PAINEWEBBER PACE SELECT ADVISORS TRUST, N-14AE, 2000-11-01

PAINEWEBBER PACE SELECT ADVISORS TRUST
N-14AE, 2000-11-01

Previous: HANCOCK JOHN VARIABLE ANNUITY ACCOUNT I, 485BPOS, EX-99.10B, 2000-11-01

Next: PAINEWEBBER PACE SELECT ADVISORS TRUST, N-14AE, EX-99.1(B), 2000-11-01

<PAGE>

As filed with the Securities and Exchange Commission on November 1, 2000

1933 Act Registration No. 333-___

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-l4

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

[ ] Pre-Effective Amendment No.______ [ ] Post-Effective Amendment No.______

PAINEWEBBER PACE SELECT ADVISORS TRUST
(Exact name of registrant as specified in charter)
51 West 52nd Street
New York, New York 10019-6114
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000

AMY R. DOBERMAN, ESQ.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas, 18th Floor
New York, New York 10019
(Name and address of agent for service)

Copies to:

JON S. RAND, ESQ. ARTHUR J. BROWN, ESQ.
Wilkie Farr & Gallagher Kirkpatrick & Lockhart LLP
787 Seventh Avenue 1800 Massachusetts Avenue, N.W., 2nd Floor
New York, New York 10019-6099 Washington D.C. 20036
Telephone: (212) 821-8256 Telephone: (202) 778-9000

Approximate Date of Proposed Public Offering: as soon as practicable after this
Registration Statement becomes effective under the Securities Act of 1933.

It is proposed that this filing will become effective on the 30th day after
filing pursuant to Rule 488.

Title of securities being registered: Class A, Class B, Class C and Class Y
shares of beneficial interest in the series of the Registrant designated PACE
Intermediate Fixed Income Investments.

No filing fee is due because the Registrant is relying on Section 24(f) of the
Investment Company Act of 1940, as amended, pursuant to which it has previously
registered an indefinite number of securities.

<PAGE>
PAINEWEBBER INVESTMENT GRADE INCOME FUND
(A SERIES OF PAINEWEBBER MANAGED INVESTMENTS TRUST)
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114

November [ ], 2000

Dear Shareholder,

The enclosed proxy statement and prospectus asks for your vote on a proposal
that will determine the future of your investment in PaineWebber Investment
Grade Income Fund.

We are seeking shareholder approval to merge Investment Grade Income Fund
into PACE Intermediate Fixed Income Investments ("PACE Fund"). If the merger is
approved, you will receive shares of the corresponding class of shares of the
PACE Fund in exchange for your Investment Grade Income Fund shares, and
Investment Grade Income Fund will cease operations. The expenses of each class
of shares of the PACE Fund following the merger would be the same or slightly
lower than the current expenses of the corresponding class of Investment Grade
Income Fund.

Mitchell Hutchins is the investment manager for both Funds and has retained
Metropolitan West Asset Management, LLC ("MWAM"), an unaffiliated firm, to
manage each Fund's assets. The two Funds have substantially the same investment
objectives and policies in that both seek current income and both invest
primarily in investment grade bonds, including U.S. government bonds, U.S. and
foreign corporate bonds, and bonds backed by mortgages. The PACE Fund invests
only in investment grade bonds. Investment Grade Income Fund may invest, to a
limited extent, in lower rated corporate bonds.

The enclosed document describes the proposed merger more fully and compares
the investment strategies and policies, risk characteristics, operating expenses
and performance histories of the two Funds in more detail. Please read this
document carefully. We have included a "Question and Answer" section that we
believe will be helpful to most investors.

YOUR VOTE IS VERY IMPORTANT. After reviewing the enclosed document, please
complete, date and sign your proxy card and return it TODAY in the enclosed
postage-paid return envelope. Or you may vote your shares by telephone or the
internet. Voting your shares early will avoid costly follow-up mail and
telephone solicitation.

THE BOARD UNANIMOUSLY URGES THAT YOU VOTE "FOR" THE PROPOSED MERGER.

Sincerely,

Brian M. Storms

PRESIDENT
<PAGE>
PAINEWEBBER INVESTMENT GRADE INCOME FUND PROPOSED MERGER
QUESTIONS AND ANSWERS

On October 6, 2000, the Board of Trustees of PaineWebber Managed Investments
Trust ("Managed Investments Trust"), on behalf of its series, PaineWebber
Investment Grade Income Fund ("Investment Grade Income Fund"), unanimously
approved the merger of Investment Grade Income Fund into PACE Intermediate Fixed
Income Investments ("PACE Intermediate Fixed Income Fund"), a series of
PaineWebber PACE Select Advisors Trust ("PACE Trust"). The merger, however, can
only occur if Investment Grade Income Fund's shareholders approve the
transaction. Here are answers to some of the most commonly asked questions.

WHAT IS A MERGER?

A fund is said to merge with another fund when it transfers its assets and
liabilities into that other fund; subsequently, the old fund ceases to operate.
Shareholders of the old fund become shareholders of the acquiring fund.

WHY IS THIS MERGER BEING PROPOSED?

Investment Grade Income Fund and PACE Intermediate Fixed Income Fund have
substantially identical investment objectives and policies. Investment Grade
Income Fund seeks high current income consistent with the preservation of
capital and liquidity, while PACE Intermediate Fixed Income Fund seeks current
income, consistent with reasonable stability of principal. Each Fund pursues its
objective by investing primarily in investment grade bonds, including U.S.
government bonds, U.S. and foreign corporate bonds, and bonds that are backed by
mortgages. PACE Intermediate Fixed Income Fund limits its investments to
investment grade bonds, while Investment Grade Income Fund may invest, to a
limited extent, in corporate bonds that are below investment grade. PACE
Intermediate Fixed Income Fund invests in bonds of varying maturities, but
normally limits its overall portfolio duration to between two and four and
one-half years. Investment Grade Income Fund has no duration policy. (See
"Comparison of the Funds" on page [ ] of the Combined Proxy
Statement/Prospectus for a more detailed comparison of the investment objectives
and policies of each Fund.)

Metropolitan West Asset Management, LLC ("MWAM"), an investment adviser that
is not affiliated with Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins"), has served as sub-adviser to both Funds since October 10, 2000. MWAM
uses the same basic investment strategy for both Funds. As a result, the two
Funds are now managed in a very similar manner.

Mitchell Hutchins and Managed Investments Trust's Board believe that
Investment Grade Income Fund's shareholders will benefit from the merger because
the combined Fund would have a larger asset base to invest, which should provide
greater opportunities for diversifying investments and realizing economies of
scale.

HOW MANY SHARES WILL I RECEIVE AT THE TIME OF THE MERGER?

If the merger is approved, you will receive shares of PACE Intermediate
Fixed Income Fund in exchange for shares of Investment Grade Income Fund. You
will receive full and fractional shares of the corresponding class of PACE
Intermediate Fixed Income Fund having an aggregate net asset value equal to the
aggregate net asset value of your Investment Grade Income Fund shares at the
time of the merger. Although the two Funds have different net asset values per
share, each class of shares of PACE Intermediate Fixed Income Fund issued in the
merger will otherwise be substantially identical to the corresponding class of
shares of Investment Grade Income Fund.

2
<PAGE>
IF I CURRENTLY ELECT TO RECEIVE MY INVESTMENT GRADE INCOME FUND DIVIDEND AS CASH
OR IF I HAVE THE DIVIDEND AUTOMATICALLY REINVESTED INTO THE FUND, WILL MY
DISTRIBUTION CHOICE REMAIN THE SAME FOR MY PACE INTERMEDIATE FIXED INCOME FUND
SHARES AFTER THE MERGER?

Yes, your distribution choice will remain the same after the merger.

WILL I HAVE TO PAY TAXES AS A RESULT OF THE MERGER?

The merger has been structured as a tax-free transaction, which means that
no gain or loss will be recognized by either Fund as a direct result of the
merger. This means that you will not realize any gain or loss on your receipt of
PACE Intermediate Fixed Income Fund shares, and that your basis for the PACE
Intermediate Fixed Income Fund shares you receive in the merger will be the same
as the basis for your Investment Grade Income Fund shares.

Immediately prior to the merger, Investment Grade Income Fund will have to
distribute all of its previously undistributed income and net capital gain, if
any, to its shareholders, and that before the end of 2000 distribution will be
taxable to Investment Grade Income Fund shareholders. You should note, however,
that both Funds expect to distribute their ordinary income for the calendar year
and net gain, if any, for the one year period ended October 31, 2000. This
distribution will be made regardless of whether the merger takes place because
of tax requirements applicable to all mutual funds. This means that if you
remain a shareholder of Investment Grade Income Fund, if the merger takes place,
you may receive two distributions of ordinary income and net capital gain, if
any.

HOW WILL THE MERGER AFFECT FUND EXPENSES?

Although the management fee paid by PACE Intermediate Fixed Income Fund to
Mitchell Hutchins is greater than the management fee for Investment Grade Income
Fund, the combined Fund is expected to have overall operating expenses that are
no higher than the current operating expenses of Investment Grade Income Fund
due to a written management fee waiver and expense reimbursement agreement
between PACE Intermediate Fixed Income Fund and Mitchell Hutchins which will
remain in effect for the period from the date the merger is effected until
December 1, 2002. Absent that agreement, the overall operating expenses of each
class of shares of the combined Fund would be somewhat higher than the current
expenses of the corresponding class of shares of Investment Grade Income Fund.
(For more details about fees and expenses of each class of shares, see
"Comparative Fee Table" on page [ ] of the Combined Proxy
Statement/Prospectus.)

HOW HAVE PACE INTERMEDIATE FIXED INCOME FUND AND INVESTMENT GRADE INCOME FUND
PERFORMED?

The following tables show the average annual total returns over several time
periods for each class of shares of Investment Grade Income Fund and the
Class P shares of PACE Intermediate Fixed Income Fund (the only outstanding
class of shares during the periods shown). A Fund's past performance does not
necessarily indicate how it will perform in the future. This may be particularly
true for both these Funds because the current sub-adviser did not manage their
assets during the periods shown. The table for Investment Grade Income Fund
reflects sales charges on its Class A, B and C shares and the higher expenses
for these classes due to the fees paid under their Rule 12b-1 plans but does not
reflect the maximum PaineWebber PACE-SM- Select Advisors Program fee of 1.50%
(which is not applicable to shares received in the merger). The Class Y shares
of Investment Grade Income Fund and the Class P shares of PACE Intermediate
Fixed Income Fund are not subject to any sales charges or 12b-1 fees. The tables
also compare each Fund's returns to returns of a broad-based market index. The
comparative indices, which are different for the two Funds, are unmanaged and,
therefore, do not include any sales charges or expenses.

3
<PAGE>
PACE INTERMEDIATE FIXED INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS
(as of December 31, 1999)

<TABLE>
<CAPTION>
CLASS CLASS P LEHMAN BROTHERS INTERMEDIATE
(INCEPTION DATE) (8/24/95) GOVERNMENT CREDIT INDEX
---------------- --------- ----------------------------
<S> <C> <C>
One Year................................ (0.11)% 0.39%
Life of Class .......................... 4.97% 5.74%
</TABLE>

INVESTMENT GRADE INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS
(as of December 31, 1999)

<TABLE>
<CAPTION>
CLASS CLASS A CLASS B* CLASS C CLASS Y LEHMAN BROTHERS
(INCEPTION DATE) (8/31/84) (7/1/91) (7/2/92) (2/20/98) CORPORATE BOND INDEX
---------------- --------- -------- -------- --------- --------------------
<S> <C> <C> <C> <C> <C>
One Year................. (5.63)% (7.02)% (2.84)% (1.58)% (1.95)%
Five Years............... 6.61% 6.35% 6.95% N/A 8.18%
Ten Years................ 7.31% N/A N/A N/A 8.21%
Life of Class............ 8.74% 6.94% 5.88% 1.00% **
</TABLE>

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

* Assumes conversion of Class B shares to Class A shares after six years.

** Average annual total returns for the Lehman Brothers Corporate Bond Index
for the life of each class were as follows: Class A--10.36%;
Class B--8.07%; Class C--7.12%; Class Y--2.82%.

WHEN WILL THE PROPOSED MERGER OCCUR?

The Funds expect to merge in February 2001, assuming Investment Grade Income
Fund shareholder approval at the special meeting to be held on January 25, 2001.

WILL THE VALUE OF MY INVESTMENT CHANGE AS A RESULT OF THE MERGER?

No, the value of your investment should not change as a result of the
merger; however, although there can be no guarantee about the future performance
of PACE Intermediate Fixed Income Fund, your investment may improve over the
long-term as a result of the merger because of lower expenses on some share
classes and economies of scale.

CAN I SELL OR EXCHANGE MY INVESTMENT GRADE INCOME FUND SHARES BEFORE THE MERGER?

If you do not wish to receive shares of PACE Intermediate Fixed Income Fund,
you are free to sell or exchange your Investment Grade Income Fund shares at any
time prior to the merger. You will be subject to any applicable contingent
deferred sales charges and taxes if you sell your Investment Grade Income Fund
shares. If you elect to exchange your shares prior to the merger, you may be
subject to taxes. Consult your tax adviser for the tax implications of an
exchange. Please call your Financial Advisor to discuss your investment options
or with any questions.

WHAT IS THE BOARD'S RECOMMENDATION ON THE MERGER?

Your Board of Trustees unanimously recommends a vote "FOR" the merger.

4
<PAGE>
PAINEWEBBER INVESTMENT GRADE INCOME FUND
(A SERIES OF PAINEWEBBER MANAGED INVESTMENTS TRUST)
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114

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

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
JANUARY 25, 2001

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

To the Shareholders:

NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders ("Meeting") of
PaineWebber Investment Grade Income Fund ("Investment Grade Income Fund"), a
series of PaineWebber Managed Investments Trust ("Managed Investments Trust"),
will be held on January 25, 2001, at 1285 Avenue of the Americas, 14th Floor,
New York, New York, 10019, at noon, Eastern time, for the following purpose:

To approve or disapprove the Agreement and Plan of Reorganization and
Termination ("Plan") that provides for the reorganization of Investment
Grade Income Fund into PACE Intermediate Fixed Income Investments ("PACE
Intermediate Fixed Income Fund"), a series of PaineWebber PACE Select
Advisors Trust ("PACE Trust"). Pursuant to the Plan, Investment Grade
Income Fund will transfer all its assets to PACE Intermediate Fixed
Income Fund, which will assume all the stated liabilities of Investment
Grade Income Fund, and PACE Trust will issue to each Investment Grade
Income Fund shareholder the number of full and fractional shares of the
applicable class of PACE Intermediate Fixed Income Fund having an
aggregate net asset value that, on the effective date of the
reorganization, is equal to the aggregate net asset value of the
shareholder's shares in Investment Grade Income Fund.

Shareholders of record as of the close of business on November 21, 2000, are
entitled to notice of, and to vote at, the Meeting or any adjournment thereof.

Please execute and return promptly in the enclosed envelope the accompanying
proxy, which is being solicited by the Board of Trustees of Managed Investments
Trust, or vote your shares by telephone or the internet. Returning your proxy
promptly is important to ensure a quorum at the Meeting. You may revoke your
proxy at any time before it is exercised by the subsequent execution and
submission of a revised proxy, by giving written notice of revocation to Managed
Investments Trust or by voting in person at the Meeting.

By Order of the Board of Trustees,

DIANNE E. O'DONNELL
SECRETARY

November [ ], 2000
51 West 52nd Street
New York, New York 10019-6114
<PAGE>
YOUR VOTE IS IMPORTANT
NO MATTER HOW MANY SHARES YOU OWN.

Please indicate your voting instructions on the enclosed proxy card, sign
and date the card and return it in the envelope provided. IF YOU SIGN, DATE
AND RETURN THE PROXY CARD BUT GIVE NO VOTING INSTRUCTIONS, YOUR SHARES WILL BE
VOTED "FOR" THE PROPOSAL DESCRIBED ABOVE. In order to avoid the additional
expense of further solicitation, we ask your cooperation in mailing your proxy
card promptly. As an alternative to using the paper proxy card to vote, you
may vote shares that are registered in your name, as well as shares held in
"street name" through a broker, via the internet or telephone. To vote in this
manner, you will need the 14-digit "control" number(s) that appear on your
proxy card(s).

To vote via the internet, please access [insert web address] on the World
Wide Web and follow the on-screen instructions.

You may also call [1-888- ] and vote by telephone.

If we do not receive your completed proxy card(s) after some time, our
proxy solicitor, [ ], may contact you. Our proxy solicitor will remind you
to vote your shares or will record your vote over the phone if you choose to
vote in that manner.

2
<PAGE>
INSTRUCTIONS FOR SIGNING PROXY CARDS

The following general rules for signing proxy cards may be of assistance
to you and avoid the time and expense involved in validating your vote if you
fail to sign your proxy card properly.

1. Individual Accounts: Sign your name exactly as it appears in the
registration on the proxy card.

2. Joint Accounts: Either party may sign, but the name of the party
signing should conform exactly to the name shown in the registration on the
proxy card.

3. All Other Accounts: The capacity of the individual signing the proxy
card should be indicated unless it is reflected in the form of registration.
For example:

<TABLE>
<CAPTION>
REGISTRATION VALID SIGNATURE
------------ ---------------
<C> <S> <C>
Corporate Accounts
(1) ABC Corp................................ ABC Corp.
John Doe, Treasurer
(2) ABC Corp................................ John Doe, Treasurer
(3) ABC Corp. c/o John Doe, Treasurer....... John Doe
(4) ABC Corp. Profit Sharing Plan........... John Doe, Trustee
Partnership Accounts
(1) The XYZ Partnership..................... Jane B. Smith, Partner
(2) Smith and Jones, Limited Partnership.... Jane B. Smith, General Partner
Trust Accounts
(1) ABC Trust Account....................... Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee u/t/d 12/28/78..... Jane B. Doe
Custodial or Estate Accounts
(1) John B. Smith, Cust. f/b/o
John B. Smith, Jr.,
UGMA/UTMA............................... John B. Smith
(2) Estate of John B. Smith................. John B. Smith, Jr., Executor
</TABLE>

3
<PAGE>
[This page is intentionally left blank.]

4
<PAGE>
PAINEWEBBER INVESTMENT GRADE INCOME FUND
(A SERIES OF PAINEWEBBER MANAGED INVESTMENTS TRUST)
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
1-800-647-1568

PACE INTERMEDIATE FIXED INCOME INVESTMENTS
(A SERIES OF PAINEWEBBER PACE SELECT ADVISORS TRUST)
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
1-800-647-1568

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

COMBINED PROXY STATEMENT AND PROSPECTUS
DATED: NOVEMBER [ ], 2000

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

This Combined Proxy Statement and Prospectus ("Proxy Statement/Prospectus")
is being furnished in connection with a Special Meeting of Shareholders of
PaineWebber Investment Grade Income Fund ("Investment Grade Income Fund"), a
series of PaineWebber Managed Investments Trust ("Managed Investments Trust"), a
Massachusetts business trust, to be held on January 25, 2001, at 1285 Avenue of
the Americas, 14th Floor, New York, New York, 10019, at noon, Eastern time (such
meeting and any adjournments thereof are referred to collectively as the
"Meeting"). At the Meeting, the shareholders of Investment Grade Income Fund are
being asked to consider and approve the following proposal:

A form of the Plan is attached as Appendix A to this Proxy
Statement/Prospectus. THE BOARD OF TRUSTEES OF MANAGED INVESTMENTS TRUST HAS
UNANIMOUSLY APPROVED THE PLAN AS BEING IN THE BEST INTERESTS OF INVESTMENT GRADE
INCOME FUND AND ITS SHAREHOLDERS. (Investment Grade Income Fund and PACE
Intermediate Fixed Income Fund sometimes are referred to individually as a
"Fund" and together as "Funds.")

Pursuant to the Plan, Investment Grade Income Fund will transfer all its
assets to PACE Intermediate Fixed Income Fund, which will assume all the stated
liabilities of Investment Grade Income Fund, and PACE Trust will issue to each
Investment Grade Income Fund shareholder the number of full and fractional
shares of beneficial interest of the applicable class of PACE Intermediate Fixed
Income Fund having an aggregate net asset value ("NAV") that, on the effective
date of the Reorganization, is equal to the aggregate NAV of the shareholder's
shares of beneficial interest in the corresponding class of Investment Grade
Income Fund (the "Reorganization"). The value of each Investment Grade Income
Fund shareholder's account with PACE Intermediate Fixed Income Fund immediately
after the Reorganization will be the same as the value of such shareholder's
account with Investment Grade Income Fund immediately prior to the
Reorganization. As a result of the Reorganization, shareholders of each class of
shares of Investment Grade Income Fund will become shareholders of the
corresponding class of shares of PACE Intermediate Fixed Income Fund. No sales
charges will be assessed on the shares of PACE Intermediate Fixed Income Fund
issued in connection with the Reorganization.
<PAGE>
PACE Intermediate Fixed Income Fund is a non-diversified series of PACE
Trust, which is an open-end management investment company currently comprised of
twelve series. PACE Intermediate Fixed Income Fund's investment objective is
current income, consistent with reasonable stability of principal. The Fund
seeks to achieve this investment objective by investing primarily in U.S. and
foreign government bonds, U.S. and foreign corporate bonds, and bonds that are
backed by mortgages and other assets. The Fund limits its investments to
investment grade bonds, but may also invest in preferred stocks. The Fund
invests in bonds of varying maturities, but normally limits its overall
portfolio "duration" to between two and four and one-half years.

This Proxy Statement/Prospectus sets forth the information that a
shareholder of Investment Grade Income Fund should know before voting on the
Plan. It should be read carefully and retained for future reference.

A Statement of Additional Information ("SAI") dated November [ ], 2000,
containing additional information about the Reorganization, including historical
financial statements, has been filed with the Securities and Exchange Commission
("SEC") and is hereby incorporated by reference in its entirety into this Proxy
Statement/Prospectus. PACE Intermediate Fixed Income Fund's Annual Report to
Shareholders for the fiscal year ended July 31, 2000, has been filed with the
SEC and is incorporated by reference in the SAI. Information about Investment
Grade Income Fund is included in its current Prospectus and SAI, each dated
March 31, 2000, as supplemented, which are on file with the SEC and are hereby
incorporated by reference into this Proxy Statement/Prospectus. Copies of the
other referenced documents, as well as Investment Grade Income Fund's
Semi-Annual Report to Shareholders for the six months ended May 31, 2000, and
its Annual Report to Shareholders for the fiscal year ended November 30, 1999,
are available without charge by writing either Investment Grade Income Fund or
PACE Intermediate Fixed Income Fund at the address shown above, or by calling
(800) 647-1568. The SEC maintains an Internet web site at http://www.sec.gov
that contains information regarding PACE Trust and Managed Investments Trust,
and other registrants that file electronically with the SEC. Copies of such
material may also be obtained, after paying a duplicating fee, from the Public
Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington, DC, 20549, or by electronic
request at the following e-mail address: [email protected]. Additional
information about the Funds also may be obtained on the Web at
http://www.painewebber.com.

AS WITH ALL OTHER MUTUAL FUND SECURITIES, THE SEC HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR DETERMINED WHETHER THE INFORMATION IN THIS PROXY
STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANYONE WHO TELLS YOU OTHERWISE IS
COMMITTING A CRIME.

2
<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
SECTION TITLE PAGE
------------- ----
<S> <C>
INTRODUCTION...................................... 1
PROPOSAL: TO APPROVE OR DISAPPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION AND TERMINATION...... 2
SYNOPSIS.......................................... 2
The Proposed Reorganization..................... 2
Comparative Fee Table........................... 3
Summary Comparison of the Funds................. 4
COMPARISON OF PRINCIPAL RISK FACTORS.............. 5
Primary Difference in the Investment Risks of
the Funds..................................... 6
COMPARISON OF THE FUNDS........................... 6
Investment Objectives........................... 6
Investment Policies............................. 6
Operations of PACE Intermediate Fixed Income
Fund Following the Reorganization............. 8
Performance..................................... 8
Sales Charges................................... 10
Dividends and Other Distributions............... 10
Taxes........................................... 10
FLEXIBLE PRICING: BUYING, SELLING AND EXCHANGING
SHARES OF PACE INTERMEDIATE FIXED INCOME FUND... 11
Flexible Pricing................................ 11
Buying Shares................................... 15
Selling Shares.................................. 16
Exchanging Shares............................... 16
Pricing and Valuation........................... 17
MANAGEMENT........................................ 18
Investment Manager and Investment Adviser....... 18
Sub-Adviser..................................... 19
Advisory Fees and Fund Expenses................. 19
ADDITIONAL INFORMATION ABOUT THE REORGANIZATION... 20
Reasons for the Reorganization.................. 20
Terms of the Reorganization..................... 22
Description of Securities to be Issued.......... 23
Temporary Waiver of Investment Restrictions..... 23
Federal Income Tax Considerations............... 23
Required Vote................................... 24
ORGANIZATION OF THE FUNDS......................... 25
FINANCIAL HIGHLIGHTS.............................. 25
CAPITALIZATION.................................... 27
LEGAL MATTERS..................................... 27
INFORMATION FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION...................................... 28
EXPERTS........................................... 28
OTHER INFORMATION................................. 28
APPENDIX A: Form of Agreement and Plan of
Reorganization and Termination.................. A-1
APPENDIX B: Security Ownership of Certain
Beneficial Owners............................... B-1
APPENDIX C: Management's Discussion of PACE
Intermediate Fixed Income Fund's Performance.... C-1
</TABLE>
<PAGE>
INTRODUCTION

This Proxy Statement/Prospectus is being furnished to shareholders of
Investment Grade Income Fund, a series of Managed Investments Trust, in
connection with the solicitation of proxies by the Board for use at the Meeting.
All properly executed and unrevoked proxies received in time for the Meeting
will be voted as instructed by shareholders. Approval of the proposal requires
the affirmative vote of the lesser of (1) 67% or more of the shares of
Investment Grade Income Fund present at the Meeting, if more than 50% of the
outstanding shares are represented at the Meeting in person or by proxy, or
(2) more than 50% of the outstanding shares entitled to vote at the Meeting. If
you execute your proxy but give no voting instructions, your shares that are
represented by proxies will be voted "FOR" the proposal described in this Proxy
Statement/Prospectus. The presence in person or by proxy of Investment Grade
Income Fund shareholders entitled to cast a majority of all the votes entitled
to be cast at the Meeting will constitute a quorum. If a quorum is not present
at the Meeting or a quorum is present but sufficient votes to approve the
proposal are not received, the persons named as proxies may propose one or more
adjournments of the Meeting to permit further solicitation of proxies. Any such
adjournment will require the affirmative vote of a majority of the shares
represented at the Meeting in person or by proxy. The persons named as proxies
will vote those proxies that they are entitled to vote "FOR" the proposal in
favor of such an adjournment and will vote those proxies required to be voted
"AGAINST" the proposal against such adjournment.

Broker non-votes are shares held in "street name" for which the broker
indicates that instructions have not been received from the beneficial owners or
other persons entitled to vote and for which the broker does not have
discretionary voting authority. Abstentions and broker non-votes will be counted
as shares present at the Meeting for quorum purposes but will not be
(i) considered votes cast at the Meeting or (ii) voted for or against any
adjournment or proposal. Abstentions and broker non-votes are effectively votes
against the proposal.

Any person giving a proxy has the power to revoke it at any time prior to
its exercise by executing a superseding proxy or by submitting a written notice
of revocation to the Secretary of Managed Investments Trust ("Secretary"). To be
effective, such revocation must be received by the Secretary prior to the
Meeting. In addition, although mere attendance at the Meeting will not revoke a
proxy, a shareholder present at the Meeting may withdraw his or her proxy by
voting in person.

Mitchell Hutchins (not the Funds) will bear the expenses of the
Reorganization. Managed Investments Trust intends to first mail this Proxy
Statement/Prospectus and the accompanying proxy card on or about November [ ],
2000. Shareholders of record as of the close of business on November 21, 2000
("Record Date"), are entitled to vote at the Meeting. On the Record Date,
Investment Grade Income Fund had [ ] shares issued and outstanding,
consisting of [ ] Class A shares, [ ] Class B shares,
[ ] Class C shares, and [ ] Class Y shares. Shareholders are
entitled to one vote for each full share held and a fractional vote for each
fractional share held. [Except as set forth in Appendix B,] as of the Record
Date, Mitchell Hutchins, the investment manager, administrator and distributor
of both Funds, does not know of any person who owns beneficially or of record 5%
or more of any class of shares of either Fund. [As of that same date, the
Trustees and officers, as a group, owned less than 1% of any class of either
Fund's outstanding shares.]

Managed Investments Trust has engaged the services of [ ] to assist
it in the solicitation of proxies for the Meeting. Managed Investments Trust
expects to solicit proxies by mail, telephone and via the internet. Managed
Investments Trust officers and employees of Mitchell Hutchins who assist in the
proxy solicitation will not receive any additional or special compensation for
any such efforts. [ ] will be paid approximately [$ ] for proxy
solicitation services. Managed Investments Trust will request broker/dealer
firms, custodians, nominees and fiduciaries to forward proxy materials to the
beneficial owners of the shares held of record by such persons. Mitchell
Hutchins may reimburse such broker/dealer firms, custodians, nominees and
fiduciaries for their reasonable expenses incurred in connection with such proxy
solicitation.

1
<PAGE>
PROPOSAL: TO APPROVE OR DISAPPROVE THE AGREEMENT AND PLAN OF REORGANIZATION AND
TERMINATION

SYNOPSIS

The following is a summary of certain information contained elsewhere in
this Proxy Statement/ Prospectus, the Statement of Additional Information, and
the Plan. As discussed more fully below, Managed Investments Trust's Board
believes that the proposed Reorganization will benefit Investment Grade Income
Fund's shareholders.

THE PROPOSED REORGANIZATION

The Boards of PACE Trust and Managed Investments Trust, including their
respective Trustees who are not "interested persons," as that term is defined in
the Investment Company Act of 1940, as amended ("1940 Act") ("Independent
Trustees"), considered and approved the Plan at meetings held on September 13,
2000 and October 6, 2000, respectively. The Plan provides for the acquisition by
PACE Intermediate Fixed Income Fund of all of Investment Grade Income Fund's
assets in exchange for PACE Intermediate Fixed Income Fund shares and the
assumption by PACE Intermediate Fixed Income Fund of all of Investment Grade
Income Fund's stated liabilities. Investment Grade Income Fund will then
distribute the PACE Intermediate Fixed Income Fund shares to its shareholders,
by class, so that each Investment Grade Income Fund shareholder will receive the
number of full and fractional shares of the corresponding class of PACE
Intermediate Fixed Income Fund equal in aggregate value to the aggregate value
of the shareholder's shares of Investment Grade Income Fund at the time of the
Reorganization. These transactions are scheduled to occur as of 4:00 p.m.,
Eastern time, on February 2, 2001, or on such later date as the conditions to
consummation of the Reorganization are satisfied ("Closing Date"). Investment
Grade Income Fund will be terminated as soon as is practicable after the Closing
Date. See "Additional Information About the Reorganization," below.

Managed Investments Trust and PACE Trust will each receive an opinion of
Kirkpatrick & Lockhart LLP to the effect that the Reorganization will constitute
a tax-free reorganization within the meaning of section 368(a)(1)(D) of the
Internal Revenue Code of 1986, as amended ("Code"). Accordingly, neither Fund
nor any of its shareholders will recognize any gain or loss for federal income
tax purposes as a direct result of the Reorganization. To the extent Investment
Grade Income Fund sells securities prior to the Closing Date, it may recognize
net gains or losses. Any such net recognized gains would increase the amount of
any distribution made to shareholders of Investment Grade Income Fund prior to
the Closing Date. See "Additional Information About the Reorganization--Federal
Income Tax Considerations," below.

For the reasons set forth below under "Additional Information About the
Reorganization--Reasons for the Reorganization," the Board of Managed
Investments Trust has determined that the Reorganization is in the best
interests of Investment Grade Income Fund and that the interests of existing
Investment Grade Income Fund shareholders will not be diluted as a result of the
Reorganization. ACCORDINGLY, MANAGED INVESTMENTS TRUST'S BOARD UNANIMOUSLY
RECOMMENDS APPROVAL OF THE TRANSACTION.

2
<PAGE>
COMPARATIVE FEE TABLE

The table below describes the fees and expenses that you would pay if you
buy and hold Investment Grade Income Fund shares or PACE Intermediate Fixed
Income Fund shares before the Reorganization and PACE Intermediate Fixed Income
Fund shares after the Reorganization. The "Annual Fund Operating Expenses" set
forth below are based on the fees and expenses for the fiscal year ended
July 31, 2000 for PACE Intermediate Fixed Income Fund and for the six months
ended May 31, 2000 (annualized) for Investment Grade Income Fund. The pro forma
information reflects the anticipated effects of the Reorganization.
<TABLE>
<CAPTION>

PACE INTERMEDIATE FIXED
INVESTMENT GRADE INCOME FUND INCOME FUND
---------------------------------------------- ----------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES (FEES PAID
DIRECTLY FROM YOUR
INVESTMENT)
Maximum Sales Charge
(load) Imposed on
Purchases (AS A
PERCENTAGE OF OFFERING
PRICE)................. 4% None None None 4% None None None
Maximum Deferred Sales
Charge (load) (AS A
PERCENTAGE OF ORIGINAL
PURCHASE PRICE OR
REDEMPTION PROCEEDS,
WHICHEVER IS LESS)..... None 5% 0.75% None None 5% 0.75% None
Exchange Fee............. None None None None None None None None
ANNUAL FUND OPERATING
EXPENSES (FEES THAT ARE
DEDUCTED FROM FUND
ASSETS)
Management Fees*......... 0.50% 0.50% 0.50% 0.50% 0.60% 0.60% 0.60% 0.60%
Distribution and/or
Service (12b-1) Fees... 0.25% 1.00% 0.75% None 0.25% 1.00% 0.75% None
Other Expenses........... 0.22% 0.25% 0.23% 0.21% 0.24% 0.27% 0.25% 0.23%
Total Annual Fund
Operating Expenses..... 0.97% 1.75% 1.48% 0.71% 1.09% 1.87% 1.60% 0.83%
Management Fee
Waiver/Expense
Reimbursements**....... N/A N/A N/A N/A N/A N/A N/A N/A
Net Expenses**........... 0.97% 1.75% 1.48% 0.71% 1.09% 1.87% 1.60% 0.83%

<CAPTION>
COMBINED PACE INTERMEDIATE FIXED
INCOME FUND
PRO FORMA
----------------------------------------------
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES (FEES PAID
DIRECTLY FROM YOUR
INVESTMENT)
Maximum Sales Charge
(load) Imposed on
Purchases (AS A
PERCENTAGE OF OFFERING
PRICE)................. 4% None None None
Maximum Deferred Sales
Charge (load) (AS A
PERCENTAGE OF ORIGINAL
PURCHASE PRICE OR
REDEMPTION PROCEEDS,
WHICHEVER IS LESS)..... None 5% 0.75% None
Exchange Fee............. None None None None
ANNUAL FUND OPERATING
EXPENSES (FEES THAT ARE
DEDUCTED FROM FUND
ASSETS)
Management Fees*......... 0.60% 0.60% 0.60% 0.60%
Distribution and/or
Service (12b-1) Fees... 0.25% 1.00% 0.75% None
Other Expenses........... 0.18% 0.21% 0.19% 0.17%
Total Annual Fund
Operating Expenses..... 1.03% 1.81% 1.54% 0.77%
Management Fee
Waiver/Expense
Reimbursements**....... (0.06)% (0.09)% (0.07)% (0.06)%
Net Expenses**........... 0.97% 1.72% 1.47% 0.71%
</TABLE>

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

* For both Funds, "Management Fees" include fees paid to Mitchell Hutchins
for administrative services.

** PACE Trust and Mitchell Hutchins have entered into a written agreement with
respect to PACE Intermediate Fixed Income Fund under which Mitchell
Hutchins is contractually obligated to waive its management fee and/or
reimburse the Fund after the Reorganization to the extent that its total
expenses for the period from the date the Reorganization is effected
through December 1, 2002 otherwise would exceed the "Net Expenses" rates
shown above. The Fund has agreed to repay Mitchell Hutchins for any
reimbursed expenses if it can do so over the following three fiscal years
without causing the Fund's expenses in any of those three years to exceed
the "Net Expenses" rates.

3
<PAGE>
The example below is intended to help you compare the costs of investing in
each Fund, both before and after the Reorganization.

The example below assumes that you invest $10,000 in each Fund (including
the combined Fund) for the time periods indicated and then sell all of your
shares at the end of those periods. The example also assumes that your
investments each have a 5% return each year and that each Fund's operating
expenses remain the same, except for the two-year period when PACE Intermediate
Fixed Income Fund's and the combined Fund's expenses are lower due to the
agreement with Mitchell Hutchins. Although your actual returns and costs may be
higher or lower, based on these assumptions your costs would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
INVESTMENT GRADE INCOME FUND
Class A....................... $495 $697 $ 915 $ 1542
Class B (assuming sale of all
shares at end of period).... 678 851 1149 1667
Class B (assuming no sale of
shares)..................... 178 551 949 1667
Class C (assuming sale of all
shares at end of period).... 226 468 808 1768
Class C (assuming no sale of
shares)..................... 151 468 808 1768
Class Y....................... 73 227 395 883
PACE INTERMEDIATE FIXED INCOME
FUND
Class A....................... 507 733 977 1676
Class B (assuming sale of all
shares at end of period).... 690 888 1211 1800
Class B (assuming no sale of
shares)..................... 190 588 1011 1800
Class C (assuming sale of all
shares at end of period).... 238 505 871 1900
Class C (assuming no sale of
shares)..................... 163 505 871 1900
Class Y....................... 85 265 460 1025
PRO FORMA PACE INTERMEDIATE
FIXED INCOME FUND
Class A....................... 495 703 934 1598
Class B (assuming sale of all
shares at end of period).... 675 852 1163 1718
Class B (assuming no sale of
shares)..................... 175 552 963 1718
Class C (assuming sale of all
shares at end of period).... 225 472 826 1822
Class C (assuming no sale of
shares)..................... 150 472 826 1822
Class Y....................... 73 234 416 943
</TABLE>

SUMMARY COMPARISON OF THE FUNDS

INVESTMENT OBJECTIVES AND POLICIES

Investment Grade Income Fund and PACE Intermediate Fixed Income Fund have
substantially identical investment objectives, policies and overall risk
characteristics in that each Fund seeks current income by investing primarily in
investment grade bonds. Investment Grade Income Fund seeks high current income
consistent with the preservation of capital and liquidity, while PACE
Intermediate Fixed Income Fund seeks current income, consistent with reasonable
stability of principal. PACE Intermediate Fixed Income Fund pursues this
objective by investing primarily in U.S. and foreign government bonds, U.S. and
foreign corporate bonds, and bonds that are backed by mortgages or other assets
and limits its investments to investment grade bonds. Investment Grade Income
Fund pursues this objective by investing primarily in a diversified range of
investment grade bonds, including U.S. government bonds, U.S. and foreign
corporate bonds, and bonds that are backed by mortgages. It also invests, to a
lesser extent, in corporate bonds that are below investment grade. PACE
Intermediate Fixed Income Fund invests in bonds of varying maturities, but
normally limits its overall portfolio duration to between two and four and one-
half years. Investment Grade Income Fund has no duration policy. PACE
Intermediate Fixed Income Fund is a non-diversified fund, which means that the
Fund may invest more of its assets in a single issuer than a diversified fund,
like Investment Grade Income Fund, can.

4
<PAGE>
INVESTMENT ADVISORY SERVICES

Mitchell Hutchins has served as the investment manager and administrator for
PACE Intermediate Fixed Income Fund since its inception in August 1995. As
investment manager for the Fund, Mitchell Hutchins provides portfolio management
oversight rather than directly managing the Fund's investments. Mitchell
Hutchins provides portfolio management oversight principally by performing
initial reviews of prospective sub-advisers and supervising and monitoring the
performance of the sub-advisers thereafter. Mitchell Hutchins also recommends to
PACE Trust whether agreements with sub-advisers should be renewed, modified or
terminated. The Fund's current sub-adviser--Metropolitan West Asset Management,
LLC ("MWAM")--has managed the Fund's investment portfolio since October 10,
2000. Prior to that date, a different sub-adviser managed all the Fund's assets.

Mitchell Hutchins has served as the investment manager or investment adviser
and as administrator for Investment Grade Income Fund since its inception in
August 1984. Prior to October 10, 2000, Mitchell Hutchins managed all the Fund's
assets. On that date, the Fund's current sub-adviser--MWAM--assumed
responsibility for managing the assets of the Fund.

PURCHASE AND REDEMPTION PROCEDURES

Funds in the PaineWebber Flexible Pricing-SM- System generally offer
Class A, Class B, Class C and Class Y shares. PACE Intermediate Fixed Income
Fund did not offer Class A, Class B, Class C or Class Y shares to the public
prior to November [ ], 2000. The purchase and redemption procedures for PACE
Intermediate Fixed Income Fund's Class A, Class B, Class C and Class Y shares
would be the same as those currently in effect for the corresponding classes of
shares of Investment Grade Income Fund. You may exchange Class A, Class B or
Class C shares of PACE Intermediate Fixed Income Fund for shares of the same
class of most other PACE Funds. Exchanges between PaineWebber funds and PACE
Funds will not be activated until on or around March 1, 2001. You may not
exchange Class Y shares.

COMPARISON OF PRINCIPAL RISK FACTORS

Both Funds are subject to substantially similar risk factors associated with
their investments in bonds. An investment in either Fund is not guaranteed; an
investor may lose money by investing in either Fund. The principal risks
presented by the Funds are:

INTEREST RATE RISK--The value of bonds generally can be expected to fall
when interest rates rise and to rise when interest rates fall. Interest rate
risk is the risk that interest rates will rise so that the value of a Fund's
investments in bonds will fall. Interest rate risk is the primary source of risk
for U.S. government bonds and usually for other very high quality bonds. The
impact of changes in the general level of interest rates on lower quality bonds
may be greater or less than the impact on higher quality bonds.

Some corporate bonds, particularly those issued at relatively high interest
rates, provide that the issuer may repay them at a predetermined price earlier
than the maturity date. The issuers of these bonds are most likely to exercise
these "call" provisions if prevailing interest rates are lower than they were
when the bonds were issued. A Fund then may have to reinvest the repayments at
lower interest rates. Bonds subject to call provisions may not benefit fully
from the rise in value that generally occurs for bonds when interest rates fall.

CREDIT RISK--Credit risk is the risk that the issuer of a bond will not make
principal or interest payments when they are due. Even if an issuer does not
default on a payment, a bond's value may decline if the market believes that the
issuer has become less able, or less willing, to make payments on time. Even
high quality bonds are subject to some credit risk. However, credit risk is
greater for lower quality bonds. Bonds that are not investment grade involve
high credit risk and are considered speculative. Some of these low quality bonds
may be in default when purchased by Investment Grade Income Fund. Low quality
bonds may fluctuate in value more than higher quality bonds and, during periods
of market volatility, may be more difficult to sell at the time and price a Fund
desires. Investment Grade Income Fund may invest,

5
<PAGE>
to a limited extent, in corporate bonds that are below investment grade, while
PACE Intermediate Fixed Income Fund limits its investments to investment grade
bonds. As a result, Investment Grade Income Fund is subject to credit risk to a
greater extent than PACE Intermediate Fixed Income Fund.

PREPAYMENT RISK--Payments on bonds that are backed by mortgage loans or
other assets may be received earlier or later than expected due to changes in
the rate at which underlying loans are prepaid. Faster prepayments often happen
when market interest rates are falling. As a result, a Fund may need to reinvest
these early payments at those lower interest rates, thus reducing its income.
Conversely, when interest rates rise, prepayments may happen more slowly,
causing the underlying loans to be outstanding for a longer time. This can cause
the market value of the security to fall because the market may view its
interest rate as too low for a longer term investment.

FOREIGN INVESTING RISK--Foreign investing involves risks relating to
political, social and economic developments abroad to a greater extent than
investing in the securities of U.S. issuers. In addition, there are differences
between U.S. and foreign regulatory requirements and market practices. Foreign
investments denominated in foreign currencies are subject to the risk that the
value of a foreign currency will fall in relation to the U.S. dollar. Currency
exchange rates can be volatile and can be affected by, among other factors, the
general economics of a country, the actions of U.S. and foreign governments or
central banks, the imposition of currency controls or speculation. Investments
in foreign government bonds involve special risks because the investors may have
limited legal recourse in the event of default. Political conditions, especially
a country's willingness to meet the terms of its debt obligations, can be of
considerable significance.

DERIVATIVES RISK--The value of "derivatives"--so-called because their value
"derives" from the value of an underlying asset, reference rate or index--may
rise or fall more rapidly than other investments. For some derivatives, it is
possible for a Fund to lose more than the amount it invested in the derivative.
Options, futures contracts and forward currency contracts are examples of
derivatives. A Fund's use of derivatives may not succeed for various reasons,
including unexpected changes in the values of the derivatives or the assets
underlying them. Also, if a Fund uses derivatives to adjust or "hedge" the
overall risk of its portfolio, the hedge will not succeed if changes in the
value of the derivatives are not matched by opposite changes in the values of
the assets being hedged.

PRIMARY DIFFERENCE IN THE INVESTMENT RISKS OF THE FUNDS

SINGLE ISSUER CONCENTRATION RISK--PACE Intermediate Fixed Income Fund is
non-diversified. A non-diversified fund may invest more than 5% of its total
assets in securities of a single issuer to a greater extent than a diversified
fund. When the Fund holds a large position in the securities of one issuer,
changes in the financial condition or in the market's assessment of that issuer
may cause larger changes in the Fund's total return and in the price of its
shares than if the Fund held only a smaller position.

COMPARISON OF THE FUNDS

INVESTMENT OBJECTIVES

The Funds have substantially identical investment objectives. PACE
Intermediate Fixed Income Fund seeks current income, consistent with reasonable
stability of principal. Investment Grade Income Fund seeks high current income,
consistent with the preservation of capital and liquidity.

INVESTMENT POLICIES

The Funds also have substantially identical investment policies. PACE
Intermediate Fixed Income Fund invests primarily in U.S. and foreign government
bonds, U.S. and foreign corporate bonds, and bonds that are backed by mortgages
and other assets. The Fund limits its investments to investment grade bonds. The
Fund also may invest in preferred stocks. PACE Intermediate Fixed Income Fund
invests in bonds of varying maturities, but normally limits its overall
portfolio "duration" to between two and four and one-

6
<PAGE>
half years. "Duration" is a measure of the fund's exposure to interest rate
risk. A longer duration means that changes in market interest rates are likely
to have a larger effect on the value of the assets in a portfolio. PACE
Intermediate Fixed Income Fund is a non-diversified fund, which means that the
Fund may invest more of its assets in a single issuer than a diversified fund
can.

Investment Grade Income Fund invests primarily in a diversified range of
investment grade bonds, including U.S. government bonds, U.S. and foreign
corporate bonds and bonds that are backed by mortgages. Investment Grade Income
Fund also invests, to a lesser extent, in corporate bonds that are below
investment grade, preferred stocks and bonds that are convertible into common
stocks. Investment Grade Income Fund has no duration policy.

MWAM decides to buy and sell specific bonds for the Funds based on its value
added strategies, with the goal of outperforming the Lehman Brothers
Intermediate Government Credit Index while maintaining below average volatility.
These strategies are anchored by MWAM's long-term economic outlook and include
managing interest rate risk through limited duration shifts, yield curve
management, diversifying the Funds' investments across all permitted investment
sectors while overweighting the most attractive sectors, identifying undervalued
securities and aggressive execution.

SECURITIES OF FOREIGN ISSUERS. Both Funds may invest in U.S. dollar
denominated securities of foreign companies. PACE Intermediate Fixed Income Fund
may invest without limit in U.S. dollar denominated foreign securities and also
may invest, to a limited extent, in securities denominated in foreign currencies
of developed countries. Investment Grade Income Fund must limit its investment
in U.S. dollar denominated securities of foreign issuers to 20% of its net
assets.

DERIVATIVES. The Funds have similar policies with respect to the use of
options, futures, and other derivatives. Investment Grade Income Fund uses
interest rate futures contracts and other derivatives to help manage its
portfolio duration. PACE Intermediate Fixed Income Fund may (but is not required
to) use options, futures and other derivatives as part of its investment
strategy or to help manage portfolio risks.

TEMPORARY DEFENSIVE POSITIONS; CASH RESERVES. Each Fund may take a
defensive position that is different from its normal investment strategy to
protect itself from adverse market conditions. This means that each Fund may
temporarily invest a larger-than-normal part, or even all, of its assets in cash
or money market instruments. In addition, PACE Intermediate Fixed Income Fund
may increase its cash reserves in connection with transitioning its portfolio to
reflect the investment style and strategies of a new investment adviser. Because
these investments provide relatively low income, a defensive or transition
position may not be consistent with achieving a Fund's investment objective.
[PACE Intermediate Fixed Income Fund is normally fully invested in accordance
with its investment objective and policies and thus may take a temporary
defensive position less frequently than would be the case for other similar
mutual funds, including Investment Grade Income Fund.] However, with the
concurrence of Mitchell Hutchins, PACE Intermediate Fixed Income Fund may take a
defensive position that is different from its normal investment strategy.

Each Fund may invest to a limited extent in money market instruments as a
cash reserve for liquidity or other purposes.

OTHER INVESTMENT POLICIES. Each Fund may invest up to 10% of its net assets
in illiquid securities. Both Funds may purchase securities on a when-issued or
delayed delivery basis. Each Fund may lend up to 33 1/3% of its total assets to
qualified broker-dealers or institutional investors. Each Fund may borrow money
from banks or through reverse repurchase agreements, but not in excess of 10% of
its total assets. Neither Fund may purchase securities while borrowings in
excess of 5% of its total assets are outstanding.

PORTFOLIO TURNOVER. Each Fund may engage in frequent trading to achieve its
investment objective. Frequent trading can result in portfolio turnover of 100%
or more (high portfolio turnover). Frequent trading may increase the portion of
a Fund's capital gains that are realized for tax purposes in any given

7
<PAGE>
year, which may increase the Fund's taxable dividends in that year. Frequent
trading also may increase the portion of a Fund's realized capital gains that is
considered "short-term" for tax purposes. Shareholders will pay higher taxes on
dividends that represent net short-term capital gains than they would pay on
dividends that represent net long-term capital gains. Frequent trading also may
result in higher fund expenses due to transaction costs. Neither Fund restricts
the frequency of trading to limit expenses or the tax effect that its dividends
may have on shareholders. The portfolio turnover rates for Investment Grade
Income Fund for the last two fiscal years ended November 30, 1999, and 1998,
were 195% and 173%, respectively, while the portfolio turnover rates for PACE
Intermediate Fixed Income Fund's last two fiscal years ended July 31, 2000 and
1999, were 88% and 89%, respectively.

OPERATIONS OF PACE INTERMEDIATE FIXED INCOME FUND FOLLOWING THE REORGANIZATION

It is not expected that PACE Intermediate Fixed Income Fund will revise any
of its policies following the Reorganization to reflect those of Investment
Grade Income Fund. MWAM has reviewed Investment Grade Income Fund's current
portfolio and determined that Investment Grade Income Fund's holdings generally
are compatible with PACE Intermediate Fixed Income Fund's portfolio. As a
result, Mitchell Hutchins believes that, if the Reorganization is approved, a
substantial portion of Investment Grade Income Fund's assets could be
transferred to and held by PACE Intermediate Fixed Income Fund.

It is expected, however, that some of Investment Grade Income Fund's
holdings may not remain at the time of the Reorganization due to normal
portfolio turnover. It is also expected that if Investment Grade Income Fund's
shareholders approve the Reorganization, the Fund's holdings that are not
compatible with PACE Intermediate Fixed Income Fund's holdings will be
liquidated in an orderly manner in connection with the Reorganization, and the
proceeds of these sales held in temporary investments or reinvested in assets
that are consistent with the holdings of PACE Intermediate Fixed Income Fund.
The portion of Investment Grade Income Fund's assets that will be liquidated in
connection with the Reorganization will depend on market conditions and on the
sub-adviser's continuing assessment of the compatibility of Investment Grade
Income Fund's holdings with PACE Intermediate Fixed Income Fund's portfolio
composition and its investment objective and policies at the approximate time of
the Reorganization. The need for Investment Grade Income Fund to dispose of
investments in connection with the Reorganization may result in the Fund's
selling securities at a disadvantageous time and could result in the Fund's
realizing gains (or losses) that would not otherwise have been realized.

PERFORMANCE

The following bar chart and table provide information about the performance
of PACE Intermediate Fixed Income Fund Class P shares and thus give some
indication of the risks of an investment in the Fund. The Fund's Class P shares
were the only outstanding class of shares during the periods shown.

The bar chart shows how PACE Intermediate Fixed Income Fund's performance
has varied from year to year. The bar chart does not reflect the maximum annual
PACE Program fee of 1.50% (which is not applicable to shares received in the
Reorganization) or the effect of sales charges or the higher expenses of PACE
Intermediate Fixed Income Fund's Class A, Class B and Class C shares; if it did,
the total returns shown would be lower.

The first table that follows the bar chart shows the average annual returns
over several time periods for the Fund's Class P shares. Class P shares are not
subject to the sales charges applicable to the Fund's Class A, Class B and
Class C shares or the higher expenses of these shares. However, because all
classes of shares invest in the same portfolio of securities, their annual
returns would differ only to the extent of the different sales charges or
expenses. The table also does not reflect the maximum annual PACE Program fee
applicable to Class P shares only.

The second table that follows the bar chart shows the average annual total
returns over several time periods for Investment Grade Income Fund's Class A,
Class B, Class C and Class Y shares. This table reflects sales charges and 12b-1
fees for Class A, Class B and Class C shares of the Fund. The Fund's

8
<PAGE>
Class Y shares are not subject to any sales charges or 12b-1 fees and thus are
most comparable to the Class P shares of PACE Intermediate Fixed Income Fund.

The tables also compare each Fund's returns to returns of a broad-based
market index that is unmanaged and, therefore, does not include any fees or
expenses. The two Funds have historically used different indices--the Lehman
Brothers Corporate Bond Index for Investment Grade Income Fund and the Lehman
Brothers Intermediate Government Credit Index for PACE Intermediate Fixed Income
Fund. For comparative purposes, the returns of both indices are shown for each
Fund in the tables below.

Each Fund's past performance does not necessarily indicate how it will
perform in the future. This may be particularly true for the Funds because,
during the periods shown, a different sub-adviser managed the assets of PACE
Intermediate Fixed Income Fund, and Mitchell Hutchins managed the assets of
Investment Grade Income Fund.

PACE INTERMEDIATE FIXED INCOME FUND--TOTAL RETURN ON CLASS P SHARES (1996 IS THE
FUND'S FIRST FULL CALENDAR YEAR OF OPERATIONS.)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
PERCENTAGES
<S> <C>
CALENDAR YEAR
1989
1990
1991
1992
1993
1994
1995
1996 3.14%
1997 7.45%
1998 7.36%
1999 -0.11%
</TABLE>

Total return January 1 to September 30, 2000--6.18%

Best quarter during years shown: 3rd quarter, 1998--4.17%
Worst quarter during years shown: 1st quarter, 1996--(1.13)%

PACE INTERMEDIATE FIXED INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS
(as of December 31, 1999)

<TABLE>
<CAPTION>
CLASS CLASS P LEHMAN BROTHERS INTERMEDIATE LEHMAN BROTHERS
(INCEPTION DATE) (8/24/95) GOVERNMENT CREDIT INDEX CORPORATE BOND INDEX
---------------- --------- ---------------------------- --------------------
<S> <C> <C> <C>
One Year........................... (0.11)% 0.39% (1.95)%
Life of Class...................... 4.97% 5.74% [ ]%
</TABLE>

9
<PAGE>
INVESTMENT GRADE INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS
(as of December 31, 1999)

<TABLE>
<CAPTION>
LEHMAN
LEHMAN BROTHERS
BROTHERS INTERMEDIATE
CLASS CLASS A CLASS B* CLASS C CLASS Y CORPORATE GOVERNMENT
(INCEPTION DATE) (8/31/84) (7/1/91) (7/2/92) (2/20/98) BOND INDEX CREDIT INDEX
---------------- --------- -------- -------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
One Year................. (5.63)% (7.02)% (2.84)% (1.58)% (1.95)% 0.39%
Five Years............... 6.61% 6.35% 6.95% N/A 8.18% %
Ten Years................ 7.31% N/A N/A N/A 8.21% %
Life of Class ........... 8.74% 6.94% 5.88% 1.00% ** **
</TABLE>

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

* Assumes conversion of Class B shares to Class A shares after six years.

** The average annual total returns for the Lehman Brothers Corporate Bond
Index and Lehman Brothers Intermediate Government Credit Index for the life
of each class were as follows: Class A--10.36% and [ ]%; Class B--8.07%
and [ ]%; Class C--7.12% and [ ]%; and Class Y--2.82% and [ ]%,
respectively.

SALES CHARGES

No sales charges apply when Investment Grade Income Fund shareholders
receive shares of PACE Intermediate Fixed Income Fund in connection with the
Reorganization.

DIVIDENDS AND OTHER DISTRIBUTIONS

Investment Grade Income Fund normally declares dividends daily and pays them
monthly. PACE Intermediate Fixed Income Fund normally declares and pays
dividends monthly. Each Fund distributes substantially all of its gains, if any,
annually. Classes with higher expenses are expected to have lower dividends. For
example, Class B and Class C shares are expected to have the lowest dividends of
any class of a Fund's shares, while Class Y shares (and, for PACE Intermediate
Fixed Income Fund, Class P shares) are expected to have the highest dividends.

As a shareholder of PACE Intermediate Fixed Income Fund, you will receive
dividends in additional shares of the Fund unless you elect to receive them in
cash. Your current dividend distribution election for Investment Grade Income
Fund will remain the same after the Reorganization. Contact your Financial
Advisor at PaineWebber if you prefer to change your election.

On or before the Closing Date, Investment Grade Income Fund will distribute
substantially all of its undistributed net investment income, net capital gain,
net short-term capital gain and net gains from foreign currency transactions, if
any, in order to continue to maintain its tax status as a regulated investment
company. It is also expected that PACE Intermediate Fixed Income Fund will
distribute substantially all of its undistributed net investment income.

TAXES

The dividends that you receive from either Fund generally are subject to
federal income tax regardless of whether you receive them in additional Fund
shares or in cash. If you hold Fund shares through a tax-exempt account or plan,
such as an IRA or 401(k) plan, dividends on your shares generally will not be
subject to tax.

10
<PAGE>
When you sell Fund shares, you generally will be subject to federal income
tax on any gain you realize. If you exchange a Fund's shares for shares of
another PaineWebber mutual fund, the transaction will be treated as a sale of
the first fund's shares, and any gain will be subject to federal income tax.

Any distribution of capital gains may be taxed at a lower rate than ordinary
income, depending on whether the Fund held the assets that generated the gains
for more than 12 months. A Fund will tell you how you should treat its dividends
for tax purposes.

FLEXIBLE PRICING: BUYING, SELLING AND EXCHANGING SHARES OF
PACE INTERMEDIATE FIXED INCOME FUND

FLEXIBLE PRICING

PACE Intermediate Fixed Income Fund offers four new classes of
shares--Class A, Class B, Class C and Class Y--established prior to the
Reorganization. The four new classes of shares of PACE Intermediate Fixed Income
Fund and the procedures for buying, selling and exchanging these shares, as
described below, are substantially identical to the corresponding classes of
shares and related procedures of Investment Grade Income Fund. Prior to November
[ ], 2000, PACE Intermediate Fixed Income Fund offered only Class P shares,
which are available only to participants in the PaineWebber PACE-SM- Select
Advisors Program.

No sales charges apply when Investment Grade Income Fund shareholders
receive Class A, Class B, Class C or Class Y shares of PACE Intermediate Fixed
Income Fund as part of the Reorganization. PACE Intermediate Fixed Income Fund
is expected to offer its four new classes of shares to the general public prior
to the Reorganization. Class Y shares are only available to certain types of
investors. Class A, Class B and Class C shares purchased other than as part of
the Reorganization will be subject to the sales charges described below. In
addition, each class has different ongoing expenses.

PACE Intermediate Fixed Income Fund has adopted a plan under Rule 12b-1
governing its Class A, Class B and Class C shares that allows it to pay service
fees for providing services to shareholders and (for Class B and Class C shares)
distribution fees for the sale of its shares. The terms of these plans are
substantially identical to the terms of the corresponding plans now in place for
Investment Grade Income Fund's Class A, Class B and Class C shares. Because the
12b-1 distribution fees for Class B and Class C shares are paid out of the
Fund's assets on an ongoing basis, over time they will increase the cost of your
investment and may cost you more than if you paid a front-end sales charge.

CLASS A SHARES

Class A shares have a front-end sales charge that is included in the
offering price of the Class A shares. This sales charge is not invested in the
Fund. Class A shares pay an annual 12b-1 service fee of 0.25% of average net
assets, but they pay no 12b-1 distribution fees. The ongoing expenses for
Class A shares are lower than for Class B and Class C shares.

The Class A sales charges for each Fund are described in the following
table.

11
<PAGE>
CLASS A SALES CHARGES

<TABLE>
<CAPTION>
DISCOUNT TO SELECTED
SALES CHARGE AS A PERCENTAGE OF: DEALERS AS PERCENTAGE
AMOUNT OF INVESTMENT OFFERING PRICE NET AMOUNT INVESTED OF OFFERING PRICE*
-------------------- -------------- ------------------- ---------------------
<S> <C> <C> <C>
Less than $100,000................. 4.00% 4.17% 3.75%
$100,000 to $249,999............... 3.00 3.09 2.75
$250,000 to $499,999............... 2.25 2.30 2.00
$500,000 to $999,999............... 1.75 1.78 1.50
$1,000,000 and over (1) ........... None None 1.00(2)
</TABLE>

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

(1) A contingent deferred sales charge of 1% of the shares' offering price or
the net asset value at the time of sale by the shareholder, whichever is
less, is charged on sales of shares made within one year of the purchase
date. Class A shares purchased through the reinvestment of dividends are
not subject to this 1% charge. Withdrawals in the first year after purchase
of up to 12% of the value of the Fund account under the fund's Systematic
Withdrawal Plan are not subject to this charge.

(2) Mitchell Hutchins pays 1% to PaineWebber.

* For an initial period ending on or about December 29, 2000, Mitchell
Hutchins will reallow the full amount of the sales charge to selected
dealers.

SALES CHARGE REDUCTIONS AND WAIVERS. You may qualify for a lower sales
charge if you already own Class A shares of a PaineWebber or PaineWebber PACE
mutual fund. You can combine the value of Class A shares that you own in other
PaineWebber or PaineWebber PACE funds and the purchase amount of the Class A
shares of the PaineWebber fund that you are buying.

You may also qualify for a lower sales charge if you combine your purchases
with those of:

- your spouse, parents or children under age 21;

- your Individual Retirement Accounts (IRAs);

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

- a company that you control;

- a trust that you created;

- Uniform Transfers to Minors Act/Uniform Gifts to Minors Act accounts
created by you or by a group of investors for your children; or

- accounts with the same adviser.

You may qualify for a complete waiver of the sales charge if you:

- Are an employee of PaineWebber or its affiliates or the spouse, parent or
child under age 21 of a PaineWebber employee;

- Buy these shares through a PaineWebber Financial Advisor who was formerly
employed as an investment executive with a competing brokerage firm that
was registered as a broker-dealer with the SEC, and

-- you were the Financial Advisor's client at the competing brokerage
firm;

-- within 90 days of buying shares in a fund, you sell shares of one or
more mutual funds that were principally underwritten by the
competing brokerage firm or its affiliates, and you either paid a
sales charge to buy those shares, pay a contingent deferred sales
charge when selling them or held those shares until the contingent
deferred sales charge was waived; and

12
<PAGE>
-- you purchase an amount that does not exceed the total amount of
money you received from the sale of the other mutual fund;

- Acquire these shares through the reinvestment of dividends of a
PaineWebber unit investment trust;

- Are a 401(k) or 403(b) qualified employee benefit plan with 50 or more
eligible employees in the plan or at least $1 million in assets;

- Are a participant in the PaineWebber Members Only-SM- Program. For
investments made pursuant to this waiver, Mitchell Hutchins may make
payments out of its own resources to PaineWebber and to participating
membership organizations in a total amount not to exceed 1% of the amount
invested; or

- Acquire these shares through a PaineWebber InsightOne-SM- Program
brokerage account; or

- [Buy shares through PaineWebber's PACE-SM- Multi-Advisor Program.]

CLASS B SHARES

Class B shares have a contingent deferred sales charge. When you purchase
Class B shares, we invest 100% of your purchase in Fund shares. However, you may
have to pay the deferred sales charge when you sell your Fund shares, depending
on how long you own the shares.

Class B shares pay an annual 12b-1 distribution fee of 0.75% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
If you hold your Class B shares for six years, they will automatically convert
to Class A shares, which have lower ongoing expenses.

If you sell Class B shares before the end of six years, you will pay a
deferred sales charge. We calculate the deferred sales charge by multiplying the
lesser of the net asset value of the Class B shares at the time of purchase or
the net asset value at the time of sale by the percentage shown below:

<TABLE>
<CAPTION>
PERCENTAGE BY WHICH
IF YOU SELL THE SHARES' NET ASSET
SHARES WITHIN: VALUE IS MULTIPLIED:
-------------- ---------------------
<S> <C>
1st year since purchase........................... 5%
2nd year since purchase........................... 4
3rd year since purchase........................... 3
4th year since purchase........................... 2
5th year since purchase........................... 2
6th year since purchase........................... 1
7th year since purchase........................... None
</TABLE>

We will not impose the deferred sales charge on Class B shares purchased
through the reinvestment of dividends or on withdrawals in any year of up to 12%
of the value of your Class B shares under the Systematic Withdrawal Plan.

For purposes of determining your deferred sales charge and whether to
convert your Class B shares to Class A shares, the holding period for the
Class B shares of PACE Intermediate Fixed Income Fund that you receive in
connection with the Reorganization will include the period for which you held
the corresponding Class B shares of Investment Grade Income Fund and any other
PaineWebber fund whose shares you exchanged for Class B shares of Investment
Grade Income Fund.

To minimize your deferred sales charge, we will assume that you are selling:

- First, Class B shares representing reinvested dividends, and

13
<PAGE>
- Second, Class B shares that you have owned the longest.

SALES CHARGE WAIVERS. You may qualify for a waiver of the deferred sales
charge on a sale of shares if:

- You participate in the Systematic Withdrawal Plan;

- You are older than 59-1/2 and are selling shares to take a distribution
from certain types of retirement plans;

- You receive a tax-free return of an excess IRA contribution;

- You receive a tax-qualified retirement plan distribution following
retirement;

- The shares are sold within one year of your death and you owned the
shares either (1) as the sole shareholder or (2) with your spouse as a
joint tenant with the right of survivorship; or

- The shares are held in trust and the death of the trustee requires
liquidation of the trust.

CLASS C SHARES

Class C shares have a level load sales charge in the form of ongoing 12b-1
distribution fees. When you purchase Class C shares, we will invest 100% of your
purchase in Fund shares.

Class C shares pay an annual 12b-1 distribution fee of 0.50% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
Class C shares do not convert to another class of shares. This means that you
will pay the 12b-1 fees for as long as you own your shares.

Class C shares also have a contingent deferred sales charge. You may have to
pay the deferred sales charge if you sell your shares within one year of the
date you purchased them. We calculate the deferred sales charge on sales of
Class C shares by multiplying 0.75% by the lesser of the net asset value of the
Class C shares at the time of purchase or the net asset value at the time of
sale. We will not impose the deferred sales charge on Class C shares purchased
through the reinvestment of dividends or on withdrawals in the first year after
purchase of up to 12% of the value of your Class C shares under the Systematic
Withdrawal Plan.

For purposes of determining your deferred sales charge, the holding period
for the Class C shares of PACE Intermediate Fixed Income Fund that you receive
in connection with the Reorganization will include the period for which you held
the corresponding Class C shares of Investment Grade Income Fund and any other
PaineWebber fund whose shares you exchanged for Class C shares of Investment
Grade Income Fund.

You may be eligible to sell your shares without paying a contingent deferred
sales charge if you are a 401(k) or 403(b) qualified employee benefit plan with
50 or more eligible employees in the plan or at least $1 million in assets.

NOTE ON SALES CHARGE WAIVERS FOR CLASS A, CLASS B AND CLASS C SHARES:

If you think that you qualify for any of these sales charge waivers
described above, you will need to provide documentation to PaineWebber or the
Fund. For more information, you should contact your PaineWebber Financial
Advisor or correspondent firm or call 1-800-647-1568. If you want information on
the Fund's Systematic Withdrawal Plan, see the SAI or contact your PaineWebber
Financial Advisor or correspondent firm.

CLASS Y SHARES

Class Y shares have no sales charge. Only specific types of investors can
purchase Class Y shares. You may be eligible to purchase Class Y shares if you:

- [Buy shares through PaineWebber's PACE-SM- Multi-Advisor Program];

14
<PAGE>
- Buy $10 million or more of PaineWebber fund shares at any one time;

- Are a qualified retirement plan with 5,000 or more eligible employees or
$50 million in assets;

- Are a corporation, bank, trust company, insurance company, pension fund,
employee benefit plan, professional firm, trust, estate or educational,
religious or charitable organization with 5,000 or more employees or with
over $50 million in investable assets; or

- Are an investment company advised by PaineWebber or an affiliate of
PaineWebber.

The trustee of PaineWebber's 401(k) Plus Plan for its employees is also
eligible to purchase Class Y shares on behalf of that Plan.

Class Y shares do not pay ongoing distribution or service fees or sales
charges. The ongoing expenses for Class Y shares are the lowest for all the
classes.

BUYING SHARES

If you are a PaineWebber client, or a client of a PaineWebber correspondent
firm, you can purchase Fund shares through your Financial Advisor. Otherwise,
you can invest in the Funds through the Funds' transfer agent, PFPC Inc. You can
obtain an application by calling 1-800-647-1568. You must complete and sign the
application and mail it, along with a check, to:

PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.

If you wish to invest in other PaineWebber funds, you can do so by:

- Contacting your Financial Advisor (if you have an account at PaineWebber
or at a PaineWebber correspondent firm);

- Mailing an application with a check; or

- Opening an account by exchanging shares from another PaineWebber fund.

You do not have to complete an application when you make additional
investments in the same fund.

The Fund and Mitchell Hutchins reserve the right to reject a purchase order
or suspend the offering of shares.

MINIMUM INVESTMENTS

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

The Fund may waive or reduce these amounts for:

- Employees of PaineWebber or its affiliates; or

- Participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the Fund's automatic investment plans.

FREQUENT TRADING. The interests of the Fund's long-term shareholders and its
ability to manage its investments may be adversely affected when its shares are
repeatedly bought and sold in response to short-term market fluctuations--also
known as "market timing." When large dollar amounts are involved, the Fund may
have difficulty implementing long-term investment strategies, because it cannot
predict how much cash it will have to invest. Market timing also may force the
Fund to sell portfolio securities at disadvantageous times to raise the cash
needed to buy a market timer's fund shares. These factors may hurt the Fund's
performance and its shareholders. When Mitchell Hutchins believes frequent
trading

15
<PAGE>
would have a disruptive effect on the Fund's ability to manage its investments,
Mitchell Hutchins and the Fund may reject purchase orders and exchanges into the
Fund by any person, group or account that Mitchell Hutchins believes to be a
market timer. The Fund may notify the market timer that a purchase order or an
exchange has been rejected after the day the order is placed.

SELLING SHARES

You can sell your Fund shares at any time. If you own more than one class of
shares, you should specify which class you want to sell. If you do not, the Fund
will assume that you want to sell shares in the following order: Class A, then
Class C, then Class B and last, Class Y.

If you want to sell shares that you purchased recently, the Fund may delay
payment until it verifies that it has received good payment. If you purchased
shares by check, this can take up to 15 days.

If you have an account with PaineWebber or a PaineWebber correspondent firm,
you can sell shares by contacting your Financial Advisor.

If you do not have an account at PaineWebber or a correspondent firm, and
you bought your shares through the transfer agent, you can sell your shares by
writing to the Fund's transfer agent. Your letter must include:

- Your name and address;

- The Fund's name;

- The Fund account number;

- The dollar amount or number of shares you want to sell; and

- A guarantee of each registered owner's signature. A signature guarantee
may be obtained from a financial institution, broker, dealer or clearing
agency that is a participant in one of the medallion programs recognized
by the Securities Transfer Agents Association. These are: Securities
Transfer Agents Medallion Program (STAMP), Stock Exchanges Medallion
Program (SEMP) and the New York Stock Exchange Medallion Signature
Program (MSP). The Fund will not accept signature guarantees that are not
a part of these programs.

Mail the letter to:

PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.

If you sell Class A shares and then repurchase Class A shares of the Fund
within 365 days of the sale, you can reinstate your account without paying a
sales charge.

It costs the Fund money to maintain shareholder accounts. Therefore, the
Fund reserves the right to repurchase all shares in any account that has a net
asset value of less than $500. If the Fund elects to do this with your account,
it will notify you that you can increase the amount invested to $500 or more
within 60 days. The Fund will not repurchase shares in accounts that fall below
$500 solely because of a decrease in the Fund's net asset value.

EXCHANGING SHARES

You may exchange Class A, Class B or Class C shares of the Fund for shares
of the same class of the other PACE funds or of PaineWebber Money Market Fund.
(It is expected that shareholders will also be able to exchange Class A,
Class B or Class C shares of a PACE fund for shares of the same class of certain
other PaineWebber mutual funds beginning on or about March 1, 2001.) You may not
exchange Class Y shares.

16
<PAGE>
You will not pay either a front-end sales charge or a deferred sales charge
when you exchange shares. However, you may have to pay a deferred sales charge
if you later sell the shares you acquired in the exchange. The Fund will use the
date that you purchased the shares in the first fund to determine whether you
must pay a deferred sales charge when you sell the shares in the acquired fund.

You may not be able to exchange your shares if your exchange is not as large
as the minimum investment amount in that other fund.

You may exchange shares of one fund for shares of another fund only after
the first purchase has settled and the first fund has received your payment.

[CONVERSION OF CLASS P SHARES INTO CLASS A SHARES. Class A shares of PACE
Intermediate Fixed Income Fund also may be acquired through conversion of
Class P shares of the Fund if a PaineWebber PACE Program participant terminates
his or her participation in that program and wishes to continue investing in the
Fund.]

PAINEWEBBER AND CORRESPONDENT FIRM CLIENTS. If you bought your shares through
PaineWebber or a correspondent firm, you may exchange your shares by placing an
order with your Financial Advisor.

OTHER INVESTORS. If you are not a PaineWebber or correspondent firm client, you
may exchange your shares by writing to the Fund's transfer agent. You must
include:

- Your name and address;

- The name of the fund whose shares you are selling and the name of the
fund whose shares you want to buy;

- Your account number;

- How much you are exchanging (by dollar amount or by number of shares to
be sold); and

- A guarantee of your signature. (See "Selling Shares" for information on
obtaining a signature guarantee.)

Mail the letter to:

PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.

The Fund may modify or terminate the exchange privilege at any time.

PRICING AND VALUATION

The price at which you may buy, sell or exchange Fund shares is based on net
asset value per share. The Fund calculates net asset value on days that the New
York Stock Exchange, Inc. ("NYSE") is open. The Fund calculates net asset value
separately for each class as of the close of regular trading on the NYSE
(generally, 4:00 p.m., Eastern time). The NYSE normally is not open on most
national holidays and on Good Friday, and the Fund does not price its shares on
these days. If trading on the NYSE is halted for the day before 4:00 p.m.,
Eastern time, the Fund's net asset value per share will be calculated as of the
time trading was halted.

Your price for buying, selling or exchanging shares will be based on the net
asset value that is next calculated after the Fund accepts your order. If you
place your order through PaineWebber, your PaineWebber Financial Advisor is
responsible for making sure that your order is promptly sent to the Fund.

17
<PAGE>
You should keep in mind that a front-end sales charge may be applied to your
purchase if you buy Class A shares. A deferred sales charge may be applied when
you sell Class B or Class C shares.

The Fund calculates its net asset value based on the current market value
for its portfolio securities. The Fund normally obtains market values for its
securities from independent pricing services that use reported last sales
prices, current market quotations or valuations from computerized "matrix"
systems that derive values based on comparable securities. If a market value is
not available from an independent pricing source for a particular security, that
security is valued at a fair value determined by or under the direction of the
Fund's board. The Fund normally uses the amortized cost method to value bonds
that will mature in 60 days or less.

Judgment plays a greater role in valuing thinly traded securities, including
many lower-rated bonds, because there is less reliable, objective data
available.

The Fund calculates the U.S. dollar value of investments that are
denominated in foreign currencies daily, based on current exchange rates. The
Fund may own securities, including some securities that trade primarily in
foreign markets, that trade on weekends or other days on which the Fund does not
calculate net asset value. As a result, the Fund's net asset value may change on
days when you will not be able to buy and sell Fund shares. If the Fund
concludes that a material change in the value of a foreign security has occurred
after the close of trading in its principal foreign market but before the close
of regular trading on the NYSE, the Fund may use fair value methods to reflect
those changes. This policy is intended to assure that the Fund's net asset value
fairly reflects security values as of the time of pricing.

MANAGEMENT

INVESTMENT MANAGER AND INVESTMENT ADVISER

Mitchell Hutchins is the investment manager and administrator of both PACE
Intermediate Fixed Income Fund and Investment Grade Income Fund. Mitchell
Hutchins is located at 51 West 52nd Street, New York, New York 10019-6114, and
is a wholly owned asset management subsidiary of PaineWebber Incorporated, which
is wholly owned by Paine Webber Group Inc. ("PW Group"), a publicly owned
financial services holding company. On September 30, 2000, Mitchell Hutchins was
adviser or sub-adviser of 31 investment companies with 75 separate portfolios
and aggregate assets of approximately $57.9 billion.

On July 12, 2000, PW Group and UBS AG ("UBS") announced that they had
entered into an agreement and plan of merger pursuant to which PW Group will
merge into a wholly owned subsidiary of UBS. If all required approvals are
obtained, and the required conditions are satisfied, PW Group and UBS expect to
complete the transaction in November 2000. UBS, with headquarters in Zurich,
Switzerland, is an internationally diversified organization with operations in
many areas of the financial services industry.

As investment manager for PACE Intermediate Fixed Income Fund, Mitchell
Hutchins recommends sub-advisers to the Board of PACE Trust to manage the Fund's
investments and monitors and reviews the performance of those sub-advisers. PACE
Trust has received an exemptive order from the SEC to permit Mitchell Hutchins
(subject to Board approval) to select and replace investment advisers and to
amend the sub-advisory contracts between Mitchell Hutchins and the sub-advisers
without obtaining shareholder approval.

As investment manager for Investment Grade Income Fund, Mitchell Hutchins
recommends sub-advisers to the Board of Managed Investments Trust and monitors
and reviews the performance of those sub-advisers. Since October 10, 2000,
Mitchell Hutchins and MWAM have provided investment management services to the
Fund under interim contracts approved by the Board of Managed Investments Trust.
Prior to October 10, 2000, Mitchell Hutchins managed Investment Grade Income
Fund's assets directly.

18
<PAGE>
SUB-ADVISER

The same sub-adviser--MWAM--manages the assets of each Fund. MWAM is located
at 11766 Wilshire Blvd., Suite 1580, Los Angeles, California 90025. MWAM was
formed in 1996 and, as of September 30, 2000, had approximately $8.7 billion in
fixed income investments under management.

MWAM uses a team approach in advising each Fund. The team members for PACE
Intermediate Fixed Income Fund are Stephen Kane, Laird R. Landmann, Tad Rivelle
and Brian H. Loo. These same team members and Scott B. Dubchansky advise
Investment Grade Income Fund. All team members have held their responsibilities
for each Fund since October 10, 2000.

Mr. Dubchansky has been chief executive officer of MWAM since August 1996.
From August 1992 through August 1996, he was a senior vice president of
Donaldson Lufkin & Jenrette in the fixed income division. Prior to August 1992,
Mr. Dubchansky was senior vice president, fixed income sales, at Kidder Peabody
and responsible for fixed income sales to institutional clients.

Mr. Kane has been a portfolio manager with MWAM since August 1996. From
November 1995 until July 1996, he was an account manager with PIMCO in Newport
Beach, California. Before then, Mr. Kane was a merchant banking associate with
Union Bank in Los Angeles, California.

Mr. Landmann has been a managing director and portfolio manager with MWAM
since August 1996. From November 1992 until July 1996, he was a principal and
co-director of fixed income with Hotchkis and Wiley in Los Angeles, California.
Before then, he was a portfolio manager with PIMCO in Newport Beach, California.

Mr. Rivelle has been the chief investment officer and a managing director
with MWAM since August 1996. From November 1992 until July 1996, he was a
principal and co-director of fixed income with Hotchkis and Wiley in Los
Angeles, California. Before then, he was a portfolio manager with PIMCO in
Newport Beach, California.

Mr. Loo has been a portfolio manager and analyst with MWAM since August
1996. From June 1996 until July 1996, Mr. Loo worked as an analyst with Hotchkis
and Wiley in Los Angeles, California. Before then, he worked as an analyst with
Trust Company of the West (starting in May 1994 while completing a graduate
finance degree at Carnegie Mellon University).

ADVISORY FEES AND FUND EXPENSES

PACE Intermediate Fixed Income Fund pays fees to Mitchell Hutchins for
management and administration services at the combined annual contract rate of
0.60% of average daily net assets. During the fiscal year ended July 31, 2000,
PACE Intermediate Fixed Income Fund paid Mitchell Hutchins at the lower
effective rate of 0.59% of the Fund's average daily net assets because Mitchell
Hutchins waived a portion of its fee. This combined fee includes an annual
contract rate of 0.40% for investment management services and 0.20% for
administrative services, both expressed as a percentage of the Fund's average
daily net assets. Investment Grade Income Fund paid fees to Mitchell Hutchins
for investment advisory and administration services for the Fund's most recent
fiscal year at the rate of 0.50% of the Fund's average daily net assets.

Although the management fee paid by PACE Intermediate Fixed Income Fund to
Mitchell Hutchins is greater than the management fee for Investment Grade Income
Fund, Mitchell Hutchins has entered into a written management fee waiver and
expense reimbursement agreement with PACE Intermediate Fixed Income Fund to
assure that the Fund's overall operating expenses after the Reorganization will
be no higher than the current overall operating expenses of Investment Grade
Income Fund. This agreement will remain in effect for the period from the date
the Reorganization is effected until December 1, 2002. Absent this agreement,
the expenses of PACE Intermediate Fixed Income Fund immediately following the
Reorganization would be somewhat higher than the current operating expenses of
Investment Grade Income Fund.

19
<PAGE>
ADDITIONAL INFORMATION ABOUT THE REORGANIZATION

REASONS FOR THE REORGANIZATION

Managed Investments Trust's Board approved the proposed Reorganization of
Investment Grade Income Fund into PACE Intermediate Fixed Income Fund at a
meeting held on October 6, 2000. At that meeting and in a series of prior
meetings and presentations, Mitchell Hutchins explained to the Board that it had
undertaken an extensive review of whether the best interests of shareholders of
a number of PaineWebber funds, including Investment Grade Income Fund, would be
served by continuing to operate the funds under their current arrangements. For
Investment Grade Income Fund, Mitchell Hutchins' review included a possible
restructuring of the Fund's investment management arrangements and a possible
reorganization into another PaineWebber fund. Mitchell Hutchins noted that,
although Investment Grade Income Fund has performed well, it generally has
underperformed its benchmark index. Mitchell Hutchins also noted that PACE
Intermediate Fixed Income Fund has a substantially identical investment
objective and, like Investment Grade Income Fund, invests primarily in
investment grade bonds. Mitchell Hutchins also advised the Board of Managed
Investments Trust that the investment management arrangements for PACE
Intermediate Fixed Income Fund were being changed. Mitchell Hutchins had
concluded that the former sub-adviser of PACE Intermediate Fixed Income Fund had
underperformed over a period of time and had recommended to PACE Trust's Board
that it be replaced. The Board of PACE Trust approved Mitchell Hutchins'
recommendations. A new sub-adviser--MWAM--started managing the Fund's assets
effective October 10, 2000. (See "Comparison of the Funds" above for a more
complete description of the investment objectives, policies and risks of the
Funds.)

Mitchell Hutchins stated its belief that the reorganization of Investment
Grade Income Fund into PACE Intermediate Fixed Income Fund would likely benefit
Investment Grade Income Fund's shareholders because the larger asset base of the
combined Fund could give the combined Fund greater opportunities to diversify
investments and realize greater economies of scale. Mitchell Hutchins noted that
the investment management and administration fee currently paid by PACE
Intermediate Fixed Income Fund is greater than that currently paid by Investment
Grade Income Fund. However, Mitchell Hutchins informed the Board that it had
entered into a written management fee waiver and expense reimbursement agreement
with PACE Intermediate Fixed Income Fund to waive its management fee and
reimburse that Fund to the extent that its total annual operating expenses for
each class of shares for the period from the date of the Reorganization through
December 1, 2002 would otherwise exceed the current overall operating expenses
of the corresponding class of shares of Investment Grade Income Fund. Mitchell
Hutchins explained that, as a result, it is anticipated that current
shareholders of each class of shares of Investment Grade Income Fund who will
become shareholders of the combined Fund if the Reorganization is approved will
be subject to total annual operating expenses that are no higher than the
expenses they currently pay as shareholders of Investment Grade Income Fund
during the period of the fee waiver and expense reimbursement. (See "Comparative
Fee Table" above for a more complete description of the fees and expenses of the
Funds, both before and after the Reorganization.)

Mitchell Hutchins then proposed immediate changes in the investment
management arrangements for Investment Grade Income Fund. Mitchell Hutchins
advised the Board of Managed Investments Trust that the proposed investment
management changes represented its judgment of the best management structure for
the Fund and believed that the changes would be more likely to help Investment
Grade Income Fund achieve its investment objective through better long-term
performance. Mitchell Hutchins noted its experience in selecting and monitoring
unaffiliated sub-advisers--particularly with respect to the various different
series of PACE Trust, all but one of which are managed by sub-advisers. Mitchell
Hutchins recommended to the Board of Managed Investments Trust that the same
sub-adviser that would be managing the assets of PACE Intermediate Fixed Income
Fund--MWAM--be retained on an interim basis to manage the assets of Investment
Grade Income Fund. After consideration of all the information presented by
Mitchell Hutchins, inquiries into the ability and resources of the proposed
sub-adviser to provide appropriate investment management services for the assets
of Investment Grade Income Fund and

20
<PAGE>
interviews with personnel of the proposed sub-adviser, Managed Investments
Trust's Board determined to implement the new investment management arrangements
effective October 10, 2000.

To implement the new investment management arrangements for Investment Grade
Income Fund, the Board of Managed Investments Trust, effective October 10, 2000,
terminated the existing investment advisory and administration contract between
the Fund and Mitchell Hutchins and approved a new interim contract with Mitchell
Hutchins and an interim sub-advisory contract between Mitchell Hutchins and the
sub-adviser. Under the Interim Management and Administration Contract ("Interim
Management Contract"), Mitchell Hutchins serves as investment manager for
Investment Grade Income Fund and provides portfolio management oversight as
opposed to direct management of the Fund's investments. Mitchell Hutchins
provides portfolio management oversight principally by performing initial
reviews of prospective sub-advisers and supervising and monitoring the
performance of the sub-advisers thereafter. The Interim Management Contract and
interim sub-advisory contract will terminate on the earlier of 150 days from
their effective date or the Closing Date of the Reorganization.

Mitchell Hutchins then reminded the Board that, once the new investment
management arrangements were in place, Investment Grade Income Fund and PACE
Intermediate Fixed Income Fund would be managed in a very similar manner.
Mitchell Hutchins noted its belief that operating two funds that offer
essentially the same investments and the same management would result in higher
expenses and less efficient operations than operating a single fund that
combines the assets of the two original funds. Mitchell Hutchins also stated its
belief that it would not be desirable from a marketing or administrative
perspective to maintain and distribute shares for two substantially similar
funds. Mitchell Hutchins noted, moreover, that PACE Intermediate Fixed Income
Fund has the additional flexibility to change its sub-adviser or add additional
sub-advisers when Mitchell Hutchins and the Board of PACE Trust decide, without
the cost or delay of needing first to obtain approval by a vote of the
shareholders of PACE Intermediate Fixed Income Fund.

Finally, Mitchell Hutchins reviewed with the Board of Managed Investments
Trust the principal terms of the Plan. Mitchell Hutchins informed the Board that
the Reorganization would be tax-free to Investment Grade Income Fund and its
shareholders, that shareholders of the combined Fund after the Reorganization
could continue to exchange into other PaineWebber open-end funds without having
to pay an additional sales load should their investment priorities change, and
that no sales charges would be imposed on any PACE Intermediate Fixed Income
Fund shares issued in connection with the Reorganization. Furthermore, Mitchell
Hutchins informed the Board of Managed Investments Trust that, for purposes of
calculating the contingent deferred sales charge, the holding period for the
Class B and Class C shares distributed to Class B and Class C shareholders of
Investment Grade Income Fund will include the holding period for the shares of
Investment Grade Income Fund and any other PaineWebber fund shares of the same
class that were exchanged for shares of Investment Grade Income Fund.

As part of its considerations, the Board of Managed Investments Trust
examined a number of factors with respect to the Reorganization, including:
(1) the compatibility of the Funds' investment objectives, policies and
restrictions; (2) the Funds' respective investment performances; (3) the likely
impact of the Reorganization on the expense ratio of PACE Intermediate Fixed
Income Fund and that expense ratio relative to Investment Grade Income Fund's
current expense ratio; (4) the costs to be incurred by each Fund as a result of
the Reorganization being borne by Mitchell Hutchins; (5) the compatibility of
the Funds' portfolio holdings and the effect on Investment Grade Income Fund and
its shareholders of any realignment of its portfolio in connection with the
Reorganization; (6) the tax consequences of the Reorganization; (7) the
potential benefits of the Reorganization to other persons, including Mitchell
Hutchins and its affiliates; (8) Mitchell Hutchins' assessment that the proposed
Reorganization will be beneficial to the shareholders of Investment Grade Income
Fund and will not dilute their interests; (9) the advisory arrangements in place
for the Funds and the level and quality of investment advisory services provided
or to be provided by Mitchell Hutchins and MWAM; and (10) the terms of the
proposed Plan.

21
<PAGE>
On the basis of the information provided to it and its evaluation of that
information, the Board of Managed Investments Trust, including a majority of its
Independent Trustees, determined that the Reorganization would be in the best
interests of Investment Grade Income Fund and that the interests of existing
Investment Grade Income Fund shareholders will not be diluted as a result of the
Reorganization. THEREFORE, THE BOARD OF MANAGED INVESTMENTS TRUST UNANIMOUSLY
APPROVED THE REORGANIZATION AND RECOMMENDED THE APPROVAL OF THE PLAN BY THE
SHAREHOLDERS OF INVESTMENT GRADE INCOME FUND AT THE MEETING.

TERMS OF THE REORGANIZATION

The terms and conditions under which the Reorganization may be consummated
are set forth in the Plan. Significant provisions of the Plan are summarized
below; however, this summary is qualified in its entirety by reference to the
Plan. A copy of the form of Agreement and Plan of Reorganization and Termination
is attached as Appendix A to this Proxy Statement/Prospectus.

The Plan contemplates (1) PACE Intermediate Fixed Income Fund's acquiring on
the Closing Date all the assets of Investment Grade Income Fund in exchange
solely for PACE Intermediate Fixed Income Fund shares and PACE Intermediate
Fixed Income Fund's assumption of all of Investment Grade Income Fund's stated
liabilities and (2) the distribution of those shares to Investment Grade Income
Fund shareholders. Investment Grade Income Fund's assets include all cash, cash
equivalents, securities, receivables (including interest and dividends
receivable), claims and rights of action, rights to register shares under
applicable securities laws, books and records, deferred and prepaid expenses
shown as assets on its books and other property owned by it as of the close of
business on the Closing Date ("Effective Time") (collectively, the "Assets").
PACE Intermediate Fixed Income Fund will assume from Investment Grade Income
Fund all its liabilities, debts, obligations, and duties of whatever kind or
nature, whether absolute, accrued, contingent, or otherwise, whether or not
arising in the ordinary course of business, and whether or not specifically
referred to in the Plan, but only to the extent disclosed or provided for in
Investment Grade Income Fund's most recent annual and semi-annual financial
statements, or incurred by Investment Grade Income Fund subsequent to the date
of those financial statements and disclosed in writing to and accepted by PACE
Trust (collectively, the "Liabilities"); provided, however, that Investment
Grade Income Fund will use its best efforts to discharge all of its known
Liabilities prior to the Effective Time. PACE Intermediate Fixed Income Fund
will deliver its shares to Investment Grade Income Fund, which then will be
distributed to Investment Grade Income Fund's shareholders.

The value of the Assets to be acquired, and the amount of the Liabilities to
be assumed, by PACE Intermediate Fixed Income Fund and the NAV of a PACE
Intermediate Fixed Income Fund share will be determined as of the close of
regular trading on the NYSE on the Closing Date ("Valuation Time"), using the
applicable valuation procedures described in PACE Intermediate Fixed Income
Fund's then-current Prospectus and SAI. These procedures are identical to those
used by Investment Grade Income Fund and described in its Prospectus and SAI.
Investment Grade Income Fund's net asset value will be the value of its Assets
to be acquired by PACE Intermediate Fixed Income Fund, less the amount of
Investment Grade Income Fund's Liabilities, as of the Valuation Time.

On, or as soon as practicable after, the Closing Date, Investment Grade
Income Fund will distribute to its shareholders of record as of the Effective
Time the PACE Intermediate Fixed Income Fund shares it receives, by class, so
that each Investment Grade Income Fund shareholder will receive the number of
full and fractional shares of the corresponding class of PACE Intermediate Fixed
Income Fund equal in aggregate NAV to the shareholder's shares in Investment
Grade Income Fund. That distribution will be accomplished by opening accounts on
the books of PACE Intermediate Fixed Income Fund in the names of Investment
Grade Income Fund's shareholders and crediting those accounts with PACE
Intermediate Fixed Income Fund shares equal in aggregate NAV to the
shareholders' shares in Investment Grade Income Fund. Fractional shares of PACE
Intermediate Fixed Income Fund will be rounded to the third decimal place.

22
<PAGE>
Immediately after the Reorganization, each former shareholder of Investment
Grade Income Fund will own shares of the class of PACE Intermediate Fixed Income
Fund equal in aggregate NAV to the aggregate NAV of that shareholder's shares of
the corresponding class of Investment Grade Income Fund immediately prior to the
Reorganization. The NAV per share of PACE Intermediate Fixed Income Fund will
not change as a result of the Reorganization. Thus, the Reorganization will not
result in a dilution of any shareholder interest in either Fund. In addition,
Mitchell Hutchins (not the Funds) will bear the expense of the Reorganization.
Investment Grade Income Fund will be terminated after the Reorganization.

The consummation of the Reorganization is subject to a number of conditions
set forth in the Plan, some of which may be waived by either Fund. In addition,
the Plan may be amended in any mutually agreeable manner, except that no
amendment may be made subsequent to the Meeting that would have a material
adverse effect on the interests of Investment Grade Income Fund shareholders. If
the Reorganization is not approved by shareholders at the Meeting, Investment
Grade Income Fund will continue to operate as a series of Managed Investments
Trust and its Board will then consider other options and alternatives for the
future of the Fund, including the liquidation of the Fund, resubmitting this
proposal for shareholder approval or other appropriate action.

DESCRIPTION OF SECURITIES TO BE ISSUED

PACE Intermediate Fixed Income Fund is authorized to issue an unlimited
number of shares of beneficial interest, par value $0.001 per share. The Fund's
shares are divided into five classes, designated Class A, Class B, Class C,
Class Y and Class P shares. Class P shares are not involved in the
Reorganization. A share of each class of PACE Intermediate Fixed Income Fund
represents an identical interest in the Fund's investment portfolio and has the
same rights, privileges and preferences. Each share of the Fund is entitled to
participate equally in dividends and other distributions of the Fund, except
that dividends and distributions shall appropriately reflect expenses allocated
to a particular class. Shares of the Fund entitle their holders to one vote per
full share and fractional votes for fractional shares held. PACE Trust does not
hold annual meetings. Shares of the Fund generally are voted together, except
that only the shareholders of a particular class of the Fund may vote on matters
affecting only that class, such as the terms of a Rule 12b-1 Plan as it relates
to the class. Shares of each series of PACE Trust will be voted separately,
except when an aggregate vote of all the series is required by law.

TEMPORARY WAIVER OF INVESTMENT RESTRICTIONS

Certain fundamental investment restrictions of Investment Grade Income Fund,
which prohibit it from acquiring more than a stated percentage of ownership of
another company, might be construed as restricting its ability to carry out the
Reorganization. By approving the Plan, you agree to waive, only for the purpose
of the Reorganization, those fundamental investment restrictions that could
prohibit or otherwise impede the transaction.

FEDERAL INCOME TAX CONSIDERATIONS

The Reorganization is intended to be a tax-free reorganization within the
meaning of section 368(a)(1)(D) of the Code. Managed Investments Trust and PACE
Trust will each receive an opinion of Kirkpatrick & Lockhart LLP, counsel to
Managed Investments Trust and tax counsel to PACE Trust, substantially to the
following effect:

(1) PACE Intermediate Fixed Income Fund's acquisition of the Assets in
exchange solely for PACE Intermediate Fixed Income Fund shares and PACE
Intermediate Fixed Income Fund's assumption of the Liabilities, followed by
Investment Grade Income Fund's distribution of those shares PRO RATA to its
shareholders constructively in exchange for their Investment Grade Income
Fund shares, will qualify as a reorganization within the meaning of
section 368(a)(1)(D) of the Code, and each Fund will be "a party to a
reorganization" within the meaning of section 368(b) of the Code;

23
<PAGE>
(2) Investment Grade Income Fund will recognize no gain or loss on its
transfer of the Assets to PACE Intermediate Fixed Income Fund in exchange
solely for PACE Intermediate Fixed Income Fund shares and PACE Intermediate
Fixed Income Fund's assumption of the Liabilities or on the subsequent
distribution of those shares to Investment Grade Income Fund's shareholders
in constructive exchange for their Investment Grade Income Fund shares;

(3) PACE Intermediate Fixed Income Fund will recognize no gain or loss
on its receipt of the Assets in exchange solely for PACE Intermediate Fixed
Income Fund shares and its assumption of the Liabilities;

(4) PACE Intermediate Fixed Income Fund's basis for the Assets will be
the same as Investment Grade Income Fund's basis therefor immediately before
the Reorganization, and PACE Intermediate Fixed Income Fund's holding period
for the Assets will include Investment Grade Income Fund's holding period
therefor;

(5) An Investment Grade Income Fund shareholder will recognize no gain
or loss on the constructive exchange of all its Investment Grade Income Fund
shares solely for PACE Intermediate Fixed Income Fund shares pursuant to the
Reorganization; and

(6) An Investment Grade Income Fund shareholder's aggregate basis for
the PACE Intermediate Fixed Income Fund shares to be received by it in the
Reorganization will be the same as the aggregate basis for its Investment
Grade Income Fund shares to be constructively surrendered in exchange for
those PACE Intermediate Fixed Income Fund shares, and its holding period for
those PACE Intermediate Fixed Income Fund shares will include its holding
period for those Investment Grade Income Fund shares, provided the
shareholder holds them as capital assets on the Closing Date.

The opinion may state that no opinion is expressed as to the effect of the
Reorganization on the Funds or any shareholder with respect to any asset as to
which any unrealized gain or loss is required to be recognized for federal
income tax purposes at the end of a taxable year (or on the termination or
transfer thereof) under a mark-to-market system of accounting.

Utilization by PACE Intermediate Fixed Income Fund after the Reorganization
of any pre-Reorganization capital losses realized by Investment Grade Income
Fund could be subject to limitation in future years under the Code.

You should consult your tax adviser regarding the effect, if any, of the
Reorganization in light of your individual circumstances. Because the foregoing
discussion only relates to the federal income tax consequences of the
Reorganization, you also should consult your tax adviser as to state and local
tax consequences, if any, of the Reorganization.

REQUIRED VOTE

The proposal to approve the Plan requires the affirmative vote of the lesser
of (1) 67% or more of the shares of Investment Grade Income Fund present at the
Meeting, if more than 50% of the outstanding shares are represented at the
Meeting in person or by proxy, or (2) more than 50% of the outstanding shares
entitled to vote at the Meeting.

THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSAL.

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

24
<PAGE>
ORGANIZATION OF THE FUNDS

PACE Intermediate Fixed Income Fund commenced operations on August 24, 1995
as a non-diversified series of PACE Trust. PACE Trust was formed as a Delaware
business trust on September 9, 1994, and is registered under the 1940 Act as an
open-end management investment company. The operations of PACE Trust, as a
Delaware business trust, are governed by its Trust Instrument, By-Laws and
Delaware law.

Investment Grade Income Fund commenced operations on March 31, 1984 as a
diversified series of PaineWebber Fixed Income Portfolios, Inc., a Maryland
corporation which later reorganized into Managed Investments Trust. Managed
Investments Trust was organized as a Massachusetts business trust on
November 21, 1986, and is registered under the 1940 Act as an open-end
management investment company. The operations of Managed Investments Trust, as a
Massachusetts business trust, are governed by its Declaration of Trust, By-Laws
and Massachusetts law.

FINANCIAL HIGHLIGHTS

The following financial highlights table is intended to help you understand
PACE Intermediate Fixed Income Fund's financial performance for the periods
shown. The table shows information for the Fund's Class P shares because they
were the only class of shares outstanding during the periods shown. Certain
information reflects financial results for a single Fund share. In the tables,
"total investment return" represents the rate that an investor would have earned
(or lost) on an investment in the Fund, assuming reinvestment of all dividends
and distributions. This information has been audited by Ernst & Young LLP,
independent auditors for PACE Intermediate Fixed Income Fund, whose report,
along with the Fund's financial statements, is included in the Fund's Annual
Report to Shareholders, dated July 31, 2000, which may be obtained without
charge by calling 1-800-647-1568.

25
<PAGE>

<TABLE>
<CAPTION>
PACE
INTERMEDIATE FIXED INCOME INVESTMENTS
--------------------------------------------------------
FOR THE YEARS ENDED
JULY 31, FOR THE PERIOD
---------------------------------------- ENDED
2000 1999 1998 1997 JULY 31, 1996+
---- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 11.98 $ 12.35 $ 12.23 $ 11.95 $ 12.00
-------- -------- ------- ------- -------
Net investment income.... 0.70 0.63 0.67 0.66 0.53
Net realized and
unrealized gains
(losses) from
investments and foreign
currency............... (0.16) (0.28) 0.09 0.28 (0.09)
-------- -------- ------- ------- -------
Net increase from
investment
operations............. 0.54 0.35 0.76 0.94 0.44
-------- -------- ------- ------- -------
Dividends from net
investment income...... (0.70) (0.64) (0.64) (0.66) (0.48)
Distributions from net
realized gains from
investments............ 0.00++ (0.08) -- -- (0.01)
-------- -------- ------- ------- -------
Total dividends and
distributions.......... (0.70) (0.72) (0.64) (0.66) (0.49)
-------- -------- ------- ------- -------
Net asset value, end of
period................. $ 11.82 $ 11.98 $ 12.35 $ 12.23 $ 11.95
======== ======== ======= ======= =======
Total investment
return(1).............. 4.74% 2.81% 6.41% 8.14% 3.59%
======== ======== ======= ======= =======
Ratios/Supplemental Data:
Net assets, end of
period (000's)......... $134,102 $139,043 $99,690 $66,751 $41,273
Expenses to average net
assets, net of fee
waivers and expense
reimbursements......... 0.78% 0.80% 0.84% 0.85% 0.85%*
Expenses to average net
assets, before fee
waivers and expense
reimbursements......... 0.79% 0.80% 0.84% 0.99% 1.23%*
Net investment income to
average net assets, net
of fee waivers and
expense
reimbursements......... 5.95% 5.26% 5.60% 5.70% 5.56%*
Net investment income to
average net assets,
before fee waivers and
expense
reimbursements......... 5.94% 5.26% 5.60% 5.56% 5.18%*
Portfolio turnover....... 88% 89% 111% 67% 36%
</TABLE>

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

+ For the period August 24, 1995 (commencement of operations) through
July 31, 1996.

++ The Portfolio made a distribution of less than $0.005 during the period.

* Annualized.

(1) Total investment return is calculated assuming a $10,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions at net asset value on the payable dates, and a sale at net
asset value on the last day of each period reported. The figures do not
include any applicable sales charges or program fees; results would be
lower if they were included. Total investment return for period of less
than one year has not been annualized.

26
<PAGE>
CAPITALIZATION

The following table shows the capitalization of each of Investment Grade
Income Fund and PACE Intermediate Fixed Income Fund as of July 31, 2000, and the
PRO FORMA capitalization as of the same date, giving effect to the
Reorganization:

<TABLE>
<CAPTION>
INVESTMENT GRADE PACE INTERMEDIATE PRO FORMA CLASS A COMBINED
INCOME FUND: FIXED INCOME FUND: PACE INTERMEDIATE FIXED
CLASS A CLASS A INCOME FUND
---------------- ------------------ --------------------------
<S> <C> <C> <C>
Net Assets......................... $185,821,997 0 $185,821,997
Shares Outstanding................. 19,243,570 0 15,723,870
Net Asset Value Per Share.......... $ 9.66 0 $ 11.82

<CAPTION>
INVESTMENT GRADE PACE INTERMEDIATE PRO FORMA CLASS B COMBINED
INCOME FUND: FIXED INCOME FUND: PACE INTERMEDIATE FIXED
CLASS B CLASS B INCOME FUND
---------------- ------------------ --------------------------
<S> <C> <C> <C>
Net Assets......................... $ 18,712,729 0 $ 18,712,729
Shares Outstanding................. 1,938,265 0 1,583,432
Net Asset Value Per Share.......... $ 9.65 0 $ 11.82

<CAPTION>
INVESTMENT GRADE PACE INTERMEDIATE PRO FORMA CLASS C COMBINED
INCOME FUND: FIXED INCOME FUND: PACE INTERMEDIATE FIXED
CLASS C CLASS C INCOME FUND
---------------- ------------------ --------------------------
<S> <C> <C> <C>
Net Assets......................... $ 23,915,200 0 $ 23,915,200
Shares Outstanding................. 2,476,680 0 2,023,654
Net Asset Value Per Share.......... $ 9.66 0 $ 11.82

<CAPTION>
INVESTMENT GRADE PACE INTERMEDIATE PRO FORMA CLASS Y COMBINED
INCOME FUND: FIXED INCOME FUND: PACE INTERMEDIATE FIXED
CLASS Y CLASS Y INCOME FUND
---------------- ------------------ --------------------------
<S> <C> <C> <C>
Net Assets......................... $ 3,403,249 0 $ 3,403,249
Shares Outstanding................. 352,262 0 287,976
Net Asset Value Per Share.......... $ 9.66 0 $ 11.82

<CAPTION>
INVESTMENT GRADE PACE INTERMEDIATE PRO FORMA CLASS P COMBINED
INCOME FUND: FIXED INCOME FUND: PACE INTERMEDIATE FIXED
CLASS P CLASS P INCOME FUND
---------------- ------------------ --------------------------
<S> <C> <C> <C>
Net Assets......................... 0 $134,102,359 $134,102,359
Shares Outstanding................. 0 11,347,462 11,347,462
Net Asset Value Per Share.......... 0 $ 11.82 $ 11.82
</TABLE>

LEGAL MATTERS

Certain legal matters concerning the issuance of PACE Intermediate Fixed
Income Fund shares as part of the Reorganization will be passed upon by Willkie
Farr & Gallagher, 787 7th Avenue, New York, New York 10019-6099, counsel to PACE
Trust. Certain legal matters concerning the tax consequences of the
Reorganization will be passed upon by Kirkpatrick & Lockhart LLP, 1800
Massachusetts Avenue, NW, Second Floor, Washington, DC 20036-1800.

27
<PAGE>
INFORMATION FILED WITH THE SECURITIES AND EXCHANGE COMMISSION

PACE Trust and Managed Investments Trust are each subject to the information
requirements of the Securities Exchange Act of 1934 and the 1940 Act and in
accordance therewith each files reports and other information with the SEC.
Reports, proxy statements, registration statements and other information may be
inspected without charge and copied at the Public Reference Room maintained by
the SEC at 450 Fifth Street, N.W., Washington, DC 20549, and at the following
regional offices of the SEC: 7 World Trade Center, Suite 1300, New York, NY
10048, and 500 West Madison Street, 14th floor, Chicago, IL 60661. Information
on the operation of the Public Reference Room may be obtained by calling the SEC
at 1-202-942-8090. The SEC maintains an Internet web site at http://www.sec.gov
that contains information regarding PACE Trust and Managed Investments Trust,
and other registrants that file electronically with the SEC. Copies of such
material may also be obtained, after paying a duplicating fee, from the Public
Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington, DC, 20549, or by electronic
request at the following e-mail address: [email protected].

EXPERTS

The audited financial statements of Investment Grade Income Fund
incorporated by reference in the SAI have been audited by Ernst & Young LLP,
independent auditors, whose report thereon is included in Investment Grade
Income Fund's Annual Report to Shareholders for the fiscal year ended November
30, 1999. The audited financial statements of PACE Intermediate Fixed Income
Fund incorporated by reference in the SAI for the fiscal year ended July 31,
2000, have been audited by Ernst & Young LLP, independent auditors, whose report
thereon is included in PACE Intermediate Fixed Income Fund's Annual Report to
Shareholders for the fiscal year ended July 31, 2000. The financial statements
audited by Ernst & Young LLP have been incorporated by reference in the SAI in
reliance on its report given on its authority as experts in auditing and
accounting.

OTHER INFORMATION

SHAREHOLDER PROPOSALS. As a general matter, Management Investments Trust
does not hold regular annual or other meetings of shareholders. Any shareholder
who wishes to submit proposals to be considered at a special meeting of
Investment Grade Income Fund's shareholders should send such proposals to
Investment Grade Income Fund at 51 West 52nd Street, New York, New York
10019-6114. Proposals must be received a reasonable period of time prior to any
meeting to be included in the proxy materials. Moreover, inclusion of such
proposals is subject to limitations under the federal securities laws. Persons
named as proxies for any subsequent shareholders' meeting will vote in their
discretion with respect to proposals submitted on an untimely basis.

OTHER BUSINESS. Management Investments Trust's management knows of no other
business to be presented to the Meeting other than the matters set forth in this
Proxy Statement/Prospectus, but should any other matter requiring a vote of
Investment Grade Income Fund's shareholders arise, the proxies will vote thereon
according to their best judgment in the interests of the Fund.

28
<PAGE>
APPENDIX A

AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION

THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION ("Agreement") is
made as of , 2000, between PaineWebber PACE Select Advisors Trust, a
Delaware business trust ("PACE Trust"), on behalf of PaineWebber PACE
Intermediate Fixed Income Investments, a segregated portfolio of assets
("series") thereof ("Acquiring Fund"), PaineWebber Managed Investments Trust, a
Massachusetts business trust ("Target Trust"), on behalf of PaineWebber
Investment Grade Income Fund, a series thereof ("Target"), and solely for
purposes of paragraph 7.2 hereof, Mitchell Hutchins Asset Management Inc.
("Mitchell Hutchins"). (Acquiring Fund and Target are sometimes referred to
herein individually as a "Fund" and collectively as the "Funds," and PACE Trust
and Target Trust are sometimes referred to herein individually as an "Investment
Company" and collectively as the "Investment Companies.") All agreements,
representations, actions, and obligations described herein made or to be taken
or undertaken by Acquiring Fund or Target are made and shall be taken or
undertaken by PACE Trust or Target Trust, respectively.

The Investment Companies wish to effect a reorganization described in
section 368(a)(1) of the Internal Revenue Code of 1986, as amended ("Code"), and
intend this Agreement to be, and adopt it as, a "plan of reorganization" within
the meaning of the regulations under section 368 of the Code ("Regulations").
The reorganization will involve the transfer of Target's assets to Acquiring
Fund in exchange solely for voting shares of beneficial interest in Acquiring
Fund and the assumption by Acquiring Fund of Target's stated liabilities,
followed by the constructive distribution of those shares PRO RATA to the
holders of shares of beneficial interest in Target ("Target Shares") in exchange
therefor, all on the terms and conditions set forth herein. The foregoing
transactions are referred to herein collectively as the "Reorganization."

The Target Shares are divided into four classes, designated Class A,
Class B, Class C, and Class Y shares ("Class A Target Shares," "Class B Target
Shares," "Class C Target Shares," and "Class Y Target Shares," respectively).
Acquiring Fund's shares are divided into five classes, four of which also are
designated Class A, Class B, Class C, and Class Y shares ("Class A Acquiring
Fund Shares," "Class B Acquiring Fund Shares," "Class C Acquiring Fund Shares,"
and "Class Y Acquiring Fund Shares," respectively, and collectively "Acquiring
Fund Shares"). Each class of Acquiring Fund Shares is substantially similar to
the identically designated class of Target Shares.

In consideration of the mutual promises contained herein, the parties agree
as follows:

1. PLAN OF REORGANIZATION AND TERMINATION

1.1. Target agrees to assign, sell, convey, transfer, and deliver all of its
assets described in paragraph 1.2 ("Assets") to Acquiring Fund. Acquiring Fund
agrees in exchange therefor--

(a) to issue and deliver to Target the number of full and fractional
(rounded to the third decimal place) (i) Class A Acquiring Fund
Shares determined by dividing the net value of Target (computed as
set forth in paragraph 2.1) ("Target Value") attributable to the
Class A Target Shares by the net asset value ("NAV") of a Class A
Acquiring Fund Share (computed as set forth in paragraph 2.2),
(ii) Class B Acquiring Fund Shares determined by dividing the
Target Value attributable to the Class B Target Shares by the NAV
of a Class B Acquiring Fund Share (as so computed), (iii) Class C
Acquiring Fund Shares determined by dividing the Target Value
attributable to the Class C Target Shares by the NAV of a Class C
Acquiring Fund Share (as so computed), and (iv) Class Y Acquiring
Fund Shares determined by dividing the Target Value attributable to
the Class Y Target Shares by the NAV of a Class Y Acquiring Fund
Share (as so computed), and

(b) to assume all of Target's stated liabilities described in paragraph
1.3 ("Liabilities").

A-1
<PAGE>
Such transactions shall take place at the Closing (as defined in paragraph 3.1).

1.2. The Assets shall include all cash, cash equivalents, securities,
receivables (including interest and dividends receivable), claims and rights of
action, rights to register shares under applicable securities laws, books and
records, deferred and prepaid expenses shown as assets on Target's books, and
other property owned by Target at the Effective Time (as defined in paragraph
3.1).

1.3. The Liabilities shall include all of Target's [liabilities, debts,
obligations, and duties of whatever kind or nature, whether absolute, accrued,
contingent, or otherwise, whether or not arising in the ordinary course of
business, and whether or not specifically referred to in this Agreement, but
only to the extent disclosed or provided for in Target Trust's financial
statements referred to in paragraph 4.1.18, or otherwise disclosed in writing to
and accepted by PACE Trust.] Notwithstanding the foregoing, Target agrees to use
its best efforts to discharge all its Liabilities before the Effective Time.

1.4. At or immediately before the Effective Time, Target shall declare and
pay to its shareholders a dividend and/or other distribution in an amount large
enough so that it will have distributed substantially all (and in any event not
less than 90%) of its investment company taxable income (computed without regard
to any deduction for dividends paid) and substantially all of its realized net
capital gain, if any, for its current taxable year through the Effective Time.

1.5. At the Effective Time (or as soon thereafter as is reasonably
practicable), Target shall distribute the Acquiring Fund Shares received by it
pursuant to paragraph 1.1 to Target's shareholders of record, determined as of
the Effective Time (each a "Shareholder" and collectively "Shareholders"), in
constructive exchange for their Target Shares. Such distribution shall be
accomplished by PACE Trust's transfer agent's opening accounts on Acquiring
Fund's share transfer books in the Shareholders' names and transferring such
Acquiring Fund Shares thereto. Each Shareholder's account shall be credited with
the respective PRO RATA number of full and fractional (rounded to the third
decimal place) Acquiring Fund Shares due that Shareholder, by class (I.E., the
account for a Shareholder of Class A Target Shares shall be credited with the
respective PRO RATA number of Class A Acquiring Fund Shares due that
Shareholder; the account for a Shareholder of Class B Target Shares shall be
credited with the respective PRO RATA number of Class B Acquiring Fund Shares
due that Shareholder; the account for a Shareholder of Class C Target Shares
shall be credited with the respective PRO RATA number of Class C Acquiring Fund
Shares due that Shareholder; and the account for a Shareholder of Class Y Target
Shares shall be credited with the respective PRO RATA number of Class Y
Acquiring Fund Shares due that Shareholder). All outstanding Target Shares,
including any represented by certificates, shall simultaneously be canceled on
Target's share transfer books. Acquiring Fund shall not issue certificates
representing the Acquiring Fund Shares issued in connection with the
Reorganization.

1.6. As soon as reasonably practicable after distribution of the Acquiring
Fund Shares pursuant to paragraph 1.5, but in all events within six months after
the Effective Time, Target shall be terminated as a series of Target Trust and
any further actions shall be taken in connection therewith as required by
applicable law.

1.7. Any reporting responsibility of Target to a public authority is and
shall remain its responsibility up to and including the date on which it is
terminated.

1.8. Any transfer taxes payable on issuance of Acquiring Fund Shares in a
name other than that of the registered holder on Target's books of the Target
Shares constructively exchanged therefor shall be paid by the person to whom
such Acquiring Fund Shares are to be issued, as a condition of such transfer.

2. VALUATION

2.1. For purposes of paragraph 1.1(a), Target's net value shall be (a) the
value of the Assets computed as of the close of regular trading on the New York
Stock Exchange ("NYSE") on the date of the Closing ("Valuation Time"), using the
valuation procedures set forth in Acquiring Fund's then-current prospectus

A-2
<PAGE>
and statement of additional information ("SAI"), less (b) the amount of the
Liabilities as of the Valuation Time.

2.2. For purposes of paragraph 1.1(a), the NAV of each class of Acquiring
Fund Shares shall be computed as of the Valuation Time, using the valuation
procedures set forth in Acquiring Fund's then-current prospectus and SAI.

2.3. All computations pursuant to paragraphs 2.1 and 2.2 shall be made by or
under the direction of Mitchell Hutchins.

3. CLOSING AND EFFECTIVE TIME

3.1. The Reorganization, together with related acts necessary to consummate
the same ("Closing"), shall occur at the Funds' principal office on or about
February [___], 2001, or at such other place and/or on such other date as to
which the Investment Companies may agree. All acts taking place at the Closing
shall be deemed to take place simultaneously as of the close of business on the
date thereof or at such other time as to which the Investment Companies may
agree ("Effective Time"). If, immediately before the Valuation Time, (a) the
NYSE is closed to trading or trading thereon is restricted or (b) trading or the
reporting of trading on the NYSE or elsewhere is disrupted, so that accurate
appraisal of the Target Value and the NAV of each class of Acquiring Fund Shares
is impracticable, the Effective Time shall be postponed until the first business
day after the day when such trading shall have been fully resumed and such
reporting shall have been restored.

3.2. Target Trust's fund accounting and pricing agent shall deliver at the
Closing a certificate of an authorized officer verifying that the information
(including adjusted basis and holding period, by lot) concerning the Assets,
including all portfolio securities, transferred by Target to Acquiring Fund, as
reflected on Acquiring Fund's books immediately after the Closing, does or will
conform to such information on Target's books immediately before the Closing.
Target Trust's custodian shall deliver at the Closing a certificate of an
authorized officer stating that the Assets held by the custodian will be
transferred to Acquiring Fund at, or arrangements for the transfer thereof to
Acquiring Fund will have been made on or before, the Effective Time.

3.3. Target Trust shall deliver to PACE Trust at the Closing a list of the
names and addresses of the Shareholders and the number of outstanding Target
Shares (by class) owned by each Shareholder (rounded to the third decimal
place), all as of the Effective Time, certified by Target Trust's Secretary or
an Assistant Secretary thereof. PACE Trust's transfer agent shall deliver at the
Closing a certificate as to the opening on Acquiring Fund's share transfer books
of accounts in the Shareholders' names. PACE Trust shall issue and deliver a
confirmation to Target Trust evidencing the Acquiring Fund Shares to be credited
to Target at the Effective Time or provide evidence satisfactory to Target Trust
that such Acquiring Fund Shares have been credited to Target's account on
Acquiring Fund's books. At the Closing, each Investment Company shall deliver to
the other bills of sale, checks, assignments, stock certificates, receipts, or
other documents the other Investment Company or its counsel reasonably requests.

3.4. Each Investment Company shall deliver to the other at the Closing a
certificate executed in its name by its President or a Vice President in form
and substance satisfactory to the recipient and dated the Effective Time, to the
effect that the representations and warranties it made in this Agreement are
true and correct at the Effective Time except as they may be affected by the
transactions contemplated by this Agreement.

4. REPRESENTATIONS AND WARRANTIES

4.1. Target represents and warrants to PACE Trust, on behalf of Acquiring
Fund, as follows:

4.1.1. Target Trust is a trust operating under a written declaration of
trust, the beneficial interest in which is divided into transferable shares
("Business Trust"), that is duly organized and validly existing under the
laws of the Commonwealth of Massachusetts; and a copy of its Amended and

A-3
<PAGE>
Restated Declaration of Trust ("Declaration of Trust") is on file with the
Secretary of the Commonwealth of Massachusetts;

4.1.2. Target Trust is duly registered as an open-end management
investment company under the Investment Company Act of 1940, as amended
("1940 Act"), and such registration will be in full force and effect at the
Effective Time;

4.1.3. Target is a duly established and designated series of Target
Trust;

4.1.4. At the Closing, Target will have good and marketable title to the
Assets and full right, power, and authority to sell, assign, transfer, and
deliver the Assets free of any liens or other encumbrances (except
securities that are subject to "securities loans" as referred to in
section 851(b)(2) of the Code); and on delivery and payment for the Assets,
Acquiring Fund will acquire good and marketable title thereto;

4.1.5. Target's current prospectus and SAI conform in all material
respects to the applicable requirements of the Securities Act of 1933, as
amended ("1933 Act"), and the 1940 Act and the rules and regulations
thereunder and do not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading;

4.1.6. Target is not in violation of, and the execution and delivery of
this Agreement and consummation of the transactions contemplated hereby will
not conflict with or violate, Massachusetts law or any provision of the
Declaration of Trust or Target Trust's By-Laws or of any agreement,
instrument, lease, or other undertaking to which Target is a party or by
which it is bound or result in the acceleration of any obligation, or the
imposition of any penalty, under any agreement, judgment, or decree to which
Target is a party or by which it is bound, except as otherwise disclosed in
writing to and accepted by PACE Trust;

4.1.7. Except as otherwise disclosed in writing to and accepted by PACE
Trust, all material contracts and other commitments of or applicable to
Target (other than this Agreement and investment contracts, including
options, futures, and forward contracts) will be terminated, or provision
for discharge of any liabilities of Target thereunder will be made, at or
prior to the Effective Time, without either Fund's incurring any liability
or penalty with respect thereto and without diminishing or releasing any
rights Target may have had with respect to actions taken or omitted or to be
taken by any other party thereto prior to the Closing;

4.1.8. Except as otherwise disclosed in writing to and accepted by PACE
Trust, no litigation, administrative proceeding, or investigation of or
before any court or governmental body is presently pending or (to Target
Trust's knowledge) threatened against Target Trust with respect to Target or
any of its properties or assets that, if adversely determined, would
materially and adversely affect Target's financial condition or the conduct
of its business; and Target Trust knows of no facts that might form the
basis for the institution of any such litigation, proceeding, or
investigation and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that materially
or adversely affects its business or its ability to consummate the
transactions contemplated hereby;

4.1.9. The execution, delivery, and performance of this Agreement have
been duly authorized as of the date hereof by all necessary action on the
part of Target Trust's board of trustees, which has made the determinations
required by Rule 17a-8(a) under the 1940 Act; and, subject to approval by
Target's shareholders, this Agreement constitutes a valid and legally
binding obligation of Target, enforceable in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, and laws of general applicability relating to or affecting
creditors' rights and to general principles of equity;

A-4
<PAGE>
4.1.10. At the Effective Time, the performance of this Agreement shall
have been duly authorized by all necessary action by Target's shareholders;

4.1.11. No governmental consents, approvals, authorizations, or filings
are required under the 1933 Act, the Securities Exchange Act of 1934, as
amended ("1934 Act"), or the 1940 Act for the execution or performance of
this Agreement by Target Trust, except for (a) the filing with the
Securities and Exchange Commission ("SEC") of a registration statement by
PACE Trust on Form N-14 relating to the Acquiring Fund Shares issuable
hereunder, and any supplement or amendment thereto ("Registration
Statement"), including therein a prospectus/proxy statement ("Proxy
Statement"), and (b) such consents, approvals, authorizations, and filings
as have been made or received or as may be required subsequent to the
Effective Time;

4.1.12. On the effective date of the Registration Statement, at the time
of the Meeting (as defined in paragraph 5.2), and at the Effective Time, the
Proxy Statement will (a) comply in all material respects with the applicable
provisions of the 1933 Act, the 1934 Act, and the 1940 Act and the rules and
regulations thereunder and (b) not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which such statements were made, not misleading; provided that the
foregoing shall not apply to statements in or omissions from the Proxy
Statement made in reliance on and in conformity with information furnished
by PACE Trust for use therein;

4.1.13. The Liabilities were incurred by Target in the ordinary course
of its business; and there are no Liabilities other than liabilities
disclosed or provided for in Target Trust's financial statements referred to
in paragraph 4.1.18, or otherwise disclosed to and accepted by PACE Trust,
none of which has been materially adverse to the business, assets, or
results of Target's operations;

4.1.14. Target is a "fund" as defined in section 851(g)(2) of the Code;
it qualified for treatment as a regulated investment company under
Subchapter M of the Code ("RIC") for each past taxable year since it
commenced operations and will continue to meet all the requirements for such
qualification for its current taxable year; the Assets will be invested at
all times through the Effective Time in a manner that ensures compliance
with the foregoing; and Target has no earnings and profits accumulated in
any taxable year in which the provisions of Subchapter M did not apply to
it;

4.1.15. Target is not under the jurisdiction of a court in a "title 11
or similar case" (within the meaning of section 368(a)(3)(A) of the Code);

4.1.16. Not more than 25% of the value of Target's total assets
(excluding cash, cash items, and U.S. government securities) is invested in
the stock and securities of any one issuer, and not more than 50% of the
value of such assets is invested in the stock and securities of five or
fewer issuers;

4.1.17. Target's federal income tax returns, and all applicable state
and local tax returns, for all taxable years through and including the
taxable year ended November 30, 1999, have been timely filed and all taxes
payable pursuant to such returns have been timely paid;

4.1.18. Target Trust's audited financial statements for the year ended
November 30, 1999, and unaudited financial statements for the six months
ended May 31, 2000, to be delivered to PACE Trust, fairly represent Target's
financial position as of each such date and the results of its operations
and changes in its net assets for the period then ended; and

4.1.19. Its management (a) is unaware of any plan or intention of
Shareholders to redeem, sell, or otherwise dispose of (i) any portion of
their Target Shares before the Reorganization to any person "related"
(within the meaning of section 1.368-1(e)(3) of the Regulations) to either
Fund or (ii) any portion of the Acquiring Fund Shares to be received by them
in the Reorganization to any person related (within such meaning) to
Acquiring Fund, (b) does not anticipate dispositions of those Acquiring Fund
Shares at the time of or soon after the Reorganization to exceed the usual
rate and

A-5
<PAGE>
frequency of dispositions of shares of Target as a series of an open-end
investment company, (c) expects that the percentage of Shareholder
interests, if any, that will be disposed of as a result of or at the time of
the Reorganization will be DE MINIMIS, and (d) does not anticipate that
there will be extraordinary redemptions of Acquiring Fund Shares immediately
following the Reorganization.

4.2. Acquiring Fund represents and warrants to Target Trust, on behalf of
Target, as follows:

4.2.1. PACE Trust is a business trust duly organized, validly existing,
and in good standing under the laws of the State of Delaware; and its
Certificate of Trust, [including any amendments thereto] ("Certificate of
Trust"), has been duly filed in the office of the Secretary of State
thereof;

4.2.2. PACE Trust is duly registered as an open-end management
investment company under the 1940 Act, and such registration will be in full
force and effect at the Effective Time;

4.2.3. Acquiring Fund is a duly established and designated series of
PACE Trust;

4.2.4. No consideration other than Acquiring Fund Shares (and Acquiring
Fund's assumption of the Liabilities) will be issued in exchange for the
Assets in the Reorganization;

4.2.5. The Acquiring Fund Shares to be issued and delivered to Target
hereunder will, at the Effective Time, have been duly authorized and, when
issued and delivered as provided herein, including the receipt of
consideration in exchange therefor in excess of the par value thereof, will
be duly and validly issued and outstanding shares of Acquiring Fund, fully
paid and non-assessable;

4.2.6. Acquiring Fund's current prospectus and SAI conform in all
material respects to the applicable requirements of the 1933 Act and the
1940 Act and the rules and regulations thereunder and do not include any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;

4.2.7. Acquiring Fund is not in violation of, and the execution and
delivery of this Agreement and consummation of the transactions contemplated
hereby will not conflict with or violate, Delaware law or any provision of
PACE Trust's Certificate of Trust, Trust Instrument (including any
amendments thereto) ("Trust Instrument"), or By-Laws or of any provision of
any agreement, instrument, lease, or other undertaking to which Acquiring
Fund is a party or by which it is bound or result in the acceleration of any
obligation, or the imposition of any penalty, under any agreement, judgment,
or decree to which Acquiring Fund is a party or by which it is bound, except
as otherwise disclosed in writing to and accepted by Target Trust;

4.2.8. Except as otherwise disclosed in writing to and accepted by
Target Trust, no litigation, administrative proceeding, or investigation of
or before any court or governmental body is presently pending or (to PACE
Trust's knowledge) threatened against PACE Trust with respect to Acquiring
Fund or any of its properties or assets that, if adversely determined, would
materially and adversely affect Acquiring Fund's financial condition or the
conduct of its business; and PACE Trust knows of no facts that might form
the basis for the institution of any such litigation, proceeding, or
investigation and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that materially
or adversely affects its business or its ability to consummate the
transactions contemplated hereby;

4.2.9. The execution, delivery, and performance of this Agreement have
been duly authorized as of the date hereof by all necessary action on the
part of PACE Trust's board of trustees (together with Target Trust's board
of trustees, the "Boards"), which has made the determinations required by
Rule 17a-8(a) under the 1940 Act; and this Agreement constitutes a valid and
legally binding obligation of Acquiring Fund, enforceable in accordance with
its terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and laws of general applicability relating to or
affecting creditors' rights and to general principles of equity;

A-6
<PAGE>
4.2.10. No governmental consents, approvals, authorizations, or filings
are required under the 1933 Act, the 1934 Act, or the 1940 Act for the
execution or performance of this Agreement by PACE Trust, except for
(a) the filing with the SEC of the Registration Statement and (b) such
consents, approvals, authorizations, and filings as have been made or
received or as may be required subsequent to the Effective Time;

4.2.11. On the effective date of the Registration Statement, at the time
of the Meeting, and at the Effective Time, the Proxy Statement will
(a) comply in all material respects with the applicable provisions of the
1933 Act, the 1934 Act, and the 1940 Act and the rules and regulations
thereunder and (b) not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which such
statements were made, not misleading; provided that the foregoing shall not
apply to statements in or omissions from the Proxy Statement made in
reliance on and in conformity with information furnished by Target Trust for
use therein;

4.2.12. Acquiring Fund is a "fund" as defined in section 851(g)(2) of
the Code; it qualified for treatment as a RIC for each past taxable year
since it commenced operations and will continue to meet all the requirements
for such qualification for its current taxable year; Acquiring Fund intends
to continue to meet all such requirements for the next taxable year; and it
has no earnings and profits accumulated in any taxable year in which the
provisions of Subchapter M of the Code did not apply to it;

4.2.13. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares issued
in the ordinary course of its business as a series of an open-end investment
company; nor does Acquiring Fund or any person "related" (within the meaning
of section 1.368-1(e)(3) of the Regulations) thereto have any plan or
intention to redeem or otherwise reacquire any Acquiring Fund Shares issued
to the Shareholders pursuant to the Reorganization, except to the extent it
is required by the 1940 Act to redeem any of its shares presented for
redemption at NAV in the ordinary course of that business;

4.2.14. Following the Reorganization, Acquiring Fund (a) will continue
Target's "historic business" (within the meaning of section 1.368-1(d)(2) of
the Regulations) and (b) will use a significant portion of Target's
"historic business assets" (within the meaning of section 1.368-1(d)(3) of
the Regulations) in a business; in addition, Acquiring Fund (c) has no plan
or intention to sell or otherwise dispose of any of the Assets, except for
dispositions made in the ordinary course of that business and dispositions
necessary to maintain its status as a RIC and (d) expects to retain
substantially all the Assets in the same form as it receives them in the
Reorganization, unless and until subsequent investment circumstances suggest
the desirability of change or it becomes necessary to make dispositions
thereof to maintain such status;

4.2.15. There is no plan or intention for Acquiring Fund to be dissolved
or merged into another business trust or a corporation or any "fund" thereof
(within the meaning of section 851(g)(2) of the Code) following the
Reorganization;

4.2.16. Immediately after the Reorganization, (a) not more than 25% of
the value of Acquiring Fund's total assets (excluding cash, cash items, and
U.S. government securities) will be invested in the stock and securities of
any one issuer and (b) not more than 50% of the value of such assets will be
invested in the stock and securities of five or fewer issuers;

4.2.17. Acquiring Fund does not directly or indirectly own, nor at the
Effective Time will it directly or indirectly own, nor has it directly or
indirectly owned at any time during the past five years, any shares of
Target;

A-7
<PAGE>
4.2.18. Acquiring Fund's federal income tax returns, and all applicable
state and local tax returns, for all taxable years through and including the
taxable year ended July 31, 1999, have been timely filed and all taxes
payable pursuant to such returns have been timely paid; and

4.2.19. PACE Trust's audited financial statements for the year ended
July 31, 2000, to be delivered to Target Trust, fairly represent Acquiring
Fund's financial position as of that date and the results of its operations
and changes in its net assets for the year then ended.

4.3. Each Fund represents and warrants to the Trust of which the other Fund
is a series, on behalf of such other Fund, as follows:

4.3.1. The fair market value of the Acquiring Fund Shares received by
each Shareholder will be approximately equal to the fair market value of its
Target Shares constructively surrendered in exchange therefor;

4.3.2. The Shareholders will pay their own expenses, if any, incurred in
connection with the Reorganization;

4.3.3. The fair market value of the Assets on a going concern basis will
equal or exceed the Liabilities to be assumed by Acquiring Fund and those to
which the Assets are subject;

4.3.4. There is no intercompany indebtedness between the Funds that was
issued or acquired, or will be settled, at a discount;

4.3.5. Pursuant to the Reorganization, Target will transfer to Acquiring
Fund, and Acquiring Fund will acquire, at least 90% of the fair market value
of the net assets, and at least 70% of the fair market value of the gross
assets, held by Target immediately before the Reorganization. For the
purposes of this representation, any amounts used by Target to pay its
Reorganization expenses and to make redemptions and distributions
immediately before the Reorganization (except (a) redemptions in the
ordinary course of its business required by section 22(e) of the 1940 Act
and (b) regular, normal dividend distributions made to conform to its policy
of distributing all or substantially all of its income and gains to avoid
the obligation to pay federal income tax and/or the excise tax under section
4982 of the Code) after the date of this Agreement will be included as
assets held thereby immediately before the Reorganization;

4.3.6. None of the compensation received by any Shareholder who is an
employee of or service provider to Target will be separate consideration
for, or allocable to, any of the Target Shares held by such Shareholder;
none of the Acquiring Fund Shares received by any such Shareholder will be
separate consideration for, or allocable to, any employment agreement,
investment advisory agreement, or other service agreement; and the
consideration paid to any such Shareholder will be for services actually
rendered and will be commensurate with amounts paid to third parties
bargaining at arm's-length for similar services;

4.3.7. Immediately after the Reorganization, the Shareholders will own
shares constituting "control" (within the meaning of section 304(c) of the
Code) of Acquiring Fund; and

4.3.8. Neither Fund will be reimbursed for any expenses incurred by it
or on its behalf in connection with the Reorganization unless those expenses
are solely and directly related to the Reorganization (determined in
accordance with the guidelines set forth in Rev. Rul. 73-54, 1973-1 C.B.
187).

A-8
<PAGE>
5. COVENANTS

5.1. Each Fund covenants to operate its respective business in the ordinary
course between the date hereof and the Closing, it being understood that--

(a) such ordinary course will include declaring and paying customary
dividends and other distributions and changes in operations
contemplated by each Fund's normal business activities, and

(b) each Fund will retain exclusive control of the composition of its
portfolio until the Closing; provided that if Target's shareholders
approve this Agreement (and the transactions contemplated hereby),
then between the date of such approval and the Closing, the Funds
shall coordinate their respective portfolios so that the transfer of
the Assets to Acquiring Fund will not cause it to fail to be in
compliance with any of its investment policies and restrictions
immediately after the Closing.

5.2. Target covenants to call a shareholders' meeting to consider and act on
this Agreement and to take all other action necessary to obtain approval of the
transactions contemplated hereby ("Meeting").

5.3. Target covenants that the Acquiring Fund Shares to be delivered
hereunder are not being acquired for the purpose of making any distribution
thereof, other than in accordance with the terms hereof.

5.4. Target covenants that it will assist PACE Trust in obtaining
information PACE Trust reasonably requests concerning the beneficial ownership
of Target Shares.

5.5. Target covenants that its books and records (including all books and
records required to be maintained under the 1940 Act and the rules and
regulations thereunder) will be turned over to PACE Trust at the Closing.

5.6. Each Fund covenants to cooperate in preparing the Proxy Statement in
compliance with applicable federal and state securities laws.

5.7. Each Fund covenants that it will, from time to time, as and when
requested by the other Fund, execute and deliver or cause to be executed and
delivered all assignments and other instruments, and will take or cause to be
taken further action, the other Fund may deem necessary or desirable in order to
vest in, and confirm to, (a) Acquiring Fund, title to and possession of all the
Assets, and (b) Target, title to and possession of the Acquiring Fund Shares to
be delivered hereunder, and otherwise to carry out the intent and purpose
hereof.

5.8. Acquiring Fund covenants to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act, and state
securities laws it deems appropriate to continue its operations after the
Effective Time.

5.9. Subject to this Agreement, each Fund covenants to take or cause to be
taken all actions, and to do or cause to be done all things, reasonably
necessary, proper, or advisable to consummate and effectuate the transactions
contemplated hereby.

6. CONDITIONS PRECEDENT

Each Fund's obligations hereunder shall be subject to (a) performance by the
other Fund of all its obligations to be performed hereunder at or before the
Effective Time, (b) all representations and warranties of the other Fund
contained herein being true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated
hereby, as of the Effective

A-9
<PAGE>
Time, with the same force and effect as if made at and as of the Effective Time,
and (c) the following further conditions that, at or before the Effective Time:

6.1. This Agreement and the transactions contemplated hereby shall have been
duly adopted and approved by each Board and shall have been approved by Target's
shareholders in accordance with the Declaration of Trust and Target Trust's
By-Laws and applicable law.

6.2. All necessary filings shall have been made with the SEC and state
securities authorities, and no order or directive shall have been received that
any other or further action is required to permit the parties to carry out the
transactions contemplated hereby. The Registration Statement shall have become
effective under the 1933 Act, no stop orders suspending the effectiveness
thereof shall have been issued, and the SEC shall not have issued an unfavorable
report with respect to the Reorganization under section 25(b) of the 1940 Act
nor instituted any proceedings seeking to enjoin consummation of the
transactions contemplated hereby under section 25(c) of the 1940 Act. All
consents, orders, and permits of federal, state, and local regulatory
authorities (including the SEC and state securities authorities) deemed
necessary by either Investment Company to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain same would not involve a risk of a material
adverse effect on either Fund's assets or properties, provided that either
Investment Company may for itself waive any of such conditions.

6.3. At the Effective Time, no action, suit, or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or to obtain damages or other relief in connection with,
the transactions contemplated hereby.

6.4. Target Trust shall have received an opinion of Willkie Farr & Gallagher
("Willkie Farr") substantially to the effect that:

6.4.1. Acquiring Fund is a duly established series of PACE Trust, a
business trust duly organized, validly existing, and in good standing under
the laws of the State of Delaware, with power under its Certificate of Trust
and Trust Instrument to own all its properties and assets and, to the
knowledge of Willkie Farr, to carry on its business as presently conducted;

6.4.2. This Agreement (a) has been duly authorized, executed, and
delivered by PACE Trust on behalf of Acquiring Fund and (b) assuming due
authorization, execution, and delivery of this Agreement by Target Trust on
behalf of Target, is a valid and legally binding obligation of PACE Trust
with respect to Acquiring Fund, enforceable in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, and laws of general applicability relating to or affecting
creditors' rights and to general principles of equity;

6.4.3. The Acquiring Fund Shares to be issued and distributed to the
Shareholders under this Agreement, assuming their due delivery as
contemplated by this Agreement and the receipt of consideration in exchange
therefor in excess of the par value thereof, will be duly authorized,
validly issued and outstanding, and fully paid and non-assessable;

6.4.4. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate PACE Trust's Certificate of Trust, Trust Instrument, or By-Laws or
any provision of any agreement (known to Willkie Farr, without any
independent inquiry or investigation) to which PACE Trust (with respect to
Acquiring Fund) is a party or by which it is bound or (to the knowledge of
Willkie Farr, without any independent inquiry or investigation) result in
the acceleration of any obligation, or the imposition of any penalty, under
any agreement, judgment, or decree to which PACE Trust (with respect to
Acquiring Fund) is a party or by which it is bound, except as set forth in
such opinion or as otherwise disclosed in writing to and accepted by Target
Trust;

A-10
<PAGE>
6.4.5. To the knowledge of Willkie Farr (without any independent inquiry
or investigation), no consent, approval, authorization, or order of any
court or governmental authority is required for the consummation by PACE
Trust on behalf of Acquiring Fund of the transactions contemplated herein,
except those obtained under the 1933 Act, the 1934 Act, and the 1940 Act and
those that may be required under state securities laws;

6.4.6. PACE Trust is registered with the SEC as an investment company,
and to the knowledge of Willkie Farr no order has been issued or proceeding
instituted to suspend such registration; and

6.4.7. To the knowledge of Willkie Farr (without any independent inquiry
or investigation), (a) no litigation, administrative proceeding, or
investigation of or before any court or governmental body is pending or
threatened as to PACE Trust (with respect to Acquiring Fund) or any of its
properties or assets attributable or allocable to Acquiring Fund and
(b) PACE Trust (with respect to Acquiring Fund) is not a party to or subject
to the provisions of any order, decree, or judgment of any court or
governmental body that materially and adversely affects Acquiring Fund's
business, except as set forth in such opinion or as otherwise disclosed in
writing to and accepted by Target Trust.

In rendering such opinion, Willkie Farr may (1) rely (i) as to matters governed
by the laws of the State of Delaware, on an opinion of competent Delaware
counsel, and (ii) as to certain factual matters, on a certificate of PACE Trust,
(2) make assumptions regarding the authenticity, genuineness, and/or conformity
of documents and copies thereof without independent verification thereof,
(3) limit such opinion to applicable federal and state law, and (4) define the
word "knowledge" and related terms to mean the knowledge of attorneys then with
Willkie Farr who have devoted substantive attention to matters directly related
to this Agreement and the Reorganization.

6.5. PACE Trust shall have received an opinion of Kirkpatrick & Lockhart LLP
("K&L") substantially to the effect that:

6.5.1. Target is a duly established series of Target Trust, a Business
Trust duly organized and validly existing under the laws of the Commonwealth
of Massachusetts with power under the Declaration of Trust to own all its
properties and assets and, to the knowledge of K&L, to carry on its business
as presently conducted;

6.5.2. This Agreement (a) has been duly authorized, executed, and
delivered by Target Trust on behalf of Target and (b) assuming due
authorization, execution, and delivery of this Agreement by PACE Trust on
behalf of Acquiring Fund, is a valid and legally binding obligation of
Target Trust with respect to Target, enforceable in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and laws of general applicability relating to or
affecting creditors' rights and to general principles of equity;

6.5.3 The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate the Declaration of Trust or Target Trust's By-Laws or any provision
of any agreement (known to K&L, without any independent inquiry or
investigation) to which Target Trust (with respect to Target) is a party or
by which it is bound or (to the knowledge of K&L, without any independent
inquiry or investigation) result in the acceleration of any obligation, or
the imposition of any penalty, under any agreement, judgment, or decree to
which Target Trust (with respect to Target) is a party or by which it is
bound, except as set forth in such opinion or as otherwise disclosed in
writing to and accepted by PACE Trust;

6.5.4. To the knowledge of K&L (without any independent inquiry or
investigation), no consent, approval, authorization, or order of any court
or governmental authority is required for the consummation by Target Trust
on behalf of Target of the transactions contemplated herein, except those
obtained under the 1933 Act, the 1934 Act, and the 1940 Act and those that
may be required under state securities laws;

A-11
<PAGE>
6.5.5. Target Trust is registered with the SEC as an investment company,
and to the knowledge of K&L no order has been issued or proceeding
instituted to suspend such registration; and

6.5.6. To the knowledge of K&L (without any independent inquiry or
investigation), (a) no litigation, administrative proceeding, or
investigation of or before any court or governmental body is pending or
threatened as to Target Trust (with respect to Target) or any of its
properties or assets attributable or allocable to Target and (b) Target
Trust (with respect to Target) is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental
body that materially and adversely affects Target's business, except as set
forth in such opinion or as otherwise disclosed in writing to and accepted
by PACE Trust.

In rendering such opinion, K&L may (1) make assumptions regarding the
authenticity, genuineness, and/or conformity of documents and copies thereof
without independent verification thereof, (2) limit such opinion to applicable
federal and state law, and (3) define the word "knowledge" and related terms to
mean the knowledge of attorneys then with K&L who have devoted substantive
attention to matters directly related to this Agreement and the Reorganization.

6.6. Each Investment Company shall have received an opinion of K&L,
addressed to and in form and substance satisfactory to it, as to the federal
income tax consequences mentioned below ("Tax Opinion"). In rendering the Tax
Opinion, K&L may rely as to factual matters, exclusively and without independent
verification, on the representations made in this Agreement, which K&L may treat
as representations made to it, or in separate letters addressed to K&L and the
certificates delivered pursuant to paragraph 3.4. The Tax Opinion shall be
substantially to the effect that, based on the facts and assumptions stated
therein and conditioned on consummation of the Reorganization in accordance with
this Agreement, for federal income tax purposes:

6.6.1. Acquiring Fund's acquisition of the Assets in exchange solely for
Acquiring Fund Shares and Acquiring Fund's assumption of the Liabilities,
followed by Target's distribution of those shares PRO RATA to the
Shareholders constructively in exchange for their Target Shares, will
qualify as a reorganization within the meaning of section 368(a)(1) of the
Code, and each Fund will be "a party to a reorganization" within the meaning
of section 368(b) of the Code;

6.6.2. Target will recognize no gain or loss on the transfer of the
Assets to Acquiring Fund in exchange solely for Acquiring Fund Shares and
Acquiring Fund's assumption of the Liabilities or on the subsequent
distribution of those shares to the Shareholders in constructive exchange
for their Target Shares;

6.6.3. Acquiring Fund will recognize no gain or loss on its receipt of
the Assets in exchange solely for Acquiring Fund Shares and its assumption
of the Liabilities;

6.6.4. Acquiring Fund's basis in the Assets will be the same as Target's
basis therein immediately before the Reorganization, and Acquiring Fund's
holding period for the Assets will include Target's holding period therefor;

6.6.5. A Shareholder will recognize no gain or loss on the constructive
exchange of all its Target Shares solely for Acquiring Fund Shares pursuant
to the Reorganization; and

6.6.6. A Shareholder's aggregate basis in the Acquiring Fund Shares to
be received by it in the Reorganization will be the same as the aggregate
basis in its Target Shares to be constructively surrendered in exchange for
those Acquiring Fund Shares, and its holding period for those Acquiring Fund
Shares will include its holding period for those Target Shares, provided the
Shareholder held them as capital assets at the Effective Time.

Notwithstanding subparagraphs 6.6.2 and 6.6.4, the Tax Opinion may state that no
opinion is expressed as to the effect of the Reorganization on the Funds or any
Shareholder with respect to any Asset as to which

A-12
<PAGE>
any unrealized gain or loss is required to be recognized for federal income tax
purposes at the end of a taxable year (or on the termination or transfer
thereof) under a mark-to-market system of accounting.

At any time before the Closing, either Investment Company may waive any of
the foregoing conditions (except that set forth in paragraph 6.1) if, in the
judgment of its Board, such waiver will not have a material adverse effect on
its Fund's shareholders' interests.

7. BROKERAGE FEES AND EXPENSES

7.1. Each Investment Company represents and warrants to the other that there
are no brokers or finders entitled to receive any payments in connection with
the transactions provided for herein.

7.2. Expenses of the Reorganization that relate to the Acquiring Fund and
Target will be borne by Mitchell Hutchins. Any such expenses which are so borne
by Mitchell Hutchins will be solely and directly related to the Reorganization.

8. ENTIRE AGREEMENT; NO SURVIVAL

Neither party has made any representation, warranty, or covenant not set
forth herein, and this Agreement constitutes the entire agreement between the
parties. The representations, warranties, and covenants contained herein or in
any document delivered pursuant hereto or in connection herewith shall not
survive the Closing.

9. TERMINATION OF AGREEMENT

This Agreement may be terminated at any time at or before the Effective
Time, whether before or after approval by Target's shareholders:

9.1. By either Fund (a) in the event of the other Fund's material breach of
any representation, warranty, or covenant contained herein to be performed at or
before the Effective Time, (b) if a condition to its obligations has not been
met and it reasonably appears that such condition will not or cannot be met, or
(c) if the Closing has not occurred on or before , 2001; or

9.2. By the parties' mutual agreement.

In the event of termination under paragraphs 9.1(c) or 9.2, there shall be
no liability for damages on the part of either Fund, or the trustees or officers
of either Investment Company, to the other Fund.

10. AMENDMENT

This Agreement may be amended, modified, or supplemented at any time,
notwithstanding approval thereof by Target's shareholders, in any manner
mutually agreed on in writing by the parties; provided that following such
approval no such amendment shall have a material adverse effect on the
Shareholders' interests.

11. MISCELLANEOUS

11.1. This Agreement shall be governed by and construed in accordance with
the internal laws of the State of New York; provided that, in the case of any
conflict between such laws and the federal securities laws, the latter shall
govern.

11.2. Nothing expressed or implied herein is intended or shall be construed
to confer upon or give any person, firm, trust, or corporation other than the
parties and their respective successors and assigns any rights or remedies under
or by reason of this Agreement.

11.3. PACE Trust acknowledges that Target Trust is a Business Trust. This
Agreement is executed by Target Trust on behalf of Target and by its trustees
and/or officers in their capacities as such, and not individually. Target
Trust's obligations under this Agreement are not binding on or enforceable
against any of its trustees, officers, or shareholders but are only binding on
and enforceable against Target's assets and

A-13
<PAGE>
property; and a trustee of Target Trust shall not be personally liable hereunder
to PACE Trust or its trustees or shareholders for any act, omission, or
obligation of Target Trust or any other trustee thereof. PACE Trust agrees that,
in asserting any rights or claims under this Agreement on behalf of Acquiring
Fund, it shall look only to Target's assets and property in settlement of such
rights or claims and not to such trustees, officers, or shareholders.

11.4. A trustee of PACE Trust shall not be personally liable hereunder to
Target Trust or its trustees or shareholders for any act, omission, or
obligation of PACE Trust or any other trustee thereof. Target Trust agrees that,
in asserting any claim against PACE Trust or its trustees, it shall look only to
Acquiring Fund's assets for payment under such claim; and neither the
shareholders nor the trustees of PACE Trust, nor any of their agents, whether
past, present, or future, shall be personally liable therefor.

11.5. This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement, and shall become effective
when one or more counterparts have been executed by each Investment Company and
delivered to the other party hereto. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.

IN WITNESS WHEREOF, each party has caused this Agreement to be executed and
delivered by its duly authorized officers as of the day and year first written
above.

<TABLE>
<S> <C> <C>
PAINEWEBBER MANAGED INVESTMENTS TRUST,
acting on behalf of its series,
PaineWebber Investment Grade Income Fund

By:
......................................

PAINEWEBBER PACE SELECT ADVISORS TRUST,
acting on behalf of its series,
PaineWebber PACE Intermediate Fixed
Income Investments

By:
......................................

MITCHELL HUTCHINS ASSET MANAGEMENT INC.

By:
......................................
</TABLE>

A-14
<PAGE>
APPENDIX B

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

As of the Record Date, the following entities owned beneficially or of
record 5% or more of the Class [ ] shares of Investment Grade Income Fund or
PACE Intermediate Fixed Income Fund. Mitchell Hutchins did not know of any other
person who owned beneficially or of record 5% or more of any other class of
either Fund's outstanding equity securities as of the Record Date.

INVESTMENT GRADE INCOME FUND

<TABLE>
<CAPTION>
PERCENT BENEFICIAL
PERCENT BENEFICIAL OWNERSHIP OF COMBINED
OWNERSHIP OF INVESTMENT PACE INTERMEDIATE
SHAREHOLDER'S NAME/ADDRESS GRADE INCOME FUND FIXED INCOME FUND
-------------------------- ----------------------- ---------------------
<S> <C> <C>
[insert name] % %
c/o Mitchell Hutchins Asset
Management Inc.
51 West 52nd Street
New York, New York 10019-6114
</TABLE>

PACE INTERMEDIATE FIXED INCOME FUND

<TABLE>
<CAPTION>
PERCENT BENEFICIAL PERCENT BENEFICIAL
OWNERSHIP OF PACE OWNERSHIP OF COMBINED
INTERMEDIATE FIXED PACE INTERMEDIATE
SHAREHOLDER'S NAME/ADDRESS INCOME FUND FIXED INCOME FUND
-------------------------- ------------------ ---------------------
<S> <C> <C>
[insert name] % %
c/o Mitchell Hutchins Asset Management
Inc.
51 West 52nd Street
New York, New York 10019-6114
</TABLE>

B-1
<PAGE>
APPENDIX C

MANAGEMENT'S DISCUSSION OF PACE INTERMEDIATE FIXED INCOME FUND'S PERFORMANCE

THE DISCUSSION BELOW WAS TAKEN FROM PACE INTERMEDIATE FIXED INCOME FUND'S
ANNUAL REPORT FOR ITS FISCAL YEAR ENDED JULY 31, 2000. THIS DISCUSSION HAS NOT
BEEN REVISED TO REFLECT SUBSEQUENT CHANGES WHICH ARE DISCUSSED ABOVE IN THE
PROXY STATEMENT/PROSPECTUS.

ADVISER: Pacific Income Advisers, Inc.

PORTFOLIO MANAGER: Lloyd McAdams

OBJECTIVE: Current income consistent with reasonable stability of principal

INVESTMENT PROCESS: The Portfolio invests primarily in U.S. and foreign
government and corporate bonds along with bonds that are backed by mortgages or
other assets. The Portfolio limits its investments to investment grade bonds.
The Portfolio's dollar-weighted average duration (a measure of sensitivity to
interest rate changes) ranges between two and four and one-half years. The
adviser focuses on anticipating yield curve shifts and actively rotating among
fixed income sectors based on its assessment of the risks and reward of each
sector. Pacific Income Advisers uses a proprietary risk-adjustment model to
identify undervalued securities.

AVERAGE ANNUAL TOTAL RETURNS, PERIODS ENDED 7/31/00

<TABLE>
<CAPTION>
6 MONTHS 1 YEAR 3 YEARS SINCE INCEPTION 8/24/95
-------- ------ ------- -----------------------
<S> <C> <C> <C> <C>
With PACE program fee*........ 3.56% 3.18% 3.08% 3.62%
Without PACE program fee...... 4.34% 4.74% 4.64% 5.18%
Lehman Brothers
Intermediate-Term
Government/ Corporate Bond
Index....................... 4.39% 5.11% 5.19% 5.89%
Lipper Short-Intermediate
Grade Debt Funds Median..... 3.83% 4.70% 4.58% 5.40%
</TABLE>

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

* The maximum annual PACE program fee is 1.5% of the value of PACE assets.

Past performance does not predict future performance. The return and
principal value of an investment will fluctuate, so that an investor's shares,
when redeemed, may be worth more or less than their original cost. Performance
results assume reinvestment of all dividends and capital gains. Total returns
for periods of one year or less are cumulative.

C-1
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE PORTFOLIO AND THE
LEHMAN BROTHERS INTERMEDIATE-TERM GOVERNMENT/CORPORATE INDEX

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO LEHMAN BROTHERS INTERMEDIATE-
WITHOUT FEE WITH FEE* TERM GOVT/CORP INDEX
<S> <C> <C> <C>
Aug-95 $10,108 $10,105 $10,000
Sep-95 $10,175 $10,159 $10,072
Oct-95 $10,232 $10,203 $10,184
Nov-95 $10,281 $10,240 $10,317
Dec-95 $10,396 $10,341 $10,426
Jan-96 $10,413 $10,344 $10,515
Feb-96 $10,340 $10,259 $10,392
Mar-96 $10,279 $10,186 $10,339
Apr-96 $10,227 $10,122 $10,303
May-96 $10,226 $10,108 $10,295
Jun-96 $10,314 $10,182 $10,404
Jul-96 $10,359 $10,214 $10,435
Aug-96 $10,381 $10,223 $10,443
Sep-96 $10,508 $10,335 $10,589
Oct-96 $10,662 $10,474 $10,776
Nov-96 $10,782 $10,579 $10,918
Dec-96 $10,722 $10,506 $10,848
Jan-97 $10,758 $10,528 $10,891
Feb-97 $10,779 $10,536 $10,911
Mar-97 $10,720 $10,464 $10,836
Apr-97 $10,825 $10,554 $10,963
May-97 $10,910 $10,624 $11,054
Jun-97 $11,006 $10,704 $11,154
Jul-97 $11,202 $10,881 $11,381
Aug-97 $11,133 $10,800 $11,324
Sep-97 $11,285 $10,934 $11,455
Oct-97 $11,401 $11,032 $11,582
Nov-97 $11,415 $11,033 $11,608
Dec-97 $11,521 $11,120 $11,701
Jan-98 $11,671 $11,251 $11,854
Feb-98 $11,640 $11,207 $11,845
Mar-98 $11,663 $11,216 $11,883
Apr-98 $11,712 $11,249 $11,942
May-98 $11,812 $11,331 $12,029
Jun-98 $11,896 $11,397 $12,106
Jul-98 $11,920 $11,406 $12,148
Aug-98 $12,118 $11,580 $12,339
Sep-98 $12,393 $11,828 $12,649
Oct-98 $12,331 $11,755 $12,636
Nov-98 $12,307 $11,717 $12,635
Dec-98 $12,368 $11,761 $12,686
Jan-99 $12,428 $11,803 $12,755
Feb-99 $12,256 $11,625 $12,568
Mar-99 $12,344 $11,694 $12,662
Apr-99 $12,366 $11,700 $12,701
May-99 $12,268 $11,593 $12,604
Jun-99 $12,262 $11,573 $12,612
Jul-99 $12,255 $11,552 $12,601
Aug-99 $12,269 $11,550 $12,611
Sep-99 $12,366 $11,627 $12,728
Oct-99 $12,393 $11,638 $12,761
Nov-99 $12,401 $11,631 $12,777
Dec-99 $12,355 $11,573 $12,735
Jan-00 $12,302 $11,509 $12,687
Feb-00 $12,418 $11,603 $12,792
Mar-00 $12,567 $11,728 $12,925
Apr-00 $12,503 $11,653 $12,895
May-00 $12,513 $11,648 $12,915
Jun-00 $12,750 $11,854 $13,143
Jul-00 $12,836 $11,919 $13,243
</TABLE>

The graph depicts the performance of PACE Intermediate Fixed Income
Investments versus the Lehman Brothers Intermediate-Term Government/Corporate
Index. It is important to note that PACE Intermediate Fixed Income Investments
is a professionally managed portfolio while the Index is not available for
investment and is unmanaged. The comparison is shown for illustrative purposes
only.

ADVISER'S COMMENTS

For the twelve months ended July 31, 2000 the Portfolio lagged the Lehman
Brothers Intermediate-Term Government/Corporate Index. The Portfolio's modest
overweight in corporates detracted from returns, as corporates significantly
underperformed during the period.

The Federal Reserve Board (the "Fed") raised the Federal Funds rate by 50
basis points in May, in order to restore supply-demand imbalances and contain
the rapid economic expansion of the previous quarters. (A basis point equals
1/100th of one percent.) Rapid productivity gains and a modest economic slowdown
toward the end of the fiscal year led the market to believe that the Fed's
tightening cycle was almost over. This supposition led to a 40 basis point rally
in the 10-year Treasury. The yield curve modestly steepened through the end of
July, but the Treasury buyback of long-term debt should keep the yield curve
inverted in the near term. (An inverted yield curve means that short-term rates
are higher than long-term rates.) We expect the Fed to remain on hold while the
effects of prior rate hikes work through the economy. After the dramatic
widening in May, corporate spreads have stabilized and begun to tighten, which
we expect to continue. (Spreads are the difference in yield or income over
Treasurys that corporate and agency obligations must offer to compensate
investors for their greater risk.)

The Portfolio began the fiscal year with a longer than benchmark duration
(duration is a measure of a bond portfolio's sensitivity to interest rate
changes). During the fiscal year we moved duration to a neutral position and
then, in August, to a position shorter than the benchmark. These moves stemmed
from our belief that there is limited upside after the recent rally. It appears
that the most optimistic economic scenario has been priced into the Treasury
market, making the risk-adjusted value of Treasurys inferior to that of spread
sectors. We remain overweighted in spread sectors, as they remain undervalued on
a risk-adjusted basis and we expect them to continue their recent tightening
trend. We continue to favor higher quality corporate sectors. As we move down in
quality, certain securities and industries offer risk-adjusted

C-2
<PAGE>
value, but we will utilize highly liquid securities only in the near term as it
appears that the illiquidity premium does not offer sufficient compensation for
the downside risk.

PACE INTERMEDIATE FIXED INCOME INVESTMENTS--PORTFOLIO STATISTICS

<TABLE>
<CAPTION>
CHARACTERISTICS* PORTFOLIO INDEX
---------------- --------- -----
<S> <C> <C>
Duration................................ 3.4 yrs 3.4 yrs
Maturity................................ 5.3 yrs 4.4 yrs
Average Coupon.......................... 6.8% 6.6%
Average Yield to Maturity............... 7.5% 7.0%
Net Assets ($MM)........................ $ 134.1 --
Number of Securities.................... 135 --
Bonds................................... 96.2% 100%
Cash & Equivalents...................... 3.8% 0%

<CAPTION>
QUALITY DIVERSIFICATION* PORTFOLIO INDEX
------------------------ --------- -----
<S> <C> <C>
Cash & Equivalents...................... 3.8% 0.0%
U.S. Government & Gov't Agencies........ 35.3 62.2
AAA..................................... 12.2 2.8
AA...................................... 3.9 7.9
A....................................... 27.4 16.2
BBB..................................... 16.8 10.9
BB...................................... 0.6 0.0
-------------------------------------------------------------
Total................................... 100.0 100.0

<CAPTION>
ASSET ALLOCATION* PORTFOLIO INDEX
----------------- --------- -----
<S> <C> <C>
Corporates.............................. 44.0% 37.8%
U.S. Government & Gov't Agencies........ 35.3 62.2
Mortgage Backed......................... 11.4 0.0
Asset Backed............................ 5.5 0.0
Cash & Equivalents...................... 3.8 0.0
-------------------------------------------------------------
Total................................... 100.0 100.0
</TABLE>

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

* Weightings represent percentages of net assets as of July 31, 2000. The
Portfolio is actively managed and all holdings are subject to change.

C-3
<PAGE>

EVERY SHAREHOLDER'S VOTE IS IMPORTANT

PLEASE SIGN, DATE AND RETURN YOUR
PROXY TODAY

Please detach at perforation before mailing.

PROXY PAINEWEBBER INVESTMENT GRADE INCOME FUND PROXY
(A SERIES OF PAINEWEBBER MANAGED INVESTMENTS TRUST)

SPECIAL MEETING OF SHAREHOLDERS - JANUARY __, 2001

THIS PROXY IS BEING SOLICITED FOR THE BOARD OF TRUSTEES OF PAINEWEBBER MANAGED
INVESTMENTS TRUST ("TRUST") ON BEHALF OF PAINEWEBBER INVESTMENT GRADE INCOME
FUND, A SERIES OF THE TRUST. The undersigned hereby appoints as proxies [KEITH
A. WELLER] and [ROBYN GREEN], and each of them (with the power of substitution)
to vote for the undersigned all shares of beneficial interest of the undersigned
in PaineWebber Investment Grade Income Fund, a series of the Trust, at the above
referenced meeting and any adjournment thereof, with all the power the
undersigned would have if personally present. The shares represented by this
proxy will be voted as instructed on the reverse side of this proxy card. UNLESS
INDICATED TO THE CONTRARY, THIS PROXY SHALL BE DEEMED TO GRANT AUTHORITY TO VOTE
"FOR" THE PROPOSAL RELATING TO PAINEWEBBER INVESTMENT GRADE INCOME FUND.

VOTE VIA THE INTERNET: http://
VOTE VIA TELEPHONE:
CONTROL NUMBER: [999 9999 9999 999]

If shares are held by an individual, sign your
name exactly as it appears on this card. If
shares are held jointly, either party may sign,
but the name of the party signing should
conform exactly to the name shown on this proxy
card. If shares are held by a corporation,
partnership of similar account, the name and
the capacity of the individual signing the
proxy card should be indicated - for example:
"ABC Corp., John Doe, Treasurer."

-----------------------------------------------
Signature

-----------------------------------------------
Signature (if held jointly)

200
-----------------------------------------, --
Date

PLEASE MARK YOUR VOTE ON THE REVERSE SIDE OF THIS CARD.

<PAGE>

EVERY SHAREHOLDER'S VOTE IS IMPORTANT

PLEASE SIGN, DATE AND RETURN YOUR
PROXY TODAY

Please detach at perforation before mailing.

THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" THE PROPOSAL. PLEASE INDICATE
YOUR VOTE BY FILLING IN THE BOX COMPLETELY. EXAMPLE: / /

FOR AGAINST ABSTAIN

1. Approval of the Agreement and Plan of / / / / / /
Reorganization and Termination that provides
for the reorganization of PaineWebber Investment
Grade Income Fund, a series of PaineWebber
Managed Investments Trust, into PACE Intermediate
Fixed Income Investments, a series of PaineWebber
PACE Select Advisors Trust.

PLEASE DATE AND SIGN THE REVERSE SIDE OF THIS CARD.
<PAGE>

PAINEWEBBER PACE SELECT ADVISORS TRUST
(ON BEHALF OF PACE INTERMEDIATE FIXED INCOME INVESTMENTS)

PAINEWEBBER MANAGED INVESTMENTS TRUST
(ON BEHALF OF PAINEWEBBER INVESTMENT GRADE INCOME FUND)

51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information relates specifically to the
proposed Reorganization whereby PACE Intermediate Fixed Income Investments
("PACE Intermediate Fixed Income Fund"), a series of PaineWebber PACE Select
Advisors Trust ("PACE Trust"), would acquire all of the assets of PaineWebber
Investment Grade Income Fund ("Investment Grade Income Fund"), a series of
PaineWebber Managed Investments Trust, in exchange solely for shares of PACE
Intermediate Fixed Income Fund and the assumption by PACE Intermediate Fixed
Income Fund of all of Investment Grade Income Fund's stated liabilities. This
Statement of Additional Information consists of this cover page, the PRO FORMA
financial statements of PACE Intermediate Fixed Income Fund (giving effect to
the Reorganization) for the year ended July 31, 2000, and the following
described documents, each of which is incorporated by reference herein and
accompanies this Statement of Additional Information:

(1) The combined Statement of Additional Information of PACE Trust,
which includes information relating to PACE Intermediate Fixed Income Fund,
dated November __, 2000;

(2) The combined Annual Report to Shareholders of PACE Trust, which
includes information relating to PACE Intermediate Fixed Income Fund for the
fiscal year ended July 31, 2000 (Incorporated by reference from N-30D, SEC
File Number 811-08764, filed October 6, 2000, accession number
0000912057-00-043979);

(3) The Semi-Annual Report to Shareholders of Investment Grade Income
Fund, dated May 31, 2000 (Incorporated by reference from N-30D, SEC File
Number 811-04040, filed August 7, 2000, accession number 0000912057-00-034897);

(4) The Annual Report to Shareholders of Investment Grade Income Fund
for the fiscal year ended November 30, 1999 (Incorporated by reference from
N-30D, SEC File Number 811-04040, filed February 10, 2000, accession number
0000912057-00-005117).

This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Prospectus/Proxy Statement dated November __,
2000 relating to the proposed Reorganization. A copy of the Prospectus/Proxy
Statement may be obtained without charge by calling toll-free 1-800-647-1568.
This Statement of Additional Information is dated November __, 2000.

<PAGE>

PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)

The following tables set forth the unaudited pro forma condensed Statement
of Assets and Liabilities as of July 31, 2000, the unaudited pro forma condensed
Statement of Operations for the twelve month period ended July 31, 2000 and the
unaudited pro forma Portfolio of Investments as of July 31, 2000 for Investment
Grade Income Fund and PACE Intermediate Fixed Income Fund as adjusted giving
effect to the Reorganization.

The pro forma Portfolio of Investments contains information about the
securities holdings of the Funds as of July 31, 2000, which has, and will
continue to, change over time due to the realignment of both Funds'
portfolios to reflect the investment style and strategies of their new
sub-adviser and also due to normal portfolio turnover in response to changes
in market conditions. It is expected, however, that some of Investment Grade
Income Fund's holdings may not remain at the time of the Reorganization due
to normal portfolio turnover. It is also expected that if Investment Grade
Income Fund's shareholders approve the Reorganization, the Fund's holdings
that are not compatible with PACE Intermediate Fixed Income Fund's holdings
will be liquidated in an orderly manner in connection with the
Reorganization, and the proceeds of these sales held in temporary investments
or reinvested in assets that are consistent with the holdings of PACE
Intermediate Fixed Income Fund. The portion of Investment Grade Income Fund's
assets that will be liquidated in connection with the Reorganization will
depend on market conditions and on the sub-adviser's continuing assessment of
the compatibility of Investment Grade Income Fund's holdings with PACE
Intermediate Fixed Income Fund's portfolio composition and its investment
objective and policies at the approximate time of the Reorganization. The
need for Investment Grade Income Fund to dispose of investments in connection
with the Reorganization may result in the Fund's selling securities at a
disadvantageous time and could result in the Fund's realizing gain (or
losses) that would not otherwise have been realized.

<PAGE>

PACE INTERMEDIATE FIXED INCOME INVESTMENTS
PAINEWEBBER INVESTMENT GRADE INCOME FUND
PROFORMA STATEMENT OF ASSETS AND LIABILITIES
FOR THE YEAR ENDED JULY 31, 2000 (UNAUDITED)

<TABLE>
<CAPTION>
PACE INTERMEDIATE
FIXED INCOME PW INVESTMENT GRADE
INVESTMENTS INCOME FUND COMBINED
------------------- --------------------- ---------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value (cost - $134,552,671,
$272,892,590, and $407,445,261, respectively) $ 131,946,358 $ 256,680,628 $ 388,626,986
Investment of cash collateral for securities loaned
(cost - $33,624,373, $12,911,250 and $46,535,623, respectively) 33,624,373 12,911,250 46,535,623
Cash 731 987 1,718
Receivable for investments sold 110 - 110
Receivable for shares of beneficial interests sold 107,910 27,306 135,216
Dividends and interest receivable 2,179,984 4,424,379 6,604,363
Deferred organizational expenses 1,025 - 1,025
Other assets 32,366 26,604 58,970
------------------- --------------------- ---------------

Total assets 167,892,857 274,071,154 441,964,011
------------------- --------------------- ---------------

LIABILITIES
Payable for cash collateral for securities loaned 33,624,373 12,911,250 46,535,623
Payable for investments purchased - 28,283,080 28,283,080
Payable for shares of beneficial interest repurchased 34,364 447,853 482,217
Payable to affiliates 69,710 103,132 172,842
Accrued expenses and other liabilities 62,051 472,660 534,711
------------------- --------------------- ---------------

Total liabilities 33,790,498 42,217,975 76,008,473
------------------- --------------------- ---------------

NET ASSETS

Common Stock/Beneficial interest shares of $0.001 par value
outstanding - 11,347,462, 24,010,777 and 30,966,394, respectively 138,976,270 273,707,523 412,683,793
Accumulated undistributed (distributions in excess of) net
investment income (loss) 642,137 (322,981) 319,156
Accumulated net realized losses from investment transactions (2,909,735) (25,319,405) (28,229,140)
Net unrealized depreciation of investments (2,606,313) (16,211,958) (18,818,271)
------------------- --------------------- ---------------
Net assets applicable to shares outstanding $ 134,102,359 $ 231,853,179 $ 365,955,538
=================== ===================== ===============

CLASS P:
Net assets $ 134,102,359 $ - $ 134,102,359
------------------- --------------------- ---------------
Shares outstanding 11,347,462 - 11,347,462
------------------- --------------------- ---------------
Net asset value and offering price per share $ 11.82 $ - $ 11.82
=================== ===================== ===============

CLASS A:
Net assets $ - $ 185,821,997 $ 185,821,997
------------------- --------------------- ---------------
Shares outstanding - 19,243,570 15,723,870
------------------- --------------------- ---------------
Net asset and redemption value per share $ - $ 9.66 $ 11.82
=================== ===================== ===============
Maximum offering price per share (net asset value plus sales
charge of 4% of offering price) $ - $ 10.06 $ 12.31
=================== ===================== ===============

CLASS B:
Net assets $ - $ 18,712,729 $ 18,712,729
------------------- --------------------- ---------------
Shares outstanding - 1,938,265 1,583,432
------------------- --------------------- ---------------
Net asset value and offering price per share $ - $ 9.65 $ 11.82
=================== ===================== ===============

CLASS C:
Net assets $ - $ 23,915,200 $ 23,915,200
------------------- --------------------- ---------------
Shares outstanding - 2,476,680 2,023,654
------------------- --------------------- ---------------
Net asset value and offering price per share $ - $ 9.66 $ 11.82
=================== ===================== ===============

CLASS Y:
Net assets $ - $ 3,403,249 $ 3,403,249
------------------- --------------------- ---------------
Shares outstanding - 352,262 287,976
------------------- --------------------- ---------------
Net asset value and offering price per share $ - $ 9.66 $ 11.82
=================== ===================== ===============
</TABLE>

See accompanying notes to proforma financial statements
<PAGE>

PACE INTERMEDIATE FIXED INCOME INVESTMENTS
PAINEWEBBER INVESTMENT GRADE INCOME FUND
PROFORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 2000 (UNAUDITED)

<TABLE>
<CAPTION>
PACE
INTERMEDIATE PW INVESTMENT
FIXED INCOME GRADE INCOME
INVESTMENTS FUND ADJUSTMENTS COMBINED
-------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 9,289,251 $ 19,824,878 $ - $ 29,114,129
Dividends - 632,052 - 632,052
-------------- --------------- ------------- ---------------
9,289,251 20,456,930 - 29,746,181
-------------- --------------- ------------- ---------------

EXPENSES:
Investment advisory and administration 828,218 1,265,852 253,170 (a) 2,347,240
Shareholder distribution and servicing fees - 940,309 - 940,309
Legal and audit 47,894 73,200 (73,200) (b) 47,894
Transfer agency and service 44,344 216,599 - 260,943
Trustees' fees 26,250 13,500 (13,500) (b) 26,250
Reports and notices to shareholders 22,325 55,632 (44,506) (b) 33,451
Amortization of organizational expenses 19,032 - - 19,032
Federal and state registration fees 17,274 36,157 (28,926) (b) 24,505
Custody and accounting 84,658 126,586 - 211,244
Other expenses 2,438 35,390 - 37,828
-------------- --------------- ------------- ---------------
1,092,433 2,763,225 93,039 3,948,697
Less: fee waivers and reimbursements from
investment adviser (13,758) (4,636) (234,724) (c) (253,118)
-------------- --------------- ------------- ---------------
Net expenses 1,078,675 2,758,589 (141,685) 3,695,579
-------------- --------------- ------------- ---------------
Net investment income 8,210,576 17,698,341 141,685 26,050,602
-------------- --------------- ------------- ---------------

REALIZED AND UNREALIZED LOSSES FROM
INVESTMENT TRANSACTIONS:
Net realized losses from investment
transactions (2,315,802) (5,417,167) - (7,732,969)
Net change in unrealized appreciation
(depreciation) of investments 387,836 (18,856,578) - (18,468,742)
-------------- --------------- ------------- ---------------
Net realized and unrealized losses from
investment activities (1,927,966) (24,273,745) - (26,201,711)
-------------- --------------- ------------- ---------------
Net increase (decrease) in net assets
resulting from operations $ 6,282,610 $ (6,575,404) $ 141,685 $ (151,109)
============== =============== ============= ===============
</TABLE>

--------------
(a) Reflects increase in fees resulting from higher fee schedule, before
waivers, of PACE Intermediate Fixed Income Investments.
(b) Reflects the anticipated savings of the merger.
(c) Reflects decrease in fees resulting from lower fee schedule, net of
waivers, of PACE Intermediate Fixed Income Investments.

See accompanying notes to proforma financial statements
<PAGE>

PACE INTERMEDIATE FIXED INCOME INVESTMENTS
PAINEWEBBER INVESTMENT GRADE INCOME FUND
PROFORMA PORTFOLIO OF INVESTMENTS
FOR THE YEAR ENDED JULY 31, 2000 (UNAUDITED)

<TABLE>
<CAPTION>
COMBINED PACE
PRINCIPAL INTERMEDIATE PW INVESTMENTS
AMOUNT FIXED INCOME GRADE INCOME
(000) MATURITY DATES INTEREST RATES INVESTMENTS FUND COMBINED
--------- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS - 14.97%
$1,000 Federal Home Loan Mortgage Corporation 03/15/10 7.000% $ - $ 990,644 $ 990,644
6,100 U.S. Treasury Bonds(1) 08/15/13 to 02/15/21 7.875 to 12.000 - 7,762,730 7,762,730
45,710 U.S. Treasury Notes(1) 11/30/01 to 02/15/10 4.250 to 7.875 33,975,552 12,042,317 46,017,869
--------------------------------------------
Total U.S. Government Obligations
(cost -- $55,098,805) 33,975,552 20,795,691 54,771,243
--------------------------------------------

GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION CERTIFICATES - 1.48%
854 GNMA 11/15/26 to 12/15/26 7.750 852,493 - 852,493
3,407 GNMA 06/15/17 to 11/15/17 8.000 - 3,461,122 3,461,122
19 GNMA 11/20/01 8.500 18,876 - 18,876
95 GNMA 01/15/02 9.000 96,140 - 96,140
142 GNMA 07/15/04 to 09/15/04 9.500 147,400 - 147,400
830 GNMA ARM 10/20/27 to 11/20/27 6.000 831,833 - 831,833
--------------------------------------------
Total Government National Mortgage
Association Certificates
(cost--$5,556,406) 1,946,742 3,461,122 5,407,864
--------------------------------------------

FEDERAL HOME LOAN MORTGAGE CORPORATION
CERTIFICATES - 1.22%
79 FHLMC 06/01/02 8.000 79,281 - 79,281
4,535 FHLMC TBA TBA 7.000 - 4,381,944 4,381,944
--------------------------------------------
Total Federal Home Loan Mortgage
Corporation Certificates
(cost--$4,470,104) 79,281 4,381,944 4,461,225
--------------------------------------------

FEDERAL NATIONAL MORTGAGE ASSOCIATION
CERTIFICATES - 7.79%
18,500 FNMA 12/31/99 6.000 - 16,973,750 16,973,750
1,400 FNMA 09/01/25 7.000 1,355,751 - 1,355,751
9,658 FNMA 06/01/10 to 09/01/29 7.500 9,541,329 - 9,541,329
544 FNMA 03/01/04 8.000 544,706 - 544,706
75 FNMA 09/01/07 13.000 84,075 - 84,075
--------------------------------------------
Total Federal National Mortgage
Association Certificates
(cost--$12,405,434) 11,525,861 16,973,750 28,499,611
--------------------------------------------

COLLATERALIZED MORTGAGE OBLIGATIONS
- 5.39%
869 FDIC REMIC Trust Series 1996-C1,
Class 1A 05/25/26 6.750 863,790 - 863,790
119 FHMLC Series 1497, Class 0 10/15/22 7.000 111,898 - 111,898
67 FHMLC Series 1588, Class TB 06/15/23 6.500 65,915 - 65,915
274 FNMA REMIC Trust 1993-70, Class C 03/25/18 6.900 272,303 - 272,303
540 Amresco Residential Securities Mortgage
Loan Trust Series 1996-3, Class A6 11/25/24 7.875 540,443 - 540,443
1,183 BA Mortgage Securities Inc. Series
1997-2, Class 1A5 10/25/27 7.250 1,150,794 - 1,150,794
5,000 CS First Boston Mortgage Securities
Corporation, Series 1998-C2, Class A2 11/15/08 6.300 - 4,624,118 4,624,118
600 CWMBS Inc. Series 1997-10, Class A4 02/25/28 6.612 591,843 - 591,843
1,288 DLJ Mortgage Acceptance Corp. Series
1997-CF1, Class A1A 05/15/06 7.400 1,289,524 - 1,289,524
855 Drexel Burnham Lambert Series H,
Class 4 04/01/17 8.500 860,970 - 860,970
1,573 GMAC Commercial Mortgage Security Inc.
Series 1997-C2, Class A1 12/15/04 6.451 1,530,519 - 1,530,519
1,265 LB Commercial Conduit Mortgage Trust
Series 1995-C2, Class A 08/25/04 7.220 1,262,572 - 1,262,572
169 Norwest Asset Securities Corp. Series
1997-5, Class A2 04/25/12 7.000 168,106 - 168,106
57 PNC Mortgage Securities Corp. Series
1997-2, Class A 03/25/27 7.250 56,336 - 56,336
72 Residential Asset Security Mortgage
Series 1997 Class A 03/25/27 7.000 71,501 - 71,501
428 Resolution Trust Corp. Series 1994-C1,
Class C 06/25/26 8.000 426,232 - 426,232
1,374 Resolution Trust Corp. Series 1995-C2,
Class D 05/25/27 7.000 1,369,516 - 1,369,516
1,000 Salomon Brothers Mortgage Securities
VII Inc. Series 1997-LB6, Class A4 12/25/27 6.910 989,130 - 989,130
2,299 Sasco Commercial Mortgage Trust, Series
1998-C3A, Class E 06/25/01 7.400 2,292,638 - 2,292,638
729 Structured Asset Securities Corp.
Series 1995-C4, Class A2 ARM 06/25/26 7.170 729,026 - 729,026
445 Structured Asset Securities Corp.
Series 1995-C4, Class D 06/25/26 7.000 443,097 - 443,097
--------------------------------------------
Total Collateralized Mortgage
Obligations (cost--$18,778,438) 15,086,153 4,624,118 19,710,271
--------------------------------------------

CORPORATE BONDS/NOTES - 61.64%

Aerospace - 0.14%
500 Lockheed Martin Corp. 12/01/09 8.200 508,001 - 508,001
--------------------------------------------

Airlines - 2.56%
171 Continental Airlines Trust Series
1997-4, Class 4C 01/02/09 6.800 162,985 - 162,985
1,410 Continental Airlines Trust Series
1998-3, Class 2C 11/01/05 7.250 1,348,806 - 1,348,806
2,500 Delta Air Lines Incorporated 12/15/22 10.375 - 2,786,633 2,786,633
4,935 Northwest Airliness Pass Through TRS 10/01/19 8.072 - 5,060,053 5,060,053
--------------------------------------------
1,511,791 7,846,686 9,358,477
--------------------------------------------

Automotive - 0.55%
750 Ford Motor Credit Corp. 02/28/02 6.500 740,855 - 740,855
1,225 Ford Motor Credit MTN 12/30/14 9.140 1,281,058 - 1,281,058
--------------------------------------------
2,021,913 - 2,021,913
--------------------------------------------

Auto Parts - 0.78%
3,000 Lear Corporation 05/15/05 7.960 - 2,863,728 2,863,728
--------------------------------------------

Banks - 8.45%
895 ABN Amro Bank NV 05/31/05 7.250 888,531 - 888,531

<PAGE>

<CAPTION>
COMBINED PACE
PRINCIPAL INTERMEDIATE PW INVESTMENTS
AMOUNT FIXED INCOME GRADE INCOME
(000) MATURITY DATES INTEREST RATES INVESTMENTS FUND COMBINED
--------- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
910 BankBoston NA MTN 03/25/08 6.375 839,772 - 839,772
4,000 Bci Us Funding Trust 1 12/29/49 8.010 - 3,655,164 3,655,164
258 Continental Bank NA 04/01/01 12.500 266,667 - 266,667
740 First Bank Systems Inc. 05/01/05 7.625 742,849 - 742,849
1,430 First Union Corp. 11/01/04 6.950 1,387,642 - 1,387,642
735 First USA Bank MTN 12/03/01 6.625 727,687 - 727,687
3,000 GS Escrow Corporation 08/01/05 7.125 - 2,685,669 2,685,669
3,000 MBNA Corporation 12/01/26 8.278 - 2,483,562 2,483,562
490 Mellon Bank NA 06/01/03 6.750 482,079 - 482,079
1,125 PNC Bank, NA 04/15/05 7.875 1,144,993 - 1,144,993
7,000 Providian Capital I 144A 02/01/27 9.525 - 5,952,989 5,952,989
900 Security Pacific Corp. MT 07/01/03 9.800 947,065 - 947,065
5,000 Southtrust Bank Alabama 05/15/25 7.690 - 5,138,515 5,138,515
500 Sovran Financial Corp. 06/15/06 9.250 527,298 - 527,298
600 United States Bancorp MTN 05/15/04 6.000 569,716 - 569,716
1,050 Washington Mutual Inc. 08/15/06 7.500 1,026,664 - 1,026,664
1,510 Wells Fargo & Co. 07/15/04 6.625 1,472,128 - 1,472,128
--------------------------------------------
11,023,091 19,915,899 30,938,990
--------------------------------------------

Cable - 2.12%
3,550 CSC Holdings Incorporated 07/15/09 to 07/15/18 7.625 to 8.125 - 3,373,161 3,373,161
4,000 TCI Communications Incorporated 03/31/27 9.650 - 4,372,904 4,372,904
--------------------------------------------
- 7,746,065 7,746,065
--------------------------------------------

Chemicals - 1.93%
960 Eastman Chemical Co. 01/15/04 6.375 913,597 - 913,597
3,000 Equistar Chemicals 02/15/04 8.500 - 2,965,068 2,965,068
1,145 Huntsman ICI Chemicals LLC 07/01/09 10.125 - 1,165,037 1,165,037
2,000 Lyondell Chemical Company 05/01/07 9.875 - 2,000,000 2,000,000
--------------------------------------------
913,597 6,130,105 7,043,702
--------------------------------------------

Communications - Fixed - 0.91%
3,500 Williams Communications Group 10/01/09 10.875 - 3,325,000 3,325,000
--------------------------------------------

Computer Hardware - 0.27%
1,000 Sun Microsystems Inc. 08/15/04 7.350 997,502 - 997,502
--------------------------------------------

Computer Software & Services - 0.44%
900 Computer Associates International Inc. 04/15/03 6.250 847,798 - 847,798
780 Oracle Corp. 02/15/04 6.720 765,863 - 765,863
--------------------------------------------
1,613,661 - 1,613,661
--------------------------------------------

Electric Companies - 0.33%
1,180 Constellation Energy Group Inc. 04/01/05 7.875 1,191,860 - 1,191,860
--------------------------------------------

Energy - 0.28%
1,090 Noram Energy Corp. 11/01/03 6.375 1,040,348 - 1,040,348
--------------------------------------------

Engineering Services - 0.62%
2,600 Allied Waste Incorporated NA 08/01/09 10.000 - 2,262,000 2,262,000
--------------------------------------------

Financial Services - 6.34%
1,240 American Express Credit Corp. 08/10/05 6.250 1,226,562 - 1,226,562
1,400 Aristar Inc. 09/01/04 7.375 1,365,168 - 1,365,168
625 Associates Corp. NA 11/01/03 5.750 592,026 - 592,026
1,400 Bellsouth Capital Funding Corp. 02/15/30 7.875 1,397,480 - 1,397,480
870 Beneficial Corp. 12/15/04 6.810 849,699 - 849,699
2,355 CIT Finance 03/15/03 7.375 - 2,341,357 2,341,357
635 Countrywide Funding Corp. MTN 09/16/03 7.450 628,605 - 628,605
1,830 FMR Corp. 144A 06/15/29 7.570 - 1,766,492 1,766,492
225 GATX Capital Corp. 11/01/00 6.500 224,362 - 224,362
2,360 Goldman Sachs Group Incorporated 08/17/05 7.625 - 2,358,237 2,358,237
1,420 Heller Financial Inc. MTN 07/22/02 6.500 1,395,861 - 1,395,861
2,000 Household International Netherlands BV 12/01/03 6.200 - 1,906,892 1,906,892
4,600 Lehman Brothers Holdings Incorporated 01/15/05 7.750 - 4,583,063 4,583,063
3,750 Macsaver Financial Services
Incorporated 02/15/02 7.400 - 1,950,000 1,950,000
650 Mellon Financial Co. 11/15/03 5.750 618,970 - 618,970
--------------------------------------------
8,298,733 14,906,041 23,204,774
--------------------------------------------

Forest Products - 0.81%
980 Abitibi Consolidated Incorporated 08/01/05 8.300 - 981,921 981,921
2,000 Tembec Industries Incorporated 06/30/09 8.625 - 1,975,000 1,975,000
--------------------------------------------
- 2,956,921 2,956,921
--------------------------------------------

Healthcare - 1.55%
3,000 Columbia/HCA Healthcare Corporation 03/30/04 7.150 - 2,853,897 2,853,897
3,000 Tenet Healthcare Corporation 12/01/08 8.125 - 2,827,500 2,827,500
--------------------------------------------
- 5,681,397 5,681,397
--------------------------------------------
<PAGE>

Hotels & Lodging - 0.26%
1,000 Marriot International Inc. 11/15/03 6.625 962,583 - 962,583
--------------------------------------------

Information & Computer Services - 0.46%
1,400 Comdisco Inc. 04/30/02 5.950 1,333,476 - 1,333,476
371 First Data Corp. 04/01/03 6.625 362,540 - 362,540
--------------------------------------------
1,696,016 - 1,696,016
--------------------------------------------

Insurance - 4.07%
700 Ace Ina Holding Inc. 08/15/06 8.300 707,298 - 707,298
955 Aetna Services Inc. 08/15/06 7.125 910,584 - 910,584
910 CNA Financial Corp. 04/15/05 6.500 829,762 - 829,762
1,010 Conseco Inc. MTN 06/15/01 6.400 848,400 - 848,400
4,500 Lumbermans Mutual Casualty Company 144A 07/01/26 9.150 - 3,974,368 3,974,368
3,000 Markel Capital Trust 01/01/46 8.710 - 2,431,938 2,431,938
3,300 Principal Financial Group 144A 08/15/09 8.200 - 3,264,159 3,264,159
2,000 Zurich Capital Trust 144A 06/01/37 8.376 - 1,921,138 1,921,138
--------------------------------------------
3,296,044 11,591,603 14,887,647
--------------------------------------------

Leisure - 0.35%
965 Carnival Corp. 04/15/08 6.150 846,669 - 846,669
430 Time Warner Entertainment Co. LP 09/01/08 7.250 416,857 - 416,857
--------------------------------------------
1,263,526 - 1,263,526
--------------------------------------------

Media - 2.84%
2,000 Liberty Media Corporation 07/15/09 7.875 - 1,942,182 1,942,182
8,700 News America Holdings Incorporated 10/15/12 to 10/17/96 7.900 to 10.125 - 8,452,737 8,452,737
--------------------------------------------
- 10,394,919 10,394,919
--------------------------------------------

Metals & Mining - 0.06%
200 BHP Finance USA LTD 12/01/02 7.875 199,928 - 199,928
--------------------------------------------

Motor Vehicles - 0.77%
3,000 Ford Motor Company 07/16/31 7.450 - 2,833,740 2,833,740
--------------------------------------------

Office Equipment - 0.27%
1,100 Xerox Corp. MTN 12/15/03 5.250 979,239 - 979,239
--------------------------------------------

Oil Refining, Distribution - 1.41%
2,150 Cheasapeake Energy 05/01/05 9.625 - 2,101,625 2,101,625
3,000 Valero Energy Corporation 06/15/05 8.375 - 3,050,727 3,050,727
--------------------------------------------
- 5,152,352 5,152,352
--------------------------------------------

Railroads - 0.13%
297 Consolidated Rail Corp. 04/01/05 7.070 292,821 - 292,821
165 CSX Transportation Inc. 03/01/06 8.410 171,054 - 171,054
--------------------------------------------
463,875 - 463,875
--------------------------------------------

Real Estate - 0.35%
1,245 EOP Operating LP 03/15/06 8.375 - 1,260,952 1,260,952
--------------------------------------------

Real Estate Investment Trusts - 2.65%
760 Archstone Communities Trust MTN 10/13/00 6.170 758,237 - 758,237
1,200 Bradley Operating Limited Partnership 03/15/06 8.875 1,145,453 - 1,145,453
1,150 Corporate Property Investment Trust 04/01/03 to 08/15/04 7.050 to 7.750 1,124,922 - 1,124,922
410 Health Care Property Investments Inc. 02/15/06 6.500 358,365 - 358,365
1,645 Kimco Realty Corp. 10/01/03 to 11/14/05 6.500 to 6.830 1,576,587 - 1,576,587
1,000 Nationwide Health Property Inc. 09/18/01 7.000 983,366 - 983,366
950 New Plan Realty Trust Corp. 04/06/05 7.750 946,994 - 946,994
1,355 Prologis Trust 07/15/06 7.050 1,273,890 - 1,273,890
400 Rouse Co. 01/15/03 8.500 405,366 - 405,366
1,125 Summit Properties Partnership LP 10/05/00 6.710 1,122,592 - 1,122,592
--------------------------------------------
9,695,772 - 9,695,772
--------------------------------------------

Retail - 3.08%
1,370 Dayton Hudson Corp. 03/01/06 9.250 1,370,491 - 1,370,491
885 JC Penney Inc. 04/01/07 7.600 774,197 - 774,197
5,950 May Department Stores Company 06/15/21 9.875 - 6,286,294 6,286,294
980 Sears Roebuck Acceptance Corp. 03/20/03 6.000 942,744 - 942,744
2,000 Shopko Stores 03/15/22 9.250 - 1,787,818 1,787,818
100 Wal-Mart Stores Inc. 06/29/11 8.875 103,329 - 103,329
--------------------------------------------
3,190,761 8,074,112 11,264,873
--------------------------------------------

<PAGE>

Tobacco - 0.56%
2,365 Phillip Morris Companies Incorporated 01/15/27 7.750 - 2,037,197 2,037,197
--------------------------------------------

Transportation Services - 0.20%
2,400 Laidlaw Incorporated 05/15/06 7.650 - 720,000 720,000
--------------------------------------------

Utilities - 3.89%
2,440 AES Corporation 06/01/09 9.500 - 2,458,300 2,458,300
5,000 Commonwealth Edison Company 06/15/20 9.875 - 5,416,380 5,416,380
3,276 Marlin Water Tr Marlin Water Capital 12/15/01 7.090 - 3,244,590 3,244,590
700 New York State Electric & Gas Corp. 05/01/20 9.875 730,360 - 730,360
780 Southern Investments PLC 12/01/06 6.800 715,962 - 715,962
1,075 TXU Eastern Funding Co 05/15/05 6.450 1,004,547 - 1,004,547
650 Virginia Electric & Power Co 04/01/21 to 03/01/25 8.250 to 8.750 650,456 - 650,456
--------------------------------------------
3,101,325 11,119,270 14,220,595
--------------------------------------------

Wireless Telecommunications - 0.83%
3,100 Nextel International Incorporated 08/01/10 12.750 - 3,030,250 3,030,250
--------------------------------------------

Yankee - 6.62%
2,318 Abbey National Capital 12/29/49 8.963 - 2,317,397 2,317,397
2,225 HSBC Capital Funding LLP 12/31/49 10.176 - 2,402,693 2,402,693
3,500 Imperial Tobacco Overseas BV(1) 04/01/09 7.125 - 3,109,050 3,109,050
7,300 Loewen Group International Incorporated 10/15/03 to 06/01/08 7.600 to 8.250 - 2,649,000 2,649,000
1,565 Metronet Communications Corporation 08/15/07 12.000 - 1,758,289 1,758,289
3,000 Petroleum Geo Services 07/15/29 8.150 - 2,837,064 2,837,064
2,000 Rogers Cantel Incorporated 06/01/08 9.375 - 2,075,000 2,075,000
2,000 Royal Bank Scotland Group PLC 03/31/49 8.817 - 2,059,726 2,059,726
4,000 Socgen Real Estate LLC 144A 12/29/49 7.640 - 3,673,624 3,673,624
1,285 Trinidad & Tobago Republic 10/01/09 9.875 - 1,336,400 1,336,400
--------------------------------------------
- 24,218,243 24,218,243
--------------------------------------------

Total Corporate Bonds/Notes
(cost--$237,521,994) 59,057,450 166,503,245 225,560,695
--------------------------------------------

ASSET BACKED SECURITIES - 2.45%
720 Aames Mortgage Trust Series 1996-D,
Class A1G 03/15/29 7.320 700,042 - 700,042
1,970 California Infrastructure Series
1997-1, Class A5 06/25/04 6.250 1,942,282 - 1,942,282
1,176 EMAC Trust Series 1998-1, Class 1A 07/15/03 6.110 1,150,129 - 1,150,129
525 Green Tree Financial Corp. Series
1996-3, Class A4 05/15/27 7.100 522,590 - 522,590
1,000 Ikon Receivables LLC Series 1999-1,
Class A3 05/15/05 5.990 989,430 - 989,430
165 Money Store Home Equity Trust Series
1996-D, Class A6 06/15/21 6.830 164,440 - 164,440
240 Money Store Home Equity Trust Series
1997-A, Class A6 10/15/21 7.210 238,840 - 238,840
191 Money Store Home Equity Trust Series
1997-C, Class AH5 02/15/15 6.590 190,164 - 190,164
955 Team Fleet Financing Corp. Series
1998-2, Class A 07/25/02 6.070 943,808 - 943,808
600 UCFC Loan Trust Series 1996-B1,
Class A7 11/15/27 8.200 589,594 - 589,594
--------------------------------------------
Total Asset Backed Securities
(cost-$9,097,839) 7,431,319 - 7,431,319
--------------------------------------------

PREFERRED STOCK - 1.92%
160 California Federal Preferred Capital
Corporation - 3,480,000 3,480,000
4 Centaur Funding - 3,542,658 3,542,658
--------------------------------------------
Total Preferred Stock (cost-$7,500,000) - 7,022,658 7,022,658
--------------------------------------------

INTERNATIONAL GOVERNMENT AND AGENCY
OBLIGATION - 0.27%
1,000 United Mexican States 02/01/06 8.500 - 997,000 997,000
--------------------------------------------

SHORT-TERM U.S. GOVERNMENT AGENCY
OBLIGATION - 4.91%
18,000 Federal Home Loan Bank Consolidated
Discount Note 08/11/00 6.380 - 17,968,100 17,968,100
--------------------------------------------

REPURCHASE AGREEMENTS - 4.59%
10,000 Repurchase Agreement dated 07/31/00
with Dresdner Bank AG
collateralized by $9,710,000 U.S.
Treasury Bond, 6.625% due
08/15/23;
(value--$10,248,852); proceeds:
$10,001,817 08/01/00 6.540 - 10,000,000 10,000,000
3,953 Repurchase Agreement dated 07/31/00
with SG Cowen Securities Group,
collateralized by $3,859,000 U.S.
Treasury Notes, 6.875% due 05/15/06;
(value--$4,032,655); proceeds:
$3,953,714 08/01/00 6.500 - 3,953,000 3,953,000
2,844 Repurchase Agreement dated 07/31/00
with State Street Bank & Trust Co.,
collateralized by $836,636 U.S.
Treasury Notes, 6.625% due 03/31/02;
(value--$857,551) and $1,589,127
U.S. Treasury Bonds, 8.125% due
08/15/19; (value--$2,044,014);
proceeds: $2,844,415 08/01/00 5.250 2,844,000 - 2,844,000
--------------------------------------------
Total Repurchase Agreements
(cost-$16,797,000) 2,844,000 13,953,000 16,797,000
--------------------------------------------

Total Investments (cost--$407,445,261)
-- 106.20% 131,946,358 256,680,628 388,626,986

<PAGE>

----------------
ARM Adjustible Rate Mortgage--The interest rates shown are the
current rate as of July 31, 2000.
FDIC Federal Deposit Insurance Corporation.
MTN Medium Term Notes.
REMIC Real Estate Mortgage Investment Conduit.
(1) Security, or portion thereof, was on loan at July 31, 2000.

See accompanying notes to proforma financial statements.
<PAGE>

PACE Intermediate Fixed Income Investments
PaineWebber Investment Grade Income Fund
Notes to Pro Forma Financial Statements
For the year ended July 31, 2000 (unaudited)

Basis of Presentation:

Subject to the approval of the Plan of Reorganization by the shareholders of
PaineWebber Investment Grade Income Fund ("Investment Grade"), PACE
Intermediate Fixed Income Investments ("Intermediate Fixed Income") would
acquire the assets of Investment Grade in exchange solely for the assumption
by Intermediate Fixed Income of Investment Grade's assets and liabilities and
shares of Intermediate Fixed Income that correspond to the outstanding shares
of Investment Grade. The number of shares to be received would be based on
the relative net asset value of Intermediate Fixed Income's shares on the
effective date of the Plan of Reorganization and Investment Grade will be
terminated as soon as practicable thereafter.

The pro forma financial statements reflect the financial position of
Intermediate Fixed Income and Investment Grade at July 31, 2000 and the
combined results of operations of Intermediate Fixed Income and Investment
Grade (collectively, the "Fund") for the year ended July 31, 2000.

As a result of the Plan of Reorganization, the investment advisory and
administration agreement fee will increase due to the higher fee schedule,
net of waivers, of Intermediate Fixed Income. However, after anticipated
savings in other expenses of the Fund, the shareholders of Investment Grade
will not experience an increase in total expenses. As an open-end fund,
Investment Grade currently pays Rule 12b-1 distribution or service fees;
Intermediate Fixed Income does not. Other fixed expenses will be reduced due
to the elimination of duplicative expenses. In addition, the pro forma
statement of assets and liabilities has not been adjusted as a result of the
proposed transaction because such adjustment would not be material. It is
estimated that the cost of approximately $185,000 associated with the merger
will be paid by Mitchell Hutchins Asset Management Incorporated ("Mitchell
Hutchins"), a wholly owned asset management subsidiary of PaineWebber
Incorporated, a wholly owned subsidiary of Paine Webber Group Inc., and
investment adviser, administrator and distributor of the Fund, so that each
fund bears no expenses of the reorganization. These costs are not included in
the pro forma statement of operations.

The pro forma financial statements are presented for the information of the
reader and may not necessarily be representative of what the actual combined
financial statements would have been had the Plan of Reorganization occurred
August 1, 1999. The pro forma financial statements should be read in
conjunction with the historical financial statements of the constituent Funds
included in or incorporated by reference in the applicable statement of
additional information.

Significant Accounting Policies:

The Fund's financial statements are prepared in accordance with generally
accepted accounting principles that requires the use of management accruals
and estimates. These unaudited financial statements reflect all adjustments,
which are, in the opinion of management, necessary to a fair statement of the
results for the interim period presented. The following is a summary of
significant accounting policies followed by the Fund.

VALUATION OF INVESTMENTS-The Fund calculates its net assets value based on
the current market value for its portfolio securities. The Fund normally
obtains market values for its securities from independent pricing sources.
Independent pricing sources may use reproted last sale prices, current market
quotations or valuations from computerized "matrix" systems that derive
values based on comparable securities. Securities traded in the
over-the-counter ("OTC") market and listed on The Nasdaq Stock Market, Inc.
("Nasdaq") normally are valued at the last sale price on Nasdaq prior to
valuation. Other OTC securities are valued at the last bid price
available prior to valuation. Securities which are listed on U.S. and foreign
stock exchanges normally are valued at the last sale price on the day the
securities are valued or, lacking any sales on such day, at the last
available bid price. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated as the

<PAGE>

primary market by Mitchell Hutchins, or by the Fund's sub-adviser. If a
market value is not available from an independent pricing source for a
particular security, that security is valued at fair value as determined in
good faith or under the direction of the Fund's board of trustees (the
"board"). The amortized cost method of valuation, which approximates market
value, generally is used to value short-term debt instruments with sixty days
or less remaining to maturity, unless the board determines that this does not
represent fair value. Investments of the Fund are valued using the amortized
cost method of valuation.

<PAGE>

PAINEWEBBER PACE SELECT ADVISORS TRUST
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114

STATEMENT OF ADDITIONAL INFORMATION DATED NOVEMBER _____, 2000

The following funds are series of PaineWebber PACE Select Advisors Trust
("Trust"), a professionally managed open-end investment company.

<TABLE>
<S> <C>
PACE Money Market Investments PACE Large Company Value Equity Investments
PACE Government Securities Fixed Income Investments PACE Large Company Growth Equity Investments
PACE Intermediate Fixed Income Investments PACE Small/Medium Company Value Equity Investments
PACE Strategic Fixed Income Investments PACE Small/Medium Company Growth Equity Investments
PACE Municipal Fixed Income Investments PACE International Equity Investments
PACE Global Fixed Income Investments PACE International Emerging Markets Equity Investments
</TABLE>

PACE Intermediate Fixed Income Investments and PACE Global Fixed Income
Investments are non-diversified series of the Trust. The other funds are
diversified series.

Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly
owned asset management subsidiary of PaineWebber Incorporated
("PaineWebber"), serves as the manager and administrator for each fund and
also as the investment adviser for PACE Money Market Investments. Mitchell
Hutchins selects and monitors unaffiliated investment advisers who provide
advisory services for the other funds. As distributor for the funds, Mitchell
Hutchins has appointed PaineWebber to serve as dealer for the sale of fund
shares.

Portions of the funds' Annual Report to Shareholders are incorporated by
reference into this Statement of Additional Information ("SAI"). The Annual
Report accompanies this SAI. You may obtain additional copies of the funds'
Annual Report without charge by calling toll-free 1-800-647-1568.

This SAI is not a prospectus and should be read only in conjunction with
the funds' current Prospectus, dated November ______, 2000. A copy of the
Prospectus may be obtained by calling any PaineWebber Financial Advisor or by
calling toll-free 1-800-647-1568. The Prospectus contains more complete
information about the funds. You should read it carefully before investing.

This SAI is dated November ______, 2000.

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Funds and Their Investment Policies................................... 2
The Funds' Investments, Related Risks and Limitations..................... 9
Strategies Using Derivative Instruments................................... 33
Organization of Trust; Trustees and Officers; Principal Holders and
Management Ownership of Securities...................................... 42
Investment Advisory, Administration and Distribution Arrangements......... 46
Portfolio Transactions.................................................... 55
Reduced Sales Charges, Additional Exchange and Redemption Information
And Other Services...................................................... 60
Conversion of Class B Shares.............................................. 65
Valuation of Shares....................................................... 65
Performance Information................................................... 67
Taxes..................................................................... 70
Other Information......................................................... 75
Financial Statements...................................................... 76
Appendix.................................................................. A-1
</TABLE>

<PAGE>

THE FUNDS AND THEIR INVESTMENT POLICIES

No fund's investment objective may be changed without shareholder
approval. Except where noted, the other investment policies of each fund may
be changed by the board without shareholder approval. As with other mutual
funds, there is no assurance that a fund will achieve its investment
objective.

PACE MONEY MARKET INVESTMENTS has an investment objective of current
income consistent with preservation of capital and liquidity. The fund
invests in high quality money market instruments that have, or are deemed to
have, remaining maturities of 13 months or less. Money market instruments are
short-term debt obligations and similar securities. These instruments include
(1) U.S. and foreign government securities, (2) obligations of U.S. and
foreign banks, (3) commercial paper and other short-term obligations of U.S.
and foreign corporations, partnerships, trusts and similar entities, (4)
repurchase agreements and (5) investment company securities. Money market
instruments also include longer term bonds that have variable interest rates
or other special features that give them the financial characteristics of
short-term debt. The fund may purchase participation interests in any of the
securities in which it is permitted to invest. Participation interests are
pro rata interests in securities held by others. The fund maintains a
dollar-weighted average portfolio maturity of 90 days or less.

PACE Money Market Investments may invest in obligations (including
certificates of deposit, bankers' acceptances, time deposits and similar
obligations) of U.S. and foreign banks only if the institution has total
assets at the time of purchase in excess of $1.5 billion. The fund's
investments in non-negotiable time deposits of these institutions will be
considered illiquid if they have maturities greater than seven calendar days.

PACE Money Market Investments may purchase only those obligations that
Mitchell Hutchins determines, pursuant to procedures adopted by the board,
present minimal credit risks and are "First Tier Securities" as defined in
Rule 2a-7 under the Investment Company Act of 1940, as amended ("Investment
Company Act"). First Tier Securities include U.S. government securities and
securities of other registered investment companies that are money market
funds. Other First Tier Securities are either (1) rated in the highest
short-term rating category by at least two nationally recognized statistical
rating organizations ("rating agencies"), (2) rated in the highest short-term
rating category by a single rating agency if only that rating agency has
assigned the obligation a short-term rating, (3) issued by an issuer that has
received such a short-term rating with respect to a security that is
comparable in priority and security, (4) subject to a guarantee rated in the
highest short-term rating category or issued by a guarantor that has received
the highest short-term rating for a comparable debt obligation or (5)
unrated, but determined by Mitchell Hutchins to be of comparable quality. If
a security in the fund's portfolio ceases to be a First Tier Security (as
defined above) or Mitchell Hutchins becomes aware that a security has
received a rating below the second highest rating by any rating agency,
Mitchell Hutchins and, in certain cases, the board, will consider whether the
fund should continue to hold the obligation. A First Tier Security rated in
the highest short-term category at the time of purchase that subsequently
receives a rating below the highest rating category from a different rating
agency may continue to be considered a First Tier Security.

PACE Money Market Investments may purchase variable and floating rate
securities with remaining maturities in excess of 13 months issued by U.S.
government agencies or instrumentalities or guaranteed by the U.S.
government. In addition, the fund may purchase variable and floating rate
securities of other issuers. The yields on these securities are adjusted in
relation to changes in specific rates, such as the prime rate, and different
securities may have different adjustment rates. Certain of these obligations
carry a demand feature that gives the fund the right to tender them back to a
specified party, usually the issuer or a remarketing agent, prior to
maturity. The fund's investment in these securities must comply with
conditions established by the Securities and Exchange Commission ("SEC")
under which they may be considered to have remaining maturities of 13 months
or less. The fund will purchase variable and floating rate securities of
non-U.S. government issuers that have remaining maturities of more than 13
months only if the securities are subject to a demand feature exercisable
within 13 months or less. See "The Funds' Investments, Related Risks and
Limitations - Credit and Liquidity Enhancements."

Generally, PACE Money Market Investments may exercise demand features
(1) upon a default under the terms of the underlying security, (2) to
maintain its portfolio in accordance with its investment objective and
policies or applicable legal or regulatory requirements or (3) as needed to
provide liquidity to the fund in order to meet redemption requests. The
ability of a bank or other financial institutional to fulfill its obligations
under a letter of credit, guarantee or other liquidity arrangement might be
affected by possible financial difficulties of its borrowers, adverse
interest rate or economic conditions, regulatory limitations or other
factors. The interest rate on floating rate or variable rate securities

2
<PAGE>

ordinarily is readjusted on the basis of the prime rate of the bank that
originated the financing or some other index or published rate, such as the
90-day U.S. Treasury bill rate, or is otherwise reset to reflect market rates
of interest. Generally, these interest rate adjustments cause the market
value of floating rate and variable rate securities to fluctuate less than
the market value of fixed rate securities.

Variable rate securities include variable amount master demand notes,
which are unsecured redeemable obligations that permit investment of varying
amounts at fluctuating interest rates under a direct agreement between PACE
Money Market Investments and an issuer. The principal amount of these notes
may be increased from time to time by the parties (subject to specified
maximums) or decreased by the fund or the issuer. These notes are payable on
demand (subject to any applicable advance notice provisions) and may or may
not be rated.

PACE Money Market Investments generally may invest no more than 5% of
its total assets in the securities of a single issuer (other than U.S.
government securities), except that the fund may invest up to 25% of its
total assets in First Tier Securities of a single issuer for a period of up
to three business days. The fund may purchase only U.S. dollar denominated
obligations of foreign issuers.

PACE Money Market Investments may invest up to 10% of its net assets in
illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to
qualified broker-dealers or institutional investors in an amount up to
33 1/3% of its total assets. The fund may borrow from banks and through
reverse repurchase agreements for temporary or emergency purposes, but not in
excess of 10% of its total assets. The costs associated with borrowing may
reduce the fund's net income.

PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS has an investment
objective of current income. Pacific Investment Management Company LLC
("PIMCO") serves as the fund's investment adviser. The fund invests in U.S.
government bonds and other bonds of varying maturities but normally maintains
a dollar-weighted average portfolio duration of between one and seven years.
Under normal circumstances, the fund invests at least 65% of its total assets
in U.S. government bonds, including those backed by mortgages, and related
repurchase agreements. The fund may invest up to 35% of its total assets in
corporate bonds, including mortgage- and asset-backed securities of private
issuers. These investments are limited to bonds that are rated at least A by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), or
Moody's Investors Service, Inc. ("Moody's"), except that the fund may not
acquire a bond if, as a result, more than 25% of its total assets would be
invested in bonds rated below AAA or if more than 10% of its total assets
would be invested in bonds rated A. The fund may invest in bonds that are
assigned comparable ratings by another rating agency and unrated bonds that
its investment adviser determines are of comparable quality to rated
securities in which the fund may invest.

PACE Government Securities Fixed Income Investments may invest in
certain zero coupon securities that are U.S. Treasury notes and bonds that
have been stripped of their unmatured interest coupon receipts. The SEC staff
currently takes the position that "stripped" U.S. government securities that
are not issued through the U.S. Treasury are not U.S. government securities.
As long as the SEC staff takes this position, the fund will not consider
these stripped U.S. government securities to be U.S. government securities
for purposes of its 65% investment requirement. The fund may not invest more
than 5% of its net assets in any combination of interest-only, principal-only
and inverse floating rate securities, including those that are not mortgage-
or asset-backed securities.

PACE Government Securities Fixed Income Investments may invest up to 10%
of its net assets in illiquid securities. The fund may purchase securities on
a when-issued or delayed delivery basis. The fund may lend its portfolio
securities to qualified broker-dealers or institutional investors in an
amount up to 33 1/3% of its total assets. The fund may engage in dollar rolls
and reverse repurchase agreements involving up to an aggregate of not more
than 5% of its total assets for investment purposes to enhance its return.
These transactions are considered borrowings. The fund may also borrow from
banks and through reverse repurchase agreements for temporary or emergency
purposes, but not in excess of 10% of its total assets. The costs associated
with borrowing may reduce the fund's net income. The fund may invest in loan
participations and assignments. These investments are generally subject to
the fund's overall limitation on investments in illiquid securities. The fund
may invest in the securities of other investment companies and may sell short
"against the box."

PACE INTERMEDIATE FIXED INCOME INVESTMENTS has an investment objective
of current income, consistent with reasonable stability of principal.
Metropolitan West Asset Management, LLC ("MWAM") serves as the fund's

<PAGE>

investment adviser. The fund invests in bonds of varying maturities but
normally maintains a dollar-weighted average portfolio duration of between
two and four and one-half years. Under normal circumstances, the fund invests
at least 65% of its total assets in U.S. government and foreign government
bonds (including bonds issued by supranational and quasi-governmental
entities and mortgage-backed securities), corporate bonds (including
mortgage- and asset-backed securities of private issuers, Eurodollar
certificates of deposit, Eurodollar bonds and Yankee bonds) and preferred
stocks. The fund limits its investments to investment grade securities. The
fund may invest up to 10% of its total assets in securities denominated in
foreign currencies of developed countries. The fund's investments may include
certain zero coupon securities that are U.S. Treasury notes and bonds that
have been stripped of their unmatured interest coupon receipts. The fund may
not invest more than 5% of its net assets in any combination of
interest-only, principal-only and inverse floating rate securities, including
those that are not mortgage- or asset-backed securities.

PACE Intermediate Fixed Income Investments may invest up to 10% of its
net assets in illiquid securities. The fund may purchase securities on a
when-issued or delayed delivery basis. The fund may lend its portfolio
securities to qualified broker-dealers or institutional investors in an
amount up to 33 1/3% of its total assets. The fund may borrow from banks and
through reverse repurchase agreements for temporary or emergency purposes,
but not in excess of 10% of its total assets. The costs associated with
borrowing may reduce the fund's net income. The fund may invest in the
securities of other investment companies and may sell short "against the box."

PACE STRATEGIC FIXED INCOME INVESTMENTS has an investment objective of
total return consisting of income and capital appreciation. Pacific
Investment Management Company LLC ("PIMCO") serves as the fund's investment
adviser. The fund invests in bonds of varying maturities but normally
maintains a dollar-weighted average portfolio duration of between three and
eight years. Under normal circumstances, the fund invests at least 65% of its
total assets in U.S. government bonds, bonds (including convertible bonds) of
U.S. and foreign private issuers, foreign government bonds (including bonds
issued by supranational and quasi-governmental entities), foreign currency
exchange-related securities, loan participations and assignments and money
market instruments (including commercial paper and certificates of deposit).
These investments include mortgage- and asset-backed securities, although the
fund's investments in mortgage-backed securities of private issuers are
limited to 35% of its total assets. The fund may not invest more than 5% of
its net assets in any combination of interest-only, principal-only and
inverse floating rate securities, including those that are not mortgage- or
asset-backed securities.

PACE Strategic Fixed Income Investments invests primarily in investment
grade bonds but may invest up to 20% of its total assets in securities,
including convertible securities, that are not investment grade but are rated
at least B by S&P or Moody's, assigned a comparable rating by another rating
agency or, if unrated, determined by its investment adviser to be of
comparable quality. The fund may invest up to 20% of its total assets in a
combination of Yankee bonds, Eurodollar bonds and bonds denominated in
foreign currencies, except that not more than 10% of the fund's total assets
may be invested in bonds denominated in foreign currencies. The fund's
investments may include Brady Bonds. The fund's investments also may include
certain zero coupon securities that are U.S. Treasury notes and bonds that
have been stripped of their unmatured interest coupon receipts, other debt
securities sold with a discount and payment-in-kind securities.

PACE Strategic Fixed Income Investments may invest up to 10% of its net
assets in illiquid securities. The fund may purchase securities on a
when-issued or delayed delivery basis. The fund may lend its portfolio
securities to qualified broker-dealers or institutional investors in an
amount up to 33 1/3% of its total assets. The fund may engage in dollar rolls
and reverse repurchase agreements involving up to an aggregate of not more
than 5% of its total assets for investment purposes to enhance the fund's
return. These transactions are considered borrowings. The fund may also
borrow from banks and through reverse repurchase agreements for temporary or
emergency purposes, but not in excess of 10% of its total assets. The costs
associated with borrowing may reduce the fund's net income. The fund may
invest in loan participations and assignments. These investments are
generally subject to the fund's overall limitation on investments in illiquid
securities. The fund may invest in the securities of other investment
companies and may sell short "against the box."

PACE MUNICIPAL FIXED INCOME INVESTMENTS has an investment objective of
high current income exempt from federal income tax. Standish, Ayer & Wood,
Inc. serves as the fund's investment adviser. Under normal conditions, the
fund invests at least 80% of its total assets in municipal bonds, the
interest on which, in the opinion of counsel to the issuers, is exempt from
federal income tax. The fund invests in bonds of varying maturities but

<PAGE>

normally maintains a dollar-weighted average portfolio duration of between
three and seven years. The fund invests in municipal bonds rated at the time
of purchase at least A, MIG-2 or Prime-2 by Moody's or A, SP-2 or A-2 by S&P
or, if unrated, determined to be of comparable quality by its investment
adviser, except that the fund may invest up to 15% of its total assets in
municipal bonds that at the time of purchase are rated Baa by Moody's, BBB by
S&P or, if unrated, are determined to be of comparable quality by its
investment adviser. The fund also may invest without limit in private
activity bonds and other municipal bonds that pay interest that is an item of
tax preference for purposes of the federal alternative minimum tax ("AMT")
(sometimes referred to as a "tax preference item"), although the fund will
endeavor to manage its portfolio so that no more than 25% of its interest
income will be a tax preference item.

PACE Municipal Fixed Income Investments may not invest more than 25% of
its total assets in municipal obligations whose issuers are located in the
same state. The fund also may not invest more than 25% of its total assets in
municipal obligations that are secured by revenues from a particular
industry, except that it may invest up to 50% of its total assets in
municipal bonds that are secured by revenues from public housing authorities
and state and local housing finance authorities, including bonds backed by
the U.S. Treasury or other U.S. government-guaranteed securities. The fund
may invest without limit in private activity bonds, including private
activity bonds that are collateralized by letters of credit issued by banks
having stockholders' equity in excess of $100 million as of the date of their
most recently published statement of financial condition. The fund may not
invest more than 5% of its net assets in municipal leases.

PACE Municipal Fixed Income Investments may invest up to 10% of its net
assets in illiquid securities. The fund may purchase securities on a
when-issued or delayed delivery basis. The fund may lend its portfolio
securities to qualified broker-dealers or institutional investors in an
amount up to 33 1/3% of its total assets. The fund may borrow from banks and
through reverse repurchase agreements for temporary or emergency purposes,
but not in excess of 10% of its total assets. The costs associated with
borrowing may reduce the fund's net income. The fund may invest up to 20% of
its total assets in certain taxable securities to maintain liquidity. The
fund may invest in the securities of other investment companies.

PACE GLOBAL FIXED INCOME INVESTMENTS has an investment objective of high
total return. Rogge Global Partners plc and Fischer Francis Trees & Watts,
Inc. and its affiliates ("FFTW") serve as the fund's investment advisers.
Mitchell Hutchins allocates the fund's assets between the two investment
advisers. The fund invests primarily in high-grade bonds, denominated in
foreign currencies or U.S. dollars, of governmental and private issuers in
the United States and developed foreign countries. The fund invests in bonds
of varying maturities but normally maintains a dollar-weighted average
portfolio duration of between four and eight years. Under normal
circumstances, the fund invests at least 65% of its total assets in U.S.
government bonds, foreign government bonds (including bonds issued by
supranational organizations and quasi-governmental entities) and bonds of
U.S. or foreign private issuers. The fund normally invests in a minimum of
four countries, one of which may be the United States. Debt securities are
considered high grade if they are rated A or better by S&P or Moody's or
another rating agency or, if unrated, determined by the fund's investment
adviser to be of comparable quality.

PACE Global Fixed Income Investments may invest up to 10% of its total
assets in bonds issued by companies and governments in emerging market
countries that are rated as low as Ba by Moody's or BB by S&P or, if unrated,
determined by the fund's investment adviser to be of comparable quality. The
fund considers "emerging market countries" to be those countries not included
in the Morgan Stanley Capital International World Index of major world
economies. The fund's investments may include Brady Bonds. The fund's
investments also may include certain zero coupon securities that are U.S.
Treasury notes and bonds that have been stripped of their unmatured interest
coupon receipts.

PACE Global Fixed Income Investments may invest up to 15% of its net
assets in illiquid securities. The fund may lend its portfolio securities to
qualified broker-dealers or institutional investors in an amount up to
33 1/3% of its total assets. The fund may borrow from banks and through
reverse repurchase agreements for temporary or emergency purposes, but not in
excess of 10% of its total assets. The costs associated with borrowing may
reduce the fund's net income. The fund may invest in structured foreign
investments and loan participations and assignments. These investments are
generally subject to the fund's overall limitation on investments in illiquid
securities, and in no event may the fund's investments in loan participations
and assignments exceed 10% of its total assets. The fund may invest in the
securities of other investment companies and may sell short "against the box."

<PAGE>

PACE LARGE COMPANY VALUE EQUITY INVESTMENTS has an investment objective
of capital appreciation and dividend income. Institutional Capital
Corporation ("ICAP"), Westwood Management Corporation and State Street Global
Advisors ("SSgA") serve as the fund's investment advisers. Mitchell Hutchins
allocates the fund's assets among the three investment advisers. The fund
invests primarily in equity securities of U.S. companies that are believed to
be undervalued. The fund's investments may include both large and medium
capitalization companies. However, under normal circumstances, the fund
invests at least 65% of its total assets in common stocks of companies with a
total market capitalization of $4.0 billion or greater at the time of
purchase. The term "market capitalization" means the market value of a
company's outstanding common stock. The fund seeks income primarily from
dividend paying stocks.

ICAP and Westwood use active stock selection strategies to invest their
share of the fund's assets. In managing its share of the fund's assets, SSgA
seeks to outperform the Russell 1000 Value Index (before fees and expenses).
SSgA uses several independent valuation measures to identify investment
opportunities within a large cap value universe and combines factors to
produce an overall rank. Comprehensive research determines the optimal
weighting of these perspectives to arrive at schemes that vary by industry.
SSgA ranks all companies within the investable universe initially from top to
bottom based on their relative attractiveness. SSgA constructs the fund's
portfolio by selecting the highest-ranked stocks from the universe and to
managing deviations from the benchmark to maximize the risk/reward trade-off.
The resulting portfolio has characteristics similar to the Russell 1000 Value
Index.

PACE Large Company Value Equity Investments may invest up to 10% of its
total assets in convertible bonds that are not investment grade, but these
securities must be rated at least BB by S&P, Ba by Moody's or, if unrated,
determined to be of comparable quality by its investment adviser. Subject to
its 65% investment requirement, the fund may invest in a broad range of
equity securities of U.S. issuers that are traded on major stock exchanges or
in the over-the-counter market. The fund may invest up to 10% of its total
assets in U.S. dollar-denominated foreign securities that are traded on
recognized U.S. exchanges or in the U.S. over-the-counter market. The fund
also may invest in U.S. government bonds and investment grade corporate bonds.

PACE Large Company Value Equity Investments may invest up to 10% of its
net assets in illiquid securities. The fund may purchase securities on a
when-issued or delayed delivery basis. The fund may lend its portfolio
securities to qualified broker-dealers or institutional investors in an
amount up to 33 1/3% of its total assets. The fund may borrow from banks and
through reverse repurchase agreements for temporary or emergency purposes,
but not in excess of 10% of its total assets. The costs associated with
borrowing may reduce the fund's net income. The fund may invest in the
securities of other investment companies and may sell short "against the box."

PACE LARGE COMPANY GROWTH EQUITY INVESTMENTS has an investment objective
of capital appreciation. Alliance Capital Management L.P. ("Alliance
Capital") and State Street Global Advisors ("SSgA") serve as the fund's
investment advisers. Mitchell Hutchins allocates the fund's assets between
the two investment advisers. The fund invests primarily in equity securities
that are believed to have substantial potential for capital growth. Dividend
income is an incidental consideration in the investment advisers' selection
of investments for the fund. Although the fund may invest in a broad range of
equity securities, including securities convertible into common stocks, under
normal circumstances it invests at least 65% of its total assets in common
stocks of companies with total market capitalization of $4.0 billion or
greater at the time of purchase. The term "market capitalization" means the
market value of a company's outstanding common stock.

Alliance Capital uses an active stock selection strategy to invest its
share of the fund's assets. In managing its share of the fund's assets, SSgA
seeks to outperform the Russell 1000 Growth Index (before fees and expenses).
SSgA uses several independent valuation measures to identify investment
opportunities within a large cap growth universe and combines factors to
produce an overall rank. Comprehensive research determines the optimal
weighting of these perspectives to arrive at schemes that vary by industry.
SSgA ranks all companies within the investable universe are ranked from top
to bottom based on their relative attractiveness. SSgA constructs the fund's
portfolio by selecting the highest-ranked stocks from the universe and
manages deviations from the benchmark to maximize the risk/reward trade-off.
The resulting portfolio has characteristics similar to the Russell 1000
Growth Index.

<PAGE>

Subject to its 65% investment requirement, PACE Large Company Growth
Equity Investments may invest in a broad range of equity securities of U.S.
issuers. The fund may invest up to 10% of its total assets in U.S.
dollar-denominated foreign securities that are traded on recognized U.S.
exchanges or in the U.S. over-the-counter market. The fund also may invest in
U.S. government bonds and investment grade corporate bonds.

PACE Large Company Growth Equity Investments may invest up to 10% of its
net assets in illiquid securities. The fund may purchase securities on a
when-issued or delayed delivery basis. The fund may lend its portfolio
securities to qualified broker-dealers or institutional investors in an
amount up to 33 1/3% of its total assets. The fund may borrow from banks and
through reverse repurchase agreements for temporary or emergency purposes,
but not in excess of 10% of its total assets. The costs associated with
borrowing may reduce the fund's net income. The fund may invest in the
securities of other investment companies and may sell short "against the box."

PACE SMALL/MEDIUM COMPANY VALUE EQUITY INVESTMENTS has an investment
objective of capital appreciation. Ariel Capital Management, Inc. and ICM
Asset Management, Inc. serve as the fund's investment advisers. Mitchell
Hutchins allocates the fund's assets between the two investment advisers. The
fund invests primarily in equity securities of companies that are believed to
be undervalued or overlooked in the marketplace. Although the fund may invest
in a broad range of equity securities, including securities convertible into
common stocks, under normal market conditions the fund invests at least 65%
of its total assets in common stocks of companies with total market
capitalization of less than $4.0 billion at the time of purchase. The term
"market capitalization" means the market value of a company's outstanding
common stock. The fund invests in equity securities that generally have
price-to-earnings ("P/E") ratios that are below the market average. The fund
invests in the equity securities of companies only if they have common stock
that is traded on a major stock exchange or in the over-the-counter market.
Subject to its 65% investment requirement, the fund may invest in U.S.
government bonds and investment grade corporate bonds.

PACE Small/Medium Company Value Equity Investments may invest up to 15%
of its net assets in illiquid securities. The fund may purchase securities on
a when-issued or delayed delivery basis. The fund may lend its portfolio
securities to qualified broker-dealers or institutional investors in an
amount up to 33 1/3% of its total assets. The fund may borrow from banks and
through reverse repurchase agreements for temporary or emergency purposes,
but not in excess of 10% of its total assets. The costs associated with
borrowing may reduce the fund's net income. The fund may invest in the
securities of other investment companies and may sell short "against the box."

PACE SMALL/MEDIUM COMPANY GROWTH EQUITY INVESTMENTS has an investment
objective of capital appreciation. Delaware Management Company serves as the
fund's investment adviser. The fund invests primarily in the stocks of
companies that are characterized by above-average earnings growth rates and
total market capitalization of less than $4.0 billion at the time of
purchase. The term "market capitalization" means the market value of a
company's outstanding common stock. Dividend income is an incidental
consideration in the investment adviser's selection of investments for the
fund. Although the fund may invest in a broad range of equity securities,
including securities convertible into common stocks, under normal
circumstances it invests at least 65% of its total assets in common stocks of
issuers with total market capitalization of less than $4.0 billion that
exhibit the potential for high future earnings growth relative to the overall
market. Subject to its 65% investment requirement, the fund may invest in
U.S. government bonds and investment grade corporate bonds. The fund may
invest up to 5% of its total assets in U.S. dollar denominated foreign
securities that are traded on recognized U.S. exchanges or in the U.S.
over-the-counter market.

PACE Small/Medium Company Growth Equity Investments may invest up to 10%
of its net assets in illiquid securities. The fund may purchase securities on
a when-issued or delayed delivery basis. The fund may lend its portfolio
securities to qualified broker-dealers or institutional investors in an
amount up to 33 1/3% of its total assets. The fund may borrow from banks and
through reverse repurchase agreements for temporary or emergency purposes,
but not in excess of 10% of its total assets. The costs associated with
borrowing may reduce the fund's net income. The fund may invest in the
securities of other investment companies and may sell short "against the box."

PACE INTERNATIONAL EQUITY INVESTMENTS has an investment objective of
capital appreciation. Martin Currie Inc. serves as the fund's investment
adviser. The fund invests primarily in equity securities of companies
domiciled outside the United States, and a large part of its investments are
usually denominated in foreign

<PAGE>

currencies. Under normal circumstances, the fund invests at least 65% of its
total assets in common stocks, which may or may not pay dividends, and
securities convertible into common stocks, of companies domiciled outside the
United States. "Domiciled," for these purposes, means companies (1) that are
organized under the laws of a country other than the United States, (2) for
which the principal securities trading market is in a country other than the
United States or (3) that derive a significant proportion (at least 50%) of
their revenues or profits from goods produced or sold, investments made or
services performed in the respective country or that have at least 50% of
their assets situated in such a country.

PACE International Equity Investments normally invests in the securities
of issuers from three or more countries outside the United States, and, under
normal market conditions, its investments involve securities principally
traded in at least 10 different countries. The fund's investment adviser
gives particular consideration to investments that are principally traded in
Japanese, European, Pacific and Australian securities markets and to
securities of foreign companies that are traded on U.S. securities markets.
The fund may also invest in the securities of companies in emerging markets,
including Asia, Latin America and other regions where the markets may not yet
fully reflect the potential of the developing economies. The fund considers
"emerging market countries" to be those countries not included in the Morgan
Stanley Capital International World Index of major world economies. The fund
invests only in those markets where the investment adviser considers there to
be an acceptable framework of market regulation and sufficient liquidity. The
fund may also invest in non-investment grade convertible securities. These
non-investment grade convertible securities may not be rated lower than B by
S&P or Moody's or, if unrated, determined by the fund's investment adviser to
be of comparable quality. The fund's investments in emerging market
securities and non-investment grade convertible securities, in the aggregate,
may not exceed 10% of its total assets at the time of purchase. Subject to
its 65% investment requirement, the fund also may invest in U.S. government
bonds and investment grade bonds of U.S. and foreign issuers.

PACE International Equity Investments may invest up to 15% of its net
assets in illiquid securities. The fund may lend its portfolio securities to
qualified broker-dealers or institutional investors in an amount up to
33 1/3% of its total assets. The fund may borrow from banks and through
reverse repurchase agreements for temporary or emergency purposes, but not in
excess of 10% of its total assets. The costs associated with borrowing may
reduce the fund's net income. The fund may invest in structured foreign
investments. The fund may invest in the securities of other investment
companies, including closed-end funds that invest in foreign markets, and may
sell short "against the box."

PACE INTERNATIONAL EMERGING MARKETS EQUITY INVESTMENTS has an investment
objective of capital appreciation. Schroder Investment Management North
America Inc. ("SIMNA") serves as the fund's investment adviser. The fund
invests at least 65% of its total assets in equity securities issued by
companies domiciled in emerging market countries. "Domiciled," for these
purposes, means companies (1) that are organized under the laws of an
emerging market country, (2) for which the principal securities trading
market is in an emerging market country or (3) that derive a significant
proportion (at least 50%) of their revenues or profits from goods produced or
sold, investments made or services performed in the respective country or
that have at least 50% of their assets situated in such a country. The fund
considers "emerging market countries" to be those countries not included in
the Morgan Stanley Capital International World Index of major world
economies. SIMNA may at times determine, based on its own analysis, that an
economy included in the MSCI World Index should nonetheless be considered an
emerging market country, in which case, that country would constitute an
emerging market country for purposes of the fund's investments. Based on
current political and economic factors, SIMNA considers Hong Kong SAR to be
such a country. The fund normally invests in the securities of issuers from
three or more emerging market countries.

PACE International Emerging Markets Equity Investments may invest up to
35% of its total assets in bonds, including U.S. government bonds, foreign
government bonds and bonds of private U.S. and foreign issuers, including
convertible bonds. The fund's investments may include Brady Bonds. The fund's
investments in bonds of private issuers are rated at the time of purchase at
least A by S&P or Moody's or, if unrated, determined by the investment
adviser to be of comparable quality, except that up to 10% of the fund's
total assets may be invested in lower quality bonds, including convertible
bonds. These lower quality bonds must, at the time of purchase, be rated at
least C by S&P or determined by the investment adviser to be of comparable
quality.

<PAGE>

SIMNA believes that one of its key strengths is the worldwide network of
local research offices, many long established, in emerging market countries,
that is maintained by SIMNA and its affiliates. Each year, these companies
research and conduct on-site visits with approximately 1,400 companies in
emerging market countries. Of those companies, SIMNA and its affiliates
further develop extensive management contacts with, and produce independent
forecasts of earnings estimates for, approximately 800 companies. SIMNA's
analysis involves researching companies across the full capitalization
spectrum.

PACE International Emerging Markets Equity Investments may invest up to
15% of its net assets in illiquid securities. The fund may lend its portfolio
securities to qualified broker-dealers or institutional investors in an
amount up to 33 1/3% of its total assets. The fund may borrow from banks and
through reverse repurchase agreements for temporary or emergency purposes,
but not in excess of 10% of its total assets. The costs associated with
borrowing may reduce the fund's net income. The fund may invest in structured
foreign investments and loan participations and assignments. These
investments are generally subject to the fund's overall limitation on
investments in illiquid securities, and in no event may the fund's
investments in loan participations and assignments exceed 10% of its total
assets. The fund may invest in the securities of other investment companies,
including closed-end funds that invest in foreign markets, and may sell short
"against the box."

THE FUNDS' INVESTMENTS, RELATED RISKS AND LIMITATIONS

The following supplements the information contained in the Prospectus
and above concerning the funds' investments, related risks and limitations.
Except as otherwise indicated in the Prospectus or SAI, the funds have
established no policy limitations on their ability to use the investments or
techniques discussed in these documents.

EQUITY SECURITIES. Equity securities include common stocks, most
preferred stocks and securities that are convertible into them, including
common stock purchase warrants and rights, equity interests in trusts,
partnerships, joint ventures or similar enterprises and depositary receipts.
Common stocks, the most familiar type, represent an equity (ownership)
interest in a corporation.

Preferred stock has certain fixed income features, like a bond, but
actually it is an equity security that is senior to a company's common stock.
Convertible bonds may include debentures and notes 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. Some preferred stock also may be converted into or exchanged for
common stock. Depositary receipts typically are issued by banks or trust
companies and evidence ownership of underlying equity securities.

While past performance does not guarantee future results, equity
securities historically have provided the greatest long-term growth potential
in a company. However, their prices generally fluctuate more than other
securities and reflect changes in a company's financial condition and in
overall market and economic conditions. Common stocks generally represent the
riskiest investment in a company. It is possible that a fund may experience a
substantial or complete loss on an individual equity investment. While this
is possible with bonds, it is less likely.

BONDS. Bonds are fixed or variable rate debt obligations, including
bills, notes, debentures, money market instruments and similar instruments
and securities. Mortgage- and asset-backed securities are types of bonds, and
certain types of income-producing, non-convertible preferred stocks may be
treated as bonds for investment purposes. Bonds generally are used by
corporations, governments and other issuers to borrow money from investors.
The issuer pays the investor a fixed or variable rate of interest and
normally must repay the amount borrowed on or before maturity. Many preferred
stocks and some bonds are "perpetual" in that they have no maturity date.

Bonds are subject to interest rate risk and credit risk. Interest rate
risk is the risk that interest rates will rise and that, as a result, bond
prices will fall, lowering the value of a fund's investments in bonds. In
general, bonds having longer durations are more sensitive to interest rate
changes than are bonds with shorter durations. Credit risk is the risk that
an issuer may be unable or unwilling to pay interest and/or principal on the
bond. Credit risk can be affected by many factors, including adverse changes
in the issuer's own financial condition or in economic conditions.

<PAGE>

CREDIT RATINGS; NON-INVESTMENT GRADE BONDS. Moody's, S&P and other
rating agencies are private services that provide ratings of the credit
quality of bonds, including municipal bonds, and certain other securities. A
description of the ratings assigned to corporate bonds by Moody's and S&P is
included in the Appendix to this SAI. The process by which Moody's and S&P
determine ratings for mortgage-backed securities includes consideration of
the likelihood of the receipt by security holders of all distributions, the
nature of the underlying assets, the credit quality of the guarantor, if any,
and the structural, legal and tax aspects associated with these securities.
Not even the highest such rating represents an assessment of the likelihood
that principal prepayments will be made by obligors on the underlying assets
or the degree to which such prepayments may differ from that originally
anticipated, nor do such ratings address the possibility that investors may
suffer a lower than anticipated yield or that investors in such securities
may fail to recoup fully their initial investment due to prepayments.

Credit ratings attempt to evaluate the safety of principal and interest
payments, but they do not evaluate the volatility of a bond's value or its
liquidity and do not guarantee the performance of the issuer. Rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or
worse than the rating indicates. There is a risk that rating agencies may
downgrade a bond's rating. Subsequent to a bond's purchase by a fund, it may
cease to be rated or its rating may be reduced below the minimum rating
required for purchase by the fund. The funds may use these ratings in
determining whether to purchase, sell or hold a security. It should be
emphasized, however, that ratings are general and are not absolute standards
of quality. Consequently, bonds with the same maturity, interest rate and
rating may have different market prices.

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

Investment grade bonds are rated in one of the four highest rating
categories by Moody's or S&P, comparably rated by another rating agency or,
if unrated, determined by the applicable investment adviser to be of
comparable quality. Moody's considers bonds rated Baa (its lowest investment
grade rating) to have speculative characteristics. This means that changes in
economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is the case
for higher rated debt securities. Bonds rated D by S&P are in payment default
or such rating is assigned upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
Bonds rated C by Moody's are in the lowest rated class and can be regarded as
having extremely poor prospects of attaining any real investment standing.
References to rated bonds in the Prospectus or this SAI include bonds that
are not rated by a rating agency but that the applicable investment adviser
determines to be of comparable quality.

Non-investment grade bonds (commonly known as "junk bonds" and sometimes
referred to as "high yield bonds") are rated Ba or lower by Moody's, BB or
lower by S&P, comparably rated by another rating agency or, if unrated,
determined by a fund's investment adviser to be of comparable quality. A
fund's investments in non-investment grade bonds entail greater risk than its
investments in higher rated bonds. Non-investment grade bonds, which are
sometimes referred to as "high yield bonds," are considered predominantly
speculative with respect to the issuer's ability to pay interest and repay
principal and may involve significant risk exposure to adverse conditions.
Non-investment grade bonds generally offer a higher current yield than that
available for investment grade issues; however, they involve greater risks,
in that they are especially sensitive 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 fluctuations in
response to changes in interest rates. During periods of economic downturn or
rising interest rates, highly leveraged issuers may experience financial
stress that could adversely affect their ability to make payments of interest
and principal and increase the possibility of default. In addition, such
issuers may not have more traditional methods of financing available to them
and may be unable to repay debt at maturity by

<PAGE>

refinancing. The risk of loss due to default by such issuers is significantly
greater because such securities frequently are unsecured by collateral and
will not receive payment until more senior claims are paid in full.

The market for non-investment grade bonds, especially those of foreign
issuers, has expanded rapidly in recent years, which has been a period of
generally expanding growth and lower inflation. These securities will be
susceptible to greater risk when economic growth slows or reverses and when
inflation increases or deflation occurs. This has been reflected in recent
volatility in emerging market securities. In the past, many lower rated bonds
experienced substantial price declines reflecting an expectation that many
issuers of such securities might experience financial difficulties. As a
result, the yields on lower rated bonds rose dramatically. However, those
higher yields did not reflect the value of the income stream that holders of
such securities expected. Rather, they reflected the risk that holders of
such securities could lose a substantial portion of their value due to
financial restructurings or defaults by the issuers. There can be no
assurance that those declines will not recur.

The market for non-investment grade bonds generally is thinner and less
active than that for higher quality securities, which may limit a fund's
ability to sell such securities at fair value in response to changes in the
economy or financial markets. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values
and liquidity of non-investment grade bonds, especially in a thinly traded
market.

Opinions relating to the validity of municipal bonds and to the
exemption of interest thereon from federal income tax and (when available)
from treatment as a tax preference item, are rendered by bond counsel to the
respective issuing authorities at the time of issuance. Neither PACE
Municipal Fixed Income Investments, its investment adviser or Mitchell
Hutchins reviews the proceedings relating to the issuance of municipal bonds
or the basis for such opinions. An issuer's obligations under its municipal
bonds are subject to the bankruptcy, insolvency and other laws affecting the
rights and remedies of creditors (such as the federal bankruptcy laws) and
federal, state and local laws that may be enacted that adversely affect the
tax-exempt status of interest on the municipal bonds held by the fund or the
exempt-interest dividends received by its shareholders, extend the time for
payment of principal or interest, or both, or impose other constraints upon
enforcement of such obligations. There is also the possibility that, as a
result of litigation or other conditions, the power or ability of issuers to
meet their obligations for the payment of principal of and interest on their
municipal bonds may be materially and adversely affected.

U.S. GOVERNMENT SECURITIES. U.S. government securities include direct
obligations of the U.S. Treasury (such as Treasury bills, notes or bonds) and
obligations issued or guaranteed as to principal and interest (but not as to
market value) by the U.S. government, its agencies or its instrumentalities.
U.S. government securities include mortgage-backed securities issued or
guaranteed by government agencies or government-sponsored enterprises. Other
U.S. government securities may be backed by the full faith and credit of the
U.S. government or supported primarily or solely by the creditworthiness of
the government-related issuer or, in the case of mortgage-backed securities,
by pools of assets.

U.S. government securities also include separately traded principal and
interest components of securities issued or guaranteed by the U.S. Treasury,
which are traded independently under the Separate Trading of Registered
Interest and Principal of Securities ("STRIPS") program. Under the STRIPS
program, the principal and interest components are individually numbered and
separately issued by the U.S. Treasury.

Treasury inflation-protected securities ("TIPS") (also known as
"inflation-indexed securities") are Treasury bonds on which the principal
value is adjusted daily in accordance with changes in the Consumer Price
Index. Interest on TIPS is payable semi-annually on the adjusted principal
value. The principal value of TIPS would decline during periods of deflation,
but the principal amount payable at maturity would not be less than the
original par amount. If inflation is lower than expected while a fund holds
TIPS, the fund may earn less on the TIPS than it would on conventional
Treasury bonds. Any increase in the principal value of TIPS is taxable in the
year the increase occurs, even though holders do not receive cash
representing the increase at that time. See "Taxes -- Other Information,"
below.

ASSET-BACKED SECURITIES. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed in more
detail below. However, the underlying assets are not first lien mortgage
loans or interests therein but include assets such as motor vehicle
installment sales contracts, other installment sales contracts, home equity
loans, leases of various types of real and personal property and receivables
from revolving

<PAGE>

credit (credit card) agreements. Such assets are securitized through the use
of trusts or special purpose corporations. Payments or distributions of
principal and interest may be guaranteed up to a certain amount and for a
certain time period by a letter of credit or pool insurance policy issued by
a financial institution unaffiliated with the issuer, or other credit
enhancements may be present. See "The Funds' Investments, Related Risks and
Limitations -- Credit and Liquidity Enhancements."

MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent direct
or indirect interests in pools of underlying mortgage loans that are secured by
real property. U.S. government mortgage-backed securities are issued or
guaranteed as to the payment of principal and interest (but not as to market
value) by Ginnie Mae (also known as the Government National Mortgage
Association), Fannie Mae (also known as the Federal National Mortgage
Association), Freddie Mac (also known as the Federal Home Loan Mortgage
Corporation) or other government sponsored enterprises. Other domestic
mortgage-backed securities are sponsored or issued by private entities,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and special
purposes entities (collectively, "Private Mortgage Lenders"). Payments of
principal and interest (but not the market value) of such private
mortgage-backed securities may be 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 they may be
issued without any government guarantee of the underlying mortgage assets but
with some form of non-government credit enhancement. Foreign mortgage-backed
securities may be issued by mortgage banks and other private or governmental
entities outside the United States and are supported by interests in foreign
real estate.

Mortgage-backed securities may be composed of one or more classes and
may be structured either as pass-through securities or collateralized debt
obligations. Multiple-class mortgage-backed securities are referred to herein
as "CMOs." Some CMOs are directly supported by other CMOs, which in turn are
supported by mortgage pools. Investors typically receive payments out of the
interest and principal on the underlying mortgages. The portions of these
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class. CMOs
involve special risk and evaluating them requires special knowledge.

A major difference between mortgage-backed securities and traditional
bonds is that interest and principal payments are made more frequently
(usually monthly) and that principal may be repaid at any time because the
underlying mortgage loans may be prepaid at any time. When interest rates go
down and homeowners refinance their mortgages, mortgage-backed securities may
be paid off more quickly than investors expect. When interest rates rise,
mortgage-backed securities may be paid off more slowly than originally
expected. Changes in the rate or "speed" of these prepayments can cause the
value of mortgage-backed securities to fluctuate rapidly.

Mortgage-backed securities also may decrease in value as a result of
increases in interest rates and, because of prepayments, may benefit less
than other bonds from declining interest rates. Reinvestments of prepayments
may occur at lower interest rates than the original investment, thus
adversely affecting a fund's yield. Actual prepayment experience may cause
the yield of a mortgage-backed security to differ from what was assumed when
the fund purchased the security. Prepayments at a slower rate than expected
may lengthen the effective life of a mortgage-backed security. The value of
securities with longer effective lives generally fluctuates more widely in
response to changes in interest rates than the value of securities with
shorter effective lives.

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.

Certain classes of CMOs and other mortgage-backed securities are
structured in a manner that makes them extremely sensitive to changes in
prepayment rates. Interest-only ("IO") and principal-only ("PO") classes are
examples of this. IOs are entitled to receive all or a portion of the
interest, but none (or only a nominal amount) of the principal payments, from
the underlying mortgage assets. If the mortgage assets underlying an IO
experience greater than anticipated principal prepayments, then the total
amount of interest payments allocable to the IO class,

<PAGE>

and therefore the yield to investors, generally will be reduced. In some
instances, an investor in an IO may fail to recoup all of his or her initial
investment, even if the security is government issued or guaranteed or is
rated AAA or the equivalent. Conversely, PO classes are entitled to receive
all or a portion of the principal payments, but none of the interest, from
the underlying mortgage assets. PO classes are purchased at substantial
discounts from par, and the yield to investors will be reduced if principal
payments are slower than expected. Some IOs and POs, as well as other CMO
classes, are structured to have special protections against the effects of
prepayments. These structural protections, however, normally are effective
only within certain ranges of prepayment rates and thus will not protect
investors in all circumstances. Inverse floating rate CMO classes also may be
extremely volatile. These classes pay interest at a rate that decreases when
a specified index of market rates increases and vice versa.

The market for privately issued mortgage-backed securities is smaller
and less liquid than the market for U.S. government mortgage-backed
securities. Foreign mortgage-backed securities markets are substantially
smaller than U.S. markets but have been established in several countries,
including Germany, Denmark, Sweden, Canada and Australia, and may be
developed elsewhere. Foreign mortgage-backed securities generally are
structured differently than domestic mortgage-backed securities, but they
normally present substantially similar investment risks as well as the other
risks normally associated with foreign securities.

During 1994, the value and liquidity of many mortgage-backed securities
declined sharply due primarily to increases in interest rates. There can be
no assurance that such declines will not recur. The market value of certain
mortgage-backed securities, including IO and PO classes of mortgage-backed
securities, can be extremely volatile, and these securities may become
illiquid. A fund's investment adviser seeks to manage its investments in
mortgage-backed securities so that the volatility of its portfolio, taken as
a whole, is consistent with its investment objective. Management of portfolio
duration is an important part of this. However, computing the duration of
mortgage-backed securities is complex. See, "The Funds' Investments, Related
Risks and Limitations -- Duration." If a fund's investment adviser does not
compute the duration of mortgage-backed securities correctly, the value of
its portfolio may be either more or less sensitive to changes in market
interest rates than intended. In addition, if market interest rates or other
factors that affect the volatility of securities held by a fund change in
ways that its investment adviser does not anticipate, the fund's ability to
meet its investment objective may be reduced.

More information concerning these mortgage-backed securities and the
related risks of investments therein is set forth below. New types of
mortgage-backed securities are developed and marketed from time to time and,
consistent with its investment limitations, a fund expects to invest in those
new types of mortgage-backed securities that its investment adviser believes
may assist it in achieving its investment objective. Similarly, a fund may
invest in mortgage-backed securities issued by new or existing governmental
or private issuers other than those identified herein.

GINNIE MAE CERTIFICATES -- Ginnie Mae guarantees certain mortgage
pass-through certificates ("Ginnie Mae certificates") that are issued by
Private Mortgage Lenders and that represent ownership interests in individual
pools of residential mortgage loans. These securities are designed to provide
monthly payments of interest and principal to the investor. Timely payment of
interest and principal is backed by the full faith and credit of the U.S.
government. Each mortgagor's monthly payments to his lending institution on
his residential mortgage are "passed through" to certificateholders such as
the funds. 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

<PAGE>

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.

PRIVATE MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities issued
by Private Mortgage Lenders are structured similarly to 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 and Freddie
Mac, they normally are structured with one or more types of credit
enhancement. See "The Funds' Investments, Related Risks and Limitations --
Mortgage-Backed Securities -- TYPES OF CREDIT ENHANCEMENT." These credit
enhancements do not protect investors from changes in market value.

COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE
PASS-THROUGHS -- CMOs are debt obligations that are collateralized by
mortgage loans or mortgage pass-through securities (collectively, "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 of, and interest on, the
Mortgage Assets (and in the case of CMOs, any reinvestment income thereon)
provide the funds to pay the 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 accrued on all classes of a CMO
(other than any principal-only or "PO" class) on a monthly, quarterly or
semi-annual 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 date or final distribution date but may be
retired earlier.

Some CMO classes are structured to pay interest at rates that are
adjusted in accordance with a formula, such as a multiple or fraction of the
change in a specified interest rate index, so as to pay at a rate that will
be attractive in certain interest rate environments but not in others. For
example, an inverse floating rate CMO class pays interest at a rate that
increases as a specified interest rate index decreases but decreases as that
index increases. For other CMO classes, the yield may move in the same
direction as market interest rates -- I.E., the yield may increase as rates
increase and decrease as rates decrease -- but may do so more rapidly or to a
greater degree. The market value of such securities generally is more
volatile than that of a fixed rate obligation. Such interest rate formulas
may be combined with other CMO characteristics. For example, a CMO class may
be an inverse IO class, on which the holders are entitled to receive no
payments of principal and are entitled to receive interest at a rate that
will vary inversely with a specified index or a multiple thereof.

<PAGE>

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) loss protection. Loss
protection relates to 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 provision 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. Loss protection 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. A fund 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 exceed 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.

SPECIAL CHARACTERISTICS OF MORTGAGE- AND ASSET-BACKED SECURITIES -- The
yield characteristics of mortgage- and asset-backed securities differ from
those of traditiona1 debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly,
and that principal may be prepaid at any time because the underlying mortgage
loans or other obligations generally may be prepaid at any time. 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- 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.

The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to
the annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, 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 was 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

<PAGE>

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 interest 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 a fund's yield.

ADJUSTABLE RATE MORTGAGE AND FLOATING RATE MORTGAGE-BACKED SECURITIES --
Adjustable rate mortgage ("ARM") securities are mortgage-backed securities
(sometimes referred to as "ARMs") that 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. 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. Because the
interest rates on ARM and floating rate mortgage-backed securities are reset
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. As a result, during periods of rising
interest rates, ARMs generally do not decrease in value as much as fixed rate
securities. Conversely, during periods of declining rates, ARMs generally do
not increase in value as much as fixed rate securities. ARMs represent a
right to receive interest payments at a rate that is adjusted to reflect the
interest earned on a pool of ARM loans. These mortgage loans generally
specify 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 ARM loans specify limitations on the maximum
amount by which the mortgage interest rate may adjust for any single
adjustment period. These mortgage loans also may limit changes in the maximum
amount by which the borrower's monthly payment may adjust for any single
adjustment period. If 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 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 the ARM loan.
Borrowers under these mortgage loans experiencing negative amortization may
take longer to build up their equity in the underlying property and may be
more likely to default.

ARM loans 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 these mortgage loans 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 ARM
loans might decrease. The rate of prepayments with respect to ARM loans has
fluctuated in recent years.

The rates of interest payable on certain ARM loans, and therefore on
certain ARM 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 securities supported by ARM loans that adjust based
on lagging indices tend to be somewhat more sensitive to interest rate
fluctuations than those reflecting current interest rate levels, although the
values of such ARM 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
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.

CREDIT AND LIQUIDITY ENHANCEMENTS. A fund may invest in securities that
have credit or liquidity enhancements or may purchase these types of
enhancements in the secondary market. Such enhancements may be

<PAGE>

structured as demand features that permit the fund to sell the instrument at
designated times and prices. These credit and liquidity enhancements may be
backed by letters of credit or other instruments provided by banks or other
financial institutions whose credit standing affects the credit quality of
the underlying obligation. Changes in the credit quality of these financial
institutions could cause losses to a fund and affect its share price. The
credit and liquidity enhancements may have conditions that limit the ability
of a fund to use them when the fund wishes to do so.

INVESTING IN FOREIGN SECURITIES. Investing in foreign securities may
involve more risks than investing in U.S. securities. The value of foreign
securities is subject to economic and political developments in the countries
where the issuers operate and to changes in foreign currency values.
Investments in foreign securities involve risks relating to political, social
and economic developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign issuers and
markets are subject. These risks may include expropriation, confiscatory
taxation, withholding taxes on interest and/or dividends, limitations on the
use of or transfer of fund assets and political or social instability or
diplomatic developments. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. In those European
countries that are using the Euro as a common currency unit, individual
national economies may be adversely affected by the inability of national
governments to use monetary policy to address their own economic or political
concerns.

Securities of foreign issuers may not be registered with the SEC, and
the issuers thereof may not be subject to its reporting requirements.
Accordingly, there may be less publicly available information concerning
foreign issuers of securities held by a fund than is available concerning
U.S. companies. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards or to other regulatory
requirements comparable to those applicable to U.S. companies.

Securities of many foreign companies may be less liquid and their prices
more volatile than securities of comparable U.S. companies. From time to time
foreign securities may be difficult to liquidate rapidly without
significantly depressing the price of such securities. Foreign markets have
different clearance and settlement procedures, and in certain markets there
have been times when settlements have failed to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when some of a fund's
assets are uninvested and no return is earned thereon. The inability of a
fund to make intended security purchases due to settlement problems could
cause the fund to miss attractive investment opportunities. Inability to
dispose of a portfolio security due to settlement problems could result
either in losses to the fund due to subsequent declines in the value of such
portfolio security or, if the fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Foreign
securities trading practices, including those involving securities settlement
where fund assets may be released prior to receipt of payment, may expose a
fund to increased risk in the event of a failed trade or the insolvency of a
foreign broker-dealer. Legal remedies for defaults and disputes may have to
be pursued in foreign courts, whose procedures differ substantially from
those of U.S. courts.

The costs of investing outside the United States frequently are higher
than those attributable to investing in the United States. This is
particularly true with respect to emerging capital markets. For example, the
cost of maintaining custody of foreign securities exceeds custodian costs for
domestic securities, and transaction and settlement costs of foreign
investing frequently are higher than those attributable to domestic
investing. Costs associated with the exchange of currencies also make foreign
investing more expensive than domestic investing.

A fund may invest in foreign securities by purchasing depositary
receipts, including American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs"), or
other securities convertible into securities of issuers based in foreign
countries. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are
receipts typically issued by a U.S. bank or trust company evidencing
ownership of the underlying securities. They generally are in registered
form, are denominated in U.S. dollars and are designed for use in the U.S.
securities markets. EDRs are European receipts evidencing a similar
arrangement, may be denominated in other currencies and are designed for use
in European securities markets. GDRs are similar to EDRs and are designed for
use in several international financial markets. For purposes of each fund's
investment policies, depositary receipts generally are deemed to have

<PAGE>

the same classification as the underlying securities they represent. Thus, a
depositary receipt representing ownership of common stock will be treated as
common stock.

ADRs are publicly traded on exchanges or over-the-counter in the United
States and are issued through "sponsored" or "unsponsored" arrangements. In a
sponsored ADR arrangement, the foreign issuer assumes the obligation to pay
some or all of the depositary's transaction fees, whereas under an
unsponsored arrangement, the foreign issuer assumes no obligations and the
depositary's transaction fees are paid directly by the ADR holders. In
addition, less information is available in the United States about an
unsponsored ADR than about a sponsored ADR.

Eurodollar bonds and Yankee bonds are types of U.S. dollar denominated
foreign securities. Eurodollar bonds are U.S. dollar denominated bonds that
are held outside the United States, primarily in Europe. Yankee bonds are
U.S. dollar denominated bonds of foreign issuers that are sold primarily in
the United States.

The funds that invest outside the United States anticipate that their
brokerage transactions involving foreign securities of companies
headquartered in countries other than the United States will be conducted
primarily on the principal exchanges of such countries. Although each fund
will endeavor to achieve the best net results in effecting its portfolio
transactions, transactions on foreign exchanges are usually subject to fixed
commissions that are generally higher than negotiated commissions on U.S.
transactions. There is generally less government supervision and regulation
of exchanges and brokers in foreign countries than in the United States.

Investment income and gains on certain foreign securities in which the
funds may invest may be subject to foreign withholding or other taxes that
could reduce the return on these securities. Tax treaties between the United
States and certain foreign countries, however, may reduce or eliminate the
amount of foreign taxes to which the funds would be subject. In addition,
substantial limitations may exist in certain countries with respect to the
funds' ability to repatriate investment capital or the proceeds of sales of
securities.

FOREIGN CURRENCY RISKS. Currency risk is the risk that changes in
foreign exchange rates may reduce the U.S. dollar value of a fund's foreign
investments. If the value of a foreign currency rises against the value of
the U.S. dollar, the value of a fund's investments that are denominated in,
or linked to, that currency will increase. Conversely, if the value of a
foreign currency declines against the value of the U.S. dollar, the value of
those fund investments will decrease. These changes may have a significant
impact on the value of fund shares. In some instances, a fund may use
derivative strategies to hedge against changes in foreign currency value.
(See "Strategies Using Derivative Instruments," below.) However,
opportunities to hedge against currency risk may not exist in certain
markets, particularly with respect to emerging market currencies, and even
when appropriate hedging opportunities are available, a fund may choose not
to hedge against currency risk.

Generally, currency exchange rates are determined by supply and demand
in the foreign exchange markets and the relative merits of investments in
different countries. In the case of those European countries that use the
Euro as a common currency unit, the relative merits of investments in the
common market in which they participate, rather than the merits of
investments in the individual country, will be a determinant of currency
exchange rates. Currency exchange rates also can be affected by the
intervention of the U.S. and foreign governments or central banks, the
imposition of currency controls, speculation, devaluation or other political
or economic developments inside and outside the United States.

Each fund values its assets daily in U.S. dollars, and funds that hold
foreign currencies do not intend to convert them to U.S. dollars on a daily
basis. These funds may convert foreign currency to U.S. dollars from time to
time. From time to time a fund's foreign currencies may be held as "foreign
currency call accounts" at foreign branches of foreign or domestic banks.
These accounts bear interest at negotiated rates and are payable upon
relatively short demand periods. If a bank became insolvent, a fund could
suffer a loss of some or all of the amounts deposited. A fund may convert
foreign currency to U.S. dollars from time to time.

The value of the assets of a fund as measured in U.S. dollars may be
affected favorably or unfavorably by fluctuations in currency rates and
exchange control regulations. Further, a fund may incur costs in connection
with conversions between various currencies. Currency exchange dealers
realize a profit based on the difference between the prices at which they are
buying and selling various currencies. Thus, a dealer normally will offer to
sell a foreign currency to a fund at one rate, while offering a lesser rate
of exchange should a fund desire immediately to resell that

<PAGE>

currency to the dealer. A fund conducts its currency exchange transactions
either on a spot (I.E., cash) basis at the spot rate prevailing in the
foreign currency exchange market, or through entering into forward, futures
or options contracts to purchase or sell foreign currencies.

SPECIAL CHARACTERISTICS OF EMERGING MARKET SECURITIES AND SOVEREIGN DEBT

EMERGING MARKET INVESTMENTS. The special risks of investing in foreign
securities are heightened in emerging markets. For example, many emerging
market currencies have experienced significant devaluations relative to the
U.S. dollar in recent years. Emerging market countries typically have
economic and political systems that are less fully developed and can be
expected to be less stable than those of developed countries. Emerging market
countries may have policies that restrict investment by foreigners, and there
is a higher risk of government expropriation or nationalization of private
property. The possibility of low or nonexistent trading volume in the
securities of companies in emerging markets also may result in a lack of
liquidity and in price volatility. Issuers in emerging markets typically are
subject to a greater degree of change in earnings and business prospects than
are companies in more developed markets.

INVESTMENT AND REPATRIATION RESTRICTIONS -- Foreign investment in the
securities markets of several emerging market countries is restricted or
controlled to varying degrees. These restrictions may limit a fund's
investment in these countries and may increase its expenses. For example,
certain countries may require governmental approval prior to investments by
foreign persons in a particular company or industry sector or limit
investment by foreign persons to only a specific class of securities of a
company, which may have less advantageous terms (including price) than
securities of the company available for purchase by nationals. Certain
countries may restrict or prohibit investment opportunities in issuers or
industries deemed important to national interests. In addition, the
repatriation of both investment income and capital from some emerging market
countries is subject to restrictions, such as the need for certain government
consents. Even where there is no outright restriction on repatriation of
capital, the mechanics of repatriation may affect certain aspects of a fund's
operations. These restrictions may in the future make it undesirable to
invest in the countries to which they apply. In addition, if there is a
deterioration in a country's balance of payments or for other reasons, a
country may impose restrictions on foreign capital remittances abroad. A fund
could be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation, as well as by the application to it
of other restrictions on investments.

If, because of restrictions on repatriation or conversion, a fund were
unable to distribute substantially all of its net investment income and
capital gains within applicable time periods, the fund would be subject to
federal income and/or excise taxes that would not otherwise be incurred and
could cease to qualify for the favorable tax treatment afforded to regulated
investment companies under the Internal Revenue Code. If it did cease to
qualify for that treatment, it would become subject to federal income tax on
all of its income and net gains. See "Taxes -- Qualification as a Regulated
Investment Company," below.

DIFFERENCES BETWEEN THE U.S. AND EMERGING MARKET SECURITIES MARKETS.
Most of the securities markets of emerging market countries have
substantially less volume than the New York Stock Exchange, and equity
securities of most companies in emerging market countries are less liquid and
more volatile than equity securities of U.S. companies of comparable size.
Some of the stock exchanges in emerging market countries are in the earliest
stages of their development. As a result, security settlements may in some
instances be subject to delays and related administrative uncertainties. Many
companies traded on securities markets in emerging market countries are
smaller, newer and less seasoned than companies whose securities are traded
on securities markets in the United States. Investments in smaller companies
involve greater risk than is customarily associated with investing in larger
companies. Smaller companies may have limited product lines, markets or
financial or managerial resources and may be more susceptible to losses and
risks of bankruptcy. Additionally, market-making and arbitrage activities are
generally less extensive in such markets, which may contribute to increased
volatility and reduced liquidity of such markets. Accordingly, each of these
markets may be subject to greater influence by adverse events generally
affecting the market, and by large investors trading significant blocks of
securities, than is usual in the United States. To the extent that an
emerging market country experiences rapid increases in its money supply and
investment in equity securities for speculative purposes, the equity
securities traded in that country may trade at price-earnings multiples
higher than those of comparable companies trading on securities markets in
the United States, which may not be sustainable.

<PAGE>

GOVERNMENT SUPERVISION OF EMERGING MARKET SECURITIES MARKETS; LEGAL
SYSTEMS. There is also less government supervision and regulation of
securities exchanges, listed companies and brokers in emerging market
countries than exists in the United States. Therefore, less information may
be available to a fund than with respect to investments in the United States.
Further, in certain countries, less information may be available to a fund
than to local market participants. Brokers in other countries may not be as
well capitalized as those in the United States, so that they are more
susceptible to financial failure in times of market, political or economic
stress. In addition, existing laws and regulations are often inconsistently
applied. As legal systems in some of the emerging market countries develop,
foreign investors may be adversely affected by new laws and regulations,
changes to existing laws and regulations and preemption of local laws and
regulations by national laws. In circumstances where adequate laws exist, it
may not be possible to obtain swift and equitable enforcement of the law.

SOCIAL, POLITICAL AND ECONOMIC FACTORS -- Many emerging market countries
may be subject to a greater degree of social, political and economic
instability than is the case in the United States. Any change in the
leadership or policies of these countries may halt the expansion of or
reverse any liberalization of foreign investment policies now occurring. Such
instability may result from, among other things, the following: (1)
authoritarian governments or military involvement in political and economic
decision making, and changes in government through extra-constitutional
means; (2) popular unrest associated with demands for improved political,
economic and social conditions; (3) internal insurgencies; (4) hostile
relations with neighboring countries; and (5) ethnic, religious and racial
disaffection. Such social, political and economic instability could
significantly disrupt the financial markets in those countries and elsewhere
and could adversely affect the value of a fund's assets. In addition, there
may be the possibility of asset expropriations or future confiscatory levels
of taxation affecting a fund.

The economies of many emerging markets are heavily dependent upon
international trade and are accordingly affected by protective trade barriers
and the economic conditions of their trading partners, principally the United
States, Japan, China and the European Union. The enactment by the United
States or other principal trading partners of protectionist trade
legislation, reduction of foreign investment in the local economies and
general declines in the international securities markets could have a
significant adverse effect upon the securities markets of these countries. In
addition, the economies of some countries are vulnerable to weakness in world
prices for their commodity exports, including crude oil. A country whose
exports are concentrated in a few commodities could be vulnerable to a
decline in the international price of such commodities.

FINANCIAL INFORMATION AND LEGAL STANDARDS -- Issuers in emerging market
countries generally are subject to accounting, auditing and financial
standards and requirements that differ, in some cases significantly, from
those applicable to U.S. issuers. In particular, the assets and profits
appearing on the financial statements of an emerging market issuer may not
reflect its financial position or results of operations in the way they would
be reflected had the financial statements been prepared in accordance with
U.S. generally accepted accounting principles. In addition, for an issuer
that keeps accounting records in local currency, inflation accounting rules
may require, for both tax and accounting purposes, that certain assets and
liabilities be restated on the issuer's balance sheet in order to express
items in terms of currency of constant purchasing power. Inflation accounting
may indirectly generate losses or profits. Consequently, financial data may
be materially affected by restatements for inflation and may not accurately
reflect the real condition of those issuers and securities markets. Also,
securities brokers and dealers in other countries may not be as well
capitalized as those in the United States, so that they are more susceptible
to financial failure in times of market, political or economic stress.

In addition, existing laws and regulations are often inconsistently
applied. As legal systems in some of the emerging market countries develop,
foreign investors may be adversely affected by new laws and regulations,
changes to existing laws and regulations and preemption of local laws and
regulations by national laws. In circumstances where adequate laws exist, it
may not be possible to obtain swift and equitable enforcement of the law.

FOREIGN SOVEREIGN DEBT. Sovereign debt includes bonds that are issued by
foreign governments or their agencies, instrumentalities or political
subdivisions or by foreign central banks. Sovereign debt also may be issued
by quasi-governmental entities that are owned by foreign governments but are
not backed by their full faith and credit or general taxing powers.
Investment in sovereign debt involves special risks. The issuer of the debt
or the governmental authorities that control the repayment of the debt may be
unable or unwilling to repay principal and/or

<PAGE>

interest when due in accordance with the terms of such debt, and the funds
may have limited legal recourse in the event of a default.

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

A sovereign debtor's willingness or ability to repay principal and
interest due in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size
of the debt service burden to the economy as a whole, the sovereign debtor's
policy toward principal international lenders and the political constraints
to which a sovereign debtor may be subject. A country whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international price of such commodities. Increased protectionism on the part
of a country's trading partners, or political changes in those countries,
could also adversely affect its exports. Such events could diminish a
country's trade account surplus, if any, or the credit standing of a
particular local government or agency. Another factor bearing on the ability
of a country to repay sovereign debt is the level of the country's
international reserves. Fluctuations in the level of these reserves can
affect the amount of foreign exchange readily available for external debt
payments and, thus, could have a bearing on the capacity of the country to
make payments on its sovereign debt.

The occurrence of political, social or diplomatic changes in one or more
of the countries issuing sovereign debt could adversely affect the funds'
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to
service their sovereign debt.

With respect to sovereign debt of emerging market issuers, investors
should be aware that certain emerging market countries are among the largest
debtors to commercial banks and foreign governments. Some emerging market
countries have from time to time declared moratoria on the payment of
principal and interest on external debt.

Some emerging market countries have experienced difficulty in servicing
their sovereign debt on a timely basis which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit
agreements or converting outstanding principal and unpaid interest to Brady
Bonds (discussed below), and obtaining new credit to finance interest
payments. Holders of sovereign debt, including the funds, may be requested to
participate in the rescheduling of such debt and to extend further loans to
sovereign debtors. The interests of holders of sovereign debt could be
adversely affected in the course of restructuring arrangements or by certain
other factors referred to below. Furthermore, some of the participants in the
secondary market for sovereign debt may also be directly involved in
negotiating the terms of these arrangements and may, therefore, have access
to information not available to other market participants. Obligations
arising from past restructuring agreements may affect the economic
performance and political and social stability of certain issuers of
sovereign debt. There is no bankruptcy proceeding by which sovereign debt on
which a sovereign has defaulted may be collected in whole or in part.

Foreign investment in certain sovereign debt is restricted or controlled
to varying degrees. These restrictions or controls may at times limit or
preclude foreign investment in such sovereign debt and increase the costs and
expenses of a fund. Certain countries in which a fund may invest require
governmental approval prior to investments by foreign persons, limit the
amount of investment by foreign persons in a particular issuer, limit the
investment by foreign persons only to a specific class of securities of an
issuer that may have less advantageous rights than the classes available for
purchase by domiciliaries of the countries or impose additional taxes on
foreign investors. Certain issuers may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in a
country's balance of payments the country could impose temporary restrictions
on foreign capital remittances. A fund could be adversely affected by delays
in, or a refusal to grant, any required governmental approval for
repatriation of capital, as well as

<PAGE>

by the application to the fund of any restrictions on investments. Investing
in local markets may require a fund to adopt special procedures, seek local
government approvals or take other actions, each of which may involve
additional costs to the fund.

BRADY BONDS -- Brady Bonds are sovereign bonds issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness. In
restructuring its external debt under the Brady Plan framework, a debtor
nation negotiates with its existing bank lenders as well as multilateral
institutions such as the International Monetary Fund ("IMF"). The Brady Plan
framework, as it has developed, contemplates the exchange of commercial bank
debt for newly issued Brady Bonds. Brady Bonds may also be issued in respect
of new money being advanced by existing lenders in connection with the debt
restructuring. The World Bank and the IMF support the restructuring by
providing funds pursuant to loan agreements or other arrangements which
enable the debtor nation to collateralize the new Brady Bonds or to
repurchase outstanding bank debt at a discount.

Brady Bonds have been issued only in recent years, and accordingly do
not have a long payment history. Agreements implemented under the Brady Plan
to date are designed to achieve debt and debt-service reduction through
specific options negotiated by a debtor nation with its creditors. As a
result, the financial packages offered by each country differ. The types of
options have included the exchange of outstanding commercial bank debt for
bonds issued at 100% of face value of such debt, which carry a below-market
stated rate of interest (generally known as par bonds), bonds issued at a
discount from the face value of such debt (generally known as discount
bonds), bonds bearing an interest rate which increases over time and bonds
issued in exchange for the advancement of new money by existing lenders.
Regardless of the stated face amount and stated interest rate of the various
types of Brady Bonds, a fund will purchase Brady Bonds in which the price and
yield to the investor reflect market conditions at the time of purchase.

Certain Brady Bonds have been collateralized as to principal due at
maturity by U.S. Treasury zero coupon bonds with maturities equal to the
final maturity of such Brady Bonds. Collateral purchases are financed by the
IMF, the World Bank and the debtor nations' reserves. In the event of a
default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero
coupon obligations held as collateral for the payment of principal will not
be distributed to investors, nor will such obligations be sold and the
proceeds distributed. The collateral will be held by the collateral agent
until the scheduled maturity of the defaulted Brady Bonds, which will
continue to be outstanding, at which time the face amount of the collateral
will equal the principal payments that would have then been due on the Brady
Bonds in the normal course. Interest payments on Brady Bonds may be wholly
uncollateralized or may be collateralized by cash or high grade securities in
amounts that typically represent between 12 and 18 months of interest
accruals on these instruments, with the balance of the interest accruals
being uncollateralized.

Brady Bonds are often viewed as having several valuation components: (1)
the collateralized repayment of principal, if any, at final maturity, (2) the
collateralized interest payments, if any, (3) the uncollateralized interest
payments and (4) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In light of
the residual risk of Brady Bonds and, among other factors, the history of
defaults with respect to commercial bank loans by public and private entities
of countries issuing Brady Bonds, investments in Brady Bonds are to be viewed
as speculative. A fund may purchase Brady Bonds with no or limited
collateralization and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) repayment of principal
primarily on the willingness and ability of the foreign government to make
payment in accordance with the terms of the Brady Bonds.

STRUCTURED FOREIGN INVESTMENTS. This term generally refers to interests
in U.S. and foreign entities organized and operated solely for the purpose of
securitizing or restructuring the investment characteristics of foreign
securities. This type of securitization or restructuring usually involves the
deposit with or purchase by a U.S. or foreign entity, such as a corporation
or trust, of specified instruments (such as commercial bank loans or Brady
Bonds) and the issuance by that entity of one or more classes of securities
backed by, or representing interests in, the underlying instruments. The cash
flow on the underlying instruments may be apportioned among the newly issued
structured foreign investments to create securities with different investment
characteristics such as varying

<PAGE>

maturities, payment priorities and interest rate provisions, and the extent
of the payments made with respect to structured foreign investments is often
dependent on the extent of the cash flow on the underlying instruments.

Structured foreign investments frequently involve no credit enhancement.
Accordingly, their credit risk generally will be equivalent to that of the
underlying instruments. In addition, classes of structured foreign
investments may be subordinated to the right of payment of another class.
Subordinated structured foreign investments typically have higher yields and
present greater risks than unsubordinated structured foreign investments.
Structured foreign investments are typically sold in private placement
transactions, and there currently is no active trading market for structured
foreign investments.

CURRENCY-LINKED INVESTMENTS. The principal amount of securities that are
indexed to specific foreign currency exchange rates may be adjusted up or
down (but not below zero) at maturity to reflect changes in the exchange rate
between two currencies. A fund may experience loss of principal due to these
adjustments.

ZERO COUPON AND OTHER OID SECURITIES; PIK SECURITIES. Zero coupon
securities are securities on which no periodic interest payments are made but
instead are sold at a deep discount from their face value. The buyer of these
securities receives a rate of return by the gradual appreciation of the
security, which results from the fact that it will be paid at face value on a
specified maturity date. There are many types of zero coupon securities. Some
are issued in zero coupon form, including Treasury bills, notes and bonds
that have been stripped of (separated from) their unmatured interest coupons
(unmatured interest payments) and receipts or certificates representing
interests in such stripped debt obligations and coupons. Others are created
by brokerage firms that strip the coupons from interest-paying bonds and sell
the principal and the coupons separately.

Other securities that are sold with original issue discount ("OID")
(I.E., the difference between the issue price and the value at maturity) may
provide for some interest to be paid prior to maturity. In addition,
payment-in-kind ("PIK") securities pay interest in additional securities, not
in cash. OID and PIK securities usually trade at a discount from their face
value.

Zero coupon securities are generally more sensitive to changes in
interest rates than debt obligations of comparable maturities that make
current interest payments. This means that when interest rates fall, the
value of zero coupon securities rises more rapidly than securities paying
interest on a current basis. However, when interest rates rise, their value
falls more dramatically. Other OID securities and PIK securities also are
subject to greater fluctuations in market value in response to changing
interest rates than bonds of comparable maturities that make current
distributions of interest in cash.

Because federal tax law requires that accrued OID and "interest" on PIK
securities be included currently in a fund's income (see "Taxes," below), a
fund might be required to distribute as a dividend an amount that is greater
than the total amount of cash it actually receives. These distributions would
have to be made from the fund's cash assets or, if necessary, from the
proceeds of sales of portfolio securities. A fund would not be able to
purchase additional securities with cash used to make these distributions,
and its current income and the value of its shares would ultimately be
reduced as a result.

Certain zero coupon securities are U.S. Treasury notes and bonds that
have been stripped of their unmatured interest coupon receipts or interests
in such U.S. Treasury securities or coupons. The staff of the SEC currently
takes the position that "stripped" U.S. government securities that are not
issued through the U.S. Treasury are not U.S. government securities. This
technique is frequently used with U.S. Treasury bonds to create CATS
(Certificate of Accrual Treasury Securities), TIGRs (Treasury Income Growth
Receipts) and similar securities.

CONVERTIBLE SECURITIES. A convertible security is a bond, 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 or dividends until the
convertible security matures or is redeemed, converted or exchanged.
Convertible securities have unique investment characteristics in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (2) are less subject to fluctuation in
value than the underlying stock because they have fixed income
characteristics and (3) provide the potential for capital appreciation if the
market price of the underlying common stock increases. While no securities
investment is without some risk,

<PAGE>

investments in convertible securities generally entail less risk than the
issuer's common stock. However, 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.

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 a fund is called for
redemption, the fund will be required to permit the issuer to redeem the
security, convert it into underlying common stock or sell it to a third party.

WARRANTS. Warrants are securities permitting, but not obligating,
holders to subscribe for other securities. Warrants do not carry with them
the right to dividends or voting rights with respect to the securities that
they entitle their holder to purchase, and they do not represent any rights
in the assets of the issuer. As a result, warrants may be considered more
speculative than certain other types of investments. In addition, the value
of a warrant does not necessarily change with the value of the underlying
securities, and a warrant ceases to have value if it is not exercised prior
to its expiration date.

LOAN PARTICIPATIONS AND ASSIGNMENTS. Investments in secured or unsecured
fixed or floating rate loans ("Loans") arranged through private negotiations
between a borrowing corporation, government or other entity and one or more
financial institutions ("Lenders") may be in the form of participations
("Participations") in Loans or assignments ("Assignments") of all or a
portion of Loans from third parties. Participations typically result in the
fund's having a contractual relationship only with the Lender, not with the
borrower. A fund has the right to receive payments of principal, interest and
any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by the Lender of the payments from the
borrower. In connection with purchasing Participations, a fund generally has
no direct right to enforce compliance by the borrower with the terms of the
loan agreement relating to the Loan, nor any rights of set-off against the
borrower, and a fund may not directly benefit from any collateral supporting
the Loan in which it has purchased the Participation. As a result, a fund
assumes the credit risk of both the borrower and the Lender that is selling
the Participation. In the event of the insolvency of the selling Lender, the
fund may be treated as a general creditor of that Lender and may not benefit
from any set-off between the Lender and the borrower. A fund will acquire
Participations only if its investment adviser determines that the selling
Lender is creditworthy.

When a fund purchases Assignments from Lenders, it acquires direct
rights against the borrower on the Loan. In an Assignment, the fund is
entitled to receive payments directly from the borrower and, therefore, does
not depend on the selling bank to pass these payments onto the fund. However,
because Assignments are arranged through private negotiations between
potential assignees and assignors, the rights and obligations acquired by the
fund as the purchaser of an Assignment may differ from, and be more limited
than, those held by the assigning Lender.

Assignments and Participations are generally not registered under the
Securities Act of 1933, as amended ("Securities Act"), and thus may be
subject to a fund's limitation on investment in illiquid securities. Because
there may be no liquid market for such securities, such securities may be
sold only to a limited number of institutional investors. The lack of a
liquid secondary market could have an adverse impact on the value of such
securities and on a fund's ability to dispose of particular Assignments or
Participations when necessary to meet the fund's liquidity needs or in
response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower.

TEMPORARY AND DEFENSIVE INVESTMENTS; MONEY MARKET INVESTMENTS. Each fund
may invest in money market investments for temporary or defensive purposes,
to reinvest cash collateral from its securities lending activities or as part
of its normal investment program. Such investments include, among other
things, (1) securities issued or guaranteed by the U.S. government or one of
its agencies or instrumentalities, (2) debt obligations of banks, savings and
loan institutions, insurance companies and mortgage bankers, (3) commercial
paper and notes, including those with variable and floating rates of
interest, (4) debt obligations of foreign branches of U.S. banks, U.S.
branches of foreign banks, and foreign branches of foreign banks, (5) debt
obligations issued or guaranteed by one or more foreign governments or any of
their foreign political subdivisions, agencies or instrumentalities,
including obligations of supranational entities, (6) bonds issued by foreign
issuers, (7) repurchase agreements and (8) securities of other investment
companies that invest exclusively in money market instruments and similar
private

<PAGE>

investment vehicles. Only those funds that may trade outside the United
States may invest in money market instruments that are denominated in foreign
currencies.

INVESTMENTS IN OTHER INVESTMENT COMPANIES. Each fund may invest in
securities of other investment companies, subject to limitations under the
Investment Company Act of 1940, as amended ("Investment Company Act"). Among
other things, these limitations currently restrict a fund's aggregate
investments in other investment companies to no more than 10% of its total
assets. A fund's investments in certain private investment vehicles are not
subject to this restriction. The shares of other investment companies are
subject to the management fees and other expenses of those companies, and the
purchase of shares of some investment companies requires the payment of sales
loads and (in the case of closed-end investment companies) sometimes
substantial premiums above the value of such companies' portfolio securities.
At the same time, a fund would continue to pay its own management fees and
expenses with respect to all its investments, including shares of other
investment companies. Each fund may invest in the shares of other investment
companies when, in the judgment of its investment adviser, the potential
benefits of the investment outweigh the payment of any management fees and
expenses and, where applicable, premium or sales load.

From time to time, investments in other investment companies may be the
most effective available means for a fund to invest a portion of its assets.
In some cases, investment in another investment company may be the most
practical way for a fund to invest in securities of issuers in certain
countries. These investments may include World Equity Benchmark SharesSM
(commonly known as "WEBS"), which are exchange-traded shares of series of an
investment company that are designed to replicate the composition and
performance of publicly traded issuers in particular foreign countries. A
fund's investment in another investment company is subject to the risks of
that investment company's underlying portfolio securities. Shares of
exchange-traded investment companies also can trade at substantial discounts
below the value of the companies' portfolio securities.

PACE Money Market Investments may invest in the securities of other
money market funds when Mitchell Hutchins believes that (1) the amounts to be
invested are too small or are available too late in the day to be effectively
invested in money market instruments, (2) shares of other money market funds
otherwise would provide a better return than direct investment in money
market instruments or (3) such investments would enhance the fund's
liquidity. The other funds may invest in the securities of money market funds
for similar reasons.

ILLIQUID SECURITIES. The term "illiquid securities" means securities
that cannot be disposed of within seven days in the ordinary course of
business at approximately the amount at which a fund has valued the
securities and includes, among other things, purchased over-the-counter
options, repurchase agreements maturing in more than seven days and
restricted securities other than those its investment adviser has determined
are liquid pursuant to guidelines established by the board. The assets used
as cover for over-the-counter options written by a fund will be considered
illiquid unless the over-the-counter options are sold to qualified dealers
who agree that the fund may repurchase any over-the-counter options they
write at a maximum price to be calculated by a formula set forth in the
option agreements. The cover for an over-the-counter option written subject
to this procedure would be considered illiquid only to the extent that the
maximum repurchase price under the formula exceeds the intrinsic value of the
option. Under current SEC guidelines, interest-only and principal-only
classes of mortgage-backed securities generally are considered illiquid.
However, interest-only and principal-only 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 the fund's
investment adviser has determined that they are liquid pursuant to guidelines
established by the board. A fund may not be able to readily liquidate its
investment in illiquid securities and may have to sell other investments if
necessary to raise cash to meet its obligations. The lack of a liquid
secondary market for illiquid securities may make it more difficult for a
fund to assign a value to those securities for purposes of valuing its
portfolio and calculating its net asset value.

Restricted securities are not registered under the Securities Act and
may be sold only in privately negotiated or other exempted transactions or
after a Securities Act registration statement has become effective. Where
registration is required, a fund may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time
of the decision to sell and the time a fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, a fund might obtain a less
favorable price than prevailed when it decided to sell.

<PAGE>

Not all restricted securities are illiquid. For funds that are
authorized to trade outside the United States, foreign securities are freely
tradeable in the country in which they are principally traded generally are
not considered illiquid, even if they are restricted in the United States. A
large institutional market has developed for many U.S. and foreign securities
that are not registered under the Securities Act. 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.

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

The board has delegated the function of making day-to-day determinations
of liquidity to each fund's investment adviser pursuant to guidelines
approved by the board. An investment adviser takes into account a number of
factors in reaching liquidity decisions, including (1) the frequency of
trades for the security, (2) the number of dealers that make quotes for the
security, (3) the number of dealers that have undertaken to make a market in
the security, (4) the number of other potential purchasers, (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) and (6) the
existence of demand features or similar liquidity enhancements. A fund's
investment adviser monitors the liquidity of restricted securities in its
portfolio and reports periodically on such decisions to the board.

In making determinations as to the liquidity of municipal lease
obligations purchased by PACE Municipal Fixed Income Investments, the
investment adviser distinguishes between direct investments in municipal
lease obligations (or participations therein) and investments in securities
that may be supported by municipal lease obligations or certificates of
participation therein. Since these municipal lease obligation-backed
securities are based on a well-established means of securitization, the
investment adviser does not believe that investing in such securities
presents the same liquidity issues as direct investments in municipal lease
obligations.

Mitchell Hutchins and (where applicable) the fund's investment adviser
monitor each fund's overall holdings of illiquid securities. If a fund's
holdings of illiquid securities exceed its limitation on investments in
illiquid securities for any reason (such as a particular security becoming
illiquid, changes in the relative market values of liquid and illiquid
portfolio securities or shareholder redemptions), Mitchell Hutchins will
consider what action would be in the best interests of a fund and its
shareholders. Such action may include engaging in an orderly disposition of
securities to reduce the fund's holdings of illiquid securities. However, a
fund is not required to dispose of illiquid securities under these
circumstances.

REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
fund purchases securities or other obligations from a bank or securities
dealer (or its affiliate) and simultaneously commits to resell them to the
counterparty 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 obligations. A fund maintains custody of the underlying obligations
prior to their repurchase, either through its regular custodian or through a
special "tri-party" custodian or sub-custodian that maintains separate
accounts for both the fund and its counterparty. Thus, the obligation of the
counterparty to pay the repurchase price on the date agreed to or upon demand
is, in effect, secured by such obligations.

Repurchase agreements carry certain risks not associated with direct
investments in securities, including a possible decline in the market value
of the underlying obligations. If their value becomes less than the
repurchase price, plus any agreed-upon additional amount, the counterparty
must provide additional collateral so that at all times the collateral is at
least equal to the repurchase price plus any agreed-upon additional amount.
The difference between the total amount to be received upon repurchase of the
obligations and the price that was paid by a fund

<PAGE>

upon acquisition is accrued as interest and included in its net investment
income. Repurchase agreements involving obligations other than U.S.
government securities (such as commercial paper and corporate bonds) may be
subject to special risks and may not have the benefit of certain protections
in the event of the counterparty's insolvency. If the seller or guarantor
becomes insolvent, the fund may suffer delays, costs and possible losses in
connection with the disposition of collateral. Each fund intends to enter
into repurchase agreements only in transactions with counterparties believed
by Mitchell Hutchins to present minimum credit risks.

REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements involve the
sale of securities held by a fund subject to its agreement to repurchase the
securities at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest. Reverse repurchase agreements are subject to each
fund's limitation on borrowings and may be entered into only with banks or
securities dealers or their affiliates. While a reverse repurchase agreement
is outstanding, a fund will maintain, in a segregated account with its
custodian, cash or liquid securities, marked to market daily, in an amount at
least equal to its obligations under the reverse repurchase agreement. See
"The Funds' Investments, Related Risks and Limitations -- Segregated
Accounts."

Reverse repurchase agreements involve the risk that the buyer of the
securities sold by a fund might be unable to deliver them when that fund
seeks to repurchase. If the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, the buyer or trustee or
receiver may receive an extension of time to determine whether to enforce a
fund's obligation to repurchase the securities, and the fund's use of the
proceeds of the reverse repurchase agreement may effectively be restricted
pending such decision.

DOLLAR ROLLS. In a dollar roll, a fund sells mortgage-backed or other
securities for delivery on the next regular settlement date for those
securities and, simultaneously, contracts to purchase substantially similar
securities for delivery on a later settlement date. Dollar rolls also are
subject to a fund's limitation on borrowings.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each fund may purchase
securities on a "when-issued" basis or may purchase or sell securities for
delayed delivery, I.E., for issuance or delivery to the fund later than the
normal settlement date for such securities at a stated price and yield.
When-issued securities include TBA ("to be announced") securities. TBA
securities, which are usually mortgage-backed securities, are purchased on a
forward commitment basis with an approximate principal amount and no defined
maturity date. The actual principal amount and maturity date are determined
upon settlement when the specific mortgage pools are assigned. A fund
generally would not pay for such securities or start earning interest on them
until they are received. However, when a fund undertakes a when-issued or
delayed-delivery obligation, it immediately assumes the risks of ownership,
including the risks of price fluctuation. Failure of the issuer to deliver a
security purchased by a fund on a when-issued or delayed-delivery basis may
result in the fund's incurring or missing an opportunity to make an
alternative investment. Depending on market conditions, a fund'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 fund's total assets, including the value of when-issued and
delayed-delivery securities held by that fund, exceeds its net assets.

A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in
market value, generally based upon changes in the level of interest rates.
Thus, fluctuation in the value of the security from the time of the
commitment date will affect a fund's net asset value. When a fund commits to
purchase securities on a when-issued or delayed delivery basis, its custodian
segregates assets to cover the amount of the commitment. See "The Funds'
Investments, Related Risks and Limitations -- Segregated Accounts." A fund's
when-issued and delayed delivery purchase commitments could cause its net
asset value per share to be more volatile. A fund may sell the right to
acquire the security prior to delivery if its investment adviser deems it
advantageous to do so, which may result in a gain or loss to the fund.

PACE MUNICIPAL FIXED INCOME INVESTMENTS -- TYPES OF MUNICIPAL BONDS. The
fund may invest in a variety of municipal bonds, as described below:

MUNICIPAL BOND -- Municipal bonds are obligations that are issued by
states, municipalities, public authorities or other issuers and that pay
interest that is exempt from federal income tax in the opinion of issuer's
counsel. The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment

<PAGE>

of principal and interest. Revenue bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source
such as from the user of the facility being financed. Municipal bonds also
include "moral obligation" bonds, which are normally issued by special
purpose authorities. For these bonds, a government unit is regarded as
morally obligated to support payment of the debt service, which is usually
subject to annual budget appropriations. Various types of municipal bonds are
described in the following sections.

MUNICIPAL LEASE OBLIGATIONS -- Municipal bonds include municipal lease
obligations, such as leases, installment purchase contracts and conditional
sales contracts, and certificates of participation therein. Municipal lease
obligations are issued by state and local governments and authorities to
purchase land or various types of equipment or facilities and may be subject
to annual budget appropriations. The fund generally invests in municipal
lease obligations through certificates of participation.

Although municipal lease obligations do not constitute general
obligations of the municipality for which its taxing power is pledged, they
ordinarily are backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. The leases
underlying certain municipal lease obligations, however, provide that lease
payments are subject to partial or full abatement if, because of material
damage or destruction of the leased property, there is substantial
interference with the lessee's use or occupancy of such property. This
"abatement risk" may be reduced by the existence of insurance covering the
leased property, the maintenance by the lessee of reserve funds or the
provision of credit enhancements such as letters of credit.

Certain municipal lease obligations contain "non-appropriation" clauses,
which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated
for such purpose on a yearly basis. Some municipal lease obligations of this
type are insured as to timely payment of principal and interest, even in the
event of a failure by the municipality to appropriate sufficient funds to
make payments under the lease. However, in the case of an uninsured municipal
lease obligation, the fund's ability to recover under the lease in the event
of a non-appropriation or default will be limited solely to the repossession
of leased property without recourse to the general credit of the lessee, and
disposition of the property in the event of foreclosure might prove difficult.

INDUSTRIAL DEVELOPMENT BONDS ("IDBS") AND PRIVATE ACTIVITY BONDS
("PABS") -- IDBs and PABs are issued by or on behalf of public authorities to
finance various privately operated facilities, such as airport or pollution
control facilities. These obligations are considered municipal bonds if the
interest paid thereon is exempt from federal income tax in the opinion of the
bond issuer's counsel. IDBs and PABs are in most cases revenue bonds and thus
are not payable from the unrestricted revenues of the issuer. The credit
quality of IDBs and PABs is usually directly related to the credit standing
of the user of the facilities being financed. IDBs issued after August 15,
1986 generally are considered PABs, and to the extent the fund invests in
such PABs, shareholders generally will be required to include a portion of
their exempt-interest dividends from that fund in calculating their liability
for the AMT. See "Taxes" below. The fund may invest more than 25% of its net
assets in IDBs and PABs.

FLOATING RATE AND VARIABLE RATE OBLIGATIONS -- Floating rate and
variable rate obligations are municipal bonds that bear interest at rates
that are not fixed but that vary with changes in specified market rates or
indices. The interest rate on floating rate or variable rate securities
ordinarily is readjusted on the basis of the prime rate of the bank that
originated the financing or some other index or published rate, such as the
90-day U.S. Treasury bill rate, or is otherwise reset to reflect market rates
of interest. Generally, these interest rate adjustments cause the market
value of floating rate and variable rate municipal securities to fluctuate
less than the market value of fixed rate obligations. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation
or capital depreciation is less than for fixed rate obligations. Floating
rate or variable rate obligations typically permit the holder to demand
payment of principal from the issuer or remarketing agent at par value prior
to maturity and may permit the issuer to prepay principal, plus accrued
interest, at its discretion after a specified notice period. Frequently,
floating rate or variable rate obligations and/or the demand features thereon
are secured by letters of credit or other credit support arrangements
provided by banks or other financial institutions, the credit standing of
which affects the credit quality of the obligations. Changes in the credit
quality of these institutions could cause losses to the fund and adversely
affect its share price.

<PAGE>

A demand feature gives the fund the right to sell the securities to a
specified party, usually a remarketing agent, on a specified date. A demand
feature is often backed by a letter of credit from a bank or a guarantee or
other liquidity support arrangement from a bank or other financial
institution. As discussed under "Participation Interests," to the extent that
payment of an obligation is backed by a letter of credit, guarantee or other
liquidity support that may be drawn upon demand, such payment may be subject
to that institution's ability to satisfy that commitment.

PARTICIPATION INTERESTS -- Participation interests are interests in
municipal bonds, including IDBs, PABs and floating and variable rate
obligations, that are owned by banks. These interests carry a demand feature
permitting the holder to tender them back to the bank, which demand feature
generally is backed by an irrevocable letter of credit or guarantee of the
bank. The credit standing of such bank affects the credit quality of the
participation interests.

A participation interest gives the fund an undivided interest in a
municipal bond owned by a bank. The fund has the right to sell the
instruments back to the bank. Such right generally is backed by the bank's
irrevocable letter of credit or guarantee and permits the fund to draw on the
letter of credit on demand, after specified notice, for all or any part of
the principal amount of the fund's participation interest plus accrued
interest. Generally, the fund expects to exercise the demand under the
letters of credit or other guarantees (1) upon a default under the terms of
the underlying bond, (2) to maintain the fund's portfolio in accordance with
its investment objective and policies or (3) as needed to provide liquidity
to the fund in order to meet redemption requests. The ability of a bank to
fulfill its obligations under a letter of credit or guarantee might be
affected by possible financial difficulties of its borrowers, adverse
interest rate or economic conditions, regulatory limitations or other
factors. The fund's investment adviser will monitor the pricing, quality and
liquidity of the participation interests held by the fund, and the credit
standing of banks issuing letters of credit or guarantees supporting such
participation interests on the basis of published financial information
reports of rating services and bank analytical services.

TENDER OPTION BONDS -- Tender option bonds are long-term municipal bonds
sold by a bank subject to a "tender option" that gives the purchaser the
right to tender them to the bank at par plus accrued interest at designated
times (the "tender option"). The tender option may be exercisable at
intervals ranging from bi-weekly to semi-annually, and the interest rate on
the bonds is typically reset at the end of the applicable interval in an
attempt to cause the bonds to have a market value that approximates their par
value. The tender option generally would not be exercisable in the event of a
default on, or significant downgrading of, the underlying municipal bonds.
Therefore, the fund's ability to exercise the tender option will be affected
by the credit standing of both the bank involved and the issuer of the
underlying securities.

PUT BONDS -- A put bond is a municipal bond that gives the holder the
unconditional right to sell the bond back to the issuer or a remarketing
agent at a specified price and exercise date, which is typically well in
advance of the bond's maturity date. The obligation to purchase the bond on
the exercise date may be supported by a letter of credit or other credit
support arrangement from a bank, insurance company or other financial
institution, the credit standing of which affects the credit quality of the
obligation.

If the put is a "one time only" put, the fund ordinarily will either
sell the bond or put the bond, depending upon the more favorable price. If
the bond has a series of puts after the first put, the bond will be held as
long as, in the judgment of its investment adviser, it is in the best
interest of the fund to do so. There is no assurance that the issuer of a put
bond acquired by a fund will be able to repurchase the bond upon the exercise
date, if the fund chooses to exercise its right to put the bond back to the
issuer.

TAX-EXEMPT COMMERCIAL PAPER AND SHORT-TERM MUNICIPAL NOTES -- Municipal
bonds include tax-exempt commercial paper and short-term municipal notes,
such as tax anticipation notes, bond anticipation notes, revenue anticipation
notes and other forms of short-term loans. Such notes are issued with a
short-term maturity in anticipation of the receipt of tax funds, the proceeds
of bond placements and other revenues.

INVERSE FLOATERS -- The fund may invest in municipal bonds on which the
rate of interest varies inversely with interest rates on other municipal
bonds or an index. Such obligations include components of securities on which
interest is paid in two separate parts - an auction component, which pays
interest at a market rate that is set periodically through an auction process
or other method, and a residual component, or "inverse floater," which pays

<PAGE>

interest at a rate equal to the difference between the rate that the issuer
would have paid on a fixed-rate obligation at the time of issuance and the
rate paid on the auction component. The market value of an inverse floater
will be more volatile than that of a fixed-rate obligation and, like most
debt obligations, will vary inversely with changes in interest rates.

Because the interest rate paid to holders of inverse floaters is
generally determined by subtracting the interest rate paid to holders of
auction components from a fixed amount, the interest rate paid to holders of
inverse floaters will decrease as market rates increase and increase as
market rates decrease. Moreover, the extent of the increases and decreases in
the market value of inverse floaters may be larger than comparable changes in
the market value of an equal principal amount of a fixed rate municipal bond
having similar credit quality, redemption provisions and maturity. In a
declining interest rate environment, inverse floaters can provide the fund
with a means of increasing or maintaining the level of tax-exempt interest
paid to shareholders.

MORTGAGE SUBSIDY BONDS -- The fund also may purchase mortgage subsidy
bonds that are normally issued by special purpose public authorities. In some
cases the repayment of such bonds depends upon annual legislative
appropriations; in other cases repayment is a legal obligation of the issuer,
and, if the issuer is unable to meet its obligations, repayment becomes a
moral commitment of a related government unit (subject, however, to such
appropriations). The types of municipal bonds identified above and in the
Prospectus may include obligations of issuers whose revenues are primarily
derived from mortgage loans on housing projects for moderate to low income
families.

STANDBY COMMITMENTS -- The fund may acquire standby commitments pursuant
to which a bank or other municipal bond dealer agrees to purchase securities
that are held in the fund's portfolio or that are being purchased by the fund
at a price equal to (1) the acquisition cost (excluding any accrued interest
paid on acquisition), less any amortized market premium or plus any accrued
market or original issue discount, plus (2) all interest accrued on the
securities since the last interest payment date or the date the securities
were purchased by the fund, whichever is later. Although the fund does not
currently intend to acquire standby commitments with respect to municipal
bonds held in its portfolio, the fund may acquire such commitments under
unusual market conditions to facilitate portfolio liquidity.

The fund would enter into standby commitments only with those banks or
other dealers that, in the opinion of its investment adviser, present minimal
credit risk. The fund's right to exercise standby commitments would be
unconditional and unqualified. A standby commitment would not be transferable
by the fund, although it could sell the underlying securities to a third
party at any time. The fund may pay for standby commitments either separately
in cash or by paying a higher price for the securities that are acquired
subject to such a commitment (thus reducing the yield to maturity otherwise
available for the same securities). The acquisition of a standby commitment
would not ordinarily affect the valuation or maturity of the underlying
municipal bonds. Standby commitments acquired by the fund would be valued at
zero in determining net asset value. Whether the fund paid directly or
indirectly for a standby commitment, its cost would be treated as unrealized
depreciation and would be amortized over the period the commitment is held by
the fund.

DURATION. Duration is a measure of the expected life of a bond on a
present value basis. Duration incorporates the bond's yield, coupon interest
payments, final maturity and call features into one measure and is one of the
fundamental tools used by the applicable investment adviser in portfolio
selection and yield curve positioning of a fund's investments in bonds.
Duration was developed as a more precise alternative to the concept "term to
maturity." Traditionally, a bond's "term to maturity" has been used as a
proxy for the sensitivity of the security's price to changes in interest
rates (which is the "interest rate risk" or "volatility" of the security).
However, "term to maturity" measures only the time until the scheduled final
payment on the bond, taking no account of the pattern of payments prior to
maturity.

Duration takes the length of the time intervals between the present time
and the time that the interest and principal payments are scheduled or, in
the case of a callable bond, expected to be made, and weights them by the
present values of the cash to be received at each future point in time. For
any bond with interest payments occurring prior to the payment of principal,
duration is always less than maturity. For example, depending on its coupon
and the level of market yields, a Treasury note with a remaining maturity of
five years might have a duration of 4.5

<PAGE>

years. For mortgage-backed and other securities that are subject to
prepayments, put or call features or adjustable coupons, the difference
between the remaining stated maturity and the duration is likely to be much
greater.

Duration allows an investment adviser to make certain predictions as to
the effect that changes in the level of interest rates will have on the value
of a fund's portfolio of bonds. For example, when the level of interest rates
increases by 1%, a debt security having a positive duration of three years
generally will decrease by approximately 3%. Thus, if an investment adviser
calculates the duration of a fund's portfolio of bonds as three years, it
normally would expect the portfolio to change in value by approximately 3%
for every 1% change in the level of interest rates. However, various factors,
such as changes in anticipated prepayment rates, qualitative considerations
and market supply and demand, can cause particular securities to respond
somewhat differently to changes in interest rates than indicated in the above
example. Moreover, in the case of mortgage-backed and other complex
securities, duration calculations are estimates and are not precise. This is
particularly true during periods of market volatility. Accordingly, the net
asset value of a fund's portfolio of bonds may vary in relation to interest
rates by a greater or lesser percentage than indicated by the above example.

Futures, options and options on futures have durations that, in general,
are closely related to the duration of the securities that underlie them.
Holding long futures or call option positions will lengthen portfolio
duration by approximately the same amount as would holding an equivalent
amount of the underlying securities. Short futures or put options have
durations roughly equal to the negative duration of the securities that
underlie these positions, and have the effect of reducing portfolio duration
by approximately the same amount as would selling an equivalent amount of the
underlying securities.

There are some situations in which the standard duration calculation
does not properly reflect the interest rate exposure of a security. For
example, floating and variable rate securities often have final maturities of
ten or more years; however, their interest rate exposure corresponds to the
frequency of the coupon reset. Another example where the interest rate
exposure is not properly captured by the standard duration calculation is the
case of mortgage-backed securities. The stated final maturity of such
securities is generally 30 years, but current prepayment rates are critical
in determining the securities' interest rate exposure. In these and other
similar situations, an investment adviser will use more sophisticated
analytical techniques that incorporate the economic life of a security into
the determination of its duration and, therefore, its interest rate exposure.

LENDING OF PORTFOLIO SECURITIES. Each fund is authorized to lend its
portfolio securities to broker-dealers or institutional investors that
Mitchell Hutchins deems qualified. Lending securities enables a fund to earn
additional income but could result in a loss or delay in recovering these
securities. The borrower of a fund's portfolio securities must maintain
acceptable collateral with that fund'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. Each fund may reinvest
any cash collateral in money market investments or other short-term liquid
investments, including other investment companies. A fund also may reinvest
cash collateral in private investment vehicles similar to money market funds,
including one managed 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. Each fund will retain authority to terminate any of its loans at
any time. Each fund may pay reasonable fees in connection with a loan and may
pay the borrower or placing broker a negotiated portion of the interest
earned on the reinvestment of cash held as collateral. A fund will receive
amounts equivalent to any dividends, interest or other distributions on the
securities loaned. Each fund 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 fund's interest.

Pursuant to procedures adopted by the board governing each fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for each fund. The board also has authorized the payment of fees
(including fees calculated as a percentage of invested cash collateral) to
PaineWebber for these services. The board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent.
PaineWebber also has been approved as a borrower under each fund's securities
lending program.

<PAGE>

SHORT SALES "AGAINST THE BOX." Each fund (other than PACE Money Market
Investments and PACE Municipal Fixed Income Investments) may engage in short
sales of securities it owns or has the right to acquire at no added cost
through conversion or exchange of other securities it owns (short sales
"against the box"). To make delivery to the purchaser in a short sale, the
executing broker borrows the securities being sold short on behalf of a fund,
and that fund is obligated to replace the securities borrowed at a date in
the future. When a fund sells short, it establishes a margin account with the
broker effecting the short sale and deposits collateral with the broker. In
addition, the fund maintains, in a segregated account with its custodian, the
securities that could be used to cover the short sale. Each fund incurs
transaction costs, including interest expense, in connection with opening,
maintaining and closing short sales "against the box."

A fund might make a short sale "against the box" to hedge against market
risks when its investment adviser believes that the price of a security may
decline, thereby causing a decline in the value of a security owned by the
fund or a security convertible into or exchangeable for a security owned by
the fund. In such case, any loss in the fund's long position after the short
sale should be reduced by a corresponding gain in the short position.
Conversely, any gain in the long position after the short sale should be
reduced by a corresponding loss in the short position. The extent to which
gains or losses in the long position are reduced will depend upon the amount
of the securities sold short relative to the amount of the securities a fund
owns, either directly or indirectly, and in the case where the fund owns
convertible securities, changes in the investment values or conversion
premiums of such securities.

SEGREGATED ACCOUNTS. When a fund enters into certain transactions that
involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis, or reverse
repurchase agreements, it will maintain with an approved custodian in a
segregated account cash or liquid securities, marked to market daily, in an
amount at least equal to the fund's obligation or commitment under such
transactions. As described below under "Strategies Using Derivative
Instruments," segregated accounts may also be required in connection with
certain transactions involving options, futures or forward currency contracts
and swaps.

INVESTMENT LIMITATIONS OF THE FUNDS

FUNDAMENTAL LIMITATIONS. The following investment limitations cannot be
changed for a fund without the affirmative vote of the lesser of (a) more
than 50% of its outstanding shares or (b) 67% or more of the shares present
at a shareholders' meeting if more than 50% of its 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 changing values of portfolio
securities or amount of total assets will not be considered a violation of
any of the following limitations. With regard to the borrowings limitation in
fundamental limitation number 4, the funds will comply with the applicable
restrictions of Section 18 of the Investment Company Act.

Under the investment restrictions adopted by the funds:

(1) A fund, other than PACE Intermediate Fixed Income Investments and
PACE Global Fixed Income Investments, may not purchase securities (other than
U.S. government securities) of any issuer if, as a result of the purchase,
more than 5% of the value of the fund's total assets would be invested in
such issuer, except that up to 25% of the value of the fund's total assets
may be invested without regard to this 5% limitation.

(2) A fund will not purchase more than 10% of the outstanding voting
securities of any one issuer, except that this limitation is not applicable
to the fund's investments in U.S. government securities and up to 25% of the
fund's assets may be invested without regard to these limitations.

(3) A fund, other than PACE Municipal Fixed Income Investments, will
invest no more than 25% of the value of its total assets in securities of
issuers in any one industry, the term industry being deemed to include the
government of a particular country other than the United States. This
limitation is not applicable to a fund's investments in U.S. government
securities.

(4) A fund will not issue senior securities (including borrowing money
from banks and other entities and through reverse repurchase agreements and
mortgage dollar rolls) in excess of 33 1/3% of its total assets

<PAGE>

(including the amount of senior securities issued, but reduced by any
liabilities and indebtedness not constituting senior securities), except that
a fund may borrow up to an additional 5% of its total assets (not including
the amount borrowed) for extraordinary or emergency purposes.

(5) A fund will not pledge, hypothecate, mortgage, or otherwise
encumber its assets, except to secure permitted borrowings or in connection
with its use of forward contracts, futures contracts, options, swaps, caps,
collars and floors.

(6) A fund will not lend any funds or other assets, except through
purchasing debt obligations, lending portfolio securities and entering into
repurchase agreements consistent with the fund's investment objective and
policies.

(7) A fund will not purchase securities on margin, except that a fund
may obtain any short-term credits necessary for the clearance of purchases
and sales of securities. For purposes of this restriction, the deposit or
payment of initial or variation margin in connection with futures contracts
or options on futures contracts will not be deemed to be a purchase of
securities on margin.

(8) A fund will not make short sales of securities or maintain a short
position, unless at all times when a short position is open it owns an equal
amount of the securities or securities convertible into or exchangeable for,
without payment of any further consideration, securities of the same issue
as, and equal in amount to, the securities sold short ("short sales against
the box"), and unless not more than 10% of the fund's net assets (taken at
market value) is held as collateral for such sales at any one time.

(9) A fund will not purchase or sell real estate or real estate limited
partnership interests, except that it may purchase and sell mortgage related
securities and securities of companies that deal in real estate or interests
therein.

(10) A fund will not purchase or sell commodities or commodity contracts
(except currencies, forward currency contracts, futures contracts and options
and other similar contracts).

(11) A fund will not act as an underwriter of securities, except that a
fund may acquire restricted securities under circumstances in which, if the
securities were sold, the fund might be deemed to be an underwriter for
purposes of the Securities Act.

NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are
non-fundamental and may be changed by the vote of the board without
shareholder approval. If a percentage restriction is adhered to at the time
of an investment or transaction, a later increase or decrease in percentage
resulting from a change in values of portfolio securities or amount of total
assets will not be considered a violation of any of the following limitations.

(1) A fund may not purchase securities of other investment companies,
except to the extent permitted by the Investment Company Act in the open
market at no more than customary brokerage commission rates. This limitation
does not apply to securities received or acquired as dividends, through
offers of exchange or as a result of reorganization, consolidation or merger.

(2) A fund will not purchase portfolio securities while borrowings in
excess of 5% of its total assets are outstanding.

STRATEGIES USING DERIVATIVE INSTRUMENTS

GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. Each fund other than PACE
Money Market Investments is authorized to use a variety of financial
instruments ("Derivative Instruments"), including certain options, futures
contracts (sometimes referred to as "futures"), options on futures contracts
and swap transactions. For funds that are permitted to trade outside the
United States, the applicable investment adviser also may use forward
currency contracts, foreign currency options and futures and options on
foreign currency futures. A fund may enter into transactions involving one or
more types of Derivative Instruments under which the full value of its
portfolio is at

<PAGE>

risk. Under normal circumstances, however, each fund's use of these
instruments will place at risk a much smaller portion of its assets. The
particular Derivative Instruments used by the funds are described below.

A fund might not use any derivative instruments or strategies, and there
can be no assurance that using any strategy will succeed. If an investment
adviser is incorrect in its judgment on market values, interest rates or
other economic factors in using a derivative instrument or strategy, a fund
may have lower net income and a net loss on the investment.

OPTIONS ON SECURITIES AND FOREIGN CURRENCIES -- A call option is a
short-term contract pursuant to which the purchaser of the option, in return
for a premium, has the right to buy the security or currency underlying the
option at a specified price at any time during the term of the option or at
specified times or at the expiration of the option, depending on the type of
option involved. The writer of the call option, who receives the premium, has
the obligation, upon exercise of the option during the option term, to
deliver the underlying security or currency against payment of the exercise
price. A put option is a similar contract that gives its purchaser, in return
for a premium, the right to sell the underlying security or currency at a
specified price during the option term or at specified times or at the
expiration of the option, depending on the type of option involved. The
writer of the put option, who receives the premium, has the obligation, upon
exercise of the option during the option term, to buy the underlying security
or currency at the exercise price.

OPTIONS ON SECURITIES INDICES -- A securities index assigns relative
values to the securities included in the index and fluctuates with changes in
the market values of those securities. A securities index option operates in
the same way as a more traditional securities option, except that exercise of
a securities index option is effected with cash payment and does not involve
delivery of securities. Thus, upon exercise of a securities 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 securities
index.

SECURITIES INDEX FUTURES CONTRACTS -- A securities 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
securities 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 AND FOREIGN CURRENCY FUTURES CONTRACTS -- Interest rate
and foreign currency futures contracts are bilateral agreements pursuant to
which one party agrees to make, and the other party agrees to accept,
delivery of a specified type of debt security or currency at a specified
future time and at a specified price. Although such futures contracts by
their terms call for actual delivery or acceptance of bonds or currency, in
most cases the contracts are closed out before the settlement date without
the making or taking of delivery.

OPTIONS ON FUTURES CONTRACTS -- Options on futures contracts are similar
to options on securities or currency, 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 or currency, 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 that 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 a put.

FORWARD CURRENCY CONTRACTS -- A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future
date, which may be any fixed number of days from the contract date agreed
upon by the parties, at a price set at the time the contract is entered into.

GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS. A fund
may use Derivative Instruments to attempt to hedge its portfolio and also to
attempt to enhance income or return or realize gains and to manage the
duration of its bond portfolio. In addition, a fund may use Derivative
Instruments to adjust its exposure to different asset classes or to maintain
exposure to stocks or bonds while maintaining a cash balance for fund

<PAGE>

management purposes (such as to provide liquidity to meet anticipated
shareholder sales of fund shares and for fund operating expenses).

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

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

A fund may purchase and write (sell) straddles on securities or indices
of securities. A long straddle is a combination of a call and a put option
purchased on the same security or on the same futures contract, where the
exercise price of the put is equal to the exercise price of the call. A fund
might enter into a long straddle when its investment adviser believes it
likely that the prices of the securities will be more volatile during the
term of the option than the option pricing implies. A short straddle is a
combination of a call and a put written on the same security where the
exercise price of the put is equal to the exercise price of the call. A fund
might enter into a short straddle when its investment adviser believes it
unlikely that the prices of the securities will be as volatile during the
term of the option as the option pricing implies.

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

Income strategies using Derivative Instruments may include the writing
of covered options to obtain the related option premiums. Return or gain
strategies may include using Derivative Instruments to increase or decrease a
fund's exposure to different asset classes without buying or selling the
underlying instruments. A fund also may use derivatives to simulate full
investment by the fund while maintaining a cash balance for fund management
purposes (such as to provide liquidity to meet anticipated shareholder sales
of fund shares and for fund operating expenses).

The use of Derivative Instruments 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, a
fund's ability to use Derivative Instruments may be limited by tax
considerations. See "Taxes."

In addition to the products, strategies and risks described below and in
the Prospectus, a fund's investment adviser may discover additional
opportunities in connection with Derivative Instruments and with hedging,
income, return and gain strategies. These new opportunities may become
available as regulatory authorities broaden the range of permitted
transactions and as new Derivative Instruments and techniques are developed.
The applicable investment adviser may use these opportunities for a fund to
the extent that they are consistent with the fund's investment objective and
permitted by its investment limitations and applicable regulatory
authorities. The funds' Prospectus or this SAI will be supplemented to the
extent that new products or techniques involve materially different risks
than those described below or in the Prospectus.

<PAGE>

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

(1) Successful use of most Derivative Instruments depends upon the
ability of a fund's investment adviser to predict movements of the overall
securities, interest rate or currency exchange markets, which requires
different skills than predicting changes in the prices of individual
securities. While the applicable investment advisers are experienced in the
use of Derivative Instruments, 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 a Derivative Instrument and price movements of the
investments that are being hedged. For example, if the value of a Derivative
Instrument used in a short hedge increased by less than the decline in value
of the hedged investment, the hedge would not be fully successful. Such a
lack of correlation might occur due to factors affecting the markets in which
Derivative Instruments are traded, rather than the value of the investments
being hedged. The effectiveness of hedges using Derivative Instruments on
indices will depend on the degree of correlation between price movements in
the index and price movements in the securities being hedged.

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

(4) As described below, a fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
(I.E., Derivative Instruments other than purchased options). If the fund was
unable to close out its positions in such Derivative Instruments, it might be
required to continue to maintain such assets or accounts or make such
payments until the positions expired or matured. These requirements might
impair a fund's ability to sell a portfolio security or make an investment at
a time when it would otherwise be favorable to do so, or require that the
fund sell a portfolio security at a disadvantageous time. A fund's ability to
close out a position in a Derivative Instrument prior to expiration or
maturity depends on the existence of a liquid secondary market or, in the
absence of such a market, the ability and willingness of a counterparty to
enter into a transaction closing out the position. Therefore, there is no
assurance that any hedging position can be closed out at a time and price
that is favorable to a fund.

COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose the funds to an
obligation to another party. A fund will not enter into any such transactions
unless it owns either (1) an offsetting ("covered") position in securities,
currencies or other options or futures contracts or (2) cash or liquid
securities, with a value sufficient at all times to cover its potential
obligations to the extent not covered as provided in (1) above. Each fund
will comply with SEC guidelines regarding cover for such 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 Derivative Instrument is open, unless
they are replaced with similar assets. As a result, committing a large
portion of a fund's assets to cover positions or to segregated accounts could
impede portfolio management or the fund's ability to meet redemption requests
or other current obligations.

OPTIONS. The funds may purchase put and call options, and write (sell)
covered put or call options on securities in which they invest and related
indices. Funds that may invest outside the United States also may purchase
put and call options and write covered options on foreign currencies. The
purchase of call options may serve as a long hedge, and the purchase of put
options may serve as a short hedge. In addition, a fund may also use

<PAGE>

options to attempt to enhance return or realize gains by increasing or
reducing its exposure to an asset class without purchasing or selling the
underlying securities. Writing covered put or call options can enable a fund
to enhance income by reason of the premiums paid by the purchasers of such
options. Writing covered call options serves as a limited short hedge,
because declines in the value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the
security appreciates to a price higher than the exercise price of the call
option, it can be expected that the option will be exercised and the affected
fund will be obligated to sell the security at less than its market value.
Writing covered put options serves as a limited long hedge because increases
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security depreciates
to a price lower than the exercise price of the put option, it can be
expected that the put option will be exercised and the fund will be obligated
to purchase the security at more than its market value. The securities or
other assets used as cover for over-the-counter options written by a fund
would be considered illiquid to the extent described under "The Funds'
Investment Policies, Related Risks and Restrictions -- Illiquid Securities."

The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration
dates of up to nine months. Generally, over-the-counter options on bonds are
European-style options. This means that the option can only be exercised
immediately prior to its expiration. This is in contrast to American-style
options that may be exercised at any time. There are also other types of
options that may be exercised on certain specified dates before expiration.
Options that expire unexercised have no value.

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

The funds may purchase and write both exchange-traded and
over-the-counter options. Currently, many options on equity securities are
exchange-traded. Exchange markets for options on bonds and foreign currencies
exist but are relatively new, and these instruments are primarily traded on
the over-the-counter market. Exchange-traded options in the United States are
issued by a clearing organization affiliated with the exchange on which the
option is listed that, in effect, guarantees completion of every
exchange-traded option transaction. In contrast, over-the-counter options are
contracts between a fund and its counterparty (usually a securities dealer or
a bank) with no clearing organization guarantee. Thus, when a fund purchases
or writes an over-the-counter option, it relies on the 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 fund as well as the loss of any expected benefit of the
transaction.

The funds' ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The
funds intend 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 over-the-counter options only by negotiating
directly with the counterparty, or by a transaction in the secondary market
if any such market exists. Although the funds will enter into
over-the-counter options only with counterparties that are expected to be
capable of entering into closing transactions with the funds, there is no
assurance that a fund will in fact be able to close out an over-the-counter
option position at a favorable price prior to expiration. In the event of
insolvency of the counterparty, a fund might be unable to close out an
over-the-counter option position at any time prior to its expiration.

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

<PAGE>

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

LIMITATIONS ON THE USE OF OPTIONS. The funds' use of options is governed
by the following guidelines, which can be changed by the board without
shareholder vote:

(1) A fund may purchase a put or call option, including any straddle or
spread, only if the value of its premium, when aggregated with the premiums
on all other options held by the fund, does not exceed 5% of its total assets.

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

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

FUTURES. The funds may purchase and sell securities index futures
contracts, interest rate futures contracts, debt security index futures
contracts and (for those funds that invest outside the United States) foreign
currency futures contracts. A fund may also purchase put and call options,
and write covered put and call options, on futures in which it is allowed to
invest. The purchase of futures or call options thereon can serve as a long
hedge, and the sale of futures or the purchase of put options thereon can
serve as a short hedge. Writing covered call options on futures contracts can
serve as a limited short hedge, and writing covered put options on futures
contracts can serve as a limited long hedge, using a strategy similar to that
used for writing covered options on securities or indices. In addition, a
fund may purchase or sell futures contracts or purchase options thereon to
increase or reduce its exposure to an asset class without purchasing or
selling the underlying securities, either as a hedge or to enhance return or
realize gains.

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

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

No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom
the transaction was effected, "initial margin" consisting of cash,
obligations of the United States or obligations 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 a fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
fund may be required by an exchange to increase the level of its initial
margin payment, and initial margin requirements might be increased generally
in the future by regulatory action.

Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but

<PAGE>

rather represents a daily settlement of each fund's obligations to or from a
futures broker. When a fund purchases an option on a futures contract, the
premium paid plus transaction costs is all that is at risk. In contrast, when
a fund purchases or sells a futures contract or writes a call option thereon,
it is subject to daily variation margin calls that could be substantial in
the event of adverse price movements. If a fund has insufficient cash to meet
daily variation margin requirements, it might need to sell securities at a
time when such sales are disadvantageous.

Holders and writers of futures contracts 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 funds intend to enter into futures transactions only on
exchanges or boards of trade where there appears to be a liquid secondary
market. However, there can be no assurance that such a market will exist for
a particular contract at a particular time.

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

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

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

LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. The funds' use of
futures and related options is governed by the following guidelines, which
can be changed by the board without shareholder vote:

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

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

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

FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. Each fund
that may invest outside the United States may use options and futures on
foreign currencies, as described above, and forward currency contracts, as
described below, to hedge against movements in the values of the foreign
currencies in which the fund's securities are denominated. Such currency
hedges can protect against price movements in a security a fund

<PAGE>

owns or intends to acquire that are attributable to changes in the value of
the currency in which it is denominated. Such hedges do not, however, protect
against price movements in the securities that are attributable to other
causes.

A fund might seek to hedge against changes in the value of a particular
currency when no Derivative Instruments on that currency are available or
such Derivative Instruments are considered expensive. In such cases, the fund
may hedge against price movements in that currency by entering into
transactions using Derivative Instruments on another currency or a basket of
currencies, the value of which its investment adviser believes will have a
positive correlation to the value of the currency being hedged. In addition,
a fund may use forward currency contracts to shift exposure to foreign
currency fluctuations from one country to another. For example, if a fund
owned securities denominated in a foreign currency and its investment adviser
believed that currency would decline relative to another currency, it might
enter into a forward contract to sell an appropriate amount of the first
foreign currency, with payment to be made in the second foreign currency.
Transactions that use two foreign currencies are sometimes referred to as
"cross hedging." Use of a different foreign currency magnifies the risk that
movements in the price of the Derivative Instrument will not correlate or
will correlate unfavorably with the foreign currency being hedged.

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

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

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

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

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

As is the case with futures contracts, parties to forward currency
contracts can enter into offsetting closing transactions, similar to closing
transactions on futures, by entering into an instrument identical to the
instrument purchased or sold, but in the opposite direction. Secondary
markets generally do not exist for forward currency contracts, with the
result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can
be no assurance that a fund will in fact be able to close

<PAGE>

out a forward currency contract at a favorable price prior to maturity. In
addition, in the event of insolvency of the counterparty, a fund might be
unable to close out a forward currency contract at any time prior to
maturity. In either event, the fund would continue to be subject to market
risk with respect to the position and would continue to be required to
maintain a position in the securities or currencies that are the subject of
the hedge or to maintain cash or securities in a segregated account.

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

LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS. A fund that may
invest outside the United States may enter into forward currency contracts or
maintain a net exposure to such contracts only if (1) the consummation of the
contracts would not obligate the fund to deliver an amount of foreign
currency in excess of the value of the position being hedged by such
contracts or (2) the fund segregates with its custodian cash or liquid
securities in an amount not less than the value of its total assets committed
to the consummation of the contract and not covered as provided in (1) above,
as marked to market daily.

SWAP TRANSACTIONS. A fund may enter into swap transactions, which
include swaps, caps, floors and collars relating to interest rates,
currencies, securities or other instruments. Interest rate swaps involve an
agreement between two parties to exchange payments that are based, for
example, on variable and fixed rates of interest and that are calculated on
the basis of a specified amount of principal (the "notional principal
amount") for a specified period of time. Interest rate cap and floor
transactions involve an agreement between two parties in which the first
party agrees to make payments to the counterparty when a designated market
interest rate goes above (in the case of a cap) or below (in the case of a
floor) a designated level on predetermined dates or during a specified time
period. Interest rate collar transactions involve an agreement between two
parties in which payments are made when a designated market interest rate
either goes above a designated ceiling level or goes below a designated floor
level on predetermined dates or during a specified time period. Currency
swaps, caps, floors and collars are similar to interest rate swaps, caps,
floors and collars, but they are based on currency exchange rates than
interest rates. Equity swaps or other swaps relating to securities or other
instruments are also similar, but they are based on changes in the value of
the underlying securities or instruments. For example, an equity swap might
involve an exchange of the value of a particular security or securities index
in a certain notional amount for the value of another security or index or
for the value of interest on that notional amount at a specified fixed or
variable rate.

A fund may enter into interest rate swap transactions to preserve a
return or spread on a particular investment or portion of its portfolio or to
protect against any increase in the price of securities it anticipates
purchasing at a later date. A fund may use interest rate swaps, caps, floors
and collars as a hedge on either an asset-based or liability-based basis,
depending on whether it is hedging its assets or its liabilities. Interest
rate swap transactions are subject to risks comparable to those described
above with respect to other hedging strategies.

A fund will usually enter into swaps on a net basis, I.E., the two
payment streams are netted out, with the fund receiving or paying, as the
case may be, only the net amount of the two payments. Because segregated
accounts will be established with respect to these transactions, Mitchell
Hutchins and the investment advisers believe these obligations do not
constitute senior securities and, accordingly, will not treat them as being
subject to a fund's borrowing restrictions. The net amount of the excess, if
any, of a fund's obligations over its entitlements with respect to each rate
swap will be accrued on a daily basis, and appropriate fund assets having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account as described above in "Investment Policies
and Restrictions--Segregated Accounts." A fund also will establish and
maintain such segregated accounts with respect to its total obligations under
any swaps that are not entered into on a net basis.

A fund will enter into swap transactions only with banks and recognized
securities dealers believed by its investment adviser to present minimal
credit risk in accordance with guidelines established by the board. If there
is a default by the other party to such a transaction, a fund will have to
rely on its contractual remedies (which may be limited by bankruptcy,
insolvency or similar laws) pursuant to the agreements related to the
transaction.

<PAGE>

ORGANIZATION OF TRUST; TRUSTEES AND OFFICERS;
PRINCIPAL HOLDERS AND MANAGEMENT OWNERSHIP OF SECURITIES

The Trust was formed on September 9, 1994 as a business trust under the
laws of the State of Delaware and has twelve operating series. The Trust is
governed by a board of trustees, which is authorized to establish additional
series and to issue an unlimited number of shares of beneficial interest of
each existing or future series, par value $0.001 per share. The board
oversees each fund's operations.

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

<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------- ----------------------------------------
<S> <C> <C>
Margo N. Alexander*+; 53 Trustee and President Mrs. Alexander is Chairman (since March 1999), chief
executive officer and a director of Mitchell Hutchins
(since January 1995) and an executive vice president
and director of PaineWebber (since March 1984). Mrs.
Alexander is president and a director or trustee of 30
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.

David J. Beaubien; 66 Trustee Mr. Beaubien is chairman of Yankee Environmental Systems,
101 Industrial Road Inc., a manufacturer of meteorological measuring systems.
Turner Falls, MA 03176 Prior to January 1991, he was senior vice president of
EG&G, Inc., a company which makes and provides a variety of
scientific and technically oriented products and
services. He is also a director of IEC, Inc., a
manufacturer of electronic assemblies, and Onix
Systems Inc., a manufacturer of process
instrumentation. From 1985 to January 1995, Mr.
Beaubien served as a director or trustee on the boards
of the Kidder, Peabody & Co. Incorporated mutual
funds. Mr. Beaubien is a trustee of one investment
company for which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as investment adviser.

E. Garrett Bewkes, Jr.**+; 74 Trustee Mr. Bewkes is a director of Paine Webber Group Inc.
("PW Group") (holding company of PaineWebber and
Mitchell Hutchins). Prior to 1996, he was a consultant
to PW Group. He serves as a consultant to PaineWebber
(since May 1999). Prior to 1988, he was chairman of
the board, president and chief executive officer of
American Bakeries Company. Mr. Bewkes is a director of
Interstate Bakeries Corporation. Mr. Bewkes is a
director or trustee of 40 investment companies for
which Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.

William W. Hewitt, Jr.; 72 Trustee Mr. Hewitt is retired. Since 1988, he has served as a
P.O. Box 2359 director or trustee on the boards of the Guardian Life
Princeton, NJ 08543-2359 Insurance Company mutual funds. From 1990 to January
1995, Mr. Hewitt served as a director or trustee on
the boards of the Kidder, Peabody & Co. Incorporated
mutual funds. From 1986-1988, he was an executive
vice president and director of mutual funds, insurance
and trust services of Shearson Lehman Brothers Inc.
From 1976-1986, he was president of Merrill Lynch
Funds Distributor, Inc. Mr. Hewitt is a trustee of one
investment company for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------- ----------------------------------------
<S> <C> <C>
Morton L. Janklow; 70 Trustee Mr. Janklow is senior partner of Janklow & Nesbit
598 Madison Avenue Associates, an international literary agency
New York, NY 10022 representing leading authors in their relationships
with publishers and motion picture, television and
multi-media companies, and of counsel to the law firm
of Janklow, Newborn & Ashley. Mr. Janklow is a
director of Revlon, Inc. (cosmetics). Mr. Janklow is a
trustee of one investment company for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.

Brian M. Storms*+; 46 Trustee Mr. Storms is president and chief operating officer of
Mitchell Hutchins (since March 1999). Mr. Storms was
president of Prudential Investments (1996-1999).
Prior to joining Prudential he was a managing director
at Fidelity Investments. Mr. Storms is a director or
trustee of 29 investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.

William D. White; 66 Trustee Mr. White is retired. From February 1989 through
P.O. Box 199 March 1994, he was president of the National League of
Upper Black Eddy, PA 10017 Professional Baseball Clubs. Prior to 1989, he was a
television sportscaster for WPIX-TV, New York. Mr.
White served on the Board of Directors of Centel from
1989 to 1993. Presently, Mr. White is on the board of
directors of Jefferson Banks Incorporated,
Philadelphia, PA. Mr. White is a trustee of one
investment company for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.

M. Cabell Woodward, Jr.**; 70 Trustee Mr. Woodward is retired. From July 1985 until his
retirement in February 1993, Mr. Woodward was vice
chairman and chief financial officer of ITT
Corporation. Mr. Woodward is a trustee of one
investment company for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.

Thomas Disbrow ***; 34 Vice President and Mr. Disbrow is a first vice president and a senior
Assistant Treasurer manager of the mutual fund finance department of
Mitchell Hutchins. Prior to November 1999, he was a
vice president of Zweig/Glaser Advisers. Mr. Disbrow
is a vice president and assistant treasurer of 30
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.

Amy R. Doberman**; 38 Vice President and Ms. Doberman is a senior vice president and general
Secretary counsel of Mitchell Hutchins. From December 1996
through July 2000, she was general counsel of Aeltus
Investment Management, Inc. Prior to working at
Aeltus, Ms. Doberman was a Division of Investment
Management Assistant Chief Counsel at the SEC. Ms.
Doberman is a vice president of 29 investment
companies and a vice president and secretary of one
investment company for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.

Joanne M. Kilkeary***; 32 Vice President and Ms. Kilkeary is a vice president and a manager of the
Assistant Treasurer mutual fund finance department of Mitchell Hutchins.
Ms. Kilkeary is a vice president and assistant
treasurer of one investment company for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------- ----------------------------------------
<S> <C> <C>
John J. Lee***; 32 Vice President and Mr. Lee is a vice president and a manager of the
Assistant Treasurer mutual fund finance department of Mitchell Hutchins.
Prior to September 1997, he was an audit manager in
the financial services practice of Ernst & Young LLP.
Mr. Lee is a vice president and assistant treasurer of
30 investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.

Kevin J. Mahoney***; 35 Vice President and Mr. Mahoney is a first vice president and a senior
Assistant Treasurer manager of the mutual fund finance department of
Mitchell Hutchins. From August 1996 through March
1999, he was the manager of the mutual fund internal
control group of Salomon Smith Barney. Prior to August
1996, he was an associate and assistant treasurer of
BlackRock Financial Management L.P. Mr. Mahoney is a
vice president and assistant treasurer of 30
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.

Ann E. Moran***; 43 Vice President and Ms. Moran is a vice president and a manager of the
Assistant Treasurer mutual fund finance department of Mitchell Hutchins.
Ms. Moran is a vice president and assistant treasurer
of 30 other investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.

Dianne E. O'Donnell**; 48 Vice President and Ms. O'Donnell is a senior vice president and deputy
Assistant Secretary general counsel of Mitchell Hutchins. Ms. O'Donnell is
a vice president and secretary of 29 investment
companies and a vice president and assistant secretary
of one investment company for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.

Paul H. Schubert***; 37 Vice President and Mr. Schubert is a senior vice president and the
Treasurer director of the mutual fund finance department of
Mitchell Hutchins. Mr. Schubert is a vice president
and treasurer of 30 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.

Barney A. Taglialatela***; 39 Vice President and Mr. Taglialatela is a vice president and a manager of
Assistant Treasurer the mutual fund finance department of Mitchell
Hutchins. Mr. Taglialatela is a vice president and
assistant treasurer of 30 investment companies for
which Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.

Keith A. Weller**; 39 Vice President and Mr. Weller is a first vice president and associate
Assistant Secretary counsel of Mitchell Hutchins. Mr. Weller is a vice
president and assistant secretary of 30 investment
companies for which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as investment adviser.

</TABLE>
-------------
* This person's business address is 51 West 52nd Street, New York, New
York 10019-6114.

** This person's business address is 1285 Avenue of the Americas, New York,
New York 10019-6028.

*** This person's business address is Newport Center III, 499 Washington Blvd.,
14th Floor, Jersey City, New Jersey 07310-1998.

+ Messrs. Bewkes and Storms and Mrs. Alexander are "interested persons" of
the Trust as defined in the Investment Company Act by virtue of their
positions with PaineWebber, PW Group and/or Mitchell Hutchins.

<PAGE>

The Trust pays each board member who is not an "interested person" of
the Trust $35,000 annually and $5,000 for attending a meeting of the board or
any committee thereof. Trustees are reimbursed for any expenses incurred in
attending meetings. Trustees of the Trust who are "interested persons" of the
Trust as defined in the Investment Company Act receive no compensation from
the Trust. Because Mitchell Hutchins, the investment advisers and PaineWebber
perform substantially all of the services necessary for the operation of the
Trust and the funds, the Trust requires no employees. No officer, director or
employee of Mitchell Hutchins, an investment adviser or PaineWebber presently
receives any compensation from the Trust for acting as a trustee or officer.

The table below includes certain information relating to the
compensation of the current members of the Trust's board who held office with
the Trust during the periods indicated.

COMPENSATION TABLE+

<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
AGGREGATE COMPENSATION FROM THE TRUST AND THE PAINEWEBBER
NAME OF PERSON, POSITION THE TRUST * FUND COMPLEX**
------------------------ ----------- --------------
<S> <C> <C>

David J. Beaubien,
Trustee............................. $ 68,750 $ 68,750

William W. Hewitt,
Trustee.............................. $ 78,750 $ 78,750

Morton L. Janklow,
Trustee............................. $ 68,750 $ 68,750

William D. White,
Trustee............................. $ 68,750 $ 68,750

M. Cabell Woodward, Jr.,
Trustee............................. $ 68,750 $ 68,750
</TABLE>
--------------------
+ Only independent board members are compensated by the PaineWebber funds and
identified above; trustees who are "interested persons", as defined in the
Investment Company Act, do not receive compensation from the PaineWebber
funds.

* Represents fees paid to each trustee during the fiscal year ended July 31,
2000. During the fiscal year ended July 31, 2000, Mitchell Hutchins waived a
portion of its management fee and subsidized certain operating expenses,
including the payment of trustees' fees, with respect to some funds in order
to lower the overall expenses of those funds to certain designated levels.

** No fund within the PaineWebber fund complex has a bonus, pension, profit
sharing or retirement plan.

PRINCIPAL HOLDERS AND MANAGEMENT OWNERSHIP OF SECURITIES. As of
___________, 2000, trustees and officers owned in the aggregate less than 1% of
the outstanding shares of any class of each fund. As of ______, 2000, the
following shareholders were shown in the Trust's records as owning more than 5%
of any class of a fund's shares:

<TABLE>
<CAPTION>
PERCENTAGE
OF SHARES BENEFICIALLY OWNED
SHAREHOLDER NAME AND ADDRESS* AS OF _____________, 2000
----------------------------- -------------------------
<S> <C>

</TABLE>
--------------------
* The shareholders listed may be contacted c/o Mitchell Hutchins Asset
Management Inc., 51 West 52nd Street, New York, NY 10019-6114.

<PAGE>
INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS

INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS. Mitchell Hutchins
acts as the investment manager and administrator to the Trust pursuant to an
Investment Management and Administration Agreement with the Trust ("Management
Agreement"). Pursuant to the Management Agreement, Mitchell Hutchins, subject to
the supervision of the Trust's board and in conformity with the stated policies
of the Trust, manages both the investment operations of the Trust and the
composition of the funds, including the purchase, retention, disposition and
lending of securities. Mitchell Hutchins is authorized to enter into advisory
agreements for investment advisory services ("Advisory Agreements") in
connection with the management of the funds. Mitchell Hutchins is responsible
for monitoring the investment advisory services furnished pursuant to the
Advisory Agreements. Mitchell Hutchins reviews the performance of all investment
advisers and makes recommendations to the board with respect to the retention
and renewal of Advisory Agreements. In connection therewith, Mitchell Hutchins
keeps certain books and records of the Trust. Mitchell Hutchins also administers
the Trust's business affairs and, in connection therewith, furnishes the Trust
with office facilities, together with those ordinary clerical and bookkeeping
services that are not furnished by the Trust's custodian and its transfer and
dividend disbursing agent. The management services of Mitchell Hutchins under
the Management Agreement are not exclusive to the Trust, and Mitchell Hutchins
is free to, and does, render management services to others.

The following table shows the fees earned (or accrued) by Mitchell
Hutchins under the Management Agreement and the portions of those fees waived
by Mitchell Hutchins for the periods indicated.

<TABLE>
<CAPTION>
ADVISORY AND ADMINISTRATION FEES EARNED ADVISORY AND ADMINISTRATION FEES
EARNED (OR ACCRUED) WAIVED BY
BY MITCHELL HUTCHINS MITCHELL HUTCHINS
FOR FISCAL YEARS ENDED JULY 31, FOR FISCAL YEARS ENDED JULY 31,
------------------------------- -------------------------------
PORTFOLIO 2000 1999 1998 2000 1999 1998
--------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
PACE Money Market Investments......... $ 210,048 $ 114,410 $ 76,176 $ 210,048 $ 114,410 $ 76,176
PACE Government Securities Fixed
Income Investments.................... 1,380,076 1,277,768 916,670 83,618 102,428 135,366
PACE Intermediate Fixed
Income Investments.................... 828,218 740,117 504,134 13,758 1,460 5,372
PACE Strategic Fixed Income
Investments........................... 1,596,218 1,302,736 697,639 84,075 70,795 91,847
PACE Municipal Fixed Income
Investments........................... 329,466 337,795 259,431 23,718 24,086 35,977
PACE Global Fixed Income
Investments........................... 821,382 805,390 599,606 240,342 220,842 209,982
PACE Large Company Value Equity
Investments........................... 2,800,505 2,581,440 1,786,641 16,771 1,732 --
PACE Large Company Growth Equity
Investments........................... 3,458,178 2,593,183 1,672,807 22,200 3,823 45,136
PACE Small/Medium Company Value
Equity Investments.................... 1,574,930 1,458,785 1,384,807 32,450 25,179 11,273
PACE Small/Medium Company Growth
Equity Investments.................... 2,495,426 1,704,803 1,328,874 17,105 15,569 43,813
PACE International Equity
Investments........................... 2,227,716 1,615,444 1,163,135 7,642 834 --
PACE International Emerging
Markets Equity Investments............ 991,438 751,091 623,343 222,127 195,575 161,872
</TABLE>

<PAGE>

For PACE Money Market Investments, in addition to the advisory and
administration fee waiver in the foregoing table, Mitchell Hutchins
reimbursed the fund for $59,723 in other expenses.

In connection with its management of the business affairs of the Trust,
Mitchell Hutchins bears the following expenses:

(1) the salaries and expenses of all of its and the Trust's personnel
except the fees and expenses of trustees who are not affiliated persons of
Mitchell Hutchins or the Trust's investment advisers;

(2) all expenses incurred, by Mitchell Hutchins or by the Trust in
connection with managing the ordinary course of the Trust's business, other
than those assumed by the Trust as described below; and

(3) the fees payable to each investment adviser (other than Mitchell
Hutchins) pursuant to the Advisory Agreements.

Under the terms of the Management Agreement, each fund bears all
expenses incurred in its operation that are not specifically assumed by
Mitchell Hutchins or the fund's investment adviser. General expenses of the
Trust not readily identifiable as belonging to a fund or to the Trust's other
series are allocated among series by or under the direction of the board in
such manner as the board deems to be fair and equitable. Expenses borne by
each fund include the following (or a fund's share of the following): (1) the
cost (including brokerage commissions) of securities purchased or sold by a
fund and any losses incurred in connection therewith, (2) fees payable to and
expenses incurred on behalf of a fund by Mitchell Hutchins, (3)
organizational expenses, (4) filing fees and expenses relating to the
registration and qualification of a fund's shares and the Trust under federal
and state securities laws and maintenance of such registration and
qualifications, (5) fees and salaries payable to trustees who are not
interested persons (as defined in the Investment Company Act) of the Trust,
Mitchell Hutchins or the investment advisers, (6) all expenses incurred in
connection with trustees' services, including travel expenses, (7) taxes
(including any income or franchise taxes) and governmental fees, (8) costs of
any liability, uncollectible items of deposit and other insurance or fidelity
bonds, (9) any costs, expenses or losses arising out of a liability of or
claim for damages or other relief asserted against the Trust or a fund for
violation of any law, (10) legal, accounting and auditing expenses, including
legal fees of special counsel for the independent trustees, (11) charges of
custodians, transfer agents and other agents, (12) costs of preparing share
certificates, (13) expenses of setting in type and printing prospectuses and
supplements thereto, statements of additional information and supplements
thereto, reports and proxy materials for existing shareholders, and costs of
mailing such materials to existing shareholders, (14) any extraordinary
expenses (including fees and disbursements of counsel) incurred by the Trust
or a fund, (15) fees, voluntary assessments and other expenses incurred in
connection with membership in investment company organizations, (16) costs of
mailing and tabulating proxies and costs of meetings of shareholders, the
board and any committees thereof, (17) the cost of investment company
literature and other publications provided to trustees and officers and (18)
costs of mailing, stationery and communications equipment.

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

The following table shows the approximate net assets as of October 31,
2000, sorted by category of investment objective, of the investment companies
as to which Mitchell Hutchins serves as adviser or sub-adviser. An investment
company may fall into more than one of the categories below:

<PAGE>

<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($MIL)
------------------- ------
<S> <C>
Domestic (excluding Money Market)..................................
Global.............................................................
Equity/Balanced....................................................
Fixed Income (excluding Money Market)..............................
Taxable Fixed Income............................................
Tax-Free Fixed Income...........................................
Money Market Funds.................................................
</TABLE>

INVESTMENT ADVISORY ARRANGEMENTS. As noted in the Prospectus, subject to
the monitoring of the Manager and, ultimately, the board, each investment
adviser manages the securities held by the fund it serves in accordance with
the fund's stated investment objective and policies, makes investment
decisions for the fund and places orders to purchase and sell securities on
behalf of the fund.

Each Advisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. Each Advisory Agreement may be
terminated by the Trust upon not more than 60 days' written notice. Each
Advisory Agreement may be terminated by Mitchell Hutchins or the investment
adviser upon not more than 120 days' written notice. Each Advisory Agreement
provides that it will continue in effect for a period of more than two years
from its execution only so long as such continuance is specifically approved
at least annually in accordance with the requirements of the Investment
Company Act.

Under the Advisory Agreements, the investment advisers will not be
liable for any error or judgment or mistake of law or for any loss suffered
by a fund in connection with the performance of the contract, except a loss
resulting from willful misfeasance, bad faith, or gross negligence on the
part of the investment advisers in the performance of their duties or from
reckless disregard of their duties and obligations thereunder. Each
investment adviser has agreed to its fees as described in the Prospectus and
which are generally lower than the fees it charges to institutional accounts
for which it serves as investment adviser and performs all administrative
functions associated with serving in that capacity in recognition of the
reduced administrative responsibilities it has undertaken with respect to the
fund. By virtue of the management, monitoring and administrative functions
performed by Mitchell Hutchins, and the fact that investment advisers are not
required to make decisions regarding the allocation of assets among the major
sectors of the securities markets, each investment adviser serves in a
subadvisory capacity to the fund. Subject to the monitoring by the Manager
and, ultimately, the board, each investment adviser's responsibilities are
limited to managing the securities held by the fund it serves in accordance
with the fund's stated investment objective and policies, making investment
decisions for the fund and placing orders to purchase and sell securities on
behalf of the fund.

PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS AND PACE STRATEGIC FIXED
INCOME INVESTMENTS

Under the Advisory Agreements for these funds with Pacific Investment
Management Company LLC ("PIMCO"), Mitchell Hutchins (not the fund) pays PIMCO
for its services a fee in the annual amount of 0.225% of the average daily
net assets of PACE Government Securities Fixed Income Investments (0.25%
prior to October 10, 2000) and 0.25% of the average daily net assets of PACE
Strategic Fixed Income Investments. For the fiscal years ended July 31, 2000,
July 31, 1999 and July 31, 1998, Mitchell Hutchins paid or accrued investment
advisory fees to PIMCO of $492,884, $456,345 and $327,708, respectively for
PACE Government Securities Fixed Income Investments and $570,078, $465,263
and $249,156, respectively for PACE Strategic Fixed Income Investments.

PIMCO, a Delaware limited liability company, is a subsidiary of PIMCO
Advisors L.P. ("PIMCO Advisors"). PIMCO Advisors was organized as a limited
partnership under Delaware law in 1987. PIMCO Advisors' sole general partner
is Pacific-Allianz Partners LLC. Pacific-Allianz Partners LLC is a Delaware
limited liability company with two members, Allianz GP Sub LLC, a Delaware
limited liability company and Pacific Asset Management LLC, a Delaware
limited liability company. Allianz GP Sub LLC is a wholly owned subsidiary of
Allianz of America, Inc., which is wholly owned by Allianz AG. Pacific Asset
Management LLC is a wholly

<PAGE>

owned subsidiary of Pacific Life Insurance Company, which is a wholly owned
subsidiary of Pacific Mutual Holding Company.

On May 5, 2000 the general partners of PIMCO Advisors closed the
transactions contemplated by the Implementation and Merger Agreement dated as
of October 31, 1999 ("Implementation Agreement"), as amended March 3, 2000,
with Allianz of America, Inc., Pacific Asset Management LLC, PIMCO Partners,
LLC, PIMCO Holding LLC, PIMCO Partners, G.P., and other parties to the
Implementation Agreement. As a result of completing these transactions, PIMCO
Advisors is now majority-owned indirectly by Allianz AG, with subsidiaries of
Pacific Life Insurance Company retaining a significant minority interest.
Allianz AG is a German based insurer. Pacific Life Insurance Company is a
Newport Beach, California based insurer.

In connection with the closing, Allianz of America entered into a
put/call arrangement for the possible disposition of Pacific Life's indirect
interest in PIMCO Advisors. The put option held by Pacific Life will allow it
to require Allianz of America, on the last business day of each calendar
quarter following the closing, to purchase at a formula-based price all of
the PIMCO Advisors' units owned directly or indirectly by Pacific Life. The
call option held by Allianz of America will allow it, beginning January 31,
2003 or upon a change in control of Pacific Life, to require Pacific Life to
sell or cause to be sold to Allianz of America, at the same formula-based
price, all of the PIMCO Advisors' units owned directly or indirectly by
Pacific Life. Allianz AG's address is Koniginstrasse 28, D-80802, Munich,
Germany.

Allianz AG, the parent of Allianz of America, is a publicly traded
German company which, together with its subsidiaries, comprises the world's
second largest insurance company as measured by premium income. Allianz AG is
a leading provider of financial services, particularly in Europe, and is
represented in 68 countries world-wide through subsidiaries, branch and
representative offices, and other affiliated entities. As of June 30, 2000,
the Allianz Group (including PIMCO) had assets under management of more than
$650 billion, and in its last fiscal year wrote approximately $50 billion in
gross insurance premiums.

Significant institutional shareholders of Allianz AG currently include
Dresdner Bank AG, Deutsche Bank AG, Munich Reinsurance and HypoVereinsbank.
BNP Paribas, Credit Lyonnais, Munich Reinsurance, HypoVereinsbank, Dresdner
Bank AG and Deutsche Bank AG, as well as certain broker-dealers that might be
controlled by or affiliated with these entities, such as DB Alex. Brown LLC,
Deutsche Bank Securities, Inc. and Dresdner Klienwort Benson North America
LLC (collectively, the "Affiliated Brokers"), may be considered to be
affiliated persons of PIMCO. Absent an SEC exemption or other relief, PACE
Government Fixed Income Investments and PACE Strategic Fixed Income
Investments generally are precluded from effecting principal transactions
with the Affiliated Brokers, and its ability to purchase securities being
underwritten by an Affiliated Broker or to utilize the Affiliated Brokers for
agency transactions is subject to restrictions. PIMCO does not believe that
the restrictions on transactions with the Affiliated Brokers described above
materially adversely affect its ability to provide services to the funds, the
funds' ability to take advantage of market opportunities, or the funds'
overall performance.

PACE INTERMEDIATE FIXED INCOME INVESTMENTS

Under the Advisory Agreement for this fund with Metropolitan West Asset
Management, LLC ("MWAM"), Mitchell Hutchins (not the fund) pays MWAM a fee in
the annual amount of 0.20% of the fund's average daily net assets up to and
including $200 million and 0.12% of the fund's average daily net assets above
$200 million. Prior to October 10, 2000, Pacific Income Advisers, Inc. was
the fund's investment adviser. For the fiscal years ended July 31, 2000, July
31, 1999 and July 31, 1998, Mitchell Hutchins paid or accrued investment
advisory fees to the prior investment adviser of $276,073, $246,706, and
$168,045, respectively. MWAM is majority-owned by its key executives, with an
approximately 40% minority ownership stake held by Metropolitan West
Financial, Inc. ("MWF"), a registered investment adviser.

<PAGE>

PACE MUNICIPAL FIXED INCOME INVESTMENTS

Under the Advisory Agreement for this fund with Standish, Ayer & Wood,
Inc. ("Standish"), Mitchell Hutchins (not the fund) pays Standish a fee in
the annual amount of 0.20% of the fund's average daily net assets up to and
including $60 million and 0.15% of the fund's average daily net assets in
excess of $60 million. Prior to June 1, 2000, Deutsche Asset Management, Inc.
was the fund's investment adviser. For the fiscal years ended July 31, 2000,
July 31, 1999 and July 31, 1998, Mitchell Hutchins paid or accrued investment
advisory fees to Standish and the prior investment adviser of $109,822,
$112,598 and $86,574, respectively.

Standish is a privately held investment management firm founded in
1933. Edward H. Ladd is the Chairman of the Board of Directors of
Standish. Richard S. Wood is President, Chief Executive Officer and a
Managing Director of Standish. George W. Noyes is the Vice Chairman and a
Managing Director of Standish. Austin C. Smith is the Treasurer of
Standish. The following constitute all of the Directors of Standish: Caleb
F. Aldrich, David H. Cameron, Maria D. Furman, Raymond J. Kubiak, George
W. Noyes, Howard B. Rubin, Thomas P. Sorbo, Ralph S. Tate and Richard S.
Wood. All of the outstanding stock of Standish is owned by SAW Trust, a
Massachusetts business trust. SAW Trust is owned entirely by its
twenty-two trustees, all of whom are officers of Standish. Nine of the
twenty-two trustees are the Directors of Standish listed above. The
remaining thirteen trustee/shareholders are: Karen K. Chandor, Lavinia
B. Chase, W. Charles Cook, Joseph M. Corrado, Richard C. Doll,
Dolores S. Driscoll, James E. Hollis III, Edward H. Ladd, Laurence A.
Manchester, Catherine A. Powers, Austin C. Smith, David C. Stuehr and
Michael W. Thompson. All of the trustee/shareholders of SAW Trust are
Standish controlling persons.

PACE GLOBAL FIXED INCOME INVESTMENTS

Under the current Advisory Agreements for this fund with Rogge Global
Partners plc and Fischer Francis Trees & Watts, Inc. ("FFTW") and its
affiliates, Mitchell Hutchins (not the fund) pays Rogge Global Partners a fee
in the annual amount of 0.25% of the portion of the fund's average annual net
assets that it manages and pays FFTW a fee in the annual amount of 0.25% of
the portion of the fund's average daily net assets that it manages up to and
including $400 million and 0.20% of the average daily net assets that it
manages in excess of $400 million. Prior to October 10, 2000, Rogge Global
Partners managed all the fund's assets and was paid by Mitchell Hutchins (not
the fund) an annual fee of 0.35% of the fund's average daily net assets. For
the fiscal years ended July 31, 2000, July 31, 1999 and July 31, 1998,
Mitchell Hutchins paid or accrued investment advisory fees to Rogge Global
Partners of $359,355, $352,679 and $262,596, respectively.

Rogge Global Partners is a wholly owned subsidiary of United Asset
Management Corporation ("UAM"), a New York Stock Exchange listed company. UAM
is principally engaged through affiliated firms in the United States and
abroad in providing institutional investment management services and
acquiring institutional management firms like Rogge Global Partners. During
the third quarter of 2000, eleven of Rogge Global Partners' senior employees
began the process of buying back 30.5% in the aggregate of the firm from UAM,
based on a valuation date of December 31, 1999. Those eleven employees,
including all six portfolio managers, will initially buy back 18% of Rogge's
shares from UAM. An additional 12.5% will be available through an option
scheme that ties in the key executives for 7 years (until 2007).

On June 16, 2000, Old Mutual and OM Acquisition Corp., a Delaware
corporation that was formed solely to effect the proposed acquisition of UAM,
entered into an Agreement and Plan of Merger ("Merger Agreement") with UAM.
Pursuant to the Merger Agreement, which was unanimously approved by the
boards of directors of Old Mutual and UAM, OM Acquisition Corp. commenced a
tender offer to acquire all of the issued and outstanding common stock of UAM.

To initiate the transaction, Old Mutual and OM Acquisition Corp. filed a
tender offer statement and UAM filed a solicitation/recommendation statement
with the SEC. The tender offer price was set at $25 per share in cash and is
subject to downward adjustment in certain circumstances, including should
UAM's revenues from assets under management decline below a specified level
prior to consummation of the offer. Consummation of the tender offer also was
subject to customary conditions, including acceptances by holders of a
majority of UAM's outstanding shares and receipt of regulatory and client
approvals. On September 26, 2000, Old Mutual announced the closure of its
tender offer for UAM.

<PAGE>

Following completion of the tender offer, OM Acquisition Corp. will be
merged with and into UAM. Thereafter, OM Acquisition Corp. will cease to
exist, and UAM will continue as the surviving corporation and become a direct
and wholly owned subsidiary of Old Mutual.

Old Mutual is a 155-year old international financial services firm that
was founded in Cape Town, South Africa, and is now headquartered in London,
England. Old Mutual was founded in 1845 principally to provide life insurance
policies in South Africa. Today, Old Mutual provides a broad array of
financial services to clients in the United Kingdom, in South Africa and
other countries in southern Africa, and in other locations principally
outside of the United States. Old Mutual, which was founded as a mutual
organization, has been a publicly held stock company since the middle of 1999.

FFTW is a New York corporation organized in 1972 and is directly owned
by Charter Atlantic Corporation, a holding company organized as a New York
corporation. The affiliates of FFTW are Fischer Francis Trees & Watts, a
corporate partnership organized under the laws of the United Kingdom
(sometimes referred to as "FFTW UK"), Fischer Francis Trees & Watts, pte Ltd
(Singapore), a Singapore corporation (sometimes referred to as "FFTW
(Singapore)") and Fischer Francis Trees & Watts, Ltd Kabushiki Kaisha
(Japan), a Japanese corporation (sometimes referred to as "FFTW (Japan)").
FFTW (Singapore) and FFTW (Japan) are wholly owned subsidiaries of FFTW. FFTW
UK is 99% owned by FFTW and 1% owned by Fischer Francis Trees & Watts Ltd.
which in turn is owned by Charter Atlantic Corporation. FFTW (Japan) will not
assume duties as sub-adviser to the fund until it has completed its
registration as a registered investment adviser with the SEC.

PACE LARGE COMPANY VALUE EQUITY INVESTMENTS

Under the current Advisory Agreements for this fund with Institutional
Capital Corporation ("ICAP"), Westwood Management Corporation ("Westwood")
and State Street Global Advisors ("SSgA"), Mitchell Hutchins (not the fund)
pays each investment adviser a fee in the annual amount of 0.30% (0.15% for
SSgA) of the fund's average daily net assets that it manages. Prior to July
1, 2000, Brinson Partners, Inc. was the fund's sole investment adviser. ICAP
and Westwood assumed their fund responsibilities on July 1, 2000 and SSgA
assumed its fund responsibilities on October 10, 2000. For the fiscal years
ended July 31, 2000, July 31, 1999 and July 31, 1998, Mitchell Hutchins paid
or accrued aggregate investment advisory fees to ICAP, Westwood and the
fund's previous investment adviser of $1,024,189, $968,040, and $670,717,
respectively. Robert H. Lyon, who serves as president, chief investment
officer and a director of ICAP owns a 51% controlling interest in ICAP.
Westwood is a wholly owned subsidiary of Southwest Securities Group, Inc., a
Dallas-based securities firm. SSgA is the investment management division of
State Street Bank and Trust Company, which is a wholly owned subsidiary of
State Street Corporation, a publicly held bank holding company.

PACE LARGE COMPANY GROWTH EQUITY INVESTMENTS

Under the current Advisory Agreements for this fund with Alliance
Capital Management L.P. ("Alliance Capital") and State Street Global Advisors
("SSgA"), Mitchell Hutchins (not the fund) pays Alliance a fee in the annual
amount of 0.30% and SSgA a fee in the annual amount of 0.15% of the fund's
average daily net assets that it manages. Alliance Capital assumed its fund
responsibilities on November 10, 1997 and SSgA assumed its fund
responsibilities on October 10, 2000. Prior to November 10, 1997, Chancellor
LGT Asset Management, Inc. was the fund's sole investment adviser. For the
fiscal years ended July 31, 2000, July 31, 1999 and July 31, 1998, Mitchell
Hutchins paid or accrued investment advisory fees to Alliance Capital and the
prior investment adviser, of $1,296,816, $972,444 and $628,243, respectively.

SSgA is the investment management division of State Street Bank and
Trust Company, which is a wholly owned subsidiary of State Street
Corporation, a publicly held bank holding company. Alliance Capital
Management Corporation ("ACMC") is a general partner of Alliance Capital and
an indirect wholly owned subsidiary of AXA Financial, Inc. ("AXA Financial"),
a Delaware corporation whose shares are traded on the New York Stock
Exchange, Inc. As of June 30, 2000, AXA Financial and its subsidiaries were
the beneficial owners of an approximately 62.5% partnership interest in
Alliance Capital, and Alliance Capital Management Holding L.P. ("Alliance
Holding") owned an approximately 35% partnership interest in Alliance
Capital. Equity interests in Alliance Holding are traded on the New York
Stock Exchange in the form of units. Approximately 97.9% of

<PAGE>

Alliance Holding's units are owned by the public and management or employees
of Alliance Capital and approximately 2.1% are owned by certain wholly owned
subsidiaries of AXA Financial. The general partner of Alliance Holding is
ACMC. As of March 1, 2000, AXA, a French insurance holding company, owned
approximately 60.3% of the issued and outstanding shares of the common stock
of AXA Financial.

PACE SMALL/MEDIUM COMPANY VALUE EQUITY INVESTMENTS

Under the current Advisory Agreements for this fund with Ariel Capital
Management, Inc. ("Ariel") and ICM Asset Management, Inc. ("ICM"), Mitchell
Hutchins (not the fund) pays each of these investment advisers a fee in the
annual amount of 0.30% of the fund's average daily net assets that it
manages. Prior to October 10, 2000, Ariel and Brandywine Asset Management,
Inc. served as investment advisers for the fund's assets and, prior to
October 4, 1999, Brandywine was the fund's sole investment adviser. For the
fiscal years ended July 31, 2000, July 31, 1999 and July 31, 1998, Mitchell
Hutchins paid or accrued aggregate investment advisory fees to Ariel and
Brandywine of $590,599, $547,044 and $519,732, respectively. Ariel is an
independent subchapter S corporation with a majority of ownership held by its
employees. ICM also is an independent subchapter S corporation with a
majority of ownership held by its employees. James M. Simmons, founder and
chief investment officer of ICM, owns more than 25% of ICM's voting stock.

PACE SMALL/MEDIUM COMPANY GROWTH EQUITY INVESTMENTS

Under the current Advisory Agreement for this fund with Delaware
Management Company, Mitchell Hutchins (not the fund) pays Delaware Management
Company a fee in the annual amount of 0.40% of the fund's average daily net
assets. Prior to December 16, 1998, Westfield Capital Management Company,
Inc. was the fund's investment adviser. For the fiscal years ended July 31,
2000, July 31, 1999 and July 31, 1998, Mitchell Hutchins paid or accrued
aggregate investment advisory fees to Delaware Management Company and to the
prior investment adviser, of $1,247,713, $852,402, and $664,437,
respectively. Delaware Management Company is a series of Delaware Management
Business Trust, a Delaware business trust. It is a member of Delaware
Investments, a subsidiary of Lincoln National Corporation ("Lincoln
National"). Lincoln National, with headquarters in Fort Wayne, Indiana, is a
diversified organization with operations in many aspects of the financial
services industry, including insurance and investment management.

PACE INTERNATIONAL EQUITY INVESTMENTS

Under the current Advisory Agreement for this fund with Martin Currie
Inc., Mitchell Hutchins (not the fund) pays Martin Currie Inc. a fee in the
annual amount of 0.35% of the fund's average daily net assets up to and
including $150 million, 0.30% of the fund's average daily net assets above
$150 million up to and including $250 million, 0.25% of the fund's average
daily net assets above $250 million up to and including $350 million, and
0.20% of the fund's average daily net assets above $350 million. Prior to
October 10, 2000, Mitchell Hutchins (not the fund) paid Martin Currie Inc. a
fee for its services under the Advisory Agreement at the annual rate of 0.40%
of the fund's average daily net assets. For the fiscal years ended July 31,
2000, July 31, 1999 and July 31, 1998, Mitchell Hutchins paid or accrued
investment advisory fees to Martin Currie Inc. of $990,097, $717,975 and
$517,629, respectively. Martin Currie Inc. is a wholly owned subsidiary of
Martin Currie Limited, a holding company.

PACE INTERNATIONAL EMERGING MARKETS EQUITY INVESTMENTS

Under the current Advisory Agreement for this fund with Schroder
Investment Management North America Inc. ("SIMNA"), Mitchell Hutchins (not the
fund) pays SIMNA a fee in the annual amount of 0.50% of the fund's average daily
net assets. SIMNA is a wholly owned subsidiary of Schroder U.S. Holdings Inc.,
which engages through its subsidiary firms in the asset management business.
SIMNA was the surviving company in a merger with Schroder Capital Management
International Inc. (the fund's investment adviser prior to July 1, 1999 and
another wholly owned subsidiary of Schroder U.S. Holdings Inc.). For the fiscal
years ended July 31, 2000, July 31, 1999 and July 31, 1998, Mitchell Hutchins
paid or accrued investment advisory fees to SIMNA and its predecessor of
$450,653, $341,405 and $283,338, respectively. Schroder U.S. Holdings Inc. is a
wholly owned subsidiary of Schroders plc., a publicly owned holding company
organized under the laws of England. Schroders plc and its affiliates currently
engage in asset management businesses. In May 2000, Schroders plc sold its

<PAGE>

worldwide investment banking business to Salomon Smith Barney. Schroders plc
retained its asset management business.

SECURITIES LENDING. For the fiscal year ended July 31, 2000,
PaineWebber, acting as the funds' lending agent, received compensation from
the funds as follows:

<TABLE>
<CAPTION>
FUND COMPENSATION
---- ------------
<S> <C>
PACE Money Market Investments................................... $ 0
PACE Government Securities Fixed Income Investments............. 158
PACE Intermediate Fixed Income Investments...................... 54,662
PACE Strategic Fixed Income Investments......................... 4,240
PACE Municipal Fixed Income Investments ........................ 0
PACE Global Fixed Income Investments............................ 11,024
PACE Large Company Value Equity Investments..................... 20,527
PACE Large Company Growth Equity Investments.................... 26,547
PACE Small/Medium Company Value Equity Investments.............. 15,171
PACE Small/Medium Company Growth Equity Investments............. 83,313
PACE International Equity Investments........................... 34,989
PACE International Emerging Markets Equity Investments.......... 8,171
</TABLE>

PERSONAL TRADING POLICIES. The funds and Mitchell Hutchins (investment
manager and principal underwriter for the funds) each have adopted a code of
ethics under rule 17j-1 of the Investment Company Act, which permits
personnel covered by the rule to invest in securities that may be purchased
or held by a fund but prohibits fraudulent, deceptive or manipulative conduct
in connection with that personal investing. Each investment adviser also has
adopted a code of ethics under rule 17j-1.

DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
each class of shares of each fund under a distribution contract with the
Trust ("Distribution Contract") that requires Mitchell Hutchins to use its
best efforts, consistent with its other businesses, to sell shares of the
funds. Shares of the funds are offered continuously. Under a dealer agreement
between Mitchell Hutchins and PaineWebber relating to each class of shares of
the funds ("PW Dealer Agreement"), PaineWebber and its correspondent firms
sell the funds' shares. Mitchell Hutchins is located at 51 West 52nd Street,
New York, New York 10019-6114 and PaineWebber is located at 1285 Avenue of
the Americas, New York, New York 10019-6028. PACE Money Market Investments
has only Class P shares established. The other funds have Class A, Class B,
Class C, Class Y and Class P shares established.

Under separate plans of distribution pertaining to the Class A, Class B
and Class C shares of each fund adopted by the Trust in the manner prescribed
under Rule 12b-1 under the Investment Company Act (each, respectively, a
"Class A Plan," "Class B Plan" and "Class C Plan," and collectively,
"Plans"), each fund pays Mitchell Hutchins a service fee, accrued daily and
payable monthly, at the annual rate of 0.25% of the average daily net assets
of each class of shares. Under the Class B Plan, each fund pays Mitchell
Hutchins a distribution fee, accrued daily and payable monthly, at the annual
rate of 0.75% of the average daily net assets of the Class B shares. Under
the Class C Plan, each fund pays Mitchell Hutchins a distribution fee,
accrued daily and payable monthly, at the annual rate of 0.75% (0.50% for
fixed income funds) of the average daily net assets of the Class C shares.
There is no distribution plan with respect to the funds' Class P or Class Y
shares and the funds pay no service or distribution fees with respect to
these classes of shares.

Mitchell Hutchins uses the service fees under the Plans for Class A,
Class B and Class C shares primarily to pay PaineWebber for shareholder
servicing, currently at the annual rate of 0.25% of the aggregate investment
amounts maintained in each fund by PaineWebber clients. PaineWebber then
compensates its Financial Advisors for shareholder servicing that they
perform and offsets its own expenses in servicing and maintaining shareholder
accounts, including related overhead expenses.

<PAGE>

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

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

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

PaineWebber compensates Financial Advisors when Class B and Class C
shares are bought by investors, as well as on an ongoing basis. Mitchell
Hutchins receives no special compensation from any of the funds or investors
at the time Class B or C shares are bought.

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

The Plans for Class A, Class B and Class C shares and the Distribution
Contract specify that each fund must pay service and distribution fees to
Mitchell Hutchins as compensation for its service- and distribution-related
activities, not as reimbursement for specific expenses incurred. Therefore,
even if Mitchell Hutchins' expenses for a fund exceed the service or
distribution fees it receives, the fund will not be obligated to pay more
than those fees. On the other hand, if Mitchell Hutchins' expenses are less
than such fees, it will retain its full fees and realize a profit. Expenses
in excess of service and distribution fees received or accrued through the
termination date of any Plan will be Mitchell Hutchins' sole responsibility
and not that of the funds. Annually, the board reviews the Plans and Mitchell
Hutchins' corresponding expenses for each class of shares of a fund
separately from the Plans and expenses of the other classes of shares of that
fund.

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

In reporting amounts expended under the Plans to the board members,
Mitchell Hutchins allocates expenses attributable to the sale of each class
of a fund's shares to such class based on the ratio of sales of shares of
such class to the sales of all other classes of shares. The fees paid by one
class of a fund's shares will not be used to subsidize the sale of any other
class of fund shares.

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

In approving the Class A Plan, the board considered all the features of
the distribution system, including (1) the conditions under which initial sales
charges would be imposed and the amount of such charges, (2) Mitchell Hutchins'
belief that the initial sales charge combined with a service fee would be
attractive to PaineWebber Financial Advisors and correspondent firms, resulting
in greater growth of the fund than might otherwise be the

<PAGE>

case, (3) the advantages to the shareholders of economies of scale resulting
from growth in the fund's assets and potential continued growth, (4) the
services provided to the fund and its shareholders by Mitchell Hutchins, (5)
the services provided by PaineWebber pursuant to the PW Dealer Agreement with
Mitchell Hutchins and (6) Mitchell Hutchins' shareholder service-related
expenses and costs.

In approving the Class B Plan, the board considered all the features of
the distribution system, including (1) the conditions under which contingent
deferred sales charges would be imposed and the amount of such charges, (2)
the advantage to investors in having no initial sales charges deducted from
fund purchase payments and instead having the entire amount of their purchase
payments immediately invested in fund shares, (3) Mitchell Hutchins' belief
that the ability of PaineWebber Financial Advisors and correspondent firms to
receive sales commissions when Class B shares are sold and continuing service
fees thereafter while their customers invest their entire purchase payments
immediately in Class B shares would prove attractive to the Financial
Advisors and correspondent firms, resulting in greater growth of the fund
than might otherwise be the case, (4) the advantages to the shareholders of
economies of scale resulting from growth in the fund's assets and potential
continued growth, (5) the services provided to the fund and its shareholders
by Mitchell Hutchins, (6) the services provided by PaineWebber pursuant to
the PW Dealer Agreement with Mitchell Hutchins and (7) Mitchell Hutchins'
shareholder service- and distribution-related expenses and costs. The board
members also recognized that Mitchell Hutchins' willingness to compensate
PaineWebber and its Financial Advisors, without the concomitant receipt by
Mitchell Hutchins of initial sales charges, was conditioned upon its
expectation of being compensated under the Class B Plan.

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

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

PORTFOLIO TRANSACTIONS

Decisions to buy and sell securities for a fund other than PACE Money
Market Investments are made by the fund's investment adviser, subject to the
overall review of Mitchell Hutchins and the board of trustees. Decisions to
buy and sell securities for PACE Money Market Investments are made by
Mitchell Hutchins as that fund's investment adviser, subject to the overall
review of the board of trustees. Although investment decisions for a fund are
made independently from those of the other accounts managed by its investment
adviser, investments of the type that the fund may make also may be made by
those other accounts. When a fund and one or more other accounts managed by
its investment adviser are prepared to invest in, or desire to dispose of,
the same security, available investments or opportunities for sales will be
allocated in a manner believed by the investment adviser to

<PAGE>

be equitable to each. In some cases, this procedure may adversely affect the
price paid or received by a fund or the size of the position obtained or
disposed of by a fund.

Transactions on U.S. stock exchanges and some foreign stock exchanges
involve the payment of negotiated brokerage commissions. On exchanges on
which commissions are negotiated, the cost of transactions may vary among
different brokers. On most foreign exchanges, commissions are generally
fixed. No stated commission is generally applicable to securities traded in
U.S. over-the-counter markets, but the prices of those securities include
undisclosed commissions or mark-ups. The cost of securities purchased from
underwriters include an underwriting commission or concession and the prices
at which securities are purchased from and sold to dealers include a dealer's
mark-up or mark-down. U.S. government securities generally are purchased from
underwriters or dealers, although certain newly issued U.S. government
securities may be purchased directly from the U.S. Treasury or from the
issuing agency or instrumentality.

For the periods indicated, the funds paid the brokerage commissions set
forth below:

<TABLE>
<CAPTION>
TOTAL BROKERAGE COMMISSIONS
-------------------------------
FISCAL YEAR ENDED JULY 31,
-------------------------------
FUND 2000 1999 1998
---- ------- -------- --------
<S> <C> <C> <C>
PACE Money Market Investments .......................... $ 0 $ 0 $ 0
PACE Government Securities Fixed Income Investments .... 0 0 0
PACE Intermediate Fixed Income Investments.............. 0 0 0
PACE Strategic Fixed Income Investments................. 7,221 4,297 17,292
PACE Municipal Fixed Income Investments................. 0 0 0
PACE Global Fixed Income Investments.................... 0 0 0
PACE Large Company Value Equity Investments............. 839,338 336,042 191,304
PACE Large Company Growth Equity Investments............ 406,265 289,045 422,526
PACE Small/Medium Company Value Equity Investments...... 741,513 715,933 491,524
PACE Small/Medium Company Growth Equity Investments..... 147,922 296,609 303,695
PACE International Equity Investments................... 724,608 722,215 441,600
PACE International Emerging Markets Equity Investments.. 611,340 361,372 286,220
</TABLE>

The funds have no obligation to deal with any broker or group of brokers
in the execution of portfolio transactions. The funds contemplate that,
consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through Mitchell Hutchins or its affiliates,
including PaineWebber. The board has adopted procedures in conformity with
Rule 17e-1 under the Investment Company Act to ensure that all brokerage
commissions paid to PaineWebber are reasonable and fair. Specific provisions
in the Management Agreement and Advisory Agreements authorize Mitchell
Hutchins and any of its affiliates that is a member of a national securities
exchange to effect portfolio transactions for the funds 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. For the last three fiscal years,
none of the funds paid any brokerage commissions to PaineWebber, except
during the fiscal year ended July 31, 1999, PACE Large Company Growth Equity
Investments paid $215 in brokerage commissions to PaineWebber, which
represented less than 1% of the total commissions paid by that fund and less
than 1% of the aggregate dollar amount of the fund's transactions involving
commission payments.

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

<PAGE>

In selecting brokers for a fund, its investment adviser will consider
the full range and quality of a broker's services. Consistent with the
interests of the funds and subject to the review of the board, Mitchell
Hutchins or the applicable investment adviser may cause a fund to purchase
and sell portfolio securities through brokers who provide Mitchell Hutchins
or the investment adviser with brokerage or research services. The funds may
pay those brokers a higher commission than may be charged by other brokers,
provided that Mitchell Hutchins or the investment adviser, as applicable,
determines in good faith that the commission is reasonable in terms either of
that particular transaction or of the overall responsibility of Mitchell
Hutchins or the investment adviser to that fund and its other clients.

Research services obtained from brokers may include written reports,
pricing and appraisal services, analysis of issues raised in proxy
statements, educational seminars, subscriptions, portfolio attribution and
monitoring services, and computer hardware, software and access charges which
are directly related to investment research. Research services may be
received in the form of written reports, online services, telephone contacts
and personal meetings with securities analysts, economists, corporate and
industry spokespersons and government representatives.

For the fiscal year ended July 31, 2000, the funds directed portfolio
transactions to brokers chosen because they provide research and analysis as
indicated below, for which the funds paid the following in brokerage
commissions:

<TABLE>
<CAPTION>
AMOUNT OF PORTFOLIO BROKERAGE
FUND TRANSACTIONS COMMISSIONS PAID
---- ------------------- ----------------
<S> <C> <C>
PACE Money Market Investments............................ $ 0 $ 0
PACE Government Securities Fixed Income Investments...... 17,000,000 519
PACE Intermediate Fixed Income Investments............... 1,676,965 307
PACE Strategic Fixed Income Investments.................. 7,800,000 851
PACE Municipal Fixed Income Investments.................. 0 0
PACE Global Fixed Income Investments..................... 0 0
PACE Large Company Value Equity Investments.............. 389,875,806 166,846
PACE Large Company Growth Equity Investments.............
PACE Small/Medium Company Value Equity Investments....... 63,281,970 166,846
PACE Small/Medium Company Growth Equity Investments...... 4,828,196 7,044
PACE International Equity Investments.................... 0 0
PACE International Emerging Markets Equity Investments... 0 0
</TABLE>

For purchases or sales with broker-dealer firms that act as principal,
Mitchell Hutchins or a fund's investment adviser seeks best execution.
Although Mitchell Hutchins or a fund's investment adviser may receive certain
research or execution services in connection with the transactions, it will
not purchase securities at a higher price or sell securities at a lower price
than would otherwise be paid if no weight was attributed to the services
provided by the executing dealer. Mitchell Hutchins or a fund's investment
adviser may engage in agency transactions in over-the-counter equity and debt
securities in return for research and execution services. These transactions
are entered into only pursuant to procedures that are designed to ensure that
the transaction (including commissions) is at least as favorable as it would
have been if effected directly with a market-maker that did not provide
research or execution services.

Research services and information received from brokers or dealers are
supplemental to the research efforts of Mitchell Hutchins and a fund's
investment adviser and, when utilized, are subject to internal analysis
before being incorporated into their investment processes. Information and
research services furnished by brokers or dealers through which or with which
a fund effects securities transactions may be used by Mitchell Hutchins or
the fund's investment adviser in advising other funds or accounts and,
conversely, research services furnished to Mitchell Hutchins or a fund's
investment adviser by brokers or dealers in connection with other funds or
accounts that either of them advises may be used in advising a fund.

<PAGE>

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

The funds will not purchase securities that are offered in underwritings
in which PaineWebber is a member of the underwriting or selling group, except
pursuant to procedures adopted by the board pursuant to Rule 10f-3 under the
Investment Company Act. Among other things, these procedures require that the
spread or commission paid in connection with such a purchase be reasonable
and fair, 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 or any affiliate thereof not participate in or benefit from
the sale to the fund.

As of July 31, 2000, the funds owned securities issued by their regular
broker-dealers (as defined in Rule 10b-1 under the Investment Company Act) as
follows:

PACE Money Market Investments: Commercial paper of Goldman Sachs Group, Inc.
($986,172); Short-term corporate obligations of Merrill Lynch & Co., Inc.
($1,999,892) and Morgan Stanley Dean Witter & Co. ($2,000,000).

PACE Government Securities Fixed Income Investments: Corporate obligations of
Lehman Brothers Holdings Inc. ($2,007,542) and Morgan Stanley Dean Witter &
Co. ($1,000,699); repurchase agreement with State Street Bank & Trust Co.
($16,093,000).

PACE Intermediate Fixed Income Investments: Repurchase agreement with State
Street Bank & Trust Co. ($2,844,000).

PACE Strategic Fixed Income Investments: Corporate obligations of Goldman
Sachs Group, Inc. ($3,251,661), Lehman Brothers Holdings Inc. ($2,308,673)
and Morgan Stanley Dean Witter & Co. ($4,497,143); repurchase agreement with
State Street Bank & Trust Co. ($2,822,000).

PACE Municipal Fixed Income Investments: None

PACE Global Fixed Income Investments: None

PACE Large Company Value Equity Investments: Common stock of Chase Manhattan
Corp. ($5,033,344); repurchase agreement with State Street Bank & Trust Co.
($804,000).

PACE Large Company Growth Equity Investments: Common stock of Chase Manhattan
Corp. ($9,122,625), Merrill Lynch & Co., Inc. ($2,068,000) and Morgan Stanley
Dean Witter & Co. ($13,486,750).

PACE Small/Medium Company Value Equity Investments: Repurchase agreement with
State Street Bank & Trust Co. ($11,103,000).

PACE Small/Medium Company Growth Equity Investments: Repurchase agreement
with State Street Bank & Trust Co. ($12,966,000).

PACE International Equity Investments: Repurchase agreement with State Street
Bank & Trust Co. ($7,214,000).

PACE International Emerging Markets Equity Investments: Repurchase agreement
with State Street Bank & Trust Co ($558,000).

58
<PAGE>

PORTFOLIO TURNOVER. PACE Money Market Investments may attempt to
increase yields by trading to take advantage of short-term market variations,
which results in high portfolio turnover. Because purchases and sales of
money market instruments are usually effected as principal transactions, this
policy does not result in high brokerage commissions to the fund. The other
funds do not intend to seek profits through short-term trading. Nevertheless,
the funds will not consider portfolio turnover rate as a limiting factor in
making investment decisions.

A fund's turnover rate is calculated by dividing the lesser of
purchases or sales of its portfolio securities for the year by the monthly
average value of the portfolio securities. Securities or options with
remaining maturities of one year or less on the date of acquisition are
excluded from the calculation. Under certain market conditions, a fund
authorized to engage in transactions in options may experience increased
portfolio turnover as a result of its investment strategies. For instance,
the exercise of a substantial number of options written by a fund (due to
appreciation of the underlying security in the case of call options or
depreciation of the underlying security in the case of put options) could
result in a turnover rate in excess of 100%. A portfolio turnover rate of
100% would occur if all of a fund's securities that are included in the
computation of turnover were replaced once during a period of one year.

Certain other practices that may be employed by a fund also could
result in high portfolio turnover. For example, portfolio securities may be
sold in anticipation of a rise in interest rates (market decline) or
purchased in anticipation of a decline in interest rates (market rise) and
later sold. In addition, a security may be sold and another of comparable
quality purchased at approximately the same time to take advantage of what an
investment adviser believes to be a temporary disparity in the normal yield
relationship between the two securities. These yield disparities may occur
for reasons not directly related to the investment quality of particular
issues or the general movement of interest rates, such as changes in the
overall demand for, or supply of, various types of securities.

Portfolio turnover rates may vary greatly from year to year as well
as within a particular year and may be affected by cash requirements for
redemptions of a fund's shares as well as by requirements that enable the
fund to receive favorable tax treatment.

The following table sets forth the portfolio turnover rates for each
fund for the periods indicated:

<TABLE>
<CAPTION>
PORTFOLIO TURNOVER RATES
--------------------------------
FISCAL YEAR FISCAL YEAR
ENDED ENDED
FUND JULY 31, 2000 JULY 31, 1999
------ ---------------- --------------
<S> <C> <C>
PACE Money Market Investments ....................................... N/A N/A
PACE Government Securities Fixed Income Investments ................. 585% 418%
PACE Intermediate Fixed Income Investments .......................... 88% 89%
PACE Strategic Fixed Income Investments ............................. 391% 202%
PACE Municipal Fixed Income Investments ............................. 33% 11%
PACE Global Fixed Income Investments ................................ 170% 226%
PACE Large Company Value Equity Investments ......................... 195% 40%
PACE Large Company Growth Equity Investments ........................ 59% 43%
PACE Small/Medium Company Value Equity Investments .................. 83% 57%
PACE Small/Medium Company Growth Equity Investments ................. 81% 102%
PACE International Equity Investments ............................... 72% 89%
PACE International Emerging Markets Equity Investments .............. 115% 66%
</TABLE>

59
<PAGE>

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

WAIVERS OF SALES CHARGES/CONTINGENT DEFERRED SALES CHARGES -- CLASS A
SHARES. The following additional sales charge waivers are available for Class A
shares if you:

- Purchase shares through a variable annuity offered only to qualified
plans. For investments made pursuant to this waiver, Mitchell
Hutchins may make payments out of its own resources to PaineWebber
and to the variable annuity's sponsor, adviser or distributor in a
total amount not to exceed l% of the amount invested;

- Acquire shares through an investment program that is not sponsored
by PaineWebber or its affiliates and that charges participants a fee
for program services, provided that the program sponsor has entered
into a written agreement with PaineWebber permitting the sale of
shares at net asset value to that program. For investments made
pursuant to this waiver, Mitchell Hutchins may make a payment to
PaineWebber out of its own resources in an amount not to exceed 1%
of the amount invested. For subsequent investments or exchanges made
to implement a rebalancing feature of such an investment program,
the minimum subsequent investment requirement is also waived;

- Acquire shares in connection with a reorganization pursuant to which
a fund acquires substantially all of the assets and liabilities of
another fund in exchange solely for shares of the acquiring fund; or

- Acquire shares in connection with the disposition of proceeds from
the sale of shares of Managed High Yield Plus Fund Inc. that were
acquired during that fund's initial public offering of shares and
that meet certain other conditions described in its prospectus.

In addition, reduced sales charges on Class A shares are available
through the combined purchase plan or through rights of accumulation
described below. Class A share purchases of $1 million or more are not
subject to an initial sales charge; however, if a shareholder sells these
shares within one year after purchase, a contingent deferred sales charge of
1% of the offering price or the net asset value of the shares at the time of
sale by the shareholder, whichever is less, is imposed.

COMBINED PURCHASE PRIVILEGE -- CLASS A SHARES. Investors and
eligible groups of related fund investors may combine purchases of Class A
shares of the funds with concurrent purchases of Class A shares of any other
PaineWebber mutual fund and thus take advantage of the reduced sales charges
indicated in the tables of sales charges for Class A shares in the
Prospectus. The sales charge payable on the purchase of Class A shares of the
funds and Class A shares of such other funds will be at the rates applicable
to the total amount of the combined concurrent purchases.

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

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

(b) an individual and his or her individual
retirement account ("IRA");

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

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

60
<PAGE>

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

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

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

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

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

REINSTATEMENT PRIVILEGE -- CLASS A SHARES. Shareholders who have
redeemed Class A shares of a fund may reinstate their account without a sales
charge by notifying the transfer agent of such desire and forwarding a check
for the amount to be purchased within 365 days after the date of redemption.
The reinstatement will be made at the net asset value per share next computed
after the notice of reinstatement and check are received. The amount of a
purchase under this reinstatement privilege cannot exceed the amount of the
redemption proceeds. Gain on a redemption is taxable regardless of whether
the reinstatement privilege is exercised, although a loss arising out of a
redemption will not be deductible to the extent the reinstatement privilege
is exercised within 30 days after redemption, in which event an adjustment
will be made to the shareholder's tax basis for shares acquired pursuant to
the reinstatement privilege. Gain or loss on a redemption also will be
readjusted for federal income tax purposes by the amount of any sales charge
paid on Class A shares, under the circumstances and to the extent described
in "Taxes --Special Rule for Class A Shareholders," below.

WAIVERS OF CONTINGENT DEFERRED SALES CHARGES -- CLASS B SHARES. The
maximum 5% contingent deferred sales charge applies to sales of shares during
the first year after purchase. The charge generally declines by 1% annually,
reaching zero after six years. Among other circumstances, the contingent
deferred sales charge on Class B shares is waived where a total or partial
redemption is made within one year following the death of the shareholder.
The contingent deferred sales charge waiver is available where the decedent
is either the sole shareholder or owns the shares with his or her spouse as a
joint tenant with right of survivorship. This waiver applies only to
redemption of shares held at the time of death.

PURCHASES OF CLASS A SHARES THROUGH THE PAINEWEBBER INSIGHTONE--SM--
PROGRAM. Investors who purchase shares through the PaineWebber InsightOne--SM--
Program are eligible to purchase Class A shares without a sales load. The
PaineWebber InsightOne--SM-- Program offers a nondiscretionary brokerage account
to investors for an asset-based fee at an annual rate of up to 1.50% of the
assets in the account. Account holders may purchase or sell certain investment
products without paying commissions or other markups/markdowns.

ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of a PACE fund may be exchanged for shares of the
corresponding class of other PACE funds. Class P and Class Y shares are not
eligible for exchange. Shareholders will receive at least 60 days' notice of
any termination or material modification of the exchange offer, except no
notice need be given if, under extraordinary circumstances, either
redemptions are suspended under the circumstances described below or a fund
temporarily delays or ceases the sales

61
<PAGE>

of its shares because it is unable to invest amounts effectively in
accordance with the fund's investment objective, policies and restrictions.

If conditions exist that make cash payments undesirable, each fund
reserves the right to honor any request for redemption by making payment in
whole or in part in securities chosen by the fund and valued in the same way
as they would be valued for purposes of computing the fund's net asset value.
Any such redemption in kind will be made with readily marketable securities,
to the extent available. If payment is made in securities, a shareholder may
incur brokerage expenses in converting these securities into cash. Each fund
has elected, however, to be governed by Rule 18f-1 under the Investment
Company Act, under which it is obligated to redeem shares solely in cash up
to the lesser of $250,000 or 1% of its net asset value during any 90-day
period for one shareholder. This election is irrevocable unless the SEC
permits its withdrawal.

The funds may suspend redemption privileges or postpone the date of
payment during any period (1) when the New York Stock Exchange is closed or
trading on the New York Stock Exchange is restricted as determined by the
SEC, (2) when an emergency exists, as defined by the SEC, that makes it not
reasonably practicable for a fund to dispose of securities owned by it or
fairly to determine the value of its assets or (3) as the SEC may otherwise
permit. The redemption price may be more or less than the shareholder's cost,
depending on the market value of a fund's portfolio at the time.

SERVICE ORGANIZATIONS. A fund may authorize service organizations,
and their agents, to accept on its behalf purchase and redemption orders that
are in "good form" in accordance with the policies of those service
organizations. A fund will be deemed to have received these purchase and
redemption orders when a service organization or its agent accepts them. Like
all customer orders, these orders will be priced based on the fund's net
asset value next computed after receipt of the order by the service
organizations or their agents. Service organizations may include retirement
plan service providers who aggregate purchase and redemption instructions
received from numerous retirement plans or plan participants.

AUTOMATIC INVESTMENT PLAN. PaineWebber offers an automatic
investment plan with a minimum initial investment of $1,000 through which a
fund will deduct $50 or more on a monthly, quarterly, semi-annual or annual
basis from the investor's bank account to invest directly in the funds' Class
A, Class B or Class C shares. For Class P shares, an automatic investment
plan is available to certain shareholders who may authorized PaineWebber to
place a purchase order each month or quarter for fund shares in an amount not
less than $500 per month or quarter.

For Class P shareholders, the purchase price is paid automatically
from cash held in the shareholder's PaineWebber brokerage account through the
automatic redemption of the shareholder's shares of a PaineWebber money
market fund or through the liquidation of other securities held in the
investor's PaineWebber brokerage account. If the PACE Program assets are held
in a PaineWebber Resource Management Account-Registered Trademark-
("RMA-Registered Trademark-") account, the shareholder may arrange for
preauthorized automatic fund transfer on a regular basis, from the
shareholder's bank account to the shareholder's RMA account. Shareholders may
utilize this service in conjunction with the automatic investment plan to
facilitate regular PACE investments. This automatic fund transfer service,
however, is not available for retirement plan shareholders. For participants
in the PACE-Registered Trademark- Multi Advisor Program, amounts invested
through the automatic investment plan will be invested in accordance with the
participant's benchmark allocation. If sufficient funds are not available in
the participant's account on the trade date to purchase the full amount
specified by the participant, no purchase will be made.

In addition to providing a convenient and disciplined manner of
investing, participation in an automatic investment plan enables an investor
to use the technique of "dollar cost averaging." When a shareholder invests
the same amount each month, the shareholder will purchase more shares when a
fund's net asset value per share is low and fewer shares when the net asset
value per share is high. Using this technique, a shareholder's average
purchase price per share over any given period will usually be lower than if
the shareholder purchased a fixed number of shares on a monthly basis during
the period. Of course, investing through the automatic investment plan does
not assure a profit or protect against loss in declining markets.
Additionally, since an automatic investment plan involves continuous
investing regardless of price levels, an investor should consider his or her
financial ability to continue purchases through periods of low price levels.
An investor should also consider whether a single, large investment in Class
B or Class C shares would qualify for Class A sales load reductions.

62
<PAGE>

For further information about an automatic investment plan, the RMA
account or the automatic funds transfer service, shareholders should contact
their PaineWebber Financial Advisor.

AUTOMATIC REDEMPTION PLAN -- CLASS P SHARES. Investors in Class P
shares may have PaineWebber redeem a portion of their shares in the PACE
Program (or the PACE-Registered Trademark-Multi-Advisor Program) monthly or
quarterly under the automatic redemption plan. Quarterly redemptions are made
in March, June, September and December. The amount to be redeemed must be at
least $500 per month or quarter. Purchases of additional shares of a fund
concurrent with redemption are ordinarily disadvantageous to shareholders
because of tax liabilities. For retirement plan shareholders, special
limitations apply. For further information regarding the automatic redemption
plan, shareholders should contact their PaineWebber Financial Advisors.

SYSTEMATIC WITHDRAWAL PLAN -- CLASS A, CLASS B AND CLASS C SHARES.
The systematic withdrawal plan allows investors to set up monthly, quarterly
(March, June, September and December), semi-annual (June and December) or
annual (December) withdrawals from their PaineWebber Mutual Fund accounts.
Minimum balances and withdrawals vary according to the class of shares:

- Class A and Class C shares. Minimum value of fund shares is $5,000;
minimum withdrawals of $100.

- Class B shares. Minimum value of fund shares is $10,000; minimum
monthly, quarterly, and semi-annual and annual withdrawals of
$100, $200, $300 and $400, respectively.

Withdrawals under the systematic withdrawal plan will not be subject
to a contingent deferred sales charge if the investor withdraws no more than
12% of the value of the fund account when the investor signed up for the Plan
(for Class B shares, annually; for Class A and Class C shares, during the
first year under the Plan). Shareholders who elect to receive dividends or
other distributions in cash may not participate in this plan.

An investor's participation in the systematic withdrawal plan will
terminate automatically if the "Initial Account Balance" (a term that means
the value of the fund account at the time the investor elects to participate
in the systematic withdrawal plan), less aggregate redemptions made other
than pursuant to the systematic withdrawal plan, is less than the minimum
values specified above. Purchases of additional shares of a fund concurrent
with withdrawals are ordinarily disadvantageous to shareholders because of
tax liabilities and, for Class A shares, initial sales charges. On or about
the 20th of a month for monthly, quarterly, semi-annual and annual plans,
PaineWebber will arrange for redemption by the funds of sufficient fund
shares to provide the withdrawal payments specified by participants in the
funds' systematic withdrawal plan. The payments generally are mailed
approximately five Business Days (defined under "Valuation of Shares") after
the redemption date. Withdrawal payments should not be considered dividends,
but redemption proceeds. If periodic withdrawals continually exceed
reinvested dividends and other distributions, a shareholder's investment may
be correspondingly reduced. A shareholder may change the amount of the
systematic withdrawal or terminate participation in the systematic withdrawal
plan at any time without charge or penalty by written instructions with
signatures guaranteed to PaineWebber or PFPC Inc. Instructions to participate
in the plan, change the withdrawal amount or terminate participation in the
plan will not be effective until five days after written instructions with
signatures guaranteed are received by PFPC. Shareholders may request the
forms needed to establish a systematic withdrawal plan from their PaineWebber
Financial Advisors, correspondent firms or PFPC at 1-800-647-1568.

TRANSFER OF ACCOUNTS. If investors holding Class A, Class B, Class C
or Class Y shares of a fund in a PaineWebber brokerage account transfer their
brokerage accounts to another firm, the fund shares will be moved to an
account with PFPC. However, if the other firm has entered into a selected
dealer agreement with Mitchell Hutchins relating to the fund, the shareholder
may be able to hold fund shares in an account with the other firm.

INDIVIDUAL RETIREMENT ACCOUNTS. A Self-Directed IRA is available
through PaineWebber through which investments may be made in Class P shares
of the funds, as well as in other investments available through PaineWebber.
The minimum initial investment in this IRA is $10,000. Investors considering
establishing an IRA should review applicable tax laws and should consult
their tax advisers.

63
<PAGE>

PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN--SM--;
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT-Registered Trademark-
(RMA)-Registered Trademark-

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

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

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

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

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

- monthly Premier account statements that itemize all account
activity, including investment transactions, checking activity
and Platinum MasterCard-Registered Trademark- transactions during
the period, and provide unrealized and realized gain and loss
estimates for most securities held in the account;

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

- automatic "sweep" of uninvested cash into the RMA accountholder's
choice of one of the six RMA money market funds-RMA Money Market
Portfolio, RMA U.S. Government Portfolio, RMA Tax-Free Fund, RMA
California Municipal Money Fund, RMA New Jersey Municipal Money
Fund and RMA New York Municipal Money Fund. AN INVESTMENT IN A
MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER

64
<PAGE>

GOVERNMENT AGENCY. ALTHOUGH A MONEY MARKET FUND SEEKS TO PRESERVE
THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO
LOSE MONEY BY INVESTING IN A MONEY MARKET FUND.

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

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

- unlimited electronic funds transfers and a bill payment service for
an additional fee;

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

- expanded account protection for the net equity securities balance
in the event of the liquidation of PaineWebber. This protection
does not apply to shares of funds that are held at PFPC and not
through PaineWebber; and

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

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

CONVERSION OF CLASS B SHARES

Class B shares of a fund will automatically convert to Class A shares
of that fund, based on the relative net asset values per share of the two
classes, as of the close of business on the first Business Day (as defined under
"Valuation of Shares") of the month in which the sixth anniversary of the
initial issuance of such Class B shares occurs. For the purpose of calculating
the holding period required for conversion of Class B shares, the date of
initial issuance shall mean (1) the date on which such Class B shares were
issued or (2) for Class B shares obtained through an exchange, or a series of
exchanges, the date on which the original Class B shares were issued. For
purposes of conversion to Class A shares, Class B shares purchased through the
reinvestment of dividends and other distributions paid in respect of Class B
shares will be held in a separate sub-account. Each time any Class B shares in
the shareholder's regular account (other than those in the sub-account) convert
to Class A shares, a pro rata portion of the Class B shares in the sub-account
will also convert to Class A shares. The portion will be determined by the ratio
that the shareholder's Class B shares converting to Class A shares bears to the
shareholder's total Class B shares not acquired through dividends and other
distributions.

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

VALUATION OF SHARES

Each fund normally determines its net asset value per share as of
the close of regular trading (usually 4:00 p.m., Eastern time) on the New
York Stock Exchange on each Monday through Friday when the New York Stock
Exchange is open. Prices will be calculated earlier when the New York Stock
Exchange closes early because trading has been halted for the day. Currently
the New York Stock Exchange is closed on the observance of the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.

65
<PAGE>

Securities that are listed on U.S. and foreign stock exchanges
normally are valued at the last sale price on the day the securities are
valued or, lacking any sales on that day, at the last available bid price. In
cases where securities are traded on more than one exchange, the securities
are generally valued on the exchange considered by a fund's investment
adviser as the primary market. Securities traded in the over-the-counter
market and listed on the Nasdaq Stock Market ("Nasdaq") normally are valued
at the last available sale price on Nasdaq prior to valuation; other
over-the-counter securities are valued at the last bid price available prior
to valuation, other than short-term investments that mature in 60 days or
less.

Where market quotations are readily available, bonds held by the
funds (other than PACE Money Market Investments) are valued based upon market
quotations, provided those quotations adequately reflect, in the judgment of
a fund's investment adviser, the fair value of the securities. Where those
market quotations are not readily available, bonds are valued based upon
appraisals received from a pricing service using a computerized matrix system
or based upon appraisals derived from information concerning the security or
similar securities received from recognized dealers in those securities. The
amortized cost method of valuation generally is used to value debt
obligations with 60 days or less remaining until maturity, unless the board
determines that this does not represent fair value. All other securities and
assets are valued at fair value as determined in good faith by or under the
direction of the board.

It should be recognized that judgment often plays a greater role in
valuing thinly traded securities and lower rated bonds than is the case with
respect to securities for which a broader range of dealer quotations and
last-sale information is available.

All investments quoted in foreign currency will be valued daily in
U.S. dollars on the basis of the foreign currency exchange rate prevailing at
the time such valuation is determined by a fund's custodian. Foreign currency
exchange rates are generally determined prior to the close of regular trading
on the NYSE. Occasionally events affecting the value of foreign investments
and such exchange rates occur between the time at which they are determined
and the close of trading on the New York Stock Exchange, which events would
not be reflected in the computation of a fund's net asset value on that day.
If events materially affecting the value of such investments or currency
exchange rates occur during such time period, the investments will be valued
at their fair value as determined in good faith by or under the direction of
the board. The foreign currency exchange transactions of the funds conducted
on a spot (that is, cash) basis are valued at the spot rate for purchasing or
selling currency prevailing on the foreign exchange market. Under normal
market conditions this rate differs from the prevailing exchange rate by less
than one-tenth of one percent due to the costs of converting from one
currency to another.

PACE MONEY MARKET INVESTMENTS. PACE Money Market Investments values
its portfolio securities in accordance with the amortized cost method of
valuation under Rule 2a-7 under the Investment Company Act. To use amortized
cost to value its portfolio securities, the fund must adhere to certain
conditions under that Rule relating to its investments. Amortized cost is an
approximation of market value, whereby the difference between acquisition
cost and value at maturity is amortized on a straight-line basis over the
remaining life of the instrument. The effect of changes in the market value
of a security as a result of fluctuating interest rates is not taken into
account and thus the amortized cost method of valuation may result in the
value of a security being higher or lower than its actual market value. In
the event that a large number of redemptions takes place at a time when
interest rates have increased, the fund might have to sell portfolio
securities prior to maturity and at a price that might not be as desirable as
the value at maturity.

The board has established procedures for the purpose of maintaining
a constant net asset value of $1.00 per share for PACE Money Market
Investments, which include a review of the extent of any deviation of net
asset value per share, based on available market quotations, from the $1.00
amortized cost per share. Should that deviation exceed 1/2 of 1%, the
trustees will promptly consider whether any action should be initiated to
eliminate or reduce material dilution or other unfair results to
shareholders. Such action may include redeeming shares in kind, selling
portfolio securities prior to maturity, reducing or withholding dividends and
utilizing a net asset value per share as determined by using available market
quotations. PACE Money Market Investments will maintain a dollar weighted
average portfolio maturity of 90 days or less and will not purchase any
instrument with a remaining maturity greater than 13 months (as calculated
under Rule 2a-7) and except that securities subject to repurchase agreements
may have maturities in excess of 13 months. PACE Money Market Investments
will limit portfolio investments, including repurchase agreements, to those
U.S. dollar denominated instruments that are of high quality

66
<PAGE>

and that the trustees determine present minimal credit risks as advised by
Mitchell Hutchins and will comply with certain reporting and recordkeeping
procedures. There is no assurance that constant net asset value per share
will be maintained. In the event amortized cost ceases to represent fair
value, the board will take appropriate action.

In determining the approximate market value of portfolio
instruments, the Trust may employ outside organizations, which may use a
matrix or formula method that takes into consideration market indices,
matrices, yield curves and other specific adjustments. This may result in the
securities being valued at a price different from the price that would have
been determined had the matrix or formula method not been used. All cash,
receivables and current payables are carried at their face value. Other
assets, if any, are valued at fair value as determined in good faith by or
under the direction of the board.

PERFORMANCE INFORMATION

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

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

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

Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the
last day of the most recent quarter prior to submission of the Performance
Advertisements for publication. Total return, or "T" in the formula above, is
computed by finding the average annual change in the value of an initial
$1,000 investment over the period. In calculating the ending redeemable value
for Class A shares, the maximum sales charge of 4.5% (4.0% for fixed income
funds) is deducted from the initial $1,000 payment and, for Class B and Class
C shares, the applicable contingent deferred sales charge imposed on a
redemption of Class B or Class C shares held for the period is deducted. All
dividends and other distributions are assumed to have been reinvested at net
asset value.

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

YIELD. Yields used in a fund's Performance Advertisements, except for
those given for PACE Money Market Investments, are calculated by dividing the
fund's interest and dividend income attributable to the fund's shares for a
30-day period ("Period"), net of expenses attributable to such fund, by the
average number of shares of such fund entitled to receive dividends during the
Period and expressing the result as an annualized percentage (assuming
semi-annual compounding) of the net asset value per share at the end of the
Period. Yield quotations are calculated according to the following formula:

6
YIELD = 2 [( a-b/cd +1 ) - 1 ]
where: a = interest earned during the Period attributable to a fund

67
<PAGE>

b = expenses accrued for the Period attributable to a fund (net of
reimbursements)
c = the average daily number of shares of a fund outstanding
during the Period that were entitled to receive dividends
d = the net asset value per share on the last day of the Period

Except as noted below, in determining interest and dividend income
earned during the Period (a variable in the above formula), a fund calculates
interest earned on each debt obligation held by it during the Period by (1)
computing the obligation's yield to maturity, based on the market value of
the obligation (including actual accrued interest) on the last business day
of the Period or, if the obligation was purchased during the Period, the
purchase price plus accrued interest and (2) dividing the yield to maturity
by 360, and multiplying the resulting quotient by the market value of the
obligation (including actual accrued interest) to determine the interest
income on the obligation for each day of the period that the obligation is in
the fund. Once interest earned is calculated in this fashion for each debt
obligation held by the fund, interest earned during the Period is then
determined by totaling the interest earned on all debt obligations. For
purposes of these calculations, the maturity of an obligation with one or
more call provisions is assumed to be the next date on which the obligation
reasonably can be expected to be called or, if none, the maturity date. With
respect to Class A shares, in calculating the maximum offering price per
share at the end of the Period (variable "d" in the above formula), the
fund's current maximum 4.5% (4.0% for fixed income funds) initial sales
charge on Class A shares is included.

Tax exempt-yield for PACE Municipal Fixed Income Investments is
calculated according to the same formula except the variable "a" equals
interest exempt from federal income tax earned during the Period. This
tax-exempt yield may then be translated into tax-equivalent yield according
to the following formula:

TAX EQUIVALENT YIELD = ( E ) + t
-------
1 - p
E = tax-exempt yield of the fund

p = stated income tax rate

t = taxable yield of the fund

The tax-equivalent yield of PACE Municipal Fixed Income Investments
assumes a 39.6% effective federal tax rate.

PACE Money Market Investments computes its yield and effective yield
quotations using standardized methods required by the SEC. The fund from time
to time advertises (1) its current yield based on a recently ended seven-day
period, computed by determining the net change, exclusive of capital changes,
in the value of a hypothetical pre-existing account having a balance of one
share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from that shareholder account, dividing the difference
by the value of the account at the beginning of the base period to obtain the
base period return, and then multiplying the base period return by (365/7),
with the resulting yield figure carried to at least the nearest hundredth of
one percent, and (2) its effective yield based on the same seven-day period
by compounding the base period return by adding 1, raising the sum to a power
equal to (365/7), and subtracting 1 from the result, according to the
following formula:
365/7
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1) ] - 1

Yield may fluctuate daily and does not provide a basis for
determining future yields. Because the yield of each fund fluctuates, it
cannot be compared with yields on savings accounts or other investment
alternatives that provide an agreed to or guaranteed fixed yield for a stated
period of time. However, yield information may be useful to an investor
considering temporary investments in money market instruments. In comparing
the yield of one money market fund to another, consideration should be given
to each fund's investment policies, including the types of investments made,
the average maturity of the portfolio securities and whether there are any
special account charges that may reduce the yield.

68
<PAGE>

OTHER INFORMATION. In Performance Advertisement, each fund may
compare its Standardized Return and/or NonStandardized Return with data
published by Lipper Analytical Services, Inc. ("Lipper"), CDA Investment
Technologies, Inc. ("CDA"), Wiesenberger Investment Companies Services
("Wiesenberger"), Investment Company Data, Inc. ("ICD"), or Morningstar
Mutual Funds ("Morningstar") or with the performance of appropriate
recognized stock and other indices, including the Standard & Poor's 500
Composite Stock Price Index, the Dow Jones Industrial Average, the Wilshire
5000 Index, other Wilshire Associates equities indices, Frank Russell Company
equity indices, the Morgan Stanley Capital International Perspective Indices,
the Salomon Smith Barney World Government bond indices, the Lehman Brothers
Bond indices, Municipal Bond Buyers Indices, 90 day Treasury Bills, 30-year
and 10-year U.S. Treasury Bonds and changes in the Consumer Price Index as
published by the U.S. Department of Commerce. The fund also may refer in such
materials to mutual fund performance rankings and other data, such as
comparative asset, expense and fee levels, published by Lipper, CDA,
Wiesenberger, ICD or Morningstar. Performance Advertisements also may refer
to discussions of a fund and comparative mutual fund data and ratings
reported in independent periodicals, including THE WALL STREET JOURNAL, MONEY
MAGAZINE, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW
YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST AND THE KIPLINGER
LETTERS. Comparisons in Performance Advertisements may be in graphic form.

Ratings may include criteria relating to portfolio characteristics
in addition to performance information. In connection with a ranking, a fund
may also provide additional information with respect to the ranking, such as
the particular category to which it relates, the number of funds in the
category, the criteria on which the ranking is based, and the effect of sales
charges, fee waivers and/or expense reimbursements.

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

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

Each fund may also compare its performance to general trends in the
stock and bond markets, as illustrated by the following graph prepared by
Ibbotson Associates, Chicago.

69
<PAGE>

Ibbotson Chart Plot Points

Chart showing performance of S&P 500, long-term U.S. government bonds,
Treasury Bills and inflation from 1925 through 1999

<TABLE>
<CAPTION>
YEAR COMMON STOCKS LONG-TERM GOV'T BONDS INFLATION/CPI TREASURY BILLS
<S> <S> <S> <S> <S>
1925 $10,000 $10,000 $10,000 $10,000
1926 $11,162 $10,777 $9,851 $10,327
1927 $15,347 $11,739 $9,646 $10,649
1928 $22,040 $11,751 $9,553 $11,028
1929 $20,185 $12,153 $9,572 $11,552
1930 $15,159 $12,719 $8,994 $11,830
1931 $8,590 $12,044 $8,138 $11,957
1932 $7,886 $14,073 $7,300 $12,072
1933 $12,144 $14,062 $7,337 $12,108
1934 $11,969 $15,472 $7,486 $12,128
1935 $17,674 $16,243 $7,710 $12,148
1936 $23,669 $17,464 $7,803 $12,170
1937 $15,379 $17,504 $8,045 $12,207
1938 $20,165 $18,473 $7,821 $12,205
1939 $20,082 $19,570 $7,784 $12,208
1940 $18,117 $20,761 $7,859 $12,208
1941 $16,017 $20,955 $8,622 $12,216
1942 $19,275 $21,629 $9,423 $12,248
1943 $24,267 $22,080 $9,721 $12,291
1944 $29,060 $22,702 $9,926 $12,332
1945 $39,649 $25,139 $10,149 $12,372
1946 $36,449 $25,113 $11,993 $12,416
1947 $38,529 $24,454 $13,073 $12,478
1948 $40,649 $25,285 $13,426 $12,580
1949 $48,287 $26,916 $13,184 $12,718
1950 $63,601 $26,932 $13,948 $12,870
1951 $78,875 $25,873 $14,767 $13,063
1952 $93,363 $26,173 $14,898 $13,279
1953 $92,439 $27,125 $14,991 $13,521
1954 $141,084 $29,075 $14,916 $13,638
1955 $185,614 $28,699 $14,972 $13,852
1956 $197,783 $27,096 $15,400 $14,193
1957 $176,457 $29,117 $15,866 $14,639
1958 $252,975 $27,342 $16,145 $14,864
1959 $283,219 $26,725 $16,387 $15,303
1960 $284,549 $30,407 $16,629 $15,711
1961 $361,060 $30,703 $16,741 $16,045
1962 $329,545 $32,818 $16,946 $16,483
1963 $404,685 $33,216 $17,225 $16,997
1964 $471,388 $34,381 $17,430 $17,598
1965 $530,081 $34,625 $17,765 $18,289
1966 $476,737 $35,889 $18,361 $19,159
1967 $591,038 $32,594 $18,920 $19,966
1968 $656,415 $32,509 $19,814 $21,005
1969 $600,590 $30,860 $21,024 $22,388
1970 $624,653 $34,596 $22,179 $23,849
1971 $714,058 $39,173 $22,924 $24,895
1972 $849,559 $41,400 $23,706 $25,851
1973 $725,003 $40,942 $25,792 $27,643
1974 $533,110 $42,725 $28,939 $29,855
1975 $731,443 $46,653 $30,969 $31,588
1976 $905,842 $54,470 $32,458 $33,193
1977 $840,766 $54,095 $34,656 $34,893
1978 $895,922 $53,458 $37,784 $37,398
1979 $1,061,126 $52,799 $42,812 $41,279
1980 $1,405,137 $50,715 $48,120 $45,917
1981 $1,336,161 $51,657 $52,421 $52,671
1982 $1,622,226 $72,507 $54,451 $58,224
1983 $1,987,451 $72,979 $56,518 $63,347
1984 $2,111,991 $84,274 $58,753 $69,586
1985 $2,791,166 $110,371 $60,968 $74,960
1986 $3,306,709 $137,446 $61,657 $79,580
1987 $3,479,675 $133,716 $64,376 $83,929
1988 $4,064,583 $146,650 $67,221 $89,257
1989 $5,344,555 $173,215 $70,345 $96,728
1990 $5,174,990 $183,924 $74,640 $104,286
1991 $6,755,922 $219,420 $76,927 $110,121
1992 $7,274,115 $237,092 $79,159 $113,982
1993 $8,000,785 $280,339 $81,334 $117,284
1994 $8,105,379 $258,556 $83,510 $121,862
1995 $11,139,184 $340,435 $85,630 $128,680
1996 $13,709,459 $337,265 $88,475 $135,381
1997 $18,272,762 $390,735 $89,897 $142,496
1998 $23,495,420 $441,777 $91,513 $149,416
1999 $28,456,286 $402,177 $93,998 $156,414
</TABLE>

The chart is shown for illustrative purposes only and does not represent any
fund's performance. These returns consist of income and capital appreciation
(or depreciation) and should not be considered an indication or guarantee of
future investment results. Year-to-year fluctuations in certain markets have
been significant and negative returns have been experienced in certain
markets from time to time. Stocks are measured by the S&P 500 Index, an
unmanaged weighted index comprising 500 widely held common stocks and varying
in composition. Unlike investors in bonds and U.S. Treasury bills, common
stock investors do not receive fixed income payments and are not entitled to
repayment of principal. These differences contribute to investment risk.
Returns shown for long-term government bonds are based on U.S. Treasury bonds
with 20-year maturities. Inflation is measured by the Consumer Price Index.
The indexes are unmanaged and are not available for investment.

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

Source: Stocks, Bonds, Bills and Inflation 1999 Yearbook-TM- Ibbotson Assoc.,
Chi. (annual updates work by Roger G. Ibbotson & Rex A. Sinquefield).

TAXES

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

SALE OR EXCHANGE OF FUND SHARES. A shareholder's sale (redemption)
of fund shares may result in a taxable gain or loss, depending on whether the
shareholder receives more or less than his or her adjusted basis for the
shares. In addition, if a fund's shares are bought within 30 days before or
after selling other shares of the fund at a loss, all or a portion of that
loss will not be deductible and will increase the basis of the newly
purchased shares.

CLASS A SHAREHOLDERS. A special tax rule applies when a shareholder
sells or exchanges Class A shares within 90 days of purchase and subsequently
acquires Class A shares of the same or another PaineWebber mutual fund
without paying a sales charge due to the 365-day reinstatement privilege or
the exchange privilege. In these cases, any gain on the sale or exchange of
the original Class A shares would be increased, or any loss would be
decreased, by the amount of the sales charge paid when those shares were
bought, and that amount would increase the basis of the PaineWebber mutual
fund shares subsequently acquired.

70
<PAGE>

CONVERSION OF CLASS B SHARES. A shareholder will recognize no gain
or loss as a result of a conversion from Class B shares to Class A shares.

QUALIFICATION AS A REGULATED INVESTMENT COMPANY. Each fund intends
to continue to qualify for treatment as a regulated investment company
("RIC") under the Internal Revenue Code. To so qualify, a fund must
distribute to its shareholders for each taxable year at least 90% of its
investment company income (consisting generally of net investment income, net
short-term capital gain and, for some funds, net gain from certain foreign
currency transactions). (PACE Municipal Fixed Income Investments must
distribute to its shareholders for each taxable year at least 90% of the sum
of its investment company taxable income (consisting generally of taxable net
investment income and net short-term capital gain) and its net interest
income excludable from gross income under section 103(a) of the Internal
Revenue Code.) In addition to this "Distribution Requirement," a fund must
meet several additional requirements. For each fund, these requirements
include the following: (1) the fund must derive at least 90% of its gross
income each taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of securities
or foreign currencies, or other income (including gains from options, futures
or forward currency contracts) derived with respect to its business of
investing in securities or those currencies ("Income Requirement"); (2) at
the close of each quarter of the fund's taxable year, at least 50% of the
value of its total assets must be represented by cash and cash items, U.S.
government securities, securities of other RICs and other securities that are
limited, in respect of any one issuer, to an amount that does not exceed 5%
of the value of the fund's total assets and that does not represent more than
10% of the issuer's outstanding voting securities; and (3) at the close of
each quarter of the fund's taxable year, not more than 25% of the value of
its total assets may be invested in securities (other than U.S. government
securities or the securities of other RICs) of any one issuer. If a fund
failed to qualify for treatment as a RIC for any taxable year, (1) it would
be taxed as an ordinary corporation on its taxable income for that year
without being able to deduct the distributions it makes to its shareholders
and (2) the shareholders would treat all those distributions, including
distributions that otherwise would be "exempt-interest dividends" as
described below under "Taxes -- Information about PACE Municipal Fixed Income
Investments" and distributions of net capital gain (the excess of net
long-term capital gain over net short-term capital loss), as taxable
dividends (that is, ordinary income) to the extent of the fund's earnings and
profits. In addition, the fund could be required to recognize unrealized
gains, pay substantial taxes and interest and make substantial distributions
before requalifying for RIC treatment.

OTHER INFORMATION. Dividends and other distributions the fund
declares in October, November or December of any year that are payable to
shareholders of record on a date in any of those months will be deemed to
have been paid by the fund and received by the shareholders on December 31 of
that year if the fund pays the distributions during the following January.

A portion of the dividends (whether paid in cash or in additional
fund shares) from the investment company taxable income of funds that invest
in equity securities of corporations may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion
for a fund may not exceed the aggregate dividends received by the fund from
U.S. corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the federal alternative minimum tax.

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

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

Dividends and interest received, and gains realized, by a fund on
foreign securities may be subject to income, withholding or other taxes imposed
by foreign countries and U.S. possessions (collectively "foreign taxes") that
would reduce the return on its securities. Tax conventions between certain
countries and the United States, however, may reduce or eliminate foreign taxes,
and many foreign countries do not impose taxes on capital gains in respect of
investments by foreign investors. If more than 50% of the value of a fund's
total assets at the close of its

71
<PAGE>

taxable year consists of securities of foreign corporations, it will be
eligible to, and may, file an election with the Internal Revenue Service that
will enable its shareholders, in effect, to receive the benefit of the
foreign tax credit with respect to any foreign taxes paid by it. Pursuant to
the election, the fund would treat those taxes as dividends paid to its
shareholders and each shareholder (1) would be required to include in gross
income, and treat as paid by him or her, his or her proportionate share of
those taxes, (2) would be required to treat his or her share of those taxes
and of any dividend paid by the fund that represents income from foreign or
U.S. possessions sources as his or her own income from those sources and (3)
could either deduct the foreign taxes deemed paid by him or her in computing
his or her taxable income or, alternatively, use the foregoing information in
calculating the foreign tax credit against his or her federal income tax. A
fund will report to its shareholders shortly after each taxable year their
respective shares of foreign taxes paid to, and the income from sources
within, foreign countries and U.S. possessions if it makes this election.
Individuals who have no more than $300 ($600 for married persons filing
jointly) of creditable foreign taxes included on Forms 1099 and all of whose
foreign source income is "qualified passive income" may elect each year to be
exempt from the extremely complicated foreign tax credit limitation, in which
event they would be able to claim a foreign tax credit without having to file
the detailed Form 1116 that otherwise is required.

Each fund may invest in the stock of "passive foreign investment
companies" ("PFICs") if that stock is a permissible investment. A PFIC is any
foreign corporation (with certain exceptions) that, in general, meets either
of the following tests: (1) at least 75% of its gross income is passive or
(2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, a fund will be
subject to federal income tax on a portion of any "excess distribution"
received on the stock of a PFIC or of any gain from disposition of that stock
(collectively "PFIC income"), plus interest thereon, even if the fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent it
distributes that income to its shareholders.

If a fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the fund will be required to include in income each year
its pro rata share of the QEF's annual ordinary earnings and net capital gain
(which it may have to distribute to satisfy the Distribution Requirement and
avoid imposition of the Excise Tax) even if the QEF does not distribute those
earnings and gain to the fund. In most instances it will be very difficult,
if not impossible, to make this election because of certain of its
requirements.

Each fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock
over a fund's adjusted basis therein as of the end of that year. Pursuant to
the election, a fund also would be allowed to deduct (as an ordinary, not
capital, loss) the excess, if any, of its adjusted basis in PFIC stock over
the fair market value thereof as of the taxable year-end, but only to the
extent of any net mark-to-market gains with respect to that stock included by
the fund for prior taxable years under the election (and under regulations
proposed in 1992 that provided a similar election with respect to the stock
of certain PFICs). A fund's adjusted basis in each PFIC's stock with respect
to which it has made this election will be adjusted to reflect the amounts of
income included and deductions taken thereunder.

The use of hedging strategies, such as writing (selling) and
purchasing options and futures contracts and entering into forward currency
contracts, involves complex rules that will determine for income tax purposes
the amount, character and timing of recognition of the gains and losses a
fund realizes in connection therewith. Gains from the disposition of foreign
currencies (except certain gains that may be excluded by future regulations),
and gains from options, futures and forward currency contracts derived by a
fund with respect to its business of investing in securities or foreign
currencies, will be treated as qualifying income under the Income Requirement.

Certain futures and foreign currency contracts in which a fund may
invest may be subject to section 1256 of the Code ("section 1256 contracts").
Any section 1256 contracts a fund holds at the end of each taxable year
generally must be "marked-to-market" (that is, treated as having been sold at
that time for their fair market value) for federal income tax purposes, with the
result that unrealized gains or losses will be treated as though they were
realized. Sixty percent of any net gain or loss recognized on these deemed
sales, and 60% of any net realized gain or loss from any actual sales of section
1256 contracts, will be treated as long-term capital gain or loss, and the
balance

72
<PAGE>

will be treated as short-term capital gain or loss. These rules may operate
to increase the amount that a fund must distribute to satisfy the
Distribution Requirement (I.E., with respect to the portion treated as
short-term capital gain), which will be taxable to the shareholders as
ordinary income, and to increase the net capital gain a fund recognizes,
without in either case increasing the cash available to the fund. A fund may
elect not to have the foregoing rules apply to any "mixed straddle" (that is,
a straddle, clearly identified by the fund in accordance with the
regulations, at least one (but not all) of the positions of which are section
1256 contracts), although doing so may have the effect of increasing the
relative proportion of net short-term capital gain (taxable as ordinary
income) and thus increasing the amount of dividends that must be distributed.

Gains or losses (1) from the disposition of foreign currencies,
including forward currency contracts, (2) on the disposition of each
foreign-currency-denominated debt security that are attributable to
fluctuations in the value of the foreign currency between the dates of
acquisition and disposition of the security and (3) that are attributable to
exchange rate fluctuations between the time a fund accrues interest,
dividends or other receivables, or expenses or other liabilities, denominated
in a foreign currency and the time the fund actually collects the receivables
or pays the liabilities, generally will be treated as ordinary income or
loss. These gains, referred to under the Code as "section 988" gains or
losses, will increase or decrease the amount of a fund's investment company
taxable income available to be distributed to its shareholders as ordinary
income, rather than increasing or decreasing the amount of its net capital
gain. If section 988 losses exceed other investment company taxable income
during a taxable year, a fund would not be able to distribute any dividends,
and any distributions made during that year before the losses were realized
would be recharacterized as a return of capital to shareholders, rather than
as a dividend, thereby reducing each shareholder's basis in his or her fund
shares.

Offsetting positions in any actively traded security, option,
futures or forward contract entered into or held by a fund may constitute a
"straddle" for federal income tax purposes. Straddles are subject to certain
rules that may affect the amount, character and timing of a fund's gains and
losses with respect to positions of the straddle by requiring, among other
things, that (1) loss realized on disposition of one position of a straddle
be deferred to the extent of any unrealized gain in an offsetting position
until the latter position is disposed of, (2) the fund's holding period in
certain straddle positions not begin until the straddle is terminated
(possibly resulting in gain being treated as short-term rather than long-term
capital gain) and (3) losses recognized with respect to certain straddle
positions, that otherwise would constitute short-term capital losses, be
treated as long-term capital losses. Applicable regulations also provide
certain "wash sale" rules, which apply to transactions where a position is
sold at a loss and a new offsetting position is acquired within a prescribed
period, and "short sale" rules applicable to straddles. Different elections
are available to the funds, which may mitigate the effects of the straddle
rules, particularly with respect to "mixed straddles" (I.E., a straddle of
which at least one, but not all, positions are section 1256 contracts).

When a covered call option written (sold) by a fund expires, it will
realize a short-term capital gain equal to the amount of the premium it
received for writing the option. When a fund terminates its obligations under
such an option by entering into a closing transaction, it will realize a
short-term capital gain (or loss), depending on whether the cost of the
closing transaction is less (or more) than the premium it received when it
wrote the option. When a covered call option written by a fund is exercised,
the fund will be treated as having sold the underlying security, producing
long-term or short-term capital gain or loss, depending on the holding period
of the underlying security and whether the sum of the option price received
on the exercise plus the premium received when it wrote the option is more or
less than the basis of the underlying security.

If a fund has an "appreciated financial position"-- generally, an
interest (including an interest through an option, futures or forward
currency contract or short sale) with respect to any stock, debt instrument
(other than "straight debt") or partnership interest the fair market value of
which exceeds its adjusted basis--and enters into a "constructive sale" of
the position, the fund will be treated as having made an actual sale thereof,
with the result that gain will be recognized at that time. A constructive
sale generally consists of a short sale, an offsetting notional principal
contract or a futures or forward currency contract entered into by a fund or
a related person with respect to the same or substantially identical
property. In addition, if the appreciated financial position is itself a
short sale or such a contract, acquisition of the underlying property or
substantially identical property will be deemed a constructive sale. The
foregoing will not apply, however, to a fund's transaction during any taxable
year that otherwise would be treated as a constructive sale if the
transaction is closed within 30 days after the end of that year and the fund
holds the appreciated financial position unhedged for 60 days after that
closing (I.E., at no time during that 60-day period is the fund's risk of
loss regarding that position reduced by reason of certain specified

73
<PAGE>

transactions with respect to substantially identical or related property,
such as having an option to sell, being contractually obligated to sell,
making a short sale or granting an option to buy substantially identical
stock or securities).

A fund that acquires zero coupon or other securities issued with
original issue discount ("OID") and/or Treasury inflation-protected
securities ("TIPS"), on which principal is adjusted based on changes in the
Consumer Price Index, must include in its gross income the OID that accrues
on those securities, and the amount of any principal increases on TIPS,
during the taxable year, even if the fund receives no corresponding payment
on them during the year. Similarly, a fund that invests in payment-in-kind
("PIK") securities must include in its gross income securities it receives as
"interest" on those securities. Each fund has elected similar treatment with
respect to securities purchased at a discount from their face value ("market
discount"). Because a fund annually must distribute substantially all of its
investment company taxable income, including any accrued OID, market discount
and other non-cash income, to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax, it may be required in a particular year to
distribute as a dividend an amount that is greater than the total amount of
cash it actually receives. Those distributions would have to be made from the
fund's cash assets or from the proceeds of sales of portfolio securities, if
necessary. The fund might realize capital gains or losses from those sales,
which would increase or decrease its investment company taxable income and/or
net capital gain.

INFORMATION ABOUT PACE MUNICIPAL FIXED INCOME INVESTMENTS. Dividends
paid by PACE Municipal Fixed Income Investments will qualify as
"exempt-interest dividends," and thus will be excludable from gross income
for federal income tax purposes by its shareholders, if the fund satisfies
the requirement that, at the close of each quarter of its taxable year, at
least 50% of the value of its total assets consists of securities the
interest on which is excludable from gross income under section 103(a); the
fund intends to continue to satisfy this requirement. The aggregate dividends
designated as exempt-interest dividends for any year by the fund may not
exceed its net tax-exempt income for the year. Shareholders' treatment of
dividends from the fund under state and local income tax laws may differ from
the treatment thereof under the Internal Revenue Code. Investors should
consult their tax advisers concerning this matter.

Entities or persons who are "substantial users" (or persons related
to "substantial users") of facilities financed by IDBs or PABs should consult
their tax advisers before purchasing fund shares because, for users of
certain of these facilities, the interest on those bonds is not exempt from
federal income tax. For these purposes, "substantial user" is defined to
include a "non-exempt person" who regularly uses in a trade or business a
part of a facility financed from the proceeds of IDBs or PABs.

Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income
(including income from tax-exempt sources such as the fund) plus 50% of their
benefits exceeds certain base amounts. Exempt-interest dividends from the
fund still would be tax-exempt to the extent described above; they would only
be included in the calculation of whether a recipient's income exceeded the
established amounts.

If fund shares are sold at a loss after being held for six months or
less, the loss will be disallowed to the extent of any exempt-interest
dividends received on those shares, and any loss not disallowed will be
treated as long-term, instead of short-term, capital loss to the extent of
any capital gain distributions received thereon. Investors also should be
aware that if shares are purchased shortly before the record date for a
capital gain distribution, the shareholder will pay full price for the shares
and receive some portion of the price back as a taxable distribution.

If the fund invests in instruments that generate taxable interest
income, under the circumstances described in the Prospectus and in the
discussion of municipal market discount bonds below, the portion of any fund
dividend attributable to the interest earned thereon will be taxable to the
fund's shareholders as ordinary income to the extent of its earnings and
profits, and only the remaining portion will qualify as an exempt-interest
dividend. The respective portions will be determined by the "actual earned"
method, under which the portion of any dividend that qualifies as an
exempt-interest dividend may vary, depending on the relative proportions of
tax-exempt and taxable interest earned during the dividend period. Moreover,
if the fund realizes capital gain as a result of market transactions, any
distributions of the gain will be taxable to its shareholders.

74
<PAGE>

The fund may invest in municipal bonds that are purchased, generally
not on their original issue, with market discount (that is, at a price less
than the principal amount of the bond or, in the case of a bond that was
issued with original issue discount, a price less than the amount of the
issue price plus accrued original issue discount) ("municipal market discount
bonds"). If a bond's market discount is less that the product of (1) 0.25% of
the redemption price at maturity times (2) the number of complete years to
maturity after the fund acquired the bond, then no market discount is
considered to exist. Gain on the disposition of a municipal market discount
bond purchased by the fund after April 30, 1993 (other than a bond with a
fixed maturity date within one year from its issuance), generally is treated
as ordinary (taxable) income, rather than capital gain, to the extent of the
bond's accrued market discount at the time of disposition. Market discount on
such a bond generally is accrued ratably, on a daily basis, over the period
from the acquisition date to the date of maturity. In lieu of treating the
disposition gain as above, the fund may elect to include market discount in
its gross income currently, for each taxable year to which it is attributable.

OTHER INFORMATION

DELAWARE BUSINESS TRUST. The Trust is an entity of the type commonly
known as a Delaware business trust. Although Delaware law statutorily limits
the potential liabilities of a Delaware business trust's shareholders to the
same extent as it limits the potential liabilities of a Delaware corporation,
shareholders of a fund could, under certain conflicts of laws jurisprudence
in various states, be held personally liable for the obligations of the Trust
or a fund. However, the trust instrument of the Trust disclaims shareholder
liability for acts or obligations of the Trust or its series (the funds) and
requires that notice of such disclaimer be given in each written obligation
made or issued by the trustees or by any officers or officer by or on behalf
of the Trust, a series, the trustees or any of them in connection with the
Trust. The trust instrument provides for indemnification from a fund's
property for all losses and expenses of any fund shareholder held personally
liable for the obligations of the fund. Thus, the risk of a shareholder's
incurring financial loss on account of shareholder liability is limited to
circumstances in which a fund itself would be unable to meet its obligations,
a possibility that Mitchell Hutchins believes is remote and not material.
Upon payment of any liability incurred by a shareholder solely by reason of
being or having been a shareholder of a fund, the shareholder paying such
liability will be entitled to reimbursement from the general assets of the
fund. The trustees intend to conduct the operations of the funds in such a
way as to avoid, as far as possible, ultimate liability of the shareholders
for liabilities of the funds.

In the event any of the initial shares of a fund are redeemed during
the five-year amortization period, the redemption proceeds will be reduced by
a pro rata portion of any unamortized deferred organizational expenses in the
same proportion as the number of initial shares being redeemed bears to the
number of initial shares outstanding at the time of redemption.

CLASSES OF SHARES. A share of each class of a fund represents an
identical interest in that fund's investment portfolio and has the same
rights, privileges and preferences. However, each class may differ with
respect to sales charges, if any, distribution and/or service fees, if any,
other expenses allocable exclusively to each class, voting rights on matters
exclusively affecting that class, and its exchange privilege, if any. The
different sales charges and other expenses applicable to the different
classes of shares of the funds will affect the performance of those classes.
Each share of a fund is entitled to participate equally in dividends, other
distributions and the proceeds of any liquidation of that fund. However, due
to the differing expenses of the classes, dividends and liquidation proceeds
on Class A, B, C, P and Y shares will differ.

VOTING RIGHTS. Shareholders of each fund are entitled to one vote
for each full share held and fractional votes for fractional shares held.
Voting rights are not cumulative and, as a result, the holders of more than
50% of all the shares of the funds as a group may elect all of the trustees
of the Trust. The shares of each series of the Trust will be voted
separately, except when an aggregate vote of all the series of the Trust is
required by law.

The Trust does not hold annual meetings. Shareholders of record of
no less than two-thirds of the outstanding shares of the Trust may remove a
trustee through a declaration in writing or by vote cast in person or by
proxy at a meeting called for that purpose. A meeting will be called to vote
on the removal of a trustee at the written request of holders of 10% of the
outstanding shares of the Trust.

75
<PAGE>

CLASS-SPECIFIC EXPENSES. Each fund may determine to allocate certain
of its expenses (in addition to service and distribution fees) to the
specific classes of its shares to which those expenses are attributable. For
example, Class B and Class C shares bear higher transfer agency fees per
shareholder account than those borne by Class A, Class P or Class Y shares.
The higher fee is imposed due to the higher costs incurred by the transfer
agent in tracking shares subject to a contingent deferred sales charge
because, upon redemption, the duration of the shareholder's investment must
be determined in order to determine the applicable charge. Although the
transfer agency fee will differ on a per account basis as stated above, the
specific extent to which the transfer agency fees will differ between the
classes as a percentage of net assets is not certain, because the fee as a
percentage of net assets will be affected by the number of shareholder
accounts in each class and the relative amounts of net assets in each class.

PRIOR NAMES. Prior to December 1, 1997, the Trust's name was
"Managed Accounts Services Portfolio Trust."

CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT.
State Street Bank and Trust Company, located at 1776 Heritage Drive, North
Quincy, Massachusetts 02171, serves as custodian and recordkeeping agent for
each fund and employs foreign sub-custodians approved by the board in
accordance with applicable requirements under the Investment Company Act to
provide custody of the funds' foreign assets. PFPC, a subsidiary of PNC Bank,
N.A., serves as each fund's transfer and dividend disbursing agent. It is
located at 400 Bellevue Parkway, Wilmington, DE 19809.

COUNSEL. The law firm Willkie Farr & Gallagher, 787 Seventh Avenue,
New York, New York serves as counsel to the Trust. Willkie Farr & Gallagher
also acts as counsel to PaineWebber and Mitchell Hutchins in connection with
other matters.

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

FINANCIAL STATEMENTS

The Trust's Annual Report to Shareholders for its fiscal year ended
July 31, 2000 is a separate document supplied with this SAI, and the
financial statements, accompanying notes and report of independent auditors
appearing therein are incorporated by this reference into the SAI.

76
<PAGE>

APPENDIX

RATINGS INFORMATION

DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS

Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt 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 payment 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 applies numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through Caa. The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category,
the modifier 2 indicates a mid-range ranking, and the modifier 3 indicates a
ranking in the lower end of that generic rating category.

DESCRIPTION OF S&P CORPORATE DEBT RATINGS

AAA. An obligation rated AAA has the highest rating assigned by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its
financial commitment on the obligation is very strong; A. An obligation rated A
is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than obligations in higher rated categories. However,
the obligor's capacity to meet its financial commitment on the obligation is
still strong; BBB. An obligation rated BBB exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation; BB, B, CCC, CC, C. Obligations rated BB, B, CCC,
CC and C are regarded as having significant speculative characteristics. BB
indicates the least degree of speculation and C the highest. While such
obligations will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions; BB. An obligation rated BB is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation; B. An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation; CCC. An obligation rated CCC is

A-1
<PAGE>

currently vulnerable to nonpayment and is dependent upon favorable business,
financial and economic conditions for the obligor to meet its financial
commitment on the obligation. In the event of adverse business, financial, or
economic conditions, the obligor is not likely to have the capacity to meet
its financial commitment on the obligation; CC. An obligation rated CC is
currently highly vulnerable to nonpayment; C. The C rating may be used to
cover a situation where a bankruptcy petition has been filed or similar
action has been taken, but payments on this obligation are being continued;
D. An obligation rated D is in payment default. The D rating category is used
when payments on an obligation 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 or the taking of a similar
action if payments on an obligation are jeopardized.

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

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. This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility
of expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or
commodities; obligations exposed to severe prepayment risk--such as
interest-only or principal-only mortgage securities; and obligations with
unusually risky interest terms, such as inverse floaters.

DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS

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

PRIME-2. Issuers assigned this rating have a strong ability for
repayment of senior short-term debt 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.

PRIME-3. Issuers assigned this rating have an acceptable capacity
for repayment of senior short-term obligations. The effect of industry
characteristics and market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.

NOT PRIME. Issuers assigned this rating do not fall within any of
the Prime rating categories.

DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS

A-2
<PAGE>

the obligation. C. A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the
obligation. D. A short-term obligation rated D is in payment default. The D
rating category is used when payments on an obligation 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 or the
taking of a similar action if payments on an obligation are jeopardized.

DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS

Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt 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 payment 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 applies numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through Caa. The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category,
the modifier 2 indicates a mid-range ranking, and the modifier 3 indicates a
ranking in the lower end of that generic rating category.

DESCRIPTION OF S&P MUNICIPAL DEBT RATINGS

AAA. An obligation rated AAA has the highest rating assigned by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its
financial commitment on the obligation is very strong; A. An obligation rated
A is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in higher rated
categories. However, the obligor's capacity to meet its financial commitment
on the obligation is still strong; BBB. An obligation rated BBB exhibits
adequate protection parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation; BB, B, CCC, CC,
C, D. Obligations rated BB, B, CCC, CC and C are regarded as having
significant speculative characteristics. BB indicates the least degree of
speculation and C the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions; BB. An obligation
rated BB is less vulnerable to nonpayment than other speculative issues.
However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation; B. An
obligation rated B is

A-3
<PAGE>

more vulnerable to nonpayment than obligations rated BB, but the obligor
currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment
on the obligation; CCC. An obligation rated CCC is currently vulnerable to
nonpayment and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the
obligation. In the event of adverse business, financial, or economic
conditions, the obligor is not likely to have the capacity to meet its
financial commitment on the obligation; CC. An obligation rated CC is
currently highly vulnerable to nonpayment; C. The C rating may be used to
cover a situation where a bankruptcy petition has been filed or similar
action has been taken, but payments on this obligation are being continued;
D. An obligation rated D is in payment default. The D rating category is used
when payments on an obligation 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 or the taking of a similar
action if payments on an obligation are jeopardized.

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

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.

DESCRIPTION OF MOODY'S RATINGS OF SHORT-TERM OBLIGATIONS

There are three categories for short-term obligations that define an
investment grade situation. These are designated Moody's Investment Grade as
MIG 1 (best quality) through MIG-3. Short-term obligations of speculative
quality are designated SG.

In the case of variable rate demand obligations (VRDOs), a two-component
rating is assigned. The first element represents an evaluation of the degree
of risk associated with scheduled principal and interest payments, and the
other represents an evaluation of the degree of risk associated with the
demand feature. The short-term rating assigned to the demand feature of a
VRDO is designated as VMIG. When either the long- or short-term aspect of a
VRDO is not rated, that piece is designated NR, e.g. Aaa/NR or NR/VMIG 1.

MIG ratings terminate at the retirement of the obligation, while a VMIG
rating expiration will be a function of each issue's specific structural or
credit features.

MIG-1/VMIG-1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing. MIG-2/VMIG-2.
This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group. MIG-3/VMIG-3. This
designation denotes favorable quality. Liquidity and cash flow protection may
be narrow and market access for refinancing is likely to be less well
established. SG. This designation denotes speculative quality. Debt
Instruments in this category lack margins of protection.

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

A S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making the assessment.

--Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).

--Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).

SP-1. Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation. SP-2.
Satisfactory capacity to pay principal and interest with some vulnerability to

A-4
<PAGE>

adverse financial and economic changes over the term of the notes. SP-3.
Speculative capacity to pay principal and interest.

DESCRIPTION OF SHORT-TERM DEBT COMMERCIAL PAPER RATINGS

Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.

Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:

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

PRIME-2. Issuers (or supporting institutions) assigned this
rating have a strong ability for repayment of senior short-term debt
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.

PRIME-3. Issuers (or supporting institutions) assigned this
rating have an acceptable capacity for repayment of senior short-term
obligations. The effect of industry characteristics and market composition
may be more pronounced. Variability in earnings and profitability may result
in changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.

NOT PRIME. Issuers assigned this rating do not fall within any of
the Prime rating categories.

Commercial paper rated by S&P have the following characteristics:

A-1. A short-term obligation rated A-1 is rated in the highest
category by S&P. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity
to meet its financial commitment on these obligations is extremely strong.
A-2. A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory. A-3. A
short-term obligation rated A-3 exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation. B. A short-term obligation rated B is regarded
as having significant speculative characteristics. The obligor currently has
the capacity to meet its financial commitment on the obligation; however, it
faces major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitments on the obligation. C. A
short-term obligation rated C is currently vulnerable to nonpayment and is
dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment on the obligation. D. A short-term
obligation rated D is in payment default. The D rating category is used when
payments on an obligation 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 or the taking of a similar action if payments on an
obligation are jeopardized.

A-5
<PAGE>

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR
REFERRED TO IN THE PROSPECTUS AND THIS STATEMENT OF
ADDITIONAL INFORMATION. THE FUNDS AND THEIR DISTRIBUTOR
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THE PROSPECTUS AND THIS
STATEMENT OF ADDITIONAL INFORMATION ARE NOT AN OFFER TO
SELL SHARES OF THE FUNDS IN ANY JURISDICTION WHERE THE
FUNDS OR THEIR DISTRIBUTOR MAY NOT LAWFULLY SELL THOSE
SHARES.
------------

PAINEWEBBER PACE
SELECT ADVISORS TRUST

-------------------------------------
Preliminary
Statement of Additional Information

November_____, 2000
-------------------------------------

<PAGE>

PART C. OTHER INFORMATION

Item 15. INDEMNIFICATION

Article IX, Section 2 of the Trust Instrument of PaineWebber PACE Select
Advisors Trust ("Trust Instrument") provides that the Registrant will indemnify
its trustees, officers, employees, investment managers and administrators and
investment advisers to the fullest extent permitted by law against claims and
expenses asserted against or incurred by them by virtue of being or having been
a trustee, officer, employee, investment manager and administrator or investment
adviser; provided that (i) no such person shall be indemnified where there has
been an adjudication or other determination, as described in Article IX, that
such person is liable to the Registrant or its shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office, or did not act in good faith in
the reasonable belief that his or her action was in the best interest of the
Registrant, or (ii) no such person shall be indemnified where there has been a
settlement, unless there has been a determination that such person did not
engage in willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office; such determination
shall be made (A) by the court or other body approving the Settlement, (B) by
the vote of at least a majority of those trustees who are neither Interested
Persons of the trust nor are parties to the proceeding based upon a review of
readily available facts (as opposed to a full trial-type inquiry), or (C) by
written opinion of independent legal counsel based upon a review of readily
available facts (as opposed to a full trial-type inquiry).

"Interested Person" has the meaning provided in the Investment Company Act
of 1940, as amended from time to time. Article IX, Section 2(c) of the Trust
Instrument also provides that the Registrant may maintain insurance policies
covering such rights of indemnification.

Article IX, Section 1 of the Trust Instrument provides that the trustees
and officers of the Registrant (i) shall not be personally liable to any person
contracting with, or having a claim against, the Trust, and (ii) shall not be
liable for neglect or wrongdoing by them or any officer, agent, employee or
investment adviser of the Registrant, provided they have exercised reasonable
care and have acted under the reasonable belief that their actions are in the
best interest of the Registrant.

Article X, Section 2 of the Trust Instrument provides that, subject to the
provisions of Article IX, the trustees shall not be liable for (i) errors of
judgment or mistakes of fact or law or (ii) any act or omission made in
accordance with advice of counsel or other experts, or (iii) failure to follow
such advice, with respect to the meaning and operation of the Trust Instrument.

Registrant undertakes to carry out all indemnification provisions of its
Trust Instrument and By-laws in accordance with Investment Company Act Release
No. 11330 (September 4, 1980) and successor releases.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be provided to trustees, officers and controlling
persons of the Trust, pursuant to the foregoing provisions or otherwise, the
Trust has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Trust of expenses
incurred or paid by a trustee, officer or controlling person of the Trust in
connection with the successful defense of any action, suit or proceeding or
payment pursuant to any

C-1
<PAGE>

insurance policy) is asserted against the Trust by such trustee, officer or
controlling person in connection with the securities being registered, the Trust
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

Item 16. EXHIBITS

(1) (a) Certificate of Business Trust effective September 9, 1994 (1)

(b) Amended and Restated Trust Instrument (filed herewith)

(2) Amended and Restated By-Laws (filed herewith)

(3) Copies of any voting trust agreement - none

(4) A copy of the Agreement and Plan of Reorganization and Termination
is included in the Combined Proxy Statement/Prospectus as Appendix A
thereto and incorporated by reference.

(5) Instruments defining the rights of holders of Registrant's shares
of beneficial interest (2)

(6) (a) Management Agreement (3)

(b) Sub-Advisory Agreement with Pacific Investment Management
Company LLC with respect to PACE Government Securities Fixed
Income Investments dated as of October 10, 2000 (filed
herewith)

(c) Sub-Advisory Agreement with Metropolitan West Asset Management
LLC with respect to PACE Intermediate Fixed Income Investments
dated as of October 10, 2000 (filed herewith)

(d) Sub-Advisory Agreement with Pacific Investment Management
Company LLC with respect to PACE Strategic Fixed Income
Investments dated as of May 5, 2000 (filed herewith)

(e) Sub-Advisory Agreement with Standish, Ayer & Wood, Inc. with
respect to PACE Municipal Fixed Income Investments dated as of
October 10, 2000 (filed herewith)

(f) Sub-Advisory Agreement with Rogge Global Partners plc with
respect to PACE Global Fixed Income Investments dated as of
October 10, 2000 (filed herewith)

(g) Sub-Advisory Agreement with Fischer Francis Trees & Watts,
Inc. with respect to PACE Global Fixed Income Investments
dated as of October 10, 2000 (filed herewith)

(h) Sub-Advisory Agreement with State Street Global Advisors with
respect to PACE Large Company Value Equity Investments dated
as of October 10, 2000 (filed herewith)

(i) Sub-Advisory Agreement with Institutional Capital Corporation
with respect to PACE Large Company Value Equity Investments
dated as of July 1, 2000 (filed herewith)

(j) Sub-Advisory Agreement with Westwood Management Corporation
with respect to PACE Large Company Value Equity Investments
dated as of July 1, 2000 (filed herewith)

C-2
<PAGE>

(k) Sub-Advisory Agreement with Alliance Capital Management L.P.
with respect to PACE Large Company Growth Equity Investments
dated as of October 10, 2000 (filed herewith)

(l) Sub-Advisory Agreement with State Street Global Advisors with
respect to PACE Large Company Growth Equity Investments dated
as of October 10, 2000 (filed herewith)

(m) Sub-Advisory Agreement with Ariel Capital Management, Inc.
with respect to PACE Small/Medium Company Value Equity
Investments dated as of October 4, 1999 (1)

(n) Sub-Advisory Agreement with ICM Asset Management, Inc. with
respect to PACE Small/Medium Company Value Equity Investments
dated as of October 10, 2000 (filed herewith)

(o) Sub-Advisory Agreement with Delaware Management Company with
respect to PACE Small/Medium Company Growth Equity Investments
dated as of December 16, 1996 (4)

(p) Form of Sub-Advisory Agreement with Martin Currie Inc. with
respect to PACE International Equity Investments dated as of
October 10, 2000 (filed herewith)

(q) Sub-Advisory Agreement with Schroder Investment Management
North America Inc. with respect to PACE International Emerging
Markets Equity Investments dated as of June 15, 1995 (3)

(7) (a) Distribution Contract (filed herewith)

(b) Dealer Agreement (filed herewith)

(8) Bonus, profit sharing or pension plans - none

(9) Custodian Agreement (1)

(10) Plan pursuant to Rule 12b-1

(a) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class A shares (filed herewith)

(b) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class B shares (filed herewith)

(d) Plan pursuant to Rule 18f-3 (filed herewith)

(11) Opinions and consents of Counsel on legality of shares (filed
herewith)

(12) Opinion and consent of Counsel on tax matters (to be filed)

(13) Transfer Agency Agreement (5)

(14) Auditors' consent (filed herewith)

(15) Financial Statements omitted from prospectus - none

(16) Powers of Attorney for Ms. Alexander and Messrs. Beaubien, Bewkes,
Hewitt, Janklow, Storms, White and Woodward (6)

(17) Additional Exhibits - none

C-3
<PAGE>

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

(1) Incorporated by reference from Post-Effective Amendment No. 8 to
registration statement, SEC File No. 33-87254, filed December 1, 1999.

(2) Incorporated by reference from Articles IV, VI, IX and X of Registrant's
Trust Instrument and from Articles V and IX of Registrant's By-Laws.

(3) Incorporated by reference from Post-Effective Amendment No. 1 to
registration statement, SEC File No. 33-87254, filed February 23, 1996.

(4) Incorporated by reference from Post-Effective Amendment No. 4 to
registration statement, SEC File No. 33-87254, filed November 13, 1997.

(5) Incorporated by reference from Post-Effective Amendment No. 2 to
registration statement, SEC File No. 33-87254, filed October 16, 1996.

(6) Incorporated by reference from Post-Effective Amendment No. 9 to
registration statement, SEC File No. 33-87254, filed September 29, 2000.

Item 17. UNDERTAKINGS

(1) The undersigned Registrant agrees that prior to any public
re-offering of the securities registered through the use of a prospectus which
is a part of this Registration Statement by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c) of the Securities Act of
1933, the re-offering prospectus will contain the information called for by the
applicable registration form for re-offerings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.

(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new Registration Statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.

C-4
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this 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 25th day of October, 2000.

PAINEWEBBER PACE SELECT ADVISORS TRUST

By: /s/ Dianne E. O'Donnell
---------------------------------------
Dianne E. O'Donnell
Vice President and Assistant Secretary

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

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Margo N. Alexander President and Trustee October 25, 2000
----------------------------- (Chief Executive Officer)
Margo N. Alexander*

/s/ David J. Beaubien Trustee and Chairman October 25, 2000
----------------------------- of the Board of Trustees
David J. Beaubien*

/s/ E. Garrett Bewkes, Jr. Trustee October 25, 2000
-----------------------------
E. Garrett Bewkes, Jr.*

/s/ William W. Hewitt, Jr. Trustee October 25, 2000
-----------------------------
William W. Hewitt, Jr.*

/s/ Morton L. Janklow Trustee October 25, 2000
-----------------------------
Morton L. Janklow*

/s/ Brian M. Storms Trustee October 25, 2000
-----------------------------
Brian M. Storms*

/s/ William D. White Trustee October 25, 2000
-----------------------------
William D. White*

/s/ M. Cabell Woodward, Jr. Trustee October 25, 2000
-----------------------------
Cabell Woodward, Jr.*

/s/ Paul H. Schubert Vice President and Treasurer (Chief October 25, 2000
----------------------------- Financial and Accounting Officer)
Paul H. Schubert
</TABLE>

* Signature affixed by Elinor W. Gammon pursuant to power of attorney dated
September 12, 2000 and incorporated by reference from Exhibit 16 to
Post-Effective Amendment No. 9 to the Registration Statement on Form N-1A
of PaineWebber PACE Select Advisors Trust, SEC File 33-87254, filed
September 29, 2000.
<PAGE>

PAINEWEBBER PACE SELECT ADVISORS TRUST

EXHIBIT INDEX

Exhibit
Number
-------

(1) (a) Certificate of Business Trust effective September 9, 1994 (1)

(b) Amended and Restated Trust Instrument (filed herewith)

(2) Amended and Restated By-Laws (filed herewith)

(3) Copies of any voting trust agreement - none

(4) A copy of the Agreement and Plan of Reorganization and Termination
is included in the Combined Proxy Statement/Prospectus as
Appendix A thereto and incorporated by reference.

(5) Instruments defining the rights of holders of Registrant's shares
of beneficial interest (2)

(6) (a) Management Agreement (3)

(b) Sub-Advisory Agreement with Pacific Investment Management
Company LLC with respect to PACE Government Securities Fixed
Income Investments dated as of October 10, 2000 (filed
herewith)

(c) Sub-Advisory Agreement with Metropolitan West Asset
Management LLC with respect to PACE Intermediate Fixed Income
Investments dated as of October 10, 2000 (filed herewith)

(d) Sub-Advisory Agreement with Pacific Investment Management
Company LLC with respect to PACE Strategic Fixed Income
Investments dated as of May 5, 2000 (filed herewith)

(e) Sub-Advisory Agreement with Standish, Ayer & Wood, Inc. with
respect to PACE Municipal Fixed Income Investments dated as
of October 10, 2000 (filed herewith)

(f) Sub-Advisory Agreement with Rogge Global Partners plc with
respect to PACE Global Fixed Income Investments dated as of
October 10, 2000 (filed herewith)

(g) Sub-Advisory Agreement with Fischer Francis Trees & Watts,
Inc. with respect to PACE Global Fixed Income Investments
dated as of October 10, 2000 (filed herewith)

(h) Sub-Advisory Agreement with State Street Global Advisors with
respect to PACE Large Company Value Equity Investments dated
as of October 10, 2000 (filed herewith)

(i) Sub-Advisory Agreement with Institutional Capital Corporation
with respect to PACE Large Company Value Equity Investments
dated as of July 1, 2000 (filed herewith)

(j) Sub-Advisory Agreement with Westwood Management Corporation
with respect to PACE Large Company Value Equity Investments
dated as of July 1, 2000 (filed herewith)

<PAGE>

(k) Sub-Advisory Agreement with Alliance Capital Management L.P.
with respect to PACE Large Company Growth Equity Investments
dated as of October 10, 2000 (filed herewith)

(l) Sub-Advisory Agreement with State Street Global Advisors with
respect to PACE Large Company Growth Equity Investments dated
as of October 10, 2000 (filed herewith)

(m) Sub-Advisory Agreement with Ariel Capital Management, Inc.
with respect to PACE Small/Medium Company Value Equity
Investments dated as of October 4, 1999 (1)

(n) Sub-Advisory Agreement with ICM Asset Management, Inc. with
respect to PACE Small/Medium Company Value Equity Investments
dated as of October 10, 2000 (filed herewith)

(o) Sub-Advisory Agreement with Delaware Management Company with
respect to PACE Small/Medium Company Growth Equity
Investments dated as of December 16, 1996 (4)

(p) Form of Sub-Advisory Agreement with Martin Currie Inc. with
respect to PACE International Equity Investments dated as of
October 10, 2000 (filed herewith)

(q) Sub-Advisory Agreement with Schroder Investment Management
North America Inc. with respect to PACE International
Emerging Markets Equity Investments dated as of June 15,
1995 (3)

(7) (a) Distribution Contract (filed herewith)

(b) Dealer Agreement (filed herewith)

(8) Bonus, profit sharing or pension plans - none

(9) Custodian Agreement (1)

(10) Plan pursuant to Rule 12b-1

(a) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class A shares (filed herewith)

(b) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class B shares (filed herewith)

(d) Plan pursuant to Rule 18f-3 (filed herewith)

(11) Opinions and consents of Counsel on legality of shares (filed
herewith)

(12) Opinion and consent of Counsel on tax matters (to be filed)

(13) Transfer Agency Agreement (5)

(14) Auditors' consent (filed herewith)

(15) Financial Statements omitted from prospectus - none

(16) Powers of Attorney for Ms. Alexander and Messrs. Beaubien, Bewkes,
Hewitt, Janklow, Storms, White and Woodward (6)

(17) Additional Exhibits - none

<PAGE>

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

(1) Incorporated by reference from Post-Effective Amendment No. 8 to
registration statement, SEC File No. 33-87254, filed December 1, 1999.

(2) Incorporated by reference from Articles IV, VI, IX and X of Registrant's
Trust Instrument and from Articles V and IX of Registrant's By-Laws.

(3) Incorporated by reference from Post-Effective Amendment No. 1 to
registration statement, SEC File No. 33-87254, filed February 23, 1996.

(4) Incorporated by reference from Post-Effective Amendment No. 4 to
registration statement, SEC File No. 33-87254, filed November 13, 1997.

(5) Incorporated by reference from Post-Effective Amendment No. 2 to
registration statement, SEC File No. 33-87254, filed October 16, 1996.

(6) Incorporated by reference from Post-Effective Amendment No. 9 to
registration statement, SEC File No. 33-87254, filed September 29, 2000.