PAINEWEBBER MASTER SERIES INC, 485BPOS, 1996-12-31

PAINEWEBBER MASTER SERIES INC
485BPOS, 1996-12-31

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<PAGE>

As filed with the Securities and Exchange Commission on December 30, 1996.

1933 Act: Registration No. 33-2524
1940 Act: Registration No. 811-4448

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
-----
Pre-Effective Amendment No._____ [_____]

Post-Effective Amendment No. 31 [ X ]
-----

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
-----

Amendment No. 24
-----

(Check appropriate box or boxes.)

PAINEWEBBER MASTER SERIES, INC.
(Exact name of registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)

Registrant's telephone number, including area code: (212) 713-2000

DIANNE E. O'DONNELL, Esq.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)

Copies to:

ELINOR W. GAMMON, Esq.
BRUCE MCDOUGAL, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.; Second Floor
Washington, D.C. 20036-1800
Telephone: (202) 778-9000

It is proposed that this filing will become effective:

[ ] Immediately upon filing pursuant to Rule 485(b)
[ X ] On January 1, 1997 pursuant to Rule 485(b)
---------------
[ ] 60 days after filing pursuant to Rule 485 (a)(i)
[ ] On pursuant to Rule 485 (a)(i)
----------------
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] On pursuant to Rule 485(a)(ii)
----------------
<PAGE>

Registrant has filed a declaration pursuant to Rule 24f-2 under the Investment
Company Act of 1940 and filed the notice required by such Rule for the most
recent fiscal year of the series designated PaineWebber Balanced Fund on October
29, 1996.
<PAGE>

PAINEWEBBER MASTER SERIES, INC.
Contents of Registration Statement

This registration statement consists of the following papers and documents:

Cover Sheet

Contents of Registration Statement

Cross Reference Sheets

PaineWebber Balanced Fund - Class A, B and C Shares
- -------------------------

Part A - Prospectus

Part B - Statement of Additional Information

PaineWebber Balanced Fund - Class Y Shares
- -------------------------

Part A - Prospectus

Part B - Statement of Additional Information

Part C - Other Information

Signature Page

Exhibits

<PAGE>

PAINEWEBBER MASTER SERIES, INC.

Class A, B, and C Shares of:

PaineWebber Balanced Fund
Form N-1A Cross Reference Sheet

Part A Item No.
and Caption Prospectus Caption
--------------- ------------------
1. Cover Page................. Cover Page
The Funds at a Glance; Expense Table
2. Synopsis...................
3. Condensed Financial
Information................ Financial Highlights

4. General Description of The Funds at a Glance; Investment Objectives
Registrant................. & Policies; Investment Philosophy & Process;
General Information

5. Management of the Fund..... Management; General Information

6. Capital Stock and Cover Page; Flexible Pricing; Dividends &
Other Securities........... Taxes; General Information

7. Purchase of Securities Flexible Pricing; How to Buy Shares; How to
Being Offered.............. Sell Shares; Other Services; Determining the
Shares' Net Asset Value

8. Redemption or How to Sell Shares; Other Services
Repurchase.................
9. Pending Legal
Proceedings................ Not Applicable

Part B Item No. Statement of Additional
and Caption Information Caption
--------------- -----------------------
10. Cover Page................. Cover Page
11. Table of Contents.......... Table of Contents
12. General Information
and History................ Other Information
Investment Policies and Restrictions;
13. Investment Objective and Portfolio Transactions
Policies...................

14. Management of the Fund..... Directors, Trustees and
<PAGE>

Officers; Principal
Holders of Securities

15. Control Persons and Directors, Trustees and Officers; Principal
Principal Holders of Holders of Securities
Securities.................

16. Investment Advisory and Investment Advisory and
Other Services............. Distribution Arrangements
17. Brokerage Allocation....... Portfolio Transactions
18. Capital Stock and Other Conversion of Class B Shares; Other
Securities................. Information

19. Purchase, Redemption Reduced Sales Charges, Additional Exchange and
and Pricing of Securi- Redemption Information and Other Services;
ties Being Offered......... Valuation of Shares

20. Tax Status................. Taxes
21. Underwriters............... Investment Advisory and Distribution
Arrangements
22. Calculation of Performance
Data....................... Performance Information

23. Financial Statements....... Financial Statements
<PAGE>

PAINEWEBBER MASTER SERIES, INC.

Class Y Shares of:

PaineWebber Balanced Fund
Form N-1A Cross Reference Sheet

Part A Item No.
and Caption Prospectus Caption
----------- ------------------

1. Cover Page................. Cover Page
The Funds at a Glance; Expense Table
2. Synopsis...................
3. Condensed Financial
Information................ Financial Highlights

4. General Description of The Funds at a Glance; Investment Objectives
Registrant................. & Policies; Investment Philosophy & Process;
General Information

5. Management of the Fund..... Management; General Information
6. Capital Stock and Cover Page; Dividends & Taxes; General
Other Securities........... Information

7. Purchase of Securities How to Buy Shares; Determining the Shares'
Being Offered.............. Net Asset Value

8. Redemption or How to Sell Shares; Other Services
Repurchase.................
9. Pending Legal
Proceedings................ Not Applicable

14. Management of the Fund..... Directors, Trustees and Officers; Principal
Holders of Securities

15. Control Persons and Directors, Trustees and Officers; Principal
Principal Holders of
<PAGE>

Securities................. Holders of Securities

16. Investment Advisory and Investment Advisory and Distribution
Other Services............. Arrangements

17. Brokerage Allocation....... Portfolio Transactions
18. Capital Stock and Other
Securities................. Other Information
19. Purchase, Redemption
and Pricing of Securities
Being Offered.............. Valuation of Shares

23. Financial Statements....... Financial Statements
<PAGE>

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

PaineWebber Balanced Fund
PaineWebber Tactical Allocation Fund
1285 Avenue of the Americas, New York, New York 10019

Prospectus -- January 1, 1997
- --------------------------------------------------------------------------------

PaineWebber Asset Allocation Funds are designed for investors generally seeking
high total return. PaineWebber Balanced Fund invests primarily in a combination
of equity securities, investment grade bonds and money market instruments and
maintains a fixed income allocation of at least 25% at all times. PaineWebber
Tactical Allocation Fund follows an investment strategy that actively allocates
its assets among equity securities, U.S. Treasury notes and U.S. Treasury
bills.

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

A Statement of Additional Information dated January 1, 1997 has been filed with
the Securities and Exchange Commission and is legally part of this Prospectus.
The Statement of Additional Information can be obtained without charge, and
further inquiries can be made, by contacting an individual Fund, your invest-
ment executive at PaineWebber or one of its correspondent firms or by calling
toll-free 1-800-647-1568.
- --------------------------------------------------------------------------------

THE PAINEWEBBER FAMILY OF MUTUAL FUNDS

The PaineWebber Family of Mutual Funds consists of six broad categories, which
are presented here. Generally, investors seeking to maximize return must assume
greater risk. Balanced Fund and Tactical Allocation Fund are both in the ASSET
ALLOCATION category.

. Money Market Fund for . Asset Allocation Funds for long-term growth and
income and stability by income by investing in stocks and bonds.
investing in high-
quality, short-term
investments.

. Bond Funds for income . Stock Funds for long-term growth by investing
by investing mainly in mainly in stocks.
bonds.

. Global Funds for long-term growth by investing
. Tax-Free Bond Funds for mainly in foreign stocks or high current income
income exempt from by investing mainly in global debt instruments.
federal income tax and,
in some cases, state
and local income taxes,
by investing in
municipal bonds.

A complete listing of the PaineWebber Family of Mutual Funds is found on the
back cover of this Prospectus.
- --------------------------------------------------------------------------------

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

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

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

<PAGE>

- --------------------------------------------------------------------------------
-------------------
PaineWebber Tactical Allocation Fund
Balanced Fund

Table of Contents
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Page
----
<S> <C>
The Funds at a Glance...................................................... 3
Expense Table.............................................................. 5
Financial Highlights....................................................... 8
Investment Objectives & Policies........................................... 11
Investment Philosophy & Process............................................ 12
Performance................................................................ 14
The Funds' Investments..................................................... 16
Flexible PricingSM......................................................... 21
How to Buy Shares.......................................................... 24
How to Sell Shares......................................................... 25
Other Services............................................................. 25
Management................................................................. 26
Determining the Shares' Net Asset Value.................................... 28
Dividends & Taxes.......................................................... 28
General Information........................................................ 30
</TABLE>

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Prospectus Page 2

<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Tactical Allocation Fund
Balanced Fund
The Funds at a Glance
- -------------------------------------------------------------------------------

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

BALANCED FUND

GOAL: To increase the value of your investment by investing in a combination
of equity securities, investment grade bonds and money market instruments,
while maintaining a fixed income allocation of at least 25% at all times.

INVESTMENT OBJECTIVE: High total return with low volatility.

RISKS: Equity securities historically have shown greater growth potential than
other types of securities, but they have also shown greater volatility.
Because the Fund invests in equity securities, its price will rise and fall.
Certain investment grade debt securities in which the Fund may invest have
speculative characteristics. The debt instruments in which the Fund may invest
are subject to interest rate risk, which means that their prices can be
expected to decrease when interest rates rise. The Fund may invest in mortgage-
and asset-backed securities, which involve additional risks, such as those
relating to the prepayment of principal on the underlying obligations. The
Fund may invest in U.S. dollar-denominated securities of foreign companies,
which involve more risk than investing in the securities of U.S. companies.
The Fund also may invest up to 10% of its total assets in high yield, high
risk convertible securities, which are considered predominantly speculative
and involve major risk exposure to adverse conditions. The Fund may use
derivatives, such as options and futures, in its investment activities, which
may involve additional risks. Investors may lose money by investing in the
Fund; your investment is not guaranteed.

SIZE: On November 30, 1996, the Fund had over $197.8 million in assets.

TACTICAL ALLOCATION FUND

GOAL: To increase the value of your investment by following a systematic
investment strategy that actively allocates the Fund's assets among equity
securities, U.S. Treasury notes and U.S. Treasury bills.

INVESTMENT OBJECTIVE: Total return, consisting of long-term capital
appreciation and current income.

RISKS: Although the Fund seeks total return, the Fund may not achieve as high
a level of either capital appreciation or current income as a fund that has
only one of those objectives as its primary objective. The Fund invests in
equity securities included in the Standard and Poor's 500 Composite Stock
Price Index (the "S&P 500 Index"). Equity securities historically have shown
greater growth potential than other types of securities, but they have also
shown greater volatility. Because the Fund invests in equity securities, its
price will rise and fall. The Fund may invest in U.S. dollar-denominated
securities of foreign companies, which can involve more risk than investing in
the securities of U.S. companies. The Fund may use derivatives, such as
options and futures, in its investment activities, which may involve
additional risks. Investors may lose money by investing in the Fund; your
investment is not guaranteed.

SIZE: On November 30, 1996, the Fund had over $209.4 million in assets.

MANAGEMENT

Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), an asset
management subsidiary of PaineWebber Incorporated ("PaineWebber"), is the
investment adviser and administrator of Balanced Fund and Tactical Allocation
Fund (each a "Fund" and, collectively, the "Funds").

MINIMUM INVESTMENT

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

----------
Prospectus Page 3

<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Tactical Allocation Fund
Balanced Fund
The Funds at a Glance
(Continued)
- -------------------------------------------------------------------------------

WHO SHOULD INVEST

BALANCED FUND is for investors who want high total return with low volatility
through investments in equity securities, investment grade bonds and money
market instruments. The Fund is designed for investors who want an investment
that maintains a fixed income allocation at all times, yet has the flexibility
to change its investment mix in response to changing market conditions. Over
time, the 25% minimum in fixed income investments should result in a lower
risk profile for the Fund than if it could invest 100% of its assets in
stocks.

TACTICAL ALLOCATION FUND is for investors who want total return, consisting of
long-term capital appreciation and current income, through a systematic
investment strategy that actively allocates assets among equity securities
included in the S&P 500 Index, U.S. Treasury notes and U.S. Treasury bills.
The Fund is designed for investors who want to participate in the broad stock
market, yet want the flexibility to take a more defensive posture when a
secular decline in stock prices is projected. This disciplined approach to
investing in stocks attempts to shift the asset mix in anticipation of, not in
response to, changing market trends.

See page for a summary of the differences between Balanced Fund and Tactical
Allocation Fund.

HOW TO PURCHASE SHARES OF THE FUNDS

Investors may select among these classes of shares:
CLASS A SHARES

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

CLASS B SHARES

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

CLASS C SHARES

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

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

<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Tactical Allocation Fund
Balanced Fund
Expense Table
- -------------------------------------------------------------------------------

The following tables are intended to assist investors in understanding the
expenses associated with investing in Class A, B and C shares of the Funds.
Expenses shown below represent those incurred for the most recent fiscal year
for Tactical Allocation Fund (annualized for the Class B shares) and
annualized expenses for the six months ended August 31, 1996 for Balanced
Fund.

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHAREHOLDER TRANSACTION EXPENSES ------- ------- -------
<S> <C> <C> <C>
Maximum Sales Charge on Purchases of Shares (as a %
of offering price).................................. 4.5% None None
Sales Charge on Reinvested Dividends (as a % of of-
fering price)....................................... 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%
Exchange Fee for Balanced Fund....................... $5.00 $5.00 $5.00
Exchange Fee for Tactical Allocation Fund............ None None None
ANNUAL FUND OPERATING EXPENSES (as a % of average net
assets)
BALANCED FUND
Management Fees...................................... 0.75% 0.75% 0.75%
12b-1 Fees........................................... 0.25 1.00 1.00
Other Expenses....................................... 0.34 0.34 0.34
----- ----- -----
Total Operating Expenses............................. 1.34% 2.09% 2.09%
===== ===== =====
TACTICAL ALLOCATION FUND
Management Fees...................................... 0.50% 0.50% 0.50%
12b-1 Fees........................................... 0.25 1.00 1.00
Other Expenses....................................... 0.42 0.34 0.45
----- ----- -----
Total Operating Expenses............................. 1.17% 1.84% 1.95%
===== ===== =====
</TABLE>

CLASS A SHARES: Sales charge waivers and a reduced sales charge purchase plan
are available. Purchases of $1 million or more are not subject to an initial
sales charge. However, if such shares are sold within one year after purchase,
a contingent deferred sales charge of 1% of the offering price or the net asset
value of the shares at the time of sale, whichever is less, is imposed.
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 within one year after purchase, a
contingent deferred sales charge of 1% of the offering price or the net
asset value of the shares at the time of sale, whichever is less, is
imposed.

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

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

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

----------
Prospectus Page 5
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Tactical Allocation Fund
Balanced Fund
Expense Table
(Continued)
- -------------------------------------------------------------------------------

EXAMPLES OF EFFECT OF FUND EXPENSES

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

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

BALANCED FUND

<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A........................................ $58 $86 $115 $199
Class B (Assuming sale of all shares at end of
period)....................................... $71 $95 $132 $205
Class B (Assuming no sale of shares)........... $21 $65 $112 $205
Class C (Assuming sale of all shares at end of
period)....................................... $31 $65 $112 $242
Class C (Assuming no sale of shares)........... $21 $65 $112 $242
</TABLE>

TACTICAL ALLOCATION FUND

<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A........................................ $56 $80 $106 $181
Class B (Assuming sale of all shares at end of
period)....................................... $69 $88 $120 $182
Class B (Assuming no sale of shares)........... $19 $58 $100 $182
Class C (Assuming sale of all shares at end of
period)....................................... $30 $61 $105 $227
Class C (Assuming no sale of shares)........... $20 $61 $105 $227
</TABLE>

ASSUMPTIONS MADE IN THE EXAMPLES

. ALL CLASSES: Reinvestment of all dividends and other distributions;
percentage amounts listed under "Annual Fund Operating Expenses" remain
the same for years shown.
. CLASS A SHARES: Deduction of the maximum 4.5% 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. Ten-year figures assume that Class B shares convert to Class A
shares at the end of the sixth year.
. CLASS C SHARES: Deduction of a 1% contingent deferred sales charge for
sales of shares within one year of purchase.

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Prospectus Page 6

<PAGE>

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

[THIS PAGE INTENTIONALLY LEFT BLANK]

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Prospectus Page 7

<PAGE>

- ------------------------------===================------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund

Financial Highlights
- -------------------------------------------------------------------------------

BALANCED FUND

The following tables provide investors with data and ratios for one Class A,
Class B and Class C share for each of the periods shown. This information is
supplemented by the financial statements, accompanying notes and the report of
Price Waterhouse LLP, independent accountants, which appear in the Fund's
Annual Report to Shareholders for the fiscal period ended August 31, 1996 and
are incorporated by reference into the Statement of Additional Information.
The financial statements and notes, as well as the information in the table
below relating to the period March 1, 1996 through August 31, 1996 and to each
of the five years in the period ended February 29, 1996, have been audited by
Price Waterhouse LLP. Further information about the Fund's performance is also
included in the Annual Report to Shareholders, which may be obtained without
charge by calling 1-800-647-1568. Prior to August 14, 1995, the Fund pursued
certain different investment policies; thus, the information shown below for
periods prior to that date may not necessarily be indicative of current or
future operations.

<TABLE>
<CAPTION>
BALANCED FUND
-----------------------------------------------------------------------------
CLASS A
-----------------------------------------------------------------------------
FOR THE PERIOD
MARCH 1, FOR THE FOR THE PERIOD
1996 YEAR ENDED FOR THE YEARS ENDED JULY 1, 1991+ TO
THROUGH FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
AUGUST 31, ------------ ------------------------------ ----------------
1996 1996 1995 1994 1993 1992
-------------- ------------ -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period......... $ 10.85 $ 9.80 $ 12.04 $ 11.54 $ 11.01 $10.09
-------- -------- -------- -------- -------- ------
Net investment
income......... 0.12++ 0.27++ 0.26 0.22 0.33 0.19
Net realized and
unrealized
gains (losses)
from investment
transactions... (0.12) 1.84 (1.07) 1.31 0.54 0.96
-------- -------- -------- -------- -------- ------
Net increase
(decrease) from
investment
operations..... 0.00 2.11 (0.81) 1.53 0.87 1.15
-------- -------- -------- -------- -------- ------
Dividends from
net investment
income......... (0.10) (0.31) (0.23) (0.25) (0.34) (0.23)
Distributions
from net
realized gains
from investment
transactions... (0.48) (0.75) (1.20) (0.78) -- --
-------- -------- -------- -------- -------- ------
Total dividends
and
distributions.. (0.58) (1.06) (1.43) (1.03) (0.34) (0.23)
-------- -------- -------- -------- -------- ------
Net asset value,
end of period.. $ 10.27 $ 10.85 $ 9.80 $ 12.04 $ 11.54 $11.01
======== ======== ======== ======== ======== ======
Total investment
return (1)..... 0.03 % 22.08 % (6.02)% 13.57 % 8.09 % 11.43 %
======== ======== ======== ======== ======== ======
Ratios/Supplemental
Data:
Net assets, end
of period
(000's)........ $157,525 $171,609 $174,761 $216,492 $154,594 $ 916
Expenses to
average net
assets......... 1.34 %* 1.29 % 1.26 % 1.21 % 1.18 % 1.30 %*
Net investment
income to
average net
assets......... 2.19 %* 2.55 % 2.41 % 1.74 % 2.52 % 3.43 %*
Portfolio
turnover....... 103 % 188 % 107 % 69 % 33 % 84 %
Average
commission rate
paid per share
on common stock
investments
purchased/sold(3). $ 0.0600 -- -- -- -- --

BALANCED FUND
---------------------------------------------------------
CLASS B
--------------------------------------------------------
FOR THE PERIOD
MARCH 1, FOR THE
1996 YEAR ENDED FOR THE YEARS ENDED
THROUGH FEBRUARY 29, FEBRUARY 28,
AUGUST 31, ------------ ----------------------------
1996 1996 1995 1994 1993
-------------- ------------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period......... $ 11.00 $ 9.90 $ 12.10 $ 11.56 $ 10.99
------- ------- ------- ------- --------
Net investment
income......... 0.08++ 0.19++ 0.44 0.26 0.30
Net realized and
unrealized
gains (losses)
from investment
transactions... (0.11) 1.86 (1.32) 1.18 0.48
------- ------- ------- ------- --------
Net increase
(decrease) from
investment
operations..... (0.03) 2.05 (0.88) 1.44 0.78
------- ------- ------- ------- --------
Dividends from
net investment
income......... (0.07) (0.20) (0.12) (0.12) (0.21
Distributions
from net
realized gains
from investment
transactions... (0.48) (0.75) (1.20) (0.78) --
------- ------- ------- ------- --------
Total dividends
and
distributions.. (0.55) (0.95) (1.32) (0.90) (0.21
------- ------- ------- ------- --------
Net asset value,
end of period.. $ 10.42 $ 11.00 $ 9.90 $ 12.10 $ 11.56
======= ======= ======= ======= ========
Total investment
return (1)..... (0.30)% 21.20 % (6.68)% 12.62 % 7.25
======= ======= ======= ======= ========
Ratios/Supplemental
Data:
Net assets, end
of period
(000's)........ $22,307 $26,627 $37,104 $83,178 $160,115
Expenses to
average net
assets......... 2.09 %* 2.05 % 1.98 % 2.05 % 1.98
Net investment
income to
average net
assets......... 1.43 %* 1.81 % 1.60 % 1.00 % 2.02
Portfolio
turnover....... 103 % 188 % 107 % 69 % 33
Average
commission rate
paid per share
on common stock
investments
purchased/sold(3). $0.0600 -- -- -- --

</TABLE>
- -------
* Annualized.

+ Commencement of issuance of shares.
++ Calculated using the monthly average shares outstanding for the year.

(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the period, reinvestment of all dividends and other
distributions at net asset value on the payable dates, and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for each class would be lower if sales
charges were included. Total investment returns for periods of less than
one year have not been annualized.
(2) During the period December 12, 1986 (commencement of issuance of Class B
shares) to February 28, 1987, PaineWebber reimbursed the Fund for a
portion of its operating expenses. If such reimbursement had not been
made, the annualized ratio of expenses to average net assets and the
annualized ratio of net investment income to average net assets would have
been 2.10% and 2.73%, respectively.

(3) Disclosure effective for fiscal years beginning on or after September 1,
1995.

- -------------------------------=================--------------------------------
Prospectus Page 8
<PAGE>

- --------------------------------------------------------------------------------
-------------------
PaineWebber Tactical Allocation Fund
Balanced Fund
Financial Highlights
(Continued)
- --------------------------------------------------------------------------------

BALANCED FUND
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS B CLASS C
- -------------------------------------------------------------------- --------------------------------------------------------------
FOR THE PERIOD
FOR THE PERIOD MARCH 1, 1996 FOR THE FOR THE FOR THE PERIOD
DECEMBER 12, 1986+ THROUGH YEAR ENDED YEARS ENDED JULY 2, 1992+ TO
FOR THE YEARS ENDED FEBRUARY 28 OR 29, TO FEBRUARY 28, AUGUST 31, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
- ------------------------------------------------ ------------------ -------------- ------------ ---------------- ----------------
1992 1991 1990 1989 1988 1987 1996 1996 1995 1994 1993
- -------- -------- -------- -------- -------- ------------------ -------------- ------------ ------ ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.21 $ 9.86 $ 9.92 $ 10.18 $ 10.40 $ 10.00 $10.88 $ 9.82 $12.03 $ 11.54 $10.86
- -------- -------- -------- -------- -------- -------- ------ ------ ------ ------- ------
0.35 0.59 0.65 0.54 0.48 0.04 0.08++ 0.19++ 0.19 0.14 0.13
0.78 0.38 0.10 (0.28) (0.09) 0.36 (0.12) 1.84 (1.07) 1.30 0.71
- -------- -------- -------- -------- -------- -------- ------ ------ ------ ------- ------
1.13 0.97 0.75 0.26 0.39 0.40 (0.04) 2.03 (0.88) 1.44 0.84
- -------- -------- -------- -------- -------- -------- ------ ------ ------ ------- ------
(0.35) (0.62) (0.70) (0.52) (0.44) -- (0.07) (0.22) (0.13) (0.17) (0.16)
-- -- (0.11) -- (0.17) -- (0.48) (0.75) (1.20) (0.78) --
- -------- -------- -------- -------- -------- -------- ------ ------ ------ ------- ------
(0.35) (0.62) (0.81) (0.52) (0.61) -- (0.55) (0.97) (1.33) (0.95) (0.16)
- -------- -------- -------- -------- -------- -------- ------ ------ ------ ------- ------
$ 10.99 $ 10.21 $ 9.86 $ 9.92 $ 10.18 $ 10.40 $10.29 $10.88 $ 9.82 $ 12.03 $11.54
======== ======== ======== ======== ======== ======== ====== ====== ====== ======= ======
11.24% 10.29% 7.53% 2.73% 4.31% 4.00% (0.38)% 21.12% (6.69)% 12.75% 7.78%
======== ======== ======== ======== ======== ======== ====== ====== ====== ======= ======
$346,290 $403,557 $557,646 $651,003 $715,771 $613,024 $6,979 $7,469 $8,525 $12,916 $7,058
2.02% 1.83% 1.84% 1.94% 1.98% 2.03%*(2) 2.09%* 2.08% 2.01% 1.96% 1.95%*
3.25% 5.46% 6.04% 5.37% 5.01% 2.80%*(2) 1.44%* 1.77% 1.62% 0.97% 1.91%*
84% 169% 327% 159% 129% 25% 103% 188% 107% 69% 33%
</TABLE>
----------
Prospectus Page 9

<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Tactical Allocation Fund
Balanced Fund
Financial Highlights
(Concluded)
- -------------------------------------------------------------------------------

TACTICAL ALLOCATION FUND

The following tables provide investors with data and ratios for one Class A,
Class B and Class C share for each of the periods shown. This information is
supplemented by the financial statements, accompanying notes and the report of
Ernst & Young LLP, independent auditors, which appear in the Fund's Annual
Report to Shareholders for the fiscal year ended August 31, 1996, 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 relating to each of the two fiscal years ended August 31, 1996
and August 31, 1995, have been audited by Ernst & Young LLP. The financial
information for the year ended August 31, 1994 and the prior periods was
audited by other auditors, whose report on this data was unqualified. Further
information about the Fund's performance is also included in the Annual Report
to Shareholders, which may be obtained without charge by calling 1-800-647-
1568.

<TABLE>
<CAPTION>
TACTICAL ALLOCATION FUND
-------------------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
---------------------------------------- -------------- -----------------------------------------------------
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
FOR THE YEARS MAY 10, JANUARY 30, FOR THE YEARS JULY 22,
ENDED 1993+ 1996+ TO ENDED 1992+
AUGUST 31, TO AUGUST 31, AUGUST 31, AUGUST 31, TO AUGUST 31,
------------------------ -------------- -------------- ------------------------------------- --------------
1996 1995** 1994 1993 1996 1996 1995** 1994 1993 1992
------- ------ ------ -------------- -------------- ------- ------- ------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period.......... $ 14.86 $13.78 $13.50 $12.90 $ 15.54 $ 14.87 $ 13.78 $ 13.49 $ 12.12 $ 12.00
------- ------ ------ ------ ------- ------- ------- ------- -------- -------
Net investment
income.......... 0.18 0.22 0.24 0.08 0.02 0.06 0.12 0.13 0.18 0.03
Net realized and
unrealized gains
from investment
transactions.... 2.31 2.05 0.32 0.59 0.57 2.32 2.06 0.33 1.34 0.09
------- ------ ------ ------ ------- ------- ------- ------- -------- -------
Net increase
from investment
operations...... 2.49 2.27 0.56 0.67 0.59 2.38 2.18 0.46 1.52 0.12
------- ------ ------ ------ ------- ------- ------- ------- -------- -------
Dividends from
net investment
income.......... (0.14) (0.22) (0.24) (0.07) -- (0.07) (0.12) (0.13) (0.15) --
Distributions
from net
realized gains
from investment
transactions.... (1.06) (0.97) (0.04) -- -- (1.06) (0.97) (0.04) -- --
------- ------ ------ ------ ------- ------- ------- ------- -------- -------
Total dividends
and
distributions to
shareholders.... (1.20) (1.19) (0.28) (0.07) -- (1.13) (1.09) (0.17) (0.15) --
------- ------ ------ ------ ------- ------- ------- ------- -------- -------
Net asset value,
end of period... $ 16.15 $14.86 $13.78 $13.50 $ 16.13 $ 16.12 $ 14.87 $ 13.78 $ 13.49 $ 12.12
======= ====== ====== ====== ======= ======= ======= ======= ======== =======
Total investment
return(1)....... 17.35% 18.43% 4.21% 5.17% 3.80% 16.52% 17.57% 3.46% 12.61% 0.98%
======= ====== ====== ====== ======= ======= ======= ======= ======== =======
Ratios/Supplemental
Data:
Net assets, end
of period
(000's)......... $23,551 $1,944 $1,801 $3,007 $28,495 $73,630 $48,105 $62,970 $107,761 $50,222
Expenses to
average net
assets.......... 1.17% 1.46% 1.13% 1.06%* 1.84%* 1.95% 2.22% 1.88% 1.73% 1.75%*
Net investment
income to
average net
assets.......... 1.12% 1.60% 1.64% 1.71%* 0.47%* 0.35% 0.86% 0.89% 1.04% 2.42%*
Portfolio
turnover........ 6% 53% 4% 0% 6% 6% 53% 4% 0% 0%
Average
commission rate
paid per share
on common stock
investments
purchased/sold(2). $ 0.0250 -- -- -- $ 0.0250 $ 0.0250 -- -- -- --
</TABLE>
- -------
+ Commencement of issuance of shares.
* Annualized.
** Investment advisory functions for the Fund were transferred from Kidder
Peabody Asset Management, Inc. to Mitchell Hutchins on February 13, 1995.

(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
capital gain distributions at net asset value on the payable dates and a
sale at net asset value on the last day of each period reported. The
figures do not include sales charges; results for each class would be
lower if sales charges were included. Total investment returns for periods
of less than one year have not been annualized.
(2) Disclosure effective for fiscal years beginning on or after September 1,
1995.

----------
Prospectus Page 10

<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Tactical Allocation Fund
Balanced Fund

Investment Objectives & Policies
- -------------------------------------------------------------------------------

The Funds' investment objectives may not be changed without shareholder
approval. Their other investment policies, except where noted, are not
fundamental and may be changed by the Funds' boards. See the brief summary on
page for the differences between Balanced and Tactical Allocation Fund.

BALANCED FUND

Balanced Fund's investment objective is to obtain high total return with low
volatility. The Fund pursues this objective by investing primarily in a
combination of three asset classes: stocks (equity securities), bonds
(investment grade bonds) and cash (money market securities). The portion
invested in each of these asset classes is based on Mitchell Hutchins'
judgment of the best allocation of the Fund's assets. However, the Fund
maintains a fixed income allocation (including bonds and cash) of at least
25%. The Fund attempts to maintain a dollar-weighted average maturity for its
fixed income investments--the average remaining time to maturity of a
portfolio's bonds--of three to ten years.

The Fund may invest in a broad range of:

. Equity securities issued by companies believed by Mitchell Hutchins to have
the potential for rapid earnings growth;

. Investment grade bonds, that is, bonds that, at the time of purchase, are
assigned one of the four highest grades 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 nationally recognized
statistical rating organization ("NRSRO") or, if unrated, are determined by
Mitchell Hutchins to be of comparable quality, and U.S. government
securities;

. Convertible securities rated at least B by S&P or Moody's, comparably rated
by another NRSRO or, if unrated, determined by Mitchell Hutchins to be of
comparable quality. Securities rated BB or B by S&P (or Ba or B by Moody's)
are regarded as having predominantly speculative characteristics with
respect to the ability to pay interest and repay principal. While such
securities may have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
The Fund will not invest more than 10% of its total assets in convertible
securities rated below investment grade; and

. High quality money market securities.

TACTICAL ALLOCATION FUND

Tactical Allocation Fund's investment objective is total return, consisting of
long-term capital appreciation and current income. The Fund seeks to achieve
its objective by using a systematic investment strategy that actively
allocates the Fund's assets among common stocks, U.S. Treasury notes and U.S.
Treasury bills.

In seeking total return, the Fund shifts its asset mix among an equity portion
designed to track the performance of the S&P 500 Index (the Fund holds
approximately 450 of the 500 stocks in the S&P 500 Index), a bond portion,
consisting of five-year U.S. Treasury notes, and a cash portion, consisting of
30-day U.S. Treasury bills. The allocation among these three segments is based
on the asset mix recommendation of the Mitchell Hutchins Tactical Allocation
Model. This Model is a systematic, cost-effective approach to allocating
assets among the three asset classes.

The performance of the Fund's equity portion is intended to replicate that of
the S&P 500 Index before deducting operating expenses.

The Fund seeks to achieve total return during all economic and financial
market cycles, with a degree of volatility lower than that of the S&P 500
Index, by investing in common stocks held in the S&P 500 Index, but can take a
more defensive posture when the Model signals a potential secular decline in
stock prices.

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

----------
Prospectus Page 11

<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Tactical Allocation Fund
Balanced Fund

Investment Philosophy & Process

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

BALANCED FUND

Mitchell Hutchins believes that superior performance can be obtained by
reallocating assets from time to time before changes in the consensus outlook
have been fully discounted by the market. Mitchell Hutchins also believes that
capital market returns (returns on stocks and bonds) reflect the consensus
expectations for key economic variables, such as interest rates, profit growth
and inflation. To implement this strategy for the Fund, Mitchell Hutchins:

. Regularly surveys market participants and generates a consensus forecast of
economic variables affecting returns on equity securities, bonds and money
market instruments; and

. Applies fundamental valuation techniques to the consensus data to determine
the asset allocation it believes to be optimal.

Once the Fund's asset allocation is determined, the portfolio managers
specializing in each asset class select individual securities for each portion
of the portfolio. Mitchell Hutchins regularly monitors market outlooks and
shifts the asset allocation mix when there are significant changes in expected
returns.

The Fund uses the following investment process to determine the individual
securities for each portion of the Fund:

. EQUITY SECURITIES. Mitchell Hutchins uses its proprietary Factor Valuation
Model to identify stocks providing a combination of value and price
momentum. This Model screens a universe of small- to large-capitalization
companies in ten different business sectors to identify undervalued
companies with strong earnings momentum that rank well in three measures:

--VALUE: projected dividends, cash flow, earnings and book value;

--MOMENTUM: earnings and price to identify companies that could surprise on
the upside; and

--ECONOMIC SENSITIVITY: to forecast how different equity securities and
industries may perform under various economic scenarios.

The equity securities ranking in the top 20% of the Factor Valuation Model's
universe are screened twice a month. Then the portfolio managers take a closer
look at those equity securities that rank higher based on value and momentum.
Mitchell Hutchins applies traditional analysis and may speak to the management
of these companies, as well as those of their competitors.

. DEBT SECURITIES. Mitchell Hutchins selects these securities based on its
analysis of their maturity and risk structures (comparing yields on Treasury
securities to yields on riskier types of debt securities).

. MONEY MARKET INSTRUMENTS. Mitchell Hutchins' decision to use these
securities is based on its judgment of how they can further the Fund's
investment objective.

As of August 31, 1996, the Fund's assets were allocated as follows: equity
securities, 54.3%; bonds, 39.5%; and cash, 6.2%. At February 29, 1996, the
asset allocation looked like this: equity securities, 59%; bonds, 30%; and
cash, 11%.

TACTICAL ALLOCATION FUND

Mitchell Hutchins allocates the Fund's assets among stocks and either bonds or
cash, based on the Tactical Allocation Model's quantitative assessment of the
projected rates of return of each asset class. This disciplined approach to
investing in stocks attempts to shift the asset mix in anticipation of, not in
response to, changing market trends. This Model embraces the concept that
incremental return can be achieved through the tactical allocation of
portfolio assets across three main asset classes--stocks, bonds and cash. The
emphasis of this Model is to avoid or reduce exposure to the stock market
during down economic cycles and to perform close to the S&P 500 Index in
periods of strongly positive market performance. In contrast to a typical S&P
500 Index fund that maintains a 100% allocation to the Index at all times, the
Fund is designed to take a more defensive posture when the Model signals a
potential secular decline in stock prices.

The basic premise of the Tactical Allocation Model is that investors accept
the risk of owning stocks,

----------
Prospectus Page 12

<PAGE>

- --------------------------------------------------------------------------------
-------------------
PaineWebber Tactical Allocation Fund
Balanced Fund

measured as volatility of return, because they expect a return advantage. This
expected return advantage of owning stocks is called the equity risk premium
("ERP"). The Model projects the stock market's expected ERP based on several
factors including:

. current price of stocks and their expected future dividends;

.economic statistics;

. five-year, "bottom-up" company earnings projections; and

.yield-to-maturity of the one-year Treasury bill.

When the stock market's ERP is high, the Model signals the Fund to invest 100%
in stocks. Conversely, when the ERP decreases below certain threshold levels,
the Model signals the Fund to reduce its exposure to stocks. The Model can
recommend stock allocations of 100%, 75%, 50%, 25% or 0%.

If the Model recommends a stock allocation of less than 100%, the Model also
recommends an asset class for the remainder of the Fund's assets. The Model
will recommend either bonds (5 year Treasury notes) or cash (30 day Treasury
bills), but not both. To make this determination, the Model calculates the
risk premium available for the notes. This "bond risk premium" ("BRP") is
calculated based on the yields-to-maturity of the five-year U.S. Treasury note
and the one year Treasury bill.

Asset reallocations are made on the first business day of each month. In
addition to any reallocation of assets dictated by the Model, any material
amounts resulting from appreciation or receipt of dividends, distributions,
interest payments and proceeds from securities maturing in each of the asset
classes are reallocated (or "rebalanced") to the extent practicable to re-
establish the Model's recommended asset allocation mix.

The Fund deviates from the recommendations of the Model only to the extent
necessary to:

. Maintain an amount in cash, not expected to exceed 2% of its total assets
under normal market conditions, to pay Fund operating expenses, dividends
and distributions on its shares and to meet anticipated sales of shares by
Fund investors; and

. Qualify as a regulated investment company for Federal income tax purposes.
See "Dividends & Taxes."

As a result, even if the Model does not recommend an allocation to cash, the
Fund still may hold cash.

As of August 31, 1996, 100% of the Fund's assets were allocated to stocks and
as of February 29, 1996, the Fund's assets were allocated as follows: 99% to
stocks, 0% to bonds and 1% to cash.

DIFFERENCES BETWEEN BALANCED FUND AND TACTICAL ALLOCATION FUND
<TABLE>
------------------------------------------------------------------------
<CAPTION>
BALANCED FUND TACTICAL ALLOCATION FUND

<S> <C> <C>
Investment Objective High total return with low Total return, consisting of long-
volatility term capital appreciation and
current income.
- ---------------------------------------------------------------------------------------------
Asset Allocation Based on Mitchell Hutchins Based on Mitchell Hutchins
Decision fundamental valuations for each Tactical Allocation Model.
asset class using its consensus
forecast for certain economic
variables.
- ---------------------------------------------------------------------------------------------
Asset Mix Fixed income allocation: at least Tactical Allocation Model signals
25% at all times. a stock segment of 100%, 75%,
50%, 25% or 0% and selects bonds
or cash for balance. Fund may
deviate from Model only to pay
its expenses, dividends and other
obligations.
- ---------------------------------------------------------------------------------------------
Stock Selection Discretionary, based on Mitchell When there is a stock allocation,
Hutchins Factor Valuation Model, invests in about 450 of 500
which evaluates companies' common stocks that make up the
potential for rapid earnings Standard & Poor's 500 Index.
growth.
- ---------------------------------------------------------------------------------------------
Fixed Income Discretionary, may select from When there is a bond allocation,
Selection broad range of debt securities five-year U.S. Treasury notes.
with government or private When there is a cash allocation,
issuers. Aims for a dollar- 30-day U.S. Treasury bills.
weighted average maturity of
three to ten years.
</TABLE>
----------
Prospectus Page 13
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Tactical Allocation Fund
Balanced Fund

Performance

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

These charts show the total returns for the Funds. Sales charges have not been
deducted from total returns shown in the charts. Returns would be lower if
sales charges were deducted. Past results are not a guarantee of future
results.

Total returns, both before and after deducting the maximum sales charges, are
shown below in the tables that follow the performance charts.

BALANCED FUND

(CHART)

Average Annual Returns for Balanced Fund
As of November 30, 1996

Class A shares Class B shares Class C shares
-------------- -------------- --------------
Inception Date 7/1/91 12/12/86 7/2/92
YTD
Before deducting maximum
sales charges 15.73% 14.91% 14.90%
After deducting maximum
sales charges 10.53% 9.91% 13.90%
ONE YEAR
Before deducting maximum
sales charges 15.91% 15.12% 15.05%
After deducting maximum
sales charges 10.65% 10.12% 14.05%
LIFE
Before deducting maximum
sales charges 10.78% 8.56% 9.86%
After deducting maximum
sales charges 9.83% 8.56% 9.86%

The inception date of the Class A shares was July 1, 1991; thus, the 1991
return represents the period from July 1, 1991 through December 31, 1991. The
Class B shares commenced operations on December 12, 1986; thus, the 1986
return for Class B shares represents the period from December 12, 1986 through
December 31, 1986. The inception date of Class C shares was July 2, 1992;
thus, the 1992 return for Class C shares represents the period from July 2,
1992 through December 31, 1992.

AVERAGE ANNUAL RETURNS

As of August 31, 1996
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Inception Date.................... 7/1/91 12/12/86 7/2/92
ONE YEAR
Before deducting maximum sales
charges......................... 8.33% 7.70% 7.54%
After deducting maximum sales
charges......................... 3.42% 2.70% 6.54%
FIVE YEARS
Before deducting maximum sales
charges......................... 8.51% 7.71% N/A
After deducting maximum sales
charges......................... 7.51% 7.41% N/A
LIFE
Before deducting maximum sales
charges......................... 9.10% 7.63% 7.80%
After deducting maximum sales
charges......................... 8.13% 7.63% 7.80%
</TABLE>

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

<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Tactical Allocation Fund
Balanced Fund

TACTICAL ALLOCATION FUND

(CHART)

Average Annual Returns
As of November 30, 1996

Class A shares Class C shares
-------------- --------------
Inception Date 5/10/93 7/22/92
YTD
Before deducting maximum
sales charges 24.08% 23.29%
After deducting maximum
sales charges 18.53% 22.29%
ONE YEAR
Before deducting maximum
sales charges 26.28% 25.39%
After deducting maximum
sales charges 20.56% 24.39%
LIFE
Before deducting maximum
sales charges 17.48% 15.49%
After deducting maximum
sales charges 15.95% 15.49%

The inception date of Class A shares was May 10, 1993; thus the 1993 return
represents the period from May 10, 1993 through December 31, 1993. As Class B
shares commenced operations on January 30, 1996, they are not included in this
chart. The Class C shares commenced operations on July 22, 1992; thus, the
1992 return for Class C shares represents the period from July 22, 1992
through December 31, 1992.

AVERAGE ANNUAL RETURNS

As of August 31, 1996
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Inception Date.................... 5/10/93 1/30/96 7/22/92
ONE YEAR
Before deducting maximum sales
charges......................... 17.35% N/A 16.52%
After deducting maximum sales
charges......................... 12.07% N/A 15.52%
LIFE
Before deducting maximum sales
charges......................... 13.56% 3.80% 12.31%
After deducting maximum sales
charges......................... 11.99% -1.20% 12.31%
</TABLE>

PERFORMANCE INFORMATION

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

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

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

----------
Prospectus Page 15

<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Tactical Allocation Fund
Balanced Fund

The Funds' Investments

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

BALANCED FUND

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. While past
performance does not guarantee future results, common stocks historically have
provided the greatest long-term growth potential compared to other types of
investments. However, their prices generally fluctuate more than other
securities, reflecting changes in a company's financial condition and in
overall market and economic conditions.

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.

U.S. GOVERNMENT SECURITIES in which the Fund may invest include direct
obligations of the U.S. government (such as Treasury bills, notes and bonds)
and obligations issued or guaranteed by U.S. government agencies and
instrumentalities.

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

ASSET-BACKED SECURITIES are debt obligations backed by specific types of
assets. The most common type of asset-backed securities is mortgage-backed
bonds, which represent a direct or indirect interest (participation) in--or
are secured by and payable from--a pool of mortgage loans secured by real
property. They are sold by government agencies, such as the Federal Home Loan
Mortgage Corporation and the Federal National Mortgage Association, and
private corporations. Investors typically receive payments out of the interest
and principal on the underlying mortgages. The growth of mortgage-backed
securities and the secondary mortgage market in which they are traded has
helped keep mortgage money available for home financing.

Mortgage-backed securities include:

. Single- and multi-class pass-through securities, representing pooled debt
obligations repackaged as shares, that pass income from debtors through the
intermediary to investors;

. Collateralized mortgage obligations ("CMOs"), which are more complex
versions of mortgage-backed bonds. Evaluating the risks and rewards of CMOs
requires special knowledge.

When interest rates go down and homeowners refinance their mortgages,
mortgage-backed bonds are paid off more quickly than investors may expect.
When interest rates rise, mortgage-backed bonds may be paid off more slowly
than originally expected.

Other asset-backed securities are structured similar to mortgage-backed
securities, except that the underlying assets are not first lien mortgage
loans or interests in them. Instead, these securities include assets such as
motor vehicle installment sales contracts, home equity loans, leases of
various types of real and personal property and receivables from revolving
credit (credit card) agreements.

ZERO COUPON SECURITIES are securities that make no periodic interest payments
but instead are sold at a deep discount from their face value. The buyer of
such a bond receives the rate of return by the gradual appreciation of the
security, which is redeemed at face value on a specified maturity date. There
are many kinds of zero coupon securities. The most commonly known is the zero
coupon bond, which either may be issued at a deep discount by a corporation or
may be created by a brokerage firm when it strips (separates) the coupons
(unmatured interest payments) off a bond and sells the principal and the
coupons separately. This technique is used frequently with U.S. Treasury
bonds; these issues include CATS (Certificates of Accrual

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Paine Webber Tactical Allocation Fund
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Treasury Securities) and TIGRs (Treasury Income Growth Receipts).

Because zero coupon securities bear no interest and holders do not receive
interest payments, they are generally more sensitive to changes in interest
rates than other U.S. government securities. For example, when interest rates
fall, the value of zero coupon securities rises more rapidly than bonds paying
out interest on a current basis, because the zero coupon bonds have locked in
a particular rate of reinvestment that becomes more attractive the further
rates fall. However, when interest rates rise, their value falls more
dramatically.

MONEY MARKET INSTRUMENTS in which the Fund may invest include:

. U.S. Treasury bills and other obligations issued or guaranteed as to
interest and principal by the U.S. government, its agencies and
instrumentalities;

. Obligations of U.S. banks (including certificates of deposit and bankers'
acceptances) with total assets in excess of $1.5 billion at the time of
purchase;

. Interest-bearing savings deposits in U.S. commercial and savings banks with
principal amounts not greater than are fully insured by the Federal Deposit
Insurance Corporation (the aggregate amount of these deposits may not exceed
5% of the value of the Fund's assets);

. Commercial paper and other short-term corporate obligations; and

. Variable and floating-rate securities and repurchase agreements.

In addition, the Fund may hold cash and may invest in participation interests
of the money market securities mentioned above without limitation. These
participation interests are the interests of securities held by others on a
pro-rata basis.

TACTICAL ALLOCATION FUND

STOCK PORTION. In its stock portion, the Fund attempts to duplicate, before
the deduction of operating expenses, the investment results of the S&P 500
Index by investing in approximately 450 of the 500 common stocks included in
that Index. The S&P 500 Index, which is chosen by S&P on a statistical basis
and may change from time to time, emphasizes large capitalization stocks and
is based on such factors as the market capitalization and trading activity of
each stock and its adequacy as a representative of stocks in a particular
industry sector. The Fund attempts to achieve a correlation between the
performance of the stock portion and that of the S&P 500 Index of at least
0.95, before the deduction of operating expenses (a correlation of 1.00 would
be perfect, which would mean that the net asset value of the stock portion
increased or decreased in exactly the same proportion as changes in the
Index).

BOND PORTION. In its bond portion, the Fund invests in U.S. Treasury notes
having five years remaining to maturity at the beginning of the then-current
calendar year or, if those instruments are unavailable at favorable prices, in
U.S. Treasury notes with remaining maturities as close as possible to five
years. The Fund does not invest in bonds and cash simultaneously, except as
noted below.

CASH PORTION. In its cash portion, the Fund invests in U.S. Treasury bills
with remaining maturities of 30 days or, if those instruments are unavailable
at favorable prices, in U.S. Treasury bills with remaining maturities as close
as possible to 30 days. Limited amounts of the Fund's assets are normally
invested in cash, generally to pay expenses.

RISKS

Under normal circumstances, Balanced Fund invests primarily in equity
securities, bonds, U.S. government securities, mortgage- and asset-backed
securities and money market instruments, and Tactical Allocation Fund invests
primarily in equity securities and U.S. government securities. Following is a
discussion of risks that are common to each Fund:

EQUITY SECURITIES. Equity securities historically have shown greater growth
potential than other types of securities. As with all investments, higher
returns are typically accompanied by higher risks; thus, common stocks
represent the riskiest investment in a company. It is possible that a Fund may
experience a substantial or complete loss on an individual equity investment.

INTEREST RATE AND CREDIT RISKS. Interest rate risk is the risk that interest
rates will rise and the prices of bonds and U.S. government securities will
fall,

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PaineWebber Tactical Allocation Fund
Balanced Fund

lowering the value of the Funds' investments. Long-term bonds, including U.S.
government securities, are generally more sensitive to interest rate changes
than short-term bonds, including U.S. government securities. Adverse changes
in economic conditions can affect an issuer's ability to pay principal and
interest.

FOREIGN SECURITIES. Balanced Fund may invest in U.S. dollar-denominated
securities of foreign issuers that are traded on recognized U.S. exchanges or
in the U.S. over-the-counter ("OTC") market. Because the S&P 500 Index
includes common stocks of foreign issuers, Tactical Allocation Fund is also
subject to certain risks associated with investments in U.S. dollar-
denominated securities of foreign issuers.

Investing in securities of foreign companies 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.
Values 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. In general, less
information may be available about foreign companies than about U.S.
companies, and they are generally not subject to the same accounting, auditing
and financial reporting standards as are U.S. companies.

DERIVATIVES. Some of the instruments in which the Funds may invest may be
referred to as "derivatives," because their value depends on (or "derives"
from) the value of an underlying asset, reference rate or index. These
instruments include options, futures contracts, interest rate protection
contracts and similar instruments that may be used in hedging and related
strategies. There is only limited consensus as to what constitutes a
"derivative" security. However, in Mitchell Hutchins' view, derivative
securities also include "stripped" securities and specially structured types
of mortgage- and asset-backed securities, such as IOs and POs. 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 takes these risks into account in its
management of the Funds.

COUNTERPARTIES. The Funds may be exposed to the risk of financial failure or
insolvency of another party. To help lessen those risks, Mitchell Hutchins,
subject to the supervision of the board of each Fund, monitors and evaluates
the creditworthiness of the parties with which each Fund does business.

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

BALANCED FUND

BOND RATINGS. The Fund invests in a broad range of investment grade bonds.
Investment grade quality means that the securities are rated within the four
highest categories by S&P and Moody's. Moody's fourth highest category (Baa)
includes securities which, in its opinion, have speculative features.

The Fund may invest up to 10% of its total assets in convertible bonds rated
lower than investment grade, that is, below BBB by S&P or Baa by Moody's, but
no lower than B by S&P or Moody's. These bonds, which are commonly referred to
as "junk bonds," are considered to be predominantly speculative with respect
to the issuer's ability to pay interest and repay principal and may be more
sensitive to adverse conditions. The Fund's policy of investing a portion of
its assets in lower rated securities thus entails greater risks than those
associated with investment in higher rated securities. The Fund also may
invest in securities that are comparably rated by another NRSRO and unrated
securities deemed by Mitchell Hutchins to be of comparable quality.

Credit ratings attempt to evaluate the safety of principal and interest
payments and do not evaluate the volatility of the bond's value or its
liquidity and do not guarantee the performance of the issuer. The rating
agencies also may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial condition may be
better or worse than the rating indicates. There is a risk that rating
agencies will downgrade bonds.

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PaineWebber Tactical Allocation Fund
Balanced Fund

backed securities may also 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. Actual prepayment
experience may cause the yield of mortgage-backed securities to differ from
the assumed average life yield. Reinvestments of prepayments may occur at
lower interest rates than the original investment, thus adversely affecting
the Fund's yield. 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. CMO classes may be specially structured in a
manner that provides any of a wide variety of investment characteristics, such
as yield, effective maturity and interest rate sensitivity. As market
conditions change, however, and particularly during periods of rapid or
unanticipated changes in market interest rates, the attractiveness of the CMO
classes and the ability of the structure to provide the anticipated investment
characteristics may be significantly reduced. These changes can result in
volatility in the market value, and in some instances, reduced liquidity, of
the CMO class.

Certain classes of CMOs and other mortgage-backed securities are structured in
a manner that makes them extremely sensitive to changes in prepayment rates.
Interest-only ("IO") and principal-only ("PO") classes are examples of this.
IOs are entitled to receive all or a portion of the interest, but none (or
only a nominal amount) of the principal payments, from the underlying mortgage
assets. If the mortgage assets underlying an IO experience greater than
anticipated principal prepayments, then the total amount of interest payments
allocable to the IO class, and therefore the yield to investors, generally
will be reduced. In some instances, an investor in an IO may fail to recoup
all of his or her initial investment, even if the security is government
issued or guaranteed or is rated AAA or the equivalent. Conversely, PO classes
are entitled to receive all or a portion of the principal payments, but none
of the interest, from the underlying mortgage assets. PO classes are purchased
at substantial discounts from par, and the yield to investors will be reduced
if principal payments are slower than expected. Some IOs and POs, as well as
other CMO classes, are structured to have special protections against the
effects of prepayments. These structural protections, however, normally are
effective only within certain ranges of prepayment rates and thus will not
protect investors in all circumstances.

During 1994, the value and liquidity of many mortgage-backed securities
declined sharply due primarily to increases in interest rates. There can be no
assurance that such declines will not recur. The market value of certain
mortgage-backed securities in which the Fund may invest, including IO and PO
classes of mortgage-backed securities, can be extremely volatile and these
securities may become illiquid. Mitchell Hutchins seeks to manage the Fund's
investments in mortgage-backed securities so that the volatility of the Fund's
portfolio, taken as a whole, is consistent with the Fund's investment
objective. If market interest rates or other factors that affect the
volatility of securities held by the Fund change in ways that Mitchell
Hutchins does not anticipate, the Fund's ability to meet its investment
objective may be reduced.

See Appendix B to the Statement of Additional Information for more information
concerning the types of mortgage-backed securities in which the Fund may
invest.

RISKS OF ZERO COUPON SECURITIES. The Fund may invest in certain zero coupon
securities that are "stripped" U.S. government securities. Zero coupon
securities pay no interest to holders prior to maturity. However, a portion of
the original issue discount on the zero coupon securities must be included in
the Fund's income. Accordingly, to continue to qualify for tax treatment as a
regulated investment company and to avoid certain excise taxes (see "Taxes" in
the Statement of Additional Information), the Fund may be required to
distribute as dividends amounts that are greater than the total amount of cash
it actually receives. These distributions must be made from the Fund's cash
assets or, if necessary, from the proceeds of sales of portfolio securities.
The Fund will not be able to purchase additional income-producing securities
with cash used to make such distributions, and its current income ultimately
may be reduced as a result. Zero coupon securities usually trade at a deep
discount from their face or par value and will be subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities that make current distributions of
interest in cash.

TACTICAL ALLOCATION FUND

LIMITS OF ASSET ALLOCATION STRATEGY. Although it seeks total return,
consisting of both capital appreciation and current income, in following its
asset allocation

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PaineWebber Tactical Allocation Fund
Balanced Fund

strategy, the Fund may not achieve as high a level of either capital
appreciation or current income as a fund that has only one of those objectives
as its primary objective. In addition, the need to qualify as a regulated
investment company for federal income tax purposes may limit the Fund's ability
to adhere rigidly to the recommendations of the Model. See "Dividends & Taxes."
In addition, the Fund is also subject to the risk that the Model may not
correctly predict the appropriate times to shift the Fund's assets from one
type of investment to another.

INDEX INVESTING AND OPEN-END INVESTMENT COMPANIES. While the Fund's stock
portion attempts to duplicate, before deduction of operating expenses, the
investment results of the S&P 500 Index, the investment results of the stock
portion generally are not identical to those of the Index. Deviations from the
performance of the S&P 500 Index may result from shareholder purchases and
sales of shares that occur daily, as well as from expenses borne by the Fund.

INVESTMENT TECHNIQUES AND STRATEGIES

STRATEGIC INVESTMENTS. In an attempt to reduce the overall risk of its
investments, known as hedging, or to enhance income or return, each Fund may
use certain types of strategic investments. These investments involve
derivative contracts, including options (on securities, futures and indexes)
and futures contracts (on stock indexes and debt securities). In addition, new
financial products and risk management techniques continue to be developed and
may be used if consistent with the Funds' investment objectives and policies.
Use of these strategies solely to enhance income may be considered a form of
speculation. Each Fund also may enter into interest rate swap agreements and
certain other interest rate protection transactions to preserve a return or
spread on a particular investment or portion of its portfolio or to protect
against an increase in the price of securities the Fund anticipates purchasing
at a later date. The Funds' ability to use the strategies may be limited by
market conditions, regulatory limits and tax considerations. The Statement of
Additional Information for the Funds contains further information on these
strategies.

Each Fund may enter into options and futures contracts under which the full
value of its portfolio is at risk. Under normal circumstances, however, the
Fund's use of these strategies will place at risk a much smaller portion of its
assets.

The Funds might not use any strategic investment, and there can be no assurance
that any strategy used will succeed. If Mitchell Hutchins is incorrect in its
judgment on interest rates, market values or other economic factors in using a
particular strategic investment, a Fund might 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 use strategic investments are different
from those needed to select securities for the Funds,

. the possibility of imperfect correlation, or even no correlation, between
price movements of strategic investments and price movements of the
securities being hedged,

. possible constraints on a Fund's ability to purchase or sell portfolio
investments at advantageous times due to the need for the Fund to "cover" or
to segregate securities, and

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

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

ILLIQUID SECURITIES. Each Fund may invest up to 10% 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 Funds do not consider
securities that are eligible for resale under SEC Rule 144A to be illiquid if
Mitchell Hutchins has determined them to be liquid, based upon the trading
markets for the securities under procedures approved by the Funds' boards.

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

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PaineWebber Tactical Allocation Fund
Balanced Fund

REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements. In a
typical repurchase agreement, a Fund buys a security and simultaneously agrees
to sell it back at an agreed-upon price and time, usually no more than seven
days after purchase. The time and price reflect a market rate of interest
unrelated to the coupon rate or maturity of the purchased securities. Risks
associated with repurchase agreements include a possible decline in the value
of the underlying securities and delays and costs to the Fund if the other
party to the repurchase agreement becomes insolvent.

OTHER INFORMATION. Each Fund may purchase securities on a when-issued basis or
may purchase or sell securities for delayed delivery. A Fund generally would
not pay for such securities or start earning interest on them until they are
delivered, but it would immediately assume the risks of ownership, including
the risk of price fluctuation. Each Fund may borrow money for temporary or
emergency purposes, but not in excess of 10% (Balanced Fund) or 20% (Tactical
Allocation Fund) of its total assets, including (in the case of Balanced Fund)
reverse repurchase agreements involving up to 5% of its total assets.
- -------------------------------------------------------------------------------

Flexible PricingSM
- -------------------------------------------------------------------------------

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

CLASS A SHARES

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

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

(1) A contingent deferred sales charge of 1% of the shares' offering price or
the net asset value at the time of sale, 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 not withdraw more
than 12% of the value of the Fund 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 chart above.

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PaineWebber Tactical Allocation Fund
Balanced Fund

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, or advisory clients of
Mitchell Hutchins;

. 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

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

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

. 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"). (This waiver is
subject to minimum requirements, with respect to the number of employees and
investment amount, established by Mitchell Hutchins. Currently, the plan
must have 100 or more eligible employees or the amount invested or to be
invested in the Fund or any other PaineWebber mutual fund must total at
least $1 million during the subsequent 13-month period); or

. 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 supplement a rebalancing feature
of such an investment program, the minimum subsequent investment requirement
and $5 exchange fee (if applicable) also are waived.

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.

CLASS B SHARES

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

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

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PaineWebber Tactical Allocation Fund
Balanced Fund

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>
PERCENTAGE BY WHICH
THE SHARES' NET ASSET
IF THE INVESTOR SELLS SHARES WITHIN: VALUE IS MULTIPLIED:
- ------------------------------------ ---------------------
<S> <C>
1st year of purchase..................................... 5%
2nd year of purchase..................................... 4
3rd year of purchase..................................... 3
4th year of purchase..................................... 2
5th year of purchase..................................... 2
6th year of purchase..................................... 1
7th year of 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 Fund in the form
of additional Class B shares will also convert to Class A shares on a pro-rata
basis. This benefits shareholders because Class A shares have lower ongoing
expenses than Class B shares. If the investor has exchanged Class B shares
between PaineWebber funds, the Fund uses the purchase date at which the
initial investment was made to determine the conversion date.

MINIMIZING THE CONTINGENT DEFERRED SALES CHARGE

When investors sell Class B shares they have owned for less than six years,
the Fund automatically will minimize the sales charge by assuming they 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 Fund's "Systematic Withdrawal Plan" (investors may
not withdraw annually more than 12% of the value of the Fund 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 Internal
Revenue 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 Fund 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% of the offering price (net asset
value of at the time of purchase) or 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 gains are not subject to
the 1% charge. Withdrawals under the Systematic Withdrawal Plan also are not
subject to this charge. However, investors may not withdraw annually more than
12% of the value of the Fund account under the Plan in the first year after
purchase.

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Prospectus Page 23
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PaineWebber Tactical Allocation Fund
Balanced Fund

How to Buy Shares
- -------------------------------------------------------------------------------

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

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

PAINEWEBBER CLIENTS

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

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

OTHER INVESTORS

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

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

. 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 Fund.

MINIMUM INVESTMENTS

<TABLE>
<S> <C>
To open an account....................................................... $1,000
To add to an account..................................................... $ 100
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A Fund may waive or reduce these minimums for:

. employees of PaineWebber or its affiliates; or

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

HOW TO EXCHANGE SHARES

As shareholders, investors have the privilege of exchanging Fund shares for
the same class of other PaineWebber mutual fund shares. 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.
Exchanges may be subject to minimum investment requirements of the fund into
which exchanges are made. A $5 fee is imposed on each exchange into or out of
Balanced Fund. Exchanges out of Tactical Allocation Fund are not charged this
fee.

. 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;

. the Fund's name;

. the Fund account number;

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

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Prospectus Page 24

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PaineWebber Tactical Allocation Fund
Balanced Fund
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How to Sell Shares
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. a guarantee of each registered owner's signature by an eligible
institution, such as a commercial bank, trust company or stock exchange
member.

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

No contingent deferred sales charge is imposed when shares are exchanged for
the corresponding class of shares of other PaineWebber mutual funds. A Fund
will use the purchase date of the initial investment to determine any
contingent deferred sales charge due when the acquired shares are sold. Fund
shares may be exchanged only after the settlement date has passed and payment
for the shares has been made. The exchange privilege is available only in
those jurisdictions where the sale of the fund shares to be acquired are
authorized. This exchange privilege may be modified or terminated at any time
and, when required by SEC rules, upon 60 days' notice. See the back cover of
this prospectus for a listing of other PaineWebber mutual funds.
Investors can sell (redeem) shares at any time. Shares will be sold at the
share price for that class as next calculated after the order is received and
accepted (less any applicable contingent deferred sales charge). Share prices
are normally calculated at the close of regular trading on the New York Stock
Exchange (currently 4:00 p.m., Eastern time).

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

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

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

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

REINSTATEMENT PRIVILEGE

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

AUTOMATIC INVESTMENT PLAN

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

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Prospectus Page 25
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PaineWebber Tactical Allocation Fund
Balanced Fund

SYSTEMATIC WITHDRAWAL PLAN

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

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

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

Withdrawals under the Systematic Withdrawal Plan are not subject to a
contingent deferred sales charge. Investors may not withdraw more than 12% of
the value of the Fund account when the investor signed up for the Plan (for
Class B shares annually; for Class A and Class C shares, during the first year
under the Plan). Shareholders who elect to receive dividends or other
distributions in cash may not participate in the Plan.

INDIVIDUAL RETIREMENT ACCOUNTS

Self-Directed IRAs are available through PaineWebber in which purchases of
PaineWebber 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 Fund in a PaineWebber brokerage account
transfer their brokerage accounts to another firm, the Fund shares will be
moved to an account with the Transfer Agent. However, if the other firm has
entered into a selected dealer agreement with Mitchell Hutchins relating to
the Fund, the shareholder may be able to hold Fund shares in an account with
the other firm.
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Management
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Balanced Fund is a series of PaineWebber Master Series, Inc. ("Corporation")
and Tactical Allocation Fund is a series of PaineWebber Investment Trust
("Trust"). The board of directors of the Corporation and the board of trustees
of the Trust oversee the Funds' operations and, as part of this overall
management responsibility, oversee various organizations responsible for the
day-to-day management of each Fund. Each board has appointed Mitchell Hutchins
as investment adviser and administrator responsible for the Fund's operations
(subject to the authority of the board).

Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, is the asset management subsidiary of PaineWebber Incorporated, which
is wholly owned by Paine Webber Group Inc., a publicly owned financial
services holding company. On November 30, 1996, Mitchell Hutchins was adviser
or sub-adviser of 29 investment companies with 64 separate portfolios and
aggregate assets of approximately $ billion.

Each board has determined that brokerage transactions for the Fund may be
conducted through PaineWebber or its affiliates in accordance with procedures
adopted by the board.

ABOUT THE INVESTMENT ADVISER

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

T. Kirkham Barneby is responsible for the asset allocation decisions for both
Balanced Fund and Tactical Allocation Fund. He has been responsible for the
day-to-day management of Tactical Allocation Fund since February 1995. 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.

Mark A. Tincher is responsible for the day-to-day management of the equity
portion of Balanced Fund.

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Prospectus Page 26

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PaineWebber Tactical Allocation Fund
Balanced Fund

Mr. Tincher is a managing director and chief investment officer of equities of
Mitchell Hutchins, responsible for overseeing the management of equity
investments. From March 1988 to March 1995, Mr. Tincher worked for Chase
Manhattan Private Bank where he was a vice president. Mr. Tincher directed the
U.S. funds management and equity research area at Chase and oversaw the
management of all Chase U.S. equity funds (the Vista Funds and Trust Investment
Funds).

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

Nirmal Singh and Craig M. Varrelman, CFA, assist Mr. McCauley in managing
Balanced Fund's debt securities. Mr. Singh and Mr. Varrelman are both first
vice presidents of Mitchell Hutchins. Prior to joining Mitchell Hutchins in
September 1993, Mr. Singh was with Merrill Lynch Asset Management, Inc., where
he was a member of the portfolio management team. From 1990 to 1993, Mr. Singh
was a senior portfolio manager at Nomura Mortgage Fund Management Corporation.
Mr. Varrelman has been with Mitchell Hutchins as a portfolio manager since 1988
and manages fixed income portfolios with an emphasis on U.S. government
securities.

Susan Messina is responsible for the day-to-day management of the portion of
Balanced Fund's assets invested in money market instruments. Ms. Messina has
been with Mitchell Hutchins since 1982 and is a senior vice president of
Mitchell Hutchins.

Each of these managers first assumed responsibilities with respect to Balanced
Fund in August 1995.

Other members of Mitchell Hutchins' domestic equity and domestic fixed income
investments groups provide input on market outlook, interest rate forecasts,
investment research and other considerations pertaining to each Fund's
investments.

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

MANAGEMENT FEES & OTHER EXPENSES

Each Fund pays Mitchell Hutchins a monthly fee for its services. For the most
recent fiscal year, Mitchell Hutchins received a monthly fee from Balanced Fund
for these services at the effective annual rate of 0.75% of the Fund's average
daily net assets and from Tactical Allocation Fund at the annual rate of 0.50%
of the Fund's average daily net assets. The management fee payable to Mitchell
Hutchins by Balanced Fund is greater than those paid by most funds.

DISTRIBUTION ARRANGEMENTS

Mitchell Hutchins is the distributor of each Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. Under
distribution plans for Class A, Class B and Class C shares ("Class A Plan,"
"Class B Plan" and "Class C Plan," collectively, "Plans"), each Fund 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 and Class C Shares.

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

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Prospectus Page 27
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PaineWebber Tactical Allocation Fund
Balanced Fund

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

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

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

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

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

The Plans and the related distribution contracts for each class of shares
("Distribution Contracts") specify that each Fund must pay service and
distribution fees to Mitchell Hutchins for its activities, not as
reimbursement for specific expenses incurred. Therefore, even if Mitchell
Hutchins' expenses exceed the service or distribution fees it receives, the
Funds will not be obligated to pay more than those fees. On the other hand, if
Mitchell Hutchins' expenses are less than such fees, it will retain its full
fees and realize a profit. Expenses in excess of service and distribution fees
received or accrued through the termination date of any Plan will be Mitchell
Hutchins' sole responsibility and not that of the Funds. Annually, the board
of each Fund reviews each 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
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The net asset value of each Fund's shares fluctuates and is determined
separately for each class as of the close of regular trading on the New York
Stock Exchange (currently 4:00 p.m., Eastern time) each Business Day. Each
Fund's net asset value per share is determined by dividing the value of the
securities held by the Fund, plus any cash or other assets, minus all
liabilities, by the total number of Fund shares outstanding.

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

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Dividends & Taxes
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DIVIDENDS

Balanced Fund pays dividends semi-annually from its net investment income and
also may distribute net short-term capital gains, if any, with the periodic
dividend. Tactical Allocation Fund pays an annual dividend from its net
investment income and short-term capital gain, if any. Net investment income
includes dividend income, accrued interest and discount, less amortization of
premium and accrued expenses. Substantially all of each Fund's net capital
gain (the excess of net long-term capital gain over net short-term capital
loss), if any, and any undistributed net short-term capital gain, is
distributed at least annually. The Funds may make additional distributions if
necessary to avoid income or excise taxes. While the Funds will not declare
any dividend in excess of the amount of net investment income and net short-
term capital gain available for distribution at the time of declaration, it is
possible that net capital losses sustained after that time could convert a
portion of such a dividend to a non-taxable return of capital.

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Prospectus Page 28
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PaineWebber Tactical Allocation Fund
Balanced Fund

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

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

TAXES

Each Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue 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) and net capital gain that it distributes to its shareholders. These
requirements may limit the ability of Tactical Allocation Fund to reallocate
its assets under certain circumstances.

Dividends from each Fund's investment company taxable income (whether paid in
cash or in additional Fund shares) generally are taxable to its shareholders
as ordinary income. Distributions of each Fund's net capital gain (whether
paid in cash or in additional Fund shares) are taxable to its shareholders as
long-term capital gain, regardless of how long they have held their Fund
shares. Shareholders not subject to tax on their income generally will not be
required to pay tax on distributions from the Funds.

Balanced Fund is required to include in its gross income each year a portion
of the original issue discount on zero coupon securities it acquires, even
though the Fund receives no interest payment on the securities during the
year.

YEAR-END TAX REPORTING

Each Fund notifies its shareholders following the end of each calendar year of
the amounts of dividends and capital gain distributions paid (or deemed paid)
that year and any portion of those dividends that qualifies for special
treatment.

WITHHOLDING REQUIREMENTS

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

TAXES ON THE SALE OR EXCHANGE OF FUND SHARES

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

SPECIAL TAX RULES FOR CLASS A SHAREHOLDERS

Special tax rules apply when a shareholder sells or exchanges Class A shares
within 90 days of purchase, and subsequently purchases 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 would increase the basis of the
PaineWebber mutual fund shares subsequently acquired.

No gain or loss will be recognized to a Shareholder as a result of conversion
of Class B into Class A shares.

* * * *

Because the foregoing only summarizes some of the important federal income tax
considerations affecting the Funds and their shareholders, a further
discussion is contained in the Statement of Additional Information.
Prospective shareholders are urged to consult their tax advisors.

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Prospectus Page 29
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PaineWebber Tactical Allocation Fund
Balanced Fund

General Information
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ORGANIZATION

BALANCED FUND

Balanced Fund is a diversified series of the Corporation, an open-end
management investment company that was incorporated in Maryland on October 29,
1985. The Corporation has authority to issue 10 billion shares of common stock
of separate series, par value $.001 per share; four billion of these shares
are classified as shares of Balanced Fund. Shares of one other series have
been authorized.

TACTICAL ALLOCATION FUND

Tactical Allocation Fund is a series of the Trust, an open-end management
investment company that was formed on March 28, 1991, as a business trust
under the laws of the Commonwealth of Massachusetts. The trustees have
authority to issue an unlimited number of shares of beneficial interest of
separate series, with a par value of $.001 per share. Shares of one other
series have been authorized.

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

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

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

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

VOTING RIGHTS

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

SHAREHOLDER MEETINGS

The Funds do not intend to hold annual meetings.

Shareholders of record of no less than two-thirds of the outstanding shares of
the Corporation or 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 Corporation's or Trust's
outstanding shares.

REPORTS TO SHAREHOLDERS

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

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Prospectus Page 30
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PaineWebber Tactical Allocation Fund
Balanced Fund

CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND AGENT

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

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Prospectus Page 31
<PAGE>

- ------------------------------=================---------------------------------

PaineWebber Balanced Fund
PaineWebber Tactical Allocation Fund

Prospectus -- January 1, 1997

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. PAINEWEBBER BOND FUNDS . PAINEWEBBER STOCK FUNDS

High Income Fund Capital Appreciation Fund
Investment Grade Income Financial Services Growth Fund
Fund Growth Fund
Low Duration U.S. Growth and Income Fund
Government Income Fund
Strategic Income Fund Small Cap Fund
Utility Income Fund
U.S. Government Income
Fund

. PAINEWEBBER TAX-FREE BOND . PAINEWEBBER GLOBAL FUNDS
FUNDS

Emerging Markets Equity Fund
California Tax-Free Global Equity Fund
Income Fund Global Income Fund
Municipal High Income
Fund

National Tax-Free
Income Fund
New York Tax-Free . PAINEWEBBER MONEY MARKET FUND
Income Fund

. PAINEWEBBER ASSET
ALLOCATION FUNDS

Balanced Fund
Tactical Allocation
Fund

A prospectus containing more complete information for any of the above
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.
<PAGE>

PAINEWEBBER BALANCED FUND
PAINEWEBBER TACTICAL ALLOCATION FUND

1285 AVENUE OF THE AMERICAS

NEW YORK, NEW YORK 10019

STATEMENT OF ADDITIONAL INFORMATION

The two funds named above (each a "Fund" and, collectively, "Funds") are
diversified series of professionally managed, open-end management investment
companies organized as a Maryland corporation and a Massachusetts business
trust, respectively. PaineWebber Balanced Fund ("Balanced Fund"), a series of
PaineWebber Master Series, Inc. ("Corporation"), seeks high total return with
low volatility; it invests primarily in a combination of equity securities,
investment grade debt securities and money market instruments. PaineWebber
Tactical Allocation Fund ("Tactical Allocation Fund"), a series of PaineWebber
Investment Trust ("Trust"), seeks total return, consisting of long-term
capital appreciation and current income, by utilizing a systematic investment
strategy that actively allocates the Fund's assets among equity securities,
U.S. Treasury notes and U.S. Treasury bills.

The investment adviser, administrator and distributor for each Fund is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
subsidiary of PaineWebber Incorporated ("PaineWebber"). As distributor for the
Fund, Mitchell Hutchins has appointed PaineWebber to serve as the exclusive
dealer for the sale of Fund shares.

This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Funds' current Prospectus, dated January 1,
1997. 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 January 1, 1997.

INVESTMENT POLICIES AND RESTRICTIONS

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

YIELD FACTORS AND RATINGS. Standard & Poor's, a division of The McGraw Hill
Companies, Inc. ("S&P"), Moody's Investors Service, Inc. ("Moody's") and other
nationally recognized statistical rating organizations ("NRSROs") are private
services that provide ratings of the credit quality of debt obligations. A
description of the range of ratings assigned to debt obligations by Moody's
and S&P is included in the Appendix to this Statement of Additional
Information. Balanced Fund may use these ratings in determining whether to
purchase, sell or hold a security. These ratings represent the NRSROs'
opinions as to the quality of the debt obligations that they undertake to
rate. 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.
Subsequent to its purchase by Balanced 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 the Fund. Mitchell Hutchins will consider such an
event in determining whether the Fund should continue to hold the obligation
but is not required to dispose of it.
<PAGE>

In addition to ratings assigned to individual bond issues, Mitchell Hutchins
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 Balanced Fund invests
are dependent on a variety of factors, including general money market
conditions, general conditions in the bond market, the financial condition of
the issuer, the size of the offering, the maturity of the obligation and its
rating. There is a wide variation in the quality of bonds, both within a
particular classification and between classifications. An issuer's obligations
under its bonds are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of bond holders or other
creditors of an issuer; litigation or other conditions may also adversely
affect the power or ability of issuers to meet their obligations for the
payment of interest and principal on their bonds.

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 pass-through
securities and collateralized mortgage obligations. Multi-class pass-through
securities and collateralized mortgage obligations are collectively referred
to herein as CMOs. The U.S. government mortgage-backed securities in which
Balanced Fund may invest include mortgage-backed securities issued or
guaranteed as to the payment of principal and interest (but not as to market
value) by the Government National Mortgage Association ("Ginnie Mae"), the
Federal National Mortgage Association ("Fannie Mae"), or the Federal Home Loan
Mortgage Corporation ("Freddie Mac"). 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 its investment limitations,
the Fund expects to invest in those new types of mortgage-backed securities
that Mitchell Hutchins believes may assist the Fund in achieving its
investment objective. Similarly, the Fund may invest in mortgage-backed
securities issued by new or existing governmental or private issuers other
than those identified herein.

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

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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 interests
and principal payments made and owed on the underlying pools. Fannie Mae
guarantees timely payment of interest and principal on Fannie Mae
certificates. The Fannie Mae guarantee is not backed by the full faith and
credit of the U.S. government.

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

PRIVATE, RTC AND SIMILAR MORTGAGE-BACKED SECURITIES. Mortgage-backed
securities issued by Private Mortgage Lenders are structured similarly to CMOs
issued or guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac. Such mortgage-
backed securities may be supported by pools of U.S. government or agency
insured or guaranteed mortgage loans or by other mortgage-backed securities
issued by a government agency or instrumentality, but they generally are
supported by pools of conventional (i.e., non-government guaranteed or
insured) mortgage loans. Since such mortgage-backed securities normally are
not guaranteed by an entity having the credit standing of Ginnie Mae, Fannie
Mae and Freddie Mac, they normally are structured with one or more types of
credit enhancement. See "--Types of Credit Enhancement." These credit
enhancements do not protect investors from changes in market value.

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

COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE PASS-
THROUGHS. CMOs are debt obligations that are collateralized 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

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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 schedule 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 class) on a monthly, quarterly or semi-annual basis.
The principal and interest on the mortgage assets may be allocated among the
several classes of a CMO in many ways. In one structure, payments of
principal, including any principal prepayments, on the mortgage assets are
applied to the classes of a CMO in the order of their respective stated
maturities or final distribution dates so that no payment of principal will be
made on any class of the CMO until all other classes having an earlier stated
maturity or final distribution date have been paid in full. In some CMO
structures, all or a portion of the interest attributable to one or more of
the CMO classes may be added to the principal amounts attributable to such
classes, rather than passed through to certificateholders on a current basis,
until other classes of the CMO are paid in full.

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

ARM AND FLOATING RATE MORTGAGE-BACKED SECURITIES. ARM mortgage-backed
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.

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 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.
Balanced Fund will not pay any additional fees for such credit enhancement,
although the existence of credit enhancement may increase the price of a
security. Credit enhancements do not provide protection against changes in the
market value of the security.

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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.

ADDITIONAL INFORMATION ON ARM AND FLOATING RATE MORTGAGE-BACKED SECURITIES.
Because the interest rates on ARM and floating rate mortgage-backed securities
are reset in response to changes in a specified market index, the values of
such securities tend to be less sensitive to interest rate fluctuations than
the values of fixed-rate securities. As a result, during periods of rising
interest rates, ARMs generally do not decrease in value as much as fixed rate
securities. Conversely, during periods of declining rates, ARMs generally do
not increase in value as much as fixed rate securities. ARM mortgage-backed
securities represent a right to receive interest payments at a rate that is
adjusted to reflect the interest earned on a pool of ARMs. ARMs generally
provide that the borrower's mortgage interest rate may not be adjusted above a
specified lifetime maximum rate or, in some cases, below a minimum lifetime
rate. In addition, certain ARMs provide for limitations on the maximum amount
by which the mortgage interest rate may adjust for any single adjustment
period. ARMs also may provide for limitations on changes in the maximum amount
by which the borrower's monthly payment may adjust for any single adjustment
period. In the event that a monthly payment is not sufficient to pay the
interest accruing on the ARM, any such excess interest is added to the
mortgage loan ("negative amortization"), which is repaid through future
monthly payments. If the monthly payment exceeds the sum of the interest
accrued at the applicable mortgage interest rate and the principal payment
that would have been necessary to amortize the outstanding principal balance
over the remaining term of the loan, the excess reduces the principal balance
of the ARM. Borrowers under ARMs experiencing negative amortization may take
longer to build up their equity in the underlying property and may be more
likely to default.

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

Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive
interest payments at rates that fluctuate in accordance with an index but that
generally are supported by pools comprised of fixed-rate mortgage loans. As
with ARM mortgage-backed securities, interest rate adjustments on floating
rate mortgage-backed securities may be based on indices that lag behind market
interest rates. Interest rates on floating rate mortgage-backed securities
generally are adjusted monthly. Floating rate mortgage-backed securities are
subject to lifetime interest rate caps, but they generally are not subject to
limitations on monthly or other periodic changes in interest rates or monthly
payments.

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<PAGE>

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 are less likely
to experience substantial prepayments. Such securities, however, often provide
that for a specified time period the issuers will replace receivables in the
pool that are repaid with comparable obligations. If the issuer is unable to
do so, repayment of principal on the asset-backed securities may commence at
an earlier date. Mortgage- and asset-backed securities may decrease in value
as a result of increases in interest rates and may benefit less than other
fixed-income securities from declining interest rates because of the risk of
prepayment.

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
rate 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 rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to
the annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are
purchased or traded in the secondary market at a premium or discount. In
addition, there is normally some delay between the time the issuer receives
mortgage payments from the servicer and the time the issuer makes the payments
on the mortgage-backed securities, and this delay reduces the effective yield
to the holder of such securities.

Yields on pass-through securities are typically quoted by investment dealers
and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools
of fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of
average life determined for each pool. In periods of declining interest rates,
the rate of prepayment tends to increase, thereby shortening the actual
average life of a pool of mortgage-backed securities. Conversely, in periods
of rising interest rates, the rate of prepayment tends to decrease, thereby
lengthening the actual average life of the pool. However, these effects may
not be present, or may differ in degree, if the mortgage loans in the pools
have adjustable interest rates or other special payment terms, such as a
prepayment charge. Actual prepayment experience may cause the yield of
mortgage-backed securities to differ from the assumed average life yield.
Reinvestments of prepayments may occur at lower interest rates than the
original investment, thus adversely affecting the yield of Balanced Fund.

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<PAGE>

REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Fund purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to
the coupon rate or maturity of the purchased securities. Each Fund maintains
custody of the underlying securities prior to their repurchase; thus, the
obligation of the bank or dealer to pay the repurchase price on the date
agreed to is, in effect, secured by such securities. If the value of such
securities is less than the repurchase price, plus any agreed-upon additional
amount, the other party to the agreement 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 securities and the price that was
paid by a Fund upon their acquisition is accrued as interest and included in
the Fund's net investment income.

Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to the Fund if the other party
to a repurchase agreement becomes insolvent. Each Fund intends to enter into
repurchase agreements only with banks and dealers in transactions believed by
Mitchell Hutchins to present minimal credit risks in accordance with
guidelines established by each Fund's board. Mitchell Hutchins reviews and
monitors the creditworthiness of those institutions under the board's general
supervision.

REVERSE REPURCHASE AGREEMENTS. Balanced Fund may enter into reverse
repurchase agreements with banks and securities dealers up to an aggregate
value of not more than 5% of its net assets. Such agreements involve the sale
of securities held by the Fund subject to its agreement to repurchase the
securities at an agreed-upon date and 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 Fund's custodian segregates assets to cover the
Fund's obligations under the reverse repurchase agreement. See "Investment
Policies and Restrictions--Segregated Accounts."

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. A security purchased on a when-
issued or delayed delivery basis is recorded as an asset on the commitment
date and is subject to changes in market value, generally based upon changes
in the level of interest rates. Thus, fluctuation in the value of the security
from the time of the commitment date will affect a Fund's net asset value.
When a Fund commits to purchase securities on a when-issued or delayed
delivery basis, its custodian segregates assets to cover the amount of the
commitment. See "Investment Policies and Restrictions--Segregated Accounts."
Each 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 deems it advantageous to do so, which may result in a gain
or loss to the Fund.

ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities. Under current SEC guidelines, interest-only ("IO") and principal-
only ("PO") classes of mortgage-backed securities are considered illiquid.
However, IO and PO classes of fixed-rate mortgage-backed securities issued by
the U.S. government or one of its agencies or instrumentalities will not be
considered illiquid if Mitchell Hutchins has determined that they are liquid
pursuant to guidelines established by Balanced Fund's board. Illiquid
securities also are considered to include, among other things, purchased over-
the-counter ("OTC") options, repurchase agreements with maturities in excess
of seven days and securities whose disposition is restricted under the federal
securities laws (other than "Rule 144A" securities and certain commercial
paper that

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<PAGE>

Mitchell Hutchins has determined to be liquid under procedures approved by
each Fund's board). The assets used as cover for OTC options written by a Fund
will be considered illiquid unless the OTC options are sold to qualified
dealers who agree that the 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. Certain illiquid
restricted securities may be sold only in privately negotiated transactions or
in public offerings with respect to which a registration statement is in
effect under the Securities Act of 1933 ("1933 Act"). Where registration is
required, a Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to sell.

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

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

Each Fund's board has delegated the function of making day-to-day
determinations of liquidity to Mitchell Hutchins, pursuant to guidelines
approved by the board. Mitchell Hutchins takes into account a number of
factors in reaching liquidity decisions, including (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 monitors the liquidity of restricted securities in each Fund's
portfolio and reports periodically on such decisions to the board.

SECTION 4(2) PAPER. Commercial paper issues in which Balanced Fund may
invest include securities issued by major corporations without registration
under the 1933 Act in reliance on the exemption from such registration
afforded by Section 3(a)(3) thereof and commercial paper issued in reliance on
the so-called "private placement" exemption from registration afforded by
Section 4(2) of the 1933 Act ("Section 4(2) paper"). Section 4(2) paper is
restricted as to disposition under the federal securities laws in that any
resale must similarly be made in an exempt transaction. Section 4(2) paper is
normally resold to other institutional investors through or with the
assistance of investment dealers who make a market in Section 4(2) paper, thus

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<PAGE>

providing liquidity. The Fund's 10% limitation on investments in illiquid
securities includes Section 4(2) paper, other than Section 4(2) paper that
Mitchell Hutchins has determined to be liquid pursuant to guidelines
established by the Fund's board. The board has delegated to Mitchell Hutchins
the function of making day-to-day determinations of liquidity with respect to
Section 4(2) paper, pursuant to guidelines approved by the board that require
Mitchell Hutchins to take into account the same factors described under
"Illiquid Securities" above for other restricted securities and require
Mitchell Hutchins to perform the same monitoring and reporting functions.

SPECIAL CONSIDERATIONS RELATING TO FOREIGN SECURITIES. To the extent each
Fund holds U.S. dollar-denominated securities of foreign issuers, such
securities may not be registered with the SEC, nor are the issuers thereof
subject to its reporting requirements. Accordingly, there may be less publicly
available information concerning foreign issuers of securities held by a Fund
than is available concerning U.S. companies. Foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory requirements comparable to those applicable
to U.S. companies.

Each Fund invests in securities of foreign issuers only if such securities
are traded in the U.S. securities markets directly or through American
Depository Receipts ("ADRs"). Generally, ADRs, in registered form, are
denominated in U.S. dollars and are designed for use in the U.S. securities
markets. ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities. For purposes of the Fund's
investment policies, ADRs are deemed to have the same classification as the
underlying securities they represent. Thus, an ADR evidencing ownership of
common stock will be treated as common stock.

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

CONVERTIBLE SECURITIES. Balanced Fund is permitted to 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 receive interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Before conversion, convertible securities
have characteristics similar to 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. 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.

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

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<PAGE>

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.

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

SHORT SALES "AGAINST THE BOX." Each Fund 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 defer realization of gains or losses for tax or other purposes. To
make delivery to the purchaser in a short sale, the executing broker borrows
the securities being sold short on behalf of the Fund, and the Fund is
obligated to replace the securities borrowed at a date in the future. When the
Fund sells short, it establishes a margin account with the broker effecting
the short sale and deposits collateral with the broker. In addition, the Fund
maintains with its custodian, in a segregated account, the securities that
could be used to cover the short sale. The Fund incurs transaction costs,
including interest expense, in connection with opening, maintaining and
closing short sales against the box. Neither Fund currently expects to have
obligations under short sales that at any time during the coming year exceed
5% of its net assets.

A Fund might make a short sale "against the box" in order to hedge against
market risks when Mitchell Hutchins 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, or when Mitchell Hutchins wants to sell a security that the Fund
owns at a current price, but also wishes to defer recognition of gain or loss
for federal income tax purposes. In such case, any loss in the Fund's long
position after the short sale should be reduced by a gain in the short
position. Conversely, any gain in the long position should be reduced by a
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 Fund owns, either directly or
indirectly, and in the case where the Fund owns convertible securities,
changes in the investment values or conversion premiums of such securities.

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

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<PAGE>

retain authority to terminate any loan at any time. A Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. A 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. A Fund will regain record ownership of loaned securities to
exercise beneficial rights, such as voting and subscription rights and rights
to dividends, interest or other distributions, when regaining such rights is
considered to be in the Fund's interest.

INVESTMENT LIMITATIONS OF THE FUNDS

FUNDAMENTAL LIMITATIONS. The following investment limitations cannot be
changed for the Funds without the affirmative vote of the lesser of (1) more
than 50% of the outstanding shares of the applicable Fund or (2) 67% or more
of the shares present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by a proxy. If
a percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or the amount of total assets will not be considered a
violation of any of the following limitations.

Each Fund will not:

(1) purchase securities of any one issuer if, as a result, more than 5%
of the Fund's total assets would be invested in securities of that issuer
or the Fund would own or hold more than 10% of the outstanding voting
securities of that issuer, except that up to 25% of the Fund'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.

The following interpretation applies to, but is not a part of, this
fundamental restriction: Mortgage- and asset-backed securities will not be
considered to have been issued by the same issuer by reason of the
securities having the same sponsor, and mortgage- and asset-backed
securities issued by a finance or other special purpose subsidiary that are
not guaranteed by the parent company will be considered to be issued by a
separate issuer from the parent company.

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

(3) issue senior securities or borrow money, except as permitted under
the Investment Company Act of 1940 ("1940 Act") and then not in excess of
33 1/3% of the Fund'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 Fund
may borrow up to an additional 5% of its total assets (not including the
amount borrowed) for temporary or emergency purposes.

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

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

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<PAGE>

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

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

NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions may be
changed by the vote of a Fund's board without shareholder approval:

Each Fund may not:

(1) invest more than 10% of its net assets in illiquid securities, a term
that means securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which the Fund
has valued the securities and includes, among other things, repurchase
agreements maturing in more than seven days;

(2) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the Fund 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;

(3) engage in short sales of securities or maintain a short position,
except that the Fund 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;

(4) invest in oil, gas or mineral exploration or development programs or
leases, except that investments in securities of issuers that invest in
such programs or leases and investments in asset-backed securities
supported by receivables generated from such programs or leases are not
subject to this prohibition;

(5) purchase securities of other investment companies, except to the
extent permitted by the 1940 Act 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;

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

HEDGING AND RELATED STRATEGIES

As discussed in the Prospectus, Mitchell Hutchins may use a variety of
financial instruments ("Strategic Instruments"), including certain options,
futures contracts (sometimes referred to as "futures") and options on futures
contracts, to attempt to hedge the Funds' portfolios and to enhance income or
return. A Fund may enter into transactions involving one or more types of
Strategic Instruments under which the full value of its portfolio is at risk.
Under normal circumstances, however, a Fund's use of these instruments will
place at risk a much smaller portion of its assets. Balanced Fund may also
enter into certain interest rate protection

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<PAGE>

transactions. Balanced Fund may use all of the instruments identified below.
Tactical Allocation Fund is limited to stock index options and futures,
futures on five-year Treasury notes and options on these permitted futures
contracts.

OPTIONS ON EQUITY AND DEBT SECURITIES--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 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 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 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 at the exercise price.

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

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

INTEREST RATE FUTURES CONTRACTS--Interest rate futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the
other party agrees to accept, delivery of a specified type of debt security
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, 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, except that an option on a futures contract gives
the purchaser the right, in return for the premium, to assume a position in
a futures contract (a long position if the option is a call and a short
position if the option is a put), rather than to purchase or sell a
security, at a specified price at any time during the option term. Upon
exercise of the option, the delivery of the futures position to the holder
of the option will be accompanied by delivery of the accumulated balance
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.

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

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<PAGE>

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

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

Strategic Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that a Fund
owns or intends to acquire. Strategic Instruments on stock indices or debt
securities, in contrast, may be used to hedge either individual securities or
broad equity market sectors. Strategic Instruments on debt securities may be
used to hedge either individual securities or broad fixed income market
sectors.

The use of Strategic Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded, the
Commodity Futures Trading Commission ("CFTC") and various state regulatory
authorities. In addition, the Funds' ability to use Hedging Instruments will
be limited by tax considerations. See "Taxes."

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

SPECIAL RISKS OF HEDGING AND RELATED STRATEGIES. The use of Strategic
Instruments involves special considerations and risks, as described below.
Risks pertaining to particular Strategic Instruments are described in the
sections that follow:

(1) Successful use of most Strategic Instruments depends upon Mitchell
Hutchins' ability to predict movements of the overall securities and interest
rate markets, which requires different skills than predicting

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<PAGE>

changes in the prices of individual securities. While Mitchell Hutchins is
experienced in the use of Strategic Instruments, there can be no assurance
that any particular strategy adopted will succeed.

(2) There might be imperfect correlation, or even no correlation, between
price movements of a Strategic Instrument and price movements of the
investments being hedged. For example, if the value of a Strategic 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 Strategic Instruments are traded. The effectiveness of hedges
using Strategic Instruments on indices will depend on the degree of
correlation between price movements in the index and price movements in the
securities being hedged.

(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Fund entered into a
short hedge because Mitchell Hutchins projected a decline in the price of a
security in the 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 Strategic Instrument. Moreover, if the price of
the Strategic Instrument declined by more than the increase in the price of
the security, the Fund could suffer a loss. In either such case, the Fund
would have been in a better position had it not hedged at all.

(4) As described below, each Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Strategic Instruments involving obligations to third parties
(i.e., Strategic Instruments other than purchased options). If a Fund were
unable to close out its positions in such Strategic Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the position expired or matured. These requirements might impair a
Fund's ability to sell a portfolio security or make an investment at a time
when it would otherwise be favorable to do so, or require that the Fund sell a
portfolio security at a disadvantageous time. A Fund's ability to close out a
position in a Strategic 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 in a Strategic Instrument can be closed out at a time and price
that is favorable to a Fund.

COVER FOR HEDGING AND RELATED STRATEGIES. Transactions using Strategic
Instruments, other than purchased options, expose the Funds to an obligation
to another party. A Fund will not enter into any such transactions unless it
owns either (1) an offsetting ("covered") position in securities or other
options on futures contracts or (2) cash, receivables and liquid securities,
with a value sufficient at all times to cover its potential obligations to the
extent not covered as provided in (1) above. The Funds will comply with SEC
guidelines regarding cover for hedging transactions and will, if the
guidelines so require, set aside cash or liquid securities in a segregated
account with its custodian in the prescribed amount.

Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Strategic Instrument is open, unless they
are replaced with similar assets. As a result, the commitment of a large
portion of a 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.

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<PAGE>

exposure to an asset class without purchasing or selling the underlying
securities. The purchase of call options serves as a long hedge, and the
purchase of put options serves as a short hedge. Writing covered put or call
options can enable a Fund to enhance income by reason of the premiums paid by
the purchasers of such options. In addition, 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 market price of the security underlying a covered
put option declines to less than the exercise price of the option, minus the
premium received, the Fund would expect to suffer a loss. 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 Fund will be obligated to sell the security at less
than its market value. The securities or other assets used as cover for OTC
options written by the Funds would be considered illiquid to the extent
described above under "Investment Policies and Restrictions--Illiquid
Securities."

The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration
dates of up to nine months. Generally, OTC options on debt securities 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. Options that expire unexercised have no value.

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

The Funds may purchase or write both exchange-traded and OTC options.
Exchange markets for options on debt securities 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 a Fund and its contra party (usually a
securities dealer or a bank) with no clearing organization guarantee. Thus,
when a Fund purchases or writes an OTC option, it relies on the contra party
to make or take delivery of the underlying investment upon exercise of the
option. Failure by the contra party to do so would result in the loss of any
premium paid by the Fund as well as the loss of any expected benefit of the
transaction. The Funds will enter into OTC option transactions only with
contra parties that have a net worth of at least $20 million.

The Funds' ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. Each Fund intends to
purchase or write only those exchange-traded options for which there appears
to be a liquid secondary market. However, there can be no assurance that such
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the
Funds will enter into OTC options only with contra parties that are expected
to be capable of entering into closing transactions with the Fund, there is no
assurance that a Fund will in fact be able to close out an OTC

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<PAGE>

option position at a favorable price prior to expiration. In the event of
insolvency of the contra party, a Fund might be unable to close out an OTC
option position at any time prior to its expiration.

If a Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call
option written by a 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.

The Funds may purchase and write put and call options on common stock
indices or indices of debt securities in much the same manner as the more
traditional options discussed above, except the index options may serve as a
hedge against overall fluctuations in the equity or debt securities market (or
market sectors) rather than anticipated increases or decreases in the value of
a particular security.

GUIDELINES FOR OPTIONS. The Funds' use of options is governed by the
following guidelines, which can be changed by each Fund's board without
shareholder vote:

1. Each 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 purchased by the Fund, does not exceed 5% of the Fund's
total assets.

2. The aggregate value of securities underlying put options written by each
Fund, determined as of the date the put options are written, will not exceed
50% of the Fund's net assets.

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

FUTURES. The Funds may purchase and sell interest rate futures contracts,
stock index futures contracts or debt securities index futures contracts. The
Funds also may purchase put and call options, and write covered put and call
options, on the futures contracts they are allowed to purchase and sell. 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 call options on securities or indices. In addition, the Funds
may purchase or sell futures contracts or options thereon to enhance return by
increasing or reducing such Fund's exposure to an asset class without
purchasing or selling the underlying securities.

Futures strategies also can be used to manage the average duration of a
Fund's portfolio. If Mitchell Hutchins wishes to shorten the average duration
of a Fund, the Fund may sell an interest rate futures contract or a call
option thereon, or purchase a put option on that futures contract. If Mitchell
Hutchins wishes to lengthen the average duration of a Fund, the Fund may buy
an interest rate futures contract or a call option thereon or sell a put
option thereon.

The Funds may also write put options on interest rate futures contracts
while at the same time purchasing call options on the same futures contracts
in order synthetically to create a long futures contract position. Such
options would have the same strike prices and expiration dates. A Fund will
engage in this strategy only when it is more advantageous to the Fund than is
purchasing the futures contract.

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<PAGE>

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

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

Holders and writers of futures 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. Each Fund intends to enter into futures transactions only on exchanges
or boards of trade where there appears to be a liquid, secondary market.
However, there can be no assurance that such a market will exist for a
particular contract at a particular time.

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

If a Fund were unable to liquidate a futures or options position due to the
absence of a liquid secondary market or the imposition of price limits, it
could incur substantial losses. The Fund would continue to be subject to
market risk with respect to the position. In addition, except in the case of
purchased options, the 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.

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<PAGE>

onerous than margin requirements in the securities markets, there might be
increased participation by speculators in the futures markets. This
participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.

GUIDELINES FOR FUTURES AND RELATED OPTIONS. The Funds' use of futures and
related options is governed by the following guidelines, which can be changed
by each Fund's board without shareholder vote:

1. To the extent a Fund enters into futures contracts and options on futures
positions traded on a commodities exchange 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 the Fund's net assets.

2. The aggregate premiums paid on all options (including options on
securities, stock indices and indices of debt securities and options on
futures contracts) purchased by a Fund that are held at any time will not
exceed 20% of the Fund's net assets.

3. The aggregate margin deposits on all futures contracts and options
thereon held at any time by a Fund will not exceed 5% of the Fund's total
assets.

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

Balanced Fund may enter into interest rate swaps, caps, collars and floors
on either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest
rate swaps on a net basis, i.e., the two payment streams are netted out, with
the 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 believes such obligations do not constitute senior securities and,
accordingly, will not treat them as being subject to the Fund's borrowing
restrictions. The net amount of the excess, if any, of the Fund's obligations
over its entitlements with respect to each interest rate swap will be accrued
on a daily basis and appropriate Fund assets having an aggregate net asset
value at least equal to the accrued excess will be maintained in a segregated
account as described above in "Investment Policies and Restrictions--
Segregated Accounts." The 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, collars and floors that are written by the Fund.

19
<PAGE>

Balanced Fund will enter into interest rate protection transactions only
with banks and recognized securities dealers believed by Mitchell Hutchins to
present minimal credit risk in accordance with guidelines established by its
board. If there is a default by the other party to such a transaction, the
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, collars and floors are more
recent innovations for which documentation is less standardized, and
accordingly, they are less liquid than swaps.

DIRECTORS, TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES

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

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
---------------------- ---------------------- --------------------
<S> <C> <C>
Margo N. Alexander**; 49 Director/Trustee and Mrs. Alexander is president, chief
President executive officer and a director of
Mitchell Hutchins (since January
1995) and an executive vice presi-
dent and a director of PaineWebber.
Mrs. Alexander is president and a
director or trustee of 29 invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Richard Q. Armstrong; 61 Director/Trustee Mr. Armstrong is chairman and prin-
78 West Brother Drive cipal of RQA Enterprises (manage-
Greenwich, CT 06830 ment consulting firm) (since April
1991 and princi-
pal occupation since March 1995).
Mr.
Armstrong is also a director of Hi
Lo
Automotive, Inc. He was chairman of
the board, chief executive officer
and co-owner of Adirondack Bever-
ages (producer and distributor of
soft drinks and sparkling/still wa-
ters) (October 1993-March 1995).
Mr. Armstrong was a part-
ner of The New England Consulting
Group (management consulting firm)
(December 1992-September 1993). He
was managing director of LVMH U.S.
Corporation (U.S. subsidiary of the
French luxury goods conglomerate,
Luis Vuitton Moet Hennessey Corpo-
ration) (1987-1991) and chairman of
its wine
</TABLE>

20
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
- ---------------------- ---------------------- --------------------
<S> <C> <C>
and spirits subsidiary, Schieffelin
& Somerset Company (1987-1991). Mr.
Armstrong is a director or trustee
of 28 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
E. Garrett Bewkes, Director/Trustee and Mr. Bewkes is a director of Paine
Jr.**; 70 Chairman of the Board of Webber Group Inc. ("PW Group")
Directors/Trustees (holding company of PaineWebber and
Mitchell Hutchins). Prior to Decem-
ber 1995, he was a consultant to PW
Group. Prior to 1988, he was chair-
man of the board, president and
chief executive officer of American
Bakeries Company. Mr. Bewkes is
also a director of Interstate Bak-
eries Corporation and NaPro
BioTherapeutics, Inc. Mr. Bewkes is
a director or trustee of 29 invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Richard R. Burt; 49 Director/Trustee Mr. Burt is chairman of Interna-
1101 Connecticut Ave- tional Equity Partners (interna-
nue, N.W. tional investments and consulting
Washington, D.C. firm) (since March 1994) and a
20036 partner of McKinsey & Company (man-
agement consulting firm) (since
1991). He is also a director of
American Publishing
Company and Archer-Daniels-Midland
Co. (agricultural commodities). He
was the chief negotiator in the
Strategic Arms Reduction Talks with
the former Soviet Union (1989-1991)
and the U.S. Ambassador to the Fed-
eral Republic of Germany (1985-
1989). Mr. Burt is a director or
trustee of 28 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Mary C. Farrell**; 47 Director/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 is em-
ployed as a
</TABLE>

21
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
---------------------- ---------------------- --------------------
<S> <C> <C>
regular panelist on Wall $treet
Week with Louis Rukeyser. She also
serves on the Board of Overseers of
New York University's Stern School
of Business. Ms. Farrell is a
director or trustee of 28
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Meyer Feldberg; 54 Director/Trustee Mr. Feldberg is Dean and Professor
Columbia University of Management of the Graduate
101 Uris Hall School of Business, Columbia Uni-
New York, New York 10027 versity. Prior to 1989, he was
president of the Illinois Institute
of Technology. Dean Feldberg is
also a director of AMSCO Interna-
tional Inc. (medical instruments
and supplies), Federated Department
Stores, Inc. and New World Communi-
cations Group Incorporated. Mr.
Feldberg is a director or trustee
of 29 investment companies for
which Mitchell Hutchins or Paine-
Webber serves as investment advis-
er.
George W. Gowen; 67 Director/Trustee Mr. Gowen is a partner in the law
666 Third Avenue firm of Dunnington, Bartholow &
New York, New York 10017 Miller. Prior to May 1994, he was a
partner in the law firm of Fryer,
Ross & Gowen. Mr. Gowen is a direc-
tor of Columbia Real Estate Invest-
ments, Inc. Mr. Gowen is a director
or trustee of 28 investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Frederic V. Malek; 60 Director/Trustee Mr. Malek is chairman of Thayer Cap-
1455 Pennsylvania Avenue, N.W. ital Partners (investment bank) and
Suite 350 a co-chairman and director of CB
Washington, D.C. 20004 Commercial Group Inc. (real es-
tate). From January 1992 to Novem-
ber 1992, he was campaign manager
of Bush-Quayle '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 (ho-
</TABLE>

22
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
- ---------------------- ---------------------- --------------------
<S> <C> <C>
tels, 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 Manage-
ment Systems, Inc. (management con-
sulting and computer related serv-
ices), Automatic Data Processing,
Inc., Avis, Inc. (passenger car
rental), FPL Group, Inc. (electric
services), National Education Cor-
poration and Northwest Airlines
Inc. Mr. Malek is a director or
trustee of 28 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Carl W. Schafer; 60 Director/Trustee Mr. Schafer is president of the At-
P.O. Box 1164 lantic Foundation (charitable foun-
Princeton, New Jersey dation supporting mainly oceano-
08542 graphic exploration and research).
He also is a director of Roadway
Express, Inc. (trucking), The
Guardian Group of Mutual Funds,
Evans Systems, Inc. (a motor fuels,
convenience store and diversified
company), Hidden Lake Gold Mines
Ltd. (gold mining), Electronic
Clearing House, Inc.
(financial transactions process-
ing), Wainoco Oil Corporation and
Nutraceutix Inc. (biotechnology).
Prior to January 1993, Mr. Schafer
was chairman of the Investment Ad-
visory Committee of the Howard
Hughes Medical Institute. Mr. Scha-
fer is a director or trustee of 28
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment
adviser.
John R. Torell III; 57 Director/Trustee Mr. Torell is chairman of Torell
767 Fifth Avenue Management, Inc. (financial advi-
Suite 4605 sory firm), chairman of Telesphere
New York, NY 10153 Corporation (electronic provider of
financial information), and a part-
ner of Zilkha & Company (merchant
banking and private
investment company). He is the for-
mer chairman and chief executive
officer of
</TABLE>

23
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
- ---------------------- ---------------------- --------------------
<S> <C> <C>
Fortune Bancorp (1990-1991 and
1990-1994, respectively), the for-
mer chairman, president and chief
executive officer of CalFed, Inc.
(savings association) (1988 to
1989) and former president of Manu-
facturers Hanover Corp. (bank)
(prior to 1988). Mr. Torell is a
director of American Home Products
Corp., New Colt Inc. (armament man-
ufacturer) and Volt Information
Sciences Inc. Mr. Torell is a di-
rector or trustee of 28 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
T. Kirkham Barneby; 50 Vice President Mr. Barneby is a managing director
and chief investment officer--quan-
titative investments of Mitchell
Hutchins. Prior to September 1994,
he was a senior vice president at
Vantage Global Management. Prior to
June 1993, he was a senior vice
president at Mitchell Hutchins. Mr.
Barneby is a vice president of five
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Teresa M. Boyle; 38 Vice President Ms. Boyle is a first vice president
of Mitchell Hutchins. Prior to No-
vember 1993, she was compliance
manager of Hyperion Capital Manage-
ment, Inc., an investment advisory
firm. Prior to April 1993,
Ms. Boyle was a vice president and
manager--legal administration of
Mitchell Hutchins. Ms. Boyle is a
vice president of 29 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
C. William Maher; 35 Vice President and Mr. Maher is a first vice president
Assistant Treasurer and a senior manager of the mutual
fund finance division of Mitchell
Hutchins. Mr. Maher is a vice pres-
ident and assistant treasurer
of 29 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>

24
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
---------------------- ---------------------- --------------------
<S> <C> <C>
Dennis McCauley; 50 Vice President Mr. McCauley is a managing director
(Master Series, Inc.) 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 18 investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Ann E. Moran; 39 Vice President Ms. Moran is a vice president of
and Assistant Treasurer Mitchell Hutchins. Ms. Moran is a
vice president and assistant trea-
surer of 29 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Dianne E. O'Donnell; 44 Vice President and Ms. O'Donnell is a senior vice pres-
Secretary ident and deputy general counsel of
Mitchell Hutchins. Ms. O'Donnell is
a vice president and secretary of
28 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment
adviser.
Emil Polito; 36 Vice President Mr. Polito is a senior vice
president and director of
operations and control for Mitchell
Hutchins. From March 1991 to
September 1993 he was director of
the Mutual Funds Sales Support and
Service Center for Mitchell
Hutchins and PaineWebber. Mr.
Polito is also vice president of 29
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Susan P. Ryan; 36 Vice President Ms. Ryan is a senior vice president
(Master Series, Inc.) and portfolio manager of Mitchell
Hutchins. Ms. Ryan has been with
Mitchell Hutchins since 1982. Ms.
Ryan is a vice president of five
investment companies for which
Mitchell Hutchins
or PaineWebber serves as investment
adviser.
</TABLE>

25
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
- ---------------------- ---------------------- --------------------
<S> <C> <C>
Victoria E. Schonfeld; Vice President Ms. Schonfeld is a managing director
46 and general counsel of Mitchell
Hutchins. Prior to May 1994, she
was a partner in the law firm of
Arnold & Porter. Ms. Schonfeld
is a vice president of 29 invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Paul H. Schubert; 33 Vice President Mr. Schubert is a first vice presi-
and Assistant Treasurer dent and a senior manager of the
mutual fund finance division of
Mitchell Hutchins.
From August 1992 to August 1994, he
was a vice president of BlackRock
Financial Management L.P. Prior to
August 1992, he was an audit man-
ager with Ernst & Young LLP. Mr.
Schubert is a vice president and
assistant treasurer of 29 invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Nirmal Singh; 40 Vice President Mr. Singh is a first vice president
(Master Series, Inc.) and a portfolio manager of Mitchell
Hutchins. Prior to September 1993,
he was a member of the portfolio
management team at Merrill Lynch
Asset Management, Inc. Mr. Singh
is a vice president of five invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment
adviser.
Julian F. Sluyters; 36 Vice President and Mr. Sluyters is a senior vice presi-
Treasurer dent and the director of the mutual
fund finance division of Mitchell
Hutchins. Prior to 1991, he was an
audit senior manager with Ernst &
Young LLP. Mr. Sluyters is a vice
president and treasurer of 29 in-
vestment companies for which Mitch-
ell Hutchins or PaineWebber serves
as investment adviser.
Mark A. Tincher; 41 Vice President Mr. Tincher is a managing director
and chief investment officer--U.S.
equity investments of Mitchell
Hutchins. Prior to March 1995, he
was a vice president and directed
the U.S. funds management and
</TABLE>

26
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
- ---------------------- ---------------------- --------------------
<S> <C> <C>
equity research areas of Chase Man-
hattan Private Bank. Mr. Tincher is
a vice president of 13 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Craig M. Varrelman; 38 Vice President Mr. Varrelman is a first vice presi-
(Master Series, Inc.) dent and a portfolio manager of
Mitchell Hutchins. Mr. Varrelman is
a vice president of five investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Keith A. Weller; 35 Vice President and Mr. Weller is a first vice president
Assistant Secretary and 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 28 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>
- --------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of the
Corporation and the Trust as defined in the 1940 Act by virtue of their
positions with PW Group, PaineWebber and/or Mitchell Hutchins.

The Corporation and the Trust each pays directors/trustees who are not
interested persons of the Corporation/Trust $1,500 annually for each series
and $150 for each board meeting and separate meeting of a board committee
(other than committee meetings held on the same day as a board meeting). The
Corporation and Trust each presently has two series and thus pays each such
board member $3,000 annually. In addition, the Corporation and Trust pays any
additional annual amounts due for board or committee meetings. Messrs.
Feldberg and Torell serve as chairmen of the audit and contract review
committees of individual funds within the PaineWebber fund complex and receive
additional annual compensation, aggregating $15,000 each from the relevant
funds. All board members are reimbursed for any expenses incurred in attending
meetings. Board members and officers of the Corporation/Trust own in the
aggregate less than 1% of the shares of either Fund. Because PaineWebber and
Mitchell Hutchins perform substantially all of the services necessary for the
operation of the Corporation, the Trust and the Funds, the Corporation and the
Trust require no employees. No officer, director or employee of PaineWebber or
Mitchell Hutchins presently receives any compensation from the Corporation or
the Trust for acting as director, trustee or officer.

27
<PAGE>

The table below includes certain information relating to the compensation of
the Corporation's and the Trust's current board members who held office with
the Corporation or Trust or with other PaineWebber funds during the fiscal
year indicated.

COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FROM THE
AGGREGATE CORPORATION,
COMPENSATION AGGREGATE THE TRUST
FROM THE COMPENSATION AND THE
NAME OF PERSON, POSITION CORPORATION*++ FROM THE TRUST*++ COMPLEX+
- ------------------------ -------------- ----------------- ------------
<S> <C> <C> <C>
Richard Q. Armstrong, -- $ 616 $ 9,000
Director/Trustee...............
Richard R. Burt, -- 616 7,750
Director/Trustee...............
Meyer Feldberg, $2,339 616 106,375
Director/Trustee...............
George W. Gowen, 2,339 616 99,750
Director/Trustee...............
Frederic V. Malek, 2,339 616 99,750
Director/Trustee...............
Carl W. Schafer, -- 3,361 118,175
Director/Trustee...............
John R. Torell III, -- 616 28,125
Director/Trustee...............
</TABLE>
- --------
Only independent members of the board are compensated by the Corporation or
the Trust and identified above; board members who are "interested persons," as
defined by the 1940 Act, do not receive compensation.

* Represents fees paid to each board member during the period March 1, 1996
through August 31, 1996 for the Corporation and for the fiscal year ended
August 31, 1996 for the Trust.
+ Represents total compensation paid to each board member during the calendar
year ended December 31, 1995; no fund within the fund complex has a pension
or retirement plan.

++ Aggregate compensation for the Corporation and the Trust are divided among
other portfolios.

PRINCIPAL HOLDERS OF SECURITIES. The Funds' records as of November 29, 1996
did not indicate that any shareholder owned more than 5% of any class of a
Fund's shares.

28
<PAGE>

INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS

INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of each Fund pursuant to a contract with the
Corporation dated August 4, 1988 and a contract with the Trust dated April 13,
1995, (each an "Advisory Contract"). Under the Advisory Contracts, and, for
Tactical Allocation Fund, substantially similar prior contracts, each Fund
pays Mitchell Hutchins an annual fee, computed daily and paid monthly,
according to the schedule set forth below:

BALANCED FUND

<TABLE>
<CAPTION>
ANNUAL
AVERAGE DAILY NET ASSETS RATE
------------------------ ------
<S> <C>
Up to $500 million................................................... 0.750%
In excess of $500 million up to $1.0 billion......................... 0.725
In excess of $1.0 billion up to $1.5 billion......................... 0.700
In excess of $1.5 billion up to $2.0 billion......................... 0.675
Over $2.0 billion.................................................... 0.650
</TABLE>

TACTICAL ALLOCATION FUND

<TABLE>
<CAPTION>
ANNUAL
AVERAGE DAILY NET ASSETS RATE
------------------------ ------
<S> <C>
Up to $250 million................................................. 0.500%
Over $250 million.................................................. 0.450
</TABLE>

During the period March 1, 1996 through August 31, 1996 and the fiscal years
ended February 29, 1996, February 28, 1995 and February 28, 1994, the
Corporation paid (or accrued) to Mitchell Hutchins investment advisory and
administrative fees of $739,209, $1,584,083, $1,934,650 and $2,326,697,
respectively, with respect to Balanced Fund.

For the fiscal years ended August 31, 1996, August 31, 1995 and August 31,
1994, the Trust paid (or accrued) to Mitchell Hutchins and a prior investment
adviser and administrator management fees of $402,466, $279,950 and $487,304,
respectively, with respect to Tactical Allocation Fund.

Under a service agreement with the Corporation that is reviewed by the
Corporation's board of directors annually, PaineWebber provides certain
services to Balanced Fund not otherwise provided by the Fund's transfer agent.
Pursuant to the service agreement, during the period March 1, 1996 through
August 31, 1996 and the fiscal years ended February 29, 1996, February 28,
1995 and February 28, 1994, PaineWebber earned fees in the amounts of $32,992,
$77,050, $100,272 and $116,755, respectively, with respect to the Fund.

Under the terms of the Advisory Contracts, each Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Corporation or the Trust not readily
identifiable as belonging to the Funds or to the Corporation's or Trust's
other series are allocated among series by or under the direction of the board
in such manner as the board deems to be fair and equitable. Expenses borne by
each Fund include the following (or the Fund's share of the following): (1)
the cost (including brokerage commissions) of securities purchased or sold by
the Fund and any losses incurred in connection therewith; (2) fees payable to
and expenses incurred on behalf of the Fund by Mitchell Hutchins; (3)
organizational expenses; (4) filing fees and expenses relating to the
registration and qualification of the Fund's shares and the Corporation/Trust
under federal and state securities laws and maintenance of such registrations
and qualifications; (5) fees and salaries payable to board members who are not
interested

29
<PAGE>

persons of the Corporation/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
Corporation/Trust or the Fund 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 and supplements thereto, statements
of additional information and supplements thereto, reports and proxy materials
for existing shareholders, and costs of mailing such materials to existing
shareholders; (14) any extraordinary expenses (including fees and
disbursements of counsel) incurred by the Corporation/Trust or the Fund; (15)
fees, voluntary assessments and other expenses incurred in connection with
membership in investment company organizations; (16) costs of mailing and
tabulating proxies and costs of meetings of shareholders, the board and any
committees thereof; (17) the cost of investment company literature and other
publications provided to board members and officers; and (18) costs of
mailing, stationery and communications equipment.

Under the Advisory Contracts, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by either Fund in
connection with the performance of the Advisory Contracts, 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. Each Advisory Contract
terminates automatically with respect to a Fund upon assignment and is
terminable at any time without penalty by the Corporation's or Trust's board
or by vote of the holders of a majority of a Fund's outstanding voting
securities on 60 days' written notice to Mitchell Hutchins, or by Mitchell
Hutchins on 60 days' written notice to the Corporation or the Trust.

The following table shows the approximate net assets as of November 30,
1996, 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).............................. $ 5,765.5
Global......................................................... 2,902.5
Equity/Balanced................................................ 3,413.6
Fixed Income (excluding Money Market).......................... 5,254.4
Taxable Fixed Income......................................... 3,610.5
Tax-Free Fixed Income........................................ 1,643.9
Money Market Funds............................................. 23,299.9
</TABLE>

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 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.

30
<PAGE>

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

Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares of each Fund adopted by the Corporation and the Trust in the
manner prescribed under Rule 12b-1 under the 1940 Act ("Class A Plan," "Class
B Plan" and "Class C Plan," collectively, "Plans"), each Fund pays Mitchell
Hutchins a service fee, accrued daily and payable monthly, at the annual rate
of 0.25% of the average daily net assets of each class of shares. Under the
Class B Plan, each Fund pays Mitchell Hutchins a distribution fee, accrued
daily and payable monthly, at the annual rate of 0.75% of the average daily
net assets of the Class B shares. Under the Class C Plan, each Fund pays
Mitchell Hutchins a distribution fee, accrued daily and payable monthly, at
the annual rate of 0.75% of the average daily net assets of the Class C
shares.

Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the Corporation's/Trust's board at least quarterly, and the board
members will review, reports regarding all amounts expended under the Plan and
the purposes for which such expenditures were made, (2) the Plan will continue
in effect only so long as it is approved at least annually, and any material
amendment thereto is approved, by the Corporation's/Trust's board, including
those board members who are not "interested persons" of the Corporation/Trust
and who have no direct or indirect financial interest in the operation of the
Plan or any agreement related to the Plan, acting in person at a meeting
called for that purpose, (3) payments by a Fund under the Plan shall not be
materially increased without the affirmative vote of the holders of a majority
of the outstanding shares of the relevant class and (4) while the Plan remains
in effect, the selection and nomination of board members who are not
"interested persons" of the Corporation/Trust shall be committed to the
discretion of the board members who are not interested persons of the
Corporation/Trust.

In reporting amounts expended under the Plans to the board members, Mitchell
Hutchins will allocate expenses attributable to the sale of each class of Fund
shares to such class based on the ratio of sales of shares of such class to
the sales of all three classes of shares. The fees paid by one class of Fund
shares will not be used to subsidize the sale of any other class of Fund
shares.

The Funds paid (or accrued) the following fees to Mitchell Hutchins under
the Class A, Class B and Class C Plans during the fiscal periods shown:

31
<PAGE>

Mitchell Hutchins estimates that it and its parent corporation, PaineWebber,
incurred the following shareholder service-related and distribution-related
expenses with respect to each Fund during the fiscal periods shown below:

CLASS A

<TABLE>
<CAPTION>
TACTICAL
BALANCED FUND ALLOCATION FUND
----------------- ---------------
FISCAL SIX FISCAL
YEAR MONTHS YEAR
ENDED ENDED ENDED
FEBRUARY AUGUST AUGUST
29, 1996 31, 1996 31, 1996
-------- -------- ---------------
<S> <C> <C> <C>
Marketing and advertising.................... $ 40,675 $ 9,325 $ 24,998
Amortization of commissions.................. -- -- --
Printing of prospectuses and statements of
additional information for other than
current shareholders........................ 322 2,251 1,685
Branch network costs allocated and interest
expense..................................... 312,428 36,320 72,649
Service fees paid to PaineWebber investment
executives.................................. 195,005 76,656 7,894
CLASS B
Marketing and advertising.................... $ 55,135 $15,040 $ 20,024
Amortization of commissions.................. 149,316 43,085 42,933
Printing of prospectuses and statements of
additional information for other than
current shareholders........................ 436 4,251 1,350
Branch network costs allocated and interest
expense..................................... 435,308 64,406 5,787
Service fees paid to PaineWebber investment
executives.................................. 34,711 11,158 --
CLASS C
Marketing and advertising.................... $ 20,190 $ 7,121 $ 34,588
Amortization of commissions.................. 34,441 10,494 190,710
Printing of prospectuses and statements of
additional information for other than
current shareholders........................ 160 2,012 2,332
Branch network costs allocated and interest
expense..................................... 155,178 28,705 58,312
Service fees paid to PaineWebber investment
executives.................................. 8,391 3,355 --
</TABLE>

"Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing Fund 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
the Fund's shares, including the PaineWebber retail branch system.

In approving each Fund's overall Flexible PricingSM system of distribution,
the Corporation's/Trust's 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 the Fund
and attracting new investors and assets to the Fund to the benefit of the Fund
and its shareholders; (2) facilitate distribution of the Fund's shares; and
(3) maintain the competitive position of the Fund in relation to other funds
that have implemented or are seeking to implement similar distribution
arrangements.

32
<PAGE>

In approving the Class A Plan for each Fund, the board members 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 a greater growth of the Fund than might
otherwise be the case, (3) the advantages to the shareholders of economies of
scale resulting from growth in the Fund's assets and potential continued
growth, (4) the services provided to the Fund and its shareholders by Mitchell
Hutchins, (5) the services provided by PaineWebber pursuant to its Exclusive
Dealer Agreement with Mitchell Hutchins and (6) Mitchell Hutchins' shareholder
service-related expenses and costs.

In approving the Class B Plan for each Fund, the board members 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 the Fund's purchase payments and instead having the
entire amount of their purchase payments immediately invested in Fund shares,
(3) Mitchell Hutchins' belief that the ability of PaineWebber 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 Fund than might otherwise be the case, (4)
the advantages to the shareholders of economies of scale resulting from growth
in the Fund's assets and potential continued growth, (5) the services provided
to the Fund and its shareholders by Mitchell Hutchins, (6) the services
provided by PaineWebber pursuant to its Exclusive Dealer Agreement with
Mitchell Hutchins and (7) Mitchell Hutchins' shareholder service- and
distribution-related expenses and costs. The board members also recognized
that Mitchell Hutchins' willingness to compensate PaineWebber and its
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 Fund, the board members considered
all the features of the distribution system, including (1) the advantage to
investors in having no initial sales charges deducted from the Fund's purchase
payments and instead having the entire amount of their purchase payments
immediately invested in Fund shares, (2) the advantage to investors in being
free from contingent deferred sales charges upon redemption for shares held
more than one year and paying for distribution on an ongoing basis, (3)
Mitchell Hutchins' belief that the ability of PaineWebber 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 Fund than might otherwise be the case, (4)
the advantages to the shareholders of economies of scale resulting from growth
in the Fund's assets and potential continued growth, (5) the services provided
to the Fund and its shareholders by Mitchell Hutchins, (6) the services
provided by PaineWebber pursuant to its Exclusive Dealer Agreement with
Mitchell Hutchins and (7) Mitchell Hutchins' shareholder service- and
distribution-related expenses and costs. The board members also recognized
that Mitchell Hutchins' willingness to compensate PaineWebber and its
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 members considered all compensation
that Mitchell Hutchins would receive under the Plan and the Distribution
Contract, including service fees and, as applicable, initial sales

33
<PAGE>

charges, distribution fees and contingent deferred sales charges. The board
members also considered the benefits that would accrue to Mitchell Hutchins
under each Plan in that Mitchell Hutchins would receive service, distribution
and advisory fees that are calculated based upon a percentage of the average
net assets of a Fund, which fees would increase if the Plan were successful
and the Fund attained and maintained significant asset levels.

Under the Distribution Contracts between the Corporation and the Trust and
Mitchell Hutchins for the Class A shares for the fiscal years set forth below,
Mitchell Hutchins earned the following approximate amounts of initial sales
charges and retained the following approximate amounts, net of concessions to
PaineWebber as exclusive dealer:

BALANCED FUND

<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------- FOR THE PERIOD
FEBRUARY 28, FEBRUARY 29, MARCH 1, 1996
--------------- ------------ THROUGH AUGUST 31,
1994 1995 1996 1996
------- ------- ------------ ------------------
<S> <C> <C> <C> <C>
Earned........................ $46,856 $33,533 $82,272 $7,576
Retained...................... 3,188 2,003 3,365 459
</TABLE>

TACTICAL ALLOCATION FUND

<TABLE>
<CAPTION>
FISCAL YEARS ENDED
AUGUST 31,
------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Earned.............................................. $58,242 $17,000 $474,448
Retained............................................ 23,819 8,737 166,202
</TABLE>

For the fiscal years shown, Mitchell Hutchins earned and retained the
following contingent deferred sales charges paid upon certain redemptions of
Class A, Class B and Class C shares:

BALANCED FUND

<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------ FOR THE PERIOD
FEBRUARY 28, FEBRUARY 29, MARCH 1, 1996
----------------- ------------ THROUGH AUGUST 31,
1994 1995 1996 1996
-------- -------- ------------ ------------------
<S> <C> <C> <C> <C>
Class A..................... $ 0 $ 0 $ 0 $ 0
Class B..................... 185,486 149,669 101,522 25,944
Class C..................... 0 0 5 206
</TABLE>

Prior to November 10, 1995, Balanced Fund's Class C shares were called
"Class D" shares.

For the fiscal years shown, Mitchell Hutchins and a prior distributor earned
and retained the following contingent deferred sales charges paid upon certain
redemptions of Class A, Class B and Class C shares:

TACTICAL ALLOCATION FUND

<TABLE>
<CAPTION>
FISCAL YEARS ENDED
AUGUST 31,
-----------------------
1994 1995 1996
-------- ------ -------
<S> <C> <C> <C>
Class A............................................... $ 0 $ 0 $ 0
Class B............................................... NA NA 20,333
Class C............................................... 223,746 2,398 6,191
</TABLE>

The inception date for Class B shares of Tactical Allocation Fund was
January 30, 1996.

34
<PAGE>

PORTFOLIO TRANSACTIONS

Subject to policies established by each board, Mitchell Hutchins is
responsible for the execution of each Fund's portfolio transactions and the
allocation of brokerage transactions. In executing portfolio transactions,
Mitchell Hutchins seeks to obtain the best net results for the Funds, taking
into account such factors as price (including the applicable brokerage
commission or dealer spread), size of order, difficulty of execution and
operational facilities of the firm involved. Generally, bonds are traded on
the OTC market on a "net" basis without a stated commission through dealers
acting for their own account and not as brokers. Prices paid to dealers in
principal transactions 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. Balanced Fund, for the period March 1, 1996
through August 31, 1996, for the fiscal years ended February 29, 1996,
February 28, 1995 and February 28, 1994, paid $134,453, $335,166, $495,853 and
$540,773, respectively, in aggregate brokerage commissions. Tactical
Allocation Fund, for the fiscal years ended August 31, 1996, August 31, 1995
and August 31, 1994, paid $41,271, $82,091 and $56,965, respectively, in
aggregate brokerage commissions.

Neither Fund has any obligation to deal with any broker or group of brokers
in the execution of portfolio transactions. Each Fund contemplates that,
consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through Mitchell Hutchins or its affiliates,
including PaineWebber. The board of each Fund has adopted procedures in
conformity with Rule 17e-1 under the 1940 Act to ensure that all brokerage
commissions paid to Mitchell Hutchins and its affiliates are reasonable and
fair. Specific provisions in each Advisory Contract authorize Mitchell
Hutchins and any of its affiliates that are members of a national securities
exchange to effect portfolio transactions for each Fund on such exchange and
to retain compensation in connection with such transactions. Any such
transactions will be effected and related compensation paid only in accordance
with applicable SEC regulations. For the fiscal years ended February 29, 1996,
February 28, 1995 and February 28, 1994, Balanced Fund paid $1,350, $7,266 and
$4,900, respectively, in brokerage commissions to PaineWebber. For the period
March 1, 1996 through August 31, 1996, Balanced Fund paid $2,220 in brokerage
commissions to PaineWebber, which represented 0.02% of the total brokerage
commissions paid by that Fund and 0.02% of the aggregate dollar amount of
transactions involving the payment of commissions. For the fiscal years ended
August 31, 1996 and August 31, 1995, Tactical Allocation Fund paid no
brokerage commissions to PaineWebber. In prior fiscal years, neither Mitchell
Hutchins nor PaineWebber was an affiliate of Tactical Allocation Fund.

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

Consistent with the interest of each Fund and subject to the review of its
board, Mitchell Hutchins may cause the Fund to purchase and sell portfolio
securities through brokers who provide the Fund with research, analysis,
advice and similar services. In return for such services, the Fund may pay to
those brokers a higher commission than may be charged by other brokers,
provided that Mitchell Hutchins determines in good faith that such commission
is reasonable in terms either of that particular transaction or of the overall
responsibility of Mitchell Hutchins to the Fund and its other clients and that
the total commissions paid by the Fund will be reasonable in relation to the
benefits to the Fund over the long term. For Balanced Fund's six months ended
August 31, 1996 and fiscal year ended February 28, 1996, Mitchell Hutchins
directed $29,295,885 and $74,360,278 in portfolio transactions to brokers
chosen because they provided research services, for which Balanced Fund paid
$38,779 and $144,391 in commissions.

35
<PAGE>

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

Research services furnished by the brokers or dealers through which or with
which a Fund effects securities transactions may be used by Mitchell Hutchins
in advising other funds or accounts and, conversely, research services
furnished to Mitchell Hutchins by brokers or dealers in connection with other
funds or accounts that Mitchell Hutchins advises may be used by Mitchell
Hutchins in advising the Fund. Information and research received from such
brokers will be in addition to, and not in lieu of, the services required to
be performed by Mitchell Hutchins under the Advisory Contracts.

Investment decisions for each 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 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 a Fund
and such other account(s) as to amount according to a formula deemed equitable
to the Fund and such other account(s). While in some cases this practice could
have a detrimental effect upon the price or value of the security as far as
the Fund is concerned or upon its ability to complete its entire order, in
other cases it is believed that coordination and the ability to participate in
volume transactions will be beneficial to the Fund.

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

PORTFOLIO TURNOVER. The portfolio turnover rate for each Fund is calculated
by dividing the lesser of the Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year. For the period March 1, 1996
through August 31, 1996 and the fiscal years ended February 29, 1996 and
February 28, 1995, the portfolio turnover rates for Balanced Fund were 103%,
188% and 107%, respectively. For the fiscal years ended August 31, 1996 and
August 31, 1995, the portfolio turnover rates for Tactical Allocation Fund
were 6% and 53%, respectively. The higher turnover for the fiscal year ended
August 31, 1995 was due to reallocations of Tactical Allocation Fund's
portfolio in accordance with its systematic asset allocation strategy.

36
<PAGE>

REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION AND
OTHER SERVICES

COMBINED PURCHASE PRIVILEGE--CLASS A SHARES. Investors and eligible groups
of related Fund investors may combine purchases of Class A shares of each Fund
with concurrent purchases of Class A shares of any other PaineWebber mutual
fund and thus take advantage of the reduced sales charges for Class A shares
indicated in the table of sales charges in the Prospectus. The sales charge
payable on the purchase of Class A shares of each Fund and Class A shares of
such other funds will be at the rates applicable to the total amount of the
combined concurrent purchases.

An "eligible group of related Fund investors" can consist of any combination
of the following:

(a) an individual, that individual's spouse, parents and children;

(b) an individual and his or her Individual Retirement Account ("IRA");

(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25%
or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);

(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);

(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 a group of related employers) and one or more
qualified retirement plans of such employer or employers (an employer
controlling, controlled by or under common control with another employer is
deemed related to that other employer); or

(h) individual accounts related together under one registered investment
adviser having full discretion and control over the accounts. The
registered investment adviser must communicate at least quarterly through a
newsletter or investment update establishing a relationship with all of the
accounts.

RIGHTS OF ACCUMULATION--CLASS A SHARES. Reduced sales charges are available
through a right of accumulation, under which investors and eligible groups of
related Fund investors (as defined above) are permitted to purchase Class A
shares of the Funds among related accounts at the offering price applicable to
the total of (1) the dollar amount then being purchased plus (2) an amount
equal to the then-current net asset value of the purchaser's combined holdings
of Class A Fund shares and Class A shares of any other PaineWebber mutual
fund. The purchaser must provide sufficient information to permit confirmation
of his or her holdings, and the acceptance of the purchase order is subject to
such confirmation. The right of accumulation may be amended or terminated at
any time.

WAIVERS OF SALES CHARGES--CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares of the Funds is waived
where a total or partial redemption is made within one year following the
death of the shareholder. The contingent deferred sales charge waiver is
available where the decedent is either the sole shareholder or owns the shares
with his or her spouse as a joint tenant with right of survivorship. This
waiver applies only to redemption of shares held at the time of death.

Certain PaineWebber mutual funds, including Balanced Fund, offered shares
subject to contingent deferred sales charges before the implementation of the
Flexible Pricing System on July 1, 1991 ("CDSC Funds"). The contingent
deferred sales charge is waived with respect to redemptions of Class B shares
of CDSC Funds purchased prior to July 1, 1991 by officers, directors
(trustees) or employees of CDSC Funds,

37
<PAGE>

Mitchell Hutchins or their affiliates (or their spouses and children under age
21). In addition, the contingent deferred sales charge will be reduced by 50%
with respect to redemptions of Class B shares of CDSC Funds purchased prior to
July 1, 1991 with a net asset value at time of purchase of at least $1
million. If Class B shares of a CDSC Fund purchased prior to July 1, 1991 are
exchanged for Class B shares of Tactical Allocation Fund, any waiver or
reduction of the contingent deferred sales charge that applied to Class B
shares of the CDSC Fund will apply to the Class B shares of Tactical
Allocation Fund acquired through the exchange.

ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of each Fund 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 the exchange fee and no notice need be given
if, under extraordinary circumstances, either redemptions are suspended under
the circumstances described below or a Fund temporarily delays or ceases the
sales of its shares because it is unable to invest amounts effectively in
accordance with the Fund's investment objective, policies and restrictions.

If conditions exist that make cash payments undesirable, each Fund reserves
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Fund and valued in the same way as they would
be valued for purposes of computing the Fund's net asset value. Any such
redemption in kind will be made with readily marketable securities, to the
extent available. If payment is made in securities, a shareholder may incur
brokerage expenses in converting those securities into cash. The Corporation
and the Trust have each elected, however, to be governed by Rule 18f-1 under
the 1940 Act, under which a Fund is obligated to redeem shares solely in cash
up to the lesser of $250,000 or 1% of the net asset value of the Fund during
any 90-day period for one shareholder. This election is irrevocable unless the
SEC permits its withdrawal. Each Fund may suspend redemption privileges or
postpone the date of payment during any period (1) when the 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 the Fund to dispose of securities owned by it or fairly to
determine the value of its assets, or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of a Fund's portfolio at the time.

AUTOMATIC INVESTMENT PLAN. Participation in the Automatic Investment Plan
enables an investor to use the technique of "dollar cost averaging." When the
investor invests the same dollar amount each month under the Plan, the
investor will purchase more shares when a Fund's net asset value per share is
low and fewer shares when the net asset value per share is high. Using this
technique, 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
low 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 Fund account at the time the investor
elects to participate in the systematic withdrawal plan) less aggregate
redemptions made other than pursuant to the systematic withdrawal plan is less
than $5,000 for Class A and Class C shareholders or $20,000 for Class B
shareholders. Purchases of additional shares of a Fund concurrent with
withdrawals are ordinarily disadvantageous to shareholders because of tax
liabilities and, for Class A shares, initial sales charges. On or about the
15th of each month for monthly plans and on or about the 15th of the months
selected for quarterly or semi-annual plans, PaineWebber will arrange for
redemption by a Fund of sufficient

38
<PAGE>

Fund shares to provide the withdrawal payment specified by participants in the
Fund's systematic withdrawal plan. The payment generally is 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
and Taxes" in the Prospectus. If periodic withdrawals continually exceed
reinvested dividends, 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 Class A shares of a Fund may reinstate their
account without a sales charge. Shareholders 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 redemption
proceeds are reinvested, if the reinstatement privilege is exercised within 30
days after redemption, and an adjustment will be made to the shareholder's tax
basis for the 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 and Taxes" in the Prospectus.

PAINEWEBBER RMA RESOURCE ACCUMULATION PLANSM;
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(R) (RMA(R))

Shares of the PaineWebber mutual funds (each a "PW Fund" and, collectively,
the "PW Funds") are available for purchase through the RMA Resource
Accumulation Plan ("Plan") by customers of PaineWebber and its correspondent
firms who maintain Resource Management Accounts ("RMA accountholders"). The
Plan allows an RMA accountholder to continually invest in one or more of the
PW Funds at regular intervals, with payment for shares purchased automatically
deducted from the client's RMA account. The client may elect to invest at
monthly or quarterly intervals and may elect either to invest a fixed dollar
amount (minimum $100 per period) or to purchase a fixed number of shares. A
client can elect to have Plan purchases executed on the first or fifteenth day
of the month. Settlement occurs three Business Days (defined under "Valuation
of Shares") after the trade date, and the purchase price of the shares is
withdrawn from the investor's RMA account on the settlement date from the
following sources and in the following order: uninvested cash balances,
balances in RMA money market funds, or margin borrowing power, if applicable
to the account.

To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client
Agreement and Instruction Form available from PaineWebber. The investor must
have received a current prospectus for each PW Fund selected prior to
enrolling in the Plan. Information about mutual fund positions and outstanding
instructions under the Plan are noted on the RMA accountholder's account
statement. Instructions under the Plan may be changed at any time, but may
take up to two weeks to become effective.

39
<PAGE>

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
low 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:

. monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold MasterCard(R)
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. Each money market fund attempts to maintain a stable price per share
of $1.00, although there can be no assurance that it will be able to do so.
Investments in the money market funds are not insured or guaranteed by the
U.S. government;

. 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 $25 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.

40
<PAGE>

CONVERSION OF CLASS B SHARES

Class B shares of each Fund will automatically convert to Class A shares of
that Fund, based on the relative net asset values of each of the classes, as
of the close of business on the first Business Day (as defined below) of the
month in which the sixth anniversary of the initial issuance of such Class B
shares of the Fund occurs. For the purpose of calculating the holding period
required for conversion of Class B shares, the date of initial issuance shall
mean (1) the date on which such Class B shares were issued, or (2) for
Class B shares obtained through an exchange, or a series of exchanges, the
date on which the original Class B shares were issued. For purposes of
conversion to Class A, 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, a pro rata portion of the Class B shares in the sub-account will also
convert to Class A. The portion will be determined by the ratio that the
shareholder's Class B shares converting to Class A 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 (1) the continuing
applicability of a ruling of the Internal Revenue Service 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 (2) the
continuing availability of an opinion of counsel to the effect that the
conversion of shares does not constitute a taxable event. If the conversion
feature ceased to be available, the Class B shares of each Fund 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 these conditions for the availability
of the conversion feature will not continue to be met.

VALUATION OF SHARES

Each Fund determines the net asset value per share separately for each class
of shares as of the close of regular trading (currently 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. Currently, the NYSE is closed on the
observance of the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.

Securities that are listed on stock exchanges are valued at the last sale
price on the day the securities are being valued or, lacking any sales on such
day, at the last available bid price. In cases where securities are traded on
more than one exchange, the securities are generally valued on the exchange
considered by Mitchell Hutchins as the primary market. Securities traded in
the OTC market and listed on Nasdaq are valued at the last available sale
price on Nasdaq at 4:00 p.m., Eastern time; other OTC securities are valued at
the last bid price available prior to valuation.

Where market quotations are readily available, debt securities are valued
based upon those quotations, provided such quotations adequately reflect, in
Mitchell Hutchins' judgment, the fair value of the security. Where such market
quotations are not readily available, such securities are valued based upon
appraisals received from a pricing service using a computerized matrix system,
or based upon appraisals derived from information concerning the security or
similar securities received from recognized dealers in those securities. All
other securities or assets will be valued at fair value as determined in good
faith by or under the direction of the Corporation's/Trust's board. The
amortized cost method of valuation generally is used to value debt obligations
with 60 days or less remaining to maturity, unless the Corporation's/Trust's
board determines that this does not represent fair value.

41
<PAGE>

PERFORMANCE INFORMATION

Each Fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are
not intended to indicate future performance. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.

TOTAL RETURN. Average annual total return quotes ("Standardized Return")
used in each Fund's Performance Advertisements are calculated according to the
following formula:

<TABLE>
<S> <C> <C> <C>
P(1 + T)n = ERV
a hypothetical initial payment of $1,000 to purchase shares of a
where: P = 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 made 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,
each Fund's maximum 4.5% initial 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 and Class C shares
held for the period is deducted. All dividends and other distributions are
assumed to have been reinvested at net asset value.

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

42
<PAGE>

The following table shows performance information for the Class A, Class B
and Class C shares of the Funds for the periods indicated. All returns for
periods of more than one year are expressed as an average return.

BALANCED FUND
<TABLE>
<CAPTION>
CLASS C
CLASS A CLASS B (FORMERLY CLASS D)
------- ------- ------------------
<S> <C> <C> <C>
Fiscal year ended August 31, 1996:
Standardized Return*....................... 3.42% 2.70% 6.54%
Non-Standardized Return.................... 8.33% 7.70% 7.54%
Five years ended August 31, 1996:
Standardized Return*....................... 7.51% 7.41% NA
Non-Standardized Return.................... 8.51% 7.71% NA
Inception** to August 31, 1996:
Standardized Return*....................... 8.13% 7.63% 7.80%
Non-Standardized Return.................... 9.10% 7.63% 7.80%

TACTICAL ALLOCATION FUND
<CAPTION>
CLASS C
CLASS A CLASS B (FORMERLY CLASS B)
------- ------- ------------------
<S> <C> <C> <C>
Fiscal year ended August 31, 1996:
Standardized Return*....................... 12.07% NA 15.52%
Non-Standardized Return.................... 17.35% NA 16.52%
Inception*** to August 31, 1996:
Standardized Return*....................... 11.99% 1.20% 12.31%
Non-Standardized Return.................... 13.56% 3.80% 12.31%
</TABLE>
- --------
* All Standardized Return figures for Class A shares reflect deduction of
the current maximum sales charge of 4.5%. 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.

** The inception date for the Class B shares of Balanced Fund was December
12, 1986. The inception dates for Class A shares and Class C shares of
Balanced Fund were July 1, 1991 and July 2, 1992, respectively.

*** The inception date for Class C shares of Tactical Allocation Fund was July
22, 1992. The inception dates for Class A shares and Class B shares of
Tactical Allocation Fund were May 10, 1993 and January 30, 1996,
respectively.

OTHER INFORMATION. In Performance Advertisements, each Fund may compare its
Standardized Return and/or its Non-Standardized Return with data published by
Lipper Analytical Services, Inc. ("Lipper") for flexible portfolio funds; CDA
Investment Technologies, Inc. ("CDA"); Wiesenberger Investment Companies
Service ("Wiesenberger"); Investment Company Data Inc. ("ICD"); or Morningstar
Mutual Funds ("Morningstar"); or with the performance of recognized stock and
other indexes, including (but not limited to) the Standard & Poor's 500
Composite Stock Price Index, the Dow Jones Industrial Average, the Morgan
Stanley International Capital World Index, the Lehman Brothers 20+ Year
Treasury Bond Index, the Lehman Brothers Government/Corporate Bond Index, the
Salomon Brothers Non-U.S. World Government Bond Index, and changes in the
Consumer Price Index as published by the U.S. Department of Commerce. Each
Fund also may refer in such materials to mutual fund performance rankings and
other data, such as comparative asset, expense and fee levels, published by
Lipper, CDA, Wiesenberger, ICD or Morningstar. Performance Advertisements also
may refer to discussions of the Funds and comparative mutual fund data

43
<PAGE>

and ratings reported in independent periodicals, including (but not limited
to) 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.

Each Fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on the Fund investment are
reinvested by being paid in additional Fund shares, any future income or
capital appreciation of the Fund would increase the value, not only of the
original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid
in cash.

Each Fund may also compare its performance with the performance of bank
certificates of deposits (CDs) as measured by the CDA Investment Technologies,
Inc. Certificate of Deposit Index, the Bank Rate Monitor National Index and
the averages of yields of CDs of major banks published by Banxquote (R) Money
Markets. In comparing a Fund's 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. Fund shares are not
insured or guaranteed by the U.S. government and returns thereon and net asset
value will fluctuate. The debt securities held by each Fund generally have
longer maturities than most CDs and may reflect interest rate fluctuations for
longer term securities. An investment in either Fund involves greater risks
than an investment in either a money market fund or a CD.

TAXES

In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code, each Fund 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 gain) ("Distribution Requirement") and must meet several
additional requirements. With respect to each Fund, these requirements include
the following: (1) the Fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of securities, or other
income (including gains from options and futures) derived with respect to its
business of investing in securities ("Income Requirement"); (2) the Fund must
derive less than 30% of its gross income each taxable year from the sale or
other disposition of securities, options or futures held for less than three
months ("Short-Short Limitation"); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. government securities, securities of
other RICs and other securities, with these other securities limited, in
respect of any one issuer, to an amount that does not exceed 5% of the value
of the Fund's total assets and that does not represent more than 10% of the
issuer's outstanding voting securities; and (4) at the close of each quarter
of the Fund's taxable year, not more than 25% of the value of its total assets
may be invested in securities (other than U.S. government securities or the
securities of other RICs) of any one issuer.

Dividends and other distributions declared by each Fund 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 Fund and received by
the shareholders on December 31 of that year if the distributions are paid by
the Fund during the following January. Accordingly, those distributions will
be taxed to shareholders for the year in which that December 31 falls.

44
<PAGE>

A portion of the dividends from each Fund's investment company taxable
income (whether paid in cash or in additional Fund shares) may be eligible for
the dividends-received deduction allowed to corporations. The eligible portion
may not exceed the aggregate dividends received by the Fund from U.S.
corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the alternative minimum tax.

If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received 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.

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

Balanced Fund may invest in the stock of "passive foreign investment
companies" ("PFICs") if such stock is denominated in U.S. dollars and
otherwise is a permissible investment. A PFIC is a foreign corporation that,
in general, meets either of the following tests: (1) at least 75% of its gross
income is passive or (2) an average of at least 50% of its assets produce, or
are held for the production of, passive income. Under certain circumstances,
the Fund will be subject to federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain from disposition
of such stock (collectively "PFIC income"), plus interest thereon, even if the
Fund distributes the PFIC income as a taxable dividend to its shareholders.
The balance of the PFIC income will be included in the Fund's investment
company taxable income and, accordingly, will not be taxable to it to the
extent that income is distributed to its shareholders. If the Fund invests in
a PFIC and elects to treat the PFIC as a "qualified electing fund" ("QEF"),
then in lieu of the foregoing tax and interest obligation, the Fund will be
required to include in income each year its pro rata share of the QEF annual
ordinary earnings and net capital gain (the excess of net long-term capital
gain over net short-term capital loss)--which likely would have to be
distributed to satisfy the Distribution Requirement and avoid imposition of
the Excise Tax--even if those earnings and gain are not distributed to the
Fund by the QEF. In most instances it will be very difficult, if not
impossible, to make this election because of certain requirements thereof.

Pursuant to proposed regulations, open-end RICs, such as Balanced Fund,
would be entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-to-market," in this context, means recognizing as gain for each
taxable year the excess, as of the end of that year, of the fair market value
of each such PFIC's stock over the owner's adjusted basis in that stock
(including mark-to-market gain for each prior year for which an election was
in effect).

The use of hedging and option income strategies, such as writing (selling)
and purchasing options and futures, involves complex rules that will determine
for income tax purposes the character and timing of recognition of the gains
and losses each Fund realizes in connection therewith. Gains from options and
futures will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures will be subject to
the Short-Short Limitation if they are held for less than three months.

45
<PAGE>

during the period of the hedge for purposes of determining whether the Fund
satisfies the Short-Short Limitation. Thus, only the net gain (if any) from
the designated hedge will be included in gross income for purposes of that
limitation. Each Fund will consider whether it should seek to qualify for this
treatment for its hedging transactions. To the extent the Fund does not
qualify for this treatment, it may be forced to defer the closing out of
certain options and futures beyond the time when it otherwise would be
advantageous to do so, in order for the Fund to continue to qualify as a RIC.

Balanced Fund may acquire zero coupon securities or other securities issued
with original issue discount. As a holder of such securities, the Fund must
include in its gross income the portion of the original issue discount that
accrues on the securities during the taxable year, even if the Fund receives
no corresponding payment on them during the year. Because the Fund annually
must distribute substantially all of its investment company taxable income,
including any accrued original issue discount, in order to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax, the Fund may
be required in a particular year to distribute as a dividend an amount that is
greater than the total amount of cash it actually receives. Those
distributions will be made from the Fund's cash assets or from the proceeds of
sales of portfolio securities, if necessary. The Fund may realize capital
gains or losses from those sales, which would increase or decrease its
investment company taxable income and/or net capital gain. In addition, any
such gains may be realized on the disposition of securities held for less than
three months. Because of the Short-Short Limitation, any such gains would
reduce the Fund's ability to sell other securities held for less than three
months that it might wish to sell in the ordinary course of its portfolio
management.

46
<PAGE>

OTHER INFORMATION

Prior to August 1995, Balanced Fund was named "PaineWebber Asset Allocation
Fund." Prior to November 1, 1995, Tactical Allocation Fund was named "Mitchell
Hutchins/Kidder, Peabody Asset Allocation Fund" and prior to February 13,
1995, it was named "Kidder, Peabody Asset Allocation Fund." Prior to November
10, 1995, Tactical Allocation Fund's Class C shares were called "Class B"
shares and Balanced Fund's Class C shares were called "Class D" shares.

CLASS-SPECIFIC EXPENSES. Each Fund might determine to allocate certain of
its expenses (in addition to distribution fees) to the specific classes of the
Fund's shares to which those expenses are attributable. For example, Class B
shares of a Fund bear higher transfer agency fees per shareholder account than
those borne by Class A or Class C 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. Moreover, the tracking and calculations required by the
automatic conversion feature of the Class B shares will cause the Transfer
Agent to incur additional costs. 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
Ave., N.W., Washington, D.C., 20036-1800, serves as counsel to the Corporation
and the Trust. Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber
and Mitchell Hutchins in connection with other matters.

INDEPENDENT AUDITORS. Price Waterhouse LLP, 1177 Avenue of the Americas, New
York, New York 10036, serves as Balanced Fund's independent accountants. Ernst
& Young LLP, 787 Seventh Avenue, New York, New York 10019, serves as Tactical
Allocation Fund's independent auditors.

FINANCIAL STATEMENTS

Each Fund's Annual Report to Shareholders for the most recent fiscal year is
a separate document supplied with this Statement of Additional Information and
the financial statements, accompanying notes and report of independent
accountants or independent auditors appearing therein are incorporated herein
by this reference.

47
<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
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues;
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities; A. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime
in the future; Baa. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well; Ba. Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class; B. Bonds which are rated B
generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.

Note: Moody's may apply 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. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong; AA. Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the high-
est rated issues only in small degree; A. Debt rated A has a strong capacity
to pay interest and repay principal although it is somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions
than debt in higher rated categories; BBB. Debt rated BBB is regarded as hav-
ing an adequate capacity to pay interest and repay principal. Whereas it nor-
mally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in higher
rated categories; BB, B. Debt rated BB or B is regarded as having predomi-
nantly speculative characteristics with respect to capacity to pay interest
and repay principal. BB indicates the least degree of speculation and B a
somewhat higher degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large uncer-
tainties or major exposures to adverse conditions.

A-1
<PAGE>

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

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

DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS

PRIME-1. Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well established industries; high rates of return
on funds employed; conservative capitalization structure with moderate
reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; well
established access to a range of financial markets and assured sources of
alternate liquidity; PRIME-2. Issuers rated Prime-2 (or supporting
institutions) have a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, may be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.

DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS

A-1. This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation; A-
2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.

A-2
<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 EITHER FUND OR ITS DISTRIBUTOR. THE
PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN
OFFERING BY EITHER FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.

-----------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions..................................... 1
Hedging and Related Strategies........................................... 12
Directors, Trustees and Officers; Principal Holders of Securities........ 20
Investment Advisory and Distribution Arrangements........................ 29
Portfolio Transactions................................................... 35
Reduced Sales Charges, Additional Exchange and Redemption Information and
Other Services.......................................................... 37
Conversion of Class B Shares............................................. 41
Valuation of Shares...................................................... 41
Performance Information.................................................. 42
Taxes.................................................................... 43
Other Information........................................................ 47
Financial Statements..................................................... 47
Appendix ................................................................ A-1
</TABLE>

PAINEWEBBER BALANCED FUND

PAINEWEBBER
TACTICAL ALLOCATION FUND

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

Statement of Additional Information January 1, 1997

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

PAINEWEBBER
<PAGE>

- -------------------------------=================--------------------------------

PaineWebber Balanced Fund
PaineWebber Tactical Allocation Fund
Class Y Shares
1285 Avenue of the Americas, New York, NY 10019

Prospectus -- January 1, 1997

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A Statement of Additional Information dated January 1, 1997 has been filed with
the Securities and Exchange Commission and is legally part of this Prospectus.
The Statement of Additional Information can be obtained without charge, and
further inquiries can be made, by contacting an individual Fund, your
investment executive at PaineWebber or one of its correspondent firms or by
calling toll-free 1-800-647-1568.

The Class Y shares described in this Prospectus are currently offered for sale
only to a limited group of investors. See "How to Buy Shares."

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
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

<PAGE>

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PaineWebber Tactical Allocation Fund
Balanced Fund

Table of Contents
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<TABLE>
<CAPTION>
Page
----
<S> <C>
The Funds at a Glance...................................................... 3
Expense Table.............................................................. 5
Financial Highlights....................................................... 6
Investment Objectives & Policies........................................... 7
Investment Philosophy & Process............................................ 8
Performance................................................................ 10
The Funds' Investments..................................................... 11
How to Buy Shares.......................................................... 16
How to Sell Shares......................................................... 17
Management................................................................. 18
Determining the Shares' Net Asset Value.................................... 19
Dividends & Taxes.......................................................... 19
General Information........................................................ 20
</TABLE>

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Prospectus Page 2
<PAGE>

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PaineWebber Balanced Fund Tactical Allocation Fund

The Funds at a Glance
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BALANCED FUND

INVESTMENT OBJECTIVE: High total return with low volatility.

RISKS: Equity securities historically have shown greater growth potential than
other types of securities, but they have also shown greater volatility.
Because the Fund invests in equity securities, its price will rise and fall.
Certain investment grade debt securities in which the Fund may invest have
speculative characteristics. The debt instruments in which the Fund may invest
are subject to interest rate risk, which means that their prices can be
expected to decrease when interest rates rise. The Fund may invest in
mortgage- and asset-backed securities, which involve additional risks, such as
those relating to the prepayment of principal on the underlying obligations.
The Fund may invest in U.S. dollar denominated securities of foreign
companies, which involve more risk than investing in the securities of U.S.
companies. The Fund also may invest up to 10% of its total assets in high
yield, high risk convertible securities, which are considered predominantly
speculative and involve major risk exposure to adverse conditions. The Fund
may use derivatives, such as options and futures, in its investment
activities, which may involve additional risks. Investors may lose money by
investing in the Fund; your investment is not guaranteed.

SIZE: On November 30, 1996, the Fund had over $197.8 million in assets.

TACTICAL ALLOCATION FUND

INVESTMENT OBJECTIVE: Total return, consisting of long-term capital
appreciation and current income.

SIZE: On November 30, 1996, the Fund had over $209.4 million in assets.

MANAGEMENT

WHO SHOULD INVEST

BALANCED FUND is for investors who want high total return with low volatility
through investments in

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Prospectus Page 3

<PAGE>

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PaineWebber Balanced Fund Tactical Allocation Fund

The Funds at a Glance
(Continued)
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equity securities, investment grade bonds and money market instruments. The
Fund is designed for investors who want an investment that maintains a fixed
income allocation at all times, yet has the flexibility to change its
investment mix in response to changing market conditions. Over time, the 25%
minimum in fixed income investments should result in a lower risk profile for
the Fund than if it could invest 100% in stocks.

See page for a summary of the differences between Balanced Fund and
Tactical Allocation Fund.

HOW TO PURCHASE CLASS Y SHARES

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

The price is the net asset value next calculated after PaineWebber's New York
City headquarters or the Transfer Agent receives the purchase order.

Investors do not pay an initial sales charge when they buy Class Y shares.
100% of their purchase is immediately invested. Investors also do not pay a
redemption fee or contingent deferred sales charge when they sell Class Y
shares.

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Prospectus Page 4
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PaineWebber Balanced Fund Tactical Allocation Fund

Expense Table
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The following tables are intended to assist investors in understanding the
expenses associated with investing in Class Y shares of the Funds.

<TABLE>
<CAPTION>
CLASS Y
-------
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Charge on Purchases of Shares (as a % of offering
price)............................................................... None
Sales Charge on Reinvested Dividends (as a % of offering price)....... None
Maximum Contingent Deferred Sales Charge (as a % of net asset value at
the time of purchase or sale, whichever is less)..................... None
Maximum Annual Investment Advisory Fee Payable by Shareholders through
INSIGHT Investment Advisory Program ("Insight") (as a % of average
daily value of shares held) (1)...................................... 1.50%
ANNUAL FUND OPERATING EXPENSES (as a % of average net assets) (2)
BALANCED FUND
Management Fees....................................................... 0.75%
12b-1 Fees............................................................ 0.00
Other Expenses (estimated)............................................ 0.34
----
Total Operating Expenses (estimated).................................. 1.09%
====
TACTICAL ALLOCATION FUND
Management Fees....................................................... 0.50%
12b-1 Fees............................................................ 0.00
Other Expenses........................................................ 0.45
----
Total Operating Expenses.............................................. 0.95%
====
</TABLE>
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(1)Participation in INSIGHT is subject to payment of an advisory fee at the
maximum annual rate of 1.50% of assets held through INSIGHT (generally
charged quarterly in advance), which may be charged to the INSIGHT
participant's PaineWebber account. This account charge is not included in
the table.

(2)See "Management" for additional information. The fees and expenses for
Tactical Allocation Fund are those actually incurred for the fiscal year
ended August 31, 1995. The fees and expenses for Balanced Fund are
estimated based on the expenses incurred by the Class A shares of that Fund
for the period March 31, 1996 to August 31, 1996.

EXAMPLE OF EFFECT OF FUND EXPENSES

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

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

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
BALANCED FUND................................... $26 $81 $138 $292
TACTICAL ALLOCATION FUND........................ $10 $30 $ 53 $117
</TABLE>

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Prospectus Page 5
<PAGE>
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PaineWebber Balanced Fund Tactical Allocation Fund

Financial Highlights
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TACTICAL ALLOCATION FUND

The following table provides investors with data and ratios for one Class Y
share for each of the periods shown. This information is supplemented by the
financial statements, accompanying notes and the report of Ernst & Young LLP,
independent auditors, which appear in the Fund's Annual Report to Shareholders
for the fiscal year ended August 31, 1996, and are incorporated by reference
into the Statement of Additional Information. The financial statements and
notes, as well as the financial information in the table below relating to
each of the two fiscal years ended August 31, 1996 and August 31, 1995, have
been audited by Ernst & Young LLP. The financial information for the year
ended August 31, 1994 and the prior periods was audited by other auditors,
whose report on this data was unqualified. Further information about the
Fund's performance is also included in the Annual Report to Shareholders,
which may be obtained without charge by calling 1-800-647-1568.

During the fiscal year ended August 31, 1996 no, Class Y shares for Balanced
Fund were outstanding and thus no financial information was available.

<TABLE>
<CAPTION>
TACTICAL ALLOCATION FUND
------------------------------------------
CLASS Y
------------------------------------------
FOR THE PERIOD
FOR THE YEARS ENDED MAY 10, 1993+
AUGUST 31, TO AUGUST 31,
-------------------------- --------------
1996 1995** 1994 1993
------- ------- ------- --------------
<S> <C> <C> <C> <C>
Net asset value, beginning of peri-
od................................. $ 14.88 $ 13.79 $ 13.52 $ 12.90
------- ------- ------- -------
Net investment income............... 0.30 0.23 0.25 0.09
Net realized and unrealized gains
from investment transactions....... 2.24 2.09 0.33 0.60
------- ------- ------- -------
Net increase from investment opera-
tions.............................. 2.54 2.32 0.58 0.69
------- ------- ------- -------
Dividends from net investment in-
come............................... (0.16) (0.26) (0.27) (0.07)
Distributions from net realized
gains from investment
transactions....................... (1.06) (0.97) (0.04) --
------- ------- ------- -------
Total dividends and distributions to
shareholders....................... (1.22) (1.23) (0.31) (0.07)
------- ------- ------- -------
Net asset value, end of period...... $ 16.20 $ 14.88 $ 13.79 $ 13.52
======= ======= ======= =======
Total investment return (1)......... 17.70% 18.79% 4.41% 5.30%
======= ======= ======= =======
Ratios/ supplemental data:
Net assets, end of period (000's).. $12,803 $ 2,506 $ 3,880 $ 3,379
Expenses to average net assets..... 0.95% 1.23% 0.88% 0.81%*
Net investment income to average
net assets........................ 1.38% 1.86% 1.90% 1.96%*
Portfolio turnover rate............ 6% 53% 4% 0%
Average commission rate paid per
share on common stock investments
purchased/sold (2)................ $0.0250 -- -- --
</TABLE>
- -------
+ Commencement of issuance of shares.
* Annualized.
** Investment advisory functions for the Fund were transferred from Kidder
Peabody Asset Management, Inc. to Mitchell Hutchins on February 13, 1995.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. Total investment
returns for periods of less than one year have not been annualized.
(2) Disclosure effective for fiscal years beginning on or after September 1,
1995.

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Prospectus Page 6
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PaineWebber Balanced Fund Tactical Allocation Fund

Investment Objectives & Policies
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BALANCED FUND

The Fund may invest in a broad range of:

. Equity securities issued by companies believed by Mitchell Hutchins to have
the potential for rapid earnings growth;

. High quality money market securities.

TACTICAL ALLOCATION FUND

The performance of the Fund's equity portion is intended to replicate that of
the S&P 500 Index before deducting operating expenses.

* * * *

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

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Prospectus Page 7
<PAGE>

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PaineWebber Balanced Fund Tactical Allocation Fund

Investment Philosophy & Process

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BALANCED FUND

. Regularly surveys market participants and generates a consensus forecast of
economic variables affecting returns on equity securities, bonds and money
market instruments; and

. Applies fundamental valuation techniques to the consensus data to determine
the asset allocation it believes to be optimal.

The Fund uses the following investment process to determine the individual
securities for each portion of the Fund:

--VALUE: projected dividends, cash flow, earnings and book value;

--MOMENTUM: earnings and price to identify companies that could surprise on
the upside; and

--ECONOMIC SENSITIVITY: to forecast how different equity securities and
industries may perform under various economic scenarios.

. MONEY MARKET INSTRUMENTS. Mitchell Hutchins' decision to use these
securities is based on its judgment of how they can further the Fund's
investment objective.

TACTICAL ALLOCATION FUND

The basic premise of the Tactical Allocation Model is that investors accept
the risk of owning stocks, measured as volatility of return, because they
expect a

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Prospectus Page 8
<PAGE>

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PaineWebber Balanced Fund Tactical Allocation Fund

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return advantage. This expected return advantage of owning stocks is called
the equity risk premium ("ERP"). The Model projects the stock market's
expected ERP based on several factors including:

. current price of stocks and their expected future dividends;

.economic statistics;

. five-year, "bottom-up" company earnings projections; and

.yield-to-maturity of the one-year Treasury bill.

Asset reallocations are made on the first business day of each month. If no
reallocation of assets is dictated by the Model, any material amounts
resulting from appreciation or receipt of dividends, distributions, interest
payments and proceeds from securities maturing in each of the asset classes
are reallocated (or "rebalanced") to the extent practicable to re-establish
the Model's recommended asset allocation mix.

The Fund deviates from the recommendations of the Model only to the extent
necessary to:

. Qualify as a regulated investment company for Federal income tax purposes.
See "Dividends & Taxes."

As a result, even if the Model does not recommend an allocation to cash, the
Fund still may hold cash.

As of August 31, 1996, 100% of the Fund's assets were allocated to stocks, and
as of February 29, 1996, the Fund's assets were allocated as follows: 99% to
stocks, 0% to bonds and 1% to cash.

DIFFERENCES BETWEEN BALANCED FUND AND TACTICAL ALLOCATION FUND

<TABLE>
<CAPTION>
-------------------------------------------------------------------
BALANCED FUND TACTICAL ALLOCATION FUND
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Objective High total return with low Total return, consisting of long-
volatility term capital appreciation and
current income.
- -----------------------------------------------------------------------------------------------
Asset Allocation Decision Based on Mitchell Hutchin Based on Mitchell Hutchins
fundamental valuations for each Tactical Allocation Model.
asset class using its consensus
forecast for certain economic
variables.
- -----------------------------------------------------------------------------------------------
Asset Mix Fixed income allocation: at Tactical Allocation Model signals
least 25% at all times. a stock segment of 100%, 75%,
50%, 25% or 0% and selects bonds
or cash for balance. Fund may
deviate from Model only to pay
its expenses, dividends and other
obligations.
- -----------------------------------------------------------------------------------------------
Stock Selection Discretionary, selection is When there is a stock allocation,
based on Mitchell Hutchins invests in about 450 of 500
evaluates companies' potential common stocks that make up the
for rapid earnings growth. Standard & Poor's 500 Index.
- -----------------------------------------------------------------------------------------------
Fixed Income Selection Discretionary, may select from When there is a bond allocation
broad range of debt securities five-year U.S. Treasury notes.
with government or private When there is a cash allocation
issuers. Aims for a dollar- 30-day U.S. Treasury bills.
weighted average maturity of
three to ten years.
</TABLE>

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Prospectus Page 9
<PAGE>

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PaineWebber Balanced Fund Tactical Allocation Fund

Performance
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This chart shows the total returns for Class Y shares of Tactical Allocation
Fund. Past results are not a guarantee of future results. No Class Y shares for
Balanced Fund were outstanding during 1996 so no performance is presented for
that Fund. Average annual returns for periods from inception through the Fund's
fiscal year end are shown below the performance chart.

TACTICAL ALLOCATION FUND
As Class Y shares commenced operations
on May 10, 1993, the 1993 return
represents the period from May 10, 1993
to December 31, 1993.

[GRAPH APPEARS HERE]

5/10/93 0%
12/31/93 6.65%
12/31/94 -0.28%
12/31/95 35.48%

AVERAGE ANNUAL RETURNS
As of August 31, 1996
<TABLE>
<CAPTION>
CLASS Y
-------
<S> <C>
Inception Date......................................................... 5/10/93
One Year............................................................... 17.70%
Life................................................................... 13.88%
</TABLE>

PERFORMANCE INFORMATION

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

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Prospectus Page 10
<PAGE>

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PaineWebber Balanced Fund Tactical Allocation Fund

The Funds' Investments

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BALANCED FUND

Mortgage-backed securities include:

. Single- and multi-class pass-through securities, representing pooled debt
obligations repackaged as shares, that pass income from debtors through the
intermediary to investors;

. Collateralized mortgage obligations ("CMOs"), which are more complex
versions of mortgage-backed bonds. Evaluating the risks and rewards of CMOs
requires special knowledge.

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Prospectus Page 11
<PAGE>

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PaineWebber Balanced Fund Tactical Allocation Fund

Because zero coupon securities bear no interest and holders do not receive
interest payments, they are generally more sensitive to changes in interest
rates than other U.S. government securities. For example, when interest rates
fall, the value of zero coupon securities rises more rapidly than bonds paying
out interest on a current basis because the zero coupon bonds have locked in a
particular rate of reinvestment that becomes more attractive the further rates
fall. However, when interest rates rise, their value falls more dramatically.

MONEY MARKET INSTRUMENTS in which the Fund may invest include:

. U.S. Treasury bills and other obligations issued or guaranteed as to
interest and principal by the U.S. government, its agencies and
instrumentalities;

. Obligations of U.S. banks (including certificates of deposit and bankers'
acceptances) with total assets in excess of $1.5 billion at the time of
purchase;

. Commercial paper and other short-term corporate obligations; and

. Variable and floating-rate securities and repurchase agreements.

TACTICAL ALLOCATION FUND

STOCK PORTION. In its stock portion, the Fund attempts to duplicate, before
the deduction of operating expenses, the investment results of the S&P 500
Index by investing in approximately 450 of the 500 common stocks included in
that index. The S&P 500 Index, which is chosen by S&P on a statistical basis
and may change from time to time, emphasizes large capitalization stocks and
is based on such factors as the market capitalization and trading activity of
each stock and its adequacy as a representative of stocks in a particular
industry sector. The Fund attempts to achieve a correlation between the
performance of the stock portion and that of the S&P 500 Index of at least
0.95, before the deduction of operating expenses (a correlation of 1.00 would
be perfect, which would mean that the net asset value of the stock portion
increased or decreased in exactly the same proportion as changes in the
Index).

RISKS

INTEREST RATE AND CREDIT RISKS. Interest rate risk is the risk that interest
rates will rise and the prices of bonds and U.S. government securities will
fall, lowering the value of the Funds' investments. Long-term bonds, including
U.S. government securities, are generally more sensitive to interest rate
changes than short-term bonds, including U.S. government securities. Adverse
changes in economic conditions can affect an issuer's ability to pay principal
and interest.

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Prospectus Page 12
<PAGE>

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PaineWebber Balanced Fund Tactical Allocation Fund

DERIVATIVES. Some of the instruments in which the Funds may invest may be
referred to as "derivatives" because their value depends on (or "derives"
from) the value of an underlying asset, reference rate or index. These
instruments include options, futures contracts, interest rate protection
contracts and similar instruments that may be used in hedging and related
strategies. There is only limited consensus as to what constitutes a
"derivative" security. However, in Mitchell Hutchins' view, derivative
securities also include "stripped" securities and specially structured types
of mortgage- and asset-backed securities, such as IOs and POs. 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 takes these risks into account in its
management of the Funds.

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

BALANCED FUND

The Fund may invest up to 10% of its total assets in convertible bonds rated
lower than investment grade, that is, below BBB by S&P or Baa by Moody's, but
no lower than B by S&P or Moody's. These bonds, which are commonly referred to
as "junk bonds", are considered to be predominantly speculative with respect
to the issuer's ability to pay interest and repay principal and may be more
sensitive to adverse conditions. The Fund's policy of investing a portion of
its assets in lower rated securities thus entails greater risks than those
associated with investment in higher rated securities. The Fund also may
invest in securities that are comparably rated by another NRSRO and unrated
securities deemed by Mitchell Hutchins to be of comparable quality.

RISKS OF MORTGAGE- AND ASSET-BACKED SECURITIES. The yield characteristics of
the mortgage- and asset-backed securities in which the Fund may invest differ
from those of traditional debt securities. Among the major differences are
that interest and principal payments are made more frequently on mortgage- and
asset-backed securities (usually monthly) and that principal may be prepaid 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 may
benefit less than other fixed income securities from declining interest rates
because of the risk of prepayment. Actual prepayment experience may cause the
yield of mortgage-backed securities to differ from the assumed average life
yield. Reinvestments of prepayments may occur at lower interest rates than the
original investment, thus adversely affecting the Fund's yield.

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Prospectus Page 13
<PAGE>

- ------------------------------===================------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund

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

See Appendix B to the Statement of Additional Information for more information
concerning the types of mortgage-backed securities in which the Fund may
invest.

TACTICAL ALLOCATION FUND

LIMITS OF ASSET ALLOCATION STRATEGY. Although it seeks total return,
consisting of both capital appreciation and current income, in following its
asset allocation strategy, the Fund may not achieve as high a level of either
capital appreciation or current income as a fund that has only one of those
objectives as its primary objective. In addition, the need to qualify as a
regulated investment company for federal income tax purposes may limit the
Fund's ability to adhere rigidly to the recommendations of the Model. See
"Dividends & Taxes." In addition, the Fund is also subject to the risk that
the Model may not correctly predict the appropriate times to shift the Fund's
assets from one type of investment to another.

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Prospectus Page 14
<PAGE>

- ------------------------------===================------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund

Prospectus Page 15

INVESTMENT TECHNIQUES AND STRATEGIES

STRATEGIC INVESTMENTS. In an attempt to reduce the overall risk of its
investments, known as hedging or to enhance income or return, each Fund may
use certain types of strategic investments. These investments involve
derivative contracts, including options (on securities, futures and indexes)
and futures contracts (on stock indexes and debt securities). In addition, new
financial products and risk management techniques continue to be developed and
may be used if consistent with the Funds' investment objectives and policies.
Use of these strategies solely to enhance income may be considered a form of
speculation. Each Fund also may enter into interest rate swap agreements and
certain other interest rate protection transactions to preserve a return or
spread on a particular investment or portion of its portfolio or to protect
against an increase in the price of securities the Fund anticipates purchasing
at a later date. The Funds' ability to use the strategies may be limited by
market conditions, regulatory limits and tax considerations. The Statement of
Additional Information for the Funds contains further information on these
strategies.

The Funds might not use any strategic instrument, and there can be no
assurance that any strategy used will succeed. If Mitchell Hutchins is
incorrect in its judgment on interest rates, market values or other economic
factors in using a particular strategic instrument, a Fund might 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 use strategic instruments are different
from those needed to select securities for the Funds,

. the possibility of imperfect correlation, or even no correlation, between
price movements of strategic instruments and price movements of the
securities being hedged,

. possible constraints on a Fund's ability to purchase or sell portfolio
investments at advantageous times due to the need for the Fund to "cover"
or to segregate securities, and

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

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

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

unrelated to the coupon rate or maturity of the purchased securities. Risks
associated with repurchase agreements include a possible decline in the value
of the underlying securities and delays and costs to the Fund if the other
party to the repurchase agreement becomes insolvent.

- ------------------------------===================------------------------------
Prospectus Page 15
<PAGE>

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PaineWebber Balanced Fund Tactical Allocation Fund

How to Buy Shares
- --------------------------------------------------------------------------------

interest on them until they are delivered, but it would immediately assume the
risks of ownership, including the risk of price fluctuation. Each Fund may
borrow money for temporary or emergency purposes, but not in excess of 10%
(Balanced Fund) or 20% (Tactical Allocation Fund) of its total assets,
including (in the case of Balanced Fund) reverse repurchase agreements
involving up to 5% of its total assets.
Class Y shares are sold to eligible investors at the net asset value next
determined after the purchase order is received at PaineWebber's New York City
headquarters or by PFPC Inc., the Funds' transfer agent ("Transfer Agent"). No
initial or contingent deferred sales charge is imposed, nor are Class Y shares
subject to rule 12b-1 distribution or service fees. The Funds and Mitchell
Hutchins reserve the right to reject any purchase order and to suspend the
offering of the Class Y shares for a period of time. Mitchell Hutchins, the
distributor for each Fund's Class Y shares, has appointed PaineWebber to serve
as the exclusive dealer for each Fund's Class Y shares.

INSIGHT

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

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

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

ACQUISITION OF CLASS Y SHARES BY OTHERS

Present holders of Class Y shares of Tactical Allocation Fund who are not
current INSIGHT participants may not purchase additional Class Y shares of that
Fund. This category includes former employees of Kidder, Peabody & Co.,
Incorporated ("Kidder, Peabody"), their associated accounts and former
directors and trustees of the former Kidder, Peabody mutual funds. Dividends
and other distributions on Class Y shares of Tactical Allocation Fund owned by
these holders will continue to be paid in additional Class Y shares at net
asset value, unless the shareholder has requested cash payments.

In addition, the following investors are eligible to buy Class Y shares:

. 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;

. an employee benefit plan qualified under section 401 (including a salary
reduction plan qualified under section 401(k)) or 403(b) of the Internal
Revenue Code that has either

5,000 or more eligible employees or

$50 million or more in assets; and

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

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

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

<PAGE>

- ------------------------------===================------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund

How to Sell Shares
- -------------------------------------------------------------------------------

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

SALES THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS

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

PaineWebber reserves the right not to honor any request to sell shares, in
which case PaineWebber promptly will forward the request to PFPC Inc., the
Funds' Transfer Agent ("Transfer Agent"), for treatment as described below.

SALES THROUGH THE TRANSFER AGENT

Shareholders also may sell Fund shares through the Transfer Agent.
Shareholders should mail requests to sell shares directly to the Transfer
Agent: PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington,
Delaware 19899. A request to sell shares will be executed at the net asset
value next computed after it is received in "good order," and proceeds from
the sale will be paid within seven days of the receipt of the request.

"Good order" means that the request must be accompanied by the following: (1)
a letter of instruction or a stock assignment specifying the number of shares
or amount of investment to be sold (or that all shares credited to the Fund
account be sold), signed by all registered owners of the shares in the exact
names in which they are registered, (2) a guarantee of the signature of each
registered owner by an eligible institution acceptable to the Transfer Agent
and in accordance with SEC rules, such as a commercial bank, trust company or
member of a recognized stock exchange, (3) other supporting legal documents
for estates, trusts, guardianships, custodianships, partnerships and
corporations and (4) duly endorsed share certificates, if any. Shareholders
are responsible for ensuring that a request to sell shares is received in
"good order."

ADDITIONAL INFORMATION ON SALES

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

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

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

<PAGE>
- ------------------------------===================-------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund

Management
- --------------------------------------------------------------------------------

Balanced Fund is a series of PaineWebber Master Series, Inc. ("Corporation")
and Tactical Allocation Fund is a series of PaineWebber Investment Trust
("Trust"). The board of directors of the Corporation and the board of trustees
of the Trust oversee the Funds' operations and, as part of this overall
management responsibility, oversee various organizations responsible for the
day-to-day management of each Fund. Each board has appointed Mitchell Hutchins
as investment adviser and administrator responsible for the Fund's operations
(subject to the authority of the board).

Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, is the asset management subsidiary of PaineWebber Incorporated, which is
wholly owned by Paine Webber Group Inc., a publicly owned financial services
holding company. On November 30, 1996, Mitchell Hutchins was adviser or sub-
adviser of 30 investment companies with 64 separate portfolios and aggregate
assets of approximately $31.9 billion.

Each board has determined that brokerage transactions for the Fund may be
conducted through PaineWebber or its affiliates in accordance with procedures
adopted by the board.

ABOUT THE INVESTMENT ADVISER

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

T. Kirkham Barneby is responsible for the asset allocation decisions for both
Balanced Fund and Tactical Allocation Fund. He has been responsible for the
day-to-day management of Tactical Allocation Fund since February 1995. 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.

Mark A. Tincher is responsible for the day-to-day management of the equity
portion of Balanced Fund. Mr. Tincher is a managing director and chief
investment officer of equities of Mitchell Hutchins responsible for overseeing
the management of equity investments. From March 1988 to March 1995, Mr.
Tincher worked for Chase Manhattan Private Bank where he was a vice president.
Mr. Tincher directed the U.S. funds management and equity research area at
Chase and oversaw the management of all Chase U.S. equity funds (the Vista
Funds and Trust Investment Funds).

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

Each of these managers first assumed responsibilities with respect to Balanced
Fund in August 1995.

- ------------------------------===================------------------------------
Prospectus Page 18

<PAGE>

- -------------------------------=================-------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund

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

MANAGEMENT FEES & OTHER EXPENSES

Each Fund pays Mitchell Hutchins a monthly fee for its services. For the most
recent fiscal year, Mitchell Hutchins received a monthly fee from Balanced
Fund for these services at the effective annual rate of 0.75% of the Fund's
average daily net assets and from Tactical Allocation Fund at the annual rate
of 0.50% of the Fund's average daily net assets. The management fee payable to
Mitchell Hutchins by Balanced Fund is greater than those paid by most funds.

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

Dividends & Taxes
- -------------------------------------------------------------------------------
DIVIDENDS

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

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

- -------------------------------=================-------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund

TAXES

YEAR-END TAX REPORTING

WITHHOLDING REQUIREMENTS

TAXES ON THE SALE OF FUND SHARES

When shareholders sell (redeem) shares, the sale may result in a taxable gain
or loss. This depends upon whether the shareholders receive more or less than
their adjusted basis for the shares. In addition, if a Fund's shares are
bought within 30 days before or after selling other shares of the Fund at a
loss, all or a portion of that loss will not be deductible and will increase
the basis of the newly purchased shares.

* * * *

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

General Information
- -------------------------------------------------------------------------------
ORGANIZATION

BALANCED FUND

TACTICAL ALLOCATION FUND

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

- -------------------------------=================-------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund

class may differ with respect to sales charges, if any, distribution and/or
service fees, if any, other expenses allocable exclusively to each class,
voting rights on matters exclusively affecting that class, and its exchange
privilege. The different sales charges and other expenses applicable to the
different classes of shares of the Funds will effect the performance of those
classes.

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

VOTING RIGHTS

SHAREHOLDER MEETINGS

The Funds do not intend to hold annual meetings.

REPORTS TO SHAREHOLDERS

CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND AGENT

- ------------------------------==================--------------------------------

PaineWebber Balanced Fund
PaineWebber Tactical Allocation Fund
Class Y Shares

Prospectus -- January 1, 1997

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

. PAINEWEBBER BOND FUNDS . PAINEWEBBER STOCK FUNDS

High Income Fund Capital Appreciation Fund
Investment Grade Income Fund Financial Services Growth Fund
Low Duration U.S. Government Growth Fund
Income Fund Growth and Income Fund
Strategic Income Fund Small Cap Fund
U.S. Government Income Fund Utility Income Fund

. PAINEWEBBER TAX-FREE . PAINEWEBBER GLOBAL FUNDS
BOND FUNDS
Emerging Markets Equity Fund
California Tax-Free Income Fund Global Equity Fund
Municipal High Income Fund Global Income Fund
National Tax-Free Income Fund
New York Tax-Free Income Fund . PAINEWEBBER MONEY MARKET FUND

. PAINEWEBBER ASSET
ALLOCATION FUNDS

Balanced Fund
Tactical Allocation Fund

- ------------------------------==================--------------------------------

<PAGE>

PAINEWEBBER BALANCED FUND
PAINEWEBBER TACTICAL ALLOCATION FUND
CLASS Y SHARES

1285 AVENUE OF THE AMERICAS

NEW YORK, NEW YORK 10019

STATEMENT OF ADDITIONAL INFORMATION

INVESTMENT POLICIES AND RESTRICTIONS

2
<PAGE>

the pools are subject to certain standards, including credit and other
underwriting criteria for individual mortgages included in the pools.

3
<PAGE>

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
schedule distributions on the multi-class mortgage pass-through securities.

4
<PAGE>

5
<PAGE>

6
<PAGE>

7
<PAGE>

8
<PAGE>

paper, other than Section 4(2) paper that Mitchell Hutchins has determined to
be liquid pursuant to guidelines established by the Fund's board. The board
has delegated to Mitchell Hutchins the function of making day-to-day
determinations of liquidity with respect to Section 4(2) paper, pursuant to
guidelines approved by the board that require Mitchell Hutchins to take into
account the same factors described under "Illiquid Securities" above for other
restricted securities and require Mitchell Hutchins to perform the same
monitoring and reporting functions.

9
<PAGE>

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

10
<PAGE>

INVESTMENT LIMITATIONS OF THE FUNDS

FUNDAMENTAL LIMITATIONS. The following investment limitations cannot be
changed for the Funds without the affirmative vote of the lesser of (1) more
than 50% of the outstanding shares of the applicable Fund or (2) 67% or more
of the shares present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy. If a
percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or the amount of total assets will not be considered a
violation of any of the following limitations.

Each Fund will not:

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

11
<PAGE>

NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions may be
changed by the vote of a Fund's board without shareholder approval:

Each Fund may not:

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

HEDGING AND RELATED STRATEGIES

12
<PAGE>

13
<PAGE>

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

14
<PAGE>

(2) There might be imperfect correlation, or even no correlation, between
price movements of a Strategic Instrument and price movements of the
investments being hedged. For example, if the value of a Strategic 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 Strategic Instruments are traded. The effectiveness of hedges
using Strategic Investments in indices will depend on the degree of
correlation between price movements in the index and price movements in the
securities being hedged.

OPTIONS. The Funds may purchase put and call options, and write (sell)
covered put and call options, on specific securities. The purchase of options
can serve to enhance return by increasing or reducing a Fund's exposure to an
asset class without purchasing or selling the underlying securities. The
purchase of call options

15
<PAGE>

serves as a long hedge, and the purchase of put options serves as a short
hedge. Writing covered put or call options can enable a Fund to enhance income
by reason of the premiums paid by the purchasers of such options. In addition,
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 market price of the
security underlying a covered put option declines to less than the exercise
price of the option, minus the premium received, the Fund would expect to
suffer a loss. 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 Fund will
be obligated to sell the security at less than its market value. The
securities or other assets used as cover for OTC options written by the Funds
would be considered illiquid to the extent described above under "Investment
Policies and Restrictions--Illiquid Securities."

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

16
<PAGE>

GUIDELINES FOR OPTIONS. The Funds' use of options is governed by the
following guidelines, which can be changed by each Fund's board without
shareholder vote:

2. The aggregate value of securities underlying put options written by each
Fund, determined as of the date the put options are written, will not exceed
50% of the Fund's net assets.

FUTURES. The Funds may purchase and sell interest rate futures contracts,
stock index futures contracts or debt securities index futures contracts. The
Funds also may purchase put and call options, and write covered put and call
options, on the futures contracts they are allowed to purchase and sell. 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 call options on securities or indices. In addition, Balanced
Fund may purchase or sell futures contracts or options thereon to enhance
return by increasing or reducing the Fund's exposure to an asset class without
purchasing or selling the underlying securities.

17
<PAGE>

other liquid, high-grade debt securities, in an amount generally equal to 10%
or less of the contract value. Margin must also be deposited when writing a
call option on a futures contract, in accordance with applicable exchange
rules. Unlike margin in securities transactions, initial margin on futures
contracts does not represent a borrowing, but rather is in the nature of a
performance bond or good-faith deposit that is returned to the Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
Fund may be required by an exchange to increase the level of its initial
margin payment, and initial margin requirements might be increased generally
in the future by regulatory action.

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.

18
<PAGE>

GUIDELINES FOR FUTURES AND RELATED OPTIONS. The Funds' use of futures and
related options is governed by the following guidelines, which can be changed
by each Fund's board without shareholder vote:

3. The aggregate margin deposits on all futures contracts and options
thereon held at any time by a Fund will not exceed 5% of the Fund's total
assets.

19
<PAGE>

DIRECTORS, TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES

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

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
---------------------- ---------------------- --------------------
<S> <C> <C>
Margo N. Alexander**; 49 Director/Trustee and Mrs. Alexander is president, chief
President executive officer and a director of
Mitchell Hutchins (since January
1995) and an executive vice presi-
dent and a director of PaineWebber.
Mrs. Alexander is president and a
director or trustee of 29 invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Richard Q. Armstrong; 61 Director/Trustee Mr. Armstrong is chairman and prin-
78 West Brother Drive cipal of RQA Enterprises (manage-
Greenwich, CT 06830 ment consulting firm) (since April
1991 and principal occupation since
March 1995). Mr. Armstrong is also
a director of Hi Lo Automotive,
Inc. He was chairman of the board,
chief executive officer and co-
owner of Adirondack Beverages (pro-
ducer and distributor of soft
drinks and sparkling/still waters)
(October 1993- March 1995). Mr.
Armstrong was a partner of The New
England Consulting Group (manage-
ment consulting firm) (December
1992-September 1993). He was manag-
ing director of LVMH U.S. Corpora-
tion (U.S. subsidiary of the French
luxury goods conglomerate, Luis
Vuitton Moet Hennessey Corporation)
(1987-1991) and chairman of its
wine and spirits subsidiary,
Schieffelin & Somerset Company
(1987-1991). Mr. Armstrong is a di-
rector or trustee of 28 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
in- vestment adviser.
</TABLE>

20
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
---------------------- ---------------------- --------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.**; 70 Director/Trustee and Mr. Bewkes is a director of Paine
Chairman of the Webber Group Inc. ("PW Group")
Board of (holding company of PaineWebber and
Directors/Trustees Mitchell Hutchins). Prior to Decem-
ber 1995, he was a consultant to PW
Group. Prior to 1988, he was chair-
man of the board, presi- dent and
chief executive officer of American
Bakeries Company. Mr. Bewkes is
also a director of Interstate Bak-
eries Corporation and NaPro
BioTherapeutics, Inc. Mr. Bewkes is
a director or trustee of 29 invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Richard R. Burt; 49 Director/Trustee Mr. Burt is chairman of Interna-
1101 Connecticut Avenue, N.W. tional Equity Partners (interna-
Washington, D.C. 20036 tional investments and consulting
firm) (since March 1994) and a
partner of McKinsey & Company (man-
agement consulting firm) (since
1991). He is also a director of
American Publishing Company and Ar-
cher-Daniels-Midland Co. (agricul-
tural commodities). He was the
chief negotiator in the Strategic
Arms Reduction Talks with the for-
mer Soviet
Union (1989-1991) and the U.S. Am-
bassador to the Federal Republic of
Germany (1985-1989). Mr. Burt is a
director or trustee of 28 invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Mary C. Farrell**; 47 Director/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 is em-
ployed 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 Busi-
ness. Ms. Farrell is a director or
trustee of 28 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>

21
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
---------------------- ---------------------- --------------------
<S> <C> <C>
Meyer Feldberg; 54 Director/Trustee Dean Feldberg is Dean and Professor
Columbia University of Management of the Graduate
101 Uris Hall School of Business, Columbia Uni-
New York, New York versity. Prior to 1989, he was
10027 president of the Illinois Institute
of Technology. Dean Feldberg is
also a director of AMSCO Interna-
tional Inc. (medical instruments
and supplies), Federated Department
Stores, Inc. and New World Communi-
cations Group Incorporated. Dean
Feldberg is a director or trustee
of 28 investment companies for
which Mitchell Hutchins or Paine-
Webber serves as investment advis-
er.
George W. Gowen; 67 Director/Trustee Mr. Gowen is a partner in the law
666 Third Avenue firm of Dunnington, Bartholow &
New York, New York Miller. Prior to May 1994, he was a
10017 partner in the law firm of Fryer,
Ross & Gowen. Mr. Gowen is a direc-
tor of Columbia Real Estate Invest-
ments, Inc. Mr. Gowen is a director
or trustee of 28 investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Frederic V. Malek; 60 Director/Trustee Mr. Malek is chairman of Thayer Cap-
1455 Pennsylvania Ave- ital Partners (investment bank) and
nue, N.W. Suite 350 a co-chairman and director of CB
Washington, D.C. 20004 Commercial Group Inc. (real es-
tate). From January 1992 to Novem-
ber 1992, he was campaign manager
of Bush-Quayle '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 Manage-
ment Systems, Inc. (management con-
sulting and computer-related serv-
ices), Automatic Data Processing,
Inc., Avis, Inc. (passenger
</TABLE>

22
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
- ---------------------- ---------------------- --------------------
<S> <C> <C>
car rental), FPL Group, Inc. (elec-
tric services), National Education
Corporation and Northwest Airlines
Inc. Mr. Malek is a director or
trustee of 28 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Carl W. Schafer; 60 Director/Trustee Mr. Schafer is president of the At-
P.O. Box 1164 lantic Foundation (charitable foun-
Princeton, New Jersey dation supporting mainly oceano-
08542 graphic exploration and research).
He also is a director of Roadway
Express, Inc. (trucking), The
Guardian Group of Mutual Funds, Ev-
ans Systems, Inc. (a motor fuels,
convenience store and diversified
company), Hidden Lake Gold Mines
Ltd. (gold mining), Electronic
Clearing House, Inc. (financial
transactions processing), Wainoco
Oil Corporation and Nutraceutix
Inc. (biotechnology). Prior to Jan-
uary 1993, Mr. Schafer was chairman
of the Investment Advisory Commit-
tee of the Howard Hughes Medical
Institute. Mr. Schafer is a direc-
tor or
trustee of 28 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
John R. Torell III; 57 Director/Trustee Mr. Torell is chairman of Torell
767 Fifth Avenue Management, Inc. (financial advi-
Suite 4605 sory firm), chairman of Telesphere
New York, NY 10153 Corporation (electronic provider of
financial information), and a part-
ner of Zilkha & Company (merchant
banking and private investment com-
pany). He is the former chairman
and chief executive officer of For-
tune Bancorp (1990-1991 and 1990-
1994, respectively), the former
chairman, president and chief exec-
utive officer of CalFed, Inc. (sav-
ings association) (1988 to 1989)
and former president of Manufactur-
ers Hanover Corp. (bank)
</TABLE>

23
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
- ---------------------- ---------------------- --------------------
<S> <C> <C>
(prior to 1988). Mr. Torell is a
director of American Home Products
Corp., New Colt Inc. (armament man-
ufacturer) and Volt Information
Sciences Inc. Mr. Torell is a di-
rector or trustee of 28 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
T. Kirkham Barneby; 50 Vice President Mr. Barneby is a managing director
and chief investment officer--quan-
titative investments of Mitchell
Hutchins. Prior to September 1994,
he was a senior vice president at
Vantage Global Management. Prior to
June 1993, he was a senior vice
president at Mitchell Hutchins. Mr.
Barneby is a vice president of five
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Teresa M. Boyle; 38 Vice President Ms. Boyle is a first vice president
of Mitchell Hutchins. Prior to No-
vember 1993, she was compliance
manager of Hyperion
Capital Management, Inc., an
investment advisory firm. Prior to
April 1993, Ms. Boyle was a vice
president and manager--legal admin-
istration of Mitchell Hutchins. Ms.
Boyle is a vice president of 29 in-
vestment companies for which Mitch-
ell Hutchins or PaineWebber serves
as investment adviser.
C. William Maher; 35 Vice President and Mr. Maher is a first vice president
Assistant Treasurer and a senior manager of the mutual
fund finance division of Mitchell
Hutchins. Mr. Maher is a vice pres-
ident and assistant treasurer of 29
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Dennis McCauley; 50 Vice President Mr. McCauley is a managing director
(Master Series, and chief investment officer--fixed
Inc.) income of Mitchell Hutchins. Prior
to December 1994, he was director
of fixed income investments of IBM
Corporation.
</TABLE>

24
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
---------------------- ---------------------- --------------------
<S> <C> <C>
Mr. McCauley is a vice president of
18 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Ann E. Moran; 39 Vice President Ms. Moran is a vice president of
and Assistant Mitchell Hutchins. Ms. Moran is a
Treasurer vice president and assistant trea-
surer of 29 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Dianne E. O'Donnell; 44 Vice President and Ms. O'Donnell is a senior vice pres-
Secretary ident and deputy general counsel of
Mitchell Hutchins. Ms. O'Donnell is
a vice presi- dent and secretary of
28 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Emil Polito; 36 Vice President Mr. Polito is a senior vice presi-
dent and director of operations and
control for Mitchell Hutchins. From
March 1991 to September 1993 he was
director of the Mutual Funds Sales
Support and Service Center for
Mitchell Hutchins and PaineWebber.
Mr. Polito is also vice president
of 29 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Susan P. Ryan; 36 Vice President Ms. Ryan is a senior vice president
(Master Series, and portfolio manager of Mitchell
Inc.) Hutchins. Ms. Ryan has been with
Mitchell Hutchins since 1982. Ms.
Ryan is a vice president of five
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Victoria E. Schonfeld; Vice President Ms. Schonfeld is a managing director
46 and general counsel of Mitchell
Hutchins. Prior to May 1994, she
was a partner in the law firm of
Arnold & Porter. Ms. Schonfeld is
a vice president of 29 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>

25
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
- ---------------------- ---------------------- --------------------
<S> <C> <C>
Paul H. Schubert; 33 Vice President Mr. Schubert is a first vice presi-
and Assistant dent and a senior manager of the
Treasurer mutual fund finance division of
Mitchell Hutchins. From August 1992
to August 1994, he was a vice pres-
ident of BlackRock Financial Man-
agement L.P. Prior to August 1992,
he was an audit manager with Ernst
& Young LLP. Mr. Schubert is a vice
president and assistant treasurer
of 29 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Nirmal Singh; 40 Vice President Mr. Singh is a first vice president
(Master Series, and a portfolio manager of Mitchell
Inc.) Hutchins. Prior to September 1993,
he was a member of the portfolio
management team at Merrill Lynch
Asset Management, Inc. Mr. Singh is
a vice president of five investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Julian F. Sluyters; 36 Vice President and Mr. Sluyters is a senior vice presi-
Treasurer dent and the director of the mutual
fund finance division of Mitchell
Hutchins. Prior to 1991, he was an
audit senior manager with Ernst &
Young LLP. Mr. Sluyters is a vice
president and treasurer of 29 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Mark A. Tincher; 41 Vice President Mr. Tincher is a managing director
and chief investment officer--U.S.
equity investments of Mitchell
Hutchins. Prior to March 1995, he
was a vice president and directed
the U.S. funds management and eq-
uity research areas of Chase Man-
hattan Private Bank. Mr. Tincher is
a vice president of 13 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Craig M. Varrelman; 38 Vice President Mr. Varrelman is a first vice presi-
(Master Series, dent and a portfolio manager of
Inc.) Mitchell Hutchins.
</TABLE>

26
<PAGE>

<TABLE>
<CAPTION>
NAME AND ADDRESS*; POSITION BUSINESS EXPERIENCE;
AGE WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
------------------ ---------------------- --------------------
<S> <C> <C>
Mr. Varrelman is a vice president
of five investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Keith A. Weller; 35 Vice President and Mr. Weller is a first vice president
Assistant Secretary and 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 28 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>
- --------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of the
Corporation and the Trust as defined in the 1940 Act by virtue of their
positions with PW Group, PaineWebber and/or Mitchell Hutchins.
The Corporation and the Trust each pays directors/trustees who are not
"interested persons" of the Corporation/Trust $1,500 annually for each series
and $150 for each board meeting and separate meeting of a board committee
(other than committee meetings held on the same day as a board meeting). The
Corporation and Trust each presently has two series and thus pays each such
board member $3,000 annually. In addition, the Corporation and Trust pays any
additional annual amounts due for board or committee meetings. Messrs Feldberg
and Torell serve as chairmen of the audit and contract review committees of
individual funds within the PaineWebber fund complex and receive additional
annual compensation aggregating $15,000 each from the relevant funds. All
board members are reimbursed for any expenses incurred in attending meetings.
Board members and officers of the Corporation/Trust own in the aggregate less
than 1% of the shares of either Fund. Because PaineWebber and Mitchell
Hutchins perform substantially all of the services necessary for the operation
of the Corporation, the Trust and the Funds, the Corporation and the Trust
require no employees. No officer, director or employee of PaineWebber or
Mitchell Hutchins presently receives any compensation from the Corporation or
the Trust for acting as director, trustee or officer.

27
<PAGE>

COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FROM THE
AGGREGATE CORPORATION,
COMPENSATION AGGREGATE THE TRUST
FROM THE COMPENSATION AND THE
NAME OF PERSON, POSITION CORPORATION* FROM THE TRUST* COMPLEX+
- ------------------------ ------------ --------------- ------------
<S> <C> <C> <C>
Richard Q. Armstrong, -- 616 $ 9,000
Director/Trustee...................
Richard R. Burt, Director/Trustee... -- 616 7,750
Meyer Feldberg, Director/Trustee.... $ 2,339 616 106,375
George W. Gowen, Director/Trustee... 2,339 616 99,750
Frederic V. Malek, 2,339 616 99,750
Director/Trustee...................
Carl W. Schafer, Director/Trustee... -- 3,361 118,175
John R. Torell III, -- 616 28,125
Director/Trustee...................
</TABLE>
- --------
Only independent members of the board are compensated by the Corporation or
the Trust and identified above; board members who are "interested persons," as
defined by the 1940 Act, do not receive compensation.

++ Aggregate compensation for the Corporation and the Trust are divided among
other portfolios.

PRINCIPAL HOLDERS OF SECURITIES. The Funds' records as of November 29, 1996
did not indicate that any Shareholder owned more than 5% of any class of a
Fund's shares.

28
<PAGE>

INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS

BALANCED FUND

TACTICAL ALLOCATION FUND

For the fiscal years ended August 31, 1996, August 31, 1995 and August 31,
1994, the Trust paid (or accrued) to Mitchell Hutchins and a prior investment
adviser and administrator management fees of $402,466, $279,950, and $487,304,
respectively, with respect to Tactical Allocation Fund.

Under a service agreement with the Corporation that is reviewed by the
Corporation's board of directors annually, PaineWebber provides certain
services to Balanced Fund not otherwise provided by the Fund's transfer agent.
Pursuant to the service agreement, during the period March 1, 1996 through
August 31, 1996, and the fiscal years ended February 29, 1996, February 28,
1995 and February 28, 1994. PaineWebber earned fees in the amounts of $32,992,
$77,050, $100,272 and $116,755 respectively, with respect to the Fund.

29
<PAGE>

As required by state regulation, Mitchell Hutchins will reimburse each Fund
if and to the extent that the aggregate operating expenses of that Fund exceed
applicable limits in any fiscal year. Currently the most restrictive such
limit applicable to each Fund is 2.5% of the first $30 million of a Fund's
average daily net assets, 2.0% of the next $70 million of its average daily
net assets and 1.5% of its average daily net assets in excess of $100 million.
Certain expenses, such as brokerage commissions, distribution fees, taxes,
interest and extraordinary items, are excluded from this limitation. For the
fiscal years ended February 29, 1996, February 28, 1995 and February 28, 1994
(for Balanced Fund) and for the fiscal years ended August 31, 1995, August 31,
1994 and August 31, 1993 (for Tactical Allocation Fund), no reimbursements
were required pursuant to such limitations for either Fund.

30
<PAGE>

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

Subject to policies established by each board, Mitchell Hutchins is
responsible for the execution of each Fund's portfolio transactions and the
allocation of brokerage transactions. In executing portfolio transactions,
Mitchell Hutchins seeks to obtain the best net results for the Funds, taking
into account such factors as price (including the applicable brokerage
commission or dealer spread), size of order, difficulty of execution and
operational facilities of the firm involved. Generally, bonds are traded on
the OTC market on a "net" basis without a stated commission through dealers
acting for their own account and not as brokers. Prices paid to dealers in
principal transactions 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. Balanced Fund, for the period March 1, 1996
through August 31, 1996, and for the fiscal years ended February 29, 1996,
February 28, 1995, and February 28, 1994, paid $134,453, $335,166, $495,853,
and $540,773, respectively, in aggregate brokerage commissions. Tactical
Allocation Fund, for the fiscal years ended August 31, 1996, August 31, 1995
and August 31, 1994, paid $41,271, $82,091 and $56,965, respectively, in
aggregate brokerage commissions.

Neither Fund has any obligation to deal with any broker or group of brokers
in the execution of portfolio transactions. Each Fund contemplates that,
consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through Mitchell Hutchins or its affiliates,
including PaineWebber. The board of each Fund has adopted procedures in
conformity with Rule 17e-1 under the 1940 Act to ensure that all brokerage
commissions paid to Mitchell Hutchins and its affiliates are reasonable and
fair. Specific provisions in each Advisory Contract authorize Mitchell
Hutchins and any of its affiliates that are members of a national securities
exchange to effect portfolio transactions for each Fund on such exchange and
to retain compensation in connection with such transactions. Any such
transactions will be effected and related compensation paid only in accordance
with applicable SEC regulations. For the fiscal years ended February 29, 1996,
February 28, 1995 and February 28, 1994, Balanced Fund paid $1,350, $7,266 and
$4,900, respectively, in brokerage commissions to PaineWebber. For the period
March 1, 1996 through August 31, 1996, Balanced Fund paid $2,220 in brokerage
commissions to PaineWebber, which represented 0.02% of the total brokerage
commissions paid by that Fund and 0.02% of the aggregate dollar amount of
transactions involving the payment of commissions. For the fiscal year ended
August 31, 1996, August 31, 1995, Tactical Allocation Fund paid no brokerage
commissions to PaineWebber. In prior fiscal years, neither Mitchell Hutchins
nor PaineWebber was an affiliate of Tactical Allocation Fund.

31
<PAGE>

Consistent with the interest of each Fund and subject to the review of its
board, Mitchell Hutchins may cause the Fund to purchase and sell portfolio
securities through brokers who provide the Fund with research, analysis,
advice and similar services. In return for such services, the Fund may pay to
those brokers a higher commission than may be charged by other brokers,
provided that Mitchell Hutchins determines in good faith that such commission
is reasonable in terms either of that particular transaction or of the overall
responsibility of Mitchell Hutchins to the Fund and its other clients and that
the total commissions paid by the Fund will be reasonable in relation to the
benefits to the Fund over the long term. For Balanced Fund's six months ended
August 31, 1996 and fiscal year ended February 28, 1996, Mitchell Hutchins
directed $29,295,885 and $74,360,258 in portfolio transactions to brokers
chosen because they provided research services, for which Balanced Fund paid
$38,779 and $144,391 in commissions.

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

32
<PAGE>

board pursuant to Rule 10f-3 under the 1940 Act. Among other things, these
procedures require that the commission or spread paid in connection with such
a purchase be reasonable and fair, that the purchase be at not more than the
public offering price prior to the end of the first business day after the
date of the public offering and that Mitchell Hutchins or any affiliate
thereof not participate in or benefit from the sale to the Fund.

VALUATION OF SHARES

33
<PAGE>

PERFORMANCE INFORMATION

TOTAL RETURN. Average annual total return quotes ("Standardized Return")
used in each Fund's Performance Advertisements are calculated according to the
following formula:

The following table shows performance information for the Class Y shares of
Tactical Allocation Fund for the periods indicated. All returns for periods of
more than one year are expressed as an average return. As of August 31, 1996,
no Class Y shares of Balanced Fund were outstanding.

<TABLE>
TACTICAL ALLOCATION FUND
<CAPTION>
CLASS Y
-------
<S> <C>
Fiscal year ended August 31, 1996:
Standardized Return*.................................................. 17.70%
Inception** to August 31, 1996:
Standardized Return*.................................................. 13.88
</TABLE>
- --------
* Class Y shares do not impose an initial or contingent deferred sales
charge; therefore, the performance information also represent a quotation
of Non-Standardized Return for the periods shown.

** The inception date for Class Y shares of Tactical Allocation Fund was May
10, 1993.

34
<PAGE>

Companies Service ("Wiesenberger"); Investment Company Data Inc. ("ICD"); or
Morningstar Mutual Funds ("Morningstar"); or with the performance of
recognized stock and other indexes, including (but not limited to) the
Standard & Poor's 500 Composite Stock Price Index, the Dow Jones Industrial
Average, the Morgan Stanley International Capital World Index, the Lehman
Brothers 20+ Year Treasury Bond Index, the Lehman Brothers
Government/Corporate Bond Index, the Salomon Brothers Non-U.S. World
Government Bond Index, and changes in the Consumer Price Index as published by
the U.S. Department of Commerce. Each Fund also may refer in such materials to
mutual fund performance rankings and other data, such as comparative asset,
expense and fee levels, published by Lipper, CDA, Wiesenberger, ICD or
Morningstar. Performance Advertisements also may refer to discussions of the
Funds and comparative mutual fund data and ratings reported in independent
periodicals, including (but not limited to) 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.

TAXES

35
<PAGE>

respect of any one issuer, to an amount that does not exceed 5% of the value
of the Fund's total assets and that does not represent more than 10% of the
issuer's outstanding voting securities; and (4) at the close of each quarter
of the Fund's taxable year, not more than 25% of the value of its total assets
may be invested in securities (other than U.S. government securities or the
securities of other RICs) of any one issuer.

36
<PAGE>

If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease
in value (whether realized or not) of the offsetting hedging position during
the period of the hedge for purposes of determining whether the Fund satisfies
the Short-Short Limitation. Thus, only the net gain (if any) from the
designated hedge will be included in gross income for purposes of that
limitation. Each Fund will consider whether it should seek to qualify for this
treatment for its hedging transactions. To the extent the Fund does not
qualify for this treatment, it may be forced to defer the closing out of
certain options and futures beyond the time when it otherwise would be
advantageous to do so, in order for the Fund to continue to qualify as a RIC.

37
<PAGE>

OTHER INFORMATION

Prior to August 1995, Balanced Fund was named "PaineWebber Asset Allocation
Fund." Prior to November 1, 1995, Tactical Allocation Fund was named "Mitchell
Hutchins/Kidder, Peabody Asset Allocation Fund" and prior to February 13,
1995, it was named "Kidder, Peabody Asset Allocation Fund." Prior to November
10, 1995, Balanced Fund's Class C shares were called "Class D" shares. Prior
to November 10, 1995, Tactical Allocation Fund's Class C shares were called
"Class B" shares and its Class Y shares were called "Class C" shares.

FINANCIAL STATEMENTS

38
<PAGE>

APPENDIX

DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS

DESCRIPTION OF S&P CORPORATE DEBT RATINGS

A-1
<PAGE>

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

DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS

DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS

A-2
<PAGE>

-----------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions....................................... 1
Hedging and Related Strategies............................................. 12
Directors, Trustees and Officers; Principal Holders of Securities.......... 20
Investment Advisory and Distribution Arrangements.......................... 29
Portfolio Transactions..................................................... 31
Valuation of Shares........................................................ 33
Performance Information.................................................... 34
Taxes...................................................................... 35
Other Information.......................................................... 38
Financial Statements....................................................... 38
Appendix................................................................... A-1
</TABLE>

PAINEWEBBER BALANCED FUND

PAINEWEBBER
TACTICAL ALLOCATION FUND

CLASS Y SHARES

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

Statement of Additional Information January 1, 1997

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

PAINEWEBBER
<PAGE>

PART C. OTHER INFORMATION
--------------------------

Item 24. Financial Statements and Exhibits
---------------------------------

(a) Financial Statements: (filed herewith)

PaineWebber Balanced Fund
- -------------------------

Included in part A of this Registration Statement:

Financial Highlights for one Class A share of the Fund for the period March
1, 1996 through August 31, 1996, for each of the four years in the period
ended February 29, 1996 and for the period July 1, 1991 (commencement of
offering) through February 29, 1992.

Financial Highlights for one Class B share of the Fund for the period March
1, 1996 through August 31, 1996, for each of the nine years in the period
ended February 29, 1996 and for the period December 12, 1986 (commencement
of operations) through February 28, 1987.

Financial Highlights for one Class C share of the Fund for the period March
1, 1996 through August 31, 1996, for each of the three years in the period
ended February 29, 1996 and for the period July 2, 1992 (commencement of
offering) through February 28, 1993.

Included in part B of this Registration Statement through incorporation by
reference from the Annual Report to Shareholders filed with the Securities and
Exchange Commission through EDGAR on November 5, 1996, Accession No. 0000950130-
96-004211:

Portfolio of Investments at August 31, 1996.

Statement of Assets and Liabilities at August 31, 1996.

Statement of Operations for the period March 1, 1996 through August 31,
1996.

Statement of Changes in Net Assets for the period March 1, 1996 through
August 31, 1996 and the year ended February 29, 1996.

Notes to Financial Statements.

Financial Highlights for one Class A share of the Fund for the period March
1, 1996 through August 31, 1996, each of the four years in the period ended
February 29, 1996 and for the period July 1, 1991 (commencement of
offering) through February 29, 1992.

Financial Highlights for one Class B share of the Fund for the period March
1, 1996 through August 31, 1996 and each of the five years in the period
ended February 29, 1996.

Financial Highlights for one Class C share of the Fund for the period March
1, 1996 through August 31, 1996, each of the three years in the period
ended

C-1
<PAGE>

February 29, 1996 and for the period July 2, 1992 (commencement of
offering) through February 28, 1993.

Report of Independent Accountants dated October 28, 1996.

(b) Exhibits:

(1) (a) Amended and Restated Articles of Incorporation effective
July 1, 1991 5/
-
(b) Articles of Amendment effective July 24, 1995 13/
--
(c) Articles of Amendment effective November 9, 1995 13/
--
(d) Articles Supplementary effective November 20, 1995 13/
--
(e) Articles Supplementary effective June 26, 1996 13/
--

(2) (a) Amended By-Laws 1/

(b) Certificate of Amendment dated September 24, 1994 to By-Laws

11/
--
(3) Voting trust agreement - none

(4) Instruments defining the rights of holders of the Registrant's
common stock 12/
--
(5) Investment Advisory and Administration Contract 2/
-
(6) (a) Distribution Contract with respect to Class A shares 10/

10/
--
(f) Exclusive Dealer Agreement with respect to Class B shares

10/
--
(g) Exclusive Dealer Agreement with respect to Class C shares

13/
--
(h) Exclusive Dealer Agreement with respect to Class Y shares

13/
--
(7) Bonus, profit sharing or pension plans - none

(8) Custodian Agreement 3/
(9) (a) Transfer Agency Agreement 4/
(b) Service Contract 3/
(10) (a) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel
to the Registrant with respect to Class A and Class B Shares
5/

(b) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel
to the Registrant with respect to Class C Shares 7/
-
(c) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel
to the Registrant with respect to Class Y Shares of
PaineWebber Balanced Fund 13/
--

(11) Other opinions, appraisals, rulings and consents: Accountant's
Consent (filed herewith)
(12) Financial statements omitted from prospectus - none
(13) Letter of investment intent 1/
(14) Prototype Retirement Plan 6/
(15) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class A Shares 7/

(b) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class B Shares 7/
-
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class C Shares 8/
-

C-2
<PAGE>

(16) (a) Schedule for Computation of Performance Quotations with
respect to Class B Shares 5/

(b) Schedule for Computation of Performance Quotations with
respect to Class A Shares 7/
-
(c) Schedule for Computation of Performance Quotations with
respect to Class C Shares 9/
-
(17) and
(27) Financial Data Schedule (filed herewith)
(18) Plan pursuant to Rule 18f-3 14/
--

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

1/ Incorporated by reference from Pre-Effective Amendment No. 2 to the
- -
registration statement, SEC File No. 33-2524, filed March 11, 1986.

2/ Incorporated by reference from Post-Effective Amendment No. 8 to the
- -
registration statement, SEC File No. 33-2524, filed April 28, 1989.

3/ Incorporated by reference from Post-Effective Amendment No. 11 to the
- -
registration statement, SEC File No. 33-2524, filed June 29, 1990.

4/ Incorporated by reference from Post-Effective Amendment No. 13 to the
- -
registration statement, SEC File No. 33-2524, filed May 3, 1991.

5/ Incorporated by reference from Post-Effective Amendment No. 14 to the
- -
registration statement, SEC File No. 33-2524, filed June 27, 1991.

6/ Incorporated by reference from Post-Effective Amendment No. 20 to the
- -
registration statement of PaineWebber Managed Investments Trust, SEC File
No. 2-91362, filed April 1, 1992.

7/ Incorporated by reference from Post-Effective Amendment No. 16 to the
- -
registration statement, SEC File No. 33-2524, filed May 1, 1992.

8/ Incorporated by reference from Post-Effective Amendment No. 18 to the
- -
registration statement, SEC File No. 33-2524, filed April 30, 1993.

9/ Incorporated by reference from Post-Effective Amendment No. 19 to the
- -
registration statement, SEC File No. 33-2524, filed July 1, 1993.

10/ Incorporated by reference from Post-Effective Amendment No. 21 to the
- --
registration statement, SEC File No. 33-2524, filed July 1, 1994.

11/ Incorporated by reference from Post-Effective Amendment No. 24 to the
- --
registration statement, SEC File No. 33-2524, filed June 27, 1995.

12/ Incorporated by reference from Articles Sixth, Seventh, Eighth, Eleventh
- --
and Twelfth of the Registrant's Articles of Incorporation and from Articles
II, VIII, X, XI and XII of the Registrant's By-Laws, as amended September
28, 1994.

C-3
<PAGE>

13/ Incorporated by reference from Post-Effective Amendment No. 28 to the
- --
registration statement, SEC File No. 33-2524, filed July 1, 1996.

14/ Incorporated by reference from Post-Effective Amendment No. 30 to the
- --
registration statement, SEC File No. 33-2524, filed September 20, 1996.

Item 25. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------

None.

Item 26. Number of Holders of Securities
-------------------------------

Number of Record
Shareholders as of
Title of Class November 29, 1996
--------------

Shares of common stock
($.001 par value)

PaineWebber Balanced Fund
- Class A shares 12,635
- Class B shares 2,240
- Class C Shares 578
- Class Y Shares 0
PaineWebber Money Market Fund
- Class A shares 1,443
- Class B shares 1,463
- Class C shares 305

Item 27. Indemnification
---------------

Article Eleventh of the Amended and Restated Articles of Incorporation provides
that the directors and officers of the Registrant shall not be liable to the
Registrant or to any of its stockholders for monetary damages to the maximum
extent permitted by applicable law. Article Eleventh also provides that any
repeal or modification of Article Eleventh or adoption, or modification of any
other provision of the Articles or By-Laws inconsistent with Article Eleventh
shall not adversely affect any limitation of liability of any director or
officer of the Registrant with respect to any act or failure to act which
occurred prior to such repeal, modification or adoption.

Article Eleventh of the Amended and Restated Articles of Incorporation and
Section 10.01 of Article X of the By-Laws provide that the Registrant shall
indemnify and advance expenses to its present and past directors, officers,
employees and agents, and any persons who are serving or have served at the
request of the Registrant as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, or enterprise, to the fullest
extent permitted by law.

C-4
<PAGE>

Section 10.02 of Article X of the By-Laws further provides that the Registrant
may purchase and maintain insurance on behalf of any person who is or was a
director, officer or employee of the Registrant, or is or was serving at the
request of the Registrant as a director, officer or employee of a corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him or out of his or her status as such whether or not the
Registrant would have the power to indemnify him or her against such liability.

Section 9 of the Investment Advisory and Administration Contract provides that
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
Registrant in connection with the matters to which the Contract relates except
for a loss resulting from willful misfeasance, bad faith or gross negligence of
Mitchell Hutchins in the performance of its duties or from its reckless
disregard of its obligations and duties under the Contract. Section 9 further
provides that any person, even though also an officer, partner, employee or
agent of Mitchell Hutchins, who may be or become an officer, director, employee
or agent of Registrant shall be deemed, when rendering services to the
Registrant or acting with respect to any business of the Registrant, to be
rendering such service to or acting solely for the Registrant and not as an
officer, partner, employee, or agent or one under the control or direction of
Mitchell Hutchins even though paid by it.

Section 9 of each Distribution Contract provides that the Registrant will
indemnify Mitchell Hutchins and its officers, directors or controlling persons
against all liabilities arising from any alleged untrue statement of material
fact in the Registration Statement or from alleged omission to state in the
Registration Statement a material fact required to be stated in it or necessary
to make the statements in it, in light of the circumstances under which they
were made, not misleading, except insofar as liability arises from untrue
statements or omissions made in reliance upon and in conformity with information
furnished by Mitchell Hutchins to the Registrant for use in the Registration
Statement; and provided that this indemnity agreement shall not protect any such
persons against liabilities arising by reason of their bad faith, gross
negligence or willful misfeasance; and shall not inure to the benefit of any
such persons unless a court of competent jurisdiction or controlling precedent
determines that such result is not against public policy as expressed in the
Securities Act of 1933. Section 9 of each Distribution Contract also provides
that Mitchell Hutchins agrees to indemnify, defend and hold the Registrant, its
officers and directors free and harmless of any claims arising out of any
alleged untrue statement or any alleged omission of material fact contained in
information furnished by Mitchell Hutchins for use in the Registration Statement
or arising out of an agreement between Mitchell Hutchins and any retail dealer,
or arising out of supplementary literature or advertising used by Mitchell
Hutchins in connection with each Distribution Contract.

Section 9 of each Exclusive Dealer Agreement contains provisions similar to
Section 9 of each Distribution Contract, with respect to PaineWebber
Incorporated ("PaineWebber").

Section 7 of the Service Contract provides that PaineWebber shall be indemnified
and held harmless by the Registrant against all liabilities, except those
arising out of bad faith, gross negligence, willful misfeasance or reckless
disregard of its duties under the Service Contract.

C-5
<PAGE>

Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended, may be provided to directors, officers and controlling persons
of the Registrant, pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in connection with the successful defense of any action, suit or proceeding or
payment pursuant to any insurance policy) is asserted against the Registrant by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------

Mitchell Hutchins, a Delaware corporation, is a registered investment adviser
and is a wholly owned subsidiary of PaineWebber which is, in turn, a wholly
owned subsidiary of Paine Webber Group Inc. Mitchell Hutchins is primarily
engaged in the investment advisory business. Information as to the officers and
directors of Mitchell Hutchins is included in its Form ADV, as filed with the
Securities and Exchange Commission (registration number 801-13219) and is
incorporated herein by reference.

Item 29. Principal Underwriters
----------------------

a) Mitchell Hutchins serves as principal underwriter and/or investment
adviser for the following investment companies:

ALL-AMERICAN TERM TRUST INC.
GLOBAL HIGH INCOME DOLLAR FUND INC.
GLOBAL SMALL CAP FUND INC.
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
MANAGED HIGH YIELD FUND INC.
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER MASTER SERIES, INC.
PAINEWEBBER MUNICIPAL SERIES
PAINEWEBBER MUTUAL FUND TRUST
PAINEWEBBER OLYMPUS FUND
PAINEWEBBER SECURITIES TRUST
PAINEWEBBER SERIES TRUST

C-6
<PAGE>

STRATEGIC GLOBAL INCOME FUND, INC.
TRIPLE A AND GOVERNMENT SERIES - 1997, INC.
2002 TARGET TERM TRUST INC.

b) Mitchell Hutchins is the principal underwriter for the Registrant.
PaineWebber acts as exclusive dealer for the shares of the Registrant.
The directors and officers of Mitchell Hutchins, their principal
business addresses, and their positions and offices with Mitchell
Hutchins are identified in its Form ADV, as filed with the Securities
and Exchange Commission (registration number 801-13219). The
directors and officers of PaineWebber, their principal business
addresses, and their positions and offices with PaineWebber are
identified in its Form ADV, as filed with the Securities and Exchange
Commission (registration number 801-7163). The foregoing information
is hereby incorporated herein by reference. The information set forth
below is furnished for those directors and officers of Mitchell
Hutchins or PaineWebber who also serve as directors or officers of the
Registrant:

Position and Offices With
Name and Principal Position With Underwriter or
Business Address Registrant Exclusive Dealer
- ---------------- -------------- ----------------

Margo N. Alexander Director and President President, Chief
1285 Avenue of the Americas Executive Officer and a
New York, New York 10019 Director of Mitchell
Hutchins; Executive Vice
President and Director of
PaineWebber

Mary C. Farrell Director Managing Director, Senior
1285 Avenue of the Americas Investment Strategist and
New York, New York 10019 Member of the Investment
Policy Committee of
PaineWebber

T. Kirkham Barneby Vice President Managing Director and
1285 Avenue of the Americas Chief Investment Officer
New York, New York 10019 - Quantitative
Investments of Mitchell
Hutchins

Teresa M. Boyle Vice President First Vice President and
1285 Avenue of the Americas Manager - Advisory
New York, New York 10019 Administration of
Mitchell Hutchins

C-7
<PAGE>

Position and Offices With
Name and Principal Position With Underwriter or
Business Address Registrant Exclusive Dealer
- ---------------- -------------- ----------------

C. William Maher Vice President First Vice President and
1285 Avenue of the Americas and Assistant a Senior Manager of the
New York, New York 10019 Treasurer Mutual Fund Finance
Division
of Mitchell Hutchins

Dennis McCauley Vice President Managing Director and
1285 Avenue of the Americas Chief Investment Officer
New York, New York 10019 - Fixed Income of
Mitchell Hutchins

Susan P. Ryan Vice President Senior Vice President of
1285 Avenue of the Mitchell Hutchins
Americas
New York, New York 10019

Ann E. Moran Vice President Vice President of
1285 Avenue of the Americas and Assistant Treasurer Mitchell Hutchins
New York, New York 10019

Dianne E. O'Donnell Vice President Senior Vice President and
1285 Avenue of the Americas and Secretary Deputy General Counsel of
New York, New York 10019 Mitchell Hutchins

Emil Polito Vice President Senior Vice President,
1285 Avenue of the Americas Director of Operations
New York, New York 10019 and Control for Mitchell
Hutchins

Victoria E. Schonfeld Vice President Managing Director and
1285 Avenue of the Americas General Counsel of
New York, New York 10019 Mitchell Hutchins

Paul H. Schubert Vice President First Vice President and
1285 Avenue of the Americas and Assistant a Senior Manager of the
New York, New York 10019 Treasurer Mutual Fund Finance
Division of Mitchell
Hutchins

Nirmal Singh Vice President First Vice President

C-8
<PAGE>

Position and Offices With
Name and Principal Position With Underwriter or
Business Address Registrant Exclusive Dealer
- ---------------- -------------- ----------------

1285 Avenue of the Americas and a Portfolio
New York, New York 10019 Manager at Mitchell
Hutchins

Julian F. Sluyters Vice President and Senior Vice President and
1285 Avenue of the Americas Treasurer Director of the Mutual
New York, New York 10019 Fund Finance Division of
Mitchell Hutchins

Mark A. Tincher Vice President Managing Director and
1285 Avenue of the Americas Chief Investment Officer
New York, New York 10019 - U.S. Equity Investments
of Mitchell Hutchins

Craig Varrelman Vice President First Vice President and
1285 Avenue of the Americas a Portfolio Manager of
New York, New York 10019 Mitchell Hutchins

Keith A. Weller Vice President First Vice President and
1285 Avenue of the Americas and Assistant Associate General Counsel
New York, New York 10019 Secretary of Mitchell Hutchins

C) None

Item 30. Location of Accounts and Records
--------------------------------

The books and other documents required by paragraphs (b)(4), (c) and (d) of
Rule 31a-1 under the Investment Company Act of 1940 are maintained in the
physical possession of Mitchell Hutchins, 1285 Avenue of the Americas, New
York, New York 10019. All other accounts, books and documents required by
Rule 31a-1 are maintained in the physical possession of Registrant's
transfer agent and custodian.

Item 31. Management Services
-------------------

Not applicable.

Item 32. Undertakings
------------

C-9
<PAGE>

Registrant hereby undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.

C-10
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York and State of
New York, on the 27th day of December, 1996.

PAINEWEBBER MASTER SERIES, INC.

By: /s/ Dianne E. O'Donnell
---------------------------------
Dianne E. O'Donnell
Vice President and Secretary

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

Signature Title Date
- --------------------------- -------------------------------- -----------------
<S> <C> <C>
/s/ Margo N. Alexander President and Director December 27, 1996
- --------------------------- (Chief Executive Officer)
Margo N. Alexander *

/s/ E. Garrett Bewkes, Jr. Director and Chairman December 27, 1996
- --------------------------- of the Board of Directors
E. Garrett Bewkes, Jr. *

/s/ Richard Q. Armstrong Director December 27, 1996
- ---------------------------
Richard Q. Armstrong *

/s/ Richard R. Burt Director December 27, 1996
- ---------------------------
Richard R. Burt *

/s/ Mary C. Farrell Director December 27, 1996
- ---------------------------
Mary C. Farrell *

/s/ Meyer Feldberg Director December 27, 1996
- ---------------------------
Meyer Feldberg *

/s/ George W. Gowen Director December 27, 1996
- ---------------------------
George W. Gowen *

/s/ Frederic V. Malek Director December 27, 1996
- ---------------------------
Frederic V. Malek *

/s/ Carl W. Schafer Director December 27, 1996
- ---------------------------
</TABLE>

<PAGE>

<TABLE>
<S> <C> <C>
Carl W. Schafer *

/s/ John R. Torell III Director December 27, 1996
- ---------------------------
John R. Torell III *

/s/ Julian F. Sluyters Vice President and Treasurer December 27, 1996
- --------------------------- (Chief Financial and Accounting
Julian F. Sluyters Officer)
</TABLE>

SIGNATURES (CONTINUED)

* Signature affixed by Elinor W. Gammon pursuant to power of attorney dated May
21, 1996 and incorporated by reference from Post-Effective Amendment No. 25
to the registration statement of PaineWebber RMA Tax-Free Fund, Inc., SEC
File No. 2-78310, filed June 27, 1996.
<PAGE>

PAINEWEBBER MASTER SERIES, INC.

EXHIBIT INDEX
-------------

Exhibit

(1) (a) Amended and Restated Articles of Incorporation effective
July 1, 1991 5/

(b) Articles of Amendment effective July 24, 1995 13/
--
(c) Articles of Amendment effective November 9, 1995 13/
--
(d) Articles Supplementary effective November 20, 1995 13/
--
(e) Articles Supplementary effective June 26, 1996 13/
--
(2) (a) Amended By-Laws 1/

(b) Certificate of Amendment dated September 24, 1994 to
By-Laws 11/
--
(3) Voting trust agreement - none

(4) Instruments defining the rights of holders of the
Registrant's common stock 12/
--
(5) Investment Advisory and Administration Contract 2/
-
(6) (a) Distribution Contract with respect to Class A shares 10/

(b) Distribution Contract with respect to Class B shares 10/
--
(c) Distribution Contract with respect to Class C shares 13/
--
(d) Distribution Contract with respect to Class Y shares 13/
--
(e) Exclusive Dealer Agreement with respect to Class A
shares 10/
--
(f) Exclusive Dealer Agreement with respect to Class B
shares 10/
--
(g) Exclusive Dealer Agreement with respect to Class C
shares 13/
--
(h) Exclusive Dealer Agreement with respect to Class Y
shares 13/
--
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement 3/
(9) (a) Transfer Agency Agreement 4/
(b) Service Contract 3/
(10) (a) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel
to the Registrant with respect to Class A and Class B Shares
5/
-
(b) Opinion and consent of Kirkpatrick & Lockhart LLP,
counsel to the Registrant with respect to Class C Shares 7/
-
(c) Opinion and consent of Kirkpatrick & Lockhart LLP,
counsel to the Registrant with respect to Class Y
Shares of PaineWebber Balanced Fund 13/
--
(11) Other opinions, appraisals, rulings and consents:
Accountant's Consent (filed herewith)
(12) Financial statements omitted from prospectus - none
(13) Letter of investment intent 1/
(14) Prototype Retirement Plan 6/
(15) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class A Shares 7/
-
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class B Shares 7/
-
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class C Shares 8/
-
<PAGE>

(16) (a) Schedule for Computation of Performance Quotations with
respect to Class B Shares 5/
-
(b) Schedule for Computation of Performance Quotations with
respect to Class A Shares 7/
-
(c) Schedule for Computation of Performance Quotations with
respect to Class C Shares 9/
-
(17) and
(27) Financial Data Schedule (filed herewith)
(18) Plan pursuant to Rule 18f-3 14/
--

___________________

1/ Incorporated by reference from Pre-Effective Amendment No. 2 to the
-
registration statement, SEC File No. 33-2524, filed March 11, 1986.

2/ Incorporated by reference from Post-Effective Amendment No. 8 to the
-
registration statement, SEC File No. 33-2524, filed April 28, 1989.

3/ Incorporated by reference from Post-Effective Amendment No. 11 to the
-
registration statement, SEC File No. 33-2524, filed June 29, 1990.

4/ Incorporated by reference from Post-Effective Amendment No. 13 to the
-
registration statement, SEC File No. 33-2524, filed May 3, 1991.

5/ Incorporated by reference from Post-Effective Amendment No. 14 to the
-
registration statement, SEC File No. 33-2524, filed June 27, 1991.

6/ Incorporated by reference from Post-Effective Amendment No. 20 to the
-
registration statement of PaineWebber Managed Investments Trust, SEC
File No. 2-91362, filed April 1, 1992.

7/ Incorporated by reference from Post-Effective Amendment No. 16 to the
-
registration statement, SEC File No. 33-2524, filed May 1, 1992.

8/ Incorporated by reference from Post-Effective Amendment No. 18 to the
-
registration statement, SEC File No. 33-2524, filed April 30, 1993.

9/ Incorporated by reference from Post-Effective Amendment No. 19 to the
-
registration statement, SEC File No. 33-2524, filed July 1, 1993.

10/ Incorporated by reference from Post-Effective Amendment No. 21 to the
--
registration statement, SEC File No. 33-2524, filed July 1, 1994.

11/ Incorporated by reference from Post-Effective Amendment No. 24 to the
--
registration statement, SEC File No. 33-2524, filed June 27, 1995.

12/ Incorporated by reference from Articles Sixth, Seventh, Eighth,
--
Eleventh and Twelfth of the Registrant's Articles of Incorporation and
from Articles II, VIII, X, XI and XII of the Registrant's By-Laws, as
amended September 28, 1994.
<PAGE>

13/ Incorporated by reference from Post-Effective Amendment No. 28 to the
--
registration statement, SEC File No. 33-2524, filed July 1, 1996.

14/ Incorporated by reference from Post-Effective Amendment No. 30 to the
--
registration statement, SEC File No. 33-2524, filed September 20,
1996.

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> PAINEWEBBER BALANCED FUND CLASS A
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> MAR-01-1996
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 155,488
<INVESTMENTS-AT-VALUE> 162,994
<RECEIVABLES> 6,096
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 107
<TOTAL-ASSETS> 169,197
<PAYABLE-FOR-SECURITIES> 11,147
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 526
<TOTAL-LIABILITIES> 11,673
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 142,356
<SHARES-COMMON-STOCK> 15,331
<SHARES-COMMON-PRIOR> 15,814
<ACCUMULATED-NII-CURRENT> 909
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,753
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,506
<NET-ASSETS> 157,524
<DIVIDEND-INCOME> 934
<INTEREST-INCOME> 1,995
<OTHER-INCOME> 0
<EXPENSES-NET> (1,110)
<NET-INVESTMENT-INCOME> 1,819
<REALIZED-GAINS-CURRENT> 6,755
<APPREC-INCREASE-CURRENT> (8,509)
<NET-CHANGE-FROM-OPS> 65
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,533
<DISTRIBUTIONS-OF-GAINS> 7,373
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,728
<NUMBER-OF-SHARES-REDEEMED> (16,930)
<SHARES-REINVESTED> 8,114
<NET-CHANGE-IN-ASSETS> (15,929)
<ACCUMULATED-NII-PRIOR> 631
<ACCUMULATED-GAINS-PRIOR> 7,282
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 623
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,110
<AVERAGE-NET-ASSETS> 164,843
<PER-SHARE-NAV-BEGIN> 10.85
<PER-SHARE-NII> .12
<PER-SHARE-GAIN-APPREC> (.12)
<PER-SHARE-DIVIDEND> (.10)
<PER-SHARE-DISTRIBUTIONS> (.48)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.27
<EXPENSE-RATIO> 1.34
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> PAINEWEBBER BALANCED FUND CLASS B
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> MAR-01-1996
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 22,019
<INVESTMENTS-AT-VALUE> 23,081
<RECEIVABLES> 863
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 16
<TOTAL-ASSETS> 23,960
<PAYABLE-FOR-SECURITIES> 1,578
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 75
<TOTAL-LIABILITIES> 1,653
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20,159
<SHARES-COMMON-STOCK> 2,141
<SHARES-COMMON-PRIOR> 2,420
<ACCUMULATED-NII-CURRENT> 129
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 956
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,063
<NET-ASSETS> 22,307
<DIVIDEND-INCOME> 132
<INTEREST-INCOME> 283
<OTHER-INCOME> 0
<EXPENSES-NET> (249)
<NET-INVESTMENT-INCOME> 166
<REALIZED-GAINS-CURRENT> 957
<APPREC-INCREASE-CURRENT> (1,205)
<NET-CHANGE-FROM-OPS> (82)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 140
<DISTRIBUTIONS-OF-GAINS> 1,038
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 245
<NUMBER-OF-SHARES-REDEEMED> (2,398)
<SHARES-REINVESTED> 1,149
<NET-CHANGE-IN-ASSETS> (2,264)
<ACCUMULATED-NII-PRIOR> 98
<ACCUMULATED-GAINS-PRIOR> 1,130
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 88
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 249
<AVERAGE-NET-ASSETS> 23,994
<PER-SHARE-NAV-BEGIN> 11.00
<PER-SHARE-NII> .08
<PER-SHARE-GAIN-APPREC> (.11)
<PER-SHARE-DIVIDEND> (.07)
<PER-SHARE-DISTRIBUTIONS> (.48)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.42
<EXPENSE-RATIO> 2.09
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> PAINEWEBBER BALANCED FUND - CLASS C
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> MAR-01-1996
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 6,888
<INVESTMENTS-AT-VALUE> 7,221
<RECEIVABLES> 270
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 5
<TOTAL-ASSETS> 7,496
<PAYABLE-FOR-SECURITIES> 494
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 23
<TOTAL-LIABILITIES> 517
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,307
<SHARES-COMMON-STOCK> 678
<SHARES-COMMON-PRIOR> 687
<ACCUMULATED-NII-CURRENT> 40
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 299
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 333
<NET-ASSETS> 6979
<DIVIDEND-INCOME> 42
<INTEREST-INCOME> 88
<OTHER-INCOME> 0
<EXPENSES-NET> (76)
<NET-INVESTMENT-INCOME> 54
<REALIZED-GAINS-CURRENT> 299
<APPREC-INCREASE-CURRENT> (377)
<NET-CHANGE-FROM-OPS> (24)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 44
<DISTRIBUTIONS-OF-GAINS> 320
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 76
<NUMBER-OF-SHARES-REDEEMED> (750)
<SHARES-REINVESTED> 360
<NET-CHANGE-IN-ASSETS> (702)
<ACCUMULATED-NII-PRIOR> 27
<ACCUMULATED-GAINS-PRIOR> 317
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 28
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 76
<AVERAGE-NET-ASSETS> 7,214
<PER-SHARE-NAV-BEGIN> 10.88
<PER-SHARE-NII> .08
<PER-SHARE-GAIN-APPREC> (.12)
<PER-SHARE-DIVIDEND> (.07)
<PER-SHARE-DISTRIBUTIONS> (.48)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.29
<EXPENSE-RATIO> 2.09
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Prospectuses and
Statements of Additional Information constituting parts of this Post-Effective
Amendment No.31 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated October 28, 1996, relating to the financial
statements and financial highlights appearing in the August 31, 1996 Annual
Report to Shareholders of PaineWebber Balanced Fund, which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Highlights - Balanced Fund" in
the Prospectuses and under the heading "Other Information - Independent
Auditors" in the Statements of Additional Information.

/s/ Price Waterhouse LLP
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
December 30, 1996