MITCHELL HUTCHINS PORTFOLIOS, 497, 1998-10-09

MITCHELL HUTCHINS PORTFOLIOS
497, 1998-10-09

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MITCHELL HUTCHINS PORTFOLIOS

1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
PROSPECTUS -- OCTOBER 1, 1998

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The Mitchell Hutchins Portfolios ("Portfolios") seek
to achieve their investment objectives by investing in
a number of other PaineWebber mutual funds.

MITCHELL HUTCHINS AGGRESSIVE PORTFOLIO seeks
long-term growth of capital by investing the
majority of its assets in equity mutual funds.

MITCHELL HUTCHINS MODERATE PORTFOLIO seeks total
return by investing its assets in a combination of
equity and bond mutual funds.

MITCHELL HUTCHINS CONSERVATIVE PORTFOLIO seeks
income and, secondarily, growth of capital by
investing the majority of its assets in bond
mutual funds.

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

A Statement of Additional Information dated October 1,
1998 has been filed with the Securities and Exchange
Commission ("SEC" or "Commission") and is legally part
of this Prospectus. The Statement of Additional
Information can be obtained without charge, and
further inquiries can be made, by contacting an
individual Portfolio, your investment executive at
PaineWebber or one of its correspondent firms or by
calling toll-free 1-800-647-1568. In addition, the
Commission maintains a website (http://www.sec.gov)
that contains the Statement of Additional Information,
material incorporated by reference, and other
information regarding registrants that file
electronically with the Commission.

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

INVESTORS SHOULD RELY ONLY ON THE INFORMATION
CONTAINED OR REFERRED TO IN THIS PROSPECTUS. THE
PORTFOLIOS AND THEIR DISTRIBUTOR HAVE NOT AUTHORIZED
ANYONE TO PROVIDE INVESTORS WITH INFORMATION THAT IS
DIFFERENT. THE PROSPECTUS IS NOT AN OFFER TO SELL
SHARES OF THE PORTFOLIOS IN ANY JURISDICTION WHERE THE
PORTFOLIOS OR THEIR DISTRIBUTOR MAY NOT LAWFULLY SELL
THOSE SHARES.

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

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Prospectus Page 1
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio

TABLE OF CONTENTS

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<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
The Portfolios at a Glance............................................................ 3

Expense Table......................................................................... 5

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

Investment Objectives & Policies...................................................... 13

Investment Philosophy & Process....................................................... 16

Performance........................................................................... 17

Investments of the Portfolios and the Underlying Funds................................ 19

Flexible Pricing(SM).................................................................. 26

How To Buy Shares..................................................................... 30

How To Sell Shares.................................................................... 31

Other Services........................................................................ 32

Management............................................................................ 32

Determining the Shares' Net Asset Value............................................... 34

Dividends & Taxes..................................................................... 35

General Information................................................................... 36
</TABLE>

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Prospectus Page 2
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio

THE PORTFOLIOS AT A GLANCE

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Mitchell Hutchins Portfolios are managed so that each Portfolio can serve as a
core part of a larger investment program. The Portfolios are intended as a
simple and efficient approach to help investors meet retirement and other
long-term goals. Although the Portfolios may make adjustments in response to
market conditions, the Portfolios are not market timing vehicles.

Each Portfolio invests in a number of PaineWebber mutual funds ("Underlying
Funds") suited to that Portfolio's particular investment objective. Mitchell
Hutchins Asset Management Inc. ("Mitchell Hutchins"), the Portfolios' investment
adviser, allocates each Portfolio's assets among Underlying Funds using
fundamental and quantitative analysis. Mitchell Hutchins will consider
reallocating each Portfolio's investments at least quarterly, but may change
allocations more frequently if market conditions warrant. Any reallocations of
investments would be within the established investment ranges. As a result,
under normal conditions, there should be no sudden large-scale changes in the
allocation of a Portfolio's investments among Underlying Funds.

When selling shares, investors should be aware that they may receive more or
less for their shares than they originally paid for them. As with any mutual
fund, there is no assurance that the Portfolios will achieve their goals.

MITCHELL HUTCHINS AGGRESSIVE PORTFOLIO

GOAL: To increase the value of an investment by investing the majority of its
assets in long-term, growth-oriented equity mutual funds.

INVESTMENT OBJECTIVE: Long-term growth of capital.

WHO SHOULD INVEST: Investors in their accumulation years, who can accept greater
volatility in the equity market in return for potentially higher returns.

MITCHELL HUTCHINS MODERATE PORTFOLIO

GOAL: To increase the value of an investment by investing its assets in a
combination of long-term, growth-oriented equity and income-producing bond
mutual funds.

INVESTMENT OBJECTIVE: Total return.

WHO SHOULD INVEST: Investors who seek growth of capital in conjunction with
income.

MITCHELL HUTCHINS CONSERVATIVE PORTFOLIO

GOAL: To provide current income by investing the majority of its assets in
income-producing bond mutual funds and, secondarily, to increase the value of an
investment by providing some growth of capital.

INVESTMENT OBJECTIVE: Income and, secondarily, growth of capital.

WHO SHOULD INVEST: Investors who need current income from their investments but
want to offset some of the effects of inflation by seeking growth of capital as
a secondary goal.

RISKS

The performance of a Portfolio will directly reflect the investment performance
of the Underlying Funds it holds. As a result, the Portfolios' ability to meet
their investment objectives depends both on the allocation of their assets among
the various Underlying Funds and the ability of those Underlying Funds to meet
their investment objectives. An investment in a Portfolio is subject to all the
risks of an investment directly in the Underlying Funds it holds. These risks
are discussed under "Investments of the Portfolios and the Underlying Funds,"
and some of the more significant risks are summarized below.

All the Portfolios hold Underlying Funds that invest primarily in equity
securities, although the specific Underlying Funds and the percentage of a
Portfolio's assets invested in each Underlying Fund varies. Equity securities
historically have shown greater growth potential than other types of securities,
but they have also shown greater volatility.

All the Portfolios hold Underlying Funds that invest primarily in bonds,
although the specific Underlying Funds and the percentage of a Portfolio's
assets invested in each Underlying Fund varies. Bonds are subject to interest
rate and credit risk. Interest rate risk is the risk that interest rates will
rise and bond prices will fall, lowering the value of the Underlying Fund's
investments. Credit risk is the risk that the issuer or guarantor may be unable
to pay interest or repay principal on the bond. Some Underlying Funds may invest
in bonds rated below investment grade, which are subject to greater risks of
default or price fluctuation than investment grade bonds and are considered
predominantly speculative.

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Prospectus Page 3
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio

THE PORTFOLIOS AT A GLANCE
(Continued)

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Some Underlying Funds are subject to the special risks of investing in foreign
equity securities or foreign bonds, which include possible adverse currency
fluctuations and political, social and economic developments abroad and
differing characteristics of foreign economies and markets. These risks are
greater with respect to securities of foreign issuers located in emerging
markets.

Each Underlying Fund (other than PaineWebber Cashfund) may use derivatives, such
as options, futures contracts, foreign currency contracts, swaps and similar
instruments, in its investment activities. Each type of derivative instrument
presents its own special risks.

Investors may lose money by investing in a Portfolio; investments in the
Portfolios are not guaranteed.

MANAGEMENT

Mitchell Hutchins, a wholly-owned asset management subsidiary of PaineWebber
Incorporated ("PaineWebber"), is the investment adviser and administrator of the
Portfolios.

Mitchell Hutchins also is the investment adviser and administrator of the
Underlying Funds other than PaineWebber Cashfund. PaineWebber serves as
investment adviser and administrator for PaineWebber Cashfund and has appointed
Mitchell Hutchins to serve as its sub-adviser and sub-administrator. Mitchell
Hutchins has appointed sub-advisers for certain other Underlying Funds.

MINIMUM INVESTMENT

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

HOW TO PURCHASE SHARES OF THE PORTFOLIOS

Investors may choose among these classes of shares:

CLASS A SHARES

The price is the net asset value plus the initial sales charge; the maximum
sales charge is 4.5% (4% for Conservative Portfolio) of the public offering
price. Although investors pay an initial sales charge when they buy Class A
shares, the ongoing expenses for this class are lower than the ongoing expenses
for Class B and Class C shares.

CLASS B SHARES

The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class B shares. As a result, 100% of their purchase is immediately
invested. However, Class B shares have higher ongoing expenses than Class A
shares. Depending upon how long they own the shares, investors may have to pay a
sales charge when they sell Class B shares. This sales charge is called a
"contingent deferred sales charge" and applies when investors sell their Class B
shares within six years after purchase. After six years, Class B shares convert
to Class A shares, which have lower ongoing expenses and no contingent deferred
sales charge.

CLASS C SHARES

The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class C shares. As a result, 100% of their purchase is immediately
invested. However, Class C shares have higher ongoing expenses than Class A
shares. A contingent deferred sales charge of 1% (0.75% for Conservative
Portfolio) is charged on shares sold within one year of purchase. Class C shares
never convert to another class of shares.

CLASS Y SHARES

Class Y shares are offered only to limited groups of investors. The price is the
net asset value. Investors do not pay an initial sales charge when they buy
Class Y shares. As a result, 100% of their purchase is immediately invested.
Investors also do not pay a contingent deferred sales charge when they sell
Class Y shares. Class Y shares have lower ongoing expenses than any other class
of shares.

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Prospectus Page 4
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio

EXPENSE TABLE

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The following tables are intended to assist investors in understanding the
expenses associated with investing in each class of shares of the Portfolios.
Investors should note that they may invest directly in the Underlying Funds and
thereby avoid incurring the fees and other expenses paid by each Portfolio.

<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B CLASS C CLASS Y
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Maximum Sales Charge on Purchases of Shares (as a % of
offering price)............................................. 4.50%(1) None None None
Sales Charge on Reinvested Dividends (as a % of offering
price)...................................................... None None None None
Maximum Contingent Deferred Sales Charge (as a % of offering
price or net asset value at the time of sale, whichever is
less)....................................................... None 5% 1%(2) None

ANNUAL FUND OPERATING EXPENSES
(as a % of average net assets)(3)
AGGRESSIVE PORTFOLIO
Management Fees (after waivers)............................... None None None None
12b-1 Fees.................................................... 0.25 1.00 1.00 None
Other Expenses (after reimbursements)......................... None None None None
----- ----- ----- -----
Total Operating Expenses...................................... 0.25% 1.00% 1.00% None
----- ----- ----- -----
----- ----- ----- -----
MODERATE PORTFOLIO
Management Fees (after waivers)............................... None None None None
12b-1 Fees.................................................... 0.25 1.00 1.00 None
Other Expenses (after reimbursements)......................... None None None None
----- ----- ----- -----
Total Operating Expenses...................................... 0.25% 1.00% 1.00% None
----- ----- ----- -----
----- ----- ----- -----
CONSERVATIVE PORTFOLIO
Management Fees (after waivers)............................... None None None None
12b-1 Fees.................................................... 0.25 1.00 0.75 None
Other Expenses (after reimbursements)......................... None None None None
----- ----- ----- -----
Total Operating Expenses...................................... 0.25% 1.00% 0.75% None
----- ----- ----- -----
----- ----- ----- -----
</TABLE>

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(1) 4.00% for Conservative Portfolio

(2) 0.75% for Conservative Portfolio

(3) Mitchell Hutchins intends to waive its 0.35% Management Fees and to
reimburse expenses for each Portfolio (to the extent that those expenses are
not paid by the Underlying Funds pursuant to an SEC exemptive order), so
that the Total Operating Expenses for each class of each Portfolio do not
exceed the amounts shown in the table for the fiscal year ending May 31,
1999. Although Mitchell Hutchins currently expects to continue such waivers
and expense reimbursements after May 31, 1999, it may discontinue or change
them at any time after that date. The expense reimbursements by Mitchell
Hutchins do not include 12b-1 fees or extraordinary expenses.

If fee waivers and expense reimbursement were not in effect, 12b-1 fees
would remain the same; annualized Management Fees, estimated Other Expenses
and Total Operating Expenses would be:

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
AGGRESSIVE PORTFOLIO:
Management Fees........................................................ 0.35% 0.35% 0.35% 0.35%
Other Expenses (estimated)............................................. 3.38% 3.45% 3.20% 3.41%
Total Operating Expenses............................................... 3.98% 4.80% 4.55% 3.76%
</TABLE>

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Prospectus Page 5
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio

EXPENSE TABLE
(Continued)

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<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
MODERATE PORTFOLIO:
Management Fees........................................................ 0.35% 0.35% 0.35% 0.35%
Other Expenses (estimated)............................................. 2.18% 2.22% 1.94% 2.24%
Total Operating Expenses............................................... 2.78% 3.57% 3.29% 2.59%

CONSERVATIVE PORTFOLIO:
Management Fees........................................................ 0.35% 0.35% 0.35% 0.35%
Other Expenses (estimated)............................................. 5.83% 5.78% 5.89% 5.84%
Total Operating Expenses............................................... 6.43% 7.13% 6.99% 6.19%
</TABLE>

CLASS A SHARES: Sales charge waivers and reduced sales charges are
available. Purchases of $1 million or more are not subject to an initial
sales charge. However, if these shares are sold by the shareholder within
one year after purchase, a contingent deferred sales charge of 1% is imposed
on the offering price or the net asset value of the shares at the time of
sale, whichever is less.
CLASS B SHARES: Sales charge waivers are available. The maximum 5%
contingent deferred sales charge applies to sales of shares during the first
year after purchase. The charge generally declines by 1% annually, reaching
zero after six years.
CLASS C SHARES: If shares are sold by the shareholder within one year after
purchase, a contingent deferred sales charge of 1% (0.75% for Conservative
Portfolio) is imposed on the offering price or the net asset value of the
shares at the time of sale, whichever is less.
CLASS Y SHARES: No initial or contingent deferred sales charge is imposed,
nor are Class Y shares subject to 12b-1 distribution or service fees. Class
Y shares may be purchased by participants in certain investment programs
that are sponsored by PaineWebber and that may invest in PaineWebber mutual
funds ("PW Programs"), when Class Y shares are purchased through that PW
Program. Participation in a PW Program is subject to an advisory fee at an
effective maximum annual rate of 1.5% of assets held through that PW
Program. This account charge is not included in the table because investors
who are not PW Program participants also are permitted to purchase Class Y
shares.

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

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
12b-1 service fees............................................................ 0.25% 0.25% 0.25% None
12b-1 distribution fees....................................................... 0.00% 0.75% 0.75%(1) None
</TABLE>

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(1) 0.50% for Conservative Portfolio

For more information, see "Management" and "Flexible Pricing-SM-."

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Prospectus Page 6
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio

EXPENSE TABLE
(Continued)

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The following table shows the expense ratios applicable to Class Y shareholders
of each Underlying Fund, based on operating expenses for its last fiscal year
ended before August 31, 1998 (except for High Income Fund and Investment Grade
Income Fund, for which the expense ratios are based on the last reporting period
ended May 31, 1998, because no Class Y shares were outstanding during their last
fiscal years). The Portfolios invest only in Class Y shares of the Underlying
Funds and, accordingly, pay no sales load or 12b-1 service or distribution fees
in connection with these investments. The Portfolios, however, indirectly bear
their pro rata share of the operating expenses applicable to Class Y
shareholders of the Underlying Funds. As a result, the investment returns of
each Portfolio will reflect the operating expenses of the Underlying Funds that
it holds.

<TABLE>
<CAPTION>
EXPENSE RATIO OF
CLASS Y SHARES OF THE
UNDERLYING FUNDS (AS A
PERCENTAGE OF AVERAGE NET
UNDERLYING PAINEWEBBER FUND ASSETS)
- ---------------------------------------------------------------------------------------------- -------------------------------
<S> <C>
PAINEWEBBER GLOBAL FUNDS
PaineWebber Global Equity Fund.............................................................. 1.10%
PaineWebber Global Income Fund.............................................................. 0.94%
PAINEWEBBER STOCK FUNDS
PaineWebber Growth Fund..................................................................... 1.00%
PaineWebber Growth and Income Fund.......................................................... 0.88%
PaineWebber Small Cap Fund.................................................................. 1.39%
PAINEWEBBER BOND FUNDS
PaineWebber High Income Fund................................................................ 0.64%
PaineWebber Investment Grade Income Fund.................................................... 0.61%
PaineWebber Low Duration U.S. Government Income Fund........................................ 0.86%
PaineWebber U.S. Government Income Fund..................................................... 0.67%
PAINEWEBBER MONEY MARKET FUND
PaineWebber Cashfund(1)..................................................................... 0.56%
</TABLE>

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(1) PaineWebber Cashfund offers only one class of shares but does not charge
any sales load or 12b-1 service or distribution fees.

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Prospectus Page 7
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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EXPENSE TABLE
(Continued)

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The following table shows the expense ratios of each Portfolio (after waivers
and reimbursements) and those of the Class Y shares of the Underlying Funds,
based on a weighted average of the Class Y expense ratios of the Underlying
Funds in which that Portfolio currently expects to invest during the current
fiscal year. These expense ratios may be higher or lower depending on the actual
allocation of a Portfolio's assets among the Underlying Funds and the expenses
actually incurred by those Underlying Funds.

<TABLE>
<CAPTION>
AGGREGATE ESTIMATED EXPENSE RATIO
OF THE PORTFOLIOS INCLUDING
INDIRECT
EXPENSES OF CLASS Y SHARES OF THE
UNDERLYING FUNDS (AS A
MITCHELL HUTCHINS PORTFOLIO PERCENTAGE OF AVERAGE NET ASSETS)
- ------------------------------------------------------------------------------------------- ---------------------------------
<S> <C>
AGGRESSIVE PORTFOLIO
Class A.................................................................................. 1.29%
Class B.................................................................................. 2.04%
Class C.................................................................................. 2.04%
Class Y.................................................................................. 1.04%
MODERATE PORTFOLIO
Class A.................................................................................. 1.15%
Class B.................................................................................. 1.90%
Class C.................................................................................. 1.90%
Class Y.................................................................................. 0.90%
CONSERVATIVE PORTFOLIO
Class A.................................................................................. 1.04%
Class B.................................................................................. 1.79%
Class C.................................................................................. 1.54%
Class Y.................................................................................. 0.79%
</TABLE>

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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio

EXPENSE TABLE
(Continued)

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EXAMPLES OF EFFECT OF FUND EXPENSES

The following examples should assist investors in understanding various costs
and expenses they incur as shareholders of a Portfolio. These expenses reflect
the aggregate estimated expense ratio of each Portfolio (net of any waivers and
reimbursements), which includes the indirect estimated expenses of the
Underlying Funds. The assumed 5% annual return shown in the examples is required
by regulations of the SEC applicable to all mutual funds. THESE EXAMPLES SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
OF A PORTFOLIO MAY BE MORE OR LESS THAN THOSE SHOWN.

An investor would pay the following expenses, directly or indirectly, on a
$1,000 investment in a Portfolio, assuming a 5% annual return:
<TABLE>
<CAPTION>
AGGRESSIVE PORTFOLIO
<S> <C> <C>
EXAMPLE 1 YEAR 3 YEARS
- ------------------------------------------------------------------------------------- ----------- -----------
Class A.............................................................................. $ 58 $ 84
Class B (Assuming sale of all shares at end of period)............................... $ 71 $ 94
Class B (Assuming no sale of shares)................................................. $ 21 $ 64
Class C (Assuming sale of all shares at end of period)............................... $ 31 $ 64
Class C (Assuming no sale of shares)................................................. $ 21 $ 64
Class Y.............................................................................. $ 11 $ 33

MODERATE PORTFOLIO
EXAMPLE 1 YEAR 3 YEARS
- ------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Class A.............................................................................. $ 56 $ 80
Class B (Assuming sale of all shares at end of period)............................... $ 69 $ 90
Class B (Assuming no sale of shares)................................................. $ 19 $ 60
Class C (Assuming sale of all shares at end of period)............................... $ 30 $ 60
Class C (Assuming no sale of shares)................................................. $ 19 $ 60
Class Y.............................................................................. $ 9 $ 29
<CAPTION>

CONSERVATIVE PORTFOLIO
EXAMPLE 1 YEAR 3 YEARS
- ------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Class A.............................................................................. $ 50 $ 72
Class B (Assuming sale of all shares at end of period)............................... $ 68 $ 86
Class B (Assuming no sale of shares)................................................. $ 18 $ 56
Class C (Assuming sale of all shares at end of period)............................... $ 26 $ 49
Class C (Assuming no sale of shares)................................................. $ 16 $ 49
Class Y.............................................................................. $ 8 $ 25
</TABLE>

ASSUMPTIONS MADE IN THE EXAMPLES

- - ALL CLASSES: Fee waivers and expense reimbursements to continue;
reinvestment of all dividends and other distributions; allocation of each
Portfolio's assets among the Underlying Funds; and percentage amounts
listed under "Annual Fund Operating Expenses" remain the same for the years
shown.

- - CLASS A SHARES: Deduction of the maximum 4.5% (4.0% for Conservative
Portfolio) initial sales charge at the time of purchase.

- - CLASS B SHARES: Deduction of the maximum applicable contingent deferred
sales charge at the time of sale, which declines over a period of six
years.

- - CLASS C SHARES: Deduction of a 1% (0.75% for Conservative Portfolio)
contingent deferred sales charge for sales of shares within one year of
purchase.

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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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FINANCIAL HIGHLIGHTS

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The following tables provide investors with data and ratios for one Class A,
Class B, Class C and Class Y share of the Portfolio indicated for the period
shown. This information is supplemented by the financial statements and
accompanying notes and the report of Ernst & Young LLP, independent auditors,
which appear in the Portfolios' Annual Report to Shareholders for the period
ended May 31, 1998 and are incorporated by reference into the Statement of
Additional Information. The financial statements and notes, as well as the
financial information in the tables below have been audited by Ernst & Young
LLP. Further information about the Portfolios' performance is also included in
the Annual Report to Shareholders, which may be obtained without charge by
calling 1-800-647-1568.

AGGRESSIVE PORTFOLIO

<TABLE>
<CAPTION>
FOR THE PERIOD FEBRUARY 24, 1998+
THROUGH MAY 31, 1998
-------------------------------------------------
CLASS A CLASS B CLASS C CLASS Y
------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net asset value, beginning of period......... $ 12.50 $ 12.50 $ 12.50 $ 12.50
------- --------- --------- ---------
Net investment income........................ 0.03 0.01 0.01 0.05
Net realized and unrealized gains from
investments................................ 0.45 0.45 0.45 0.44
------- --------- --------- ---------
Total increase from investment operations.... 0.48 0.46 0.46 0.49
------- --------- --------- ---------
Net asset value, end of period............... $ 12.98 $ 12.96 $ 12.96 $ 12.99
------- --------- --------- ---------
------- --------- --------- ---------
Total investment return(1)................... 3.84% 3.68% 3.68% 3.92%
------- --------- --------- ---------
------- --------- --------- ---------

Ratios/Supplemental Data:
Net assets, end of period (000's)............ $ 1,622 $ 1,440 $ 2,048 $ 10
Expenses to average net assets, net of
waivers and reimbursements from adviser.... 0.25%* 1.00%* 1.00%* 0.00%*
Expenses to average net assets, before
waivers and reimbursements from adviser.... 3.98%* 4.80%* 4.55%* 3.76%*
Net investment income to average net assets,
net of waivers and reimbursements from
adviser.................................... 1.49%* 0.70%* 0.69%* 1.57%*
Net investment loss to average net assets,
before waivers and reimbursements from
adviser.................................... (2.24)%* (3.10)%* (2.86)%* (2.19)%*
Portfolio turnover rate...................... 6% % 6 % 6 % 6
</TABLE>

- ---------

+ Commencement of operations.

* Annualized.

(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the period reported, reinvestment of all dividends and other
distributions, if any, at net asset value on the payable dates and a sale at
net asset value on the last day of the period reported. The figures do not
include sales charges; results for Class A, Class B and Class C would be
lower if sales charges were included. Total investment return for the period
has not been annualized.

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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio

FINANCIAL HIGHLIGHTS
(Continued)

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

MODERATE PORTFOLIO

<TABLE>
<CAPTION>
FOR THE PERIOD FEBRUARY 24, 1998+
THROUGH MAY 31, 1998
---------------------------------------------------
CLASS A CLASS B CLASS C CLASS Y
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net asset value, beginning of period......... $ 12.50 $ 12.50 $ 12.50 $ 12.50
--------- --------- --------- ---------
Net investment income........................ 0.06 0.04 0.04 0.09
Net realized and unrealized gains from
investments................................ 0.37 0.36 0.36 0.35
--------- --------- --------- ---------
Total increase from investment operations.... 0.43 0.40 0.40 0.44
--------- --------- --------- ---------
Net asset value, end of period............... $ 12.93 $ 12.90 $ 12.90 $ 12.94
--------- --------- --------- ---------
--------- --------- --------- ---------
Total investment return(1)................... 3.44% 3.20% 3.20% 3.52%
--------- --------- --------- ---------
--------- --------- --------- ---------

Ratios/Supplemental Data:
Net assets, end of period (000's)............ $ 1,676 $ 2,956 $ 2,801 $ 12
Expenses to average net assets, net of
waivers and reimbursements from adviser.... 0.25%* 1.00%* 1.00%* 0.00%*
Expenses to average net assets, before
waivers and reimbursements from adviser.... 2.78%* 3.57%* 3.29%* 2.59%*
Net investment income to average net assets,
net of waivers and reimbursements from
adviser.................................... 2.63%* 1.87%* 1.92%* 2.76%*
Net investment income (loss) to average net
assets, before waivers and reimbursements
from adviser............................... 0.10%* (0.70)%* (0.37)%* 0.17%*
Portfolio turnover rate...................... %13 %13 %13 %13
</TABLE>

- ---------

+ Commencement of operations.

* Annualized.

(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates and a sale at
net asset value on the last day of the period reported. The figures do not
include sales charges; results for Class A, Class B and Class C would be
lower if sales charges were included. Total investment return for the period
has not been annualized.

- --------------------------------------------------------------------------------
Prospectus Page 11
<PAGE>
- --------------------------------------------------------------------------------
--------------------------
Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio

FINANCIAL HIGHLIGHTS
(Continued)

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

CONSERVATIVE PORTFOLIO

<TABLE>
<CAPTION>
FOR THE PERIOD FEBRUARY 24, 1998+
THROUGH MAY 31, 1998
---------------------------------------------------
CLASS A CLASS B CLASS C CLASS Y
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net asset value, beginning of period......... $ 12.50 $ 12.50 $ 12.50 $ 12.50
--------- --------- --------- ---------
Net investment income........................ 0.10 0.07 0.08 0.16
Net realized and unrealized gains from
investments................................ 0.21 0.22 0.22 0.16
--------- --------- --------- ---------
Total increase in net asset value from
operations................................. 0.31 0.29 0.30 0.32
--------- --------- --------- ---------
Net asset value, end of period............... $ 12.81 $ 12.79 $ 12.80 $ 12.82
--------- --------- --------- ---------
--------- --------- --------- ---------
Total investment return(1)................... 2.48% 2.32% 2.40% 2.56%
--------- --------- --------- ---------
--------- --------- --------- ---------

Ratios/Supplemental Data:
Net assets, end of period (000's)............ $ 519 $ 1,667 $ 485 $ 5
Expenses to average net assets, net of
waivers and reimbursements from adviser.... 0.25%* 1.00%* 0.75%* 0.00%*
Expenses to average net assets, before
waivers and reimbursements from adviser.... 6.43%* 7.13%* 6.99%* 6.19%*
Net investment income to average net assets,
net of waivers and reimbursements from
adviser.................................... 4.66%* 3.92%* 4.23%* 4.75%*
Net investment loss to average net assets,
before waivers and reimbursements from
adviser.................................... (1.52)%* (2.21)%* (2.00)%* (1.43)%*
Portfolio turnover rate...................... %11 %11 %11 %11
</TABLE>

- ---------

+ Commencement of operations.

* Annualized.

- --------------------------------------------------------------------------------
Prospectus Page 12
<PAGE>
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------------------------
Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio

INVESTMENT OBJECTIVES & POLICIES

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

The investment objectives of the Portfolios may not be changed without
shareholder approval. Each Portfolio seeks to achieve its investment objective
by investing within specified ranges among certain Underlying Funds. Each
Portfolio seeks to maintain different allocations between Underlying Funds that
are equity funds and Underlying Funds that are bond funds (including a money
market fund), depending on its investment objective.

Mitchell Hutchins allocates investments for each Portfolio among Underlying
Funds based on Mitchell Hutchins' outlook for the economy, financial markets and
the relative performance of the Underlying Funds. Based on Mitchell Hutchins'
recommendations, the board of trustees ("board") of the Portfolios has
established investment ranges that designate minimum and maximum percentages for
the allocation of each Portfolio's investable assets between equity funds and
bond funds and for the percentage of the Portfolio's assets that may be invested
in a particular Underlying Fund.

The table below sets forth for each Portfolio the equity fund/bond fund
allocation targets and the permissible investment ranges for the Underlying
Funds.

<TABLE>
<CAPTION>
AGGRESSIVE MODERATE CONSERVATIVE
UNDERLYING FUND PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
EQUITY FUND/BOND FUND TARGET*....................................................... 80/20% 60/40% 20/80%

EQUITY FUNDS
PaineWebber Global Equity Fund.................................................... 0%-30% 0%-20% 0%
PaineWebber Growth Fund........................................................... 0%-10% 0%-20% 0%
PaineWebber Growth and Income Fund................................................ 20%-40% 20%-40% 10%-30%
PaineWebber Small Cap Fund........................................................ 20%-40% 0%-20% 0%

BOND FUNDS
PaineWebber Global Income Fund.................................................... 0%-10% 0%-20% 5%-15%
PaineWebber High Income Fund...................................................... 0%-20% 0%-10% 0%
PaineWebber Investment Grade Income Fund.......................................... 0%-10% 0%-20% 0%-20%
PaineWebber Low Duration U.S. Government Income Fund.............................. 0% 0%-10% 20%-40%
PaineWebber U.S. Government Income Fund........................................... 0% 0%-20% 20%-40%
PAINEWEBBER CASHFUND................................................................ 0%-20% 0%-20% 0%-20%
</TABLE>

- ---------

* Each Portfolio may deviate from its equity fund/bond fund targets within
ranges of ten percent above or below the relevant target percentages.

The Underlying Funds represent a broad spectrum of investments. The equity/bond
ranges and the investment ranges are based on the degree to which Mitchell
Hutchins expects the selected Underlying Funds, in combination, to be
appropriate for a Portfolio's particular investment objective. If appreciation
or depreciation in the value of an Underlying Fund's shares causes the
percentage of a Portfolio's assets invested in that Underlying Fund or the
Portfolio's equity fund/bond fund target to exceed or be less than the
applicable investment range, Mitchell Hutchins will consider whether to
reallocate the assets of the Portfolio, but is not required to do so. The
Underlying Funds in which each Portfolio may invest, the equity fund/bond fund
targets and ranges and the investment ranges applicable to each Underlying Fund
may be changed by the Portfolios' board without shareholder approval.

Each Portfolio maintains cash reserves for meeting redemptions, expenses and in
connection with making new investments. The Portfolios may invest these cash
reserves in Cashfund or may invest directly in short-term U.S. government
securities, high grade short-term commercial paper and repurchase agreements.
When Mitchell Hutchins believes that unusual market or economic conditions
warrant a temporary defensive posture, each Portfolio may invest up to 100% of
its total assets in these securities or in Cashfund.

- --------------------------------------------------------------------------------
Prospectus Page 13
<PAGE>
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio

INVESTMENT OBJECTIVES AND POLICIES OF UNDERLYING FUNDS

The following is a concise description of the investment objectives and policies
of the Underlying Funds in which the Portfolios may invest. As with any mutual
fund, there is no assurance that any Underlying Fund will achieve its investment
objective. The Statement of Additional Information includes more information
about the investment policies of the Underlying Funds. Those policies also are
described more fully in the prospectus of each Underlying Fund. No offer is made
in this Prospectus of shares of any Underlying Fund.

GLOBAL EQUITY FUND

Global Equity Fund's investment objective is long-term growth of capital. The
Fund seeks to achieve this goal by investing primarily in equity securities
issued by companies in foreign countries, as well as in the United States. The
Fund normally invests in at least three countries, one of which is typically the
United States. Under normal circumstances, Global Equity Fund invests at least
80% of its total assets in securities of issuers in the United States and
countries represented in the Morgan Stanley Capital International Europe,
Australia and Far East Index ("EAFE Index"). The EAFE Index is a well known
index that reflects most major equity markets outside the United States. The
Fund may invest up to 20% of its total assets in securities of issuers located
in other countries (for example, Canada) and in emerging markets. The Fund may
invest up to 35% of its total assets in investment grade bonds that are issued
by corporate or governmental entities and that have maturities no longer than
seven years. The Fund may invest up to 10% of its net assets in convertible
securities rated below investment grade. The Fund may assume a temporary
defensive position by investing all or a significant portion of its assets in
securities of U.S. and Canadian issuers or by holding cash or short-term money
market investments.

Mitchell Hutchins is responsible for allocating Global Equity Fund's investments
between U.S. and foreign securities markets and for the management of the Fund's
U.S. investments. The Fund's foreign investments are managed by Invista Capital
Management, Inc. under a sub-advisory contract.

GLOBAL INCOME FUND

Global Income Fund's primary investment objective is high current income
consistent with prudent investment risk; capital appreciation is a secondary
objective. The Fund seeks to achieve these objectives by investing principally
in high-quality bonds issued or guaranteed by foreign governments, by the U.S.
government, by their respective agencies or instrumentalities or by
supranational organizations, or issued by U.S. or foreign companies. The Fund's
portfolio consists primarily of bonds rated within one of the two highest grades
assigned by a nationally recognized rating agency or, if unrated, determined by
Mitchell Hutchins to be of comparable quality. Normally, at least 65% of the
Fund's total assets consist of high-quality bonds (and receivables from the sale
of such bonds), denominated in foreign currencies or U.S. dollars, of issuers
located in at least three of the following countries: Australia, Austria,
Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy,
Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland, Thailand, the United Kingdom and the United States. No more than
40% of the Fund's assets normally are invested in securities of issuers located
in any one country other than the United States. Up to 5% of the Fund's total
assets may be invested in bonds convertible into equity securities. At least 65%
of the Fund's total assets normally are invested in income producing securities.

Global Income Fund may invest up to 35% of its total assets in bonds rated below
the two highest grades assigned by a rating agency. Except as noted below, these
bonds must be at least investment grade. Within this 35% limitation, the Fund
may invest up to 20% of its total assets in bonds rated below investment grade.
Many emerging market bonds are not investment grade. The Fund's total
investments in emerging market bonds may exceed 20%, however, if it also invests
in emerging market bonds with investment grade ratings.

Global Income Fund is a non-diversified fund as defined in the Investment
Company Act of 1940 ("1940 Act") and is subject to greater risk than funds that
have a broader range of investments.

GROWTH FUND

Growth Fund's investment objective is long-term capital appreciation. The Fund
seeks to achieve this objective by investing primarily in equity securities
issued by companies believed by Mitchell Hutchins to have substantial potential
for capital growth. Under normal circumstances, the Fund invests at least 65% of
its total assets in equity securities. The Fund may invest up to 35% of its
total assets in U.S. government bonds and in corporate bonds (including up to
10% in bonds and convertible securities rated below investment grade). Up to 25%
of the Fund's total assets may be invested in U.S. dollar-denominated equity
securities and bonds of foreign issuers that are traded on recognized U.S.
exchanges or in the U.S. over-the-counter ("OTC") market.

- --------------------------------------------------------------------------------
Prospectus Page 14
<PAGE>
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio

GROWTH AND INCOME FUND

Growth and Income Fund's investment objective is current income and capital
growth. The Fund seeks to achieve this objective by investing primarily in
dividend-paying equity securities believed by Mitchell Hutchins to have the
potential for rapid earnings growth. Normally, the Fund invests at least 65% of
its total assets in these equity securities. The Fund may invest up to 35% of
its total assets in equity securities not meeting these selection criteria, as
well as in U.S. government bonds, corporate bonds and money market instruments,
including up to 10% in convertible bonds rated below investment grade. Up to 25%
of the Fund's total assets may be invested in U.S. dollar-denominated equity
securities and bonds of foreign issuers that are traded on recognized U.S.
exchanges or in the U.S. OTC market.

SMALL CAP FUND

Small Cap Fund's investment objective is long-term capital appreciation. Under
normal circumstances, at least 65% of its total assets are invested in equity
securities of small cap companies, which are defined as companies having market
capitalizations of up to $1 billion. The Fund may invest up to 35% of its total
assets in equity securities of companies that are larger than small cap
companies, as well as in U.S. government bonds, corporate bonds and money market
instruments, including up to 10% of total assets in convertible bonds rated
below investment grade. Up to 25% of the Fund's total assets may be invested in
U.S. dollar-denominated equity securities of foreign issuers traded on
recognized U.S. exchanges or in the U.S. OTC market.

HIGH INCOME FUND

High Income Fund's investment objective is to provide high income. The Fund
normally invests at least 65% of its total assets in high yield, high risk,
income-producing corporate bonds that, at the time of purchase, are rated B or
better by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P"), or Moody's Investors Service, Inc. ("Moody's"), are comparably rated by
another rating agency or, if unrated, are considered to be of comparable quality
by Mitchell Hutchins. The Fund may include in this 65% of its total assets any
equity securities (including common stocks and rights and warrants for equity
securities) that are attached to corporate bonds or are part of a unit including
corporate bonds, so long as the corporate bonds meet these requirements. The
Fund also may invest up to 35% of its total assets in (1) bonds that are rated
below B (and rated as low as D by S&P or C by Moody's) or comparable unrated
bonds (2) U.S. government bonds, (3) equity securities and (4) money market
instruments, including repurchase agreements. Up to 25% of the Fund's total
assets may be invested in bonds and equity securities that are not paying
current income. Up to 35% of the Fund's net assets may be invested in securities
of foreign issuers. However, no more than 10% of the Fund's net assets may be
invested in securities of foreign issuers that are denominated and traded in
currencies other than the U.S. dollar.

INVESTMENT GRADE INCOME FUND

Investment Grade Income Fund's objective is to provide high current income
consistent with the preservation of capital and liquidity. The Fund normally
invests at least 65% of its total assets in U.S. government and investment grade
corporate bonds (including mortgage-backed securities). The Fund also may invest
up to 35% of its total assets in the following: (1) corporate bonds that are
rated below investment grade, (2) preferred stocks, (3) convertible securities,
(4) asset-backed securities other than mortgage-backed securities, (5)
commercial paper or variable amount master notes whose issuers, at the time the
security is purchased by the Fund, have outstanding either long-term bonds that
are rated investment grade by S&P or Moody's or commercial paper rated in the
highest rating category by S&P or Moody's and (6) other money market
instruments, including repurchase agreements.

Investment Grade Income Fund may invest in mortgage-backed securities only if
they are issued or guaranteed by the U.S. government or if, at the time of
purchase, they are investment grade. The Fund may invest in other asset-backed
securities only if, at the time of purchase, they are rated in one of the two
highest rating categories by S&P or Moody's. The Fund may invest no more than
10% of its total assets in interest-only and principal-only classes of
mortgage-backed securities.

Up to 20% of Investment Grade Income Fund's net assets may be invested in
certain foreign securities. These are: (1) U.S. dollar-denominated securities of
foreign issuers or of foreign branches of U.S. banks that are traded in the U.S.
securities markets and (2) securities that are U.S. dollar-denominated but whose
value is linked to the value of foreign currencies.

U.S. GOVERNMENT INCOME FUND AND LOW DURATION U.S. GOVERNMENT INCOME FUND ("LOW
DURATION INCOME FUND")

U.S. Government Income Fund's investment objective is to provide high income
consistent with the preservation of capital and liquidity. Low Duration Income
Fund's investment objective is to achieve the highest level of income consistent
with the preservation of capital and low volatility of net asset value.

Low Duration Income Fund seeks to limit (but not eliminate) the volatility of
net asset value by normally

- --------------------------------------------------------------------------------
Prospectus Page 15
<PAGE>
- --------------------------------------------------------------------------------
------------------------
Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio

maintaining an overall portfolio duration between 1 to 3 years. U.S. Government
Income Fund has no fixed portfolio duration policy. "Duration" is a measure of
the expected life of a fixed income security on a present value basis.

Each Fund normally invests at least 65% of its total assets in U.S. government
bonds (including mortgage-backed securities) and repurchase agreements with
respect to them. Each Fund also may invest up to 35% of its total assets in
privately issued mortgage-backed and asset-backed securities that, at the time
of purchase, are rated in the highest rating category by a nationally recognized
rating agency, such as S&P or Moody's, or if unrated, are considered to be of
comparable quality by Mitchell Hutchins or, for Low Duration Income Fund, its
sub-adviser, Pacific Investment Management Company ("PIMCO").

Each Fund has a fundamental policy of normally concentrating at least 25% of its
total assets in U.S. government and privately issued mortgage- and asset-backed
securities. This policy has the effect of increasing each Fund's exposure to the
risks of these securities and might cause the Fund's net asset value to
fluctuate more than otherwise would be the case. Some types of mortgage- and
asset-backed securities, including "interest only," "principal-only" and inverse
floating rate classes of these securities, can be extremely volatile and may
become illiquid. Low Duration Income Fund does not invest in these classes of
mortgage-backed securities.

CASHFUND

Cashfund's investment objective is to provide current income, stability of
principal and high liquidity. The Fund invests exclusively in high quality money
market instruments having or deemed to have remaining maturities of 13 months or
less. These instruments include (1) U.S. government securities, (2) obligations
of U.S. and foreign banks, (3) commercial paper and other short-term obligations
of U.S. and foreign companies, governments and similar entities, including
variable and floating rate securities and participation interests and (4)
repurchase agreements involving any of the foregoing. Shares of Cashfund are not
insured or guaranteed by the U.S. government.

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

INVESTMENT PHILOSOPHY & PROCESS

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

Mitchell Hutchins' team of three Chief Investment Officers ("Team") employs a
two-step approach to allocating each Portfolio's investments among the
Underlying Funds.

First, in accordance with each Portfolio's current equity fund/bond fund target,
the Team allocates the Portfolio's assets among five basic asset categories of
the Underlying Funds:

- - U.S. equity;

- - global equity;

- - U.S. bond;

- - global bond; and

- - money market (the Portfolios may invest in a money market fund or directly in
money market instruments).

When the Team's analysis indicates that a different allocation is more likely to
achieve a Portfolio's goals, the Portfolio may deviate from its target
allocations within the established investment ranges for equity and bond
securities. The Team bases its category allocation decisions in part on Mitchell
Hutchins' quantitative models, which include an analysis of the following
factors:

- - price-to-earnings ratios,

- - inflation rates,

- - real interest rates and

- - the yield curves in the United States and overseas.

Analysis of these variables generates estimated returns of equities in the four
major stock markets (the United States, the United Kingdom, Germany and Japan)
that represent in excess of 70% of global market capitalization, the estimated
changes of bond yields in the U. S. bond market and global bond markets, and the
estimated spreads between these yields.

Second, after deciding the appropriate asset category allocation for each
Portfolio, the Team allocates each Portfolio's investments among the Underlying
Funds within each of the five asset categories. For example, in making a
decision to allocate investments among the Underlying Funds that invest in U.S.
bonds, the Team

- --------------------------------------------------------------------------------
Prospectus Page 16
<PAGE>
- --------------------------------------------------------------------------------
------------------------
Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio

evaluates relevant factors including the outlook for the direction of interest
rates, the duration of the relevant Underlying Funds' portfolios and yield
differentials among sectors of the bond markets. Similarly, the Team may
consider factors such as the relative valuations of different sectors of the
equity market (for example, large capitalization or small capitalization) and
the risks of the different sectors when deciding the appropriate allocation
among U.S. equity funds.

In addition to using quantitative analysis, Team members may rely on their own
judgment, as well as the judgment of the Underlying Funds' portfolio managers,
when making investment decisions. The Team will consider reallocating Portfolio
investments at least quarterly, but may change allocations more frequently if
market conditions warrant.

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

PERFORMANCE

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

The following tables show total returns for each Portfolio for its initial
fiscal period (February 24, 1998 to May 31, 1998) of each class of shares before
and after deducting the maximum sales charges. Past results are not a guarantee
of future results.

TOTAL RETURN
LIFE (2/24/98 - 5/31/98)

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
SHARES SHARES SHARES SHARES
--------- --------- --------- ---------

<S> <C> <C> <C> <C>
AGGRESSIVE PORTFOLIO
Before deducting maximum sales charges........................................... 3.84% 3.68% 3.68% 3.92%
After deducting maximum sales charges............................................ (0.84)% (1.32)% 2.68% 3.92%
MODERATE PORTFOLIO
Before deducting maximum sales charges........................................... 3.44% 3.20% 3.20% 3.52%
After deducting maximum sales charges............................................ (1.22)% (1.80)% 2.20% 3.52%
CONSERVATIVE PORTFOLIO
Before deducting maximum sales charges........................................... 2.48% 2.32% 2.40% 2.56%
After deducting maximum sales charges............................................ (2.14)% (2.68)% 1.65% 2.56%
</TABLE>

PERFORMANCE OF UNDERLYING FUNDS

The following table shows the average annual total returns of each Underlying
Fund (other than Cashfund) for the most recent one-, five- and ten-year periods
(or since inception if shorter). The performance information reflects both
standardized and non-standardized returns. These terms are defined below in
"Performance Information" in this section. Standardized returns are shown net of
the maximum applicable initial and contingent deferred sales charges and other
distribution-related expenses and service fees. Non-standardized returns do not
reflect maximum applicable sales charges and thus are higher than standardized
returns.
The Portfolios invest in Class Y shares of the Underlying Funds (other than
Cashfund), which are not subject to sales charges and distribution-related
expenses and service fees. However, Class A, B or C shares of the Portfolios are
subject to these sales charges and expenses, all of which will reduce the
returns to an investor.

For the Underlying Funds that invest predominantly in bonds, 30-day yield is
also given. For Cashfund, yield and effective yield are shown in a footnote.

- --------------------------------------------------------------------------------
Prospectus Page 17
<PAGE>
- --------------------------------------------------------------------------------
------------------------
Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio

PERFORMANCE OF UNDERLYING FUNDS
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
ASSETS OF ALL THROUGH 8/31/98
CLASSES AS OF INCEPTION ---------------------------------
UNDERLYING FUND 8/31/98 ($000'S) DATE CLASS(1) ONE YEAR FIVE YEARS TEN YEARS
- ---------------------------------------- ---------------- ----------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
EQUITY FUNDS
PaineWebber Global Equity Fund........ $ 380,690 11/14/91(3) A
Standardized Return................. (10.44)% 6.75% 8.24%(3)
Non-Standardized Return............. (6.22) 7.75 8.98(3)
PaineWebber Growth Fund............... 319,500 03/18/85 A
Standardized Return................. (1.27) 9.05 13.23
Non-Standardized Return............. 3.37 10.06 13.75
PaineWebber Growth and Income Fund.... 1,238,731 12/20/83 A
Standardized Return................. (7.85) 12.63 12.22
Non-Standardized Return............. (3.51) 13.67 12.74
PaineWebber Small Cap Fund............ 107,276 02/01/93(3) B
Standardized Return................. (23.70) 5.39 5.69(3)
Non-Standardized Return............. (20.05) 5.70 5.83(3)
BOND FUNDS
PaineWebber Global Income Fund........ 482,116 03/20/87 B
Standardized Return................. 2.14 4.41 7.92
Non-Standardized Return............. 7.14 4.72 7.92
PaineWebber High Income Fund.......... 532,630 08/31/84 A
Standardized Return................. (6.32) 4.43 9.13
Non-Standardized Return............. (2.37) 5.29 9.57
PaineWebber Investment Grade Income
Fund................................. 291,908 08/31/84 A
Standardized Return................. 5.76 5.83 9.15
Non-Standardized Return............. 10.14 6.70 9.59
PaineWebber Low Duration U.S.
Government Income Fund............... 149,664 05/03/93(3) C
Standardized Return................. 5.79 4.21 4.18(3)
Non-Standardized Return............. 6.54 4.21 4.18(3)
PaineWebber U.S. Government Income
Fund................................. 341,802 08/31/84 A
Standardized Return................. 6.44 3.20 6.87
Non-Standardized Return............. 10.94 4.05 7.30

<CAPTION>
30-DAY
YIELD FOR
PERIOD
ENDED
UNDERLYING FUND 8/31/98(2)
- ---------------------------------------- -----------
<S> <C>
EQUITY FUNDS
PaineWebber Global Equity Fund........
Standardized Return................. N/A
Non-Standardized Return............. N/A
PaineWebber Growth Fund...............
Standardized Return................. N/A
Non-Standardized Return............. N/A
PaineWebber Growth and Income Fund....
Standardized Return................. N/A
Non-Standardized Return............. N/A
PaineWebber Small Cap Fund............
Standardized Return................. N/A
Non-Standardized Return............. N/A
BOND FUNDS
PaineWebber Global Income Fund........
Standardized Return................. 3.71%
Non-Standardized Return............. 3.71
PaineWebber High Income Fund..........
Standardized Return................. 9.80
Non-Standardized Return............. 9.80
PaineWebber Investment Grade Income
Fund.................................
Standardized Return................. 5.70
Non-Standardized Return............. 5.70
PaineWebber Low Duration U.S.
Government Income Fund...............
Standardized Return................. 4.50
Non-Standardized Return............. 4.50
PaineWebber U.S. Government Income
Fund.................................
Standardized Return................. 4.88
Non-Standardized Return............. 4.88
</TABLE>

- ---------

(1) The class outstanding for the longest period. If more than one class is
outstanding for the longest period, the table shows performance for the
class that represents the largest portion of the Underlying Fund's net
assets.

(2) For the seven-day period ended August 31, 1998, PaineWebber Cashfund's
yield was 5.11% and its effective yield was 5.24%.

(3) No class has been outstanding for ten years. The average annual return
figure represents the return for the life of the longest outstanding class
of the Underlying Fund.

- --------------------------------------------------------------------------------
Prospectus Page 18
<PAGE>
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio

The past performance of the Underlying Funds is not a guarantee of future
results for either the Underlying Funds or the Portfolios. Further information
about each Underlying Fund's performance is contained in its Annual Report to
Shareholders, which may be obtained without charge by contacting the Underlying
Fund, your PaineWebber investment executive or PaineWebber's correspondent firms
or by calling toll-free 1-800-647-1568.

PERFORMANCE INFORMATION

The Portfolios perform a standardized computation of annualized total return and
may show this return in advertisements or promotional materials. Standardized
return shows the change in value of an investment in a Portfolio as a steady
compound annual rate of return. Actual year-by-year returns fluctuate and may be
higher or lower than standardized return. Standardized returns for Class A
shares of the Portfolios reflect deduction of the Portfolios' maximum initial
sales charge of 4.5% (4.0% for Conservative Portfolio) at the time of purchase,
and standardized returns for the Class B and Class C shares of the Portfolios
reflect deduction of the applicable contingent deferred sales charge imposed on
the sale of shares held for the period. One-, five- and ten-year periods will be
shown, unless the Portfolio or class has been in existence for a shorter period.
If so, returns will be shown for the period since inception, known as "Life."

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

Moderate Portfolio and Conservative Portfolio also may advertise their yields.
Yield reflects investment income net of expenses over a 30-day (or one-month)
period on the Portfolio shares, expressed as an annualized percentage of the
maximum offering price per share for Class A shares and net asset value per
share for Class B, Class C and Class Y shares at the end of the period. Yield
computations differ from other accounting methods and thus may differ from
dividends actually paid or reported net income.

The Underlying Funds perform the same standardized computation of annualized
total return as the Portfolios, and the Bond Funds perform the same yield
computations.

As a money market fund, Cashfund may advertise its yield and effective yield
based on the income earned on an investment in Cashfund over a specified seven
day period. That income is then "annualized" (that is, assumed to be earned each
week over a 52-week period) and shown as a percentage of the investment. The
effective yield is calculated similarly but, when annualized, the income earned
is assumed to be reinvested. The effective yield will be higher than the yield
because of the compounding effect of this assumed reinvestment.

All total return and yield information reflects past performance and does not
indicate future results. The investment return and principal value of shares of
the Portfolios and the Underlying Funds will fluctuate. The amount investors
receive when selling shares may be more or less than what they paid.

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INVESTMENTS OF THE PORTFOLIOS AND
THE UNDERLYING FUNDS

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INVESTMENTS AND RISKS OF THE PORTFOLIOS

The value of the Underlying Funds' investments, and thus the net asset value of
both the Underlying Funds and the Portfolios, will fluctuate in response to
changes in market

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and economic conditions, as well as the financial condition and prospects of
issuers in which the Underlying Funds invest.

Each Portfolio invests in a limited number of Underlying Funds and may invest
more than 25% of its assets in a single Underlying Fund. As a result, the
performance of a single Underlying Fund can have a significant effect on the
performance of a Portfolio and the price of that Portfolio's shares.

The shareholders of a Portfolio will be subject to the risks of the securities
held by and the investment techniques used for an Underlying Fund in direct
proportion to the amount of assets allocated by that Portfolio to the Underlying
Fund. The risks of each Underlying Fund are determined by the nature of the
securities it holds and the investment techniques and strategies used by
Mitchell Hutchins or a sub-adviser. Certain of these securities, investment
techniques and related risks are described here. More information is available
in the Statement of Additional Information and in the prospectuses of the
Underlying Funds.

TYPES OF SECURITIES OF THE UNDERLYING FUNDS

EQUITY SECURITIES include common stocks, preferred stocks and securities that
are convertible into them, including convertible debentures and notes and common
stock purchase warrants and rights. 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 is actually
equity in a company, like common stock. Convertible securities may include
debentures, notes and preferred equity securities, which are convertible into
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. Depository receipts typically are issued
by banks or trust companies and evidence ownership of underlying equity
securities.

BONDS (including notes and debentures) are used by corporations and governments
to borrow money from investors. The issuer pays the investors a fixed or
variable rate of interest and must repay the amount borrowed at or before
maturity. Bonds have varying degrees of investment risk and varying levels of
sensitivity to changes in interest rates.

U.S. GOVERNMENT BONDS include direct obligations of the U.S. government (such as
U.S. Treasury bills, notes and bonds) and obligations issued or guaranteed by
the U.S. government, its agencies or its instrumentalities. U.S. government
bonds include mortgage-backed securities issued or guaranteed by government
agencies or government-sponsored enterprises. Other U.S. government bonds 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-sponsored entity,
such as the Resolution Funding Corporation, Sallie Mae (also known as the
Student Loan Marketing Association), the Federal Home Loan Banks and the
Tennessee Valley Authority.

CORPORATE BONDS are bonds issued by corporations, banks, partnerships, trusts or
other non-governmental entities.

MORTGAGE- AND ASSET-BACKED SECURITIES are bonds backed by specific types of
assets. 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 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
mortgage-backed securities are sponsored or issued by private entities,
including investment banking firms and mortgage originators. 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 as either pass-through securities or
collateralized debt obligations.

Other asset-backed securities are similar to mortgage-backed securities, except
that the underlying assets are different. These underlying assets may be nearly
any type of financial asset or receivable, such as motor vehicle installment
sales contracts, home equity loans, leases of various types of real and personal
property and receivables from credit cards.

MONEY MARKET SECURITIES are high-quality, short-term instruments and include
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, bank certificates of deposit, bankers' acceptances, high
grade commercial paper and repurchase agreements secured by these instruments.

RISKS OF THE UNDERLYING FUNDS

Following is a discussion of the risks that are common to a number of the
Underlying Funds:

EQUITY SECURITIES. While past performance does not guarantee future results,
equity securities historically have provided the greatest long-term growth
potential in a

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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 an Underlying Fund may experience a
substantial or complete loss on an individual equity investment.

BONDS--INTEREST RATE AND CREDIT RISK. Interest rate risk is the risk that
interest rates will rise and bond prices will fall, lowering the value of the
Underlying Fund's bond investments. Long-term bonds are generally more sensitive
to interest rate changes than short-term bonds. See "Duration."

Credit risk is the risk the issuer or guarantor may be unable to pay interest or
repay principal on the bond. This can be affected by many factors, including
adverse changes in the issuer's own financial condition or in economic
conditions.

DURATION. Duration is a measure of the expected life of a bond on a present
value basis. Duration incorporates a bond's yield, coupon interest rate
payments, final maturity and call features into one measure and is one of the
fundamental tools used by Mitchell Hutchins or a sub-adviser in portfolio
selection and yield curve positioning for the Underlying Funds.

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.

Duration allows Mitchell Hutchins or a sub-adviser to make certain predictions
as to the effect that changes in the level of interest rates will have on the
value of an Underlying Fund's portfolio. For example, when the level of interest
rates increases by 1%, a fixed income security having a positive duration of
three years generally will decrease by approximately 3%. Thus, if Mitchell
Hutchins or a sub-adviser calculates the duration of the Fund's portfolio 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 expected.
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 an Underlying
Fund's portfolio may vary in relation to interest rates by a greater or lesser
percentage than indicated by the above example.

CREDIT RATINGS; BONDS RATED BELOW INVESTMENT GRADE. Credit ratings attempt to
evaluate the safety of principal and interest payments, but they do not evaluate
the volatility of the 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 bonds.

Investment grade bonds are rated in one of the four highest rating categories by
a rating agency, such as S&P or Moody's, or, if unrated, are considered to be of
comparable quality by Mitchell Hutchins or a sub-adviser. 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 bonds. Investment Grade
Income Fund and High Income Fund may invest without limit in bonds with the
lowest investment grade rating.

High yield, high risk bonds are rated below investment grade and are commonly
referred to as "junk bonds." High Income Fund may invest its entire portfolio in
these bonds. Investment Grade Income Fund may invest up to 35% of its its total
assets in these bonds. High yield, high risk bonds are considered predominantly
speculative with respect to the issuer's ability to pay interest and repay
principal. An Underlying Fund's investments in these lower rated bonds entail
greater risk than its investments in investment grade bonds. Lower rated bonds
may be more sensitive to adverse market conditions. During an economic downturn
or period of rising interest rates, their issuers may experience financial
stress that adversely affects their ability to pay interest and repay principal
and may increase the possibility of default. Lower rated bonds are frequently
unsecured by collateral and will not receive payment until more senior claims
are paid in full. The market for these bonds is thinner and less active, which
may limit the Underlying Funds' ability to sell them at fair value in response
to changes in the economy or financial markets.

FOREIGN SECURITIES. Investing in foreign securities involves more risks than
investing in securities of U.S. companies. Their value is subject to economic
and political developments in the countries where the companies operate and to
changes in foreign currency values. Values

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may also be affected by foreign tax laws, changes in foreign economic or
monetary policies, exchange control regulations and regulations involving
prohibitions on the repatriation of foreign currencies. Investments in foreign
countries could be affected by other factors not present in the United States,
including expropriation, confiscatory taxation, lack of uniform accounting and
auditing standards and potential difficulties in enforcing contractual
obligations and could be subject to extended clearance and settlement periods.

In general, less information may be available about foreign companies than about
U.S. companies, and foreign companies are generally not subject to the same
accounting, auditing and financial reporting standards as are U.S. companies.
Foreign securities markets may be less liquid and subject to less regulation
than the U.S. securities markets. The costs of investing outside the United
States frequently are higher than those in the United States. These costs
include relatively higher brokerage commissions and foreign custody expenses.

EMERGING MARKET SECURITIES. Investing in securities issued by companies located
in emerging market countries involves additional risks. These countries
typically have economic and political systems that are relatively less mature,
and can be expected to be less stable, than those of developed countries.
Emerging market countries may have policies that restrict investment by
foreigners in those countries, and there is a risk of government expropriation
or nationalization of private property. The possibility of low or nonexistent
trading volume in the securities of companies in emerging market countries may
also result in a lack of liquidity and in price volatility. Issuers in emerging
market countries typically are subject to a greater degree of change in earnings
and business prospects than are companies in developed markets.

CURRENCY. Currency risk is the risk that changes in foreign exchange rates may
reduce the U.S. dollar value of an Underlying Fund's foreign investments. An
Underlying Fund's share value may change significantly when investments are
denominated in foreign currencies. Generally, currency exchange rates are
determined by supply and demand in the foreign exchange markets and the relative
merits of investments in different countries. Currency exchange rates can also
be affected by the intervention of the U.S. and foreign governments or central
banks, the imposition of currency controls, devaluations, speculation or other
political or economic developments inside and outside the United States.

Several European countries expect to adopt a single currency, the euro,
effective January 1, 1999. This change may significantly impact European capital
markets, and related risks may increase volatility in world capital markets.
This, in turn, may impact an Underlying Fund's share price.
CURRENCY-LINKED INVESTMENTS. Some Underlying Funds may invest in securities that
are indexed to specific foreign currency exchange rates. The principal amount of
these securities may be adjusted up or down (but not below zero) at maturity to
reflect changes in the exchange rate between two currencies. The Underlying
Funds may experience loss of principal due to these adjustments.

DERIVATIVES. Some of the instruments in which the Underlying Funds may invest
may be referred to as "derivatives," because their value depends on (or
"derives" from) the value of an underlying asset, reference rate or index. These
instruments include options, futures contracts, forward currency contracts,
interest rate swaps and similar instruments. There is limited consensus as to
what constitutes a "derivative" security. The market value of derivative
instruments and securities sometimes is more volatile than that of other
investments, and each type of derivative instrument may pose its own special
risks. Mitchell Hutchins or the sub-advisers take these risks into account in
their management of the Underlying Funds.

ZERO COUPON BONDS, OID AND PIK SECURITIES. Zero coupon bonds are securities that
pay no periodic interest but instead are sold at a deep discount from their face
value. The buyer of these bonds 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 kinds of zero coupon
bonds. Some are issued in zero-coupon form, including stripped U.S. government
securities issued through the U.S. Treasury. Others are created by brokerage
firms that strip (separate) the coupons (unmatured interest payments) from
interest-paying bonds and sell the principal and the coupons separately.

Some Underlying Funds may invest in other securities with original issue
discount ("OID"), a term that means the securities are issued at a price lower
than their value at maturity even though the securities also may pay cash
dividends. In addition, Investment Grade Income Fund and High Income Fund may
invest in payment-in-kind ("PIK") securities, a term that means interest is paid
in additional securities and not in cash. OID and PIK securities also are more
sensitive to changes in interest rates than securities that pay interest in
cash.

TREASURY INFLATION-PROTECTION SECURITIES. The Underlying Funds may invest in
Treasury Inflation-Protection Securities ("TIPS"), which 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 semiannually on the adjusted
principal value. The principal value of TIPS would

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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.

SOVEREIGN DEBT AND BRADY BONDS. Sovereign debt includes bonds that are issued or
guaranteed 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. The
issuer of the debt or the governmental authorities that control the repayment of
the debt may be unable or unwilling to pay interest or repay principal when due
in accordance with the terms of such debt, and the Underlying Fund may have
limited legal recourse in the event of default. Political conditions, especially
a sovereign entity's willingness to meet the terms of its debt obligations, are
of considerable significance.

Brady bonds are sovereign debt securities issued under a 1989 plan that allows
emerging market countries to restructure their outstanding debt to U.S. and
other banks. Although Brady Bonds are collateralized by U.S. government
securities, payment of interest and repayment of principal is not guaranteed by
the U.S. government.

MORTGAGE- AND ASSET-BACKED SECURITIES. The yield characteristics of mortgage-and
asset-backed securities differ from those of traditional bonds. A major
difference 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 or other assets generally may be prepaid at any time.
Generally, prepayments on fixed-rate mortgage loans will increase during a
period of falling interest rates and decrease during a period of rising interest
rates. Mortgage-and asset-backed securities may also 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 an Underlying Fund's yield. Actual prepayment experience may
cause the yield of a mortgage-backed security to differ from what was assumed
when the Underlying Fund purchased the 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.

The market for privately issued mortgage- and asset-backed securities is smaller
and less liquid than the market for U.S. government mortgage-backed securities.
Both U.S. government and privately issued 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 in this prospectus as "CMOs." 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 especially during periods
of rapid or unanticipated changes in market interest rates, the attractiveness
of some 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 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, and, therefore, the yield
to investors, generally will be reduced. In some instances, an investor may fail
to recoup all of his original investment in the IO, even if the security is
government-guaranteed or is considered to be of the highest credit quality.
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.

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.

CONVERTIBLE SECURITIES. Several Underlying Funds may invest in convertible
securities. A convertible security is a bond, debenture, note, preferred stock
or other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. A convertible security entitles
the holder to

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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, 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.

LOAN PARTICIPATIONS AND ASSIGNMENTS. Certain Underlying Funds may invest in
fixed and floating rate loans arranged through private negotiations with a U.S.
or foreign borrower. These investments normally are participations in or
assignments of all or a portion of loans made by banks. Participations typically
will result in the Underlying Funds' having a contractual relationship only with
the lender, not with the borrower. In a participation, the Underlying Fund is
entitled to receive payments of principal, interest and any loan fees by the
lender only when and if they are received. Also, the Underlying Fund may not
directly benefit from any collateral supporting the underlying loan. As a
result, the Underlying Fund assumes the credit risk of both the borrower and the
lender that is selling the participation. If the lender becomes insolvent, the
Underlying Fund may be treated as a general creditor of the lender and may not
benefit from any set-off between the lender and the borrower. In a loan
assignment, the Underlying Fund is entitled to receive payments directly from
the borrower and, therefore, does not depend on the selling bank to pass these
payments on to the Underlying Fund.

COUNTERPARTIES. An Underlying Fund may be exposed to the risk of insolvency of
another party with which the Underlying Fund enters into a transaction, such as
a repurchase agreement or a derivative contract. To help lessen those risks,
Mitchell Hutchins and the applicable sub-advisers, subject to the supervision of
the respective boards, monitor and evaluate the creditworthiness of the parties
with which each Underlying Fund does business.

CONCENTRATION IN MORTGAGE-BACKED SECURITIES. U.S. Government Income Fund and Low
Duration Income Fund each concentrates at least 25% of its total assets in U.S.
government and privately issued mortgage- and asset-backed securities. This
policy has the effect of increasing each of these Underlying Fund's exposure to
the risks of these securities and might cause its net asset value to fluctuate
more than would otherwise be the case. Some types of mortgage-backed securities,
including IOs, POs and inverse floating rate classes of these securities, can be
extremely volatile and may become illiquid. Low Duration Income Fund does not
invest in these classes of mortgage-backed securities.

NON-DIVERSIFIED STATUS. Global Income Fund is "non-diversified," as that term is
defined in the 1940 Act. This means that it is permitted to invest a greater
proportion of its assets in the securities of a smaller number of issuers. As a
result, that Fund may be subject to greater risk because its return and the
price of its shares may be significantly affected by the market condition or
market assessment of a single issuer.

YEAR 2000 RISKS. Like other mutual funds, financial and business organizations
around the world, each of the Portfolios and Underlying Funds could be adversely
affected if the computer systems used by Mitchell Hutchins, other service
providers and entities with computer systems that are linked to Portfolio
records do not properly process and calculate date-related information and data
from and after January 1, 2000. This is commonly known as the "Year 2000 Issue."
Mitchell Hutchins is taking steps that it believes are reasonably designed to
address the Year 2000 Issue with respect to the computer systems that it uses
and to obtain satisfactory assurances that comparable steps are being taken by
each of the Portfolio's other major service providers. However, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
Portfolios.

Similarly, the companies in which Underlying Funds invest and trading systems
used by the Underlying Funds could be adversely affected by the Year 2000 Issue.
The ability of a company or trading system to respond successfully to the Year
2000 Issue requires both technological sophistication and diligence, and there
can be no assurance that any steps taken will be sufficient to avoid an adverse
impact.

INVESTMENT TECHNIQUES AND STRATEGIES

HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS. Each Underlying Fund
except Cashfund may use derivative instruments, which may include options (both
exchange traded and OTC), futures contracts and forward currency contracts, in
strategies intended to reduce the overall risk of its investments ("hedge") or,
in the case of some Underlying Funds, to enhance income or return (including
reallocating exposure to different asset classes) or realize gains. Use of these
derivative instruments solely to enhance income or realize gains may be
considered a form of speculation. The Underlying Funds that invest substantially
in bonds also may use interest rate swaps and similar contracts to preserve a
return or spread on a particular investment or

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portion of their portfolios or to protect against an increase in the price of
securities that the Underlying Fund anticipates purchasing at a later date. New
financial products and risk management techniques continue to be developed, and
may be used by an Underlying Fund if consistent with its investment objective
and policies. The Statement of Additional Information contains further
information on these derivative instruments and related strategies. The
Underlying Funds might not use any derivative instruments or strategies, and
there can be no assurance that using them will succeed. If Mitchell Hutchins or
the applicable sub-adviser is incorrect in its judgment on market values,
interest rates or other economic factors in using a hedging strategy, an
Underlying Fund may have lower net income and a net loss on the investment. Each
of these strategies involves certain risks, which include:

- - the fact that the skills needed to implement a strategy using derivative
instruments are different from those needed to select securities for the
Underlying Funds;

- - the possibility of imperfect correlation, or even no correlation, between
price movements of derivative instruments used in hedging strategies and price
movements of the securities or currencies being hedged;

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

- - the possibility that an Underlying Fund is unable to close out or liquidate
its hedged position.

REPURCHASE AGREEMENTS. All the Underlying Funds may use repurchase agreements
and the Portfolios also may use them in investing cash reserves. Repurchase
agreements are transactions in which a Portfolio or Underlying Fund purchases
obligations from a bank or recognized securities dealer (or their affiliates)
and simultaneously commits to resell the obligations to that counterparty,
usually no more than seven days after purchase, 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. The Funds or Portfolios
maintain custody of the underlying obligations prior to their repurchase, either
through a regular custodian or through a special "tri-party" custodian or
sub-custodian that maintains separate accounts for both the Fund or Portfolio
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. 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 or Portfolio may suffer delays, costs and
possible losses in connection with the disposition of collateral. The Funds and
Portfolios intend to enter into repurchase agreements only with banks and
dealers in transactions believe by Mitchell Hutchins or the sub-adviser to
present minimum credit risks in accordance with the guidelines established by
the applicable board.

BORROWINGS, DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS. U.S. Government
Income Fund and Low Duration Income Fund each may invest in "arbitraged" dollar
roll and reverse repurchase transactions. Certain Underlying Funds may also
enter into reverse repurchase agreements. In a dollar roll, the Underlying Fund
sells mortgage-backed or other securities for delivery on the next regular
settlement date and, simultaneously, contracts to purchase substantially
identical securities for delivery on a later settlement date. In a reverse
repurchase agreement, the Underlying Fund sells securities to a bank or dealer
and agrees to repurchase them on demand or on a specified future date and at a
specified price. In "arbitraged" transactions, the Underlying Fund maintains an
offsetting position in cash or in U.S. government or investment grade bonds that
mature on or before the settlement date of the related dollar roll or reverse
repurchase agreement. Mitchell Hutchins believes that these "arbitraged"
transactions do not present the risks that are normally associated with
leverage. These Underlying Funds may invest up to 5% of their total assets in
dollar rolls that are not arbitraged. These dollar rolls and reverse repurchase
transactions are subject to each of these Underlying Fund's limitation on
borrowings and may not exceed 33 1/3% of its total assets. Each of these
Underlying Funds also may borrow for temporary or emergency purposes, but not in
excess of an additional 5% of its total assets.

Each other Underlying Fund may borrow money and use reverse repurchase
agreements subject to its limitation on borrowings, which varies from 10% to
33 1/3% of total assets.

Each Portfolio also may borrow money for temporary or emergency purposes in an
amount not exceeding 33 1/3% of its total assets.

WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Each Underlying Fund may purchase
securities on a "when-issued" or delayed-delivery basis. In when-issued or
delayed-delivery transactions, delivery of the securities occurs beyond normal
settlement periods, but the Underlying Fund would not pay for such securities or
start earning interest on them until they are delivered.

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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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However, when the Underlying Fund purchases securities on a when-issued or
delayed-delivery basis, it immediately assumes the risks of ownership, including
the risk of price fluctuation.

LENDING PORTFOLIO SECURITIES. Each Underlying Fund may lend its securities to
qualified broker-dealers or institutional investors in an amount up to 33 1/3%
of its total assets. Lending securities enables an Underlying Fund to earn
additional income but could result in a loss or delay in recovering these
securities.

PORTFOLIO TURNOVER. Each Portfolio's and Underlying Fund's portfolio turnover
rate may vary greatly from year to year and will not be a limiting factor when
Mitchell Hutchins or a sub-adviser deems portfolio changes appropriate. A higher
turnover rate (100% or more) for a Portfolio or Underlying Fund will involve
correspondingly greater transaction costs, which will be borne directly by the
Portfolio or Underlying Fund, and may increase the potential for short-term
capital gains.

DEFENSIVE POSITIONS; CASH RESERVES. When Mitchell Hutchins or the applicable
sub-adviser believes that unusual market or economic circumstances warrant a
defensive posture, an Underlying Fund may temporarily commit all or any portion
of its assets to cash or investment grade money market instruments of U.S.
issuers (and foreign issuers for some Underlying Funds), including repurchase
agreements. Each Underlying Fund may invest up to 35% of its total assets in
cash or investment grade money market instruments of U.S. issuers (and foreign
issuers for some Underlying Funds) for liquidity purposes or pending investment
in other securities.

ILLIQUID SECURITIES. Each Underlying Fund may invest up to 10% or 15% of its net
assets in illiquid securities, including repurchase agreements maturing in more
than seven days, certain cover for OTC options and securities whose disposition
is restricted under the federal securities laws. The Underlying Funds do not
consider securities that are eligible for resale pursuant to SEC Rule 144A to be
illiquid securities if Mitchell Hutchins or the sub-adviser, as applicable, has
determined such securities to be liquid based upon the trading markets for the
securities and under procedures approved by the Underlying Funds' boards.
Investing in 144A securities could have the effect of increasing the level of
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities. The lack of a liquid
secondary market for illiquid securities may make it more difficult for an
Underlying Fund to assign a value to those securities for purposes of
calculating its net asset value.

Each Portfolio may invest up to 15% of its net assets in illiquid securities,
including Rule 144A securities, but intends to use this authorization only in
connection with its investment of cash reserves in short-term securities.

OTHER INFORMATION. Each Underlying Fund may invest up to 10% of its total assets
in the securities of other investment companies. To the extent an Underlying
Fund invests in other investment companies, its shareholders, including the
Portfolios, incur duplicative fees and expenses, including investment advisory
fees.

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FLEXIBLE PRICING-SM-

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

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

CLASS A SHARES

HOW PRICE IS CALCULATED: The price is the net asset value plus the initial sales
charge (the maximum is 4.5% of the public offering price; 4% for Conservative
Portfolio) next calculated after PaineWebber's New York City headquarters or
PFPC Inc., the Portfolios' transfer agent ("Transfer Agent"), receives the
purchase order. Although investors pay an initial sales charge when they buy
Class A shares, the ongoing expenses for this class are lower than the ongoing
expenses of Class B and Class C shares. Class A shares sales charges are
calculated as follows:

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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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AGGRESSIVE PORTFOLIO AND MODERATE PORTFOLIO

<TABLE>
<CAPTION>
SALES CHARGE AS DISCOUNT TO
A PERCENTAGE OF SELECTED
--------------------- DEALERS
OFFERING NET AMOUNT AS PERCENTAGE OF
AMOUNT OF INVESTMENT PRICE INVESTED OFFERING PRICE
- --------------------------------------------- -------- ---------- ----------------
<S> <C> <C> <C>
Less than $50,000............................ 4.50% 4.71% 4.25%
$50,000 to $99,999........................... 4.00 4.17 3.75
$100,000 to $249,999......................... 3.50 3.63 3.25
$250,000 to $499,999......................... 2.50 2.56 2.25
$500,000 to $999,999......................... 1.75 1.78 1.50
$1,000,000 and over(1)....................... None None 1.00(2)
</TABLE>

CONSERVATIVE PORTFOLIO

<TABLE>
<CAPTION>
SALES CHARGE AS DISCOUNT TO
A PERCENTAGE OF SELECTED
--------------------- DEALERS
OFFERING NET AMOUNT AS PERCENTAGE OF
AMOUNT OF INVESTMENT PRICE INVESTED 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 representing reinvestment of any dividends or other
distributions are not subject to the 1% charge. Withdrawals under the
Systematic Withdrawal Plan are not subject to this charge. However,
investors may withdraw no more than 12% of the value of the Portfolio
account under the Plan in the first year after purchase.

(2) Mitchell Hutchins pays 1% to PaineWebber.

SALES CHARGE REDUCTIONS & WAIVERS

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

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

- - their spouses, parents or children under age 21;

- - their Individual Retirement Accounts (IRAs);

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

- - any company controlled by the investor;

- - trusts created by the investor;

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

- - accounts with the same adviser.

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

The sales charge will not apply when the investor:

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

- - is the spouse, parent or child of any of the above;

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

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

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

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

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

- - is an employer establishing an employee benefit plan qualified under section
401, including a salary reduction plan qualified under section 401(k) or
section 403(b) of the Internal Revenue Code ("Code") (each a "qualified
plan"). (This waiver is subject to minimum requirements, with respect to the
number of employees and the amount of plan assets, established by Mitchell
Hutchins. Currently, the plan must have 50 or more eligible employees and at
least $1 million in assets.) 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;

- - is a participant in the PaineWebber Members Only Program-TM-. 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;

- - is 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 1% of the amount invested;

- - acquires Class A 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 Class A 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;

- - acquires Class A shares in connection with a reorganization pursuant to which
a Portfolio acquires substantially all of the assets and liabilities of
another investment company in exchange solely for shares of the Portfolio; or

- - acquires Class A 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.
For more information on how to get any reduced sales charge, investors should
contact their investment executive at PaineWebber or one of its correspondent
firms or call 1-800-647-1568. Investors must provide satisfactory information to
PaineWebber or the Portfolio if they seek any of these sales charge reductions
or waivers.

CLASS B SHARES

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

Depending on how long they own their Portfolio investment, investors may have to
pay a sales charge when they sell their Portfolio shares. This sales charge is
called a "contingent deferred sales charge." The amount of the charge depends on
how long the investor owned the shares. The sales charge is calculated by
multiplying the offering price (net asset value at the time of purchase) or the
net asset value of the shares at the time of sale by the shareholder, whichever
is less, by the percentage shown on the following table. Investors who own
shares for more than six years do not have to pay a sales charge when selling
those shares.

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

CONVERSION OF CLASS B SHARES

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

- --------------------------------------------------------------------------------
Prospectus Page 28
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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MINIMIZING THE CONTINGENT DEFERRED SALES CHARGE

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

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

- - Second, Class B shares held in the Portfolio the longest.

WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGE

The contingent deferred sales charge will not apply to:

- - sales of shares under the Portfolio's "Systematic Withdrawal Plan" (investors
may withdraw annually no more than 12% of the value of the Portfolio account
under the Plan);

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

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

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

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

Investors must provide satisfactory information to PaineWebber or the Portfolio
if they seek any of these waivers.

CLASS C SHARES

HOW PRICE IS CALCULATED: The price of Class C shares is the net asset value next
calculated after PaineWebber's New York City headquarters or the Transfer Agent
receives the purchase order. Investors do not pay an initial sales charge when
they buy Class C shares, but the ongoing expenses of Class C shares are higher
than those of Class A shares. Because investors do not pay an initial sales
charge when they buy Class C shares, 100% of their purchase is immediately
invested. Class C shares never convert to any other class of shares.

A contingent deferred sales charge of 1% (0.75% for Conservative Portfolio) of
the offering price (net asset value at the time of purchase) or the net asset
value of the shares 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. Other
PaineWebber mutual funds may impose a different contingent deferred sales charge
on Class C shares sold within one year of the purchase date. A sale of Class C
shares acquired through an exchange and held less than one year will be subject
to the same contingent deferred sales charge that would have been imposed on the
Class C shares of the PaineWebber mutual fund originally purchased. Class C
shares representing reinvestment of any dividends or capital gain distributions
will not be subject to the 1% (0.75% for Conservative Portfolio) charge.
Withdrawals under the Systematic Withdrawal Plan also will not be subject to
this charge. However, investors may withdraw no more than 12% of the value of
the Portfolio account under the Plan in the first year after purchase.

CLASS Y SHARES

HOW PRICE IS CALCULATED. Eligible investors may purchase Class Y shares at the
net asset value next calculated after PaineWebber's New York City headquarters
or the Transfer Agent receives the purchase order. Because investors do

not pay an initial sales charge when they buy Class Y shares, 100% of their
purchase is immediately invested. No contingent deferred sales charge is imposed
on Class Y shares, and the ongoing expenses for Class Y shares are lower than
for the other classes because Class Y shares are not subject to rule 12b-1
distribution or service fees.

LIMITED GROUP OF INVESTORS. Only the following investors are eligible to buy
Class Y shares:

- - a participant in the PW Program listed below when Class Y shares are purchased
through that PW Program;

- - an investor who buys $10 million or more at any one time in any combination of
PaineWebber mutual funds in the Flexible Pricing-SM- System; or

- - a qualified plan that has either

5,000 or more eligible employees or

$50 million or more in assets.

PACE MULTI-ADVISOR PROGRAM. An investor who participates in PACE Multi-Advisor
Program is eligible to purchase Class Y shares. The PACE Multi-Advisor Program
is an advisory program sponsored by PaineWebber that provides comprehensive
investment services, including investor profiling, a personalized asset
allocation strategy using an appropriate combination of funds and a quarterly
investment performance review. Participation in the PACE Multi-Advisor Program
is subject to payment of an advisory fee at the effective maximum annual rate of
1.5% of assets. Employees of PaineWebber and its affiliates are entitled to a
waiver of this fee.

Please contact your PaineWebber investment executive or PaineWebber's
correspondent firms for more information concerning mutual funds that are
available in the PACE Multi-Advisor Program.

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Prospectus Page 29
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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HOW TO BUY SHARES

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

Prices are calculated for each class of a Portfolio's shares once each Business
Day, at the close of regular trading on the New York Stock Exchange (usually
4:00 p.m., Eastern time). Prices will be calculated earlier when the New York
Stock Exchange closes early because trading has been halted for the day. A
"Business Day" is any day, Monday through Friday, on which the New York Stock
Exchange is open for business. Shares are purchased at the next share price
calculated after the purchase order is received by PaineWebber's New York City
headquarters or the Transfer Agent.

Each Portfolio and Mitchell Hutchins reserve the right to reject any purchase
order and to suspend the offering of Portfolio shares for a period of time.

When placing an order to buy shares, investors should specify which class of
shares they want to buy. If investors fail to specify the class, they will
automatically receive Class A shares, which include an initial sales charge.
Investors in Class Y shares must provide satisfactory information to PaineWebber
or the Portfolio that they are eligible to purchase Class Y shares.

PAINEWEBBER CLIENTS

Investors who are PaineWebber clients may buy shares through PaineWebber
investment executives or its correspondent firms. Investors may buy shares in
person, by mail, by telephone or by wire (the minimum wire purchase is $1
million). PaineWebber investment executives and correspondent firms are
responsible for promptly sending investors' purchase orders to PaineWebber's New
York City headquarters. Investors may pay for their purchases with checks drawn
on U.S. banks or with funds they have in their brokerage accounts at PaineWebber
or its correspondent firms.

OTHER INVESTORS

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

New investors to PaineWebber may complete and sign an account application and
mail it along with a check. Investors may also open an account in person.

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

- - mail an application with a check; or

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

Investors do not have to send an application when making additional investments
in the Portfolio.

MINIMUM INVESTMENTS

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

A Portfolio may waive or reduce these minimums for:

- - employees of PaineWebber or its affiliates;

- - participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the Portfolio's automatic investment plan; or

- - transactions in Class A and Class Y shares made in certain investment
programs.

HOW TO EXCHANGE SHARES

As shareholders, investors have the privilege of exchanging Class A, Class B and
Class C shares of the Portfolios for the same class of shares of most other
PaineWebber mutual funds. For classes of shares where no initial sales charge is
imposed, a contingent deferred sales charge may apply if the investor sells the
shares acquired through the exchange. Class Y shares are not exchangeable.

Exchanges may be subject to minimum investment requirements of the fund into
which exchanges are made.

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

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

- the investor's name and address;

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Prospectus Page 30
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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- the Portfolio's name;

- the Portfolio account number;

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

- a guarantee of each registered owner's signature. A signature guarantee may
be obtained from a domestic bank or trust company, broker, dealer, clearing
agency or savings association which is a participant in a medallion program
recognized by the Securities Transfer Association. The three recognized
medallion programs are Securities Transfer Agent Medallion Program (STAMP),
Stock Exchanges Medallion Program (SEMP) and the New York Stock Exchange
Medallion Signature Program (MSP). Signature guarantees which are not a part
of these programs will not be accepted.

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

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

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

HOW TO SELL SHARES

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

Investors can sell (redeem) shares at any time. Shares will be sold at the share
price for that class as next calculated (less any applicable contingent deferred
sales charge) after the order is received by PaineWebber's New York City
headquarters or the Transfer Agent. Share prices are normally calculated at the
close of regular trading on the New York Stock Exchange (usually 4:00 p.m.,
Eastern time). Prices will be calculated earlier when the New York Stock
Exchange closes early because trading has been halted for the day.

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

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

Investors who have an account with PaineWebber or one of PaineWebber's
correspondent firms can sell their shares by contacting their investment
executive. Investors who do not have an account and have bought their shares
through

the Transfer Agent may sell shares by writing a "letter of instruction," as
detailed in "How to Exchange Shares."

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

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Prospectus Page 31
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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REINSTATEMENT PRIVILEGE

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

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

OTHER SERVICES

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

Investors should consult their investment executives at PaineWebber or one of
its correspondent firms to learn more about the following services available
with respect to the Portfolios' Class A, Class B and Class C shares:

AUTOMATIC INVESTMENT PLAN

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

SYSTEMATIC WITHDRAWAL PLAN

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

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

- - CLASS B SHARES. Minimum value of Portfolio shares is $20,000; minimum monthly,
quarterly, semiannual and

annual withdrawals of $200, $400, $600 and $800, respectively.

Withdrawals under the Systematic Withdrawal Plan will not be subject to a
contingent deferred sales charge. An investor may withdraw no more than 12% of
the value of the Portfolio account when the investor signed up for the Plan
(annually for Class B shares; during the first year under the Plan for Class A
and Class C shares). Shareholders who elect to receive dividends or other
distributions in cash may not participate in the Plan.

INDIVIDUAL RETIREMENT ACCOUNTS

Self-directed IRAs are available through PaineWebber in which purchases of
PaineWebber mutual funds and other investments may be made. Investors
considering establishing an IRA should review applicable tax laws and should
consult their tax advisers.

TRANSFER OF ACCOUNTS

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

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

MANAGEMENT

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

The Portfolios are governed by a board of trustees, which oversees their
operations. Each Portfolio has appointed Mitchell Hutchins as investment adviser
and administrator responsible for that Portfolio's operations (subject to the
authority of the board). As investment adviser and administrator, Mitchell
Hutchins supervises all aspects of each Portfolio's operations and makes and
implements all investment decisions for that Portfolio.

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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York
10019, is an asset management subsidiary of PaineWebber Incorporated, which is
wholly owned by Paine Webber Group Inc., a publicly owned financial services
holding company. On August 31, 1998 Mitchell Hutchins was adviser or sub-adviser
of 32 investment companies with 68 separate portfolios and aggregate assets of
approximately $38.9 billion.

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

T. Kirkham Barneby, Dennis McCauley and Mark A. Tincher are responsible for the
day-to-day management of each Portfolio's investments.

Mr. Barneby is a managing director and chief investment officer of quantitative
investments of Mitchell Hutchins. Mr. Barneby rejoined Mitchell Hutchins in 1994
after being with Vantage Global Management for one year. During the eight years
that Mr. Barneby was previously with Mitchell Hutchins, he was a senior vice
president responsible for quantitative management and asset allocation models.

Dennis McCauley is a managing director and chief investment officer of fixed
income investments of Mitchell Hutchins. Prior to joining Mitchell Hutchins in
December 1994, Mr. McCauley was director of fixed income investments of IBM
Corporation.

Mark A. Tincher is a managing director and chief investment officer of equities
of Mitchell Hutchins. Prior to joining Mitchell Hutchins in March 1995, Mr.
Tincher was a vice president of Chase Manhattan Private Bank where he directed
the U.S. funds management and equity research areas.

MANAGEMENT FEES & OTHER EXPENSES

Each Portfolio incurs various expenses in its operations, such as the management
fee paid to Mitchell Hutchins, 12b-1 distribution and service fees paid with
respect to the various classes, custody and transfer agency fees, brokerage
commissions, professional fees, expenses of board and shareholder meetings, fees
and expenses relating to registration of its shares, taxes and governmental
fees, fees and expenses of trustees, costs of obtaining insurance, expenses of
printing and distributing shareholder materials, organizational expenses and
extraordinary expenses, including costs or losses in any litigation.

Each Portfolio has agreed to pay Mitchell Hutchins a monthly fee for its
services at the annual rate of 0.35% of its average daily net assets. Mitchell
Hutchins intends to waive its management fees and reimburse expenses for each
Portfolio (to the extent that those expenses are not paid by the Underlying
Funds pursuant to an SEC exemptive order, as described below), so that the total
operating expenses for each class of shares of each Portfolio do not exceed the
amounts shown in the Expense Table for the fiscal year ending May 31, 1999.
Although Mitchell Hutchins currently expects to continue such waivers and
expense reimbursements after May 31, 1999, it may discontinue or change them at
any time after that date.

The Portfolios, Mitchell Hutchins, PaineWebber and the Underlying Funds have
received exemptive relief from the SEC that permits them to enter into a
"Servicing Agreement." Under the proposed Servicing Agreement, Mitchell Hutchins
would arrange for all services pertaining to the operation of the Portfolios.
The officers of the Underlying Funds, at the direction of the Funds' boards,
would determine annually whether the aggregate administrative expenses (which
include transfer agent expenses, shareholder servicing expenses, custody, legal
and accounting fees, but do not include 12b-1 distribution and service fees or
extraordinary expenses) of a Portfolio with respect to its investment in an
Underlying Fund are greater than the estimated savings to the Underlying Fund
from the operation of the Portfolio. If the aggregate financial benefits to the
Underlying Fund equal or exceed the administrative expenses of a Portfolio with
respect to its investment in the Underlying Fund, there would be no charge to
the Portfolio for the services under the Servicing Agreement. The expenses would
be passed through to the Underlying Fund in proportion to the average daily
value of each Underlying Fund's shares held by each Portfolio, provided further
that no Underlying Fund would bear such expenses in excess of the estimated
savings to it. Consequently, no Underlying Fund would be expected to carry
expenses that are in excess of the estimated savings to it. The estimated
savings are expected to result from the reduction of shareholder servicing costs
due to the elimination of separate shareholder accounts which otherwise might be
invested in the Underlying Funds. All expenses of the Portfolios, excluding
certain non-recurring and extraordinary expenses, would be paid for in
accordance with the Servicing Agreement.

Each Underlying Fund pays a management fee to Mitchell Hutchins (PaineWebber for
Cashfund) and also pays other operating expenses. An investor in a Portfolio
will indirectly pay both the Portfolio's management fee and other expenses and
the management fees and other expenses of the Underlying Funds held by that
Portfolio. Investors who do not wish to take advantage of the Portfolios'
allocation of their assets among several

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Prospectus Page 33
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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Underlying Funds may invest directly in the Underlying Funds and thereby avoid
incurring the management fee and other expenses paid by each Portfolio.

DISTRIBUTION ARRANGEMENTS

Mitchell Hutchins is the distributor of each Portfolio's shares and has
appointed PaineWebber as the exclusive dealer for the sale of those shares.
There is no distribution plan with respect to the Portfolios' Class Y shares.
Under distribution plans for Class A, Class B and Class C shares ("Class A
Plan," "Class B Plan" and "Class C Plan," collectively, "Plans"), each Portfolio
pays Mitchell Hutchins:

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

- - Monthly distribution fees at the annual rate of 0.75% of the average daily net
assets of Class B shares.

- - Monthly distribution fees at the annual rate of 0.75% (0.50% for Conservative
Portfolio) of the average daily net assets of Class C shares.

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

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

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

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

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

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

The Plans and the related distribution contracts for Class A, Class B and Class
C shares ("Distribution Contracts") specify that each Portfolio must pay service
and distribution fees to Mitchell Hutchins for its activities, not as
reimbursement for specific expenses incurred. Therefore, even if Mitchell
Hutchins' expenses exceed the service or distribution fees it receives, the
Portfolios 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 Portfolios. Annually, the
board reviews the Plan and Mitchell Hutchins' corresponding expenses for each
class separately from the Plans and expenses of the other classes.

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DETERMINING THE SHARES' NET ASSET VALUE

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

The net asset value of a Portfolio's shares fluctuates and is determined
separately for each class, normally as of the close of regular trading on the
New York Stock Exchange ("NYSE") (usually 4:00 p.m., Eastern time) each Business
Day. Each Portfolio's net asset value per share is determined by dividing the
value of the securities it holds (that is, the shares of Underlying Funds), plus
any cash or other assets, minus all liabilities, by the total number of
Portfolio shares outstanding. The value of each Underlying Fund will be its net
asset value at the time of computation.

If trading on the NYSE is halted for the day before 4:00 p.m., Eastern time, and
trading on the NYSE will not resume again that day, the Portfolio's net asset
value per share will be calculated at the time trading was halted.

Short-term investments that have a maturity of more than 60 days are valued at
prices based on market quotations

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Prospectus Page 34
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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for securities of similar type, yield and maturity. The amortized cost method of
valuation generally is used to value debt obligations with 60 days or less
remaining to maturity, unless the board determines that this does not represent
fair value.

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DIVIDENDS & TAXES

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DIVIDENDS

Each of Conservative Portfolio and Moderate Portfolio declares and pays
dividends from its net investment income quarterly; Aggressive Portfolio
declares and pays dividends from its net investment income annually. A
Portfolio's net investment income consists of dividends paid to it from the net
investment income of the Underlying Funds in which it holds shares--plus accrued
interest and earned discount (including both original issue and market
discounts) on direct investments in money market or other short-term debt
investments, if any--less applicable expenses. Each Portfolio also annually
distributes substantially all of its net capital gains, if any, which consist of
(1) distributions to it from the net capital gains, if any, of Underlying Funds
in which it holds shares and (2) net gains realized from the Portfolio's
disposition of Underlying Fund shares (which dispositions generally are
occasioned by reallocating the Portfolio's assets among Underlying Funds or by
the need to make distributions and/or payments of redemption proceeds in excess
of available cash). A Portfolio may make additional distributions, if necessary,
to avoid a 4% excise tax on certain undistributed income and capital gains.

Dividends and other distributions paid on each class of shares of a Portfolio
are calculated at the same time and in the same manner. Dividends on Class A,
Class B and Class C shares of a Portfolio are expected to be lower than those on
its Class Y shares because the other classes have higher expenses resulting from
their distribution and service fees. Similarly, dividends on Class B and Class C
shares of a Portfolio are expected to be lower than those on its Class A shares
because Class B and Class C shares have higher expenses resulting from their
distribution fees. For the same reason, dividends on Conservative Portfolio's
Class B shares are expected to be lower than those on its Class C shares.

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

TAXES

Each Portfolio intends to continue to qualify for treatment as a regulated
investment company under the Code so that it will not have to pay federal income
tax on the part of its investment company taxable income (generally consisting
of net investment income and net short-term capital gain) ("taxable income") and
net capital gain (that is, the excess of net long-term capital gain over net
short-term capital loss) that it distributes to its shareholders.

Dividends paid to a Portfolio from an Underlying Fund's taxable income (which
may include net gains from certain foreign currency transactions) are included
in the Portfolio's taxable income, and dividends from the latter (whether paid
in cash or additional shares) generally are taxable to the Portfolio's
shareholders as ordinary income. Distributions of a Portfolio's net capital
gain, consisting of distributions to it of net capital gain from Underlying
Funds in which it holds shares and net gains realized from the Portfolio's
disposition of Underlying Fund shares held for more than twelve months (whether
paid in cash or additional shares), are taxable to its shareholders as long-term
capital gains, regardless of how long they have held their Portfolio shares.
Under the Taxpayer Relief Act of 1997, as modified by recent legislation, the
maximum tax rate applicable to a non-corporate taxpayers net capital gain
recognized on capital assets held for more than one year is 20% (10% for
taxpayers in the 15% marginal tax bracket). In the case of regulated investment
companies such as the Portfolios and the Underlying Funds, the relevant holding
period is determined by how long they have held the securities on which the gain
was realized, not by how long the shareholders have held their shares.
Shareholders who are not subject to tax on their income generally will not be
required to pay tax on distributions.

YEAR-END TAX REPORTING

Following the end of each calendar year, each Portfolio notifies its
shareholders of the amounts of dividends and

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Prospectus Page 35
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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capital gain distributions paid (or deemed paid) for that year and any portion
of those dividends that qualifies for special treatment.

BACKUP WITHHOLDING

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

TAXES ON THE SALE OR EXCHANGE OF PORTFOLIO SHARES

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

SPECIAL TAX RULES FOR CLASS A SHAREHOLDERS

Special tax rules apply when a shareholder sells (redeems) or exchanges Class A
shares within 90 days of purchase and subsequently acquires Class A shares of a
PaineWebber 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 will increase the basis of the PaineWebber
mutual fund shares subsequently acquired.

CLASS B SHAREHOLDERS

No gain or loss will be recognized by a shareholder as a result of a conversion
from Class B shares to Class A shares.

* * * *

The foregoing only summarizes some of the important tax considerations affecting
the Portfolios and their shareholders. Please see the further discussion in the
Statement of Additional Information. Prospective shareholders are urged to
consult their tax advisers.

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GENERAL INFORMATION

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ORGANIZATION

The Portfolios are diversified series of Mitchell Hutchins Portfolios ("Trust"),
an open-end management investment company formed on August 9, 1996 as a business
trust under the laws of Delaware. The trustees of the Trust have authority to
issue an unlimited number of shares of beneficial interest of separate series,
with a par value of $0.001 per share. The board has established one series other
than the Portfolios.

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

Each share of each Portfolio is entitled to participate equally in dividends,
other distributions and the proceeds of any liquidation of that Portfolio.
However, due to the differing expenses of the classes, dividends and liquidation
proceeds on a Portfolio's Class A, B, C and Y shares will differ.

VOTING RIGHTS

Shareholders of each Portfolio are entitled to one vote for each full share held
and fractional votes for fractional shares held. Voting rights are not
cumulative, and the holders of more than 50% of all the shares of the Portfolios
as a group may elect all the board members of the Trust. The shares of a
Portfolio will be voted together,

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Prospectus Page 36
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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except that only the shareholders of a particular class may vote on matters
affecting only that class, such as the terms of a Plan as it relates to the
class. The shares of each series of the Trust will be voted separately, except
when an aggregate vote of all the securities is required by law.

SHAREHOLDER MEETINGS

The Trust does not intend to hold annual meetings. Shareholders of record of no
less than two-thirds of the outstanding shares of the Trust may remove a board
member 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 board member at the written request of holders of 10% of the
outstanding shares of the Trust.

REPORTS TO SHAREHOLDERS; OTHER INFORMATION

Each Portfolio sends its shareholders audited annual and unaudited semiannual
reports, each of which includes a list of the investment securities held by the
Portfolio as of the end of the period covered by the report. The Statement of
Additional Information, which is incorporated by this reference into this
Prospectus, is available to shareholders upon request.

CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND DISBURSING AGENT

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

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Prospectus Page 37
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MITCHELL HUTCHINS PORTFOLIOS

PROSPECTUS--OCTOBER 1, 1998

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THE PAINEWEBBER FAMILY OF MUTUAL FUNDS consists of the seven
broad categories presented here. Class A, Class B and Class C
shareholders in the Mitchell Hutchins Portfolios may exchange
their shares for the corresponding shares of most funds in the
PaineWebber Family of Mutual Funds.

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

High Income Fund

Investment Grade Income Fund

Low Duration U.S. Government
Income Fund

Strategic Income Fund

U.S. Government Income Fund

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

California Tax-Free Income Fund

Municipal High Income Fund

National Tax-Free Income Fund

New York Tax-Free Income Fund

/ / PAINEWEBBER ASSET ALLOCATION FUNDS for high total return by investing in
stocks and bonds.

Balanced Fund

Tactical Allocation Fund

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

Financial Services Growth Fund

Growth Fund

Growth and Income Fund

Mid Cap Fund

Small Cap Fund

S&P 500 Index Fund

Utility Income Fund

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

Asia Pacific Growth Fund

Emerging Markets Equity Fund

Global Equity Fund

Global Income Fund

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

/ / PAINEWEBBER FUNDS OF FUNDS for either long-term growth of capital; total
return; or income and, secondarily, growth of capital by investing in other
PaineWebber mutual funds.

Mitchell Hutchins Aggressive Portfolio

Mitchell Hutchins Moderate Portfolio

Mitchell Hutchins Conservative Portfolio

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

- -C- 1998 PaineWebber Incorporated

--------------
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<PAGE>
MITCHELL HUTCHINS PORTFOLIOS
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION

The Portfolios described below (each a "Portfolio") are diversified series
of Mitchell Hutchins Portfolios ("Trust"), an open-end management investment
company organized as a Delaware business trust. The Portfolios seek to achieve
their investment objectives by investing in a number of other PaineWebber mutual
funds ("Underlying Funds").

MITCHELL HUTCHINS AGGRESSIVE PORTFOLIO seeks long-term growth of capital by
investing the majority of its assets in equity mutual funds.

MITCHELL HUTCHINS MODERATE PORTFOLIO seeks total return by investing its
assets in a combination of equity and bond mutual funds.

MITCHELL HUTCHINS CONSERVATIVE PORTFOLIO seeks income and, secondarily,
growth of capital by investing the majority of its assets in bond mutual funds.

Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), an asset
management subsidiary of PaineWebber Incorporated ("PaineWebber"), is the
investment adviser, administrator and distributor for each Portfolio. As
distributor, Mitchell Hutchins has appointed PaineWebber to serve as the
exclusive dealer for the sale of the Portfolio shares.

This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Portfolios' current Prospectus dated October
1, 1998. A copy of the Prospectus may be obtained by calling any PaineWebber
investment executive or correspondent firm, or by calling toll-free
1-800-647-1568. This Statement of Additional Information is dated October 1,
1998.

PORTFOLIOS--INVESTMENT POLICIES AND RESTRICTIONS

The following supplements the information contained in the Prospectus
concerning the investment policies and limitations of the Portfolios. Except as
otherwise indicated in the Prospectus or this Statement of Additional
Information, there are no policy limitations on the Portfolios' ability to use
the investments or techniques discussed in these documents.

DIRECT INVESTMENTS IN SECURITIES. As stated in the Prospectus, in addition
to investing in the Underlying Funds, each Portfolio may invest directly in
short-term U.S. government securities, commercial paper and other short-term
corporate obligations and other money market instruments, including repurchase
agreements. Under normal conditions, each Portfolio's investments in these
securities, together with its investments in PaineWebber Cashfund, an Underlying
Fund that is a money market fund, is not expected to exceed 20% of its total
assets. However, when Mitchell Hutchins believes that unusual market or economic
conditions warrant a temporary defensive posture, each Portfolio may invest
without limit in these securities.

REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Portfolio purchases securities or other obligations 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 securities. The Portfolio maintains custody of the
underlying obligations prior to their repurchase, either through its regular
custodian or through a special "tri-party" custodian or subcustodian that
maintains separate accounts for both the Portfolio 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. 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
<PAGE>
obligations and the price that was paid by a Portfolio upon acquisition is
accrued as interest and included in its net investment income.

MONEY MARKET INSTRUMENTS. Money market instruments may include securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
investment grade commercial paper and other short-term corporate obligations,
bank certificates of deposit, bankers' acceptances and repurchase agreements
secured by any of the foregoing.

U.S. GOVERNMENT SECURITIES. The Portfolios may invest in various direct
obligations of the U.S. Treasury and obligations issued or guaranteed by the
U.S. government or one of its agencies or instrumentalities (collectively, "U.S.
government securities"). Among the U.S. government securities that may be held
by the Portfolios are securities that are supported by the full faith and credit
of the United States, securities that are supported by the right of the issuer
to borrow from the U.S. Treasury and securities that are supported solely by the
credit of the instrumentality. U.S. government securities are described in
greater detail in "Underlying Funds--Investment Policies" below.

ILLIQUID SECURITIES. Each Portfolio may invest up to 15% of its net assets
in illiquid securities, although the Portfolios intend to use this authorization
only in connection with their investment of cash reserves in short-term
securities. The term "illiquid securities" for this purpose means securities
that cannot be disposed of within seven days in the ordinary course of business
at approximately the amount at which a Portfolio has valued the securities and
includes, among other things, repurchase agreements maturing in more than seven
days and restricted securities other than those Mitchell Hutchins has determined
to be liquid pursuant to guidelines established by the Trust's board of trustees
("board"). More information about illiquid securities and the circumstances
under which restricted securities can be determined to be liquid is provided
below in "Underlying Funds--Investment Policies, Illiquid Securities". If the
amount of a Portfolio's net assets invested in illiquid securities increases to
more than 15% as a result of a change in the values of its investments or its
amount of total assets, the Portfolio will engage in an orderly disposition to
bring its holdings of such securities to no more than 15% of its net assets.

OTHER INVESTMENTS. Although their fundamental and non-investment
limitations (described below) do not prohibit the Portfolios from purchasing or
selling financial options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative instruments or from
engaging in short sales of securities the Portfolios own (short sales "against
the box"), the Portfolios do not intend to engage in these transactions during
the coming year.

INVESTMENT LIMITATIONS OF THE PORTFOLIOS

FUNDAMENTAL LIMITATIONS. The following fundamental investment limitations
cannot be changed for a Portfolio without the affirmative vote of the lesser of
(a) more than 50% of the outstanding shares of the Portfolio or (b) 67% or more
of the shares of the Portfolio present at a shareholders' meeting if more than
50% of the outstanding shares of the Portfolio are represented at the meeting in
person or by proxy. Except with respect to fundamental investment limitation
(2), if a percentage restriction is adhered to at the time of an investment or
transaction, a later increase or decrease in percentage resulting from a change
in values of portfolio securities or amount of total assets will not be
considered a violation of any of the foregoing limitations.

Each Portfolio will not:

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

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

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

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

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

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

(7) purchase securities of any one issuer if, as a result, more than 5%
of the Portfolio's total assets would be invested in securities of
that issuer or the Portfolio would own or hold more than 10% of the
outstanding voting securities of that issuer, except that up to 25%
of the Portfolio's total assets may be invested without regard to
this limitation, and except that this limitation does not apply to
securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment
companies.

NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions may be
changed by the board without shareholder approval.

Each Portfolio will not:

(1) invest more than 15% of its net assets in illiquid securities, a term
which means securities that cannot be disposed of within seven days
in the ordinary course of business at approximately the amount at
which the Portfolio has valued the securities and includes, among
other things, repurchase agreements maturing in more than seven days.

(2) purchase portfolio securities while borrowings in excess of 5% of its
total assets are outstanding.

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

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

3
<PAGE>
(5) purchase securities of other investment companies, except to the
extent permitted by the 1940 Act or under the terms of an exemptive
order granted by the Securities and Exchange Commission ("SEC") and
except that this limitation does not apply to securities received or
acquired as dividends, through offers of exchange, or as a result of
reorganization, consolidation, or merger.

Notwithstanding the foregoing investment limitations, the Portfolios may
invest in Underlying Funds that have adopted investment limitations that may be
more or less restrictive than those listed above. As a result, the Portfolios
may engage indirectly in investment strategies that are prohibited under the
investment limitations listed above. The investment limitations and other
investment policies and restrictions of each Underlying Fund are described in
its prospectus and statement of additional information.

In accordance with each Portfolio's investment program as set forth in the
Prospectus, a Portfolio may invest more than 25% of its assets in any one
Underlying Fund. However, each Underlying Fund in which a Portfolio may invest
(other than PaineWebber Low Duration U.S. Government Income Fund and PaineWebber
U.S. Government Income Fund) will not concentrate more than 25% of its total
assets in any one industry.

UNDERLYING FUNDS--INVESTMENT POLICIES

The following supplements the information contained in the Prospectus
concerning the investment policies and limitations of the Underlying Funds. With
respect to certain Underlying Funds, Mitchell Hutchins has retained one or more
sub-advisers ("Sub-Adviser" or "Sub-Advisers"), who are identified by name in
the Prospectus. More information about the investment policies and restrictions
and the investment limitations of each Underlying Fund is set forth in its
prospectus and statement of additional information.

YIELD FACTORS AND RATINGS. Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), and
other nationally recognized statistical rating organizations ("NRSROs") are
private services that provide ratings of the credit quality of debt obligations,
bonds and certain other securities. A description of the ratings assigned to
corporate bonds and commercial paper, by Moody's and S&P is included in the
Appendix to this Statement of Additional Information. The process by which S&P
and Moody's determine ratings for mortgage-and asset-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
such securities. Not even the highest such ratings represent 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.

The Underlying 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,
debt obligations with the same maturity, interest rate and rating may have
different market prices. Also, NRSROs may fail to make timely changes in credit
ratings in response to subsequent events so that an issuer's current financial
condition may be better or worse than the rating indicates. The rating assigned
to a security by a NRSRO does not reflect an assessment of the volatility of the
security's market value or of the liquidity of an investment in the security.
Subsequent to its purchase by an Underlying Fund, an issue of debt obligations
may cease to be rated or its rating may be reduced below the minimum rating
required for purchase by that Underlying Fund.

In addition to ratings assigned to individual bond issues, Mitchell Hutchins
or the sub-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 and other debt securities in which the Underlying Funds
invest 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

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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.

Debt securities rated Ba or lower by Moody's, BB or lower by S&P, comparably
rated by another NRSRO or determined by Mitchell Hutchins to be of comparable
quality are below investment grade, are deemed by those agencies to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal and may involve significant risk exposure to adverse
conditions. Lower rated debt securities generally offer a higher current yield
than that available for investment grade issues, but they involve higher 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 which
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 refinancing. The risk of loss due to default by such
issuers is significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness.

The market for lower-rated debt securities has expanded rapidly in recent
years, and its growth generally paralleled a long economic expansion. In the
past, the prices of many lower-rated debt securities declined substantially,
reflecting an expectation that many issuers of such securities might experience
financial difficulties. As a result, the yields on lower-rated debt securities
rose dramatically. However, such higher yields did not reflect the value of the
income stream that holders of such securities expected, but rather the risk that
holders of such securities could lose a substantial portion of their value as a
result of the issuers' financial restructurings or defaults. There can be no
assurance that such declines will not recur.

U.S. GOVERNMENT SECURITIES. The Underlying Funds may invest in various
direct obligations of the U.S. Treasury and obligations issued or guaranteed by
the U.S. government or one of its agencies or instrumentalities. Among the U.S.
government securities that may be held by the Underlying Funds are securities
that are supported by the full faith and credit of the United States, securities
that are supported by the right of the issuer to borrow from the U.S. Treasury
and securities that are supported solely by the credit of the instrumentality.
Certain Underlying Funds may invest in mortgage-backed securities issued or
guaranteed by the U.S. government, its agencies and instrumentalities. These
securities are described below under "Underlying Funds-- Investment
Policies--Mortgage-Backed Securities."

Certain Underlying Funds may invest in exchange rate-related U.S. government
securities. Such securities are indexed to specific foreign currency exchange
rates and generally provide that the interest rate and/or principal amount will
be adjusted upwards or downwards (but not below zero) to reflect changes in the
exchange rate between two currencies while the obligations are outstanding.
While such securities offer the potential for an attractive rate of return, they
also entail the risk of loss of principal.

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 sale
contracts, other installment sale contracts, home equity loans, leases of
various types of real and personal property and receivables from revolving
credit (credit card) agreements. Such assets are securitized through the use of
trusts 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.

MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent direct or
indirect participations in, or are secured by and payable from, mortgage loans
secured by real property and include single- and multi-class mortgage
pass-through securities and collateralized mortgage obligations. U.S. government
mortgage-backed

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securities include mortgage-backed securities 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 mortgage-backed securities are issued by private issuers,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and special
purpose entities (collectively, "Private Mortgage Lenders"). 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.

New types of mortgage-backed securities are developed and marketed from time
to time and, consistent with their investment policies and limitations, the
Underlying Funds expect to invest in these new types of mortgage-backed
securities that Mitchell Hutchins or the applicable Sub-Adviser believes may
assist in achieving the Underlying Fund's investment objective. Similarly, an
Underlying 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 certificate holders such as an underlying Fund.
Mortgage pools consist of whole mortgage loans or participations in loans. The
terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. Lending institutions that originate
mortgages for the pools are subject to certain standards, including credit and
other underwriting criteria for individual mortgages included in the pools.

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

FREDDIE MAC CERTIFICATES. Freddie Mac also facilitates a national secondary
market for conventional residential and U.S. government-insured mortgage loans
through its mortgage purchase and mortgage-backed securities sales activities.
Freddie Mac issues two types of mortgage pass-through securities: mortgage
participation certificates ("PCs") and guaranteed mortgage certificates
("GMCs"). Each PC represents a pro rata share of all interest and principal
payments made and owed on the underlying pool. Freddie Mac generally guarantees
timely monthly payment of interest on PCs and the ultimate payment of principal,
but it also has a PC program under which it guarantees timely payment of both
principal and interest. GMCs also represent a pro rata interest in a pool of
mortgages. These instruments, however, pay interest semiannually 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 the pass-through
certificates and collateralized mortgage obligations ("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-

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

In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, also referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrued on all classes of a CMO (other than any principal
only or "PO" class) on a monthly, quarterly or semiannual basis. The principal
and interest on the Mortgage Assets may be allocated among the several classes
of a CMO in many ways. In one structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of a
CMO in the order of their respective stated maturities or final distribution
dates so that no payment of principal will be made on any class of the CMO until
all other classes having an earlier stated maturity or final distribution date
have been paid in full. In some CMO structures, all or a portion of the interest
attributable to one or more of the CMO classes may be added to the principal
amounts attributable to such classes, rather than passed through to
certificateholders on a current basis, until other classes of the CMO are paid
in full.

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

TYPES OF CREDIT ENHANCEMENT. To lessen the effect of failures by obligors
on Mortgage Assets to make payments, mortgage-backed securities may contain
elements of credit enhancement. Such credit enhancement falls into two
categories: (1) liquidity protection and (2) protection against losses resulting
after default by an obligor on the underlying assets and collection of all
amounts recoverable directly from the obligor and through liquidation of the
collateral. Liquidity protection refers to the 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. Protection against losses resulting
after default and liquidation ensures ultimate

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payment of the obligations on at least a portion of the assets in the pool. Such
protection may be provided through guarantees, insurance policies or letters of
credit obtained by the issuer or sponsor, from third parties, through various
means of structuring the transaction or through a combination of such
approaches. The Underlying Funds 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
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that principal
may be prepaid at any time because the underlying mortgage loans or other
obligations generally may be prepaid at any time. 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 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 average
of 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 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

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

ADDITIONAL INFORMATION ON ADJUSTABLE RATE MORTGAGE AND FLOATING RATE
MORTGAGE-BACKED SECURITIES. Adjustable rate mortgage ("ARM") securities are
mortgage-backed securities 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 (such mortgage loans are
referred to as "ARMs"). 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, ARM securities generally do not decrease in
value as much as fixed rate securities. Conversely, during periods of declining
rates, ARM securities generally do not increase in value as much as fixed rate
securities. ARM securities represent a right to receive interest payments at a
rate that is adjusted to reflect the interest earned on a pool of ARMs. ARMs
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 ARMs specify limitations on the maximum
amount by which the mortgage interest rate may adjust for any single adjustment
period. ARMs also may limit changes in the maximum amount by which the
borrower's monthly payment may adjust for any single adjustment period. In the
event that a monthly payment is not sufficient to pay the interest accruing on
the ARM, any such excess interest is added to the mortgage loan ("negative
amortization"), which is repaid through future 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. Borrowers under ARMs experiencing
negative amortization may take longer to build up their equity in the underlying
property and may be more likely to default.

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

The rates of interest payable on certain ARMs, 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 ARMs 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

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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.

DURATION. Duration is a measure of the expected life of a fixed income
security that was developed as a more precise alternative to the concept "term
to maturity." Traditionally, a debt security'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 a debt security
provides for a final payment, taking no account of the pattern of the security's
payments prior to maturity.

For any fixed income security with interest payments occurring prior to the
payment of principal, duration is always less than maturity. For example,
depending upon 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 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. 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 a 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, Mitchell Hutchins
and the applicable Sub-Advisers 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.

ZERO COUPON BONDS, OID AND PIK SECURITIES. Federal tax law requires that
the holder of a bond with original issue discount ("OID") accrue a portion of
the OID on the bond as income each year, even though the holder may receive no
interest payment on the bond during the year. Accordingly, although an investing
Underlying Fund will receive no payments on its zero coupon bonds prior to their
maturity or disposition, it will have income attributable to such bonds.
Similarly, while payment-in-kind ("PIK") securities may pay interest in the form
of additional securities rather than cash, that interest must be included in an
Underlying Fund's annual income.

To qualify for pass-through federal income tax treatment as a regulated
investment company, an Underlying Fund must distribute substantially all of its
net investment income each year, including non-cash income. Accordingly, each
Underlying Fund will be required to include in its dividends an amount equal to
the income attributable to its zero coupon bonds and other OID and PIK
securities. Those dividends will be paid from the cash assets of an Underlying
Fund or by liquidation of portfolio securities, if necessary, at a time when the
Underlying Fund otherwise might not have done so.

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<PAGE>
Certain zero coupon bonds 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 (Certificates of Accrual
Treasury Securities), TIGRs (Treasury Income Growth Receipts) and similar
securities. As long as the SEC takes this position, "CATS" and "TIGRs", which
are not issued through the U.S. Treasury, will not be counted as U.S. government
securities for purposes of the 65% investment requirement applicable to
PaineWebber U.S. Government Income Fund and PaineWebber Low Duration U.S.
Government Income Fund.

FOREIGN AND EMERGING MARKET SECURITIES. 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 are greater for
emerging market securities and may include expropriation, confiscatory taxation,
withholding taxes on interest and/or dividends, limitations on the use of or
transfer of Underlying 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. Securities of many foreign
companies may be less liquid and their prices more volatile than securities of
comparable U.S. companies. Many foreign securities may be difficult to liquidate
rapidly without significantly depressing the price of such securities. There may
be less publicly available information concerning foreign issuers of securities
held by the Underlying Funds than is available concerning U.S. companies.
Transactions in foreign securities may be subject to less efficient settlement
practices. Foreign securities trading practices, including those involving
securities settlement where Underlying Fund assets may be released prior to
receipt of payment, may expose the Underlying Funds 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.

These risks are greater for emerging market securities than for securities
of foreign issuers in more developed markets. Disclosure and regulatory
standards for securities traded in emerging markets are less stringent than in
the U.S. and other major markets. There also may be a lower level of monitoring
and regulation of emerging markets and the activities of investors in such
markets, and enforcement of existing regulations may be extremely limited. In
certain emerging 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 the assets of an Underlying Fund are uninvested and no return is
earned thereon. The inability of an Underlying Fund to make intended portfolio
security purchases due to settlement problems could cause the Underlying Fund to
miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could result either in losses to the
Underlying Fund due to subsequent declines in the value of such portfolio
security or, if the Underlying Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.

To the extent that the Underlying Funds hold securities of foreign issuers,
these securities may not be registered with the SEC, and the issuers may not be
subject to its reporting requirements. Accordingly, there may be less publicly
available information concerning foreign issuers of securities held by the
Underlying Funds 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.

The Underlying Funds may invest in foreign securities by purchasing
depository receipts, including American Depository Receipts ("ADRs"), European
Depository Receipts ("EDRs") and Global Depository 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

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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 markets. For purposes of each Underlying Fund's
investment policies, ADRs, EDRs and GDRs are deemed to have the same
classification as the underlying securities they represent. Thus, an ADR, EDR or
GDR representing ownership of common stock will be treated as common stock.

ADRs are publicly traded on exchanges or over the counter ("OTC") 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
transactions 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.

The Underlying Funds 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.
Transactions on foreign exchanges are usually subject to fixed commissions that
are generally higher than negotiated commissions on U.S. transactions, although
each Underlying Fund will endeavor to achieve the best net results in effecting
its portfolio transactions. There is generally less government supervision and
regulation of exchanges and brokers in foreign countries than in the United
States.

INVESTMENTS IN OTHER INVESTMENT COMPANIES. From time to time, investments
in other investment companies may be the most effective available means by which
the Underlying Funds may invest in securities of issuers in certain countries.
Such investments may include, for example, World Equity Benchmark Shares-SM-
(commonly known as "WEBS"), which are exchange-traded shares of investment
company series that are designed to replicate the composition and performance of
publicly traded issuers in particular foreign countries. Investment in such
investment companies may involve the payment of management expenses and, in
connection with some purchases, sales loads, and payment of substantial premiums
above the value of such companies' portfolio securities. At the same time, an
Underlying Fund would continue to pay its own management fees and other
expenses. The Underlying Funds may make these investments when, in the judgment
of Mitchell Hutchins or the applicable Sub-Adviser, the potential benefits
outweigh the payment of any applicable premium, sales load and expenses. The
Underlying Funds investments in other investment companies are subject to the
provisions of the 1940 Act, except that an Underlying Fund will not purchase
securities of registered open-end investment companies or registered unit
investment trusts in reliance on section 12(d)(1)(F) or (12)(d)(1)(G) of the
1940 Act.

Investment income on certain foreign securities in which the Underlying
Funds may invest, and gains realized on the disposition thereof, may be subject
to foreign income, withholding or other taxes that could reduce the yield and/or
total return on these securities. Tax treaties between the United States and
foreign countries, however, may reduce or eliminate the amount of foreign taxes
to which the Underlying Funds would be subject.

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

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

The occurrence of political, social or diplomatic changes in one or more of
the countries issuing Sovereign Debt could adversely affect the Underlying
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. While Mitchell Hutchins and the Sub-Advisers manage the
Underlying Funds' portfolios in a manner that is intended to minimize the
exposure to such risks, there can be no assurance that adverse political changes
will not cause an Underlying Fund to suffer a loss of interest or principal on
any of its holdings.

BRADY BONDS. Brady Bonds are Sovereign Debt securities 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, the Underlying 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 which would have
then been due on the Brady Bonds in the normal course. Interest payments on
Brady Bonds may be wholly uncollateralized or maybe 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

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<PAGE>
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. The Underlying Funds
may purchase Brady Bonds with no or limited collateralizations 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.

FOREIGN CURRENCY TRANSACTIONS. Although the Underlying Funds value their
assets daily in U.S. dollars, they do not intend to convert their holdings of
foreign currencies to U.S. dollars on a daily basis. The Underlying Funds'
foreign currencies generally will be held as "foreign currency call accounts" at
foreign branches of foreign or domestic banks. These accounts bear interest at
negotiated rates and are payable upon relatively short demand periods. If a bank
became insolvent, the Underlying Funds could suffer a loss of some or all of the
amounts deposited. The Underlying Funds may convert foreign currency to U.S.
dollars from time to time. Although foreign exchange dealers generally do not
charge a stated commission or fee for conversion, the prices posted generally
include a "spread," which is the difference between the prices at which the
dealers are buying and selling foreign currencies.

EUROPEAN CURRENCY UNIFICATION. Several European countries expect to adopt a
single currency, the euro, effective January 1, 1999. Countries participating in
the Economic and Monetary Union expect that their exchange rates will become
irrevocably fixed on that date. The countries expected to participate are
Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the
Netherlands, Portugal and Spain. A newly created European Central Bank (ECB)
will attempt to manage monetary policy for this region. Pre-existing national
currencies will continue to be valid until they are replaced by euro coins and
bank notes, which is expected to occur by sometime in 2002. These changes may
significantly impact European capital markets, and related risks may increase
volatility in world capital markets. This, in turn, may impact an Underlying
Fund's share price.

Risks related to the euro include the following: market uncertainties if its
introduction is delayed; potential increased volatility in exchange rates,
especially between European countries that are participating in the new currency
and those that are not; unanticipated expenses incurred in accommodating the new
currency; investor uncertainty resulting in asset shifts away from the affected
currencies; possible inconsistent treatment of European Currency Units, a
currency basket used as a unit of account for settlement purposes which
preexists the euro's introduction; disputes concerning the enforceability of
contracts; and interest rate and exchange rate volatility as the new ECB and
market participants search for a common understanding of policy targets and
instruments. More specifically, risks include:

- Currency unification could be delayed. This could cause uncertainty in
world markets and create unanticipated expenses as a result of having to
undo changes made in anticipation of the euro's advent;

- Exchange rates between the U.S. dollar and European currencies may become
more volatile and unstable;

- European entities may face substantial conversion costs which may not be
accurately anticipated and could impact issuer profitability and
creditworthiness;

- Institutional investors may shift assets away from certain European
currencies because of the uncertainty, making markets less liquid;

- European Currency Units (ECUs), currency baskets used as a unit of account
by the European Community, have been treated by capital markets like a
currency for settlement purposes. When euros are introduced, the value of
ECUs will become fixed; however, their value may be altered because the
treatment of ECUs in some financial contracts is not uniform;

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<PAGE>
- Some major European countries, including the United Kingdom, Sweden and
Denmark will not be participating in the introduction of the euro. This
could lead to greater volatility in exchange rates between the currencies
of countries participating in the euro and those that are not;

- There is a risk that some contracts (E.G., bank loan agreements,
derivatives contracts, and foreign exchange contracts) may become
unenforceable when the currencies are unified. Certain political units,
including The European Council and the State of New York, have enacted
laws or regulations designed to ensure that financial contracts will
continue to be enforceable after the euro's introduction; however, it is
possible that these laws will not be completely effective in preventing
disputes from arising. Disputes and litigation could negatively impact an
Underlying Fund's portfolio holdings and may create uncertainties in the
valuation of financial contracts an Underlying Fund could hold;

- Suitable clearing, settlement and operational systems may not be ready for
the euro conversion; and

- European interest rates and exchange rates could become more volatile as
the European Central Bank and market participants search for a common
understanding of policy targets and instruments.

CONVERTIBLE SECURITIES. Before conversion, convertible securities have
characteristics similar to non-convertible debt securities in that they
ordinarily provide a stable stream of income with generally higher yields than
those of common stocks of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure but are usually
subordinated to comparable non-convertible securities. While no securities
investment is without some risk, investments in convertible securities generally
entail less risk than the issuer's common stock, although the extent to which
such risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed income security.

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

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

WARRANTS. Warrants are securities permitting, but not obligating, their
holder to subscribe for other securities or commodities. 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.

ILLIQUID SECURITIES. The Underlying Funds may invest up to 10% or 15% of
their net assets in illiquid securities. The term "illiquid securities" for this
purpose means securities that cannot be disposed of within

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<PAGE>
seven days in the ordinary course of business at approximately the amount at
which an Underlying Fund has valued the securities and includes, among other
things, purchased OTC options, repurchase agreements maturing in more than seven
days and restricted securities other than those Mitchell Hutchins or a
Sub-Adviser, as applicable, have determined are liquid pursuant to guidelines
established by each Underlying Fund's board of trustees or board of directors
(each sometimes referred to as a "board"). The assets used as cover for OTC
options written by the Underlying Funds will be considered illiquid unless the
OTC options are sold to qualified dealers who agree that a Fund may repurchase
any OTC option it writes at a maximum price to be calculated by a formula set
forth in the option agreement. The cover for an OTC option written subject to
this procedure 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 ("IO") and principal-only ("PO")
classes of mortgage-backed securities, in which certain Underlying Funds may
invest, are considered illiquid. However, IO and PO classes of fixed-rate
mortgage-backed securities issued by the U.S. government or one of its agencies
or instrumentalities will not be considered illiquid if Mitchell Hutchins or the
Sub-Adviser has determined that they are liquid pursuant to guidelines
established by the applicable board. To the extent an Underlying Fund invests in
illiquid securities, it may not be able readily to liquidate these investments
and may have to sell other investments if necessary to raise cash to meet its
obligations.

Restricted securities are not registered under the Securities Act of 1933
("1933 Act") and may be sold only in privately negotiated or other exempt
transactions or after a 1933 Act registration statement has become effective.
Where registration is required, an Underlying 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, an Underlying Fund might
obtain a less favorable price than prevailed when it decided to sell.

However, not all restricted securities are illiquid. To the extent that
foreign securities are freely tradeable in the country in which they are
principally traded, they are not considered illiquid for an Underlying Fund that
may invest in securities in that country even if the securities are restricted
in the United States. In addition, a large institutional market has developed
for many U.S. and foreign securities that are not registered under the 1933 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, which establishes a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers, providing both readily ascertainable values for restricted
securities and the ability to liquidate an investment to satisfy share
redemption orders. Such markets include automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held by
an Underlying Fund, however, could adversely affect the marketability of such
portfolio securities and the Fund might be unable to dispose of such securities
promptly or at favorable prices.

Each board of the Underlying Funds has delegated the function of making
day-to-day determinations of liquidity to Mitchell Hutchins or the applicable
Sub-Adviser pursuant to guidelines approved by the board. Mitchell Hutchins or
the Sub-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 and (5) the nature of the security and how trading is
effected (E.G., the time needed to sell the security, how offers are solicited
and the mechanics of transfer). Mitchell Hutchins or the Sub-Adviser

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monitors the liquidity of restricted securities in each Underlying Fund's
portfolio and reports periodically on such decisions to the applicable board.

REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which an
Underlying Fund purchases securities or other obligations 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. The Underlying Fund maintains custody
of the underlying obligations prior to their repurchase, either through its
regular custodian or through a special "tri-party" custodian or subcustodian
that maintains separate accounts for both the Underlying 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. 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 an Underlying Fund upon acquisition is accrued as interest and
included in its net investment income.

REVERSE REPURCHASE AGREEMENTS. Most of the Underlying Funds may enter into
reverse repurchase agreements with banks and securities dealers. Such agreements
involve the sale of securities held by the Underlying Fund subject to the Fund's
agreement to repurchase the securities at an agreed-upon date or upon demand and
at a price reflecting a market rate of interest. Such agreements are considered
to be borrowings and may be entered into only for temporary or emergency
purposes. While a reverse repurchase agreement is outstanding, the Underlying
Fund's custodian segregates assets to cover the Fund's obligations under the
reverse repurchase agreement. See "Underlying Funds--Investment
Policies--Segregated Accounts."

LENDING OF PORTFOLIO SECURITIES. Each Underlying Fund is authorized to lend
up to 33 1/3% of its total assets to broker-dealers or institutional investors
that Mitchell Hutchins deems qualified, but only when the borrower maintains
acceptable collateral with that Underlying 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. The Underlying Fund may reinvest
cash collateral in money market instruments or other short-term liquid
investments. 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 Underlying
Fund will retain authority to terminate any of its loans at any time. Each
Underlying 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 cash held as collateral. Each Underlying Fund will receive reasonable
interest on the loan or a flat fee from the borrower and amounts equivalent to
any dividends, interest or other distributions on the securities loaned. Each
Underlying 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 each Underlying Fund's board governing its
securities lending program, PaineWebber has been retained to serve as lending
agent for the Underlying Fund. The boards have also authorized the payment of
fees (including fees calculated as a percentage of invested cash collateral) to
PaineWebber for these services. The board of each Underlying Fund periodically
reviews all portfolio securities loan transactions of that Underlying Fund for
which PaineWebber acted as lending agent.

SHORT SALES "AGAINST THE BOX." Each Underlying Fund other than PaineWebber
Cashfund 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 an Underlying Fund, and that Underlying Fund is obligated to replace
the securities borrowed at a date in the future. When an Underlying Fund sells
short, it establishes a margin account with the broker effecting the short sale,
and deposits collateral with the

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<PAGE>
broker. In addition, the Underlying Fund maintains with its custodian, in a
segregated account, the securities that could be used to cover the short sale.
An Underlying Fund incurs transaction costs, including interest expense, in
connection with opening, maintaining and closing short sales "against the box."

An Underlying Fund might make a short sale "against the box" to hedge
against market risks when Mitchell Hutchins or a Sub-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 an Underlying 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 the
Underlying Fund owns, either directly or indirectly, and in the case where the
Underlying Fund owns convertible securities, changes in the investment values or
conversion premiums of such securities. As a result of the Taxpayer Relief Act
of 1997, short sales "against the box" no longer may be used to defer the
recognition of gain for federal income tax purposes.

LOAN PARTICIPATIONS AND ASSIGNMENTS. PaineWebber Investment Grade Income
Fund and PaineWebber High Income Fund each may invest up to 5% of its net
assets, and PaineWebber Global Income Fund may invest without limitation, in
secured or unsecured fixed or floating rate loans ("Loans") arranged through
private negotiations between a borrowing corporation and one or more financial
institutions ("Lenders"). These Underlying Funds' investments in Loans are
expected in most instances to be in the form of participations
("Participations") in Loans and assignments ("Assignments") of all or a portion
of Loans from third parties. Participations typically result in an Underlying
Fund's having a contractual relationship only with the Lender, not with the
borrower. An Underlying 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, an Underlying 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 the Fund may not directly benefit from any collateral
supporting the Loan in which it has purchased the Participation. As a result, an
Underlying 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 Lender
selling a Participation, an Underlying Fund may be treated as a general creditor
of the Lender and may not benefit from any set-off between the Lender and the
borrower. The Underlying Funds will acquire Participations only if the Lender
interpositioned between the Fund and the borrower is determined by Mitchell
Hutchins to be creditworthy.

When an Underlying Fund purchases Assignments from Lenders, it acquires
direct rights against the borrower on the Loan. However, because Assignments are
arranged through private negotiations between potential assignees and assignors,
the rights and obligations acquired by an Underlying 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 1933
Act and thus are subject to each Underlying Fund's limitation on investment in
illiquid securities. Because there is no liquid market for such securities, the
Underlying Funds anticipate that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market will
have an adverse impact on the value of such securities and on an Underlying
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.

SEGREGATED ACCOUNTS. When an Underlying Fund enters into certain
transactions to make future payments to third parties, 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

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such transactions. As described below under "Underlying Funds--Hedging and Other
Strategies Using Derivative Instruments," segregated accounts may also be
required in connection with certain transactions involving options, futures
contracts and forward currency contracts, swaps or similar instruments.

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

UNDERLYING FUNDS--HEDGING AND OTHER STRATEGIES
USING DERIVATIVE INSTRUMENTS

GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. Mitchell Hutchins and the
Sub-Advisers may use a variety of financial contracts ("Derivative
Instruments"), including certain options, futures contracts (sometimes referred
to as "futures") and options on futures contracts to attempt to hedge the
portfolio of an Underlying Fund or to enhance income or gains, including
shifting an Underlying Fund's exposure from one asset class to another. Certain
Underlying Funds also may hedge their portfolios by entering into certain swaps
or other interest rate protection transactions and by using forward currency
contracts. An Underlying Fund may enter into transactions involving one or more
types of Derivative Instruments under which the full value of its portfolio is
at risk. Under normal circumstances, however, an Underlying Fund's use of these
Derivative Instruments will place at risk a much smaller portion of its assets.
PaineWebber Cashfund does not use options or futures contracts. The particular
Derivative Instruments used by the Underlying Funds are described below.

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. 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. 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

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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 debt securities 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. 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 an Underlying Fund's
portfolio. Thus, in a short hedge an Underlying 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, an Underlying 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, an Underlying 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, an Underlying 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 an Underlying Fund intends to acquire.
Thus, in a long hedge, an Underlying 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, an Underlying 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, an Underlying Fund could
exercise the call and thus limit its acquisition cost to the exercise price plus
the premium paid and transaction costs. Alternatively, an Underlying Fund might
be able to offset the price increase by closing out an appreciated call option
and realizing a gain.

Derivative Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that an
Underlying 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 an Underlying Fund has invested or expects
to invest. Derivative Instruments on debt securities may be used to hedge either
individual securities or broad fixed income market sectors.

Income strategies include the writing of covered options to obtain the
related option premiums. Return strategies include the use of Derivative
Instruments to increase or reduce an Underlying Fund's exposure to an asset
class without buying or selling the underlying instruments.

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

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<PAGE>
addition, an Underlying 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, Mitchell Hutchins and the Sub-Advisers expect to discover additional
opportunities in connection with options, futures contracts and other derivative
instruments and hedging techniques. These new opportunities may become available
as Mitchell Hutchins or the Sub-Advisers develop new techniques, as regulatory
authorities broaden the range of permitted transactions and as new options,
futures contracts, foreign currency contracts or other derivative instruments
and techniques are developed. Mitchell Hutchins or a Sub-Adviser, as applicable,
may utilize these opportunities for an Underlying Fund to the extent that they
are consistent with the Fund's investment objective and permitted by its
investment limitations and applicable regulatory authorities. An Underlying
Fund's prospectus or statement of additional information will be supplemented to
the extent that new products or techniques involve materially different risks
than those described below or in its prospectus.

SPECIAL RISKS OF HEDGING STRATEGIES. The use of Derivative Instruments in
hedging strategies 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 Mitchell Hutchins or a Sub-Adviser, as applicable, to predict movements of
the overall securities and interest rate markets, which requires different
skills than predicting changes in the prices of individual securities. While
Mitchell Hutchins and the Sub-Advisers are experienced in the use of Derivative
Instruments, there can be no assurance that any particular hedging strategy
adopted will succeed.

(2) There might be imperfect correlation, or even no correlation, between
price movements of a Derivative Instrument and price movements of the
investments 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 unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which
Derivative Instruments are traded. 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 an Underlying Fund entered
into a short hedge because Mitchell Hutchins or a Sub-Adviser projected a
decline in the price of a security in that Underlying 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, that Underlying Fund could
suffer a loss. In either such case, the Underlying Fund would have been in a
better position had it not hedged at all.

(4) As described below, an Underlying 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 Underlying
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
an Underlying 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. An Underlying 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 contra party to enter
into a transaction closing out the position. Therefore, there is no assurance
that any position can be closed out at a time and price that is favorable to an
Underlying Fund.

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<PAGE>
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose the Underlying
Funds to an obligation to another party. An Underlying Fund will not enter into
any such transactions unless it owns either (1) an offsetting ("covered")
position in securities, other options or futures contracts or (2) cash and
liquid securities, with a value sufficient at all times to cover its potential
obligations to the extent not covered as provided in (1) above. Each Underlying
Fund will comply with SEC guidelines regarding cover for these 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, the commitment of a large portion of
an Underlying Fund's assets to cover or segregated accounts could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.

OPTIONS. Certain of the Underlying Funds may purchase put and call options,
and write (sell) covered put or call options on securities on which they are
permitted to invest and indices of those securities. Those Underlying Funds that
are permitted to invest in foreign securities denominated in foreign currencies
also may purchase put and call options on foreign currencies. The purchase of
call options serves as a long hedge, and the purchase of put options serves as a
short hedge. Writing covered 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 Underlying 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 Underlying Fund will be obligated to purchase
the security at more than its market value. The securities or other assets used
as cover for OTC options written by an Underlying Fund will be considered
illiquid to the extent described under "Underlying Funds-- Investment
Policies--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. Options that expire unexercised have no value.

An Underlying Fund may effectively terminate its right or obligation under
an option by entering into a closing transaction. For example, an Underlying
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, an Underlying 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
an Underlying Fund to realize profits or limit losses on an option position
prior to its exercise or expiration.

The Underlying Funds may purchase and write both exchange-traded and OTC
options. Exchange markets for options on debt securities and foreign currencies
exist but are relatively new, and these instruments are primarily traded on the
OTC market. Exchange-traded options in the United States are issued by a
clearing organization affiliated with the exchange on which the option is listed
which, in effect, guarantees completion of every exchange-traded option
transaction. In contrast, OTC options are contracts between an Underlying Fund
and its counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when an Underlying Fund purchases or writes an OTC
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 Underlying Fund as well as
the loss of any expected benefit of the transaction.

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Generally, the OTC debt options or foreign currency options used by the
Underlying Funds are European-style options. This means that the option is only
exercisable immediately prior to its expiration. This is in contrast to
American-style options, which are exercisable at any time prior to the
expiration date of the option.

The Underlying Funds' ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The
Underlying 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 OTC options only by negotiating directly with the
counterparty, or by a transaction in the secondary market if any such market
exists. Although the Underlying Funds will enter into OTC options only with
counterparties that are expected to be capable of entering into closing
transactions with the Underlying Funds, there is no assurance that an Underlying
Fund will in fact be able to close out an OTC option position at a favorable
price prior to expiration. In the event of insolvency of the counterparty, an
Underlying Fund might be unable to close out an OTC option position at any time
prior to its expiration.

If an Underlying 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 Underlying 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.

LIMITATIONS ON THE USE OF OPTIONS. The use of options is governed by the
following guidelines, which can be changed by the board of each Underlying Fund
without shareholder vote:

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

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

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

FUTURES. The Underlying Funds may purchase and sell futures contracts that
are related to securities in which they are permitted to invest, such as
securities index futures contracts for Underlying Funds that invest in equity
securities, interest rate futures contracts for Underlying Funds that invest in
bonds and foreign currency futures contracts for Underlying Funds that invest in
securities that are denominated in foreign currencies. An Underlying 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.

No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract an Underlying 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 that are fully guaranteed as to
principal and interest by the United States, in an amount generally equal to 10%
or less of the contract value. Margin must also be deposited when writing a call
option on a futures contract, in accordance with applicable exchange rules.
Unlike margin in securities transactions, initial margin on futures contracts
does not represent a borrowing, but rather is in the nature of a performance
bond or good-faith deposit that is returned to an Underlying Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, an
Underlying

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<PAGE>
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.

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

Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Underlying 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 an Underlying 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. An Underlying Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, an Underlying 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 use of futures
and related options is governed by the following guidelines, which can be
changed by the applicable board for each Underlying Fund without shareholder
vote:

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

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<PAGE>
(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 an Underlying Fund that are held at any time will not
exceed 20% of that Underlying Fund's net assets.

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

FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. Those
Underlying Funds that invest in securities that are denominated in foreign
currencies 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 their portfolio
securities are denominated. Such currency hedges can protect against price
movements in a security an Underlying Fund owns or intends to acquire that are
attributable to changes in the value of the currency in which it is denominated.
Such hedges do not, however, protect against price movements in the securities
that are attributable to other causes.

The Underlying Funds 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 more expensive than certain other
hedging instruments. In such cases, the Underlying Funds 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
Mitchell Hutchins or the applicable Sub-Adviser believes will have a positive
correlation to the value of the currency being hedged. The risk that movements
in the price of the Derivative Instrument will not correlate perfectly with
movements in the price of the currency being hedged is magnified when this
strategy is used.

The value of 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, an Underlying 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 hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the Underlying Funds 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. An Underlying Fund that invests in securities
denominated in foreign currencies 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, an Underlying 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
Underlying Fund intends to acquire. Forward currency contract transactions may
also serve as short hedges--for example, an Underlying Fund may sell a forward
currency contract to lock in the U.S. dollar equivalent of the proceeds from the
anticipated sale of a security denominated in a foreign currency.

As noted above, an Underlying Fund also may seek to hedge against changes in
the value of a particular currency by using forward contracts on another foreign
currency or a basket of currencies, the value of which Mitchell Hutchins or a
Sub-Adviser believes will have a positive correlation to the values of the
currency being

25
<PAGE>
hedged. In addition, an Underlying Fund may use forward currency contracts to
shift its exposure to foreign currency fluctuations from one country to another.
For example, if an Underlying Fund owned securities denominated in a foreign
currency and Mitchell Hutchins or the Sub-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 cost to an Underlying 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 an Underlying Fund enters into a forward currency contract,
it relies on the contra party to make or take delivery of the underlying
currency at the maturity of the contract. Failure by the contra party to do so
would result in the loss of any expected benefit of the transaction.

As is the case with futures contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the contra party. Thus, there can be no assurance
that an Underlying Fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the contra party, an Underlying Fund might be unable to close out
a forward currency contract at any time prior to maturity. In either event, the
Underlying 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, an Underlying 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. An Underlying Fund
may enter into forward currency contracts or maintain a net exposure to such
contracts only if (1) the consummation of the contracts would not obligate the
Underlying Fund to deliver an amount of foreign currency in excess of the value
of the position being hedged by such contracts or (2) the Underlying 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.

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

26
<PAGE>
The Underlying Funds expect to enter into interest rate protection
transactions to preserve a return or spread on a particular investment or
portion of its portfolio or to protect against any increase in the price of
securities it anticipates purchasing at a later date. The Underlying Funds
intend to use these transactions as a hedge and not as a speculative investment.
Interest rate protection transactions are subject to risks comparable to those
described above with respect to other hedging strategies.

An Underlying Fund may enter into interest rate swaps, caps, floors and
collars on either an asset-based or liability-based basis, depending on whether
it is hedging its assets or its liabilities, and will usually enter into
interest rate swaps on a net basis, I.E., the two payment streams are netted
out, with the Underlying Fund receiving or paying, as the case may be, only the
net amount of the two payments. Inasmuch as these interest rate protection
transactions are entered into for good faith hedging purposes, and inasmuch as
segregated accounts will be established with respect to such transactions,
Mitchell Hutchins, the applicable Sub-Advisers and the Underlying Funds believe
such obligations do not constitute senior securities and, accordingly, will not
treat them as being subject to the Underlying Funds' borrowing restrictions. The
net amount of the excess, if any, of an Underlying Fund's obligations over its
entitlements with respect to each interest rate swap will be accrued on a daily
basis, and appropriate Underlying 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 "Underlying Funds-- Investment
Policies--Segregated Accounts." The Underlying Fund also will establish and
maintain such segregated accounts with respect to its total obligations under
any interest rate swaps that are not entered into on a net basis and with
respect to any interest rate caps, floors and collars that are written by the
Underlying Fund.

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

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

27
<PAGE>
TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES

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

<TABLE>
<CAPTION>
POSITION WITH THE BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST OTHER DIRECTORSHIPS
- ------------------------------------ ------------------------- ------------------------------------------------
<S> <C> <C>
Margo N. Alexander**; 51 Trustee and President Mrs. Alexander is president, chief executive
officer and a director of Mitchell Hutchins
(since January 1995) and an executive vice
president and a director of PaineWebber (since
March 1994). Mrs. Alexander is president and a
director or trustee of 32 investment companies
for which Mitchell Hutchins, PaineWebber or
their affiliates serve as investment adviser.

Richard Q. Armstrong; 63 Trustee Mr. Armstrong is chairman and principal of
One Old Church Road R.Q.A. Enterprises (management consulting firm)
Unit #6 (since April 1991 and principal occupation
Greenwich, CT 06830 since March 1995). Mr. Armstrong was chairman
of the board, chief executive officer and
co-owner of Adirondack Beverages (producer and
distributor of soft drinks and sparkling/still
waters) (October 1993-March 1995). He was a
partner of the New England Consulting Group
(management consulting firm) (December
1992-September 1993). He was managing director
of LVMH U.S. Corporation (U.S. subsidiary of
the French luxury goods conglomerate, Louis
Vuitton Moet Hennessey Corporation) (1987-1991)
and chairman of its wine and spirits
subsidiary, Schieffelin & Somerset Company
(1987-1991). Mr. Armstrong is a director or
trustee of 31 investment companies for which
Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.

E. Garrett Bewkes, Jr.**; 72 Trustee and Chairman of Mr. Bewkes is a director of Paine Webber Group
the Board of Trustees Inc. ("PW Group") (holding company of
PaineWebber and Mitchell Hutchins). Prior to
December 1995, he was a consultant to PW Group.
Prior to 1988, he was chairman of the board,
president and chief executive officer of
American Bakeries Company. Mr. Bewkes is a
director of Interstate Bakeries Corporation.
Mr. Bewkes is a director or trustee of 34
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve
as investment adviser.
</TABLE>

28
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH THE BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST OTHER DIRECTORSHIPS
- ------------------------------------ ------------------------- ------------------------------------------------
<S> <C> <C>
Richard R. Burt; 51 Trustee Mr. Burt is chairman of IEP Advisors, Inc.
1275 Pennsylvania Ave., N.W. (international investments and consulting firm)
Washington, D.C. 20004 (since March 1994) and a partner of McKinsey &
Company (management consulting firm) (since
1991). He is also a director of
Archer-Daniels-Midland Co. (agricultural
commodities), Hollinger International Co.
(publishing), Homestake Mining Corp.,
Powerhouse Technologies Inc. and Wierton Steel
Corp. He was the chief negotiator in the
Strategic Arms Reduction Talks with the former
Soviet Union (1989-1991) and the U.S.
Ambassador to the Federal Republic of Germany
(1985-1989). Mr. Burt is a director or trustee
of 31 investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve
as investment adviser.

Mary C. Farrell**; 48 Trustee Ms. Farrell is a managing director, senior
investment strategist and member of the
Investment Policy Committee of PaineWebber. Ms.
Farrell joined PaineWebber in 1982. She is a
member of the Financial Women's Association and
Women's Economic Roundtable and appears as a
regular panelist on Wall $treet Week with Louis
Rukeyser. She also serves on the Board of
Overseers of New York University's Stern School
of Business. Ms. Farrell is a director or
trustee of 31 investment companies for which
Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.

Meyer Feldberg; 56 Trustee Mr. Feldberg is Dean and Professor of Management
Columbia University of the Graduate School of Business, Columbia
101 Uris Hall University. Prior to 1989, he was president of
New York, New York 10027 the Illinois Institute of Technology. Dean
Feldberg is also a director of Primedia Inc.,
Federated Department Stores, Inc. and Revlon,
Inc. Dean Feldberg is a director or trustee of
33 investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve
as investment adviser.
</TABLE>

29
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH THE BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST OTHER DIRECTORSHIPS
- ------------------------------------ ------------------------- ------------------------------------------------
<S> <C> <C>
George W. Gowen; 69 Trustee Mr. Gowen is a partner in the law firm of
666 Third Avenue Dunnington, Bartholow & Miller. Prior to May
New York, New York 10017 1994, he was a partner in the law firm of
Fryer, Ross & Gowen. Mr. Gowen is a director or
trustee of 31 investment companies for which
Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.

Frederic V. Malek; 61 Trustee Mr. Malek is chairman of Thayer Capital Partners
1455 Pennsylvania Avenue, N.W. (merchant bank). From January 1992 to November
Suite 350 1992, he was campaign manager of Bush-Quayle
Washington, D.C. 20004 '92. From 1990 to 1992, he was vice chairman
and, from 1989 to 1990, he was president of
Northwest Airlines Inc., NWA Inc. (holding
company of Northwest Airlines Inc.) and Wings
Holdings Inc. (holding company of NWA Inc.).
Prior to 1989, he was employed by the Marriott
Corporation (hotels, restaurants, airline
catering and contract feeding), where he most
recently was an executive vice president and
president of Marriott Hotels and Resorts. Mr.
Malek is also a director of American Management
Systems, Inc. (management consulting and
computer-related services), Automatic Data
Processing, Inc., CB Commercial Group, Inc.
(real estate services), Choice Hotels
International (hotel and hotel franchising),
FPL Group, Inc. (electric services), Manor
Care, Inc. (health care), and Northwest
Airlines Inc. Mr. Malek is a director or
trustee of 31 investment companies for which
Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.
</TABLE>

30
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH THE BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST OTHER DIRECTORSHIPS
- ------------------------------------ ------------------------- ------------------------------------------------
<S> <C> <C>
Carl W. Schafer; 62 Trustee Mr. Schafer is president of the Atlantic
66 Witherspoon Street Foundation (charitable foundation supporting
#1100 mainly oceanographic exploration and research).
Princeton, NJ 08542 He also is a director of Base Ten Systems, Inc.
(software), Roadway Express, Inc. (trucking),
The Guardian Group of Mutual Funds, the
Harding, Loevner Funds, Evans Systems, Inc. (a
motor fuels, convenience store and diversified
company), Electronic Clearing House, Inc.
(financial transactions processing), Frontier
Oil Corporation and Nutraceutix, Inc.
(biotechnology company). Prior to January 1993,
Mr. Schafer was chairman of the Investment
Advisory Committee of the Howard Hughes Medical
Institute. Mr. Schafer is a director or trustee
of 31 investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve
as investment adviser.

T. Kirkham Barneby; 52 Vice President Mr. Barneby is a managing director and chief
investment officer--quantitative investments of
Mitchell Hutchins. Prior to September 1994, he
was a senior vice president at Vantage Global
Management. Mr. Barneby is a vice president of
six investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serves as investment adviser.

Lawrence Chinsky; 29 Vice President and Mr. Chinsky is an assistant vice president and
Assistant Treasurer investment monitoring officer of the mutual
fund finance department of Mitchell Hutchins.
Prior to August 1997, he was a securities
compliance examiner with the Office of
Compliance, Inspections and Examinations in the
New York Regional Office of the SEC. Mr.
Chinsky is vice president and assistant
treasurer of 32 investment companies for which
Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.

John J. Lee; 30 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 32
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve
as investment adviser.
</TABLE>

31
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH THE BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST OTHER DIRECTORSHIPS
- ------------------------------------ ------------------------- ------------------------------------------------
<S> <C> <C>
Dennis McCauley; 51 Vice President Mr. McCauley is a managing director and chief
investment officer--fixed income of Mitchell
Hutchins. Prior to December 1994, he was
director of fixed income investments of IBM
Corporation. Mr. McCauley is a vice president
of 22 investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve
as investment adviser.

Ann E. Moran; 41 Vice President and Ms. Moran is a vice president and a manager of
Assistant Treasurer the mutual fund finance department of Mitchell
Hutchins. Ms. Moran is a vice president and
assistant treasurer of 32 investment companies
for which Mitchell Hutchins, PaineWebber or
their affiliates serve as investment adviser.

Dianne E. O'Donnell; 46 Vice President and Ms. O'Donnell is a senior vice president and
Secretary deputy general counsel of Mitchell Hutchins.
Ms. O'Donnell is a vice president and secretary
of 31 investment companies and vice president
and assistant secretary for one investment
company which Mitchell Hutchins, PaineWebber or
their affiliates serve as investment adviser.

Emil Polito; 37 Vice President Mr. Polito is a senior vice president and
director of operations and control for Mitchell
Hutchins. Mr. Polito is a vice president for 32
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve
as investment adviser.

Victoria E. Schonfeld; 47 Vice President Ms. Schonfeld is a managing director and general
counsel of Mitchell Hutchins. Prior to May
1994, she was a partner in the law firm of
Arnold & Porter. Ms. Schonfeld is a vice
president of 31 investment companies and vice
president and secretary of one investment
company for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.

Paul H. Schubert; 35 Vice President and Mr. Schubert is a senior vice president and the
Treasurer director of the mutual fund finance department
of Mitchell Hutchins. From August 1992 to
August 1994, he was a vice president of
BlackRock Financial Management L.P. Mr.
Schubert is a vice president and treasurer of
32 investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve
as investment adviser.
</TABLE>

32
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH THE BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST OTHER DIRECTORSHIPS
- ------------------------------------ ------------------------- ------------------------------------------------
<S> <C> <C>
Barney A. Taglialatela; 37 Vice President and Mr. Taglialatela is a vice president and a
Assistant Treasurer manager of the mutual fund finance department
of Mitchell Hutchins. Prior to February 1995,
he was a manager of the mutual fund finance
division of Kidder Peabody Asset Management,
Inc. Mr. Taglialatela is a vice president and
assistant treasurer of 32 investment companies
for which Mitchell Hutchins, PaineWebber or
their affiliates serve as investment adviser.

Mark A. Tincher; 43 Vice President Mr. Tincher is a managing director and chief
investment officer--equities of Mitchell
Hutchins. Prior to March 1995, he was a vice
president and directed the U.S. funds
management and equity research areas of Chase
Manhattan Private Bank. Mr. Tincher is a vice
president of 13 investment companies for which
Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.

Keith A. Weller; 37 Vice President and Mr. Weller is a first vice president and
Assistant Secretary associate general counsel of Mitchell Hutchins.
Prior to May 1995, he was an attorney in
private practice. Mr. Weller is a vice
president and assistant secretary of 31
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve
as investment adviser.
</TABLE>

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

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

** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of the
Trust as defined in the 1940 Act by virtue of their positions with PW Group,
PaineWebber and/or Mitchell Hutchins.

33
<PAGE>
The Trust pays trustees who are not "interested persons" of the Trust $1,000
annually for each Portfolio and $150 per Portfolio for each board meeting and
each separate meeting of a board committee. Accordingly, the Trust pays each
such trustee $3,000 annually for its three series, plus any additional amounts
due for board or committee meetings. Each chairman of the audit and contract
review committees of individual funds within the PaineWebber fund complex
receives additional compensation aggregating $15,000 annually. All trustees are
reimbursed for any expenses incurred in attending meetings. Trustees and
officers own in the aggregate less than 1% of the outstanding shares of each
Portfolio. Because PaineWebber and Mitchell Hutchins perform substantially all
the services necessary for the operation of the Trust and each Portfolio, the
Trust requires no employees. No officer, director or employee of Mitchell
Hutchins or PaineWebber presently receives any compensation from the Trust for
acting as a trustee or officer.

The table below includes certain information related to the compensation of
the Trust's trustees during its initial fiscal period ended May 31, 1998, and
the total compensation of those trustees for all PaineWebber funds during the
calendar year ended December 31, 1997.

COMPENSATION TABLE+

<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FOR THE
AGGREGATE TRUST
COMPENSATION AND
FOR THE THE FUND
NAME OF PERSON, POSITION TRUST(1) COMPLEX(2)
- -------------------------------------------------------------------------------- ------------- -----------------
<S> <C> <C>
Richard Q. Armstrong, Trustee................................................... $ 700 $ 94,885
Richard R. Burt, Trustee........................................................ 700 87,085
Meyer Feldberg, Trustee......................................................... 1,211 117,853
George W. Gowen, Trustee........................................................ 700 101,567
Frederic V. Malek, Trustee...................................................... 700 95,845
Carl W. Schafer, Trustee........................................................ 700 94,885
</TABLE>

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

+ Only independent members of the board are compensated for their services as
trustees and identified above; trustees who are "interested persons," as
defined by the 1940 Act, do not receive compensation

(1) For the period February 24, 1998 (commencement of operations) through May
31, 1998.

(2) Represents total compensation paid to each trustee during the calendar year
ended December 31, 1997; no fund within the fund complex has a bonus,
pension, profit sharing or retirement plan.

PRINCIPAL HOLDERS OF SECURITIES

The following shareholders are shown in the Portfolios' records as owning
more than 5% of their shares:

<TABLE>
<CAPTION>
NUMBER AND PERCENTAGE
OF
SHARES BENEFICIALLY
OWNED AS OF
NAME AND ADDRESS* AUGUST 31, 1998
- ---------------------------------------------------- ---------------------
<S> <C> <C>
CONSERVATIVE PORTFOLIO

PaineWebber Custodian
PaineWebber FBO
Wilfred Robinson 23,536 8.02%

PaineWebber Custodian
Richard Agostini 31,649 11.26%
</TABLE>

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

* The shareholders listed may be contacted c/o Mitchell Hutchins Asset
Management, Inc., 1285 Avenue of the Americas, New York, NY 10019.

34
<PAGE>
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS

INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator to each Portfolio pursuant to a contract ("Advisory
Contract") with the Trust. Under the Advisory Contract, each Portfolio pays
Mitchell Hutchins a fee, computed daily and paid monthly, at the annual rate of
0.35% of average daily net assets.

During the period February 24, 1998 (commencement of operations) to May 31,
1998, Mitchell Hutchins earned advisory fees in the amount of $2,560 with
respect to Aggressive Portfolio, $4,531 with respect to Moderate Portfolio and
$1,408 with respect to Conservative Portfolio. All these amounts were waived by
Mitchell Hutchins.

Under the terms of the Advisory Contract, each Portfolio bears all of its
expenses incurred in its operation that are not specifically assumed by Mitchell
Hutchins. Expenses borne by the Portfolio include the following: (1) the cost
(including brokerage commissions) of securities purchases or sold by the
Portfolio and any losses incurred in connection therewith; (2) fees payable to
and expenses incurred on behalf of the Portfolios by Mitchell Hutchins; (3)
organizational expenses; (4) filing fees and expenses relating to the
registration and qualification of the Portfolio's shares under federal and state
securities laws and maintenance of such registrations and qualifications; (5)
fees and salaries payable to board members and officers who are not "interested
persons" (as defined in the 1940 Act) of the Trust or Mitchell Hutchins; (6) all
expenses incurred in connection with the board members' 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 Portfolio for violation of any law; (10) legal, accounting and auditing
expenses, including legal fees of special counsel for the independent board
members; (11) charges of custodians, transfer agents and other agents; (12)
costs of preparing share certificates; (13) expenses of setting in type and
printing prospectuses, statements of additional information and supplements
thereto, reports and proxy materials for existing shareholders, and costs of
mailing such materials to shareholders; (14) any extraordinary expenses
(including fees and disbursements of counsel) incurred by the Portfolio; (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 or any
committee thereof; (17) the cost of investment literature and other publications
provided to board members and officers; and (18) costs of mailing, stationery
and communications equipment.

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

NET ASSETS. The following table shows the approximate net assets as of
August 31, 1998, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.

<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY $ MIL
- ---------------------------------------------------------------------------------- ----------
<S> <C>
Domestic (excluding Money Market)................................................. $ 7,065.7
Global............................................................................ 3,506.5
Equity/Balanced................................................................... 5,530.6
Fixed Income (excluding Money Market)............................................. 5,058.7
Taxable Fixed Income............................................................ 3,474.7
Tax-Free Fixed Income........................................................... 1,584.0
Money Market Funds................................................................ 29,448.7
</TABLE>

35
<PAGE>
PERSONNEL TRADING POLICIES. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to a code of ethics that describes
the fiduciary duty owed to shareholders of PaineWebber mutual funds and other
Mitchell Hutchins advisory accounts by all Mitchell Hutchins' directors,
officers and employees, establishes procedures for personal investing and
restricts certain transactions. For example, employee accounts generally must be
maintained at PaineWebber, personal trades in most securities require
pre-clearance and short-term trading and participation in initial public
offerings generally are prohibited. In addition, the code of ethics puts
restrictions on the timing of personal investing in relation to trades by
PaineWebber funds and other Mitchell Hutchins advisory clients.

DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
each class of shares of each Portfolio under separate distribution contracts
with the Trust (collectively, "Distribution Contracts") that require Mitchell
Hutchins to use its best efforts, consistent with its other businesses, to sell
shares of each Portfolio. Shares of each Portfolio are offered continuously.
Under separate exclusive dealer agreements between Mitchell Hutchins and
PaineWebber relating to each class of shares of each Portfolio (collectively,
"Exclusive Dealer Agreements"), PaineWebber and its correspondent firms sell the
Portfolios' shares.

Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares adopted by the Trust in the manner prescribed under Rule 12b-1
under the 1940 Act (each, respectively, a "Class A Plan," "Class B Plan" and
"Class C Plan" and, collectively, "Plans"), each Portfolio 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 for each
respective Portfolio. Under the Class B Plan and Class C Plan, each Portfolio
pays Mitchell Hutchins a distribution fee, accrued daily and payable monthly, at
the annual rate of 0.75% (0.50% for Class C shares of Conservative Portfolio) of
the average daily net assets of that Class. There is no distribution plan with
respect to Class Y shares and the Portfolios pay no service or distribution fees
with respect to their Class Y shares.

Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the board at least quarterly, and the trustees will review, reports
regarding all amounts expended under the Plan and the purposes for which such
expenditures were made, (2) the Plan will continue in effect only so long as it
is approved at least annually, and any material amendment thereto is approved,
by the board, including those trustees who are not "interested persons" of the
Trust and who have no direct or indirect financial interest in the operation of
the Plan or any agreement related to the Plan, acting in person at a meeting
called for that purpose, (3) payments by a Portfolio 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 that Portfolio and (4) while
the Plan remains in effect, the selection and nomination of trustees who are not
"interested persons" of the Trust shall be committed to the discretion of the
trustees who are not "interested persons" of the Trust.

In reporting amounts expended under the Plans to the board, Mitchell
Hutchins allocates expenses attributable to the sale of each class of each
Portfolio's shares to such class based on the ratio of sales of shares of such
class to the sales of all classes of shares. The fees paid by one class of a
Portfolio's shares will not be used to subsidize the sale of any other class of
that Portfolio's shares.

The Portfolios paid (or accrued) the following distribution fees to Mitchell
Hutchins under the Class A, Class B and Class C Plans during the period February
24, 1998 (commencement of operations) to May 31, 1998:

<TABLE>
<CAPTION>
AGGRESSIVE MODERATE CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ------------

<S> <C> <C> <C>
Class A...................................................................... $ 568 $ 774 $ 221

Class B...................................................................... 1,842 5,431 2,412

Class C...................................................................... 3,173 4,389 565
</TABLE>

36
<PAGE>
Mitchell Hutchins estimates that it and its parent corporation, PaineWebber,
incurred the following shareholder service-related and distribution-related
expenses with respect to the Portfolios during the fiscal period ended May 31,
1998:
<TABLE>
<CAPTION>
CLASS A
--------------------------------------
AGGRESSIVE MODERATE CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ------------

<S> <C> <C> <C>
Marketing and advertising.................................................... $ 5,722 $ 4,396 $ 3,891

Printing of prospectuses and statements of additional information............ 0 0 0

Branch network costs allocated and interest expense.......................... 7,575 5,820 5,150

Service fee paid to investment executives.................................... 216 294 80

CLASS B
--------------------------------------
AGGRESSIVE MODERATE CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ------------
<S> <C> <C> <C>

Marketing and advertising.................................................... $ 4,633 $ 7,701 $ 11,002

Amortization of commissions.................................................. 562 1,606 725

Printing of prospectuses and statements of additional information............ 0 0 0

Branch network costs allocated and interest expense.......................... 6,311 10,634 14,794

Service fee paid to investment executives.................................... 175 516 229
<CAPTION>

CLASS C
--------------------------------------
AGGRESSIVE MODERATE CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ------------
<S> <C> <C> <C>

Marketing and advertising.................................................... $ 7,974 $ 6,232 $ 3,436

Amortization of commissions.................................................. 904 1,251 143

Printing of prospectuses and statements of additional information............ 0 0 0

Branch network costs allocated and interest expense.......................... 10,572 8,270 4,553

Service fee paid to investment executives.................................... 301 417 71
</TABLE>

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

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

In approving the Class A Plan for each Portfolio, 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 investment executives and correspondent
firms, resulting in greater growth of the Portfolio than might otherwise be the
case, (3) the advantages to the shareholders of economies of scale resulting
from growth in the Portfolio's assets and potential continued growth, (4) the
services provided to the Portfolio and its shareholders by Mitchell Hutchins,
(5) the services provided by PaineWebber pursuant to its Exclusive

37
<PAGE>
Dealer Agreement with Mitchell Hutchins and (6) Mitchell Hutchins' shareholder
service-related expenses and costs.

In approving the Class B Plan for each Portfolio, 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 Portfolio purchase payments and instead having the entire amount
of their purchase payments immediately invested in Portfolio shares, (3)
Mitchell Hutchins' belief that the ability of PaineWebber investment executives
and correspondent firms to receive sales commissions when Class B shares are
sold and continuing service fees thereafter while their customers invest their
entire purchase payments immediately in Class B shares would prove attractive to
the investment executives and correspondent firms, resulting in greater growth
of the Portfolio than might otherwise be the case, (4) the advantages to the
shareholders of economies of scale resulting from growth in the Portfolio's
assets and potential continued growth, (5) the services provided to the
Portfolio and its shareholders by Mitchell Hutchins, (6) the services provided
by PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins
and (7) Mitchell Hutchins' shareholder service and distribution-related expenses
and costs. The board also recognized that Mitchell Hutchins' willingness to
compensate PaineWebber and its investment executives, without the concomitant
receipt by Mitchell Hutchins of initial sales charges, was conditioned upon its
expectation of being compensated under the Class B Plan.

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

With respect to each Plan, the 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 advisory fees which are
calculated based upon a percentage of the average net assets of each Portfolio,
which would increase if the Plan were successful and the Portfolio attained and
maintained significant asset levels.

Under the Distribution Contract between the Trust and Mitchell Hutchins for
the Class A shares for the fiscal period February 24, 1998 (commencement of
operations) to May 31, 1998, Mitchell Hutchins earned the following approximate
amounts of sales charges and retained the following approximate amounts, net of
concessions to PaineWebber as exclusive dealer:

<TABLE>
<CAPTION>
AGGRESSIVE MODERATE CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ------------

<S> <C> <C> <C>
Earned....................................................................... $ 50,393 $ 59,932 $ 13,243

Retained..................................................................... 31,244 37,158 8,211
</TABLE>

38
<PAGE>
For the fiscal period February 24, 1998 (commencement of operations) to May
31, 1998, Mitchell Hutchins earned and retained the following contingent
deferred sales charges paid upon certain redemptions of Class A, Class B and
Class C shares:

<TABLE>
<CAPTION>
AGGRESSIVE MODERATE CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ------------

<S> <C> <C> <C>
Class A...................................................................... $ 0 $ 0 $ 0

Class B...................................................................... 49 0 18

Class C...................................................................... 44 1,245 0
</TABLE>

PORTFOLIO TRANSACTIONS

All orders for the purchase or sale of portfolio securities for the
Portfolios (normally shares of the Underlying Funds) are placed on behalf of a
particular Portfolio by Mitchell Hutchins. A Portfolio will not incur any
commissions or sales charges when it invests in shares of the Underlying Funds,
but it may incur such costs if it invests directly in other types of securities.
When a Portfolio purchases short-term U.S. government securities or commercial
paper directly, it may purchase such securities in dealer transactions, which
generally include a "spread," as explained below. For the period February 24,
1998 (commencement of operations) to May 31, 1998, the Portfolios paid no
brokerage commissions.

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

The Portfolios and the Underlying Funds have no obligation to deal with any
broker or group of brokers in the execution of portfolio transactions. The
Portfolios and the Underlying Funds contemplate that, consistent with the policy
of obtaining the best net results, brokerage transactions may be conducted
through PaineWebber. Each Portfolio and Underlying Fund's board has adopted
procedures in conformity with Rule 17e-1 under the 1940 Act to ensure that all
brokerage commissions paid to PaineWebber are reasonable and fair. Specific
provisions in the Advisory Contract authorize PaineWebber to effect portfolio
transactions for the Portfolios on an 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 fiscal period ended May 31, 1998, the Portfolios paid no brokerage
commissions to PaineWebber or any other affiliate of Mitchell Hutchins.

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

Consistent with the interests of the Portfolios and the Underlying Funds and
subject to the review of each Portfolio's or Underlying Fund's board, Mitchell
Hutchins or a Sub-Adviser may cause a Portfolio or an Underlying Fund to
purchase and sell portfolio securities from and to dealers or through brokers
who provide Mitchell Hutchins or a Sub-Adviser with research, analysis, advice
and similar services. In return for such services, a Portfolio or Underlying
Fund may pay to those brokers a higher commission than may be charged by other
brokers, provided that Mitchell Hutchins or a Sub-Adviser determines in good
faith that such commission is reasonable in terms either of that particular
transaction or of the overall responsibility of Mitchell Hutchins to

39
<PAGE>
that Portfolio or Underlying Fund and its other clients and that the total
commissions paid by the Portfolio or Underlying Fund will be reasonable in
relation to the benefits to the each over the long term. During the fiscal
period ended May 31, 1998, the Portfolios directed no brokerage transactions to
brokers chose because they provided research services.

For purchases or sales with broker-dealer firms which act as principal,
Mitchell Hutchins or a Sub-Adviser seeks best execution. Although Mitchell
Hutchins or a Sub-Adviser may receive certain research or execution services in
connection with these transactions, they will not purchase securities at a
higher price or sell securities at a lower price than would otherwise be paid if
no weight was attributed to the services provided by the executing dealer.
Moreover, Mitchell Hutchins and a Sub-Adviser will not enter into any explicit
soft dollar arrangements relating to principal transactions and will not receive
in principal transactions the types of services which could be purchased for
hard dollars. Mitchell Hutchins or a Sub-Adviser may engage in agency
transactions in OTC equity and debt securities in return for research and
execution services. These transactions are entered into only in compliance with
procedures ensuring that the transaction (including commissions) is at least as
favorable as it would have been if effected directly with a market-maker that
did not provide research or execution services. These procedures include
Mitchell Hutchins or a Sub-Adviser receiving multiple quotes from dealers before
executing the transactions on an agency basis.

Information and research services furnished by brokers or dealers through
which or with which the Portfolios or Underlying Funds effect securities
transactions may be used by Mitchell Hutchins or a Sub-Adviser in advising other
funds or accounts and, conversely, research services furnished to Mitchell
Hutchins or a Sub-Adviser by brokers or dealers in connection with other funds
or accounts that either of them advises may be used in advising the Portfolios
or Underlying Funds. Information and research received from brokers or dealers
will be in addition to, and not in lieu of, the services required to be
performed by Mitchell Hutchins under the Advisory Contract or a Sub-Adviser
under its contract with Mitchell Hutchins.

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

The Portfolios and Underlying 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 Trust's and each
Underlying Fund's board pursuant to Rule 10f-3 under the 1940 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 Portfolios or
Underlying Funds.

PORTFOLIO TURNOVER. The Portfolios' annual portfolio turnover rates may
vary greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate is
calculated by dividing the lesser of each Portfolio's annual sales or purchases
of portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of securities in the portfolio during the year. For the period
February 24, 1998 (commencement of operations) to May 31, 1998, the portfolio
turnover rate was 6% for Aggressive Portfolio, 13% for Moderate Portfolio and
11% for Conservative Portfolio.

The portfolio turnover rates of the Underlying Funds have ranged from 45% to
359% during their most recent full fiscal years. There can be no assurance that
the portfolio turnover rates of the Underlying Funds will remain within this
range during subsequent fiscal years.

40
<PAGE>
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES

COMBINED PURCHASE PRIVILEGE-CLASS A SHARES. Investors and eligible groups
of related Portfolio investors may combine purchases of Class A shares of the
Portfolios 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 table of sales charges for Class A shares in the Prospectus. The sales
charge payable on the purchase of Class A shares of the Portfolios 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 Portfolio 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 individual(s);

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

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

(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 ACCUMULATIONS-CLASS A SHARES. Reduced sales charges are available
through a right of accumulation, under which investors and eligible groups of
related Portfolio investors (as defined above) are permitted to purchase Class A
shares of the Portfolios 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 Portfolio shares and Class A shares of any other PaineWebber mutual
fund. The purchaser must provide sufficient information to permit confirmation
of his or her holdings, and the acceptance of the purchase order is subject to
such confirmation. The right of accumulation may be amended or terminated at any
time.

WAIVERS OF SALES CHARGES-CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where the
decedent is either the individual 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.

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

41
<PAGE>
unable to invest amounts effectively in accordance with the Portfolio's
investment objective, policies and restrictions.

If conditions exist that make cash payments undesirable, each Portfolio
reserves the right to honor any request for redemption by making payment in
whole or in part in securities chosen by the Portfolio and valued in the same
way as they would be valued for purposes of computing the Portfolio's net asset
value. If payment is made in securities, a shareholder may incur brokerage
expenses in converting these securities into cash.

The Portfolios may suspend redemption privileges or postpone the date of
payment during any period (1) when the New York Stock Exchange ("NYSE") is
closed or trading on the NYSE is restricted as determined by the SEC, (2) when
an emergency exists, as defined by the SEC, that makes it not reasonably
practicable for a Portfolio 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 Portfolio's securities at the time.

SERVICE ORGANIZATIONS. A Portfolio may authorize service organizations, and
their agents, to accept on its behalf purchase and redemption orders that are in
"good form." A Portfolio 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 Portfolio'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. Participation in the Automatic Investment Plan
enables an investor to use the technique of "dollar cost averaging." When an
investor invests the same dollar amount each month under the Plan, the investor
will purchase more shares when a Portfolio's net asset value per share is low
and fewer shares when the net asset value per share is high. Using this
technique, an investor's average purchase price per share over any given period
will be lower than if the investor 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, because the 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 both low and high
price levels.

SYSTEMATIC WITHDRAWAL 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 Portfolio 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 $5,000 for Class A and Class C shareholders or $20,000 for Class B
shareholders. Purchases of additional shares of a Portfolio 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, semiannual or annual plans, PaineWebber will
arrange for redemption by the Portfolios of sufficient Portfolio shares to
provide the withdrawal payments specified by participants in the Portfolios'
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,
with the tax consequences described under "Dividends & Taxes" in the Prospectus.
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. ("Transfer Agent"). 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 the Transfer Agent. Shareholders may request the forms needed to
establish a systematic withdrawal plan from their PaineWebber investment
executives, correspondent firms or the Transfer Agent at 1-800-647-1568.

REINSTATEMENT PRIVILEGE-CLASS A SHARES. As described in the Prospectus,
shareholders who have redeemed their Class A shares may reinstate their account
in a Portfolio without a sales charge. Shareholders

42
<PAGE>
may exercise the reinstatement privilege by notifying the Transfer Agent of such
desire and forwarding a check for the amount to be purchased within 365 days
after the date of redemption. The reinstatement will be made at the net asset
value per share next computed after the notice of reinstatement and check are
received. The amount of a purchase under this reinstatement privilege cannot
exceed the amount of the redemption proceeds. Gain on a redemption is taxable
regardless of whether the reinstatement privilege is exercised; however, a loss
arising out of a redemption will not be deductible to the extent the
reinstatement privilege is exercised within 30 days after redemption, and an
adjustment will be made to the shareholder's tax basis for shares acquired
pursuant to the reinstatement privilege. Gain or loss on a redemption also will
be adjusted for federal income tax purposes by the amount of any sales charge
paid on Class A shares, under the circumstances and to the extent described in
"Dividends & Taxes" in the Prospectus.

PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN-SM-
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT-REGISTERED TRADEMARK-
(RMA-REGISTERED TRADEMARK-)

Shares of PaineWebber mutual funds, including the Portfolios (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 continually to 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.

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:

43
<PAGE>
- monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold
MasterCard-Registered Trademark- transactions during the period, and
provide unrealized and realized gain and loss estimates for most
securities held in the account;

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

- automatic "sweep" of uninvested cash into the RMA accountholder's choice
of one of the 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
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;

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

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

- expanded account protection to $100 million in the event of the
liquidation of PaineWebber. This protection does not apply to shares of
the RMA money market funds or the PW Funds because those shares are held
at the transfer agent and not through PaineWebber; and

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

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

CONVERSION OF CLASS B SHARES

Class B shares of a Portfolio will automatically convert to Class A shares
of that Portfolio, based on the relative net asset values per share of each
class, 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 (i) the date on which such Class B shares were
issued, or (ii) 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 availability of 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 of the Class B shares beyond six years
from the date of purchase. Mitchell Hutchins has no reason to believe that this
condition for the availability of the conversion feature will not be met.

44
<PAGE>
VALUATION OF SHARES

Each Portfolio determines the net asset values per share separately for each
class of shares, normally as of the close of regular trading (usually 4:00 p.m.,
Eastern time) on the NYSE on each Business Day, which is defined as each Monday
through Friday when the NYSE is open. Prices will be calculated earlier when the
NYSE closes early because trading has been halted for the day. Currently the
NYSE 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.

The value of the shares of each Underlying Fund will be their net asset
value at the time the net asset value of the Portfolio shares is determined. The
Portfolios generally use the amortized cost method of valuation to value debt
obligations with 60 days or less remaining until maturity, unless the board
determines that this does not represent fair value.

PERFORMANCE INFORMATION

Each Portfolio's performance data quoted in advertising and other
promotional materials ("Performance Advertisements") represents 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 each Portfolio's Performance Advertisements are
calculated according to the following formula:

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

Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value, for Class A shares, the
maximum 4.5% (4% for Conservative Portfolio) sales charge is deducted from the
initial $1,000 payment and, for Class B and Class C shares, the applicable
contingent deferred sales charge imposed on a redemption of Class B or Class C
shares held for the period is deducted. All dividends and other distributions
are assumed to have been reinvested at net asset value.

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

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

45
<PAGE>
The following tables show performance information for each class of the
Portfolios' shares for the period indicated.

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------

<S> <C> <C> <C> <C>
AGGRESSIVE PORTFOLIO:
Inception to May 31, 1998*

Standardized Return**.................... (0.84%) (1.32%) 2.68% 3.92%

Non Standardized Return.................. 3.84% 3.68% 3.68% 3.92%

MODERATE PORTFOLIO:
Inception to May 31, 1998*

Standardized Return**.................... (1.22%) (1.80%) 2.20% 3.52%

Non Standardized Return.................. 3.44% 3.20% 3.20% 3.52%

CONSERVATIVE PORTFOLIO:
Inception to May 31, 1998*

Standardized Return**.................... (2.14%) (2.68%) 1.65% 2.56%

Non Standardized Return.................. 2.48% 2.32% 2.40% 2.56%
</TABLE>

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

* The inception date for all Classes was February 24, 1998.

** All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5% (4.0% for Conservative Portfolio). All
Standardized Return figures for Class B and Class C shares reflect deduction
of the applicable contingent deferred sales charges imposed on a redemption
of shares held for the period.

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

<TABLE>
<S> <C> <C>
YIELD = 2 [( a-b/cd +1 ) 6 -1 ]
where: a = interest earned during the Period
attributable to a class of shares
b = expenses accrued for the Period
attributable to a class of shares (net
of
reimbursements)
c = the average daily number of shares of a
class outstanding during the Period
that
were entitled to receive dividends
d = the maximum offering price per share (in
the case of Class A shares) or the net
asset value per share (in the case of
Class B and Class C shares) on the last
day
of the Period.
</TABLE>

Except as noted below, in determining interest income earned during the
Period (variable "a" in the above formula), a Portfolio 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

46
<PAGE>
income on the obligation for each day of the period that the obligation is in
the portfolio. Once interest earned is calculated in this fashion for each debt
obligation held by the Portfolio, interest earned during the Period is then
determined by totalling the interest earned on all debt obligations. For
purposes of these calculations, the maturity of an obligation with one or more
call provisions is assumed to be the next date on which the obligation
reasonably can be expected to be called or, if none, the maturity date. With
respect to Class A shares, in calculating the maximum offering price per share
at the end of the Period (variable "d" in the above formula) the Portfolio's
current maximum 4.5% (4% for Conservative Portfolio) initial sales charge on
Class A shares is included.

The following table shows the 30-day yield for each class of Moderate
Portfolio and Conservative Portfolio for the 30 days period ended May 31, 1998.

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
--------- --------- --------- ---------

<S> <C> <C> <C> <C>
MODERATE PORTFOLIO:..................................................... 2.49 1.89 1.93 2.79

CONSERVATIVE PORTFOLIO:................................................. 4.24 3.76 3.99 4.66
</TABLE>

OTHER INFORMATION. In Performance Advertisements, the Portfolios may
compare their Standardized Return and/or their Non-Standardized Return with data
published by Lipper Analytical Services, Inc. ("Lipper"), CDA Investment
Technologies, Inc. ("CDA"), Wiesenberger Investment Companies Service
("Wiesenberger"), Investment Company Data, Inc. ("ICD") or Morningstar Mutual
Funds ("Morningstar"), with the performance of recognized stock and other
indices, including the Standard & Poor's 500 Composite Stock Price Index ("S&P
500"), the Dow Jones Industrial Average ("DJIA"), the International Finance
Corporation Global Total Return Index, the Nasdaq Composite Index, the Russell
2000 Index, the Wilshire 5000 Index, the Lehman Bond Index, the Lehman Brothers
20+ Year Treasury Bond Index, the Lehman Brothers Government/Corporate Bond
Index, other similar Lehman Brothers indices or components thereof, 30-year and
10-year U.S. Treasury bonds, the Morgan Stanley Capital International
Perspective Indices, the Morgan Stanley Capital International Energy Sources
Index, the Standard & Poor's Oil Composite Index, the Morgan Stanley Capital
International World Index, the Salomon Brothers Non-U.S. Dollar Index, the
Salomon Brothers Non-U.S. World Government Bond Index, the Salomon Brothers
World Government Index, other similar Salomon Brothers indices or components
thereof and changes in the Consumer Price Index as published by the U.S.
Department of Commerce. The Portfolios also may refer in such materials to
mutual fund performance rankings and other data, such as comparative asset,
expense and fee levels, published by Lipper, CDA, Wiesenberger, ICD or
Morningstar. Performance Advertisements also may refer to discussions of the
Portfolios 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.

The Portfolios 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 Portfolio investment are
reinvested in additional Portfolio shares, any future income or capital
appreciation of a Portfolio would increase the value, not only of the original
Portfolio investment, but also of the additional Portfolio shares received
through reinvestment. As a result, the value of a Portfolio investment would
increase more quickly than if dividends or other distributions had been paid in
cash.

The Portfolios 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) Money Markets. In comparing the
Portfolios' 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 Portfolios are not insured or
guaranteed by the U.S. government and returns and net

47
<PAGE>
asset values will fluctuate. The debt securities held by the Portfolios may have
longer maturities than most CDs and may reflect interest rate fluctuations for
longer term debt securities. An investment in any Portfolio involves greater
risks than an investment in either a money market fund or a CD.

The Portfolios may also compare their performance to general trends in the
stock and bond markets, as illustrated by the following graph prepared by
Ibbotson Associates, Chicago.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
U.S.
S&P 500 TR U.S. LT GVT TR U.S. 30 DAY TBILL TR INFLATION
<S> <C> <C> <C> <C>
1925 $10,000 $10,000 $10,000 $10,000
1926 $11,162 $10,777 $10,327 $9,851
1927 $15,347 $11,739 $10,649 $9,646
1928 $22,040 $11,751 $11,028 $9,553
1929 $20,185 $12,153 $11,552 $9,572
1930 $15,159 $12,719 $11,630 $8,994
1931 $8,590 $12,044 $11,957 $8,138
1932 $7,886 $14,073 $12,072 $7,300
1933 $12,144 $14,062 $12,108 $7,337
1934 $11,969 $15,472 $12,128 $7,486
1935 $17,674 $16,243 $12,148 $7,710
1936 $23,669 $17,464 $12,170 $7,603
1937 $15,379 $17,504 $12,207 $8,045
1938 $20,165 $18,473 $12,205 $7,821
1939 $20,082 $19,570 $12,208 $7,784
1940 $18,117 $20,761 $12,208 $7,859
1941 $16,017 $20,955 $12,216 $8,622
1942 $19,275 $21,629 $12,248 $9,423
1943 $24,267 $22,080 $12,291 $9,721
1944 $29,060 $22,702 $12,332 $9,926
1945 $39,649 $25,139 $12,372 $10,149
1946 $36,449 $25,113 $12,416 $11,993
1947 $38,529 $24,454 $12,478 $13,073
1948 $40,649 $25,285 $12,580 $13,426
1949 $48,287 $26,918 $12,718 $13,184
1950 $63,601 $26,932 $12,870 $13,948
1951 $78,875 $25,873 $13,063 $14,767
1952 $93,363 $26,173 $13,279 $14,898
1953 $92,439 $27,125 $13,521 $14,991
1954 $141,084 $29,075 $13,638 $14,916
1955 $185,614 $28,699 $13,852 $14,972
1956 $197,783 $27,096 $14,193 $15,400
1957 $176,457 $29,117 $14,639 $15,866
1958 $252,975 $27,342 $14,864 $16,145
1959 $283,219 $26,725 $15,303 $16,387
1960 $284,549 $30,407 $15,711 $16,629
1961 $361,060 $30,703 $16,045 $16,741
1962 $329,545 $32,818 $16,483 $16,946
1963 $404,685 $33,216 $16,997 $17,225
1964 $471,388 $34,381 $17,598 $17,430
1965 $530,081 $34,625 $18,289 $17,765
1966 $476,737 $35,889 $19,159 $18,361
1967 $591,038 $32,594 $19,966 $18,920
1968 $656,415 $32,509 $21,005 $19,814
1969 $600,590 $30,860 $22,388 $21,024
1970 $624,653 $34,596 $23,848 $22,179
1971 $714,058 $38,173 $24,895 $22,924
1972 $849,559 $41,400 $25,851 $23,706
1973 $725,003 $40,942 $27,643 $25,792
1974 $533,110 $42,725 $29,855 $28,939
1975 $731,443 $46,653 $31,588 $30,969
1976 $905,842 $54,470 $33,193 $32,458
1977 $840,766 $54,095 $34,893 $34,656
1978 $895,922 $53,458 $37,398 $37,784
1979 $1,061,126 $52,799 $41,279 $42,812
1980 $1,405,137 $50,715 $45,917 $48,120
1981 $1,336,161 $51,657 $52,671 $52,421
1982 $1,622,226 $72,507 $58,224 $54,451
1983 $1,987,451 $72,979 $63,347 $56,518
1984 $2,111,991 $84,274 $69,586 $58,753
1985 $2,791,168 $110,371 $74,960 $60,968
1986 $3,306,709 $137,446 $79,580 $62,657
1987 $3,479,675 $133,716 $83,929 $64,376
1988 $4,064,583 $146,650 $89,257 $67,221
1989 $5,344,555 $173,215 $96,728 $70,345
1990 $5,174,990 $183,924 $104,286 $74,640
1991 $6,755,922 $219,420 $110,121 $76,927
1992 $7,274,115 $237,092 $113,982 $79,159
1993 $8,000,785 $280,339 $117,284 $81,334
1994 $8,105,379 $258,556 $121,862 $83,510
1995 $11,139,184 $340,436 $128,681 $85,630
1996 $13,709,459 $337,265 $135,381 $88,475
1997 $18,272,762 $390,736 $142,496 $90,092
</TABLE>

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

Source: Stocks, Bonds, Bills and Inflation 1998 Yearbook-TM- Ibbotson Assoc.,
Chi., (annual updates work by Roger G. Ibbotson & Rex A. Sinquefield).

The chart is shown for illustrative purposes only and does not represent any
Portfolio'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, 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 indices are
unmanaged and are not available for investment.

Over time, stocks have outperformed all other investments by a wide margin,
offering a solid hedge against inflation. From 1925 to 1997, stocks beat all
other traditional asset classes. A $10,000 investment in the stocks comprising
the S&P 500 grew to $18,272,762, significantly more than any other investment.

TAXES

TAXATION OF THE PORTFOLIOS. To continue to qualify for treatment as a
regulated investment company ("RIC") under the Internal Revenue Code, each
Portfolio must distribute to its shareholders for each taxable year at least 90%
of its investment company taxable income (consisting generally of net investment
income and net short-term capital gains) ("Distribution Requirement") and must
meet several additional requirements. For

48
<PAGE>
each Portfolio these requirements include the following: (1) the Portfolio must
derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of securities, or other income derived with respect to its
business of investing in securities ("Income Requirement"); (2) at the close of
each quarter of the Portfolio'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 (including the Underlying Funds) and other
securities, with these other securities limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Portfolio'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 Portfolio'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, including the Underlying Funds) of any one issuer.

Each Portfolio will invest its assets in shares of Underlying Funds and
money market and other short-term instruments. Accordingly, each Portfolio's
income will consist of distributions from Underlying Funds, net gains realized
from the disposition of Underlying Fund shares and interest. If an Underlying
Fund qualifies for treatment as a RIC under the Internal Revenue Code--each has
done so for its past taxable years and intends to continue to do so for its
current and future taxable years--(1) dividends paid to a Portfolio from the
Underlying Fund's investment company taxable income (which may include net gains
from certain foreign currency transactions) will be taxable to the Portfolio as
ordinary income to the extent of the Underlying Fund's earnings and profits, and
(2) distributions paid to a Portfolio from the Underlying Fund's net capital
gain (that is, the excess of net long-term capital gain over net short-term
capital loss) will be taxable to the Portfolio as long-term capital gains,
regardless of how long the Portfolio has held the Underlying Fund's shares. If a
Portfolio purchases shares of an Underlying Fund within 30 days before or after
redeeming at a loss other shares of that Underlying Fund (whether pursuant to a
rebalancing of the Portfolio's portfolio or otherwise), all or part of the loss
will not be deductible by the Portfolio and instead will increase its basis for
the newly purchased shares.

Although each of PaineWebber Global Income Fund and PaineWebber Global
Equity Fund will be eligible to elect to "pass-through" to its shareholders
(including a Portfolio) the benefit of the foreign tax credit with respect to
any foreign and U.S. possessions income taxes it pays if more than 50% of the
value of its total assets at the close of any taxable year consists of
securities of foreign corporations, no Portfolio will qualify to pass that
benefit through to its shareholders because of its inability to satisfy that
test.

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

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

A portion of the dividends from a Portfolio's investment company taxable
income (whether paid in cash or additional shares) may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion for
any Portfolio may not exceed the total of its proportionate share of the
aggregate dividends received from U.S. corporations by the Underlying Funds in
which it invests that qualify as RICs. However, dividends received by a
corporate shareholder and deducted by it pursuant to the dividends-received
deduction are subject indirectly to the alternative minimum tax.

If Portfolio 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 on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any dividend or capital gain distribution, the shareholder will
pay full price for the shares and receive some portion of the price back as a
taxable distribution.

49
<PAGE>
The portion of each Portfolio's dividends attributable to interest on U.S.
government obligations, including the portion of dividends the Portfolio
receives from Underlying Funds qualifying as RICs that is attributable to such
interest, may be exempt from state and local income tax.

OTHER INFORMATION

Prior to August 20, 1997, the Trust's name was "PaineWebber Journey
Portfolios," and prior to July 22, 1997, its name was "PaineWebber Select Fund."
The Trust is a Delaware business trust. The Trust has authority to issue an
unlimited number of shares of beneficial interest. The Trust's board may,
without shareholder approval, divide the authorized shares into an unlimited
number of separate series and may divide the shares of any series into classes,
and the costs of doing so will be borne by the Trust. The Trust currently
consist of four series, each with four classes of shares; three series currently
offer shares to the public.

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 Portfolio
could, under certain conflicts of laws jurisprudence in various states, be held
personally liable for the obligations of the Trust or a Portfolio. However, the
trust instrument of the Trust disclaims shareholder liability for acts or
obligations of the Trust or its series (the Portfolios) 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 Portfolio's property for all losses and
expenses of any series shareholder held personally liable for the obligations of
the Portfolio. Thus, the risk of a shareholder's incurring financial loss on
account of shareholder liability is limited to circumstances in which a
Portfolio itself would be unable to meet its obligations, a possibility which
Mitchell Hutchins believes is remote and not material. Upon payment of any
liability incurred by a shareholder solely by reason of being or having been a
shareholder of a Portfolio, the shareholder paying such liability will be
entitled to reimbursement from the general assets of the Portfolio. The trustees
intend to conduct the operations of the Portfolios in such a way as to avoid, as
far as possible, ultimate liability of the shareholders for liabilities of the
Portfolios.

CLASS-SPECIFIC EXPENSES. Each Portfolio may determine to allocate certain
of its expenses (in addition to distribution fees) to the specific classes of
the Portfolio's shares to which those expenses are attributable. For example, a
Portfolio's Class B and Class C shares bear higher transfer agency fees per
shareholder account than those borne by Class A 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.

COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the Portfolios.
Kirkpatrick & Lockhart LLP 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 and each Portfolio.

FINANCIAL STATEMENTS

Each Portfolio's Annual Report to Shareholders for the period ended May 31,
1998 is a separate document supplied with this Statement of Additional
information, and the financial statements, accompanying notes and report of
independent auditors appearing therein are incorporated herein by this
reference.

50
<PAGE>
APPENDIX

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 a
"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 risks 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 B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category, the modifier 2 indicates a mid-range ranking, and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.

DESCRIPTION OF S&P 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;

51
<PAGE>
AA. An obligation rated AA differs from the higher rated issues 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 lowest 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 currently vulnerable to nonpayment and
is dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitments 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.

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.

52
<PAGE>

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

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Portfolios--Investment Policies And
Restrictions........................ 1
Underlying Funds--Investment
Policies............................ 4
Underlying Funds--Hedging And Other
Strategies Using Derivative
Instruments......................... 19
Trustees And Officers; Principal
Holders Of Securities............... 28
Investment Advisory And Distribution
Arrangements........................ 35
Portfolio Transactions................ 39
Reduced Sales Charges, Additional
Exchange And Redemption Information
And Other Services.................. 41
Conversion Of Class B Shares.......... 44
Valuation Of Shares................... 45
Performance Information............... 45
Taxes................................. 48
Other Information..................... 50
Financial Statements.................. 50
Appendix.............................. 51
</TABLE>

- -C-1998 PaineWebber Incorporated
MITCHELL HUTCHINS
PORTFOLIOS

--------------------------
Statement of Additional Information
October 1, 1998

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

PAINEWEBBER