Shares at a premium
over prevailing market prices by discouraging a third party from seeking to
obtain control of the Trust in a tender offer or similar transaction. See
'Description of the Shares--Share Repurchases and Tender Offers.' The overall
effect of these provisions is to render more difficult the accomplishment of a
merger or the assumption of control by a Principal Shareholder. They provide,
however, the advantage of potentially requiring persons seeking control of the
Trust to negotiate with its management regarding the price to be paid and
facilitating the continuity of the Trust's management, investment objective and
policies. The board of directors of the Trust has considered the foregoing
anti-takeover provisions and concluded that they are in the best interests of
the Trust and its shareholders.

CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND REGISTRAR

State Street Bank and Trust Company, One Heritage Drive, North Quincy,

Massachusetts 02171, serves as custodian of the Trust's assets. PNC Bank,
National Association, whose principal business address is Broad and Chestnut
Streets, Philadelphia, Pennsylvania 19110, is the Trust's transfer and dividend
disbursing agent and registrar.

FURTHER INFORMATION

Further information concerning these securities and the Trust may be found
in the Registration Statement, of which this Prospectus constitutes a part, on
file with the SEC.

33
<PAGE>
TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL INFORMATION

The Table of Contents for the SAI is as follows:

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Policies and Restrictions........................ 1
Investment Limitations...................................... 6
Strategic Transactions...................................... 7
Directors and Officers...................................... 15
Control Persons and Principal Holders of Securities......... 18
Investment Advisory Arrangements............................ 19
Portfolio Transactions...................................... 20
Valuation of Shares......................................... 21
Taxation.................................................... 22
Additional Information...................................... 24
Financial Statements........................................ 25
Appendix A.................................................. A-1
Appendix B.................................................. B-1
</TABLE>

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<PAGE>
APPENDIX A
TYPES OF MORTGAGE-BACKED SECURITIES

The Trust may invest in the following types of Mortgage-Backed Securities.
New types of Mortgage-Backed Securities are developed and marketed from time to
time and, consistent with its investment limitations, the Trust expects to
invest in those new types of Mortgage-Backed Securities that Mitchell Hutchins
believes may assist the Trust in achieving its investment objective. Similarly,
the Trust may invest in Mortgage-Backed Securities issued by new or existing
governmental or private issuers other than those identified in this Appendix and
in the Statement of Additional Information.

GINNIE MAE CERTIFICATES

Ginnie Mae guarantees certain mortgage pass-through certificates ('Ginnie
Mae certificates') that are issued by Private Mortgage Lenders and that
represent ownership interests in individual pools of residential mortgage loans.
These securities are designed to provide monthly payments of interest and
principal to the investor. Timely payment of interest and principal is backed by
the full faith and credit of the United States government. Each mortgagor's
monthly payments to his lending institution on his residential mortgage are
'passed through' to certificateholders, such as the Trust. Mortgage pools
consist of whole mortgage loans or participations in loans. The terms and
characteristics of the mortgage instruments are generally uniform within a pool
but may vary among pools. Lending institutions that originate mortgages for the
pools are subject to certain standards, including credit and other underwriting
criteria for individual mortgages included in the pools.

FANNIE MAE CERTIFICATES

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

FREDDIE MAC CERTIFICATES

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

A-1
<PAGE>
PRIVATE, RTC AND SIMILAR MORTGAGE-BACKED SECURITIES

Mortgage-Backed Securities issued by Private Mortgage Lenders are
structured similarly to the pass-through certificates and CMOs issued or
guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac. Such Mortgage-Backed

Securities may be supported by pools of U.S. government or agency insured or
guaranteed mortgage loans or by other Mortgage-Backed Securities issued by a
government agency or instrumentality, but they generally are supported by pools
of conventional (i.e., non-government guaranteed or insured) mortgage loans.
Since such Mortgage-Backed Securities normally are not guaranteed by an entity
having the credit standing of Ginnie Mae, Fannie Mae or Freddie Mac, they
normally are structured with one or more types of credit enhancement. See
'--Types of Credit Enhancement.' Such credit enhancements do not protect
investors from changes in market value.

The Resolution Trust Corporation ('RTC'), which was organized by the U.S.
government in connection with the savings and loan crisis, holds assets of
failed savings associations as either a conservator or receiver for such
associations, or it acquires such assets in its corporate capacity. These assets
include, among other things, single family and multifamily mortgage loans, as
well as commercial mortgage loans. In order to dispose of such assets in an
orderly manner, RTC has established a vehicle through which it sells
Mortgage-Backed Securities. RTC Mortgage-Backed Securities represent pro rata
interests in pools of mortgage loans that RTC holds or has acquired, as
described above, and are supported by one or more of the types of private credit
enhancements used by Private Mortgage Lenders.

COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE PASS-THROUGHS

CMOs are debt obligations that are collateralized either by mortgage loans,
mortgage pass-through securities or other CMOs (such collateral collectively
being called 'Mortgage Assets'). CMOs may be issued by Private Mortgage Lenders
or by government entities such as Fannie Mae or Freddie Mac. Multi-class
mortgage pass-through securities are interests in trusts that are comprised of
Mortgage Assets and that have multiple classes similar to those in CMOs. Unless
the context indicates otherwise, references herein to CMOs include multi-class
mortgage pass-through securities. Payments of principal and interest on the
Mortgage Assets (and, in the case of CMOs, any reinvestment income thereon)
provide the funds to pay debt service on the CMOs or to make scheduled
distributions on the multi-class mortgage pass-through securities.

In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, also referred to as a 'tranche,' is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of a CMO (other than any PO class) on
a monthly, quarterly or semiannual basis. The principal and interest on the
Mortgage Assets may be allocated among the several classes of a CMO in many
ways. In one structure, payments of principal, including any principal
prepayments, on the Mortgage Assets are applied to the classes of a CMO in the
order of their respective stated maturities or final distribution dates so that
no payment of principal will be made on any class of the CMO until all other

classes having an earlier stated maturity or final distribution date have been
paid in full. In some CMO structures, all or a portion of the interest
attributable to one or more of the CMO classes may be added to the principal
amounts attributable to such classes, rather than passed through to
certificateholders on a current basis, until other classes of the CMO are paid
in full.

Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity

A-2
<PAGE>
date or final distribution date but may be retired earlier. PAC Bonds are a form
of parallel pay CMO designed to provide relatively predictable payments of
principal provided that, among other things, the actual prepayment experience on
the underlying mortgage loans falls within a contemplated range. If the actual
prepayment experience on the underlying mortgage loans is at a rate faster or
slower than the contemplated range or if deviations from other assumptions
occur, principal payments on a PAC Bond may be greater or smaller than
predicted. The magnitude of the contemplated range varies from one PAC Bond to
another; a narrower range increases the risk that prepayments will be greater or
smaller than contemplated.

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

The rate of interest payable on CMO classes may be set at levels that are
either above or below market rates at the time of issuance, so that the
securities will be sold at a substantial premium to, or discount from, par
value. In the most extreme case, one class will be entitled to receive all or a
portion of the interest but none of the principal from the underlying Mortgage
Assets (the interest-only or 'IO' class) and one class will be entitled to
receive all or a portion of the principal but none of the interest (the
principal-only or 'PO' class). IOs and POs may also be created from
Mortgage-Backed Securities that are not CMOs. The yields on IOs, POs and other
Mortgage-Backed Securities that are purchased at a substantial premium or
discount generally are extremely sensitive to the rate of principal payments
(including prepayments) on the underlying Mortgage Assets. If the Mortgage
Assets underlying an IO experience greater than anticipated principal
prepayments, an investor may fail to recoup fully its initial investment even if
the security is government issued or guaranteed or is rated AAA or the

equivalent.

While the market values of particular securities in which the Trust invests
may be volatile, or may become volatile under certain conditions, Mitchell
Hutchins seeks to manage the Trust so that the volatility of the Trust's
portfolio, taken as a whole, is consistent with the Trust's investment
objective. If Mitchell Hutchins incorrectly forecasts interest rate changes or
other factors that may affect the volatility of securities held by the Trust,
the Trust's ability to meet its investment objective may be reduced.

ARM AND FLOATING RATE MORTGAGE-BACKED SECURITIES

ARM Mortgage-Backed Securities represent a right to receive interest
payments at a rate that is adjusted to reflect the interest earned on a pool of
mortgage loans bearing variable or adjustable rates of interest (such mortgage
loans are referred to as 'ARMs'). ARMs generally provide that the borrower's
mortgage interest rate may not be adjusted above a specified lifetime maximum
rate or, in some cases, below a minimum lifetime rate. In addition, certain ARMs
provide for limitations on the maximum amount by which the mortgage interest
rate may adjust for any single adjustment period. ARMs also may provide for
limitations on changes in the maximum amount by which the borrower's monthly
payment may adjust for any single adjustment period. In the event that a monthly
payment is not sufficient to pay the interest accruing on the ARM, any such
excess interest is added to the mortgage loan ('negative amortization'), which
is repaid through future monthly payments. If the monthly payment exceeds the
sum of the interest accrued at the applicable mortgage interest rate and the
principal payment that would have been necessary to amortize the outstanding
principal balance over the remaining term of the loan, the excess reduces the
principal balance of

A-3
<PAGE>
the ARM. Borrowers under ARMs experiencing negative amortization may take longer
to build up their equity in the underlying property and may be more likely to
default.

The rates of interest payable on certain ARMs, and therefore on certain ARM
Mortgage-Backed Securities, are based on indices, such as the one-year constant
maturity Treasury rate, that reflect changes in market interest rates. Others
are based on indices, such as the 11th District Federal Home Loan Bank Cost of
Funds index ('COFI'), that tend to lag behind changes in market interest rates.
The values of ARM Mortgage-Backed Securities supported by ARMs that adjust based
on lagging indices tend to be more sensitive to interest rate fluctuations than
those reflecting current interest rate levels, although the values of such ARM
Mortgage-Backed Securities still tend to be less sensitive to interest rate
fluctuations than fixed-rate securities.

Floating Rate Mortgage-Backed Securities are classes of Mortgage-Backed
Securities that have been structured to represent the right to receive interest

payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. As with ARM
Mortgage-Backed Securities, interest rate adjustments on Floating Rate
Mortgage-Backed Securities may be based on indices that lag behind market
interest rates. Interest rates on Floating Rate Mortgage-Backed Securities
generally are adjusted monthly. Floating Rate Mortgage-Backed Securities are
subject to lifetime interest rate caps, but they generally are not subject to
limitations on monthly or other periodic changes in interest rates or monthly
payments.

TYPES OF CREDIT ENHANCEMENT

To lessen the effect of failures by obligors on Mortgage Assets to make
payments, Mortgage-Backed Securities may contain elements of credit enhancement.
Such credit enhancement falls into two categories: (1) liquidity protection; and
(2) protection against losses resulting after default by an obligor on the
underlying assets and collection of all amounts recoverable directly from the
obligor and through liquidation of the collateral. Liquidity protection refers
to the provisions of advances, generally by the entity administering the pool of
assets (usually the bank, savings association or mortgage banker that
transferred the underlying loans to the issuer of the security), to ensure that
the receipt of payments on the underlying pool occurs in a timely fashion.
Protection against losses resulting after default and liquidation ensures
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches. The Trust will not pay any additional fees for such credit
enhancement, although the existence of credit enhancement may increase the price
of a security. Credit enhancements do not provide protection against changes in
the market value of the security.

Examples of credit enhancement arising out of the structure of the
transaction include 'senior-subordinated securities' (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of 'spread accounts' or 'reserve funds' (where cash or investments,
sometimes funded from a portion of the payments on the underlying assets, are
held in reserve against future losses) and 'over-collateralization' (where the
scheduled payments on, or the principal amount of, the underlying assets exceeds
that required to make payment of the securities and pay any servicing or other
fees). The degree of credit enhancement provided for each issue generally is
based on historical information regarding the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in such a security.

A-4
<PAGE>
SPECIFIED MORTGAGE-BACKED SECURITIES

Specified Mortgage-Backed Securities include IOs, POs (other than IOs and
POs that are PAC Bonds) or inverse floating rate obligations or other types of
Mortgage-Backed Securities that may be developed in the future and that are
determined by Mitchell Hutchins to present types and levels of risk that are
comparable to such IOs, POs and inverse floating rate obligations. An IO is a
class of Mortgage-Backed Security that is entitled to receive all or a portion
of the interest, but none of the principal payments, on the underlying Mortgage
Assets; a PO is a class of Mortgage-Backed Security that is entitled to receive
all or a portion of the principal payments, but none of the interest payments,
on the underlying Mortgage Assets.

Mortgage-Backed Securities that constitute inverse floating rate
obligations are Mortgage-Backed Securities on which the interest rates adjust or
vary inversely to changes in market interest rates. Typically, an inverse
floating rate Mortgage-Backed Security is one of two components created from a
pool of fixed rate mortgage loans. The other component is a variable rate
Mortgage-Backed Security, on which the amount of interest payable is adjusted
directly in accordance with market interest rates. The inverse floating rate
obligation receives the portion of the interest on the underlying fixed-rate
mortgages that is allocable to the two components and that remains after
subtracting the amount of interest payable on the variable rate component. The
market value of an inverse floating rate obligation will be more volatile than
that of a fixed-rate obligation and, like most debt obligations, will vary
inversely with changes in interest rates. Certain of such inverse floating rate
obligations have coupon rates that adjust to changes in market interest rates to
a greater degree than the change in the market rate and accordingly have
investment characteristics similar to investment leverage. As a result, the
market value of such inverse floating rate obligations are subject to greater
risk of fluctuation than other Mortgage-Backed Securities, and such fluctuations
could adversely affect the ability of the Trust to achieve its investment
objective.

A-5
<PAGE>
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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 AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST
OR PAINEWEBBER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE TRUST OR
BY PAINEWEBBER IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.

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

TABLE OF CONTENTS

<TABLE>

<CAPTION>
PAGE
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<S> <C>
Trust Expenses................................. 2
Prospectus Summary............................. 3
Financial Highlights........................... 12
The Trust...................................... 14
The Offering................................... 14
Use of Proceeds................................ 14
Trading History................................ 14
Investment Objective and Policies.............. 15
Risk Factors and Other Investment Practices.... 20
Management of the Trust........................ 26
Dividends and Other Distributions;
Dividend Reinvestment Plan................... 27
Taxation....................................... 29
Description of the Shares...................... 30
Custodian, Transfer and Dividend Disbursing
Agent and Registrar.......................... 33
Further Information............................ 33
Table of Contents of
Statement of Additional Information.......... 34
Appendix A..................................... A-1
</TABLE>
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All-American
Term Trust Inc.

Common Stock

------------------------
PROSPECTUS
------------------------

PaineWebber Incorporated

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

JUNE , 1995

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(Copyright) 1995 PaineWebber, Inc.

[LOGO] Recycled
Paper

<PAGE>
ALL-AMERICAN TERM TRUST INC.
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION

Shares of the Trust's common stock ('Shares') may be offered from time to
time in order to effect over-the-counter ('OTC') secondary market sales by
PaineWebber Incorporated ('PaineWebber') in its capacity as a dealer and
secondary market-maker. PaineWebber may (but is not obligated to) make such a
secondary market.

Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), a wholly
owned subsidiary of PaineWebber, serves as investment adviser and administrator
of the Trust. This Statement of Additional Information is not a prospectus and
should be read only in conjunction with the Trust's current Prospectus, dated
June , 1995. Capitalized terms not otherwise defined herein have the same
meanings as in the Prospectus. A copy of the Prospectus may be obtained by
contacting PaineWebber at 1285 Avenue of the Americas, New York, New York 10019,
or calling 1-800-852-4750. This Statement of Additional Information is dated
June , 1995.

INVESTMENT POLICIES AND RESTRICTIONS

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

YIELD FACTORS AND RATINGS

Moody's Investors Service, Inc. ('Moody's'), Standard & Poor's Ratings
Group ('S&P') and other nationally recognized statistical ratings organizations
('NRSROs') are private services that provide ratings of the credit quality of
debt obligations. The Trust uses these ratings in connection with its
determination as to whether to purchase, sell or hold a security. It should be
emphasized, however, that ratings are general and are not absolute standards of
quality. Consequently, securities with the same maturity, interest rate and
ratings may have different market prices. See Appendix A to this Statement of
Additional Information for a more complete description of S&P's and Moody's
securities ratings. The Trust may invest in non-rated securities determined by
Mitchell Hutchins, at the time of investment, to be of comparable quality to
rated securities in which the Trust may invest. The Trust will be more dependent

upon Mitchell Hutchins' investment analysis of such non-rated securities than in
the case of rated securities. Such securities are included in the computation of
any percentage limitations applicable to comparable rated securities.

SPECIAL CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES AND ASSET-BACKED
SECURITIES

The yield characteristics of Mortgage-Backed Securities and Asset-Backed
Securities differ from those of traditional debt securities. Among the major
differences are that interest and principal payments are made more frequently,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other obligations generally may be prepaid at any
time. As a result, if the securities are
<PAGE>
purchased at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity, while a prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity. Conversely, if
the securities are purchased at a discount, faster than expected prepayments
will increase, while slower than expected prepayments will reduce, yield to
maturity. In general, prepayments are likely to be greater during a period of
decreasing interest rates and such prepayments are likely to be reinvested at
lower interest rates than the yield of the securities prepaid. Accelerated
prepayments on securities purchased at a premium also impose a risk of loss of
principal because the premium may not have been fully amortized at the time the
principal is repaid in full.

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

ARMs also may be subject to a greater rate of prepayments in a declining
interest rate environment. For example, during a period of declining interest
rates, prepayments on ARMs could increase because the availability of fixed
mortgage loans at competitive interest rates may encourage mortgagors to
'lock-in' at a lower interest rate. Conversely, during a period of rising
interest rates, prepayments on ARMs might decrease. The rate of prepayments with
respect to ARMs has fluctuated in recent years.

ARMs underlying ARM Mortgage-Backed Securities generally provide that the
borrower's mortgage interest rate may not be adjusted over a specified lifetime
maximum rate. ARMs also may provide for limitations on the maximum amount by
which the borrower's mortgage interest rate may adjust for any single adjustment
period or by which the borrower's required monthly payment may adjust for any
single adjustment period. Similarly, interest rate changes on Floating Rate
Mortgage-Backed Securities are subject to lifetime interest rate caps. Interest
rates on ARMs generally are reset only at monthly or longer intervals. Interest
rate changes on ARM and Floating Rate Mortgage-Backed Securities may be based on
indices that tend to lag behind changes in market rates. Accordingly, the coupon
rate on such Mortgage-Backed Securities often lags behind changes in short-term
interest rates, which may negatively affect the market value in periods of
increasing interest rates. The market value of ARM and Floating Rate
Mortgage-Backed Securities may be affected adversely if prevailing interest
rates increase beyond the applicable limits on interest rate or interest payment
adjustments. Since the indices applicable to certain ARMs are at times affected
by factors unrelated to changes in prevailing interest rates, the coupon rate on
ARM Mortgage-Backed Securities could, under some circumstances, be adjusted at a
rate or in a direction that does not reflect prevailing interest rates, which
could adversely affect the market value of the securities. In periods of
declining interest rates, the market values of ARM and Floating Rate
Mortgage-Backed Securities generally will increase to a lesser extent, if at
all, than the values of fixed rate Mortgage-Backed Securities.

The rate of interest on Mortgage-Backed Securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, such as Ginnie Mae,
and due to any

2
<PAGE>
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the Mortgage-Backed Securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
Mortgage-Backed Securities and this delay reduces the effective yield to the
holder of such securities.

Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools of
fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a

pool of mortgage-related securities. Conversely, in periods of rising rates, the
rate of prepayment tends to decrease, thereby lengthening the actual average
life of the pool. However, these effects may not be present, or may differ in
degree, if the mortgage loans in the pools have adjustable interest rates or
other special payment terms, such as a prepayment charge. Actual prepayment
experience may cause the yield of Mortgage-Backed Securities to differ from the
assumed average life yield. Reinvestment of prepayments may occur at lower
interest rates than the original investment, thus adversely affecting the yield
of the Trust.

ZERO COUPON MUNICIPAL SECURITIES

As indicated in the Prospectus, the Trust may invest in zero coupon
securities that are issued for various public purposes by or on behalf of
municipal issuers or that are created by investment banks or other private
parties that separate the interest and principal components of an
interest-paying security that has been previously issued by or on behalf of a
municipal issuer (collectively, 'Zero Coupon Municipal Securities').

The two principal classifications of the debt obligations of municipal
issuers are (1) 'general obligation' bonds and (2) 'revenue' bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable only from the revenues derived from a particular facility or class of
facility or project or, in a few cases, from the proceeds of a special excise or
other tax, but are not supported by the issuer's power to levy taxes. There are
variations in the security and credit quality of municipal obligations, both
within a particular classification and between classifications, depending on
numerous factors. The yields and market values of municipal obligations are
dependent on a variety of factors, including general economic and monetary
conditions, money market factors, the condition of the municipal obligation
market, prevailing income tax rates, the size of a particular offering, the
maturity of the obligation and the rating of the issue.

Zero Coupon Municipal Securities do not entitle the holder to periodic
payments prior to maturity and therefore are issued and traded at a discount
from their face or par value. In the absence of financial difficulties of the
issuer, the discount generally decreases as the maturity of the security
approaches. Zero Coupon Municipal Securities can be sold prior to their maturity
dates in the secondary market at the then prevailing market value, which depends
primarily on the time remaining to maturity, prevailing levels of interest rates
and the perceived credit quality of the issuer.

3
<PAGE>
The market prices of Zero Coupon Municipal Securities are more volatile
than the market prices of securities of comparable quality and similar maturity
that pay interest periodically and may respond to a greater degree to
fluctuations in interest rates than do such other securities. Many of the types
of Zero Coupon Municipal Securities in which the Trust may invest are currently
categorized as illiquid under guidelines of the staff of the Securities and
Exchange Commission ('SEC'). See '--Illiquid Securities.'

ASSET-BACKED SECURITIES

Asset-Backed Securities present certain risks that are not presented by
Mortgage-Backed Securities or other securities in which the Trust may invest.
Primarily, these securities do not have the benefit of a security interest in
collateral that is comparable to first lien mortgage loans. Credit card
receivables are generally unsecured, and the debtors on such receivables are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set-off certain amounts owed
on the credit cards, thereby reducing the balance due. Automobile receivables
generally are secured by automobiles rather than residential real property. Most
issuers of automobile receivables permit the loan servicers to retain possession
of the underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the Asset-Backed Securities. In addition,
because of the large number of vehicles involved in a typical issuance and
technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in the underlying
automobiles. Therefore, there is the possibility that, in some cases, recoveries
on repossessed collateral may not be available to support payments on these
securities.

CONVERTIBLE SECURITIES

As indicated in the Prospectus, the Trust may invest in convertible
securities. The value of a convertible security is a function of its 'investment
value' (determined by its yield compared with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
'conversion value' (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors may also have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value and
generally the conversion value decreases as the convertible security approaches
maturity. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition, a
convertible security generally will sell at a premium over its conversion value
determined by the extent to which investors place value on the right to acquire
the underlying common stock while holding a fixed income security.

The Trust has no current intention of converting any convertible securities
it may own into equity or holding them as equity upon conversion, although it
may do so for temporary purposes. A convertible security may be subject to
redemption at the option of the issuer at a price established in the convertible
security's governing instrument. If a convertible security held by the Trust is
called for redemption, the Trust will be required to permit the issuer to redeem
the security, convert it into the underlying common stock or sell it to a third
party. Convertible debt securities will be considered to be Corporate Debt
Securities for purposes of the percentage limitations relating to the ratings of

Corporate Debt Securities in which the Trust may invest.

4
<PAGE>
ILLIQUID SECURITIES

As indicated in the Prospectus, the Trust may invest up to 25% of its total
assets (determined at the time of investment) in illiquid securities. 'Illiquid
securities' for this purpose are securities that cannot be disposed of within
seven days at approximately the amount at which the Trust has valued the
securities and includes, among other things, certain Zero Coupon Municipal
Securities, purchased OTC options, repurchase agreements maturing in more than
seven days, certain IOs and POs and restricted securities other than Rule 144A
securities and commercial paper that Mitchell Hutchins has determined to be
liquid pursuant to guidelines established by the Trust's board of directors.

Restricted securities may be sold only in privately negotiated or Rule 144A
transactions or in public offerings with respect to which a registration
statement is in effect under the 1933 Act. Where registration is required, the
Trust may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Trust may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Trust might obtain a less favorable price than prevailed when it
decided to sell. See 'Risk Factors and Other Investment Practices--Illiquid
Securities' in the Prospectus.

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

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

prices.

The Trust's board of directors has delegated the function of making
day-to-day determinations of liquidity to Mitchell Hutchins, pursuant to
guidelines approved by the board. Mitchell Hutchins takes into account a number
of factors in reaching liquidity decisions, including but not limited to (1) the
frequency of trades for the security, (2) the number of dealers that make quotes
for the security, (3) the number of dealers that have undertaken to make a
market in the security, (4) the number of other potential purchasers and (5) the
nature of the security and how trading is effected (e.g., the time needed to
sell the security, how bids are solicited and the mechanics of transfer).
Mitchell Hutchins monitors the liquidity of restricted securities in the Trust's
portfolio and reports periodically on such decisions to the board of directors.

5
<PAGE>
LENDING OF PORTFOLIO SECURITIES

Although the Trust has no current intention to do so, the Trust is
authorized to lend portfolio securities with a value of up to 33 1/3% of its
total assets (determined at the time of the transaction) to broker-dealers or
institutional investors that Mitchell Hutchins deems qualified, but only when
the borrower maintains with the Trust's custodian collateral, either in cash or
money market instruments, in an amount at least equal to the market value of the
securities loaned, plus accrued interest and dividends, determined on a daily
basis and adjusted accordingly. In determining whether to lend securities to a
particular broker-dealer or institutional investor, Mitchell Hutchins will
consider, and during the period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. The Trust will
retain authority to terminate any loans at any time. The Trust may pay
reasonable administrative and custodial fees in connection with a loan and may
pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Trust will
receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest or other distributions on the
securities loaned. The Trust will regain record ownership of loaned securities
to exercise beneficial rights, such as voting and subscription rights and rights
to dividends, interest or other distributions, when regaining such rights is
considered by Mitchell Hutchins to be in the Trust's interest.

INVESTMENT LIMITATIONS

All investment policies of the Trust may be changed by the Trust's board of
directors without shareholder approval, except for the Trust's investment
objective and the following fundamental investment limitations, which cannot be
changed without the affirmative vote of the lesser of (a) more than 50% of the
outstanding Shares of the Trust or (b) 67% or more of such Shares present at a
shareholders' meeting if more than 50% of the outstanding Shares are represented
at the meeting in person or by proxy. If a percentage restriction is adhered to
at the time of an investment or transaction, a later increase or decrease in
percentage resulting from a change in values of portfolio securities or the
amount of total assets will not be considered a violation of any of the
following limitations or of any of the Trust's investment policies. As

fundamental investment limitations, the Trust may not:

(1) issue senior securities or borrow money from banks or other
entities (including borrowings through reverse repurchase agreements and
mortgage dollar rolls), in excess of 33 1/3% of the Trust's total assets
(including the amount of borrowings and senior securities issued, but
reduced by any liabilities and indebtedness not constituting senior
securities), except that the Trust may borrow up to an additional 5% of its
total assets (not including the amount borrowed) for temporary or emergency
purposes;

(2) purchase the securities of any one issuer if as a result more than
5% of its total assets would be invested in the securities of that issuer,
provided, that securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities are not subject to this limitation and
further provided that up to 25% of the Trust's total assets may be invested
without regard to this 5% limitation;

(3) make an investment in any one industry if the investment would
cause the aggregate value of all the Trust's investments in such industry
to equal 25% or more of the Trust's total assets; provided that this
limitation shall not apply to: (a) investments in securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities; and
(b) securities issued by Municipal Issuers other than those backed only by
the assets and revenues of a non-governmental entity;

6
<PAGE>
(4) purchase securities on margin, except for short-term credits
necessary for clearance of portfolio transactions, and except that the
Trust may make margin deposits in connection with its use of options,
futures contracts and options on futures contracts;

(5) engage in the business of underwriting securities of other
issuers, except to the extent that, in connection with the disposition of
portfolio securities, the Trust may be deemed an underwriter under federal
securities laws and except that the Trust may write options;

(6) make short sales of securities or maintain a short position,
except that the Trust may maintain short positions in connection with its
use of Strategic Transactions and may sell short 'against the box';

(7) purchase or sell real estate (including real estate limited
partnership interests), provided that the Trust may invest in securities
secured by real estate or interests therein or issued by entities that
invest in real estate or interests therein, and provided further that the
Trust may exercise rights under agreements relating to such securities,
including the right to enforce security interests and to liquidate real
estate acquired as a result of such enforcement;

(8) purchase or sell commodities or commodity contracts, except that
the Trust may engage in Strategic Transactions; or

(9) make loans, except through loans of portfolio instruments,

mortgage dollar rolls and repurchase agreements, provided that for purposes
of this restriction the acquisition of bonds, debentures or other debt
instruments or interests therein and investment in government obligations,
short-term commercial paper, certificates of deposit and bankers'
acceptances shall not be deemed to be the making of a loan.

For purposes of fundamental investment limitation (2) above,
Mortgage-Backed Securities and Asset-Backed Securities will not be considered to
have been issued by the same issuer by reason of such securities having the same
sponsor, and Mortgage-Backed Securities and Asset-Backed Securities issued by a
finance subsidiary or other single purpose subsidiary of a corporation that are
not guaranteed by the parent corporation will be considered to be issued by a
separate issuer from its parent corporation.

STRATEGIC TRANSACTIONS

As discussed in the Prospectus, the Trust may purchase and sell a variety
of financial instruments ('Strategic Transactions'), including certain options,
futures contracts (sometimes referred to as 'futures'), options on futures
contracts and interest rate protection transactions, for the purposes described
in the Prospectus under 'Risk Factors and Other Investment Practices--Strategic
Transactions.'

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

7
<PAGE>
Conversely, a long hedge is a Strategic Transaction intended partially or
fully to offset potential increases in the acquisition cost of one or more
investments that the Trust intends to acquire. Thus, in a long hedge the Trust
takes a position in a Strategic Transaction the price of which is expected to
move in the same direction as the price of the prospective investment being
hedged. For example, the Trust might purchase a call option on a security it
intends to purchase in order to hedge against an increase in the cost of the
security. If the price of the security increased above the exercise price of the
call, the Trust could exercise the call and thus limit its acquisition cost to
the exercise price plus the premium paid and transaction costs. Alternatively,
the Trust might be able to offset the price increase by closing out an
appreciated call option and realizing a gain.

The use of Strategic Transactions is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they are traded,
the Commodity Futures Trading Commission ('CFTC') and may become subject to
regulation by various state regulatory authorities. In addition, the Trust's
ability to use Strategic Transactions will be limited by tax considerations. See
'Taxation.'

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

SPECIAL RISKS OF STRATEGIC TRANSACTIONS

The use of Strategic Transactions involves special considerations and
risks, as described below. Risks pertaining to particular Strategic Transactions
are described in the sections that follow.

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

(2) There might be imperfect correlation, or even no correlation,
between price movements of Strategic Transactions and price movements of
the related portfolio positions. For example, if the value of Strategic
Transactions used to hedge related portfolio positions against market
decline increased by less than the decline in value of the related
portfolio positions, the strategy would not be fully successful. Such a
lack of correlation might occur due to factors unrelated to the value of
the related portfolio positions, such as speculative or other pressures on
the markets in which Strategic Transactions are traded. The effectiveness
of Strategic Transactions involving indices will depend on the degree of
correlation between price movements in the indices and price movements in
the related portfolio positions.

(3) Strategic Transactions, if successful, can reduce risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the related portfolio positions. However, Strategic
Transactions can also reduce opportunity for gain by offsetting the
positive effect of favorable price movements in the positions. For example,
if the Trust entered into a Strategic Transaction to hedge a related
portfolio position because Mitchell Hutchins projected a decline in the
price of that position, and the price of that position increased instead,
the gain from that increase might be wholly or partially offset by a
decline in the price of the Strategic Transaction. Moreover, if the price
of the Strategic Transaction declined by more than the increase in the

price of the position, the Trust could suffer a loss. In either

8
<PAGE>
such case, the Trust would have been in a better position had it not
entered into the Strategic Transaction at all.

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

COVER FOR STRATEGIC TRANSACTIONS

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

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

OPTIONS

The Trust may purchase and write (sell) put and call options on U.S.

government securities, Mortgage-Backed Securities and corporate debt securities.
The Trust also may purchase and sell put and call options on securities indices
and other financial indices. The purchase of call options can serve as a long
hedge, and the purchase of put options can serve as a short hedge. Writing put
or call options can enable the Trust to enhance income by reason of the premiums
paid by the purchasers of such options. However, if the market price of the
security underlying a put option declines to less than the exercise price on the
option, minus the premium received, the Trust would expect to suffer a loss.
Writing covered call options can serve as a limited short hedge, because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the Trust will be obligated to
sell the security at less than its market value. If the covered call option is
an OTC option, all or a portion of the securities or other assets used as cover
would be considered illiquid. See 'Risk Factors and Other Investment
Practices--Illiquid Securities' in the Prospectus.

9
<PAGE>
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised have
no value.

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

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

Generally, OTC options on debt securities are European-style options. This
means that the option is only exercisable immediately prior to its expiration.
This is the contrast to American-style options, which are exercisable at any
time prior to the expiration date of the option.

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

If the Trust were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by the Trust would result in the Trust being unable to sell the
investment used as cover for the written option until the option expires or is
exercised.

Options on indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an option
on an index depends on price movements in the instruments making up the market,
market segment, industry or other composite on

10
<PAGE>
which the underlying index is based, rather than price movements in individual
securities, as is the case with respect to options on securities.

FUTURES

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

Futures strategies also can be used to manage the average duration of the
Trust's portfolio. If Mitchell Hutchins wishes to shorten the average duration

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

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

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

Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Trust intends to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time. Secondary markets for options on futures are currently in the
development stage, and the Trust will not trade options or futures on any
exchange on board of trade unless, in Mitchell Hutchins' opinion, the liquidity
risks for such options are not greater than the corresponding risks for futures.

11
<PAGE>
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of

unfavorable positions.

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

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

GUIDELINES FOR FUTURES AND RELATED OPTIONS

In view of the risks involved in using the futures and options strategies
that are described above, the Trust does not purchase or sell futures contracts
or related options if, immediately thereafter, the sum of the amount of initial
margin deposits on the Trust's existing futures positions and initial margin
deposits and premiums paid for related options would exceed 5% of the Trust's
total assets; however, in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. This guideline may be modified by the Trust without shareholder
vote. For purposes of this guideline, options on futures contracts traded on a
commodities exchange are considered 'related options.' Adoption of this
guideline will not limit the percentage of the Trust's assets at risk to 5%.

COMBINED TRANSACTIONS

The Trust may enter into multiple transactions, including multiple options
transactions, multiple futures transactions and any combination of futures and
options transactions ('component' transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
Mitchell Hutchins, it is in the best interests of the Trust to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on Mitchell Hutchins' judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.

12
<PAGE>
TYPES OF INSTRUMENTS

The instruments used by the Trust in effecting Strategic Transactions
include the following:

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

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

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

INTEREST RATE FUTURES CONTRACTS--An interest rate futures contract is a
bilateral agreement pursuant to which one party agrees to accept and the other
party agrees to make delivery of the specific type of debt security called for
in the contract at a specified future time and at a specified price.

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

accompanied by delivery of the accumulated balance, which represents the amount
by which the market price of the futures contract exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option on
the future. The writer of an option, upon exercise, will assume a short position
in the case of a call, and a long position in the case of put.

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

13
<PAGE>
level on predetermined dates or during a specified time period. Interest rate
collar transactions involve an agreement between two parties in which the first
party makes payments to the counterparty when a designated market interest rate
goes above a designated level on predetermined dates or during a specified time
period, and the counterparty makes payments to the first party when a designated
market interest rate goes below a designated level on predetermined dates or
during a specified time period.

The Trust would enter into interest rate protection transactions to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against any increase in the price of securities the Trust
anticipates purchasing at a later date or to effectively fix the rate of
interest that it pays on one or more borrowings or series of borrowings. The
Trust would use these transactions as a hedge and not as a speculative
investment. Interest rate protection transactions are subject to risks
comparable to those described above with respect to other hedging strategies.

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

respect to any interest rate caps, collars and floors that are written by the
Trust.

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

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

<PAGE>
DIRECTORS AND OFFICERS

The overall management of the business and affairs of the Trust is vested
with its board of directors. The board of directors approves all significant
agreements between the Trust and persons or companies furnishing services to it,
including the Trust's agreements with its investment adviser and administrator,
custodian and transfer and dividend disbursing agent and registrar. The
day-to-day operations of the Trust are delegated to its officers and to Mitchell
Hutchins, subject always to the investment objective and policies of the Trust
and to general supervision by the Trust's board of directors.

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

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH THE TRUST OTHER DIRECTORSHIPS
- --------------------------------- ------------------- --------------------------------------------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.**; 68 Director and Mr. Bewkes is a director of Paine Webber Group Inc. ('PW
Chairman of the Group') (holding company of PaineWebber and Mitchell
Board of Directors Hutchins) and a consultant to PW Group. Prior to 1988,
he was chairman of the board, president and chief
executive officer of American Bakeries Company. Mr.
Bewkes is also a director of Interstate Bakeries
Corporation and a director or trustee of 26 other
investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.

John R. Torell III; 55 Director Mr. Torell is chairman of Torell Management, Inc.
767 Fifth Avenue (financial advisory firm) (since 1989). He is the
Suite 4605 former chairman and chief executive officer of Fortune
New York, NY 10153 Bancorp (since 1990 and 1991, respectively). He is the
former chairman, president and chief executive officer
of CalFed, Inc. (savings association) (1988 to 1989)
and former president of Manufacturers Hanover Corp.
(bank) (prior to 1988). Mr. Torell is also a director
of American Home Products Corp., Volt Information
Sciences Inc. and a director or trustee of nine other
investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.

William D. White; 60 Director Mr. White is retired. From February 1989 through March
P.O. Box 199 1994, he was president of the National League of
Upper Black Eddy, PA Professional Baseball Clubs. Prior to 1989, he was a
18972 television sportscaster for WPIX-TV, New York. Mr.
White is also a director or trustee of nine other
investment companies for which Mitchell Hutchins
serves as investment adviser.
</TABLE>

15
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH THE TRUST OTHER DIRECTORSHIPS
- --------------------------------- ------------------- --------------------------------------------------------
Paul B. Guenther; 54 President Mr. Guenther is a director of PaineWebber and Mitchell
Hutchins and president and a director of PW Group. Mr.
Guenther is also president of 26 and a director of 17
other investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
<S> <C> <C>

Teresa M. Boyle; 36 Vice President Ms. Boyle is a first vice president and manager --
advisory administration of Mitchell Hutchins. Prior to
November 1993, she was Compliance Manager of Hyperion
Capital Management, Inc., an investment advisory firm.
Prior to April 1993, Ms. Boyle was a vice president
and manager -- legal administration of Mitchell
Hutchins. Ms. Boyle is also a vice president of 39
other investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.

Joan L. Cohen; 30 Vice President and Ms. Cohen is a vice president and attorney of Mitchell
Assistant Secretary Hutchins. Prior to December 1993, she was an associate
at the law firm of Seward & Kissel. Ms. Cohen is also
a vice president and assistant secretary of 26 other
investment companies for which Mitchell Hutchins or

PaineWebber serves as investment adviser.

Mary B. King; 31 Vice President Mrs. King is a first vice president and a portfolio
manager of Mitchell Hutchins. Mrs. King is also a vice
president of one other investment company for which
Mitchell Hutchins or PaineWebber serves as investment
adviser.

Ann E. Moran; 37 Vice President and Ms. Moran is a vice president of Mitchell Hutchins. Ms.
Assistant Treasurer Moran is also a vice president and assistant treasurer
of 39 other investment companies for which Mitchell
Hutchins or PaineWebber serves as investment adviser.

Dianne E. O'Donnell; 42 Vice President and Ms. O'Donnell is a senior vice president and senior
Secretary associate general counsel of Mitchell Hutchins. Ms.
O'Donnell is also a vice president and secretary of 39
other investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
</TABLE>

16
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH THE TRUST OTHER DIRECTORSHIPS
- --------------------------------- ------------------- --------------------------------------------------------
Victoria E. Schonfeld; 44 Vice President Ms. Schonfeld is a managing director and general counsel
of Mitchell Hutchins. From April 1990 to May 1994, she
was a partner in the law firm of Arnold & Porter.
Prior to April 1990, she was a partner in the law firm
of Shereff, Friedman, Hoffman & Goodman. Ms. Schonfeld
is also a vice president of 39 other investment
companies for which Mitchell Hutchins or PaineWebber
serves as investment adviser.
<S> <C> <C>

Paul H. Schubert; 32 Vice President and Mr. Schubert is a vice president of Mitchell Hutchins.
Assistant Treasurer From August 1992 to August 1994, he was a vice
president at BlackRock Financial Management, L.P.
Prior to August 1992, he was an audit manager with
Ernst & Young LLP. Mr. Schubert is also a vice
president and assistant treasurer of 39 other
investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.

Martha J. Slezak; 32 Vice President and Ms. Slezak is a vice president of Mitchell Hutchins.
Assistant Treasurer From September 1991 to April 1992, she was
fund-raising director for a U.S. Senate campaign.
Prior to September 1991, she was a tax manager with
Arthur Andersen & Co. Ms. Slezak is also a vice
president and assistant treasurer of 39 other

investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.

Julian F. Sluyters; 34 Vice President and Mr. Sluyters is a senior vice president and the director
Treasurer of the mutual fund finance division of Mitchell
Hutchins. Prior to 1991, he was an audit senior
manager with Ernst & Young. Mr. Sluyters is also a
vice president and treasurer of other 39 investment
companies for which Mitchell Hutchins or PaineWebber
serves as investment adviser.

Gregory K. Todd; 38 Vice President and Mr. Todd is a first vice president and associate general
Assistant Secretary counsel of Mitchell Hutchins. Prior to 1993, he was a
partner in the law firm of Shereff, Friedman, Hoffman
& Goodman. Mr. Todd is also a vice president and
assistant secretary of 39 other investment companies
for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
</TABLE>

(Footnotes on next page)

17
<PAGE>
(Footnotes from previous page)
- ------------------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mr. Bewkes is an 'interested person' of the Trust, as defined in the 1940
Act, by virtue of his position with PW Group, the parent company of PaineWebber
and Mitchell Hutchins.

The Trust pays directors who are not 'interested persons' of the Trust
$1,500 annually and $250 per meeting of the board of directors or any committee
thereof. Directors also are reimbursed for any expenses incurred in attending
meetings. Because Mitchell Hutchins performs substantially all of the services
necessary for the operation of the Trust, the Trust requires no employees. No
officer, director or employee of PaineWebber or Mitchell Hutchins presently
receives any compensation from the Trust for acting as a director or officer.

COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT ESTIMATED FROM THE TRUST
AGGREGATE BENEFITS ACCRUED ANNUAL AND THE TRUST
NAME OF COMPENSATION AS PART OF THE BENEFITS UPON COMPLEX PAID
PERSON, POSITION FROM THE TRUST* TRUST'S EXPENSES RETIREMENT TO DIRECTORS +

- --------------------------------------------- --------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
E. Garrett Bewkes, Jr.,
Director and chairman of the board of
directors.................................. -- -- -- --
John R. Torell III,
Director................................... $2,875 -- -- $39,750
William D. White,
Director................................... 2,375 -- -- 33,250
</TABLE>

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

* Represents fees paid to each director during the fiscal year ended January 31,
1995.

+ Represents total compensation paid to each director by the Trust Complex
during the twelve months ended December 31, 1994.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of , 1995, Cede & Co. (the nominee of The Depository Trust
Company, a securities depository) owned of record of the Shares or
% of the outstanding Shares. To the knowledge of the Trust, no person is the
beneficial owner of 5% or more of its Shares.

As of , 1995, the directors and officers of the Trust as a group
beneficially owned less than 1% of the Trust's outstanding Shares.

18
<PAGE>
INVESTMENT ADVISORY ARRANGEMENTS

Pursuant to the Investment Advisory and Administration Contract ('Mitchell
Hutchins Contract'), Mitchell Hutchins provides a continuous investment program
for the Trust and makes investment decisions and places orders to buy, sell or
hold particular securities. As administrator, Mitchell Hutchins supervises all
matters relating to the operation of the Trust and obtains for its corporate,
administrative and clerical personnel, office space, equipment and services,
including arranging for the periodic preparation, updating, filing and
dissemination of proxy materials, tax returns and reports to the Trust's board
of directors, shareholders and regulatory authorities.

In addition to the payments to Mitchell Hutchins under the Mitchell
Hutchins Contract described above, the Trust pays certain other costs,
including: (1) the costs (including brokerage commissions) of securities
purchased or sold by the Trust and any losses incurred in connection therewith;

(2) expenses incurred on behalf of the Trust by Mitchell Hutchins; (3)
organizational expenses of the Trust, whether or not advanced by Mitchell
Hutchins; (4) filing fees and expenses relating to the registration and
qualification of the Shares under federal and state securities laws; (5) fees
and salaries payable to directors who are not interested persons of the Trust or
Mitchell Hutchins; (6) all expenses incurred in connection with the directors'
services, including travel expenses; (7) taxes (including any income or
franchise taxes) and governmental fees; (8) costs of any liability,
uncollectible items of deposit and any other insurance or fidelity bonds; (9)
any costs, expenses or losses arising out of a liability of or claims for
damages or other relief asserted against the Trust for violation of any law;
(10) legal, accounting and auditing expenses, including legal fees of special
counsel for the independent directors; (11) charges of custodians, transfer
agents and other agents; (12) costs of preparing Share certificates; (13)
expenses of printing and distributing reports to shareholders; (14) any
extraordinary expenses (including fees and disbursements of counsel) incurred by
the Trust; (15) fees, voluntary assessments and other expenses incurred in
connection with membership in investment company organizations; (16) costs of
mailing and tabulating proxies and costs of meetings of shareholders, the board
and any committees thereof; (17) the costs of investment company literature and
other publications provided to directors and officers; (18) costs of mailing,
stationery and communications equipment; (19) interest charges on borrowings;
and (20) fees and expenses of listing and maintaining any listing of the Shares
on the NYSE or any other national securities exchange.

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

For the fiscal year ended January 31, 1995 and for the fiscal period March
1, 1993 (commencement of operations) to January 31, 1994, the Trust paid or
accrued to Mitchell Hutchins $1,715,693 and $1,703,857, respectively, in
investment advisory and administration fees.

19
<PAGE>
PORTFOLIO TRANSACTIONS

Subject to policies established by the board of directors, Mitchell
Hutchins is responsible for the execution of the Trust's portfolio transactions
and the allocation of brokerage transactions. The securities in which the Trust
invests generally are traded on a 'net' basis without a stated commission,
through dealers acting for their own account and not as brokers. With respect to

portfolio securities traded on the OTC market, the Trust engages primarily in
transactions with dealers unless a better price or execution could be obtained
by using a broker. Prices paid to dealers generally include a 'spread,' which is
the difference between the prices at which the dealer is willing to purchase and
sell a specific security at that time. In executing portfolio transactions,
Mitchell Hutchins seeks to obtain the best net results for the Trust, taking
into account such factors as the price (including the applicable brokerage
commission or dealer spread), size of the order, difficulty of execution and
operational facilities of the firm involved. While Mitchell Hutchins generally
seeks competitive commission rates, payment of the lowest commission may not
necessarily be consistent with obtaining the best net results. For the fiscal
year ended January 31, 1995 and for the fiscal period March 1, 1993
(commencement of operations) to January 31, 1994, the Trust paid no brokerage
commissions.

In placing orders with brokers and dealers, Mitchell Hutchins attempts to
obtain the best net price and the most favorable execution of their orders.
Consistent with applicable legal requirements, Mitchell Hutchins may seek to
direct portfolio transactions in arrangements designed to reduce the Trust's
operating expenses. Mitchell Hutchins may, in its discretion, purchase and sell
portfolio securities to and from brokers and dealers who provide the Trust with
research, analysis, statistical, pricing advice and similar services. Mitchell
Hutchins may pay to those brokers, in return for such services, a higher
commission than would have been charged by other brokers, provided that Mitchell
Hutchins determines in good faith that such commission is reasonable in terms
either of that particular transaction or of the overall responsibility of
Mitchell Hutchins to the Trust and its other clients and that the total
commissions paid by the Trust will be reasonable in relation to the benefits to
the Trust over the long term. For purchases or sales with broker-dealer firms
which act as principal, Mitchell Hutchins seeks best execution. Although
Mitchell Hutchins may receive certain research or execution services in
connection with these transactions, Mitchell Hutchins will not purchase
securities at a higher price or sell securities at a lower price than would
otherwise be paid if no weight was attributed to the research services provided
by the executing dealer. Moreover, Mitchell Hutchins will not enter into any
explicit soft dollar arrangements relating to principal transactions and will
not receive in principal transactions the types of services which could be
purchased for hard dollars. Mitchell Hutchins may engage in agency transactions
in OTC equity and debt securities in return for research and execution services.
These transactions are entered into only in compliance with procedures ensuring
that the transaction (including commissions) is at least as favorable as it
would have been if effected directly with a market-maker that did not provide
research for execution services. These procedures include Mitchell Hutchins
receiving multiple quotes from dealers before executing the transaction on an
agency basis.

Research services furnished by brokers or dealers through which or with
which the Trust effects securities transactions may be used by Mitchell Hutchins
in advising other funds or accounts it advises and, conversely, research
services furnished to Mitchell Hutchins in connection with other funds or
accounts that Mitchell Hutchins advises may be used in advising the Trust.

Although it is not possible to place a dollar value on these services, it is the
opinion of Mitchell Hutchins that the receipt of such services should not reduce
its overall research expenses. Information and research received from brokers
and dealers is in addition to, and not in lieu of, the services required to be
performed by Mitchell Hutchins under the Mitchell Hutchins Contract.

20
<PAGE>
The Trust has no obligation to deal with any broker or group of brokers in
the execution of portfolio transactions. The Trust contemplates that, consistent
with obtaining the best net results, brokerage transactions may be conducted
through Mitchell Hutchins or any of its affiliates, including PaineWebber. The
Trust's board of directors has adopted procedures in conformity with Rule 17e-1
under the 1940 Act to ensure that all brokerage commissions paid to Mitchell
Hutchins or any of its affiliates are reasonable and fair. Specific provisions
in the Mitchell Hutchins Contract authorize Mitchell Hutchins and any of its
affiliates which is a member of a national securities exchange to effect
portfolio transactions for the Trust on such exchange and to retain compensation
in connection with such transactions. Any such transactions will be effected and
related compensation paid only in accordance with applicable SEC regulations.

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

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

VALUATION OF SHARES

The net asset value of the Shares is determined weekly on the second to
last day in each week which the NYSE is open (or on such other day as may be
determined by the Trust's board of directors) and also is determined monthly as
of the close of regular trading on the NYSE on the last day of the month on
which the NYSE is open for trading. The net asset value per Share is computed by
dividing the value of the securities held by the Trust plus any cash or other
assets (including interest and dividends accrued but not yet received and earned

discount) minus all liabilities (including accrued expenses) by the total number
of Shares outstanding at such time.

When market quotations are readily available, the Trust's debt securities
are valued based upon those quotations. When market quotations for options and
futures positions held by the Fund are readily available, those positions are
valued based upon such quotations. Market quotations generally are not available
for options traded in the OTC market. When market quotations for options and
futures positions or any other securities and assets of the Trust are not
readily available, they are valued at fair value as determined in good faith by
or under the direction of the board of directors, generally based upon
appraisals received from a pricing service using a computerized matrix system or
derived from information concerning the security or similar securities received
from recognized dealers in those securities. Notwithstanding the above, debt
securities with maturities of 60 days or less generally are valued at amortized
cost if their original term to maturity was 60 days or less, or by amortizing
the difference between their fair value as of the 61st day prior to

21
<PAGE>

maturity and their maturity value if their original term to maturity exceeded 60
days, unless in either case the board of directors or its delegate determines
that this does not represent fair value. It should be recognized that judgment
plays a greater role in valuing lower rated Corporate Debt Securities and in
valuing securities that are not actively traded because there is less reliable,
objective data available.

TAXATION

General. In order to continue to qualify for treatment as a regulated
investment company ('RIC') under the Internal Revenue Code, the Trust must
distribute to its shareholders for each taxable year at least 90% of the sum of
its investment company taxable income (consisting generally of taxable net
investment income and net short-term capital gain) plus its net interest income
excludable from gross income under section 103(a) of the Internal Revenue Code
('tax-exempt income') ('Distribution Requirement') and must meet several
additional requirements. Among these requirements are the following: (1) the
Trust must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of securities, or other income (including gains
from options or futures contracts) derived with respect to its business of
investing in securities ('Income Requirement'); (2) the Trust must derive less
than 30% of its gross income each taxable year from the sale or other
disposition of securities, options or futures contracts held for less than three
months ('Short-Short Limitation'); (3) at the close of each quarter of the
Trust's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. government securities, securities of
other RICs and other securities, with those other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the value of the
Trust's total assets; and (4) at the close of each quarter of the Trust's

taxable year, not more than 25% of the value of its total assets may be invested
in securities (other than U.S. government securities or the securities of other
RICs) of any one issuer. If the Trust fails to qualify for treatment as a RIC
for any taxable year, it would be taxed as an ordinary corporation on its
taxable income for that year (even if that income was distributed to its
shareholders) and all distributions out of its earnings and profits would be
taxable to its shareholders as dividends (that is, ordinary income).

The Trust will be subject to a nondeductible 4% excise tax ('Excise Tax')
to the extent it fails to distribute by the end of any calendar year at least
98% of the sum of its ordinary income (not including tax-exempt income) for that
year and its capital gain net income for the one-year period ending on October
31 of that year, plus certain other amounts. For these purposes, any taxable
income retained by the Trust, and on which it pays federal income tax, will be
treated as having been distributed.

The Trust intends to distribute a sufficient amount of its net investment
income each year so as to satisfy the Distribution Requirement and to avoid
imposition of the Excise Tax. The Trust may decide, however, to retain for
reinvestment all or a portion of its net capital gain (the excess of net
long-term capital gain over short-term capital loss). If it did so, the
undistributed gain would be taxed to the Trust at corporate income tax rates in
addition to possibly being subject to the Excise Tax; the tax consequences to
its shareholders are described under 'Taxation' in the Prospectus.

Any capital losses that the Trust may realize could only be used to offset
capital gains and could not be used to reduce the Trust's ordinary income. Thus,
if the Trust sustained a net capital loss in a given taxable year, its net asset
value would be reduced thereby, but the amount the Trust would be required to
distribute to satisfy the Distribution Requirement would not be decreased. Net
capital losses that the Trust cannot use in one taxable year may be carried
forward by it for eight years. If any capital losses have not been used by the
time the Trust terminates, the potential benefits of those capital losses will
be lost.

22
<PAGE>
While any obligations constituting senior securities are outstanding, the
Trust may not declare any cash dividend or other distribution on its Shares
unless, at the time of the declaration, the Trust satisfies certain dividend
payment and asset coverage requirements. See 'Dividends and Other Distributions;
Dividend Reinvestment Plan' in the Prospectus. Any such suspension of
distributions on the Shares could prevent the Trust from satisfying the
Distribution Requirement and avoiding imposition of the Excise Tax.

Distributions. A participant in the Trust's Dividend Reinvestment Plan
will be treated as having received a distribution in the amount of the cash used
to purchase Shares on his behalf, including a pro rata portion of the brokerage
fees incurred by the Transfer Agent. See 'Dividends and Other Distributions;
Dividend Reinvestment Plan' in the Prospectus.

Zero Coupon Municipal Securities and Payment-In-Kind Securities. The Trust
may acquire Zero Coupon Municipal Securities (or other securities, such as PO

classes of Mortgage-Backed Securities) that are issued with original issue
discount. As the holder of such a security, the Trust would have to include in
its gross income the original issue discount that accrues on the security for
the taxable year, even if the Trust receives no payment on the security during
the year. Because the Trust annually must distribute (1) at least 90% of its net
investment income, including any accrued original issue discount (even if
tax-exempt income), to satisfy the Distribution Requirement and (2)
substantially all of its non-tax-exempt income to avoid imposition of the Excise
Tax, the Trust may be required in a particular year to distribute as a dividend
an amount that is greater than the total amount of cash it actually receives.
Those distributions will be made from the Trust's cash assets, or from the
proceeds of sales of portfolio securities or from borrowings, if necessary. The
Trust may realize capital gains or losses from those sales, which would increase
or decrease the Trust's investment company taxable income or net capital gain.
In addition, any such gains may be realized on the disposition of securities
held for less than three months. Because of the Short-Short Limitation, any such
gains would reduce the Trust's ability to sell other securities, or options or
futures, held for less than three months that it might wish to sell in the
ordinary course of its portfolio management. The Trust will not invest in Zero
Coupon Municipal Securities the interest on which is a tax preference item for
purposes of the federal alternative minimum tax.

Strategic Transactions. The use of Strategic Transactions, such as selling
(writing) and purchasing options and futures, involves complex rules that will
determine for income tax purposes the character and timing of recognition of the
gains and losses the Trust realizes in connection therewith. These rules also
may require the Trust to 'mark to market' (that is, treat as sold for their fair
market value) at the end of each taxable year certain positions in its
portfolio, which may cause the Trust to recognize income without receiving cash
with which to make distributions necessary to satisfy the Distribution
Requirement and to avoid imposition of the Excise Tax. In that event, the Trust
might have to liquidate securities to enable it to make the required
distributions, which would cause the Trust to recognize gains or losses and
might affect its ability to satisfy the Short-Short Limitation.

Income from transactions in options and futures derived by the Trust with
respect to its business of investing in securities will qualify as permissible
income under the Income Requirement. However, income from the disposition of
options and futures will be subject to the Short-Short Limitation if they are
held for less than three months.

If the Trust satisfies certain requirements, any increase in value of a
position that is part of a 'designated hedge' will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Trust satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The
Trust will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent the Trust does not qualify for this
treatment, it may be forced to defer the

23
<PAGE>

closing out of certain options and futures beyond the time when it otherwise
would be advantageous to do so, in order for the Trust to continue to qualify as
a RIC.

Other Securities. As a result of investing in certain securities and also
as a result of leveraging to purchase or hold certain other securities, the
Trust may be required to report taxable income in excess of the economic income
derived therefrom. The timing and character of any deduction attributable to the
Trust's failure to fully recoup its initial investment in certain
Mortgage-Backed Securities as a result of greater than anticipated prepayments
of principal on the underlying mortgage assets are unclear.

The tax treatment of certain securities in which the Trust may invest is
not free from doubt, and it is possible that an Internal Revenue Service
examination of the issuers of those securities or of the Trust could result in
adjustments to the Trust's taxable income.

ADDITIONAL INFORMATION

SHARE REPURCHASES AND TENDERS

As discussed in the Prospectus, the Trust's board of directors may tender
for its shares to reduce or eliminate the discount to net asset value at which
the Fund's shares might trade. Even if such a tender offer has been made, it
will be the board of directors' announced policy, which may be changed by the
board of directors, not to accept tenders or effect Share repurchases (or, if a
tender offer has not been made, not to initiate a tender offer) if: (1) such
transactions, if consummated, would (a) result in the delisting of the Shares
from the NYSE (the NYSE having advised the Trust that it would consider
delisting if the aggregate market value of the outstanding shares is less than
$5,000,000, the number of publicly held Shares falls below 600,000 or the number
of round-lot holders falls below 1,200) or (b) impair the Trust's status as a
regulated investment company under the Internal Revenue Code (which would
eliminate the Trust's eligibility to deduct dividends paid to its shareholders,
thus causing its income to be fully taxed at the corporate level in addition to
the taxation of shareholders on distributions received from the Trust); (2) the
Trust would not be able to liquidate portfolio securities in an orderly manner
and consistent with the Trust's investment objective and policies in order to
repurchase its Shares; or (3) there is, in the board of directors' judgment, any
(a) material legal action or proceeding instituted or threatened challenging
such transactions or otherwise materially adversely affecting the Trust, (b)
suspension of trading or limitation on prices of securities generally on the
NYSE or any other exchange on which portfolio securities of the Trust are
traded, (c) declaration of a banking moratorium by federal or state authorities
or any suspension of payment by banks in the United States, New York State or
any state in which the Trust invests, (d) limitation affecting the Trust or the
issuers of its portfolio securities imposed by federal or state authorities on

the extension of credit by lending institutions, (e) commencement of war, armed
hostilities or other international or national calamity directly or indirectly
involving the United States or (f) other event or condition that would have a
material adverse effect on the Trust or its shareholders if Shares were
repurchased. The board of directors may modify these conditions in light of
experience.

COUNSEL

The law firm of Kirkpatrick & Lockhart, 1800 M Street, N.W., Washington,
D.C. 20036-5891 counsel to the Trust, has passed upon the legality of the shares
offered by the Trust's Prospectus. Kirkpatrick & Lockhart also acts as counsel
to Mitchell Hutchins and PaineWebber in connection with other matters.

24
<PAGE>
INDEPENDENT AUDITORS

Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019, serves as
the Trust's independent auditors.

FINANCIAL STATEMENTS

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

25
<PAGE>
APPENDIX A

RATINGS

DESCRIPTION OF MOODY'S RATINGS FOR CORPORATE AND CONVERTIBLE BONDS,
MORTGAGE-BACKED SECURITIES AND ASSET-BACKED SECURITIES

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

Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective

elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.

A. Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.

Baa. Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest 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.

Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa to B. The modifier 1 indicates that the company
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.

A-1
<PAGE>
DESCRIPTION OF S&P RATINGS FOR CORPORATE AND CONVERTIBLE DEBT, MORTGAGE-BACKED
SECURITIES AND ASSET-BACKED SECURITIES

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

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

BB. Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.

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

CCC. Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.

CC. The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.

C. The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.

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

A-2
<PAGE>
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 jeopardized.

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

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

DESCRIPTION OF SELECTED MOODY'S COMMERCIAL PAPER RATINGS

PRIME-1. Issuers (or related supporting institutions) assigned this
highest rating have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; well established access to a range of financial markets and assured
sources of alternate liquidity.

PRIME-2. Issuers (or related supporting institutions) assigned this rating
have a strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.

DESCRIPTION OF SELECTED S&P COMMERCIAL PAPER RATINGS

A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.

A-1. This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.

A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.

A-3
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK.
<PAGE>
APPENDIX B

PERFORMANCE COMPARISONS AND ECONOMIC INFORMATION

The Trust may, in advertisements, reports to shareholders and other
publicly-distributed documents, compare its performance with or otherwise
discuss the investment returns of various securities, such as 6-month Treasury
bills, 1-year Treasury notes, and 10-year and 30-year Treasury bonds. Such
comparisons or discussions also may include economic data and statistics
published by the United States Bureau of Labor Statistics, such as the cost of
living index, information and statistics on the residential mortgage market or
the market for Mortgage-Backed Securities such as those published by the Federal
Reserve Bank, the Office of Thrift Supervision, Ginnie Mae, Fannie Mae and
Freddie Mac and the Lehman Mortgage-Backed Securities Index. The Trust also may
compare its performance with or otherwise discuss data (including average 30-day
money market fund yields) published by Lipper Analytical Services, Inc.,
IBC/Donoghue's Money Market Fund Report, Wiesenberger Investment Service or
Investment Company Data Inc. In comparing the Trust or its performance to money
market funds, investors should keep in mind that money market funds seek to
maintain a constant net asset value per share of $1.00, while the net asset
value of the Shares will fluctuate. The securities held by the Trust generally
have longer maturities than those held by money market funds and may reflect
interest rate fluctuations for longer term securities.

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

The Trust may include discussions or illustrations of the effects of
compounding in advertisements. 'Compounding' refers to the fact that, if
dividends and other distributions are reinvested in additional Shares, any
future income or capital appreciation would increase the net asset value, not
only of the original Trust investment, but also of the additional Shares
received through reinvestment. As a result, the net asset value of an investment
in the Trust would increase more rapidly than if dividends and other
distributions had been paid in cash.

B-1
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE TRUST OR PAINEWEBBER. THIS PROSPECTUS AND
THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY THE

TRUST OR BY PAINEWEBBER IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions........... 1
Investment Limitations......................... 6
Strategic Transactions......................... 7
Directors and Officers......................... 15
Control Persons and Principal Holders
of Securities................................ 18
Investment Advisory Arrangements............... 19
Portfolio Transactions......................... 20
Valuation of Shares............................ 21
Taxation....................................... 22
Additional Information......................... 24
Financial Statements........................... 25
Appendix A..................................... A-1
Appendix B..................................... B-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

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

All-American Term Trust
Inc.
Common Stock

------------------------
STATEMENT OF ADDITIONAL
INFORMATION
------------------------
PaineWebber Incorporated
------------------------

JUNE , 1995

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

(Copyright) 1995 PaineWebber, Inc.

[LOGO] Recycled
Paper

<PAGE>
PART C - OTHER INFORMATION

Item 24. Financial Statements and Exhibits

1. Financial Statements:

Included in Part A of the Registration Statement:

a. Financial Highlights for the fiscal year ended
January 31, 1995

Included through incorporation by reference in Part B of
the Registration Statement and filed electronically with
the Annual Report to Shareholders with the Securities and
Exchange Commission on March 31, 1995 (File No. 811-7352,
Accession No. 889812-95-89) and filed herewith as an
attachment:

a. Report of Ernst & Young LLP, Independent
Auditors, dated March 30, 1995

b. Portfolio of Investments as of January 31, 1995

c. Statement of Assets and Liabilities as of January
31, 1995

d. Statement of Operations for the fiscal year ended
January 31, 1995

e. Statement of Cash Flows for the fiscal year ended
January 31, 1995

f. Statement of Changes in Net Assets for the fiscal
year ended January 31, 1995

g. Notes to Financial Statements

h. Quarterly Results of Operations (unaudited)

i. Financial Highlights for the fiscal year ended
January 31, 1995

2. Exhibits:

a. (i) Articles of Incorporation1/
(ii) Articles of Amendment2/

1/ Incorporated herein by reference to exhibit 1(a) to the
Registration Statement on Form N-2 filed November 19, 1992 (File
No. 33-54776).

2/ Incorporated herein by reference to exhibit 1(b) to Pre-Effective
Amendment No. 1 to the Registration Statement on Form N-2 filed
December 7, 1992 (File No. 33-54776).

II-1

<PAGE>
(iii) Articles of Amendment3/
b. (i) Bylaws (filed herewith)
(ii) Amendment to Bylaws dated January 11,
1995 (filed herewith)

c. None
d. Inapplicable
e. Dividend Reinvestment Plan4/
f. None
g. Investment Advisory and Administration
Contract5/
h. None6/
i. None
j. Custodian Agreement7/
k. Transfer Agency Agreement 8/
l. Opinion and Consent of Counsel9/
m. None
n. Consent of Independent Auditors (filed herewith)
o. None
p. Letter of Investment Intent10/
q. None

3/ Incorporated herein by reference to exhibit 1(c) to Pre-Effective
Amendment No. 2 to the Registration Statement on Form N-2 filed
January 27, 1993 (File No. 33-54776).

4/ Incorporated herein by reference to exhibit 9(c) to Pre-Effective
Amendment No. 3 to the Registration Statement on Form N-2 filed
February 19, 1993 (File No. 33-54776).

5/ Incorporated herein by reference to exhibit 6 to Pre-Effective
Amendment No. 3 to the Registration Statement on Form N-2 filed
February 19, 1993 (File No. 33-54776).

6/ The shares offered by the Prospectus will be offered in order to
effect over-the-counter secondary market transactions by
PaineWebber in its capacity as a dealer and secondary market
maker and not pursuant to any agreement with the Trust. Shares
were originally issued in a public offering pursuant to an
Underwriting Agreement and a related document, included as
exhibits 7(a) and (b) to Pre-Effective Amendment No. 3 to the
Registration Statement on Form N-2 filed February 19, 1993 (File
No. 33-54776).

7/ Incorporated herein by reference to exhibit 9(a) to Pre-Effective
Amendment No. 3 to the Registration Statement on Form N-2 filed
February 19, 1993 (File No. 33-54776).

8/ Incorporated herein by reference to exhibit 9(b) to Pre-Effective
Amendment No. 3 to the Registration Statement on Form N-2 filed
February 19, 1993 (File No. 33-54776).

9/ Incorporated herein by reference to exhibit l to the Initial
Registration Statement on Form N-2 filed June 15, 1993 (File No.
33-64496).

10/ Incorporated herein by reference to exhibit 14 to Pre-Effective
Amendment No. 3 to the Registration Statement on Form N-2 filed
February 19, 1993 (File No. 33-54776).

II-2

<PAGE>

Item 25. Marketing Arrangements

Inapplicable. See note accompanying Item 24.2.h.

Item 26. Other Expenses of Issuance and Distribution

Not applicable to current Post-Effective Amendment; for expenses
incurred in connection with this Registration Statement; see the Trust's
Initial Registration Statement on Form N-2, SEC File No. 33-64496, filed
June 15, 1993.

Item 27. Persons Controlled by or Under Common Control

None.

Item 28. Number of Holders of Securities

Number of Record
Holders as of
Title of Class March 27, 1995
-------------- ----------------
Common Stock, par value 519
$0.001 per share

Item 29. Indemnification

Incorporated by reference to Item 3 of Part II to Pre-Effective
Amendment No. 3 to the Registration Statement on Form N-2 filed
February 19, 1993 (File No. 33-54776).

Item 30. Business and Other Connections of Investment Adviser

See "Management of the Trust" in the Prospectus.

Mitchell Hutchins, a Delaware corporation, is a registered

investment adviser and is wholly owned by PaineWebber, which in turn is
wholly owned by Paine Webber Group Inc. Mitchell Hutchins is primarily
engaged in the investment advisory business. Information as to executive
officers and directors of Mitchell Hutchins is included in its Form ADV
filed on December 19, 1994, with the SEC (Registration number 801-13219)
and is incorporated herein by reference.

Item 31. Location of Accounts and Records

The accounts and records of the Trust are maintained at the
office of Mitchell Hutchins at 1285 Avenue of the Americas, New York, New
York 10019, at the office of the Trust's custodian, State Street Bank and
Trust Company at One Heritage Drive, North Quincy, Massachusetts 02171,
and at the office of the Trust's transfer agent, PNC Bank, National
Association, c/o PFPC Inc., 103 Bellevue Parkway, Wilmington, Delaware
19809.

Item 32. Management Services

None.

II-3

<PAGE>

Item 33. Undertakings

The Undertakings of the Registrant, as set forth in the Trust's
Initial Registration Statement on Form N-2 filed on June 15, 1993 (File
No. 33-58946) are hereby revised to read as follows:

The Registrant hereby undertakes:

(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to this
registration statement:

(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act
of 1933:

(ii) To reflect in the prospectus any acts or
elements arising after the effective
date of the registration statement (or
the most recent post-effective amendment
thereof) which, individually or in the
aggregate, represent a fundamental
change in the information set forth in
the registration statement; and

(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such

information in the registration
statement.

(2) That for the purpose of determining any liability
under the Securities Act of 1933, the information omitted from
the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497 under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared
effective.

(3) That for the purpose of determining any liability
under the Securities Act of 1933, each post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.

(4) To remove from registration by means of a post-
effective amendment any of the securities being registered which
remain unsold at the termination of the offering.

(5) To send by first class mail or other means
designed to ensure equally prompt delivery, within two business
days of receipt of a written or oral request, any Statement of
Additional Information.

II-4
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, and the
State of New York, on the 4th day of April, 1995.

ALL-AMERICAN TERM TRUST INC.

By: /s/ Gregory K. Todd
------------------------------
Gregory K. Todd
Vice President

Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated:

Signature Title Date
--------- ----- ----
/s/ E. Garrett Bewkes, Jr. Director, Chairman of April 4, 1995
- -------------------------- the Board of Directors
E. Garrett Bewkes, Jr.*

/s/ John R. Torell III Director April 4, 1995
- --------------------------
John R. Torell III**

/s/ William D. White Director April 4, 1995
- --------------------------
William D. White**

/s/ Paul B. Guenther President (Chief April 4, 1995
- -------------------------- Executive Officer)
Paul B. Guenther

/s/ Julian F. Sluyters Vice President and April 4, 1995
- -------------------------- Treasurer (Principal
Julian F. Sluyters Financial and
Accounting Officer)

*/ Signature affixed by Robert A. Wittie pursuant to power of attorney
dated January 3, 1994, and incorporated by reference from Post-
Effective Amendment No. 20 to the Registration Statement of
PaineWebber Master Series, Inc., SEC File No. 33-2524, filed February
28, 1994.

**/ Signatures affixed by Robert A. Wittie pursuant to powers of attorney
dated December 16, 1992, and incorporated by reference from Pre-
Effective Amendment No. 2 to the Registration Statement of All-
American Term Trust Inc., SEC File No. 33-54776, filed January
27, 1993.

<PAGE>
ALL-AMERICAN TERM TRUST INC.

EXHIBIT INDEX
Document Description Sequential
-------------------- Page
Exhibit Number
------- ----------

a. (i) Articles of Incorporation [previously
filed as exhibit 1(a) to the
Registration Statement on Form N-2
filed November 19, 1992 (File No. 33-
54776)]
(ii) Articles of Amendment [previously filed
as exhibit 1(b) to Pre-Effective
Amendment No. 1 to the Registration
Statement on Form N-2 filed December 7,
1992 (File No. 33-54776)]

(iii) Articles of Amendment [previously filed
as exhibit 1(c) to Pre-Effective
Amendment No. 2 to the Registration
Statement on Form N-2 filed January 27,

1993 (File No. 33-54776)]

b. (i) Bylaws (filed herewith)

(ii) Amendment to Bylaws dated January 11,
1995 (filed herewith)

c. None

d. Inapplicable

e. Dividend Reinvestment Plan [previously
filed as exhibit 9(c) to Pre-Effective
Amendment No. 3 to the Registration
Statement on Form N-2 filed
February 19, 1993 (File No. 33-54776)]
f. None

g. Investment Advisory and Administration
Contract [previously filed as exhibit 6
to Pre-Effective Amendment No. 3 to the
Registration Statement on Form N-2
filed February 19, 1993 (File No. 33-
54776)]
h. None

i. None

j. Custodian Agreement [previously filed
as exhibit 9(a) to Pre-Effective
Amendment No. 3 to the Registration
Statement on Form N-2 filed
February 19, 1993 (File No. 33-54776)]

II-5

<PAGE>
k. Transfer Agency Agreement [previously
filed as exhibit 9(b) to Pre-Effective
Amendment No. 3 to the Registration
Statement on Form N-2 filed
February 19, 1993 (File No. 33-54776)]

l. Opinion and consent of counsel
[previously filed as exhibit 1 to the
Initial Registration Statement on Form
N-2 filed June 15, 1993 (File No. 33-
64496)]
m. None

n. Consent of Independent Auditors (filed
herewith)

o. None

p. Letter of Investment Intent [previously
filed as exhibit 14 to Pre-Effective
Amendment No. 3 to the Registration
Statement on Form N-2 filed
February 19, 1993 (File No. 33-54776)]

q. None

II-6

<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 01/31/95
ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000894233
<NAME> ALL-AMERICAN TERM TRUST INC.
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-START> FEB-01-1994
<PERIOD-END> JAN-31-1995
<INVESTMENTS-AT-COST> 279,757
<INVESTMENTS-AT-VALUE> 264,166
<RECEIVABLES> 4,071
<ASSETS-OTHER> 6
<OTHER-ITEMS-ASSETS> 142
<TOTAL-ASSETS> 268,385
<PAYABLE-FOR-SECURITIES> 85,609
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 339
<TOTAL-LIABILITIES> 85,948
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 205,598
<SHARES-COMMON-STOCK> 13,707
<SHARES-COMMON-PRIOR> 13,707
<ACCUMULATED-NII-CURRENT> 1,272
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (8,842)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (15,591)
<NET-ASSETS> 182,437
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 19,060
<OTHER-INCOME> 0
<EXPENSES-NET> (2,004)
<NET-INVESTMENT-INCOME> 17,056
<REALIZED-GAINS-CURRENT> (7,819)
<APPREC-INCREASE-CURRENT> (19,811)
<NET-CHANGE-FROM-OPS> (10,574)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (16,763)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (27,337)
<ACCUMULATED-NII-PRIOR> 718
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0

<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,716
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,004
<AVERAGE-NET-ASSETS> 190,633
<PER-SHARE-NAV-BEGIN> 15.30
<PER-SHARE-NII> 1.24
<PER-SHARE-GAIN-APPREC> (2.01)
<PER-SHARE-DIVIDEND> (1.22)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.31
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

ALL-AMERICAN TERM TRUST INC.

A Maryland Corporation

BYLAWS

As Amended January 7, 1993

<PAGE>

TABLE OF CONTENTS
Page

ARTICLE I
NAME OF CORPORATION, LOCATION OF OFFICES AND SEAL . . . . 1
Section 1. Name. . . . . . . . . . . . . . . . . . . . . 1
Section 2. Principal Offices . . . . . . . . . . . . . . 1
Section 3. Seal. . . . . . . . . . . . . . . . . . . . . 1

ARTICLE II
STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . . 1
Section 1. Annual Meetings . . . . . . . . . . . . . . . 1
Section 2. Special Meetings. . . . . . . . . . . . . . . 1
Section 3. Notice of Meetings. . . . . . . . . . . . . . 2
Section 4. Quorum and Adjournment of Meetings. . . . . . 2
Section 5. Voting and Inspectors . . . . . . . . . . . . 3
Section 6. Validity of Proxies . . . . . . . . . . . . . 3
Section 7. Stock Ledger and List of Stockholders . . . . 4
Section 8. Action Without Meeting. . . . . . . . . . . . 4

ARTICLE III
BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . . . 4
Section 1. Powers. . . . . . . . . . . . . . . . . . . . 4
Section 2. Number and Term of Directors. . . . . . . . . 4
Section 3. Election. . . . . . . . . . . . . . . . . . . 5
Section 4. Vacancies and Newly Created Directorships . . 5
Section 5. Removal . . . . . . . . . . . . . . . . . . . 6
Section 6. Chairman of the Board . . . . . . . . . . . . 6
Section 7. Annual and Regular Meetings . . . . . . . . . 6
Section 8. Special Meetings. . . . . . . . . . . . . . . 6
Section 9. Waiver of Notice. . . . . . . . . . . . . . . 7
Section 10. Quorum and Voting . . . . . . . . . . . . . . 7
Section 11. Action Without a Meeting. . . . . . . . . . . 7
Section 12. Compensation of Directors . . . . . . . . . . 7

ARTICLE IV
COMMITTEES. . . . . . . . . . . . . . . . . . . . . . . . 7
Section 1. Organization. . . . . . . . . . . . . . . . . 7
Section 2. Executive Committee . . . . . . . . . . . . . 8
Section 3. Proceedings and Quorum. . . . . . . . . . . . 8
Section 4. Other Committees. . . . . . . . . . . . . . . 8

ARTICLE V
OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 1. General . . . . . . . . . . . . . . . . . . . 8
Section 2. Election, Tenure and Qualifications . . . . . 8
Section 3. Vacancies and Newly Created Officers. . . . . 9
Section 4. Removal and Resignation . . . . . . . . . . . 9
Section 5. President . . . . . . . . . . . . . . . . . . 9
Section 6. Vice President. . . . . . . . . . . . . . . . 9

Section 7. Treasurer and Assistant Treasurers. . . . . . 10
Section 8. Secretary and Assistant Secretaries . . . . . 10
Section 9. Subordinate Officers. . . . . . . . . . . . . 10

<PAGE>

Section 10. Remuneration. . . . . . . . . . . . . . . . . 11
Section 11. Surety Bond . . . . . . . . . . . . . . . . . 11

ARTICLE VI
CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . 11
Section 1. Certificates of Stock . . . . . . . . . . . . 11
Section 2. Transfer of Shares. . . . . . . . . . . . . . 12
Section 3. Stock Ledgers . . . . . . . . . . . . . . . . 12
Section 4. Transfer Agents and Registrars. . . . . . . . 12
Section 5. Fixing of Record Date . . . . . . . . . . . . 12
Section 6. Lost, Stolen or Destroyed Certificates. . . . 13

ARTICLE VII
FISCAL YEAR AND ACCOUNTANT. . . . . . . . . . . . . . . . 13
Section 1. Fiscal Year . . . . . . . . . . . . . . . . . 13
Section 2. Accountant. . . . . . . . . . . . . . . . . . 13

ARTICLE VIII
CUSTODY OF SECURITIES . . . . . . . . . . . . . . . . . . 14
Section 1. Employment of a Custodian . . . . . . . . . . 14
Section 2. Termination of Custodian Agreement. . . . . . 14
Section 3. Other Arrangements. . . . . . . . . . . . . . 14

ARTICLE IX
INDEMNIFICATION AND INSURANCE . . . . . . . . . . . . . . 14
Section 1. Indemnification of Officers, Directors,
Employees and Agents . . . . . . . . . . . . . . . . 14
Section 2. Insurance of Officers, Directors, Employees
and Agents . . . . . . . . . . . . . . . . . . . . . 15
Section 3. Amendment . . . . . . . . . . . . . . . . . . 15

ARTICLE X
AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . 15
Section 1. General . . . . . . . . . . . . . . . . . . . 15
Section 2. By Stockholder

- 2 -

<PAGE>

BYLAWS

ALL-AMERICAN TERM TRUST INC.

(A MARYLAND CORPORATION)

ARTICLE I

NAME OF CORPORATION, LOCATION OF
OFFICES AND SEAL

Section 1. Name. The name of the Corporation is All-American Term
Trust Inc.

Section 2. Principal Offices. The principal office of the
Corporation in the State of Maryland shall be located in the City
of Baltimore. The Corporation may, in addition, establish and
maintain such other offices and places of business as the Board of
Directors may, from time to time, determine.

Section 3. Seal. The corporate seal of the Corporation shall be
circular in form and shall bear the name of the Corporation, the
year of its incorporation, and the word "Maryland." The form of
the seal shall be subject to alteration by the Board of Directors
and the seal may be used by causing it or a facsimile to be
impressed or affixed or printed or otherwise reproduced. Any
officer or director of the Corporation shall have authority to
affix the corporate seal of the Corporation to any document
requiring the same.

ARTICLE II
STOCKHOLDERS

Section 1. Annual Meetings. An annual meeting of stockholders
shall be held as required and for the purposes prescribed by the
Investment Company Act of 1940, as amended ("1940 Act"), and the
laws of the State of Maryland and for the election of directors and
the transaction of such other business as may properly come before
the meeting. Except for the first fiscal year of the Corporation,
the meeting shall be held annually at a time set by the Board of
Directors at the Corporation's principal offices or at such other
place within the United States as the Board of Directors shall
select.

Section 2. Special Meetings. Special meetings of stockholders may
be called at any time by the Chairman of the Board, President, any
Vice President or by a majority of the Board of Directors, and

shall be held at such time and place as may be stated in the notice
of the meeting.

<PAGE>

Special meetings of the stockholders may be called by the
Secretary upon the written request of the holders of shares
entitled to vote not less than 25 percent of all the votes entitled
to be cast at such meeting, provided that (1) such request shall
state the purposes of such meeting and the matters proposed to be
acted on, and (2) the stockholders requesting such meeting shall
have paid to the Corporation the reasonably estimated cost of
preparing and mailing the notice thereof, which the Secretary shall
determine and specify to such stockholders. No special meeting
shall be called upon the request of stockholders to consider any
matter which is substantially the same as a matter voted upon at
any special meeting of the stockholders held during the preceding
twelve months, unless requested by the holders of a majority of all
shares entitled to be voted at such meeting.

Section 3. Notice of Meetings. The Secretary shall cause notice
of the place, date and hour, and, in the case of a special meeting,
the purpose or purposes for which the meeting is called, to be
mailed, postage prepaid, not less than ten nor more than ninety
days before the date of the meeting, to each stockholder entitled
to vote at such meeting at his or her address as it appears on the
records of the Corporation at the time of such mailing. Notice
shall be deemed to be given when deposited in the United States
mail addressed to the stockholders as aforesaid. Notice of any
stockholders' meeting need not be given to any stockholder who
shall sign a written waiver of such notice whether before or after
the time of such meeting, or to any stockholder who is present at
such meeting in person or by proxy. Notice of adjournment of a
stockholders' meeting to another time or place need not be given if
such time and place are announced at the meeting. Irregularities
in the notice of any meeting to, or the nonreceipt of any such
notice by, any of the stockholders shall not invalidate any action
otherwise properly taken by or at any such meeting.

Section 4. Quorum and Adjournment of Meetings. The presence at
any stockholders' meeting, in person or by proxy, of stockholders
entitled to cast a majority of the votes shall be necessary and
sufficient to constitute a quorum for the transaction of business.
In the absence of a quorum, the holders of a majority of shares
entitled to vote at the meeting and present in person or by proxy,
or, if no stockholder entitled to vote is present in person or by
proxy, any officer present entitled to preside or act as secretary
of such meeting may adjourn the meeting without determining the
date of the new meeting or from time to time without further notice
to a date not more than 120 days after the original record date.
Any business that might have been transacted at the meeting
originally called may be transacted at any such adjourned meeting
at which a quorum is present.

Section 5. Voting and Inspectors. Except as otherwise provided in
the Articles of Incorporation or by applicable law, at each
stockholders' meeting, each stockholder shall be entitled to one

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vote for each share of stock of the Corporation validly issued and
outstanding and registered in his or her name on the books of the
Corporation on the record date fixed in accordance with Section 5
of the Article VI hereof, either in person or by proxy appointed by
instrument in writing subscribed by such stockholder or his or her
duly authorized attorney, except that no shares held by the
Corporation shall be entitled to a vote. If no record date has
been fixed, the record date for the determination of stockholders
entitled to notice of or to vote at a meeting of stockholders shall
be the later of the close of business on the day on which notice of
the meeting is mailed or the thirtieth day before the meeting, or,
if notice is waived by all stockholders, at the close of business
on the tenth day next preceding the day on which the meeting is
held.

Except as otherwise provided in the Articles of Incorporation
or these Bylaws or as required by provisions of the 1940 Act, all
matters shall be decided by a vote of the majority of the votes
validly cast. The vote upon any question shall be by ballot
whenever requested by any person entitled to vote, but, unless such
a request is made, voting may be conducted in any way approved by
the meeting.

At any meeting at which there is an election of Directors, the
chairman of the meeting may, and upon the request of the holders of
ten percent of the stock entitled to vote at such election shall,
appoint two inspectors of election who shall first subscribe an
oath or affirmation to execute faithfully the duties of inspectors
at such election with strict impartiality and according to the best
of their ability, and shall, after the election, make a certificate
of the result of the vote taken. No candidate for the office of
Director shall be appointed as an inspector.

Section 6. Validity of Proxies. The right to vote by proxy shall
exist only if the instrument authorizing such proxy to act shall
have been signed by the stockholder or by his or her duly
authorized attorney. Unless a proxy provides otherwise, it shall
not be valid more than eleven months after its date. All proxies
shall be delivered to the Secretary of the Corporation or to the
person acting as Secretary of the meeting before being voted, who
shall decide all questions concerning qualification of voters, the
validity of proxies, and the acceptance or rejection of votes. If
inspectors of election have been appointed by the chairman of the
meeting, such inspectors shall decide all such questions. A proxy
with respect to stock held in the name of two or more persons shall
be valid if executed by one of them unless at or prior to exercise

of such proxy the Corporation receives a specific written notice to
the contrary from any one of them. A proxy purporting to be
executed by or on behalf of a stockholder shall be deemed valid
unless challenged at or prior to its exercise.

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Section 7. Stock Ledger and List of Stockholders. It shall be the
duty of the Secretary or Assistant Secretary of the Corporation to
cause an original or duplicate stock ledger to be maintained at the
office of the Corporation's transfer agent. Such stock ledger may
be in written form or any other form capable of being converted
into written form within a reasonable time for visual inspection.
Any one or more persons, each of whom has been a stockholder of
record of the Corporation for more than six months next preceding
such request, who owns in the aggregate 5% or more of the
outstanding capital stock of the Corporation, may submit (unless
the Corporation at the time of the request maintains a duplicate
stock ledger at its principal office in Maryland) a written request
to any officer of the Corporation or its resident agent in Maryland
for a list of the stockholders of the Corporation. Within 20 days
after such a request, there shall be prepared and filed at the
Corporation's principal office in Maryland a list containing the
names and addresses of all stockholders of the Corporation and the
number of shares of each class held by each stockholder, certified
as correct by an officer of the Corporation, by its stock transfer
agent, or by its registrar.

Section 8. Action Without Meeting. Any action required or
permitted to be taken by stockholders at a meeting of stockholders
may be taken without a meeting if (1) all stockholders entitled to
vote on the matter consent to the action in writing, (2) all
stockholders entitled to notice of the meeting but not entitled to
vote at it sign a written waiver of any right to dissent, and (3)
the consents and waivers are filed with the records of the meetings
of stockholders. Such consent shall be treated for all purposes as
a vote at the meeting.

ARTICLE III
BOARD OF DIRECTORS

Section 1. Powers. Except as otherwise provided by operation of
law, by the Articles of Incorporation, or by these Bylaws, the
business and affairs of the Corporation shall be managed under the
direction of and all the powers of the Corporation shall be
exercised by or under authority of its Board of Directors.

Section 2. Number and Term of Directors. Except for the initial
Board of Directors, the Board of Directors shall consist of not
fewer than three nor more than fifteen Directors, as specified by
a resolution of a majority of the entire Board of Directors and at

least one member of the Board of Directors shall be a person who is
not an "interested person" of the Corporation, as that term is
defined in the 1940 Act. All other directors may be interested
persons of the Corporation if the requirements of Section 10(d) of
the 1940 Act are met by the Corporation and its investment adviser.
All acts done at any meeting of the Directors or by any person
acting as a Director, so long as his or her successor shall not

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have been duly elected or appointed, shall, notwithstanding that it
be afterwards discovered that there was some defect in the election
of the Directors or of such person acting as a Director or that
they or any of them were disqualified, be as valid as if the
Directors or such other person, as the case may be, had been duly
elected and were or was qualified to be Directors or a Director of
the Corporation. Each Director shall hold office until his or her
successor is elected and qualified or until his or her earlier
death, resignation or removal.

Section 3. Election. At the first annual meeting of stockholders,
Directors shall be elected by vote of the holders of a majority of
the shares present in person or by proxy and entitled to vote
thereon. Thereafter, except as otherwise provided in these Bylaws,
the Directors shall be elected by the stockholders at a meeting
held on a date fixed by the Board of Directors. A plurality of all
the votes cast at a meeting at which a quorum is present is
sufficient to elect a Director.

Section 4. Vacancies and Newly Created Directorships. If any
vacancies shall occur in the Board of Directors by reason of death,
resignation, removal or otherwise, or if the authorized number of
Directors shall be increased, the Directors then in office shall
continue to act, and such vacancies (if not previously filled by
the stockholders) may be filled by a majority of the Directors then
in office, although less than a quorum, except that a newly created
Directorship may be filled only by a majority vote of the entire
Board of Directors, provided, however, that if the stockholders of
any class of the Corporation's capital stock are entitled
separately to elect one or more directors, a majority of the
remaining directors, elected by that class (if any) may fill any
vacancy among the number of directors elected by that class;
provided further, however, that, at any time that there are
stockholders of the Corporation, immediately after filling such
vacancy, at least two-thirds (2/3) of the Directors then holding
office shall have been elected to such office by the stockholders
of the Corporation. In the event that at any time, other than the
time preceding the first annual stockholders' meeting, less than a
majority of the Directors of the Corporation holding office at that
time were elected by the stockholders, a meeting of the
stockholders shall be held promptly and in any event within sixty
days for the purpose of electing Directors to fill any existing

vacancies in the Board of Directors, unless the Securities and
Exchange Commission shall by order extend such period.

Section 5. Removal. At any stockholders' meeting duly called,
provided a quorum is present, the stockholders may remove any
director from office (either with or without cause) and may elect
a successor or successors to fill any resulting vacancies for the
unexpired terms of the removed director or directors. A majority
of all votes represented at a meeting is sufficient to remove a
Director for cause.

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Section 6. Chairman of the Board. The Board of Directors may, but
shall not be required to, elect a Chairman of the Board. Any
Chairman of the Board shall be elected from among the Directors of
the Corporation and may hold such office only so long as he or she
continues to be a Director. The Chairman, if any, shall preside at
all stockholders' meetings and at all meetings of the Board of
Directors, and may be ex officio a member of all committees of the
Board of Directors. The Chairman, if any, shall have such powers
and perform such duties as may be assigned from time to time by the
Board of Directors.

Section 7. Annual and Regular Meetings. The annual meeting of the
Board of Directors for choosing officers and transacting other
proper business shall be held at such other time and place as the
Board may determine. The Board of Directors from time to time may
provide by resolution for the holding of regular meetings and fix
their time and place within or outside the State of Maryland.
Except as otherwise provided in the 1940 Act, notice of such annual
and regular meetings need not be given, provided that notice of any
change in the time or place of such meetings shall be sent promptly
to each Director not present at the meeting at which such change
was made, in the manner provided for notice of special meetings.
Except as otherwise provided under the 1940 Act, members of the
Board of Directors or any committee designated thereby may
participate in a meeting of such Board or committee by means of a
conference telephone or similar communications equipment that
allows all persons participating in the meeting to hear each other
at the same time.

Section 8. Special Meetings. Special meetings of the Board of
Directors shall be held whenever called by the Chairman of the
Board, the President (or, in the absence or disability of the
President, by any Vice President), the Treasurer or by two or more
Directors, at the time and place (within or without the State of
Maryland) specified in the respective notice or waivers of notice
of such meetings. Notice of special meetings, stating the time and
place, shall be (1) mailed to each Director at his or her residence
or regular place of business at least three days before the day on
which a special meeting is to be held or (2) delivered to him or

her personally or transmitted to him or her by telegraph, telefax,
telex, cable or wireless at least one day before the meeting.

Section 9. Waiver of Notice. No notice of any meeting need be
given to any Director who is present at the meeting or who waives
notice of such meeting in writing (which waiver shall be filed with
the records of such meeting), either before or after the time of
the meeting.

Section 10. Quorum and Voting. At all meetings of the Board of
Directors, the presence of one half or more of the number of
Directors then in office shall constitute a quorum for the
transaction of business, provided that there shall be present at

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least two directors. In the absence of a quorum, a majority of the
Directors present may adjourn the meeting, from time to time, until
a quorum shall be present. The action of a majority of the
Directors present at a meeting at which a quorum is present shall
be the action of the Board of Directors, unless concurrence of a
greater proportion is required for such action by law, by the
Articles of Incorporation or by these Bylaws.

Section 11. Action Without a Meeting. Except as otherwise
provided under the 1940 Act, any action required or permitted to be
taken at any meeting of the Board of Directors or of any committee
thereof may be taken without a meeting if a written consent to such
action is signed by all members of the Board or of such committee,
as the case may be, and such written consent is filed with the
minutes of proceedings of the Board or committee.

Section 12. Compensation of Directors. Directors shall be
entitled to receive such compensation from the Corporation for
their services as may from time to time be determined by resolution
of the Board of Directors.

ARTICLE IV
COMMITTEES

Section 1. Organization. By resolution adopted by the Board of
Directors, the Board may designate one or more committees of the
Board of Directors, including an Executive Committee. The Chairmen
of such committees shall be elected by the Board of Directors.
Each committee must be comprised of two or more members, each of
whom must be a Director and shall hold committee membership at the
pleasure of the Board. The Board of Directors shall have the power
at any time to change the members of such committees and to fill
vacancies in the committees. The Board may delegate to these
committees any of its powers, except the power to declare a

dividend or distribution on stock, authorize the issuance of stock,
recommend to stockholders any action requiring stockholders'
approval, amend these Bylaws, approve any merger or share exchange
which does not require stockholder approval, approve or terminate
any contract with an "investment adviser" or "principal
underwriter," as those terms are defined in the 1940 Act, or to
take any other action required by the 1940 Act to be taken by the
Board of Directors.

Section 2. Executive Committee. Unless otherwise provided by
resolution of the Board of Directors, when the Board of Directors
is not in session, the Executive Committee, if one is designated by
the Board, shall have and may exercise all powers of the Board of
Directors in the management of the business and affairs of the
Corporation that may lawfully be exercised by an Executive

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Committee. The President shall automatically be a member of the
Executive Committee.

Section 3. Proceedings and Quorum. In the absence of an
appropriate resolution of the Board of Directors, each committee
may adopt such rules and regulations governing its proceedings,
quorum and manner of acting as it shall deem proper and desirable.
In the event any member of any committee is absent from any
meeting, the members thereof present at the meeting, whether or not
they constitute a quorum, may appoint a member of the Board of
Directors to act in the place of such absent member.

Section 4. Other Committees. The Board of Directors may appoint
other committees, each consisting of one or more persons, who need
not be Directors. Each such committee shall have such powers and
perform such duties as may be assigned to it from time to time by
the Board of Directors, but shall not exercise any power which may
lawfully be exercised only by the Board of Directors or a committee
thereof.

ARTICLE V
OFFICERS

Section 1. General. The officers of the Corporation shall be a
President, a Secretary, and a Treasurer, and may include one or
more Vice Presidents, Assistant Secretaries or Assistant
Treasurers, and such other officers as may be appointed in
accordance with the provisions of Section 9 of this Article.

Section 2. Election, Tenure and Qualifications. The officers of
the Corporation, except those appointed as provided in Section 9 of
this Article V, shall be elected by the Board of Directors at its
first meeting or such subsequent meetings as shall be held prior to

its first annual meeting, and thereafter annually at its annual
meeting. If any officers are not elected at any annual meeting,
such officers may be elected at any subsequent regular or special
meeting of the Board. Except as otherwise provided in this Article
V, each officer elected by the Board of Directors shall hold office
until the next annual meeting of the Board of Directors and until
his or her successor shall have been elected and qualified. Any
person may hold one or more offices of the Corporation except that
no one person may serve concurrently as both President and Vice
President. A person who holds more than one office in the
Corporation may not act in more than one capacity to execute,
acknowledge, or verify an instrument required by law to be
executed, acknowledged, or verified by more than one officer. No
officer need be a Director.

Section 3. Vacancies and Newly Created Officers. If any vacancy
shall occur in any office by reason of death, resignation, removal,
disqualification or other cause, or if any new office shall be

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created, such vacancies or newly created offices may be filled by
the Board of Directors at any regular or special meeting or, in the
case of any office created pursuant to Section 9 hereof, by any
officer upon whom such power shall have been conferred by the Board
of Directors.

Section 4. Removal and Resignation. Any officer may be removed
from office by the vote of a majority of the members of the Board
of Directors given at a regular meeting or any special meeting
called for such purpose, if the Board has determined the best
interests of the Corporation will be served by removal of that
officer. Any officer may resign from office at any time by
delivering a written resignation to the Board of Directors, the
President, the Secretary, or any Assistant Secretary. Unless
otherwise specified therein, such resignation shall take effect
upon delivery.

Section 5. President. The President shall be the chief executive
officer of the Corporation and, in the absence of the Chairman of
the Board or if no Chairman of the Board has been elected, shall
preside at all stockholders' meetings and at all meetings of the
Board of Directors and shall in general exercise the powers and
perform the duties of the Chairman of the Board. Subject to the
supervision of the Board of Directors, the President shall have
general charge of the business, affairs and property of the
Corporation and general supervision over its officers, employees
and agents. Except as the Board of Directors may otherwise order,
the President may sign in the name and on behalf of the Corporation
all deeds, bonds, contracts, or agreements. The President shall
exercise such other powers and perform such other duties as from
time to time may be assigned by the Board of Directors.

Section 6. Vice President. The Board of Directors may from time
to time elect one or more Vice Presidents who shall have such
powers and perform such duties as from time to time may be assigned
to them by the Board of Directors or the President. At the request
of, or in the absence or in the event of the disability of, the
President, the Vice President (or, if there are two or more Vice
Presidents, then the senior of the Vice Presidents present and able
to act) may perform all the duties of the President and, when so
acting, shall have all the powers of and be subject to all the
restrictions upon the President.

Section 7. Treasurer and Assistant Treasurers. The Treasurer
shall be the principal financial and accounting officer of the
Corporation and shall have general charge of the finances and books
of account of the Corporation. Except as otherwise provided by the
Board of Directors, the Treasurer shall have general supervision of
the funds and property of the Corporation and of the performance by
the Custodian of its duties with respect thereto. The Treasurer
shall render to the Board of Directors, whenever directed by the
Board, an account of the financial condition of the Corporation and

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of all transactions as Treasurer; and as soon as possible after the
close of each financial year the Treasurer shall make and submit to
the Board of Directors a like report for such financial year. The
Treasurer shall perform all acts incidental to the office of
Treasurer, subject to the control of the Board of Directors.

Any Assistant Treasurer may perform such duties of the
Treasurer as the Treasurer or the Board of Directors may assign,
and, in the absence of the Treasurer, may perform all the duties of
the Treasurer.

Section 8. Secretary and Assistant Secretaries. The Secretary
shall attend to the giving and serving of all notices of the
Corporation and shall record all proceedings of the meetings of the
stockholders and Directors in books to be kept for that purpose.
The Secretary shall keep in safe custody the seal of the
Corporation, and shall have responsibility for the records of the
Corporation, including the stock books and such other books and
papers as the Board of Directors may direct and such books,
reports, certificates and other documents required by law to be
kept, all of which shall at all reasonable times be open to
inspection by any Director. The Secretary shall perform such other
duties which appertain to this office or as may be required by the
Board of Directors.

Any Assistant Secretary may perform such duties of the
Secretary as the Secretary or the Board of Directors may assign,
and, in the absence of the Secretary, may perform all the duties of

the Secretary.

Section 9. Subordinate Officers. The Board of Directors from time
to time may appoint such other officers and agents as it may deem
advisable, each of whom shall have such title, hold office for such
period, have such authority and perform such duties as the Board of
Directors may determine. The Board of Directors from time to time
may delegate to one or more officers or agents the power to appoint
any such subordinate officers or agents and to prescribe their
respective rights, terms of office, authorities and duties. Any
officer or agent appointed in accordance with the provisions of
this Section 9 may be removed, either with or without cause, by any
officer upon whom such power of removal shall have been conferred
by the Board of Directors.

Section 10. Remuneration. The salaries or other compensation of
the officers of the Corporation shall be fixed from time to time by
resolution of the Board of Directors in the manner provided by
Section 10 of Article III, except that the Board of Directors may
by resolution delegate to any person or group of persons the power
to fix the salaries or other compensation of any subordinate
officers or agents appointed in accordance with the provisions of
Section 9 of this Article V.

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Section 11. Surety Bond. The Board of Directors may require any
officer or agent of the Corporation to execute a bond (including,
without limitation, any bond required by the 1940 Act and the rules
and regulations of the Securities and Exchange Commission
promulgated thereunder) to the Corporation in such sum and with
such surety or sureties as the Board of Directors may determine,
conditioned upon the faithful performance of his or her duties to
the Corporation, including responsibility for negligence and for
the accounting of any of the Corporation's property, funds or
securities that may come into his or her hands.

ARTICLE VI
CAPITAL STOCK

Section 1. Certificates of Stock. The interest of each
stockholder of the Corporation shall be evidenced by certificates
for shares of stock in such form as the Board of Directors may from
time to time authorize, provided, however, the Board of Directors
may, in its discretion, authorize the issuance of non-certificated
shares. No certificate shall be valid unless it is signed by the
President or a Vice President and countersigned by the Secretary or
an Assistant Secretary or the Treasurer or an Assistant Treasurer
of the Corporation and sealed with the seal of the Corporation, or
bears the facsimile signatures of such officers and a facsimile of
such seal. In case any officer who shall have signed any such

certificate, or whose facsimile signature has been placed thereon,
shall cease to be such an officer (because of death, resignation or
otherwise) before such certificate is issued, such certificate may
be issued and delivered by the Corporation with the same effect as
if he or she were such officer at the date of issue.

In the event the Board of Directors authorizes the issuance of
non-certificated shares of stock, the Board of Directors may, in
its discretion and at any time, discontinue the issuance of share
certificates and may, by written notice to the registered owners of
each certificated share, require the surrender of share
certificates to the Corporation for cancellation. Such surrender
and cancellation shall not affect the ownership of shares of the
Corporation.

Section 2. Transfer of Shares. Shares of the Corporation shall be
transferable on the books of the Corporation by the holder of
record thereof in person or by his or her duly authorized attorney
or legal representative (i) upon surrender and cancellation of a
certificate or certificates for the same number of shares of the
same class, duly endorsed or accompanied by proper instruments of
assignment and transfer, with such proof of the authenticity of the
signature as the Corporation or its agents may reasonably require,
or (ii) as otherwise prescribed by the Board of Directors. The
shares of stock of the Corporation may be freely transferred, and
the Board of Directors may, from time to time, adopt rules and

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regulations with reference to the method of transfer of the shares
of stock of the Corporation. The Corporation shall be entitled to
treat the holder of record of any share of stock as the absolute
owner thereof for all purposes, and accordingly shall not be bound
to recognize any legal, equitable or other claim or interest in
such share on the part of any other person, whether or not it shall
have express or other notice thereof, except as otherwise expressly
provided by law or the statutes of the State of Maryland.

Section 3. Stock Ledgers. The stock ledgers of the Corporation,
containing the names and addresses of the stockholders and the
number of shares held by them respectively, shall be kept at the
principal offices of the Corporation or, if the Corporation employs
a transfer agent, at the offices of the transfer agent of the
Corporation.

Section 4. Transfer Agents and Registrars. The Board of Directors
may from time to time appoint or remove transfer agents and
registrars of transfers for shares of stock of the Corporation, and
it may appoint the same person as both transfer agent and
registrar. Upon any such appointment being made all certificates
representing shares of capital stock thereafter issued shall be
countersigned by one of such transfer agents or by one of such

registrars of transfers or by both and shall not be valid unless so
countersigned. If the same person shall be both transfer agent and
registrar, only one countersignature by such person shall be
required.

Section 5. Fixing of Record Date. The Board of Directors may fix
in advance a date as a record date for the determination of the
stockholders entitled to notice of or to vote at any stockholders'
meeting or any adjournment thereof, or to express consent to
corporate action in writing without a meeting, or to receive
payment of any dividend or other distribution or allotment of any
rights, or to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other
lawful action, provided that (1) such record date shall be within
ninety days prior to the date on which the particular action
requiring such determination will be taken; (2) the transfer books
shall not be closed for a period longer than twenty days; and (3)
in the case of a meeting of stockholders, the record date shall be
at least ten days before the date of the meeting.

Section 6. Lost, Stolen or Destroyed Certificates. Before issuing
a new certificate for stock of the Corporation alleged to have been
lost, stolen or destroyed, the Board of Directors or any officer
authorized by the Board may, in its discretion, require the owner
of the lost, stolen or destroyed certificate (or his legal
representative) to give the Corporation a bond or other indemnity,
in such form and in such amount as the Board or any such officer
may direct and with such surety or sureties as may be satisfactory
to the Board or any such officer, sufficient to indemnify the

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Corporation against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.

ARTICLE VII
FISCAL YEAR AND ACCOUNTANT

Section 1. Fiscal Year. The fiscal year of the Corporation shall
be twelve calendar months ending at the time established by the
Board of Directors.

Section 2. Accountant.

A. The Corporation shall employ an independent public
accountant or a firm of independent public accountants as its
Accountant to examine the accounts of the Corporation and to sign
and certify financial statements filed by the Corporation. The
Accountant's certificates and reports shall be addressed both to
the Board of Directors and to the stockholders. The employment of

the Accountant shall be conditioned upon the right of the
Corporation to terminate the employment forthwith without any
penalty by vote of a majority of the outstanding voting securities
at any stockholders' meeting called for that purpose.

B. A majority of the members of the Board of Directors who
are not "interested persons" (as defined in the 1940 Act) of the
Corporation shall select the Accountant at any meeting held within
thirty days before or after the beginning of the fiscal year of the
Corporation or before the annual stockholders' meeting in that
year. The selection shall be submitted for ratification or
rejection at the next succeeding annual stockholders' meeting. If
the selection is rejected at that meeting, the Accountant shall be
selected by majority vote of the Corporation's outstanding voting
securities, either at the meeting at which the rejection occurred
or at a subsequent meeting of stockholders called for the purpose
of selecting an Accountant.

C. Any vacancy occurring between annual meetings due to the
resignation of the Accountant may be filled by the vote of a
majority of the members of the Board of Directors who are not
interested persons.

ARTICLE VIII
CUSTODY OF SECURITIES

Section 1. Employment of a Custodian. The Corporation shall place
and at all times maintain in the custody of a Custodian (including
any sub-custodian for the Custodian) all funds, securities and
similar investments owned by the Corporation. The Custodian (and
any sub-custodian) shall be a bank or trust company of good

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<PAGE>

standing having an aggregate capital, surplus, and undivided
profits not less than fifty million dollars ($50,000,000) or such
other financial institution as shall be permitted by rule or order
of the Securities and Exchange Commission. The Custodian shall be
appointed from time to time by the Board of Directors, which shall
fix its remuneration.

Section 2. Termination of Custodian Agreement. Upon termination
of the agreement for services with the Custodian or inability of
the Custodian to continue to serve, the Board of Directors shall
promptly appoint a successor Custodian, but in the event that no
successor Custodian can be found who has the required
qualifications and is willing to serve, the Board of Directors
shall call as promptly as possible a special meeting of the
stockholders to determine whether the Corporation shall function
without a Custodian or shall be liquidated. If so directed by
resolution of the Board of Directors or by vote of the holders of

a majority of the outstanding shares of stock of the Corporation,
the Custodian shall deliver and pay over all property of the
Corporation held by it as specified in such vote.

Section 3. Other Arrangements. The Corporation may make such
other arrangements for the custody of its assets (including deposit
arrangements) as may be required by any applicable law, rule or
regulation.

ARTICLE IX
INDEMNIFICATION AND INSURANCE

Section 1. Indemnification of Officers, Directors, Employees and
Agents. The Corporation shall indemnify its present and past
directors, officers, employees and agents, and any persons who are
serving or have served at the request of the Corporation as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust, or enterprise, to the full
extent provided and allowed by Section 2-418 of the Annotated
Corporations and Associations Code of Maryland concerning
corporations, as amended from time to time or any other applicable
provisions of law. Notwithstanding anything herein to the
contrary, no director, officer, investment adviser or principal
underwriter of the Corporation shall be indemnified in violation of
Sections 17(h) and (i) of the 1940 Act. Expenses incurred by any
such person in defending any proceeding to which he is a party by
reason of service in the above-referenced capacities shall be paid
in advance or reimbursed by the Corporation to the full extent
permitted by law, including Sections 17(h) and (i) of the 1940 Act.

Section 2. Insurance of Officers, Directors, Employees and Agents.
The Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the

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<PAGE>

Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against that person and incurred by
that person in or arising out of his or her position, whether or
not the Corporation would have the power to indemnify him or her
against such liability.

Section 3. Amendment. No amendment, alteration or repeal of this
Article or the adoption, alteration or amendment of any other
provision of the Articles of Incorporation or Bylaws inconsistent
with this Article shall adversely affect any right or protection of
any person under this Article with respect to any act or failure to
act which occurred prior to such amendment, alteration, repeal or
adoption.

ARTICLE X
AMENDMENTS

Section 1. General. Except as provided in Section 2 of this
Article X, all Bylaws of the Corporation, whether adopted by the
Board of Directors or the stockholders, shall be subject to
amendment, alteration or repeal, and new Bylaws may be made by the
affirmative vote of either: (1) the holders of record of a
majority of the outstanding shares of stock of the Corporation
entitled to vote, at any annual or special meeting, the notice or
waiver of notice of which shall have specified or summarized the
proposed amendment, alteration, repeal or new Bylaw; or (2) a
majority of the Directors, at any regular or special meeting the
notice or waiver of notice of which shall have specified or
summarized the proposed amendment, alteration, repeal or new Bylaw.

Section 2. By Stockholders Only. No amendment of any section of
these Bylaws shall be made except by the stockholders of the
Corporation if the Bylaws provide that such section may not be
amended, altered or repealed except by the stockholders. From and
after the issue of any shares of the capital stock of the
Corporation no amendment, alteration or repeal of Article X shall
be made except by the affirmative vote of the holders of either:
(a) more than two-thirds of the Corporation's outstanding shares
present at a meeting at which the holders of more than fifty
percent of the outstanding shares are present in person or by
proxy, or (b) more than fifty percent of the Corporation's
outstanding shares.

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AMENDMENT TO BY-LAWS

ALL-AMERICAN TERM TRUST INC.

CERTIFICATE OF VICE PRESIDENT AND ASSISTANT SECRETARY

I, Gregory K. Todd, Vice President and Assistant Secretary of All-American
Term Trust Inc. ("Trust"), hereby certify that, at a duly convened meeting of
the Board of Directors of the Trust held on September 28, 1994, the Directors
adopted the following resolution:

RESOLVED, that the following language replace the second sentence
and revise the first sentence of Article II, Section 6 of the Trust's by-laws:

"The right to vote by proxy shall exist only if the proxy is
authorized to act by (1) a written instrument dated not more
than eleven months prior to the meeting and executed either by
the stockholder or by his or her duly authorized attorney in
fact (who may be so authorized by a writing or by any non-
written means permitted by the laws of the State of Maryland)
of (2) such electronic, telephonic, computerized or other
alternative means as may be approved by a resolution adopted
by the Directors."

Dated: January 11, 1995

By: /s/ Gregory K. Todd
---------------------------------------
Gregory K. Todd
Vice President and Assistant Secretary
All-American Term Trust Inc.

New York, New York (ss)

Subscribed and sworn before me this 11th day of January, 1995.

/s/ Giovanni A. Urena
________________________
Notary Public

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Financial
Highlights" in the Propectuses and "Independent Auditors" in the
Statements of Additional Information and to the incorporation by
reference of our report dated March 6, 1995, in this Registration
Statement (Form N-1A 811-7352) of PaineWebber All American Term Trust.

ERNST & YOUNG LLP

New York, New York
April 4, 1995