ALL AMERICAN TERM TRUST INC, POS 8C, 1997-04-01

ALL AMERICAN TERM TRUST INC
POS 8C, 1997-04-01

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 1, 1997

SECURITIES ACT FILE NO. 33-64496
INVESTMENT COMPANY ACT FILE NO. 811-7352

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM N-2

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
PRE-EFFECTIVE AMENDMENT NO. |_|
POST-EFFECTIVE AMENDMENT NO. 4 |X|
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
AMENDMENT NO. 8 |X|
(CHECK APPROPRIATE BOX OR BOXES)

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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

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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)

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COPIES TO:

ROBERT A. WITTIE, ESQ. GREGORY K. TODD, ESQ.
JENNIFER R. GONZALEZ, ESQ. MITCHELL HUTCHINS ASSET
KIRKPATRICK & LOCKHART LLP MANAGEMENT, INC.
1800 Massachusetts Avenue, N.W. 1285 Avenue of the Americas

Washington, D.C. 20036-1800 New York, New York 10019

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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. 33-54776).

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<PAGE>
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<CAPTION>

ALL-AMERICAN TERM TRUST INC.
FORM N-2 CROSS REFERENCE SHEET

PART A
ITEM NUMBER Caption Prospectus Caption
----------- ------- ------------------
<S> <C> <C>
1 Outside Front Cover............................... Outside Front 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................. The Trust; Trading History; Investment
Objective and Policies; Risk Factors and
Other Investment Practices; Description of
the Shares
9 Management........................................ Management of the Trust; Description of the
Shares; Custodian, Transfer and Dividend
Disbursing Agent and Registrar
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
----------- ------- ----------------------
<S> <C> <C>
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;
Investment Limitations; 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;
Additional Information; Management of the
Trust (in Prospectus); Custodian, Transfer
and Dividend Disbursing Agent and Registrar (in Prospectus)
21 Brokerage Allocation and Other Practices.......... Portfolio Transactions
22 Tax Status........................................ Taxation
23 Financial Statements.............................. Financial Statements

</TABLE>

<PAGE>
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 and administrator, 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.
See 'RISK FACTORS AND OTHER INVESTMENT PRACTICES--LOWER GRADE SECURITIES.'
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 retained 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.' NO ADDITIONAL SHARES WILL BE ISSUED IN
CONNECTION WITH THIS OFFERING. The 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 NYSE at the time of sale. The closing price for
the Shares on the NYSE on May , 1997 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 1, 1997 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 NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

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

PaineWebber Incorporated

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

The date of this Prospectus is June 1, 1997.

<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.

<TABLE>
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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
SHARES)(2)
Investment Advisory and Administration
Fees............................... 0.90%
Interest Payments on Borrowed Funds... 0.00%
Other Expenses........................ 0.28%
----
Total Annual Expenses.............. 1.18%
----
----
</TABLE>

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(1) Prices for Shares traded in the OTC secondary 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.

EXAMPLE

An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Trust, assuming a (i) 5% annual return and (ii)
reinvestment of all dividends and other distributions at net asset value:

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One Year Three Years Five Years Ten Years
- -------- ----------- ---------- ---------
$12 $37 $65 $143
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This Example assumes that the percentage amounts listed under Annual
Expenses remain the same in the years shown. 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's 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 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 and in the Statement
of Additional Information ('SAI'). Investors should carefully consider
information set forth under the heading 'Risk Factors and Other Investment
Policies.'

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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........ No additional shares of the Trust's common stock
('Shares') will be issued in connection with this
offering. The 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.

3
<PAGE>

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<S> <C>
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.

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 Service, a division of The
McGraw-Hill Companies, Inc. ('S&P'), or 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
</TABLE>

4
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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, 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
<PAGE>

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Investment Adviser
and
Administrator..... Mitchell Hutchins, a wholly owned asset management
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.

Dividends and Other
Distributions..... The Trust declares and pays monthly dividends from its
net investment income. The Trust has retained, and
currently intends to continue 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 will it retain in
any year more than 10% of its net investment income in
that year. The Trust expects to distribute annually all
or a portion of any net capital gain (the excess of net
long-term capital gain over net short-term capital loss)
it realizes in excess of available capital loss
carryforwards.

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 its later
years as its dollar-weighted average life 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 they 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 other 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
</TABLE>

6
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Shares in connection with the Plan. See 'Dividends and
Other Distributions; Dividend Reinvestment Plan.'

Share Repurchases
and Tender
Offers............ The Trust's board of directors, in consultation with
Mitchell Hutchins, at least annually considers whether to
make open market Share repurchases or tender offers at
net asset value. 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 January 31, 2003. To the
extent capital losses realized by the Trust 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 retained 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 its term. Also, in order to avoid the
imposition of federal income tax on any undistributed
income and gains and the imposition of a 4% federal
excise tax on certain undistributed income and gains
('Excise Tax') 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 (or, for income tax purposes,
the succeeding year). The Trust's ability to return
$15.00 per Share to investors on its 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 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
</TABLE>

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<TABLE>
<S> <C>
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.

Certain types of Mortgaged-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.

The yields on Specified Mortgage-Backed Securities (as
described 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 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
</TABLE>

8
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to shareholders on or about 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.

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
</TABLE>

9
<PAGE>

<TABLE>
<S> <C>
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 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.

Lending of Portfolio Securities. The Trust may lend its
securities to qualified broker-dealers or institutional
investors in an amount up to 33 1/3% of the Trust's total
assets. Lending securities enables the Trust to earn
additional income, but could result in a loss or delay in
recovering these securities.

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
</TABLE>

10
<PAGE>
<TABLE>
<S> <C>
repurchase agreements, lending portfolio securities and
engaging in Strategic Transactions.

Market Price of Shares. Shares of closed-end investment
companies, including the Trust, frequently trade at a
discount to their 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 selected per share data and ratios for one Share
for the periods shown. This information is supplemented by the audited financial
statements and accompanying notes appearing in the Trust's Annual Report to
Shareholders for the fiscal year ended January 31, 1997, which are incorporated
by reference into the Trust's SAI and 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 Annual Report to Shareholders.

<TABLE>
<CAPTION>
FOR THE YEARS FOR THE PERIOD
ENDED MARCH 1, 1993
JANUARY 31, (COMMENCEMENT OF
-------------------------------- OPERATIONS)
1997 1996 1995 TO JANUARY 31, 1994
-------- -------- ------ -------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period........................... $ 14.37 $ 13.31 $15.30 $ 15.00
-------- -------- ------ -------
Net investment income.............. 1.10 1.19 1.24 1.11

Net realized and unrealized gains
(losses) on investment
transactions..................... 0.13 0.99 (2.01) 0.27
-------- -------- ------ -------
Net increase (decrease) in net
asset value resulting from
operations....................... 1.23 2.18 (0.77) 1.38
-------- -------- ------ -------
Dividends from net investment
income........................... (1.06) (1.12) (1.22) (1.06)

Distributions in excess of net
realized gains from investment
transactions..................... -- -- -- (0.02)
-------- -------- ------ -------
Total dividends and
distributions.................... (1.06) (1.12) (1.22) (1.08)
-------- -------- ------ -------
Net asset value, end of period..... $ 14.54 $ 14.37 $13.31 $ 15.30
-------- -------- ------ -------
-------- -------- ------ -------
Per share market value, end of
period........................... $ 12.75 $ 13.25 $12.13 $ 14.38
-------- -------- ------ -------
-------- -------- ------ -------
Total investment return (1)........ 4.59% 19.34% (7.13)% 3.04%
-------- -------- ------ -------
-------- -------- ------ -------
Ratios/Supplemental Data:

Net assets, end of period
(000's).......................... $199,303 $196,997 $182,437 $209,775

Ratio of expenses to average net
assets........................... 1.18% 1.05% 1.05% 1.04%*

Ratio of net investment income to
average net assets............... 7.70% 8.49% 8.95% 8.02%*

Portfolio turnover rate............ 391% 415% 383% 416%
</TABLE>

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

(1) Total investment return on market value is calculated assuming a purchase 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 and distributions 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
SENIOR AS OF END OF AS OF END OF $1,000 OF
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
January 31, 1996 $80,334,705 $3,452 $ 2,000
January 31, 1997 $84,486,699 $3,432 $ 2,244
</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

No additional Shares will be issued in connection with this 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 the Shares for each fiscal quarter within the two
most recent fiscal years and each fiscal quarter since the beginning of the
current fiscal year: (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., Eastern time, 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 May , 1997, 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>
04/30/95... $12.75 $12.00 $13.61 $13.20 (6.32)% (9.09)%
07/31/95... 13.25 12.25 14.47 14.22 (8.43) (13.85)
10/31/95... 12.63 12.13 14.22 14.34 (11.18) (15.41)
01/31/96... 13.38 12.25 14.27 14.40 (6.24) (14.93)
04/30/96... 13.38 12.13 14.39 14.11 (7.02) (14.03)
07/31/96... 12.63 12.13 14.13 14.03 (10.62) (13.54)
10/31/96... 13.00 12.38 14.36 14.16 (9.47) (12.57)
01/31/97... 12.88 12.50 14.55 14.42 (11.48) (13.31)
04/30/97...
</TABLE>

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

14
<PAGE>
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
U.S. jurisdiction or whose securities are principally traded in the U.S.
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 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.

15
<PAGE>
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 fiscal year ended January 31, 1997, the Trust had 96.71% of its
dollar-weighted average portfolio in debt securities that received a rating from
S&P, and 3.29% 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)--38.04%, AA--0%, A--6.84%, BBB--21.82%,
BB--6.16%, B--23.35%, CCC--0.30%, CC--0%, C--0% and D--0.20%. It should be noted
that this information reflects the average composition of the Trust's assets as
of the end of the fiscal year ended January 31, 1997 and is not necessarily
representative of the Trust's assets as of any other time in that period, the
current fiscal year or at any time in the future.

16
<PAGE>
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 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

17
<PAGE>
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 original issue discount 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 discount, on Zero Coupon
Municipal Securities in which the Trust invests, is generally not taxable to the
Trust; however, when distributed to shareholders, that accrued discount will be
treated for tax purposes in the same manner as other dividend distributions
(that is, as a taxable dividend to the extent of the Trust's earnings and
profits). Any accrued discount from Zero Coupon Municipal Securities that 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 that
seek to qualify for federal income tax treatment as a regulated investment
company ('RIC') distribute at least 90% of its 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 will be required, in order to maintain its desired tax treatment as a RIC, to
include in its distributions to shareholders with respect to each year at least
that portion of income attributable to Zero Coupon Municipal Securities that
exceeds 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 distribute that excess. 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, 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.

18
<PAGE>
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. 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 equity securities (including common stocks, warrants and
rights) when attached to Corporate Debt Securities or preferred stock or as part
of a unit including Corporate Debt Securities or preferred stock or in
connection with a conversion or exchange of Corporate Debt Securities or
preferred stock. 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 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

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<PAGE>

domestic banks; and (4) repurchase agreements with respect to any of the
foregoing. Repurchase agreements are transactions in which the Trust purchases
securities from a bank or recognized securities dealer and simultaneously
commits to resell the securities to the bank or dealer at an agreed-upon date or
upon demand and at a 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 January 31, 2003. To the extent
capital losses realized by the Trust 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 retained 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 its
term. Also, in order to avoid the imposition of federal income tax on any
undistributed income and gains and the imposition of the Excise Tax, 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 (or, for income tax purposes, the succeeding year).

The Trust's ability to return $15.00 per Share to investors on its
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 and by retained
income on Zero Coupon Municipal Securities over the life of the Trust. The Trust
expects to continue to retain an amount approximately equal to its income on the
Zero Coupon Municipal Securities in its portfolio, provided that such retention
is consistent with the Trust's continued qualification for treatment as a RIC
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.

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<PAGE>
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 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.

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 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 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

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<PAGE>
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 to net asset value. See 'Trading History.' Whether investors
will realize gains or losses upon the sale of Shares will not depend directly
upon changes in the Trust's net asset value, but will depend upon whether the
market price of the Shares at the time of sale is above or below the original
purchase price for the Shares. The market price of the Shares is determined by
such factors as relative demand for, and supply of, such Shares in the market,
general market and economic conditions, changes in the Trust's net asset value
and other factors beyond the control of the Trust. 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.

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<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 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 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, and that
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
or upon demand and at a price reflecting a market rate of interest. At the time
the Trust enters into a reverse repurchase agreement, an approved custodian
segregates cash or liquid 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, 1997, the Trust's portfolio would need to experience an annual
return of 1.75% in order to cover the 5.94% 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% 1.75% 5% 10%
Corresponding Return to
Shareholder............ -16.90% -9.71% -2.52% 0% 4.67% 11.86%
</TABLE>

LENDING OF PORTFOLIO SECURITIES

The Trust is authorized to lend portfolio securities with a value of up to
33 1/3% of its total assets to broker-dealers or institutional investors that
Mitchell Hutchins deems qualified, but only when the borrower maintains
acceptable collateral with the Trust's custodian in an amount, marked to market
daily, at least equal to the market value of the securities loaned, plus accrued
interest and dividends. Acceptable collateral is limited to cash, U.S.
government securities and irrevocable letters of credit that meet certain
guidelines established by Mitchell Hutchins. In determining whether to lend
securities to a particular broker-dealer or institutional investor, Mitchell
Hutchins will consider, and during the period of the loan will monitor, all
relevant facts and circumstances, including the creditworthiness of the
borrower. 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
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, when regaining such
rights is considered to be in the Trust's interest.

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<PAGE>
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 may
also be used to enhance income. The Trust may enter into Strategic Transactions
under which up to 100% of its 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,

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<PAGE>
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. In when-issued or delayed
delivery transactions, delivery of the securities occurs beyond normal
settlement periods, but no payment or delivery is made by the Trust prior to the
actual delivery or payment by the other party to the transaction. The Trust does
not accrue income with respect to a when-issued or delayed security prior to its
stated delivery date. 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 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 or liquid 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 last two fiscal years, the Trust's portfolio turnover rate was 391%
and 415%, 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
(100% or more) 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.

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'

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<PAGE>

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 March 31, 1997, total
assets under Mitchell Hutchins' management exceeded $ billion. As of that
date, Mitchell Hutchins served as investment adviser or sub-adviser to 30
registered investment companies with 65 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 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.

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 years ended January 31, 1997, January 31, 1996 and January 31,
1995, the Trust's total expenses, stated as a percentage of average net assets,
were 1.18%, 1.05% and 1.05%, respectively. 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 years ended January 31, 1997,
January 31, 1996 and January 31, 1995, the Trust's total expenses during that
period were 3.75%, 3.64% and 3.36%, respectively, of average net assets.

Thomas J. Libassi, Julieanna Berry and James F. Keegan are responsible for
the day-to-day management of the Trust's portfolio. Mr. Libassi is a senior vice
president and a portfolio manager 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. Mr. Libassi has held
his Trust responsibilities since May 1994. Ms. Berry is a vice president and a
portfolio manager of Mitchell Hutchins and has been employed by Mitchell
Hutchins as a portfolio manager since 1989. Ms. Berry has held her Trust
responsibilities since February 1996. Mr. Keegan is a senior vice president and
a portfolio manager of Mitchell Hutchins. Prior to joining Mitchell Hutchins in
March 1996, Mr. Keegan was director of fixed income strategy and research with
Merrion Group, L.P. From 1987 to 1994, he was a vice president of Bankers Trust,
where he was director of credit research for the global investment management
group. Mr. Keegan has held his Trust responsibilities since April 1996.

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.

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

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<PAGE>
DIVIDENDS AND OTHER DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN

DIVIDENDS AND OTHER DISTRIBUTIONS

The Trust declares and pays monthly dividends from its net investment
income. 'Net investment income,' as used herein, includes all interest
(including accrued tax-exempt discount 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. The
Trust has retained, and currently intends to continue 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 will it
retain in any year more than 10% of its net investment income in that year. The
Trust expects that all or a portion of its net capital gain (the excess of net
long-term capital gain over net short-term capital loss), if any, in excess of
available capital loss carryforwards will be distributed at least annually.

Various factors may affect the level of the dividends and other
distributions paid by the Trust, including the asset mix, interest rates, the
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 its later
years as its dollar-weighted average life 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
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, other distribution or purchase. See 'Description of
the Shares--Share Repurchases and Tender Offers.'

DIVIDEND REINVESTMENT PLAN

Under the Plan, all dividends and other distributions payable to
shareholders whose Shares are registered in their own names, or in the name of
PaineWebber (or its nominee), are automatically reinvested in additional Shares,
unless they 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 whose Shares are held in the name of a
broker or nominee other than PaineWebber (or its nominee) should contact such
other 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 another
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 distribution for a
particular shareholder equals the result obtained by dividing the amount of the
distribution 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

28
<PAGE>
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.'

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 or in the Transfer Agent's records. 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 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, net short-term capital gain and net realized gains from
certain transactions) and net capital gain that is distributed to its
shareholders. To continue to qualify for such treatment as a RIC, the Trust
must, among other things, distribute to its shareholders for each taxable year

at least 90% of its investment company taxable income and net tax-exempt income
(including original issue discount on Zero Coupon Municipal Securities)
('Distribution Requirement'). The Trust's distributions for any taxable year,
for purposes of determining both its income tax liability and whether it
satisfies the Distribution Requirement (but not its liability for the Excise
Tax), include not only distributions made during the year but also distributions
made within 12 months after the end of the year that satisfy certain specific
requirements (known as 'spillover distributions'). Spillover distributions, if
any, will be taxable to each shareholder for his taxable year in which they are
received, not the Trust's taxable year to which they relate. The Trust might
need to utilize the spillover distribution mechanism to avoid income tax
liability and/or maintain its continued qualification for treatment as a RIC.

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. It is not expected that any portion of the
Trust's distributions will be eligible for the dividends-received deduction
available for corporations.

29
<PAGE>

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's distributable net capital gain for any
taxable year equals its net capital gain realized during the year less any
available capital loss carryforwards. At January 31, 1997, the Trust had net
capital loss carryforwards of $12,306,837.) The Trust may decide 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 65%
of his proportionate share of those gains.

A participant in the Plan is treated as having received a distribution in
the amount of cash used to purchase Shares on his behalf, including a pro rata
portion of the brokerage fees incurred by the Transfer Agent. 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.
Shareholders who are not liable for tax on their income and whose shares are not
debt-financed are not required to pay tax on dividends or other distributions
that they receive from the Trust.

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 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. 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.

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 the sum of any capital gain
distributions received thereon plus any undistributed capital gains designated
with respect thereto, 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 also is required from
dividends and capital gain distributions payable to such 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.

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<PAGE>
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 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 is normally 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 , 1997.

<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
EXCLUSIVE OF AMOUNT
AMOUNT HELD BY HELD
REGISTRANT OR FOR BY REGISTRANT OR FOR
ITS 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 best interest
of shareholders, the Trust's board of directors has determined that it will from
time to time consider taking action to attempt to reduce or eliminate any
discount. To that end, the board, in consultation with Mitchell Hutchins, at
least annually considers whether to repurchase

31
<PAGE>
Shares in the open market or to make a tender offer for the Shares at their net
asset value. At such times, the board 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. The board may at any time, however, decide that
the Trust should not repurchase shares or make a tender offer. 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. See 'Additional Information--Share Repurchases and Tender Offers' in the
SAI.

There is 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 its net asset
value per Share.

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 its total assets and therefore have the effect of increasing its
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

32
<PAGE>
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;

(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 and the Trust's SAI
constitute 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........................................... 14
Control Persons and Principal Holders of Securities.............. 21
Investment Advisory Arrangements................................. 21
Portfolio Transactions........................................... 23
Valuation of Shares.............................................. 24
Taxation......................................................... 25
Additional Information........................................... 27
Financial Statements............................................. 28
Appendix A....................................................... A-1
Appendix B....................................................... B-1
</TABLE>

34
<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 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') 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 U.S. 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 U.S. 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 U.S. 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, held assets of failed
savings associations as either a conservator or receiver for such associations,
or it acquired such assets in its corporate capacity. These assets included,
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 established a vehicle through which it sold Mortgage-Backed
Securities. RTC Mortgage-Backed Securities represent pro rata interests in pools
of mortgage loans that RTC 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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
----
<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................... 28
Taxation....................................... 29
Description of the Shares...................... 31
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>

All-American
Term Trust Inc.

Common Stock
------------------------
PROSPECTUS

------------------------
PaineWebber Incorporated
------------------------

JUNE 1, 1997

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

<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 1, 1997. 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 1, 1997.

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
Service, a division of The McGraw-Hill Companies, Inc. ('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

<PAGE>
mortgage loans or other obligations generally may be prepaid at any time. As a
result, if the securities are 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

2
<PAGE>
through monthly payments to certificateholders and to any guarantor, such as
Ginnie Mae, and due to any 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>
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) purchase securities of any one issuer if, as a result, more than
5% of the Trust's total assets would be invested in securities of that
issuer or the Trust would own or hold more than 10% of the outstanding
voting securities of that issuer, except that up to 25% of the Trust's
total assets may be invested without regard to this limitation, and except
that this limitation does not apply to securities issued or guaranteed by
the U.S. government, its agencies and instrumentalities or to securities
issued by other investment companies.

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

(3) issue senior securities or borrow money, except as permitted
under the 1940 Act and then not in excess of 33 1/3% of the Trust's total
assets (including the amount of the senior securities issued but reduced by

any liabilities not constituting senior securities) at the time of the
issuance or borrowing, except that the Trust may borrow up to an additional
5% of its total assets (not including the amount borrowed) for temporary or
emergency purposes.

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

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

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

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

6
<PAGE>
The following interpretations apply to, but are not a part of, fundamental
restriction (1):

Each state (including the District of Columbia and Puerto Rico),
territory and possession of the United States, each political
subdivision, agency, instrumentality and authority thereof, and each
multi-state agency of which a state is a member is a separate
'issuer.' When the assets and revenues of an agency, authority,
instrumentality or other political subdivision are separate from the
government creating the subdivision and the security is backed only
by the assets and revenues of the subdivision, such subdivision
would be deemed to be the sole issuer. Similarly, in the case of an
Industrial Development Bond or Private Activity Bond, if that bond
is backed only by the assets and revenues of the non-governmental
user, then that non-governmental user would be deemed to be the sole
issuer. However, if the creating government or another entity
guarantees a security, then to the extent that the value of all

securities issued or guaranteed by that government or entity and
owned by the Trust exceeds 10% of the Trust's total assets, the
guarantee would be considered a separate security and would be
treated as issued by that government or entity.

Mortgage-Backed and Asset-Backed Securities will not be considered
to have been issued by the same issuer by reason of the securities
having the same sponsor, and Mortgage-Backed and Asset-Backed
Securities issued by a finance or other special purpose subsidiary
that are not guaranteed by the parent company will be considered to
be issued by a separate issuer from the parent company.

The following investment restrictions are not fundamental and may be
changed by the Trust's board of directors without shareholder approval.

The Trust will not:

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

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

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

<PAGE>
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.

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
and the Commodity Futures Trading Commission ('CFTC'). 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

8
<PAGE>
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 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 and liquid
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 or liquid 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

9
<PAGE>
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.

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

10
<PAGE>
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 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's portfolio, 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's portfolio, 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, obligations of
the United States or obligations that are fully guaranteed as to principal and
interest by the United States, 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.

11
<PAGE>
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.

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

12
<PAGE>
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.

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.

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

13
<PAGE>
'notional principal amount') for a specified period of time. Interest rate cap
and floor transactions involve an agreement between two parties in which the
first party agrees to make payments to the counterparty when a designated market
interest rate goes above (in the case of a cap) or below (in the case of a
floor) a designated level on predetermined dates or during a specified time
period. Interest rate collar transactions involve an agreement between two
parties in which the 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 or liquid securities, marked to market daily, 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.

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

14
<PAGE>
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:

Richard Q. Armstrong; 61 Director Mr. Armstrong is chairman and principal of RQA Enterprises
78 West Brother Drive (management consulting firm) (since April 1991 and
Greenwich, CT 06830 principal occupation since March 1995). Mr. Armstrong is
also a director of Hi Lo Automotive, Inc. He was chairman
of the board, chief executive officer and co-owner of
Adirondack Beverages (producer and distributor of soft
drinks and sparkling/still waters) (October 1993-March
1995). Mr. Armstrong was a partner of The New England
Consulting Group (management consulting firm) (December
1992-September 1993). He was managing director of LVMH
U.S. Corporation (U.S. subsidiary of the French luxury
goods conglomerate, Luis Vuitton Moet Hennessey
Corporation) (1987-1991) and chairman of its wine and
spirits subsidiary, Schieffelin & Somerset Company
(1987-1991). Mr. Armstrong is a director or trustee of 28
investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.

E. Garrett Bewkes, Jr.**; 70 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). Prior to December 1995, he was 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 NaPro BioTherapeutics, Inc. Mr.
Bewkes is a director or trustee of 29 investment companies
for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
</TABLE>

15
<PAGE>

<TABLE>

<CAPTION>
POSITION PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS* WITH THE TRUST DURING PAST FIVE YEARS
- ------------------------------ ------------------ ------------------------------------------------------------
<S> <C> <C>
Richard R. Burt; 50 Director Mr. Burt is chairman of International Equity Partners
1101 Connecticut Avenue, N.W. (international investments and consulting firm) (since
Washington, D.C. 20036 March 1994) and a partner of McKinsey & Company
(management consulting firm) (since 1991). He is also a
director of American Publishing Company and
Archer-Daniels-Midland Co. (agricultural commodities). He
was the chief negotiator in the Strategic Arms Reduction
Talks with the former Soviet Union (1989-1991) and the
U.S. Ambassador to the Federal Republic of Germany
(1985-1989). Mr. Burt is a director or trustee of 28
investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.

Mary C. Farrell**; 47 Director Ms. Farrell is a managing director, senior investment
strategist and member of the Investment Policy Committee
of PaineWebber. Ms. Farrell joined PaineWebber in 1982.
She is a member of the Financial Women's Association and
Women's Economic Roundtable and is employed as a regular
panelist on Wall $treet Week with Louis Rukeyser. She also
serves on the Board of Overseers of New York University's
Stern School of Business. Ms. Farrell is a director or
trustee of 28 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment adviser.

Meyer Feldberg; 55 Director Mr. Feldberg is Dean and Professor of Management of the
Columbia University Graduate School of Business, Columbia University. Prior to
101 Uris Hall 1989, he was president of the Illinois Institute of
New York, New York 10027 Technology. Dean Feldberg is also a director of K-III
Communications Corporation, Federated Department Stores,
Inc. and Revlon, Inc. Dean Feldberg is a director or
trustee of 28 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment adviser.
</TABLE>

16
<PAGE>

Mitchell Hutchins or PaineWebber serves as investment
adviser.

Frederic V. Malek; 60 Director Mr. Malek is chairman of Thayer Capital Partners (merchant
1455 Pennsylvania Avenue, N.W. bank). From January 1992 to November 1992, he was campaign
Suite 350 manager of Bush-Quayle '92. From 1990 to 1992, he was vice
Washington, D.C. 20004 chairman and, from 1989 to 1990, he was president of
Northwest Airlines Inc., NWA Inc. (holding company of
Northwest Airlines Inc.) and Wings Holdings Inc. (holding
company of NWA Inc.). Prior to 1989, he was employed by
the Marriott Corporation (hotels, restaurants, airline
catering and contract feeding), where he most recently was
an executive vice president and president of Marriott
Hotels and Resorts. Mr. Malek is also a director of
American Management Systems, Inc. (management consulting
and computer related services), Automatic Data Processing,
Inc., CB Commercial Group, Inc. (real estate services),
Choice Hotels International (hotel and hotel franchising),
FPL Group, Inc. (electric services), Integra, Inc.
(biomedical), Manor Care, Inc. (health care), National
Educational Corporation and Northwest Airlines Inc. Mr.
Malek is a director or trustee of 28 investment companies
for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
</TABLE>

17
<PAGE>

<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS* WITH THE TRUST DURING PAST FIVE YEARS
- ------------------------------ ------------------ ------------------------------------------------------------
<S> <C> <C>
Carl W. Schafer; 61 Director Mr. Schafer is president of the Atlantic Foundation
P.O. Box 1164 (charitable foundation supporting mainly oceanographic
Princeton, New Jersey 08542 exploration and research). He also is a director of
Roadway Express, Inc. (trucking), The Guardian Group of
Mutual Funds, Evans Systems, Inc. (motor fuels,
convenience store and diversified company), Electronic
Clearing House, Inc. (financial transactions processing),
Wainoco Oil Corporation and Nutraceutix Inc.
(biotechnology company). Prior to January 1993, he was
chairman of the Investment Advisory Committee of the
Howard Hughes Medical Institute. Mr. Schafer is a director
or trustee of 28 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment adviser.

Julieana Berry; 33 Vice President Ms. Berry is a vice president and a portfolio manager of
Mitchell Hutchins. Ms. Berry is also a vice president of
two investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.

James F. Keegan; 36 Vice President Mr. Keegan is a senior vice president and a portfolio
manager of Mitchell Hutchins. Prior to March 1996, he was
director of fixed income strategy and research of Merrion
Group, L.P. From 1987 to 1994, he was a vice president of
global investment management of Bankers Trust. Mr. Keegan
is a vice president of three investment companies for
which Mitchell Hutchins or PaineWebber serves as
investment adviser.

Thomas J. Libassi; 38 Vice President Mr. Libassi is a senior vice president and a portfolio
manager of Mitchell Hutchins. Prior to May 1994, he was a
vice president of Keystone Custodian Funds Inc. with
portfolio management responsibility. Mr. Libassi is a vice
president of four investment companies for which Mitchell
Hutchins serves as investment adviser.

C. William Maher; 35 Vice President and Mr. Maher is a first vice president and a senior manager of
Assistant the mutual fund finance division of Mitchell Hutchins. Mr.
Treasurer Maher is a vice president and assistant treasurer of 29
investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>

18
<PAGE>

Ann E. Moran; 39 Vice President and Ms. Moran is a vice president of Mitchell Hutchins. Ms.
Assistant Moran is a vice president and assistant treasurer of 29
Treasurer investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.

Dianne E. O'Donnell; 44 Vice President and Ms. O'Donnell is a senior vice president and deputy general
Secretary counsel of Mitchell Hutchins. Ms. O'Donnell is a vice
president and secretary of 29 investment companies for
which Mitchell Hutchins or PaineWebber serves as
investment adviser.

Emil Polito; 36 Vice President Mr. Polito is a senior vice president and director of
operations and control for Mitchel Hutchins. From March

1991 to September 1993 he was director of the Mutual Funds
Sales Support and Service Center for Mitchell Hutchins and
PaineWebber. Mr. Polito is a vice president of 29
investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.

Victoria E. Schonfeld; 46 Vice President Ms. Schonfeld is a managing director and general counsel of
Mitchell Hutchins. Prior to May 1994, she was a partner in
the law firm of Arnold & Porter. Ms. Schonfeld is a vice
president of 29 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment adviser.

Paul H. Schubert; 34 Vice President and Mr. Schubert is a first vice president and a senior manager
Assistant of the mutual fund finance division of Mitchell Hutchins.
Treasurer From August 1992 to August 1994, he was a vice president
at BlackRock Financial Management Inc. Prior to August
1992, he was an audit manager with Ernst & Young LLP. Mr.
Schubert is a vice president and assistant treasurer of 29
investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>

19
<PAGE>

Mark A. Tincher; 41 Vice President Mr. Tincher is a managing director and chief investment
officer--equities of Mitchell Hutchins. Prior to March
1995, he was a vice president and directed the U.S. funds
management and equity research areas of Chase Manhattan
Private Bank. Mr. Tincher is a vice president of 13
investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.

Gregory K. Todd; 40 Vice President and Mr. Todd is a first vice president and senior associate
Assistant general counsel of Mitchell Hutchins. Prior to 1993, he
Secretary was a partner in the law firm of Shereff, Friedman,
Hoffman & Goodman. Mr. Todd is a vice president and
assistant secretary of nine investment companies and a
vice president and secretary of one investment company for
which Mitchell Hutchins or PaineWebber serves as
investment adviser.

Keith A. Weller; 35 Vice President and Mr. Weller is a first vice president and associate general
Assistant counsel of Mitchell Hutchins. Prior to May 1995, he was an
Secretary attorney in private practice. Mr. Weller is a vice
president and assistant secretary of 28 investment
companies for which Mitchell Hutchins or PaineWebber
serves as investment adviser.

Teresa M. West; 38 Vice President Ms. West is a first vice president 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. West was a vice president
and manager--legal administration of Mitchell Hutchins.
Ms. West is a vice president of 29 investment companies
for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
</TABLE>

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

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

** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are 'interested persons' of the
Trust, as defined in the 1940 Act, by virtue of his or her position with
Mitchell Hutchins, PaineWebber or PW Group.

20
<PAGE>

The Trust pays directors who are not 'interested persons' of the Trust
$1,000 annually and $150 for each board meeting and each separate meeting of a
board committee. Each chairman of the audit and contract review committees of
individual funds within the PaineWebber fund complex receives additional
compensation aggregating $15,000 annually from the relevant funds. All directors
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. The table below includes certain
information relating to the compensation of the Trust's current directors who
held office with the Trust or other PaineWebber funds during the Trust's last
fiscal year.

COMPENSATION TABLE+

<TABLE>
<CAPTION>
TOTAL

COMPENSATION
AGGREGATE FROM THE TRUST
NAME OF COMPENSATION AND THE FUND
PERSON, POSITION FROM THE TRUST* COMPLEX**
- ------------------------------ --------------- --------------
<S> <C> <C>
Richard Q. Armstrong,
Director.................... $2,572 $59,873
Richard R. Burt, Director..... 2,422 51,173
Meyer Feldberg, Director***... 1,156 96,181
George W. Gowen,
Director***................. 1,156 92,431
Frederic V. Malek,
Director***................. 1,156 92,431
Carl W. Schafer,
Director***................. 1,156 62,307
</TABLE>

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

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

* Represents fees paid to each director during the fiscal year ended January
31, 1997.

** Represents total compensation paid to each director by the fund complex
during the twelve months ended December 31, 1996; no fund within the complex has
a bonus, pension, profit sharing or retirement plan.

*** Elected as a director at a shareholder meeting held on April 11, 1996.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of May , 1997, 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 May , 1997, the directors and officers of the Trust as a group
beneficially owned less than 1% of the Trust's outstanding Shares.

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.

21
<PAGE>
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 years ended January 31, 1997, January 31, 1996 and January
31, 1995, the Trust paid or accrued to Mitchell Hutchins, $1,762,781, $1,734,243
and $1,715,693, respectively, in investment advisory and administration fees.

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

22
<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
years ended January 31, 1997, January 31, 1996 and January 31, 1995, 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 or 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. For the fiscal years ended January 31, 1997, January 31, 1996 and
January 31, 1995, Mitchell Hutchins did not direct any portfolio transactions to
brokers chosen because they provide research and analysis.

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

23
<PAGE>
not in lieu of, the services required to be performed by Mitchell Hutchins under
the Mitchell Hutchins Contract.

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.

Transactions in futures contracts are executed through futures commission
merchants ('FCMs') who receive brokerage commissions for their services. The
Trust's procedures in selecting FCMs to execute the Trust's transactions in
futures contracts are similar to those in effect with respect to brokerage
transactions in securities. For the fiscal years ended January 31, 1997, January
31, 1996 and January 31, 1995, the Trust paid no commissions to FCMs.

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.

24
<PAGE>

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 Trust 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 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, net short-term capital gains and net realized gains from
certain transactions) 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 investment
company taxable income and tax-exempt income each year so as to satisfy the
Distribution Requirement and to avoid imposition of the Excise

25
<PAGE>
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 net
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 and realized a net capital loss in a given taxable year,
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 tax
benefits of those capital losses will be lost.

While any obligations constituting senior securities are outstanding, the
Trust may not declare any cash dividend or other distribution on the 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.

Original Issue Discount. 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 a holder of such a
security, the Trust would have to take into account each taxable year the
original issue discount that accrues on the security for the 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 investment company taxable
income, including any accrued original issue discount (whether taxable or not),
to satisfy the Distribution Requirement and (2) substantially all of its
non-tax-exempt income to avoid imposition of the Excise Tax, it may be required
in a particular year to distribute as a dividend an amount that is greater than
the total amount of cash it actually receives. Those distributions will be made
from the 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 its 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 it to recognize gains or losses and might
affect its ability to satisfy the Short-Short Limitation.

Gains from 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.

26
<PAGE>
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 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 make a
tender offer for Shares to reduce or eliminate the discount to net asset value
at which the Trust's Shares might trade. Even if such a tender offer has been
made, it will be the board's announced policy, which may be changed by the
board, 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 RIC (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's 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.

27
<PAGE>
COUNSEL

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

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, 1997 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.

28
<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.

R. The r is attached to highlight derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to non-credit risks. Examples of such obligations are:
securities whose principal or interest return is indexed to equities,
commodities, or currencies; certain swaps and options; and interest only and
principal only mortgage securities.

The absence of an r symbol should not be taken as an indication that an
obligation will exhibit no volatility or variability in total return.

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 senior short-term
promissory obligations. Prime-1 repayment capacity will normally be evidenced by
many of the following characteristics: leading market positions in well
established industries; high rates of return on funds employed; conservative
capitalization 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-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......................... 14
Control Persons and Principal Holders
of Securities................................ 21
Investment Advisory Arrangements............... 21
Portfolio Transactions......................... 23
Valuation of Shares............................ 24
Taxation....................................... 25
Additional Information......................... 27
Financial Statements........................... 28
Appendix A..................................... A-1
Appendix B..................................... B-1
</TABLE>
------------------------

All-American Term Trust
Inc.
Common Stock
------------------------
STATEMENT OF ADDITIONAL
INFORMATION
------------------------
PaineWebber Incorporated
------------------------

JUNE 1, 1997

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

<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 each of the three years in the period
ended January 31, 1997 and for the period March 1, 1993
(commencement of operations) to January 31, 1994

Included in Part B of the Registration Statement through
incorporation by reference from the Annual Report to
Shareholders, previously filed with the Securities and
Exchange Commission through EDGAR on March 26, 1997
(File No. 811-7352) (Accession No. 0000894233-97-000001):

a. Portfolio of Investments as of January 31, 1997

b. Statement of Assets and Liabilities as of January 31, 1997

c. Statement of Operations for the fiscal year ended January
31, 1997

d. Statement of Cash Flows for the fiscal year ended January
31, 1997

e. Statement of Changes in Net Assets for each of the two
years in the period ended January 31, 1997

f. Notes to Financial Statements

g. Financial Highlights for each of the three years in the
period ended January 31, 1997 and for the period March 1,
1993 (commencement of operations) to January 31, 1994

h. Report of Ernst & Young LLP, Independent Auditors, dated
March 11, 1997

2. Exhibits:

a. (i) Articles of Incorporation(1)
(ii) Articles of Amendment(2)
(iii) Articles of Amendment(3)

b. (i) Bylaws(4)

- --------
(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).

(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 b(i) to Post-Effective
Amendment No. 2 to the Registration Statement on Form N-2 filed
April 4, 1995 (File No. 33-64496).

II-1
<PAGE>

(ii) Amendment to Bylaws dated January 11, 1995(5)

c. None
d. Inapplicable
e. Dividend Reinvestment Plan(6)
f. None
g. Investment Advisory and Administration Contract(7)
h. None(8)
i. None
j. Custodian Agreement(9)
k. Transfer Agency Agreement(10)
l. Opinion and Consent of Counsel(11)
m. None
n. Consent of Independent Auditors (filed herewith)
o. None
p. Letter of Investment Intent(12)
q. None
r. Financial Data Schedule (filed herewith)
- --------
(5) Incorporated herein by reference to exhibit b(ii) to Post-Effective
Amendment No. 2 to the Registration Statement on Form N-2 filed April 4,
1995 (File No. 33-64496).

(6) 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).

(7) 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).

(8) The shares offered by the Prospectus may 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).

(9) 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).

(10) 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).

(11) Incorporated herein by reference to exhibit 1 to the Initial Registration
Statement on Form N-2 filed June 15, 1993 (File No. 33-64496).

(12) 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

<TABLE>
Number of Record
Holders as of
TITLE OF CLASS March 14, 1997
- -------------- ----------------
<S> <C>
Common Stock, par value
$0.001 per share 441
</TABLE>

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 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 November 19, 1992 (File No.
33-54776) 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
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York, on the 1st day of April, 1997.

ALL-AMERICAN TERM TRUST INC.

By: /s/ GREGORY K. TODD
-------------------------
Gregory K. Todd
Vice President and Assistant Secretary

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

Signature Title Date
- --------- ----- ----
<S> <C> <C>

/s/ Margo N. Alexander President and Director Apr. 1, 1997
- ---------------------- (Chief Executive Officer)
Margo N. Alexander *

/s/ E. Garrett Bewkes, Jr. Director and Chairman Apr. 1, 1997

- -------------------------- of the Board of Directors
E. Garrett Bewkes, Jr. *

/s/ Richard Q. Armstrong Director Apr. 1, 1997
- ------------------------
Richard Q. Armstrong *

/s/ Richard Burt Director Apr. 1, 1997
- ----------------
Richard Burt *

/s/ Mary C. Farrell Director Apr. 1, 1997
- -------------------
Mary C. Farrell *

/s/ Meyer Feldberg Director Apr. 1, 1997
- ------------------
Meyer Feldberg *

/s/ George W. Gowen Director Apr. 1, 1997
- -------------------
George W. Gowen *

/s/ Frederic V. Malek Director Apr. 1, 1997
- ---------------------
Frederic V. Malek *

/s/ Carl W. Schafer Director Apr. 1, 1997
- ---------------------
Carl W. Schafer *

/s/ Julian F. Sluyters Vice President and Treasurer (Chief Apr. 1, 1997
- ---------------------- Financial and Accounting Officer)
Julian F. Sluyters

</TABLE>

<PAGE>

SIGNATURES (CONTINUED)

* Signature affixed by Robert A. Wittie pursuant to power of attorney dated
May 21, 1996 and incorporated by reference from Post-Effective Amendment
No. 25 to the Registration Statement of PaineWebber RMA Tax-Free Fund, SEC
File No. 2-78310, filed June 27, 1996.

<PAGE>

ALL-AMERICAN TERM TRUST INC.

EXHIBIT INDEX

DOCUMENT DESCRIPTION

<TABLE>

EXHIBIT
-------
<S> <C> <C>
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 [previously filed as exhibit 99.b(i) to Post-Effective Amendment No.
2 to the Registration Statement on Form N-2 filed April 4, 1995 (File No.
33-64496)]

(ii) Amendment to Bylaws dated January 11, 1995 [previously filed as exhibit
99.b(ii) to Post-Effective Amendment No. 2 to the Registration Statement on
Form N-2 filed April 4, 1995 (File No. 33-64496)]

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)]

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

r. Financial Data Schedule (filed herewith)

</TABLE>
II-5

<PAGE>
CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Independent Auditors" in the Statement of
Additional Information and to the incorporation by reference of our report dated
March 11, 1997, in this Registration Statement (Form N-2 No. 33-64496) of
All-American Term Trust Inc.

/s/ ERNST & YOUNG LLP
----------------------
ERNST & YOUNG LLP

New York, New York
March 31, 1997

<ARTICLE> 6
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<INVESTMENTS-AT-COST> 277294
<INVESTMENTS-AT-VALUE> 280141
<RECEIVABLES> 6580
<ASSETS-OTHER> 140
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 286861
<PAYABLE-FOR-SECURITIES> 87171
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 387
<TOTAL-LIABILITIES> 87558
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 205598
<SHARES-COMMON-STOCK> 13707
<SHARES-COMMON-PRIOR> 13707
<ACCUMULATED-NII-CURRENT> 2984
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (12126)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2847
<NET-ASSETS> 199303
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 17345
<OTHER-INCOME> 0
<EXPENSES-NET> (2302)
<NET-INVESTMENT-INCOME> 15043
<REALIZED-GAINS-CURRENT> 675
<APPREC-INCREASE-CURRENT> 1116
<NET-CHANGE-FROM-OPS> 16834
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</TABLE>