PAINEWEBBER MASTER SERIES INC, 497, 1996-07-17

PAINEWEBBER MASTER SERIES INC
497, 1996-07-17

Previous: WPG GROWTH FUND, 497, 1996-07-17

Next: CORPORATE PROPERTY ASSOCIATES 7, 8-K/A, 1996-07-17

<PAGE>

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

PaineWebber Balanced Fund
PaineWebber Tactical Allocation Fund
1285 Avenue of the Americas, New York, New York 10019
Prospectus -- July 1, 1996
- --------------------------------------------------------------------------------
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.
PaineWebber Tactical Allocation Fund follows an investment strategy that ac-
tively 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 July 1, 1996 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.

. Tax-Free Bond Funds for . Global Funds for long-term growth by investing
income exempt from mainly in foreign stocks or high current income
federal income taxes by investing mainly in global debt instruments.
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 OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH 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.......................................................... 23
How to Sell Shares......................................................... 25
Other Services............................................................. 25
Management................................................................. 26
Determining the Shares' Net Asset Value.................................... 28
Dividends & Taxes.......................................................... 28
General Information........................................................ 30
</TABLE>

- ------------------------------=================--------------------------------
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.

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 securities in which the Fund may invest have
speculative characteristics. 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 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 May 31, 1996, the Fund had over $199.7 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 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 May 31, 1996, the Fund had over $103.3 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,
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.

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 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 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 the purchase date. 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,
except for Class B shares of Tactical Allocation Fund, for which "Other
Expenses"are estimated based on expenses incurred by Class C shares during the
most recent fiscal year.

<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
net asset value at the time of purchase or 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....................................... 0.29 0.30 0.33
----- ----- -----
Total Operating Expenses............................. 1.29% 2.05% 2.08%
===== ===== =====
TACTICAL ALLOCATION FUND
Management Fees...................................... 0.50% 0.50% 0.50%
12b-1 Fees........................................... 0.25 1.00 1.00
Other Expenses....................................... 0.71 0.72 0.72
----- ----- -----
Total Operating Expenses............................. 1.46% 2.22% 2.22%
===== ===== =====
</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 a sales
charge. However, if such shares are sold within one year after purchase, a
contingent deferred sales charge of 1% is imposed on the net asset value of
the shares at the time of purchase or sale, whichever is less.
CLASS B SHARES: Sales charge waivers are available. The maximum 5%
contingent deferred sales charge applies to sales of shares during the first
year after purchase. The charge generally declines by 1% annually, reaching
zero after six years.
CLASS C SHARES: If shares are sold within one year after purchase, a
contingent deferred sales charge of 1% is imposed on the net asset value of
the shares at the time of purchase or sale, whichever is less.
- --------------------------------------------------------------------------------

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 each 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 $84 $113 $194
Class B (Assuming sale of all shares at end of
period)....................................... $71 $94 $130 $201
Class B (Assuming no sale of shares)........... $21 $64 $110 $201
Class C (Assuming sale of all shares at end of
period)....................................... $31 $65 $112 $241
Class C (Assuming no sale of shares)........... $21 $65 $112 $241
</TABLE>

TACTICAL ALLOCATION FUND

<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A........................................ $59 $89 $121 $212
Class B (Assuming sale of all shares at end of
period)....................................... $73 $99 $139 $219
Class B (Assuming no sale of shares)........... $23 $69 $119 $219
Class C (Assuming sale of all shares at end of
period)....................................... $33 $69 $119 $255
Class C (Assuming no sale of shares)........... $23 $69 $119 $255
</TABLE>

- --------------------------------------------------------------------------------
ASSUMPTIONS MADE IN THE EXAMPLES

. ALL CLASSES: Reinvestment of all dividends and 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.
- --------------------------------------------------------------------------------

- ------------------------------================----------------------------------
Prospectus Page 6

<PAGE>

[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

- ------------------------------================----------------------------------
PaineWebber Tactical Allocation Fund
Balanced 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 and accompanying notes appearing in
the Fund's Annual Report to Shareholders for the fiscal year ended February 29,
1996 and the report of Price Waterhouse LLP, independent accountants, appearing
in the Fund's Annual Report to Shareholders. Both 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 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 CLASS B
-------------------------------------------------------------- -----------------------------------------
FOR THE FOR THE PERIOD FOR THE
YEAR ENDED FOR THE YEARS ENDED JULY 1, 1991+ TO YEAR ENDED FOR THE YEARS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 29, FEBRUARY 28,
------------ ------------------------------ ---------------- ------------ ----------------------------
1996 1995 1994 1993 1992 1996 1995 1994 1993
------------ -------- -------- -------- ---------------- ------------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 9.80 $ 12.04 $ 11.54 $ 11.01 $10.09 $ 9.90 $ 12.10 $ 11.56 $ 10.99
-------- -------- -------- -------- ------ ------- ------- ------- --------
Net investment income... 0.27++ 0.26 0.22 0.33 0.19 0.19++ 0.44 0.26 0.30
Net realized and
unrealized gains
(losses) from
investment
transactions........... 1.84 (1.07) 1.31 0.54 0.96 1.86 (1.32) 1.18 0.48
-------- -------- -------- -------- ------ ------- ------- ------- --------
Net increase (decrease)
from investment
operations............. 2.11 (0.81) 1.53 0.87 1.15 2.05 (0.88) 1.44 0.78
-------- -------- -------- -------- ------ ------- ------- ------- --------
Dividends from net
investment income...... (0.31) (0.23) (0.25) (0.34) (0.23) (0.20) (0.12) (0.12) (0.21)
Distributions from net
realized gains from
investment
transactions........... (0.75) (1.20) (0.78) -- -- (0.75) (1.20) (0.78) --
-------- -------- -------- -------- ------ ------- ------- ------- --------
Total dividends and
distributions.......... (1.06) (1.43) (1.03) (0.34) (0.23) (0.95) (1.32) (0.90) (0.21)
-------- -------- -------- -------- ------ ------- ------- ------- --------
Net asset value, end of
period................. $ 10.85 $ 9.80 $ 12.04 $ 11.54 $11.01 $ 11.00 $ 9.90 $ 12.10 $ 11.56
======== ======== ======== ======== ====== ======= ======= ======= ========
Total investment return
(1).................... 22.08 % (6.02)% 13.57 % 8.09 % 11.43 % 21.20 % (6.68)% 12.62 % 7.25 %
======== ======== ======== ======== ====== ======= ======= ======= ========
Ratios/Supplemental
Data:
Net assets, end of
period (000's)......... $171,609 $174,761 $216,492 $154,594 $ 916 $26,627 $37,104 $83,178 $160,115
Expenses to average net
assets................. 1.29 % 1.26 % 1.21 % 1.18 % 1.30 %* 2.05 % 1.98 % 2.05 % 1.98 %
Net investment income to
average net assets..... 2.55 % 2.41 % 1.74 % 2.52 % 3.43 %* 1.81 % 1.60 % 1.00 % 2.02 %
Portfolio turnover...... 188 % 107 % 69 % 33 % 84 % 188 % 107 % 69 % 33 %
</TABLE>
- -------
* Annualized.
** Formerly Class D shares.
+ 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 date, 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.

- ------------------------------=================---------------------------------
Prospectus Page 8

<PAGE>

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

Financial Highlights
(Continued)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
BALANCED FUND
- --------------------------------------------------------------------------------------------------------------------------
CLASS B CLASS C**
- ------------------------------------------------------------------------- ------------------------------------------------
FOR THE PERIOD FOR THE FOR THE FOR THE PERIOD
DECEMBER 12, 1986+ YEAR ENDED YEARS ENDED JULY 2, 1992+ TO
FOR THE YEARS ENDED FEBRUARY 28 OR 29, TO FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
- ---------------------------------------------------- ------------------ ------------ ---------------- ----------------
1992 1991 1990 1989 1988 1987 1996 1995 1994 1993
- -------- -------- -------- -------- -------- ------------------ ------------ ------ ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.21 $ 9.86 $ 9.92 $ 10.18 $ 10.40 $ 10.00 $ 9.82 $12.03 $ 11.54 $10.86
- -------- -------- -------- -------- -------- -------- ------ ------ ------- ------
0.35 0.59 0.65 0.54 0.48 0.04 0.19++ 0.19 0.14 0.13
0.78 0.38 0.10 (0.28) (0.09) 0.36 1.84 (1.07) 1.30 0.71
- -------- -------- -------- -------- -------- -------- ------ ------ ------- ------
1.13 0.97 0.75 0.26 0.39 0.40 2.03 (0.88) 1.44 0.84
- -------- -------- -------- -------- -------- -------- ------ ------ ------- ------
(0.35) (0.62) (0.70) (0.52) (0.44) -- (0.22) (0.13) (0.17) (0.16)
-- -- (0.11) -- (0.17) -- (0.75) (1.20) (0.78) --
- -------- -------- -------- -------- -------- -------- ------ ------ ------- ------
(0.35) (0.62) (0.81) (0.52) (0.61) -- (0.97) (1.33) (0.95) (0.16)
- -------- -------- -------- -------- -------- -------- ------ ------ ------- ------
$ 10.99 $ 10.21 $ 9.86 $ 9.92 $ 10.18 $ 10.40 $10.88 $ 9.82 $ 12.03 $11.54
======== ======== ======== ======== ======== ======== ====== ====== ======= ======
11.24 % 10.29 % 7.53 % 2.73 % 4.31 % 4.00 % 21.12 % (6.69)% 12.75 % 7.78 %
======== ======== ======== ======== ======== ======== ====== ====== ======= ======
$346,290 $403,557 $557,646 $651,003 $715,771 $613,024 $7,469 $8,525 $12,916 $7,058
2.02 % 1.83 % 1.84 % 1.94 % 1.98 % 2.03%*(2) 2.08 % 2.01 % 1.96 % 1.95 %*
3.25 % 5.46 % 6.04 % 5.37 % 5.01 % 2.80%*(2) 1.77 % 1.62 % 0.97 % 1.91 %*
84 % 169 % 327 % 159 % 129 % 25% 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 and accompanying notes appearing in
the Fund's Annual Report to Shareholders for the fiscal year ended August 31,
1995 and the report of Ernst & Young LLP, independent auditors, appearing in
the Fund's Annual Report to Shareholders. Both 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
the
fiscal year ended 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. The financial statements and notes and the financial
information in the tables below, as they relate to the six months ended
February 29, 1996, have been taken from the records of the Fund
without examination by the independent auditors, who have not expressed an
opinion on the information.

<TABLE>
<CAPTION>
TACTICAL ALLOCATION FUND
--------------------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C***
------------------------------------------- -------------- ----------------------------------------------------
FOR THE FOR THE PERIOD FOR THE PERIOD FOR THE FOR THE PERIOD
SIX MONTHS FOR THE YEARS MAY 10, JANUARY 30, SIX MONTHS FOR THE YEARS JULY 22,
ENDED ENDED 1993+ 1996+ TO ENDED ENDED 1992+
FEBRUARY 29, AUGUST 31, TO AUGUST 31, FEBRUARY 29, FEBRUARY 29, AUGUST 31, TO AUGUST 31,
------------ -------------- -------------- -------------- ------------ ----------------------- ---------------
1996 1996 1996
(UNAUDITED) 1995** 1994 1993 (UNAUDITED) (UNAUDITED) 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.......... 0.11 0.22 0.24 0.08 0.01 0.03 0.12 0.13 0.18 0.03
Net realized and
unrealized gains
from investment
transactions.... 2.00 2.05 0.32 0.59 0.25 2.02 2.06 0.33 1.34 0.09
------- ------ ------ ------ ------ ------- ------- ------- -------- -------
Net increase
from investment
operations...... 2.11 2.27 0.56 0.67 0.26 2.05 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... $ 15.77 $14.86 $13.78 $13.50 $15.80 $ 15.79 $ 14.87 $ 13.78 $ 13.49 $ 12.12
======= ====== ====== ====== ====== ======= ======= ======= ======== =======
Total investment
return(1)....... 14.59% 18.43% 4.21% 5.17% 1.67% 14.13% 17.57% 3.46% 12.61% 0.98%
======= ====== ====== ====== ====== ======= ======= ======= ======== =======
Ratios/Supplemental
Data:
Net assets, end
of period
(000's)......... $ 3,989 $1,944 $1,801 $3,007 $ 910 $54,473 $48,105 $62,970 $107,761 $ 50,222
Expenses to
average net
assets.......... 1.35%* 1.46% 1.13% 1.06%* 2.06%* 2.02%* 2.22% 1.88% 1.73% 1.75%*
Net investment
income to
average net
assets.......... 1.05%* 1.60% 1.64% 1.71%* 1.59%* 0.35%* 0.86% 0.89% 1.04% 2.42%*
Portfolio
turnover........ 5% 53% 4% 0% 5% 5% 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.
*** Formerly Class B shares.
(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.

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 ("Model"). The 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, 1995, the Fund's assets were allocated as follows: equity
securities, 48.5%; bonds, 46.6%; and cash, 4.9%. 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 bonds or cash,
based on the Model's quantitative assessment of the projected rates of return
of each asset class. The 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 the 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.

The basic premise of the Model is that investors accept the risk of owning
stocks, measured as volatility of

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

<PAGE>

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

return, because they expect a return advantage. The expected return advantage
of stocks fluctuates as investor psychology pushes the market to valuation
extremes. The Model incorporates the following factors to determine the
allocations:

.Expected future dividends and current price of stocks;

.Economic statistics;

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

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

The Fund's asset allocation mix is dictated by the Model, except as described
below. The Fund does not maintain a portion of its investments in each asset
class at all times. The weightings can range from 100% to 0% in stocks, bonds
or cash. Possible asset mixes are 100% stocks; 75% stocks/25% bonds or cash;
100% bonds or cash. For example, as of August 31, 1995, and again as of
February 29, 1996, the Fund's assets were allocated as follows: 99% to stocks,
0% to bonds and 1% to cash. The Fund does not hold bonds and cash at the same
time, except for limited amounts always held in cash generally to pay
expenses. This disciplined approach to investing in stocks attempts to shift
the asset mix in anticipation of, not in response to, changing market trends.

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.

In contrast to a typical S&P 500 Index fund that maintains a 100% allocation
to the Index, the Fund is designed to take a more defensive posture when the
Model signals a potential secular decline in stock prices. 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; and

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

- ------------------------------==================--------------------------------
Prospectus Page 13
<PAGE>

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

Performance

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

These charts show the total returns for each Fund for each calendar year since
its inception. Sales charges have not been deducted from the total returns.
Returns would be lower if sales charges were deducted. Past results are not a
guarantee of future results.

Average annual returns for periods through each Fund's fiscal year end since
inception, both before and after deducting the maximum sales charges, are
shown below in the tables that follow the performance charts.

BALANCED FUND

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.

[CHART APPEARS HERE]

Class A Percentage
<S> <C>
1991 11.53%
1992 5.18%
1993 15.63%
1994 -9.88%
1995 23.16%
</TABLE>

Class B Percentage
<S> <C>
12/12/86
12/31/86 -2.40%
1987 1.21%
1988 11.34%
1989 10.84%
1990 1.94%
1991 18.52%
1992 4.46%
1993 14.66%
1994 -10.51%
1995 22.27%
</TABLE>
<TABLE>
<CAPTION>

Class C Percentage
<S> <C>
1992 5.08%
1993 14.79%
1994 -10.48%
1995 22.18%
</TABLE>

AVERAGE ANNUAL RETURNS
As of February 29, 1996
<TABLE>
<CAPTION>
CLASS C SHARES
CLASS A SHARES CLASS B SHARES (FORMERLY CLASS D SHARES)
-------------- -------------- -------------------------
<S> <C> <C> <C>
Inception Date.......... 7/1/91 12/12/86 7/2/92
ONE YEAR
Before deducting maxi-
mum sales charges..... 22.08% 21.20% 21.12%
After deducting maximum
sales charges......... 16.60% 16.20% 20.12%
FIVE YEARS
Before deducting maxi-
mum sales charges..... N/A 8.73% N/A
After deducting maximum
sales charges......... N/A 8.44% N/A
LIFE
Before deducting maxi-
mum sales charges..... 10.13% 7.90% 9.04%
After deducting maximum
sales charges......... 9.04% 7.90% 9.04%
</TABLE>

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

<PAGE>

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

TACTICAL ALLOCATION FUND

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 or in the table below. 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.

[CHART APPEARS HERE]

Class A Percentage
<S> <C>
1993 6.48%
1994 -0.59%
1995 35.12%
</TABLE>

Class C Percentage
<S> <C>
7/22/92
12/31/92 6.67%
1993 7.64%
1994 -1.28%
1995 34.09%
</TABLE>

AVERAGE ANNUAL RETURNS
As of August 31, 1995
<TABLE>
<CAPTION>
CLASS C SHARES
(FORMERLY CLASS
CLASS A SHARES B SHARES)
-------------- ---------------
<S> <C> <C>
Inception Date................................... 5/10/93 7/22/92
ONE YEAR
Before deducting maximum sales charges.......... 18.43% 17.57%
After deducting maximum sales charges........... 13.10% 16.57%
LIFE
Before deducting maximum sales charges.......... 11.98% 11.00%
After deducting maximum sales charges........... 9.76% 11.00%
</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 the Funds 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. 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 necessarily
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, 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 in a company. However, their
prices generally fluctuate more than other securities, and reflect changes in
a company's financial condition and in overall market and economic conditions.

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.

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 Treasury Securities)
and TIGRs (Treasury Income Growth Receipts).

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

<PAGE>

- ------------------------------==================-------------------------------
Paine Webber Tactical Allocation Fund
Balanced 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;

. 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 investors
may lose their entire 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,

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

<PAGE>

- ------------------------------===================------------------------------
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.

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.

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 bonds rated investment
grade. 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.

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.

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. 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

- ------------------------------==================--------------------------------
Prospectus Page 18
<PAGE>

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

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 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."

- ------------------------------==================--------------------------------
Prospectus Page 19

<PAGE>

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

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 certain 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.

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.

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.

- ------------------------------==================--------------------------------
Prospectus Page 20

<PAGE>

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

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 Pricing(SM)

- -------------------------------------------------------------------------------
Each Fund offers three classes of shares 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' net asset value at
the time of purchase or 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. This charge does not apply to Class A shares bought before
November 10, 1995.
(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.
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.

- ------------------------------==================--------------------------------
Prospectus Page 21

<PAGE>

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

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

. the investor 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 or 403(b), or a salary reduction plan qualified under section 401(k), 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 in connection with a reorganization pursuant to
which the Fund acquires substantially all of the assets and liabilities of
another investment company in exchange solely for shares of the Fund.

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 net asset value of the shares at the time of sale or purchase,
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.

- ------------------------------==================--------------------------------
Prospectus Page 22

<PAGE>

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

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 net asset value of the shares
at the time of purchase or sale, 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. This charge does not apply to Class C shares bought
before November 10, 1995.
- -------------------------------------------------------------------------------

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

- ------------------------------==================--------------------------------
Prospectus Page 23

<PAGE>

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

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
</TABLE>

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. In 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

. 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 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.

- ------------------------------==================--------------------------------
Prospectus Page 24

<PAGE>

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

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

Investors can sell (redeem) shares at any time. Shares will be sold at the
share price for that class as next calculated 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.
- -------------------------------------------------------------------------------

Other Services
- -------------------------------------------------------------------------------
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."

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

- ------------------------------==================--------------------------------
Prospectus Page 25

<PAGE>

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

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.
- -------------------------------------------------------------------------------

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 May 31, 1996, Mitchell Hutchins was adviser or
sub-adviser of 31 investment companies with 65 separate portfolios and
aggregate assets of approximately $30.4 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. 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

- ------------------------------==================--------------------------------
Prospectus Page 26

<PAGE>

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

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.

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

- ------------------------------==================--------------------------------
Prospectus Page 27

<PAGE>

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

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 the Plans and Mitchell Hutchins' corresponding expenses
for each class separately from the Plans and expenses of the other classes.
- -------------------------------------------------------------------------------

Determining the Shares' Net Asset Value

- -------------------------------------------------------------------------------
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 that value is 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.
- -------------------------------------------------------------------------------

Dividends & Taxes

- -------------------------------------------------------------------------------
DIVIDENDS

Tactical Allocation Fund pays dividends quarterly from its net investment
income, and Balanced Fund pays dividends semi-annually from its net investment
income. Each Fund also may distribute net short-term capital gain, if any,
with the periodic dividend. 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.

Dividends and other distributions paid on each class of shares of each Fund
are calculated at the same time and in the same manner. Dividends on Class B
and Class C shares of the Funds are expected to be lower than those for 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.

- ------------------------------==================--------------------------------
Prospectus Page 28

<PAGE>

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

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 shareholders as
ordinary income. Distributions of each Fund's net capital gain (whether paid in
cash or in additional Fund shares) are taxable to 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 amounts distributed to them.

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 those shareholders who otherwise are
subject to backup withholding.

TAXES ON THE SALE OR EXCHANGE OF FUND SHARES

When shareholders sell (redeem) shares, it 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, in
the case of a loss, decreased by the amount of the sales charge paid when those
shares were bought, and that amount will increase the basis of the PaineWebber
mutual fund shares subsequently acquired.

* * * *

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.

- ------------------------------==================--------------------------------
Prospectus Page 29

<PAGE>

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

General Information
- -------------------------------------------------------------------------------

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, and the remaining shares are
classified as shares of the Corporation's other series.

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 each 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 the board members of the
respective Fund. 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 semi-annual
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.

- ------------------------------==================--------------------------------
Prospectus Page 30

<PAGE>

- ------------------------------===================------------------------------
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.

- ------------------------------==================--------------------------------
Prospectus Page 31

<PAGE>

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

PaineWebber Balanced Fund
PaineWebber Tactical Allocation Fund
Prospectus -- July 1, 1996

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

. 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 Small Cap Value Fund
Strategic Income 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
Class Y Shares

1285 Avenue of the Americas, New York, NY 10019
Prospectus -- July 1, 1996

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

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.
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.

A Statement of Additional Information dated July 1, 1996 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
primarily to participants in the INSIGHT Investment Advisory Program ("IN-
SIGHT"), when purchased through that program. See "How to Buy Shares."

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

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 OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

---------
----------------------------------------------------------------------------
Prospectus Page 1
<PAGE>

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

Table of Contents

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

Page
----
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.......................................................... 15
How to Sell Shares......................................................... 16
Management................................................................. 17
Determining the Shares' Net Asset Value.................................... 18
Dividends & Taxes.......................................................... 19
General Information........................................................ 20

----------
- --------------------------------------------------------------------------------
Prospectus Page 2
<PAGE>

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

The Funds at a Glance

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

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.

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 securities in which the Fund may invest have
speculative characteristics. 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 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 May 31, 1996, the Fund had over $199.7 million in assets.

TACTICAL ALLOCATION FUND

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

SIZE: On May 31, 1996, the Fund had over $103.3 million in assets.

MANAGEMENT

WHO SHOULD INVEST

----------
- --------------------------------------------------------------------------------
Prospectus Page 3
<PAGE>
- --------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund

The Funds at a Glance
(Continued)

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

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.

----------
- --------------------------------------------------------------------------------
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 Y shares of the Funds.

<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Charge on Purchases of Shares.............................. None
Sales Charge on Reinvested Dividends..................................... None
Maximum Contingent Deferred Sales Charge................................. None
Maximum Annual Investment Advisory Fee Payable by Shareholders through
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)............................................... 0.29
----
Total Operating Expenses (estimated)..................................... 1.04%
====
TACTICAL ALLOCATION FUND
Management Fees.......................................................... 0.50%
12b-1 Fees............................................................... 0.00
Other Expenses........................................................... 0.73
----
Total Operating Expenses................................................. 1.23%
====
</TABLE>
- -------
(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
fiscal year ended February 29, 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 each 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 $79 $135 $288

<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
TACTICAL ALLOCATION FUND........................ $28 $85 $144 $306
</TABLE>

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

Financial Highlights

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

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 and accompanying notes appearing in the Fund's Annual
Report to Shareholders for the fiscal year ended August 31, 1995 and the
report of Ernst & Young LLP, independent auditors, appearing in the Fund's
Annual Report to Shareholders. Both 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 the fiscal
year ended 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. The financial statements and notes and the financial
information in the table below, as they relate to the six months ended
February 29, 1996, have been taken from the records of the Fund without
examination by the independent auditors, who have not expressed an opinion on
the information.

During the fiscal year ended February 29, 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 SIX FOR THE YEARS FOR THE PERIOD
MONTHS ENDED ENDED MAY 10, 1993+
FEBRUARY 29, AUGUST 31, TO AUGUST 31,
------------ ---------------- --------------
1996
(UNAUDITED) 1995** 1994 1993
------------ ------- ------- --------------
<S> <C> <C> <C> <C>
Net asset value, beginning of pe-
riod............................ $ 14.88 $ 13.79 $ 13.52 $ 12.90
------- ------- ------- -------
Net investment income............ 0.19 0.23 0.25 0.09
Net realized and unrealized gains
from investment transactions.... 1.95 2.09 0.33 0.60
------- ------- ------- -------
Net increase from investment op-
erations........................ 2.14 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... $ 15.80 $ 14.88 $ 13.79 $ 13.52
======= ======= ======= =======
Total investment return (1)...... 14.80% 18.79% 4.41% 5.30%
======= ======= ======= =======
Ratios/ supplemental data:
Net assets, end of period
(000's)........................ $12,686 $ 2,506 $ 3,880 $ 3,379
Expenses to average net assets.. 1.09%* 1.23% 0.88% 0.81%*
Net investment income to average
net assets..................... 1.53%* 1.86% 1.90% 1.96%*
Portfolio turnover.............. 5% 53% 4% 0%
Average commission rate paid per
share on common stock invest-
ments 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.
*** Formerly Class C shares.
(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. 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 6
<PAGE>

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

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.

----------
- --------------------------------------------------------------------------------
Prospectus Page 7
<PAGE>

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

Investment Philosophy & Process

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

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 Model is that investors accept the risk of owning
stocks, measured as volatility of return, because they expect a return
advantage. The expected return advantage of stocks fluctuates as investor
psychology pushes the market to valuation extremes. The Model incorporates the
following factors to determine the allocations:

. Expected future dividends and current price of stocks;

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

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

. Economic statistics;

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

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

The Fund's asset allocation mix is dictated by the Model, except as described
below. The Fund does not maintain a portion of its investments in each asset
class at all times. The weightings can range from 100% to 0% in stocks, bonds
or cash. Possible asset mixes are 100% stocks; 75% stocks/25% bonds or cash;
100% bonds or cash. For example, as of August 31, 1995, and again as of
February 29, 1996, the Fund's assets were allocated as follows: 99% to stocks,
0% to bonds and 1% to cash. The Fund does not hold bonds and cash at the same
time, except for limited amounts held in cash generally to pay expenses. This
disciplined approach to investing in stocks attempts to shift the asset mix in
anticipation of, not in response to, changing market trends.

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

----------
- --------------------------------------------------------------------------------
Prospectus Page 9
<PAGE>

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

Performance

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

This chart shows the total returns for Class Y shares of Tactical Allocation
Fund for each calendar year since the Fund's inception. Past results are not a
guarantee of future results. Average annual returns for periods from inception
through the Fund's fiscal year end are shown below the performance chart. No
Class Y shares for Balanced Fund were outstanding during 1995 so no performance
is presented for that Fund.

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.

[CHART APPEARS HERE]
<TABLE>
<CAPTION>
<S> <C>
5/10/93-12/31/93 6.65%
1994 -0.28%
1995 35.48%
</TABLE>

AVERAGE ANNUAL RETURNS
As of August 31, 1995
<TABLE>
<CAPTION>
CLASS Y SHARES
--------------
<S> <C>
Inception Date................................................... 5/10/93
One Year......................................................... 18.79%
Life............................................................. 12.28%
</TABLE>

PERFORMANCE INFORMATION

Total return information reflects past performance and does not necessarily
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, 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 10
<PAGE>

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

The Funds' Investments

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

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.

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

----------
- --------------------------------------------------------------------------------
Prospectus Page 11
<PAGE>
- --------------------------------------------------------------------------------
-------------------
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.

-------------
- --------------------------------------------------------------------------------
Prospectus Page 12
<PAGE>
- --------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund

associated with investments in U.S. dollar-denominated securities of foreign
issuers.

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.
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.

-----------
- --------------------------------------------------------------------------------
Prospectus Page 13
<PAGE>
- --------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund

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.

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

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 certain 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

----------
- --------------------------------------------------------------------------------
Prospectus Page 14
<PAGE>

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

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.

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.

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.

How to Buy Shares

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

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

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

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.

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.
- -------------------------------------------------------------------------------

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

----------
- --------------------------------------------------------------------------------
Prospectus Page 16
<PAGE>

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

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.
- -------------------------------------------------------------------------------

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).

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.

----------
- --------------------------------------------------------------------------------
Prospectus Page 17
<PAGE>

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

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.

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

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.
- -------------------------------------------------------------------------------

Determining the Shares' Net Asset Value

----------
- --------------------------------------------------------------------------------
Prospectus Page 18
<PAGE>

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

Dividends & Taxes

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

DIVIDENDS

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

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 shareholders as
ordinary income. Distributions of each Fund's net capital gain (whether paid
in cash or in additional Fund shares) are taxable to 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 amounts distributed to them.

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

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 so those shareholders who
otherwise are subject to backup withholding.

TAXES ON THE SALE OF FUND SHARES

When shareholders sell (redeem) shares, it 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.

* * * *

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.

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

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

General Information

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

ORGANIZATION

BALANCED FUND

TACTICAL ALLOCATION FUND

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

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

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

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

PaineWebber Family of Funds

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

. 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 Value 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>

The Fund is a series of PaineWebber Master Series, Inc. This Prospectus con-
cisely sets forth information about the Fund a prospective investor should
know before investing. Please retain this Prospectus for future reference. A
Statement of Additional Information dated July 1, 1996 (which is incorporated
by reference herein) has been filed with the Securities and Exchange Commis-
sion. The Statement of Additional Information can be obtained without charge,
and further inquiries can be made, by contacting the Fund, your PaineWebber
investment executive or PaineWebber's correspondent firms or by calling toll-
free 1-800-647-1568.

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

A professionally managed mutual fund seeking maximum current income consistent
with liquidity and conservation of capital. The Fund invests in high-grade
money market instruments.

AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOV-
ERNMENT. WHILE THE FUND SEEKS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00
PER SHARE, THERE IS NO ASSURANCE THAT IT WILL BE ABLE TO DO SO.

- -------------------------------------------------------------------------------
July 1, 1996

PAINEWEBBER

MONEY MARKET FUND
1285 Avenue of the Americas
New York, New York 10019

- -------------------------------------------------------------------------------
[ ] Maximum Current Income Consistent with Liquidity and Conservation of
Capital

[ ] Professional Management

[ ] Daily Dividends

[ ] Exchange Privileges

- -------------------------------------------------------------------------------
A PaineWebber Mutual Fund
<PAGE>

[This Page Intentionally Left Blank]
2
<PAGE>

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 AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR ITS DISTRIBUTOR
IN
ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.

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

PAINEWEBBER MONEY MARKET FUND

PROSPECTUS SUMMARY

See the body of the Prospectus for more information on the
topics discussed in this summary.

The Fund: PaineWebber Money Market Fund ("Fund") is a
diversified series of PaineWebber Master Series, Inc.,
an open-end management investment company organized as
a Maryland corporation ("Corporation").

Investment Objective Maximum current income consistent with liquidity and
and Policies: conservation of capital; invests in high-grade money
market instruments.

Assets at May 31, Over $48.6 million.
1996:

Investment Adviser: Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins"), an asset management subsidiary of
PaineWebber Incorporated ("PaineWebber"), manages over
$44.2 billion in assets.
See "Management."

Investing in the Class A shares, Class B shares and Class C shares of
Fund: the Fund may be obtained only through an exchange of
shares of the corresponding class of most other
PaineWebber mutual funds. Exchanges may be made
through PaineWebber or PFPC Inc., the Fund's transfer
agent ("Transfer Agent"). See "Investing in the Fund."
(Investors who are clients of PaineWebber or its
correspondent firms are referred to as "PaineWebber
clients.")

Exchanges: Shares may be exchanged for shares of the
corresponding class of most PaineWebber mutual funds.

Redemptions: PaineWebber clients may redeem through PaineWebber;
other shareholders must redeem through the Transfer
Agent.

Dividends: Declared daily and paid monthly. See "Dividends and
Taxes."

Reinvestment: All dividends are paid in Fund shares of the same
class at net asset value unless the shareholder has
requested cash.

Net Asset Value: The Fund seeks to maintain its net asset value at
$1.00 per share.

3
<PAGE>

WHO SHOULD INVEST. The Fund invests primarily in various types of high-grade
money market instruments. Accordingly, the Fund is designed for investors in
other PaineWebber mutual funds whose investment objectives or needs have
changed so that they presently seek current income and preservation of capital
for all or a portion of their investment.

RISK FACTORS. There can be no assurance that the Fund will achieve its in-
vestment objective. In periods of declining interest rates, the Fund's yield
will tend to be somewhat higher than prevailing market rates, and in periods of
rising interest rates, the Fund's yield generally will be somewhat lower. See
"Investment Objective and Policies."

EXPENSES OF INVESTING IN THE FUND. The following tables are intended to as-
sist investors in understanding the expenses associated with investing in Class
A, B and C shares of the Fund.

SHAREHOLDER TRANSACTION EXPENSES

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum sales charge on purchases of shares
(as a % of public offering price)............ None(1) None(1) None(1)
Sales charge on reinvested dividends.......... None None None
Exchange fee.................................. $5.00(2) $5.00(2) $5.00(2)
Maximum contingent deferred sales charge (as a
% of net asset value at the time of
investment or redemption, whichever is less). None(3) 5%(4) 1%(5)

ANNUAL FUND OPERATING EXPENSES (6)
(as a percentage of average net assets)

<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Management fees............................... 0.50% 0.50% 0.50%
12b-1 fees (7)................................ 0.25 0.75 0.75
Other expenses................................ 0.56 0.54 0.54
---- ---- ----
Total operating expenses...................... 1.31% 1.79% 1.79%
==== ==== ====
</TABLE>
- -------
(1) Shares of the Fund may be acquired solely through an exchange of shares
of the corresponding class of another PaineWebber mutual fund. No initial sales
charge is imposed when Class A shares of the Fund are acquired through an ex-
change. See "Investing in the Fund."
(2) Exchange fee waivers are available for all Classes.
(3) Class A shares of the Fund may be subject to a contingent deferred sales
charge ("CDSC") of 1% upon redemption if the original shares that were pur-
chased and subsequently exchanged (directly or through a series of exchanges)
to obtain Class A shares of the Fund were subject to a 1% CDSC upon redemption
and less than one year has elapsed since the original shares were purchased.
(4) Redemptions of Class B shares of the Fund that were acquired through an
exchange of Class B shares of PaineWebber Low Duration U.S. Government Income
Fund will be subject to a maximum CDSC of 3%, provided that the exchanged
shares would have been subject to the lower schedule had they been redeemed
rather than exchanged for Class B shares of the Fund. The maximum 3% CDSC ap-
plies to redemptions during the first year after purchase; the charge declines
by 1% following each of the first, third and fourth years after purchase,
reaching zero after four years. Redemptions of Class B shares of the Fund that
were acquired through an exchange of Class B shares of any other PaineWebber
mutual fund will be subject to a maximum CDSC of 5%. The maximum 5% CDSC ap-
plies to redemptions during the first year after purchase; the charge generally
declines by 1% annually thereafter, reaching zero after six years. The holding
period of Class B shares acquired through an exchange with another PaineWebber
mutual fund will be calculated from the date that the Class B shares were ini-
tially acquired in the other fund. See "Redemptions."

4
<PAGE>

- -------
(5) Redemptions of Class C shares of the Fund that were acquired through an
exchange of Class C shares of another PaineWebber mutual fund and are held less
than one year will be subject to the same CDSC that would have been imposed on
the Class C shares of the PaineWebber mutual fund originally purchased. The
maximum CDSC applicable to Class C shares sold within one year of the purchase
date is 1% (0.75% for funds that invest predominantly in debt securities) of
net asset value of the shares at the time of purchase or sale, whichever is
less.
(6) See "Management" for additional information. All expenses are those actu-
ally incurred for the fiscal year ended February 29, 1996.
(7) 12b-1 fees have two components, as follows:

<TABLE>
<CAPTION>
CLASS CLASS CLASS
A B C
----- ----- -----
<S> <C> <C> <C>
12b-1 service fees......................................... 0.25% 0.25% 0.25%
12b-1 distribution fees.................................... 0.00 0.50 0.50
</TABLE>

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 (includ-
ing distribution fees) than the economic equivalent of the maximum front-end
sales charge permitted by the National Association of Securities Dealers, Inc.

EXAMPLE OF EFFECT OF FUND EXPENSES

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

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class A shares....................... $13 $42 $ 72 $158
Class B shares:
Assuming a complete redemption at
end of period (1)(2)............... $68 $86 $117 $186
Assuming no redemption (2).......... $18 $56 $ 97 $186
Class C shares.......................
Assuming a complete redemption at
end of period (1).................. $28 $56 $ 97 $211
Assuming no redemption ............. $18 $56 $ 97 $211
</TABLE>
- -------
(1) Assumes deduction at the time of redemption of the maximum applicable
CDSC.
(2) Ten-year figures assume conversion of Class B shares to Class A shares at
end of sixth year.

This Example assumes that all dividends are reinvested and that the percent-
age amounts listed under Annual Fund Operating Expenses remain the same in the
years shown. The above tables and the assumption in the Example of a 5% annual
return are required by regulations of the Securities and Exchange Commission
("SEC") applicable to all mutual funds; the assumed 5% annual return is not a
prediction of, and does not represent, the projected or actual performance of
any class of Fund shares.

THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EX-
PENSES, AND THE FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE
SHOWN. The actual expenses attributable to each class of Fund shares will de-
pend upon, among other things, the level of average net assets and the extent
to which the Fund incurs variable expenses, such as transfer agency costs.

5
<PAGE>

FINANCIAL HIGHLIGHTS

The table below provides selected per share data and ratios for one Class A
share, one Class B share and one Class C share of the Fund for each of the pe-
riods shown. This information is supplemented by the financial statements and
accompanying notes appearing in the Fund's Annual Report to Shareholders for
the fiscal year ended February 29, 1996, which are incorporated by reference
into the Statement of Additional Information. The financial statements and
notes and the information in the table below, insofar as it relates to the
five years in the period ended February 29, 1996, have been audited by Price
Waterhouse LLP, independent accountants, whose report thereon is also included
in the Annual Report to Shareholders, which may be obtained without charge.

<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
FOR THE YEARS ENDED FOR THE PERIOD
---------------------------------- JULY 1, 1991+
FEBRUARY 28 OR 29, TO FEBRUARY 29,
---------------------------------- ----------------
1996 1995 1994 1993 1992
------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C>
Net asset value:
Beginning of period...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------
Net investment income..... 0.046 0.037 0.016 0.022 0.026
Dividends from net
investment income........ (0.046) (0.037) (0.016) (0.022) (0.026)
------- ------- ------- ------- ------
Net asset value:
End of period............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======
Total investment return
(1)...................... 4.69% 3.95% 1.64% 2.25% 2.47%
======= ======= ======= ======= ======
Ratios/supplemental data:
Net assets, end of period
(000's).................. $23,735 $21,042 $14,204 $11,716 $3,806
Expenses to average net
assets................... 1.31% 1.06% 1.72% 1.74% 1.90%*
Net investment income to
average net assets....... 4.68% 3.85% 1.70% 2.18% 3.61%*
</TABLE>
- -------
* Annualized.
** Formerly Class D.
+ Commencement of issuance of shares.
(1) Total investment return is calculated assuming a $1,000 investment in Fund
shares on the first day of each period reported, reinvestment of all divi-
dends 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 would be lower if sales charges were included. To-
tal return information for periods less than one year is not annualized.

6
<PAGE>

FINANCIAL HIGHLIGHTS--(CONTINUED)
<TABLE>
<CAPTION>
CLASS B
- ----------------------------------------------------------------------------------------------
FOR THE PERIOD
SEPTEMBER 26,
1986+ TO
FOR THE YEARS ENDED FEBRUARY 28 OR 29, FEBRUARY 28,
- ------------------------------------------------------------------------------ --------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ------- ------- ------ ------- ------- ------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ------- ------- ------ ------- ------- ------- ------- ------- ------- -------
0.041 0.032 0.011 0.016 0.039 0.068 0.076 0.068 0.055 0.012
(0.041) (0.032) (0.011) (0.016) (0.039) (0.068) (0.076) (0.068) (0.055) (0.012)
- ------- ------- ------ ------- ------- ------- ------- ------- ------- -------
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ====== ======= ======= ======= ======= ======= ======= =======
4.18% 3.41% 1.12% 1.73% 4.16% 6.98% 8.18% 6.75% 5.57% 1.65%
======= ======= ====== ======= ======= ======= ======= ======= ======= =======
$26,592 $39,123 $9,819 $15,280 $29,341 $50,842 $50,392 $50,320 $44,744 $ 620
1.79% 1.55% 2.25% 2.28% 2.06% 1.40% 1.48% 1.25% 1.25% 1.25%*
4.17% 3.46% 1.16% 1.69% 4.07% 6.82% 7.77% 6.88% 5.89% 4.71%*
</TABLE>

7
<PAGE>

FINANCIAL HIGHLIGHTS--(CONCLUDED)
<TABLE>
<CAPTION>
CLASS C**
----------------------------------------
FOR THE YEARS ENDED FOR THE PERIOD
----------------------- JULY 14, 1992+
FEBRUARY 28, OR 29, TO FEBRUARY 28,
----------------------- ---------------
1996 1995 1994 1993
------ ------- ------ ---------------
<S> <C> <C> <C> <C>
Net asset value:
Beginning of period.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------- ------ ------
Net investment income................. 0.041 0.033 0.012 0.009
Dividends from net investment income.. (0.041) (0.033) (0.012) (0.009)
------ ------- ------ ------
Net asset value:
End of period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ======= ====== ======
Total investment return (1)........... 4.14% 3.44% 1.19% 0.81%
====== ======= ====== ======
Ratios/supplemental data:
Net assets, end of period (000's)..... $5,754 $16,137 $9,430 $2,220
Expenses to average net assets........ 1.79% 1.55% 2.14% 2.14%*
Net investment income to average net
assets............................... 4.27% 3.35% 1.36% 1.67%*
</TABLE>

8
<PAGE>

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to provide maximum current income consis-
tent with liquidity and conservation of capital. The Fund's investments include
(1) U.S. Treasury bills and other obligations issued or guaranteed as to inter-
est and principal by the U.S. government, its agencies or instrumentalities;
such obligations may or may not be backed by the full faith and credit of the
United States; (2) obligations of U.S. banks, including certificates of depos-
it, bankers' acceptances, time deposits and similar obligations of foreign
branches of domestic banks and obligations issued by domestic branches of for-
eign banks; issuing banks must have total assets at the time of purchase in ex-
cess of $1.5 billion; (3) time deposits of savings associations having total
assets in excess of $1.5 billion at the time of purchase. The Fund invests in
time deposits only with maturities of seven days or less. The Fund may also
make interest-bearing savings deposits in U.S. commercial and savings banks
having total assets of $1.5 billion or less, in principal amounts at each such
bank not greater than are insured by the Federal Deposit Insurance Corporation,
provided that the aggregate amount of such deposits (plus interest earned) does
not exceed 5% of the Fund's net asset value; (4) commercial paper of U.S. com-
panies, including variable amount master demand notes and other short-term cor-
porate obligations; and (5) repurchase agreements relating to any of the fore-
going. The Fund may also purchase participation interests in any of the securi-
ties in which it is permitted to invest. Participation interests are pro rata
interests in securities held by others. The Fund invests in securities with a
remaining maturity of up to 13 months and maintains a dollar-weighted average
maturity of 90 days or less.

The commercial paper and other short-term obligations purchased by the Fund
consist only of obligations that Mitchell Hutchins determines, pursuant to pro-
cedures adopted by the Corporation's board of directors, present minimal credit
risks and are either (1) rated in one of the two highest short-term ratings
categories by at least two nationally recognized statistical rating organiza-
tions ("NRSROs"), (2) rated in one of the two highest short-term ratings cate-
gories by a single NRSRO if only that NRSRO has assigned the obligations a
short-term rating or (3) unrated, but determined by Mitchell Hutchins to be of
comparable quality ("Eligible Securities").

The Fund may invest no more than 5% of its total assets in obligations that
are Eligible Securities but have not been rated in the highest short-term rat-
ings category by at least two NRSROs (or by one NRSRO if only one NRSRO has as-
signed the obligation a short-term rating) or, if the obligations are unrated,
determined by Mitchell Hutchins to be of comparable quality ("Second Tier Secu-
rities"). The Fund also may invest no more than the greater of 1% of its total
assets or $1 million in Second Tier Securities of a single issuer. Furthermore,
the Fund generally may invest no more than 5% of its total assets in the secu-
rities of a single issuer (other than securities issued by the U.S. government,
its agencies or instrumentalities).

In managing the Fund's portfolio, Mitchell Hutchins may employ a number of
professional money management techniques, including varying the composition and
the average weighted maturity of the Fund's portfolio based upon its assessment
of the relative values of the various money market instruments and future in-
terest rate patterns in order to respond to changing economic and money market
conditions and to shifts in fiscal and monetary policy. Mitchell Hutchins may
also seek to improve the Fund's yield by purchasing or selling securities in
order to take advantage of yield disparities among similar or dissimilar

9
<PAGE>

money market instruments that regularly occur in the money market.

In periods of declining interest rates the Fund's yield will tend to be some-
what higher than prevailing market rates, and in periods of rising interest
rates the opposite will be true. Also, when interest rates are falling, net
cash inflows from the continuous sale of Fund shares are likely to be invested
in portfolio instruments producing lower yields than the balance of the Fund's
portfolio, thereby reducing the Fund's yield. In periods of rising interest
rates, the opposite can be true. There can be no assurance that the Fund will
achieve its investment objective.

U.S. GOVERNMENT SECURITIES. The U.S. government securities in which the Fund
may invest include direct obligations of the U.S. Treasury (such as Treasury
bills, notes and bonds) and obligations issued or guaranteed by U.S. government
agencies and instrumentalities. The Fund may invest in U.S. government securi-
ties that are supported by the full faith and credit of the U.S. government
(such as Government National Mortgage Association certificates), securities
supported primarily or solely by the creditworthiness of the issuer (such as
securities of the Resolution Funding Corporation and the Tennessee Valley Au-
thority) and securities that are supported primarily or solely by specific
pools of assets and the creditworthiness of a U.S. government-related issuer
(such as mortgage-backed securities issued by the Federal National Mortgage As-
sociation and the Federal Home Loan Mortgage Corporation).

The Fund may also acquire securities issued or guaranteed as to principal and
interest by the U.S. government in the form of custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds. Such notes and bonds are held in custody by a
bank on behalf of the owners of such notes or bonds. These custodial receipts
are known by various names, including "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"). The
Fund also may invest in separately traded principal and interest components of
securities issued or guaranteed by the U.S. Treasury. The principal and inter-
est components of selected securities are traded independently under the Sepa-
rate Trading of Registered Interest and Principal of Securities ("STRIPS") pro-
gram. Under the STRIPS program, the principal and interest components are indi-
vidually numbered and separately issued by the U.S. Treasury at the request of
depository financial institutions, which then trade the component parts inde-
pendently.

VARIABLE AND FLOATING RATE SECURITIES. The Fund may purchase variable and
floating rate securities with remaining maturities in excess of 13 months is-
sued by U.S. government agencies or instrumentalities or guaranteed by the U.S.
government, or (if subject to a demand feature exercisable within 13 months or
less) issued by U.S. companies. The yield on these securities is adjusted in
relation to changes in specific money market rates, such as the prime rate, and
different securities may have different adjustment rates. The Fund's investment
in these securities must comply with conditions established by the SEC under
which they may be considered to have remaining maturities of 13 months or less.
Certain of these obligations carry a demand feature that gives the Fund the
right to tender them back to the issuer or a remarketing agent and receive the
principal amount of the security prior to maturity. The demand feature may or
may not be backed by letters of credit or other credit support arrangements
provided by banks or other financial institutions, the credit standing of which
affects the credit quality of the obligation.

10
<PAGE>

Securities purchased by the Fund may include variable amount master demand
notes, which are unsecured redeemable obligations that permit investment of va-
rying amounts at fluctuating interest rates under a direct agreement between
the issuer and the Fund. The principal amount of these notes may be increased
from time to time by the parties (subject to specified maximums) or decreased
by the Fund or the issuer. These notes are payable on demand and are typically
unrated.

REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
Fund purchases securities from a bank or recognized securities dealer and si-
multaneously 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. Although repurchase
agreements carry certain risks not associated with direct investments in secu-
rities, including possible decline in the market value of the underlying secu-
rities and delays and costs to the Fund if the other party to the repurchase
agreement becomes insolvent, the Fund intends to enter into repurchase agree-
ments only with banks and dealers in transactions believed by Mitchell Hutchins
to present minimum credit risks in accordance with guidelines established by
the Corporation's board of directors.

LENDING OF PORTFOLIO SECURITIES. The Fund is authorized to lend up to 33 1/3%
of the total value of its portfolio securities to broker-dealers or institu-
tional investors that Mitchell Hutchins deems qualified. Lending securities en-
ables the Fund to earn additional income, but could result in a loss or delay
in recovering securities.

OTHER INFORMATION. The Fund may borrow money for temporary purposes, but not
in excess of 10% of its total assets, including reverse repurchase agreements
involving up to 5% of its total assets. The Fund may not invest more than 10%
of its net assets in illiquid securities, including repurchase agreements with
maturities in excess of seven days. The Fund's investment objective of seeking
maximum current income consistent with liquidity and conservation of capital
may not be changed without the affirmative vote of its shareholders. Certain
investment limitations, as described in the Statement of Additional Informa-
tion, also may not be changed without shareholder approval. All other invest-
ment policies may be changed by the Corporation's board of directors without
shareholder approval.

INVESTING IN THE FUND

Shares of the Fund are available only through an exchange of shares of the
corresponding class of other PaineWebber mutual funds. No initial sales charge
is imposed on the Fund shares being acquired, and no CDSC is imposed on the
shares of the other PaineWebber mutual fund being disposed of, through an ex-
change. However, CDSCs may apply to redemptions of Fund shares acquired through
an exchange. See "Redemptions." A $5.00 exchange fee is charged for each ex-
change, and exchanges may be subject to minimum investment requirements of the
fund into which exchanges are made.

The other PaineWebber mutual funds with which Fund shares may be exchanged
include the following:

PaineWebber Income Funds
.GLOBAL INCOME FUND
.HIGH INCOME FUND
.INVESTMENT GRADE INCOME FUND
.LOW DURATION U.S. GOVERNMENT INCOME FUND
.STRATEGIC INCOME FUND
.U.S. GOVERNMENT INCOME FUND

11
<PAGE>

PaineWebber Tax-Free Income Funds
.CALIFORNIA TAX-FREE INCOME FUND
.MUNICIPAL HIGH INCOME FUND
.NATIONAL TAX-FREE INCOME FUND
.NEW YORK TAX-FREE INCOME FUND

PaineWebber Growth Funds
.CAPITAL APPRECIATION FUND
.EMERGING MARKETS EQUITY FUND
.FINANCIAL SERVICES GROWTH FUND
.GLOBAL EQUITY FUND
.GROWTH FUND
.SMALL CAP GROWTH FUND
.SMALL CAP VALUE FUND

PaineWebber Growth and Income Funds
.BALANCED FUND
.GROWTH AND INCOME FUND
.TACTICAL ALLOCATION FUND
.UTILITY INCOME FUND

PaineWebber clients must place exchange orders through their PaineWebber in-
vestment executives or correspondent firms. Shareholders who are not
PaineWebber clients must place exchange orders in writing with the Transfer
Agent: PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington,
Delaware 19899. All exchanges will be effected based on the relative net asset
values per share next determined after the exchange order is received at
PaineWebber's New York City offices or by the Transfer Agent. See "Valuation of
Shares." Exchanges may be made on any Business Day. A "Business Day" is each
day, Monday through Friday, on which the New York Stock Exchange, Inc. ("NYSE")
is open.

This exchange privilege may be modified or terminated at any time, upon at
least 60 days' notice when such notice is required by SEC rules. See the State-
ment of Additional Information for further details. This exchange privilege is
available only in those jurisdictions where the sale of the PaineWebber mutual
fund shares to be acquired may be legally made. Before making any exchange,
shareholders should contact their PaineWebber investment executives or corre-
spondent firms or the Transfer Agent to obtain more information and prospec-
tuses of the PaineWebber mutual funds to be acquired through the exchange.

REDEMPTIONS

Fund shares may be redeemed at their net asset value (subject to any applica-
ble CDSC) and redemption proceeds will be paid after receipt of a redemption
request, as described below. PaineWebber clients may redeem shares through
PaineWebber or its correspondent firms; all other shareholders must redeem
through the Transfer Agent. If a redeeming shareholder owns shares of more than
one class, the shares will be redeemed in the following order unless the share-
holder specifically requests otherwise: Class A shares, then Class C shares,
and finally Class B shares.

CONTINGENT DEFERRED SALES CHARGE--CLASS A SHARES. Class A shares held less
than one year are subject to a CDSC if the Class A shares of the PaineWebber
mutual fund initially purchased and subsequently exchanged for Class C shares
of the Fund were purchased without an initial sales charge due to the sales
charge waiver for purchases of $1 million or more. This CDSC is equal to 1% of
the lower of (a) the net asset value of the shares at the time of initial pur-
chase or (b) the net asset value of the shares at the time of redemption. The
holding period of Class A shares of the Fund is calculated from the date the
Class A shares of the other PaineWebber mutual fund were initially purchased.
Class A shares will be considered to represent, as applicable, dividend and
capital gain distribution reinvestments in such other funds. Redemption order
will be determined as

12
<PAGE>

described for Class B shares (see "Contingent Deferred Sales Charge--Class B
Shares"). Class A shares acquired through reinvestment of dividends and capital
gain distributions are not subject to this CDSC. The CDSC is waived for ex-
changes and for most redemptions in connection with the systematic withdrawal
plan. THIS CDSC DOES NOT APPLY TO REDEMPTIONS OF CLASS A SHARES PURCHASED PRIOR
TO NOVEMBER 10, 1995. For federal income tax purposes, the amount of the CDSC
will reduce the gain or increase the loss, as the case may be, realized on the
redemption. The amount of any CDSC will be paid to Mitchell Hutchins.

CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. A CDSC is imposed upon most
redemptions of Class B shares. The amount of the CDSC will be calculated by
multiplying the percentage indicated below by the lower of (a) the net asset
value of the shares at the time of initial purchase or (b) the net asset value
of the shares at the time of redemption. Class B shares held six years or
longer (four years or longer for Fund shares acquired in certain exchanges for
Class B shares of PaineWebber Low Duration U.S. Government Income Fund) and
Class B shares acquired through reinvestment of dividends or capital gain dis-
tributions are not subject to the CDSC.

REDEMPTIONS OF FUND SHARES ACQUIRED THROUGH AN EXCHANGE FOR SHARES OF
PAINEWEBBER LOW DURATION U.S. GOVERNMENT INCOME FUND.

<TABLE>
<CAPTION>
CDSC AS A
REDEMPTION PERCENTAGE OF
DURING NET ASSET VALUE
---------- ---------------
<S> <C>
1st Year Since Purchase......................................... 3%
2nd Year Since Purchase......................................... 2
3rd Year Since Purchase......................................... 2
4th Year Since Purchase......................................... 1
5th Year Since Purchase......................................... None
</TABLE>

The schedule above will apply only if the exchanged shares would have been
subject to the same lower schedule had they been redeemed rather than exchanged
for Class B shares of the Fund.

REDEMPTIONS OF FUND SHARES ACQUIRED THROUGH AN EXCHANGE FOR SHARES OF ANY
OTHER PAINEWEBBER MUTUAL FUND.

<TABLE>
<CAPTION>
CDSC AS A
REDEMPTION PERCENTAGE OF
DURING NET ASSET VALUE
---------- ---------------
<S> <C>
1st Year Since Purchase......................................... 5%
2nd Year Since Purchase......................................... 4
3rd Year Since Purchase......................................... 3
4th Year Since Purchase......................................... 2
5th Year Since Purchase......................................... 2
6th Year Since Purchase......................................... 1
7th Year Since Purchase......................................... None
</TABLE>

In determining the applicability and rate of any CDSC, it will be assumed
that a redemption is made first of Class B shares representing the reinvestment
of dividends and capital gain distributions and then of other shares held by
the shareholder for the longest period of time. The holding period of Class B
shares acquired through an exchange with another PaineWebber mutual fund will
be calculated from the date that the Class B shares were initially acquired in
one of the other funds, and Class B shares being redeemed will be considered to
represent, as applicable, dividend and capital gain distribution reinvestments
in such other funds. This will result in any CDSC being imposed at the lowest
possible rate. For federal income tax purposes, the amount of the CDSC will re-
duce the gain or increase the loss, as the case may be, realized on the redemp-
tion. The amount of CDSC will be paid to Mitchell Hutchins.

SALES CHARGE WAIVERS--CLASS B SHARES. The CDSC will be waived for exchanges,
as described above, and for most redemptions in connection with the Fund's sys-
tematic withdrawal plan. In addition, the CDSC will be

13
<PAGE>

waived for a total or partial redemption if made within one year of the death
of the shareholder. The CDSC waiver is available where the decedent is either
the sole shareholder or owns the shares with his or her spouse as a joint ten-
ant with right of survivorship. This waiver applies only to redemption of
shares held at the time of death. The CDSC will also be waived in connection
with a lump-sum or other distribution in the case of an individual retirement
account ("IRA"), a self-employed individual retirement plan (so-called "Keogh
Plan") or a custodial account under Section 403(b) of the Internal Revenue Code
following attainment of age 59 1/2; a total or partial redemption resulting
from a distribution following retirement in the case of a tax-qualified retire-
ment plan; and any redemption resulting from a tax-free return of an excess
contribution to an IRA.

CDSC waivers will be granted subject to confirmation (by PaineWebber in the
case of shareholders who are PaineWebber clients or by the Transfer Agent in
the case of all other shareholders) of the shareholder's status or holdings, as
the case may be.

CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES. Class C shares held less
than one year are subject to the same CDSC that would have been imposed on the
Class C shares of the PaineWebber mutual fund initially purchased and subse-
quently exchanged for Class C shares of the Fund. This CDSC will be either 1%
or 0.75% of the lower of (a) the net asset value of the shares at the time of
initial purchase or (b) the net asset value of the shares at the time of re-
demption. The holding period of Class C shares of the Fund is calculated from
the date the Class C shares of the other PaineWebber mutual fund were initially
purchased. Class C shares will be considered to represent, as applicable, divi-
dend and capital gain distribution reinvestments in such other funds. Redemp-
tion order will be determined as described for Class B shares (see "Contingent
Deferred Sales Charge--Class B Shares"). Class C shares acquired through rein-
vestment of dividends and capital gain distributions are not subject to this
CDSC. The CDSC is waived for exchanges and for most redemptions in connection
with the systematic withdrawal plan. THIS CONTINGENT DEFERRED SALES CHARGE DOES
NOT APPLY TO REDEMPTIONS OF CLASS C SHARES PURCHASED PRIOR TO NOVEMBER 10,
1995. For federal income tax purposes, the amount of the CDSC will reduce the
gain or increase the loss, as the case may be, realized on the redemption. The
amount of any CDSC will be paid to Mitchell Hutchins.

REDEMPTION THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. PaineWebber clients
may submit redemption requests to their investment executives or correspondent
firms in person or by telephone, mail or wire. As the Fund's agent, PaineWebber
may honor a redemption request by repurchasing Fund shares from a redeeming
shareholder at the shares' net asset value next determined after receipt of the
request by PaineWebber's New York City offices. Within three Business Days af-
ter receipt of the request, repurchase proceeds (less any applicable CDSC) will
be paid by check or credited to the shareholder's brokerage account at the
election of the shareholder. PaineWebber investment executives and correspon-
dent firms are responsible for promptly forwarding redemption requests to
PaineWebber's New York City offices.

PaineWebber reserves the right not to honor any redemption request, in which
case PaineWebber promptly will forward the request to the Transfer Agent for
treatment as described below.

REDEMPTION THROUGH THE TRANSFER AGENT. Fund shareholders who are not
PaineWebber clients must redeem their shares through the Transfer Agent by
mail; other shareholders also

14
<PAGE>

may redeem Fund shares through the Transfer Agent. Shareholders should mail re-
demption requests directly to the Transfer Agent: PFPC Inc., Attn: PaineWebber
Mutual Funds, P.O. Box 8950, Wilmington, Delaware 19899. A redemption request
will be executed at the net asset value next determined after it is received in
"good order," and redemption proceeds will be paid within seven days of 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 redeemed (or that all shares
credited to a Fund account be redeemed), 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 and (3) other supporting
legal documents for estates, trusts, guardianships, custodianships, partner-
ships and corporations. Shareholders are responsible for ensuring that a re-
quest for redemption is received in "good order."

ADDITIONAL INFORMATION ON REDEMPTIONS. A shareholder may have redemption pro-
ceeds 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 redemption requirements generally, should be referred to
the shareholder's PaineWebber investment executive or correspondent firm, or to
the Transfer Agent if the shares are not held in a PaineWebber brokerage ac-
count.

Because the Fund incurs certain fixed costs in maintaining shareholder ac-
counts, the Fund reserves the right to redeem all Fund shares in any share-
holder account of less than $500 net asset value. If the Fund elects to do so,
it will notify the shareholder and provide the share holder the opportunity to
increase the amount invested to $500 or more within 60 days of the notice. The
Fund will not redeem accounts that fall below $500 solely as a result of a re-
duction in net asset value per share.

TRANSFER OF ACCOUNTS. If a shareholder holding Fund shares in a PaineWebber
brokerage account transfers his brokerage account to another firm, the Fund
shares normally will be transferred to an account with the Transfer Agent. How-
ever, 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.

CONVERSION OF CLASS B SHARES

A shareholder's Class B shares will automatically convert to Class A shares
approximately six years after the date of issuance, together with a pro rata
portion of all Class B shares representing dividends and other distributions
paid in additional Class B shares. The Class B shares so converted will no
longer be subject to the higher expenses borne by Class B shares. The conver-
sion will be effected at the relative net asset values per share of the two
classes (normally $1.00) on the first Business Day of the month in which the
sixth anniversary of the issuance of the Class B shares occurs. See "Valuation
of Shares." If a shareholder effects one or more exchanges among Class B shares
of the PaineWebber mutual funds during the six-year period, the holding periods
for the shares so exchanged will be counted toward the six-year period.

DIVIDENDS AND TAXES

DIVIDENDS. The Fund declares dividends daily from its net investment income
and pays

15
<PAGE>

them monthly. Shares begin earning dividends on the day after the exchange is
effected and continue to receive dividends declared through the date of redemp-
tion. The Fund distributes its net short-term capital gain annually but may
make more frequent distributions of such gain if necessary to maintain its net
asset value per share at $1.00 or to avoid income or excise taxes. The Fund
does not expect to realize net long-term capital gain and thus does not antici-
pate payment of any long-term capital gain distributions. Dividends paid on all
classes of shares are calculated at the same time and in the same manner. Divi-
dends on Class B and Class C shares are expected to be lower than those on
Class A shares because of the higher expenses resulting from the distribution
fees borne by the Class B and Class C shares. Dividends on each class also
might be affected differently by the allocation of other class-specific ex-
penses.

Dividends are paid in additional Fund shares of the same class unless the
shareholder has requested cash payments. Shareholders who wish to receive divi-
dends in cash, either mailed to the shareholder by check or credited to the
shareholder's PaineWebber account, should contact their PaineWebber investment
executives or correspondent firms.

TAXES. The Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code so that it will be relieved
of federal income tax on that part of its investment company taxable income
(consisting generally of net investment income and net short-term capital gain,
if any) that is distributed to its shareholders.

Dividends from the Fund's investment company taxable income (whether paid in
cash or in additional Fund shares) are taxable to its shareholders as ordinary
income to the extent of the Fund's earnings and profits. Shareholders not sub-
ject to tax on their income will not be required to pay tax on amounts distrib-
uted to them.

The Fund notifies its shareholders following the end of each calendar year of
the amount of dividends paid that year.

The Fund is required to withhold 31% of all dividends payable to any individ-
uals and certain other noncorporate shareholders who do not provide the Fund
with a correct taxpayer identification number. Withholding at that rate also is
required from dividends payable to such shareholders who otherwise are subject
to backup withholding.

No gain or loss will be recognized to a shareholder as a result of a conver-
sion of Class B shares into Class A shares.

The foregoing is only a summary of some of the important federal tax consid-
erations generally affecting the Fund and its shareholders; see the Statement
of Additional Information for a further discussion. There may be other federal,
state or local tax considerations applicable to a particular investor. Prospec-
tive shareholders are urged to consult their tax advisers.

VALUATION OF SHARES

The Fund uses its best efforts to maintain its net asset value at $1.00 per
share. Net asset value per share is determined by dividing the Fund's net as-
sets by the total number of Fund shares outstanding. The Fund's net assets are
equal to the value of the Fund's investments and its other assets minus its li-
abilities. Net asset value is determined separately for each class as of the
close of regular trading on the NYSE (currently 4:00 p.m., Eastern time) each
Business Day.

The Fund values its portfolio securities using the amortized cost method of
valuation,

16
<PAGE>

under which market value is approximated by amortizing the difference between
the acquisition cost and value at maturity of an instrument on a straight-line
basis over its remaining life. All cash, receivables and current payables are
carried at their face value. Other assets, if any, are valued at fair value as
determined in good faith by or under the direction of the Corporation's board
of directors.

MANAGEMENT

The Corporation's board of directors, as part of its overall management re-
sponsibility, oversees various organizations responsible for the Fund's day-to-
day management. Mitchell Hutchins, the Fund's investment adviser and adminis-
trator, makes and implements all investment decisions and supervises all as-
pects of the Fund's operations. Mitchell Hutchins receives a monthly fee for
these services at the annual rate of 0.50% of the Fund's average daily net as-
sets.

The 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.

Mitchell Hutchins is located at 1285 Avenue of the Americas, New York, New
York 10019. It is a wholly owned subsidiary of PaineWebber, which is in turn
wholly owned by Paine Webber Group Inc., a publicly owned financial services
holding company. As of May 31, 1996, Mitchell Hutchins was adviser or sub-
adviser of 31 investment companies with 65 separate portfolios and aggregate
assets of over $30.4 billion.

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

DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins is the distributor of Fund
shares and has appointed PaineWebber as the exclusive dealer for the sale of
Fund shares. Under separate plans of distribution pertaining to the Class A
shares, the Class B shares and the Class C shares ("Class A Plan", "Class B
Plan" and "Class C Plan," collectively, "Plans"), the 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. In addition, the Fund pays Mitchell
Hutchins monthly distribution fees at the annual rate of 0.50% of the average
daily net assets of the Class B and Class C shares.

Under the Plans, Mitchell Hutchins uses the service fees primarily to pay
PaineWebber for shareholder servicing, currently at the annual rate of 0.25% of
the aggregate investment amounts maintained in the Fund by PaineWebber clients.
PaineWebber passes on a portion of these fees to its investment executives to
compensate them for shareholder servicing that they perform and retains the re-
mainder to offset its own expenses in servicing and maintaining shareholder ac-
counts. These expenses may include costs of the PaineWebber branch office in
which the investment executive is based, such as rent, communications equip-
ment, employee salaries and other overhead costs.

Mitchell Hutchins uses the distribution fees under the Class B and Class C
Plans to offset the Fund's marketing costs attributable to those classes, such
as preparation of sales literature, advertising and printing and distributing
prospectuses and other shareholder materials to prospective investors. Mitchell
Hutchins also may use the distribution fees to pay additional compensation to
PaineWebber and other costs allocated to Mitchell Hutchins' and PaineWebber's
distribution activities, including employee salaries, bonuses and other

17
<PAGE>

overhead expenses. These expenses may include the branch office costs noted
above. Because shares of the Fund may be acquired only through an exchange of
shares of other PaineWebber mutual funds, Mitchell Hutchins does not pay com-
missions to PaineWebber for selling Fund shares.

Mitchell Hutchins receives the proceeds of the CDSCs paid upon certain re-
demptions and may use these proceeds for any of the expenses described above.
See "Redemptions."

During the period they are in effect, the Plans and related distribution con-
tracts pertaining to each class of shares ("Distribution Contracts") obligate
the Fund to pay service and distribution fees to Mitchell Hutchins as compensa-
tion for its service and distribution activities, not as reimbursement for spe-
cific expenses incurred. Thus, even if Mitchell Hutchins' expenses exceed its
service or distribution fees, the Fund will not be obligated to pay more than
those fees and, if Mitchell Hutchins' expenses are less than such fees, it will
retain its full fees and realize a profit. The Fund will pay the service and
distribution fees to Mitchell Hutchins until either the applicable Plan or Dis-
tribution Contract is terminated or not renewed. In that event, Mitchell
Hutchins' expenses in excess of service and distribution fees received or ac-
crued through the termination date will be Mitchell Hutchins' sole responsibil-
ity and not obligations of the Fund. In their annual consideration of the con-
tinuation of each Plan, the directors will review the Plan and Mitchell
Hutchins' corresponding expenses for each class separately from the Plans and
corresponding expenses for the other two classes.

PERFORMANCE INFORMATION

From time to time the Fund may advertise its "yield" and "effective yield."
Both yield figures are based on historical earnings and are not intended to in-
dicate future performance. The "yield" of the Fund is the income on an invest-
ment in the Fund over a specified seven-day period. This income is then
"annualized" (that is, assumed to be earned each week over a 52-week period)
and shown as a percentage of the investment. The "effective yield" is calcu-
lated similarly, but when annualized the income earned is assumed to be rein-
vested. The "effective yield" will be higher than the "yield" because of the
compounding effect of this assumed reinvestment.

GENERAL INFORMATION

ORGANIZATION. PaineWebber Master Series, Inc. is registered with the SEC as a
diversified, open-end management investment com-pany and was incorporated in
Maryland on October 29, 1985. The Fund commenced operations on September 26,
1986. The Corporation has authority to issue 10 billion shares of common stock
of separate series, par value $.001 per share; one billion of these shares are
classified as shares of the Fund, and the remaining shares are classified as
shares of the Corporation's other series.

The outstanding shares of common stock of the Fund are divided into three
Classes, designated Class A shares, Class B shares and Class C shares. Each
class represents interests in the same assets of the Fund. The classes differ
as follows: (1) each class of shares has exclusive voting rights on matters
pertaining to its plan of distribution; (2) Class B shares bear ongoing distri-
bution fees, are subject to a CDSC upon most redemptions and will automatically
convert to Class A shares approximately six years after issuance; (3) Class C
shares are not subject to an initial sales charge, but may be subject to a CDSC
if redeemed within one year of purchase, bear ongoing distribution expenses and
do not convert into another class; and (4) each

18
<PAGE>

class may bear differing amounts of certain class-specific expenses. The dif-
ferent sales charges and other expenses applicable to the different classes of
Fund shares may affect the performance of those classes.

The Corporation does not hold annual shareholder meetings. There normally
will be no meetings of shareholders to elect directors unless fewer than a ma-
jority of the directors holding office have been elected by shareholders.
Shareholders of record holding at least two-thirds of the outstanding shares of
the Corporation may remove a director by votes cast in person or by proxy at a
meeting called for that purpose. The directors are required to call a meeting
of shareholders for the purpose of vot-ing upon the question of removal of any
director when so requested in writing by the shareholders of record holding at
least 10% of the Corporation's outstanding shares. Each share of the Fund has
equal voting rights, except as noted above. Each share of the Fund is entitled
to participate equally in dividends and other distributions and the proceeds of
any liquidation except that, due to the differing expenses borne by the three
classes, dividends are likely to be lower for the Class B and Class C shares
than for the Class A shares. The shares of each series of the Corporation will
be voted separately except when an aggregate vote of all series is required by
the Investment Company Act of 1940.

CERTIFICATES. To avoid additional operating costs and for investor conve-
nience, the Fund does not issue share certificates. Ownership of Fund shares is
recorded on a stock register by the Transfer Agent and shareholders have the
same rights of ownership with respect to such shares as if certificates had
been issued.

CUSTODIAN AND TRANSFER AGENT. State Street Bank and Trust Company, whose
principal address is One Heritage Drive, North Quincy, Massachusetts 02171, is
custodian of the Fund's assets. PFPC Inc., a subsidiary of PNC Bank, N.A.,
whose principal business address is 400 Bellevue Parkway, Wilmington, Delaware
19809, is the Fund's transfer and dividend disbursing agent.

CONFIRMATIONS AND STATEMENTS. Shareholders receive confirmations of purchases
and redemptions of Fund shares. PaineWebber clients receive statements at least
quarterly that report their Fund activity and consolidated year-end statements
that show all Fund transactions for that year. Shareholders who are not Paine-
Webber clients receive quarterly statements from the Transfer Agent. Sharehold-
ers also receive audited annual and unaudited semi-annual financial statements
of the Fund.

19
<PAGE>

Shares of the Fund can be exchanged for shares of the following PaineWebber
Mutual Funds:

INCOME FUNDS
.Global Income Fund
.High Income Fund
.Investment Grade Income Fund
.Low Duration U.S. Government Income Fund
.U.S. Government Income Fund

TAX-FREE INCOME FUNDS
.California Tax-Free Income Fund
.Municipal High Income Fund
.National Tax-Free Income Fund
.New York Tax-Free Income Fund

GROWTH FUNDS
.Capital Appreciation Fund
.Emerging Markets Equity Fund
.Financial Services Growth Fund
.Global Equity Fund
.Growth Fund
.Small Cap Growth Fund
.Small Cap Value Fund

GROWTH AND INCOME FUNDS
.Balanced Fund
.Growth and Income Fund
.Utility Income 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. Read the prospectus carefully before
investing.

PAINEWEBBER

MONEY

MARKET

[ ] FUND

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 3
Financial Highlights....................................................... 6
Investment Objective and Policies.......................................... 9
Investing in the Fund...................................................... 11
Redemptions................................................................ 12
Conversion of Class B Shares............................................... 15
Dividends and Taxes........................................................ 15
Valuation of Shares........................................................ 16
Management................................................................. 17
Performance Information.................................................... 18
General Information........................................................ 18
</TABLE>

PROSPECTUS

July 1, 1996
- -------------------------
<PAGE>

PAINEWEBBER MONEY MARKET FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019

STATEMENT OF ADDITIONAL INFORMATION

PaineWebber Money Market Fund ("Fund") is a diversified series of PaineWebber
Master Series, Inc. ("Corporation"), a professionally managed mutual fund. The
Fund's investment adviser, administrator and distributor 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 Fund's current
Prospectus, dated July 1, 1996. 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 July 1, 1996.

INVESTMENT POLICIES AND RESTRICTIONS

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

YIELD FACTORS AND RATINGS OF MONEY MARKET INSTRUMENTS. The yields on the
money market instruments in which the Fund invests (such as commercial paper
and bank obligations) are dependent on a variety of factors, including general
money market conditions, conditions in the particular market for the
obligation, the financial condition of the issuer, the size of the offering,
the maturity of the obligation and the ratings of the issue. The ratings of
nationally recognized statistical rating organizations ("NRSROs") represent
their opinions as to the quality of the obligations they undertake to rate.
Ratings, however, are general and are not absolute standards of quality.
Consequently, obligations with the same rating, maturity and interest rate may
have different market prices. Subsequent to its purchase by the Fund, an issue
may cease to be rated or its rating may be reduced. In the event that a
security in the Fund's portfolio ceases to be a "First Tier" security, as
defined in the Prospectus, or Mitchell Hutchins becomes aware that a security
has received a rating below the second highest rating by any NRSRO, Mitchell
Hutchins, and in certain cases the Corporation's board of directors ("board"),
will consider whether the Fund should continue to hold the obligation. A "First
Tier" security is a security that is either (1) rated in the highest short-term
rating category by at least two NRSROs, (2) rated in the highest short-term
rating category by a single NRSRO if only that NRSRO has assigned the
obligation a short-term rating or (3) unrated, but determined by Mitchell
Hutchins to be of comparable quality. A First Tier security rated in the
highest short-term rating category by a single NRSRO at the time of purchase
that subsequently receives a rating below the highest rating category from a
different NRSRO will continue to be considered a First Tier security.

OBLIGATIONS OF FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS. The Fund may
invest in obligations of domestic branches of foreign banks and foreign
branches of domestic banks. Such investments may involve risks that are
different from investments in obligations of domestic branches of domestic
banks. These risks may include unfavorable political and economic developments,
withholding taxes, seizure of foreign deposits, currency controls, interest
limitations
<PAGE>

or other governmental restrictions which might affect the payment of principal
or interest on the securities held by the Fund. Additionally, there may be less
publicly available information about foreign banks and their branches, as these
institutions may not be subject to the same regulatory requirements as domestic
banks.

FLOATING RATE AND VARIABLE RATE DEMAND INSTRUMENTS. As noted in the
Prospectus, the Fund may invest in floating rate and variable rate securities
with demand features. A demand feature gives the Fund the right to sell the
securities back to a specified party, usually a remarketing agent, on a
specified date, at a price equal to their par value. A demand feature is often
backed by a letter of credit or guarantee from a bank, which permits the
remarketing agent to draw on the letter of credit on demand, after specified
notice, for all or any part of the exercise price of the demand feature.
Generally, the Fund intends to exercise demand features only (1) upon a default
under the terms of the underlying security, (2) to maintain the Fund's
portfolio in accordance with its investment objective and policies or (3) as
needed to provide liquidity to the Fund in order to meet redemption requests.
The ability of a bank to fulfill its obligations under a letter of credit or
guarantee might be affected by possible financial difficulties of its
borrowers, adverse interest rate or economic conditions, regulatory limitations
or other factors. The interest rate on floating rate or variable rate
securities ordinarily is readjusted on the basis of the prime rate of the bank
that originated the financing or some other index or published rate, such as
the 90-day U.S. Treasury bill rate. Generally, these interest rate adjustments
cause the market value of floating rate and variable rate securities to
fluctuate less than the market value of fixed rate obligations.

REPURCHASE AGREEMENTS. As stated in the Prospectus, the Fund may enter into
repurchase agreements with respect to any security in which it is authorized to
invest, except that securities subject to repurchase agreements may have
maturities in excess of 13 months. The Fund maintains custody of the underlying
securities prior to their repurchase; thus, the obligation of the bank or
securities dealer to pay the repurchase price on the date agreed to is, in
effect, secured by such securities. If the value of these 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 the Fund upon
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. The 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 the
board. Mitchell Hutchins will review and monitor the creditworthiness of those
institutions under the board's general supervision.

REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements with banks and securities dealers up to an aggregate value of not
more than 5% of its total assets. Such agreements involve the sale of
securities held by the Fund subject to the Fund's 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 will maintain with its custodian in a
segregated account cash, U.S. government securities or other liquid, high-

2
<PAGE>

grade debt obligations, marked to market daily, in an amount at least equal to
the Fund's obligations under the reverse repurchase agreement.

ILLIQUID SECURITIES. The Fund will not invest more than 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 and includes, among other things, repurchase agreements maturing in
more than seven days and restricted securities other than those Mitchell
Hutchins has determined to be liquid pursuant to guidelines established by the
board. Commercial paper issues in which the Fund may invest include securities
issued by major corporations without registration under the Securities Act of
1933 ("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 which is 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 providing
liquidity.

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 the 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.

The 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 will monitor the liquidity of
restricted securities in the Fund's portfolio and report periodically on such
decisions to the board.

3
<PAGE>

LENDING OF PORTFOLIO SECURITIES. As indicated in the Prospectus, the Fund is
authorized to lend up to 33 1/3% 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. The Fund will retain authority to terminate
any loan at any time. The 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. The 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. The Fund will retain
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. The 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.

(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 or
to certificates of deposit and bankers' acceptances of domestic branches of
U.S. banks.

The following interpretation applies to, but is not a part of, this
fundamental restriction: With respect to this limitation, domestic and
foreign banking will be considered to be different industries.

(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.

4
<PAGE>

(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.

(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.

The foregoing fundamental investment limitations cannot be changed without
the affirmative vote of the lesser of (1) more than 50% of the outstanding
shares of the 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, a later increase or decrease in
percentage resulting from a change in values of portfolio securities or amount
of total assets will not be considered a violation of any of the foregoing
limitations.

The following investment restrictions are not fundamental and may be changed
by the vote of the board without shareholder approval.

The Fund will not:

(1) purchase or retain the securities of any issuer if the officers and
directors of the Corporation and Mitchell Hutchins (each owning
beneficially more than 1/2 of 1% of the outstanding securities of the
issuer) own in the aggregate more than 5% of the securities of such issuer.

(2) make investments in warrants, if such investments, valued at the lower of
cost or market, exceed 5% of the value of the Fund's net assets, which
amount may include warrants that are not listed on the New York Stock
Exchange, Inc. ("NYSE") or the American Stock Exchange, Inc., provided such
unlisted warrants, valued at the lower of cost or market, do not exceed 2%
of the Fund's net assets, and further provided that this restriction does
not apply to warrants attached to, or sold as a unit with, other
securities.

(3) 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.

(4) 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.

(5) 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

5
<PAGE>

asset-backed securities supported by receivables generated from such
programs or leases are not subject to this prohibition.

(6) 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.

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

DIRECTORS AND OFFICERS

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

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
Margo N. Alexander**; 49 Director and Mrs. Alexander is president,
President chief executive officer and a
director of Mitchell Hutchins
(since January 1995) and also an
executive vice president and a
director of PaineWebber. Mrs.
Alexander is president and a di-
rector or trustee of 30 invest-
ment companies for which Mitch-
ell Hutchins or PaineWebber
serves as investment adviser.
Richard Q. Armstrong; 60 Director Mr. Armstrong is chairman and
78 West Brother Drive principal of RQA Enterprises
Greenwich, CT 06830 (management consulting firm)
(since April 1991 and principal
occupation since March 1995).
Mr. Armstrong is also a director
of HiLo Automotive, Inc. He was
chairman of the board, chief ex-
ecutive officer and co-owner of
Adirondack Beverages (producer
and distributor of soft drinks
and sparkling/still waters) (Oc-
tober 1993-March 1995). Mr. Arm-
strong was a partner of The New
England Consulting Group (man-
agement consulting firm) (Decem-
ber 1992-September 1993). He was
managing director of LVMH U.S.
Corporation (U.S. subsidiary of
the French luxury
</TABLE>

6
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
goods conglomerate, Luis Vuitton
Moet Hennessey Corporation)
(1987-1991) and chairman of its
wine and spirits subsidiary,
Schieffelin & Somerset Company
(1987-1991). Mr. Armstrong is a
director or trustee of 29 in-
vestment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
E. Garrett Bewkes, Jr.**; 69 Director and Mr. Bewkes is a director of Paine
Chairman of the Webber Group Inc. ("PW Group")
Board (holding company of PaineWebber
and Mitchell Hutchins). Prior to
December 1995 he was a consul-
tant to PW Group. Prior to 1988,
he was chairman of the board,
president and chief executive
officer of American Bakeries
Company. Mr. Bewkes is a direc-
tor of Interstate Bakeries Cor-
poration and NaPro
BioTherapeutics, Inc. Mr. Bewkes
is a director or trustee of 30
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Richard R. Burt; 49 Director Mr. Burt is chairman of Interna-
1101 Connecticut Avenue, N.W. tional Equity Partners (interna-
Washington, D.C. 20036 tional investments and consult-
ing firm) (since March 1994) and
a partner of McKinsey & Company
(management consulting firm)
(since 1991). He is also a di-
rector of American Publishing
Company. He was the chief nego-
tiator in the Strategic Arms Re-
duction Talks with the former
Soviet Union (1989-1991) and the
U.S. Ambassador to the Federal
Republic of Germany (1985-1989).
Mr. Burt is a director or
trustee of 29 investment compa-
nies for
</TABLE>

7
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Mary C. Farrell**; 46 Director Ms. Farrell is a managing direc-
tor, senior investment strate-
gist and member of the Invest-
ment Policy Committee of
PaineWebber. Ms. Farrell joined
PaineWebber in 1982. She is a
member of the Financial Women's
Association and Women's Economic
Roundtable, and is employed as a
regular panelist on Wall Street
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 di-
rector or trustee of 29 invest-
ment companies for which Mitch-
ell Hutchins or PaineWebber
serves as investment adviser.
Meyer Feldberg; 54 Director Mr. Feldberg is Dean and Profes-
Columbia University sor of Management of the Gradu-
101 Uris Hall ate School of Business, Columbia
New York, New York 10027 University. Prior to 1989, he
was president of the Illinois
Institute of Technology. Mr.
Feldberg is also a director of
AMSCO International Inc., Feder-
ated Department Stores, Inc. and
New World Communications Group
Incorporated. Mr. Feldberg is a
director or trustee of 29 in-
vestment companies for which
Mitchell Hutchins or PaineWebber
serves as an investment adviser.
George W. Gowen; 66 Director 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 director of Columbia Real
Estate Investments, Inc. Mr.
Gowen is a
</TABLE>

8
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
director or trustee of 29 in-
vestment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Frederic V. Malek; 59 Director Mr. Malek is chairman of Thayer
901 15th St., N.W. Capital Partners (investment
Suite 300 bank) and a co-chairman and di-
Washington, D.C. 20005 rector of CB Commercial Group
Inc. (real estate). From January
1992 to November 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 North-
west Airlines Inc., NWA Inc.
(holding company of Northwest
Airlines Inc.) and Wings Hold-
ings Inc. (holding company of
NWA Inc.). Prior to 1989, he was
employed by the Marriott Corpo-
ration (hotels, restaurants,
airline catering and contract
feeding), where he most recently
was an executive vice president
and president of Marriott Hotels
and Resorts. Mr. Malek is also a
director of American Management
Systems, Inc. (management con-
sulting and computer-related
services), Automatic Data
Processing, Inc., Avis, Inc.
(passenger car rental), FPL
Group, Inc. (electric services),
National Education Corporation
and Northwest Airlines Inc. Mr.
Malek is a director or trustee
of 29 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Carl W. Schafer; 60 Director Mr. Schafer is president of the
P. O. Box 1164 Atlantic Foundation (charitable
Princeton, New Jersey 08542 foundation supporting mainly
oceanographic exploration and
</TABLE>

9
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
research). He also is a director
of Roadway Express, Inc. (truck-
ing), The Guardian Group of Mu-
tual Funds, Evans Systems, Inc.
(a motor fuels, convenience
store and diversified company),
Hidden Lake Gold Mines Ltd.
(gold mining), Electronic Clear-
ing House, Inc. (financial
transactions processing),
Wainoco Oil Corporation and
Nutraceutix Inc. (biotechnolo-
gy). Prior to January 1993, Mr.
Schafer was chairman of the In-
vestment Advisory Committee of
the Howard Hughes Medical Insti-
tute. Mr. Schafer is a director
or trustee of 29 investment com-
panies for which Mitchell
Hutchins or PaineWebber serves
as investment adviser.
John R. Torell III; 56 Director Mr. Torell is chairman of Torell
767 Fifth Avenue Management, Inc. (financial ad-
Suite 4605 visory firm), chairman of
New York, New York 10153 Telesphere Corporation (elec-
tronic provider of financial in-
formation), and a partner of
Zilkha & Company (merchant bank-
ing and private investment com-
pany). He is the former chairman
and chief executive officer of
Fortune Bancorp (1990-1991 and
1990-1994, respectively), the
former chairman, president and
chief executive officer of
CalFed, Inc. (savings associa-
tion) (1988 to 1989) and former
president of Manufacturers Hano-
ver Corp. (bank) (prior to
1988). Mr. Torell is also a di-
rector of American Home Products
Corp., Volt Information Sciences
Inc., and New Colt Inc. (arma-
ment manufacturer). Mr. Torell
is a director or trustee of 29
investment companies for which
Mitchell
</TABLE>

10
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
Hutchins or PaineWebber serves
as investment adviser.
T. Kirkham Barneby; 49 Vice President Mr. Barneby is a managing direc-
tor and chief investment offi-
cer--quantitative investments of
Mitchell Hutchins. Prior to Sep-
tember 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
four investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Teresa M. Boyle; 37 Vice President Ms. Boyle is a first vice presi-
dent and manager--advisory ad-
ministration of Mitchell
Hutchins. Prior to November
1993, she was compliance manager
of Hyperion Capi- tal Manage-
ment, Inc., an investment advi-
sory firm. Prior to April 1993,
Ms. Boyle was a vice president
and manager--legal administra-
tion of Mitchell Hutchins. Ms.
Boyle is a vice president of 30
investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
C. William Maher; 34 Vice President and Mr. Maher is a first vice presi-
Assistant Treasurer dent and a senior manager of the
mutual fund finance division of
Mitchell Hutchins. Mr. Maher is
a vice president and assistant
treasurer of 30 investment com-
panies for which Mitchell
Hutchins or PaineWebber serves
as investment adviser.
Dennis McCauley; 49 Vice President Mr. McCauley is a managing direc-
tor and chief investment offi-
cer--fixed income of Mitchell
Hutchins.
</TABLE>

11
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
Prior to December 1994, he was
director of fixed income invest-
ments of IBM Corporation. Mr.
McCauley is a vice president of
19 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Susan Messina; 35 Vice President Ms. Messina is a senior vice
president and portfolio manager
of Mitchell Hutchins. Ms. Mes-
sina has been with Mitchell
Hutchins since 1982. Ms. Messina
is a vice president of five in-
vestment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Ann E. Moran; 38 Vice President and Ms. Moran is a vice president of
Assistant Treasurer Mitchell Hutchins. Ms. Moran is
a vice president and assistant
treasurer of 30 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
Secretary president and deputy general
counsel of Mitchell Hutchins.
Ms. O'Donnell is a vice presi-
dent and secretary of 29 invest-
ment companies for which Mitch-
ell Hutchins or PaineWebber
serves as investment adviser.
Victoria E. Schonfeld; 45 Vice President Ms. Schonfeld is a managing di-
rector 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
30 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>

12
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
Paul H. Schubert; 33 Vice President and Mr. Schubert is a first vice
Assistant Treasurer president and a senior manager
of the mutual fund finance divi-
sion of Mitchell Hutchins. From
August 1992 to August 1994, he
was a vice president of Black-
Rock Financial Management L.P.
Prior to August 1992, he was an
audit manager with Ernst & Young
LLP. Mr. Schubert is a vice
president and assistant trea-
surer of 30 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Nirmal Singh; 39 Vice President Mr. Singh is a first vice presi-
dent and a portfolio manager of
Mitchell Hutchins. Prior to Sep-
tember 1993, he was a member of
the portfolio management team at
Merrill Lynch Asset Management,
Inc. Mr. Singh is a vice presi-
dent of five investment compa-
nies for which Mitchell Hutchins
or PaineWebber serves as invest-
ment adviser.
Julian F. Sluyters; 35 Vice President and Mr. Sluyters is a senior vice
Treasurer president 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 30 investment
companies for which Mitchell
Hutchins or PaineWebber serves
as investment adviser.
Mark A. Tincher; 40 Vice President Mr. Tincher is a managing direc-
tor and chief investment offi-
cer--U.S. equity investments of
Mitchell Hutchins. Prior to
March 1995, he was a vice presi-
dent and directed the U.S. funds
management and equity research
areas of Chase
</TABLE>

13
<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
Manhattan Private Bank. Mr.
Tincher is a vice president of
14 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Craig M. Varrelman; 37 Vice President Mr. Varrelman is a first vice
president and a portfolio man-
ager 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; 34 Vice President and Mr. Weller is a first vice presi-
Assistant Secretary dent and associate general coun-
sel of Mitchell Hutchins. Prior
to May 1995, he was an attorney
in private practice. Mr. Weller
is a vice president and assis-
tant secretary of 29 investment
companies for which Mitchell
Hutchins or PaineWebber serves
as investment adviser.
</TABLE>
- --------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, N.Y. 10019.

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

The Corporation pays directors who are not interested persons of the
Corporation $1,000 annually per series of the Corporation and $150 for each
meeting of a board committee (other than committee meetings held on the same
day as a board meeting). The Corporation presently has two series and thus pays
each such director $2,000 annually, plus any additional amounts due for board
or committee meetings. Messrs. Feldbeg and Torell each receive additional
annual compensation from the PaineWebber fund complex (including the Fund) of
$15,000 for serving as chairmen of the audit and contract review committees of
the funds. Directors are reimbursed for any expenses incurred in attending
meetings of the board or any committee thereof. Directors and officers of the
Corporation own in the aggregate less than 1% of the shares of the Fund.
Because PaineWebber and Mitchell Hutchins perform substantially all of the
services necessary for the operation of the Corporation and the Fund, the
Corporation requires no employees. No officer, director or employee of
PaineWebber or Mitchell Hutchins presently receives any compensation from the
Corporation for acting as director or officer.

14
<PAGE>

The table below includes certain information relating to the compensation of
the Corporation's current directors who held office with the Corporation or
other PaineWebber funds during the fiscal year ended February 29, 1996.

COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL
COMPENSATION
AGGREGATE FROM THE
COMPENSATION CORPORATION
FROM THE AND THE
NAME OF PERSON, POSITION CORPORATION* COMPLEX+
- ------------------------ ------------ ------------
<S> <C> <C>
Richard Q. Armstrong, Director........................ -- $ 9,000
Richard R. Burt, Director............................. -- 7,750
Meyer Feldberg, Director.............................. $4,750 106,375
George W. Gowen, Director............................. 4,500 99,750
Frederic V. Malek, Director........................... 4,750 99,750
Carl W. Schafer, Director............................. -- 118,175
John R. Torell, III, Director......................... -- 28,125
</TABLE>
- --------
Only independent members of the board are compensated by the Corporation and
identified above; directors who are "interested persons," as defined by the
1940 Act, do not receive compensation.
* Represents fees paid to each director during the fiscal year ended February
29, 1996; the Corporation does not have a pension or retirement plan.
+ Represents total compensation paid to each director during the calendar year
ended December 31, 1995.

BENEFICIAL OWNERSHIP OF GREATER THAN 5% OF FUND SHARES

The following shareholder is shown in the Corporation's records as owning
more than 5% of the Fund's shares.

<TABLE>
<CAPTION>
NUMBER AND PERCENTAGE
OF
SHARES BENEFICIALLY
OWNED
NAME AND ADDRESS* AS OF JUNE 5, 1996
- ----------------- ----------------------
<S> <C> <C>
H. Cherrick.............................................. 6,022,113.190 (12.38%)
</TABLE>
- --------
* The shareholder listed may be contacted c/o Mitchell Hutchins, 1285 Avenue of
the Americas, New York, NY 10019.

INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS

INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS. Mitchell Hutchins acts
as the investment adviser and administrator of the Fund pursuant to a contract
with the Corporation dated August 4, 1988 ("Advisory Contract"). Under the
Advisory Contract, the Fund pays Mitchell Hutchins a fee, computed daily and
paid monthly, at the annual rate of 0.50% of the Fund's average daily net
assets.

15
<PAGE>

During the fiscal years ended February 29, 1996, February 28, 1995 and
February 28, 1994, the Fund paid (or accrued) to Mitchell Hutchins investment
advisory and administrative fees of $312,991, $536,405 and $134,243,
respectively.

Under a service agreement that is reviewed annually by the board, PaineWebber
provides certain services to the Fund not otherwise provided by the Fund's
transfer agent. Pursuant to the service agreement, during the fiscal years
ended February 29, 1996, February 28, 1995 and February 28, 1994, the Fund paid
or accrued to PaineWebber $17,432, $21,549 and $11,227, respectively.

Under the terms of the Advisory Contract, the Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Corporation not readily identifiable as
belonging to the Fund or to the Corporation'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 the Fund include the following (or
the Fund's share of the following): (1) the cost (including any 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 under federal and state securities laws and
maintenance of such registrations and qualifications; (5) fees and salaries
payable to directors who are not interested persons of the Corporation or
Mitchell Hutchins; (6) all expenses incurred in connection with the directors'
services, including travel expenses; (7) taxes (including any income or
franchise taxes) and governmental fees; (8) costs of any liability,
uncollectible items of deposit and 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 or the Fund for violation of any
law; (10) legal, accounting and auditing expenses, including legal fees of
special counsel for the independent directors; (11) charges of custodians,
transfer agents and other agents; (12) 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; (13) any
extraordinary expenses (including fees and disbursements of counsel) incurred
by the Corporation or the Fund; (14) fees, voluntary assessments and other
expenses incurred in connection with membership in investment company
organizations; (15) costs of mailing and tabulating proxies and costs of
meetings of shareholders, the board and any committees thereof; (16) the cost
of investment company literature and other publications provided to directors
and officers; and (17) costs of mailing, stationery and communications
equipment.

As required by state regulation, Mitchell Hutchins will reimburse the Fund if
and to the extent that the aggregate operating expenses of the Fund in any
fiscal year exceed applicable limits. Currently, the most restrictive such
limit applicable to the Fund is 2.5% of the first $30 million of the 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, taxes, interest, distribution
fees and extraordinary items, are excluded from this limitation. No such
reimbursements were required for the fiscal years ended February 29, 1996,
February 28, 1995 and February 28, 1994.

Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the

16
<PAGE>

contract, except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of Mitchell Hutchins in the performance of its duties or
from reckless disregard of its duties and obligations thereunder. The Advisory
Contract terminates automatically upon assignment and is terminable with
respect to the Fund at any time without penalty by the board or by vote of the
holders of a majority of the Fund's outstanding voting securities on 60 days'
written notice to Mitchell Hutchins, or by Mitchell Hutchins on 60 days'
written notice to the Fund.

The following table shows the approximate net assets as of May 31, 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>
INVESTMENT CATEGORY NET ASSETS ($ MIL)
------------------- -------------------
<S> <C>
Domestic (excluding Money Market)..................... $ 5,608.2
Global................................................ 2,833.3
Equity/Balanced....................................... 3,127.4
Fixed Income (excluding Money Market)................. 5,314.1
Taxable Fixed Income................................ 3,683.0
Tax-Free Fixed Income............................... 1,631.1
Money Market Funds.................................... 21,968.9
</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 the 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.

DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
Class A, Class B and Class C shares of the Fund under separate distribution
contracts with the Corporation dated July 7, 1993 and November 10, 1995
(collectively, "Distribution Contracts") that require Mitchell Hutchins to use
its best efforts, consistent with its other businesses, to sell shares of the
Fund. Shares of the Fund are offered continuously. Under separate exclusive
dealer agreements between Mitchell Hutchins and PaineWebber dated July 7, 1993
and November 10, 1995 relating to the Class A, Class B and Class C shares of
the Fund (collectively, "Exclusive Dealer Agreements"), PaineWebber and its
correspondent firms sell the Fund's shares.

Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares of the Fund adopted by the Corporation in the manner prescribed
under Rule 12b-1 under the 1940 Act ("Class A Plan," "Class B Plan" and "Class
C Plan," collectively, "Plans"), the 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 and Class C Plans,
the Fund pays Mitchell Hutchins distribution fees, accrued daily and payable
monthly, at the annual rate of 0.50% of the average daily net assets of the
Class B shares and the Class C shares.

17
<PAGE>

Among other things, each Plan provides that (1) Mitchell Hutchins will submit
to the board at least quarterly, and the directors will review, reports
regarding all amounts expended under the Plan and the purposes for which such
expenditures were made, (2) the Plan will continue in effect only so long as it
is approved at least annually, and any material amendment thereto is approved,
by the board, including those directors who are not "interested persons" of the
Corporation 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 the 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 directors who are not
"interested persons" of the Corporation shall be committed to the discretion of
the directors who are not "interested persons" of the Corporation.

In reporting amounts expended under the Plans to the directors, 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.

For the fiscal year ended February 29, 1996, the Fund paid (or accrued) fees
to Mitchell Hutchins under the Plans as follows: Class A--$44,610, Class B--
$255,457 and Class C--$80,194.

Mitchell Hutchins estimates that it and its parent corporation, PaineWebber,
incurred the following shareholder service-related and distribution-related
expenses with respect to the Fund for the fiscal year ended February 29, 1996:

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------- -------- --------
<S> <C> <C> <C>
Marketing and advertising........................... $ 23,771 $15,992 $ 20,190
Amortization of commissions......................... NA 166,290 16,194
Printing of prospectuses and statements of addi-
tional information for other than current share-
holders............................................ 213 239 51
Service fees paid to PaineWebber investment execu-
tives.............................................. 20,045 33,129 10,111
Branch network costs allocated and interest expense
................................................... 125,416 99,717 108,771
</TABLE>

"Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins in 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 the Class A Plan, the directors considered all the features of
the distribution system, including (1) the benefit to the Fund and its
shareholders of the Fund being available as an exchange vehicle for the Class A
shares of other PaineWebber mutual funds such that Class A Fund shares could be
exchanged with Class A shares of other PaineWebber mutual funds without an
initial sales charge being incurred, (2) the advantages to the shareholders of
economies of scale resulting from growth in the Fund's assets and potential
continued growth, (3) the services provided to the Fund and its shareholders by
Mitchell Hutchins, (4) the services provided by PaineWebber pursuant

18
<PAGE>

to its Exclusive Dealer Agreement with Mitchell Hutchins and (5) Mitchell
Hutchins' shareholder service-related expenses and costs.

In approving the Class B Plan, the directors 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
benefit to the Fund and its shareholders of the Fund being available as an
exchange vehicle for shares of the corresponding class of other PaineWebber
mutual funds such that Class B Fund shares could be exchanged with shares of
the corresponding class of other PaineWebber mutual funds without a contingent
deferred sales charge being incurred; (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 and distribution-related expenses and costs.

In approving the Class C Plan, the directors considered all the features of
the distribution system, including (1) the benefit to the Fund and its
shareholders of the Fund being available as an exchange vehicle for shares of
the corresponding class of other PaineWebber mutual funds, (2) the advantage to
investors in 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 do not face contingent deferred sales charges for shares held more than one
year, 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 directors 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 of shares
held more than one year, was conditioned upon its expectation of being
compensated under the Class C Plan.

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

For the fiscal year ended February 29, 1996, Mitchell Hutchins earned and
retained the following contingent deferred sales charges paid upon certain
redemptions of Class A, Class B and Class C shares:

<TABLE>
<S> <C>
Class A....................................... $ 0
Class B....................................... $285,185
Class C....................................... $ 0
</TABLE>

19
<PAGE>

PORTFOLIO TRANSACTIONS

The Advisory Contract authorizes Mitchell Hutchins (with the approval of the
board) to select brokers and dealers to execute purchases and sales of the
Fund's portfolio securities. It directs Mitchell Hutchins to use its best
efforts to obtain the best available price and most favorable execution with
respect to all transactions for the Fund. To the extent that the execution and
price offered by more than one dealer are comparable, Mitchell Hutchins may, in
its discretion, effect transactions in portfolio securities with dealers who
provide the Fund with research, analysis, advice and similar services. The Fund
will not purchase portfolio securities at a higher price or sell such
securities at a lower price in connection with transactions effected with a
dealer, acting as principal, who furnishes research services to Mitchell
Hutchins than would be the case if no weight were given by Mitchell Hutchins to
the dealer's furnishing of such services. For purchases or sales with broker-
dealer firms that 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 that could be purchased
for hard dollars. Mitchell Hutchins may engage in agency transactions in over-
the-counter ("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 dealers
through which or with which the 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 dealers in connection with
other funds or accounts that Mitchell Hutchins advises may be used by Mitchell
Hutchins in advising the Fund. Since its inception, the Fund has not paid any
brokerage commissions, nor has it allocated any transactions to dealers for
research, analysis, advice and similar services. Information and research
received from such dealers will be in addition to, and not in lieu of, the
services required to be performed by Mitchell Hutchins under the Advisory
Contract.

The Fund purchases portfolio securities from dealers and underwriters as well
as from issuers. Securities are usually traded on a net basis with dealers
acting as principal for their own accounts without a stated commission. 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. When securities are purchased
directly from an issuer, no commissions or discounts are paid. When securities
are purchased in underwritten offerings, they include a fixed amount of
compensation to the underwriter.

Investment decisions for the 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 the 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 the Fund and such other account(s)
as to amount according to a formula deemed equitable to the Fund and such
account(s). While in some

20
<PAGE>

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.

ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION; REDUCED SALES CHARGES

As discussed in the Prospectus, eligible shares of the Fund may be exchanged
only 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 the 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 which make cash payments undesirable, the Fund reserves
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Fund and valued in the same way as they would
be valued for purposes of computing the Fund's net asset value. Any such
redemption in kind will be made with readily marketable securities, to the
extent available. If payment is made in securities, a shareholder may incur
brokerage expenses in converting these securities into cash. The Corporation
has elected, however, to be governed by Rule 18f-1 under the 1940 Act, under
which the 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 Securities and
Exchange Commission ("SEC") permits its withdrawal. The 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, which makes it
not reasonably practicable for the Fund to dispose of securities owned by it or
to determine fairly 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 the Fund's portfolio at the time.

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

The contingent deferred sales charge on Class B shares is waived with respect
to redemptions of shares purchased prior to July 1, 1991 by officers, directors
(or trustees) or employees of the Corporation, Mitchell Hutchins or their
affiliates (or their spouses and children under age 21). The contingent
deferred sales charge will be reduced by 50% with respect to redemptions of
Class B shares that represent shares purchased prior to July 1, 1991 with a net
asset value at the time of purchase of at least $1 million.

21
<PAGE>

CONVERSION OF CLASS B SHARES

Class B shares of the Fund will automatically convert to Class A shares,
based on the relative net asset values per share of the two classes, as of the
close of business on the first Business Day (as defined 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 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.

Under normal circumstances, the net asset values per share of the two classes
will be the same. However, if the Fund's accrued expenses on any Business Day
were to exceed the Fund's accrued income for that Business Day, the net asset
value per share of the Class B shares could be lower than that of the Class A
shares because of the higher ongoing expenses borne by the Class B shares. If
such a divergence existed on a conversion date, a shareholder would receive
fewer Class A shares than the number of Class B shares converted, although the
dollar value would be the same. As set forth below under "Valuation of Shares,"
the Fund uses its best efforts to maintain its net asset value for each class
at $1.00 per share, and Mitchell Hutchins considers the possibility that the
net asset values per share of the two classes will diverge to be remote.

VALUATION OF SHARES

The Fund determines its net asset value per share separately for each Class
as of the close of regular trading (currently 4:00 p.m., Eastern time) on the
NYSE on 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.

The Fund values its portfolio securities in accordance with the amortized
cost method of valuation under Rule 2a-7 under the 1940 Act. To use amortized
cost to value its portfolio securities,

22
<PAGE>

the Fund must adhere to certain conditions under that Rule relating to the
Fund's investments, some of which are discussed in the Prospectus. Amortized
cost is an approximation of market value of an instrument, whereby the
difference between its acquisition cost and value at maturity is amortized on a
straight-line basis over the remaining life of the instrument. The effect of
changes in the market value of a security as a result of fluctuating interest
rates is not taken into account and thus the amortized cost method of valuation
may result in the value of a security being higher or lower than its actual
market value. In the event that a large number of redemptions take place at a
time when interest rates have increased, the Fund may have to sell portfolio
securities prior to maturity and at a price that might not be as desirable.

The board has established procedures for the purpose of maintaining a
constant net asset value of $1.00 per share, which include a review of the
extent of any deviation of net asset value per share, based on available market
quotations, from the $1.00 amortized cost per share. Should that deviation
exceed 1/2 of 1%, the directors will promptly consider whether any action
should be initiated to eliminate or reduce material dilution or other unfair
results to shareholders. Such action may include redeeming shares in kind,
selling portfolio securities prior to maturity, reducing or withholding
dividends and utilizing a net asset value per share as determined by using
available market quotations. The Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less and will not purchase any instrument with
a remaining maturity greater than 13 months, will limit portfolio investments,
including repurchase agreements, to those U.S. dollar-denominated instruments
that are of high quality and that the directors determine present minimal
credit risks as advised by Mitchell Hutchins, and will comply with certain
reporting and recordkeeping procedures. There is no assurance that constant net
asset value will be maintained. In the event amortized cost ceases to represent
fair value per share, the board will take appropriate action.

In determining the approximate market value of portfolio investments, the
Fund may employ outside organizations, which may use a matrix or formula method
that takes into consideration market indices, matrices, yield curves and other
specific adjustments. This may result in the securities being valued at a price
different from the price that would have been determined had the matrix or
formula method not been used. All cash, receivables and current payables are
carried at their face value. Other assets, if any, are valued at fair value as
determined in good faith by or under the direction of the board.

CALCULATION OF YIELD

The Fund computes its yield and effective yield quotations for each class of
shares using standardized methods required by the SEC. The Fund from time to
time advertises for each class of shares (1) the current yield based on a
recently ended seven-day period, computed by determining the net change,
exclusive of capital changes, in the value of a hypothetical pre-existing
account having a balance of one share of such class at the beginning of the
period, subtracting a hypothetical charge reflecting deductions from that
shareholder account, dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7), with the resulting yield figure
carried to at least the nearest hundredth of one percent, and (2) the effective
yield based on the same seven-day

23
<PAGE>

period by compounding the base period return and by adding 1, raising the sum
to a power equal to (365/7) and subtracting 1 from the result, according to the
following formula:

EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)/3657/] - 1

For the seven days ended February 29, 1996, the yield of the Fund's Class A
shares was 3.95%, of the Class B shares was 3.44% and of the Class C shares was
3.34%. The effective yield of the Fund's Class A shares was 4.03%, of the Class
B shares was 3.50% and of the Class C shares was 3.40%.

Yield may fluctuate daily and does not provide a basis for determining future
yields. Because the yield of each class of shares of the Fund fluctuates, it
cannot be compared with yields on savings accounts or other investment
alternatives that provide an agreed-to or guaranteed fixed yield for a stated
period of time. However, yield information may be useful to an investor
considering temporary investments in money market instruments. In comparing the
yield of one money market fund to another, consideration should be given to
each fund's investment policies, including the types of investments made, the
average maturity of the portfolio securities and whether there are any special
account charges which may reduce the yield.

OTHER INFORMATION. The Fund's performance data quoted in advertising and
other promotional materials ("Performance Advertisements") represent past
performance and are not intended to indicate future results. The return on an
investment in the Fund will fluctuate. In Performance Advertisements, the Fund
may compare its yield with data published by Lipper Analytical Services, Inc.
for money funds ("Lipper"), CDA Investment Technologies, Inc. ("CDA"),
IBC/Donoghue's Money Market Fund Report ("Donoghue"), 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 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 the Consumer Price Index as published by
the U.S. Department of Commerce. The Fund also may refer in such materials to
mutual fund performance rankings and other data, such as comparative asset,
expense and fee levels, published by Lipper, CDA, Donoghue, Wiesenberger, ICD
or Morningstar. Performance Advertisements also may refer to discussions of the
Fund and comparative mutual fund data and ratings reported in independent
periodicals, including THE WALL STREET JOURNAL, MONEY Magazine, FORBES,
BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES, THE
CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS. Comparisons in
Performance Advertisements may be in graphic form.

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

24
<PAGE>

The Fund may also compare its performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Certificate of Deposit
Index, the Bank Rate Monitor National Index and the averages of yields of CDs
of major banks published by Banxquote(R) Money Markets. In comparing the 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, its returns will fluctuate and, while the Fund attempts to maintain
a stable net asset value of $1.00 per share, there is no assurance that it will
be able to do so.

TAXES

In order to continue to qualify for treatment as a regulated investment
company under the Internal Revenue Code, the 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, if any) and must meet several additional requirements. Among
these requirements are 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, gains from the sale or other disposition of
securities and certain other income; (2) the Fund must derive less than 30% of
its gross income each taxable year from the sale or other disposition of
securities held for less than three months; (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 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 (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) of any one issuer.

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

OTHER INFORMATION

CLASS-SPECIFIC EXPENSES. The Fund might determine to allocate certain of its
expenses (in addition to distribution fees) to the specific classes of its
shares to which those expenses are attributable. For example, Class B shares
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 multi-year
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

25
<PAGE>

by the number of shareholder accounts in each class and the relative amounts of
net assets in each class.

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

INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 1177 Avenue of the Americas,
New York, N.Y. 10036, serves as the Corporation's independent accountants.

FINANCIAL STATEMENTS

The Fund's Annual Report to Shareholders for the fiscal year ended February
29, 1996 is a separate document supplied with this Statement of Additional
Information and the financial statements, accompanying notes and report of
independent accountants appearing therein are incorporated by reference in this
Statement of Additional Information.

26
<PAGE>

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS
AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY
THE 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
Directors and Officers..................................................... 6
Investment Advisory, Administration and Distribution Arrangements.......... 15
Portfolio Transactions..................................................... 20
Additional Exchange and Redemption Information; Reduced Sales Charges...... 21
Conversion of Class B Shares............................................... 22
Valuation of Shares........................................................ 22
Calculation of Yield....................................................... 23
Taxes...................................................................... 25
Other Information.......................................................... 25
Financial Statements....................................................... 26
</TABLE>

PaineWebber
Money Market Fund

- --------------------------------------------------------------------------------
Statement of Additional Information July 1, 1996

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

[LOGO OF PAINEWEBBER APPEARS HERE]