PAINEWEBBER MASTER SERIES INC, 485BPOS, 1999-12-09

PAINEWEBBER MASTER SERIES INC
485BPOS, 1999-12-09

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As filed with the Securities and Exchange Commission on December 9, 1999

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

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]

Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 40 [ X ]

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 33 [ X ]
(Check appropriate box or boxes.)

PAINEWEBBER MASTER SERIES, INC.
(Exact name of registrant as specified in charter)
51 West 52nd Street
New York, New York 10019-6114
(Address of principal executive offices)

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

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

Copies to:

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

Approximate Date of Proposed Public Offering: Effective Date of this Post
Effective Amendment.

It is proposed that this filing will become effective:
[ ] Immediately upon filing pursuant to Rule 485(b)
[X] On December 10, 1999 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485 (a)(1)
[ ] On______________pursuant to Rule 485 (a)(1)
[ ] 75 days after filing pursuant to Rule 485(a)(2)
[ ] On ______________ pursuant to Rule 485(a)(2)

Title of Securities Being Registered: Class A, B, C and Y Shares of Common
Stock of PaineWebber Balanced Fund.

<PAGE>

PaineWebber
Balanced Fund

PaineWebber
Tactical Allocation Fund

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

PROSPECTUS

DECEMBER 10, 1999

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

This prospectus offers shares in PaineWebber's asset allocation funds. Each fund
offers four classes of shares, Classes A, B, C and Y. Each class has different
sales charges and ongoing expenses. You can choose the class that is best for
you based on how much you plan to invest and how long you plan to hold your fund
shares. Class Y shares are available only to certain types of investors.

As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved either fund's shares or determined whether this
prospectus is complete or accurate. To state otherwise is a crime.

<PAGE>

PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund

Contents
THE FUNDS
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What every investor 3 PaineWebber Balanced Fund
should know about
the funds 6 PaineWebber Tactical Allocation Fund

9 More About Risks and Investment Strategies

YOUR INVESTMENT
- --------------------------------------------------------------------------------

Information for 11 Managing Your Fund Account
managing your fund -- Flexible Pricing
account -- Buying Shares
-- Selling Shares
-- Exchanging Shares
-- Pricing and Valuation

ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------

Additional important 17 Management
information about
the funds 19 Dividends and Taxes

20 Financial Highlights

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

Where to learn more Back cover
about PaineWebber
mutual funds

- --------------------------------------------------------------------------------
The funds are not complete or
balanced investment programs.
- --------------------------------------------------------------------------------

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Prospectus Page 2
<PAGE>

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PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund

Balanced Fund

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- --------------------------------------------------------------------------------

FUND OBJECTIVE

High total return with low volatility.

PRINCIPAL INVESTMENT STRATEGIES

The fund allocates its investments among three investment
sectors:
o stocks

o bonds

o cash (money market instruments)

The fund normally has investments in each sector but it always keeps at least
25% of its total assets in a combination of bonds and cash. This is intended to
limit changes in the value of fund shares compared to funds that invest solely
in stocks.

The fund's bonds are primarily investment grade, but it may invest, to a lesser
extent, in lower quality bonds. The fund may invest in U.S. dollar-denominated
securities of foreign issuers. The fund may (but is not required to) use
options, futures contracts and other derivatives to adjust its exposure to
different asset classes, to manage the "duration" of its bond investments and to
maintain exposure to stocks or bonds while maintaining a cash balance for fund
management purposes. "Duration" is a measure of the fund's exposure to interest
rate risk.

Mitchell Hutchins Asset Management Inc., the fund's investment adviser, believes
investors tend to reach a consensus as to the likely effect of changes in key
economic variables (for example, interest rates, profits and inflation) on each
investment sector. Mitchell Hutchins also believes that prices of securities in
each sector tend to move toward a level that reflects that consensus, but that
this takes time. By using fundamental valuation techniques, Mitchell Hutchins
attempts to adjust the allocation of the fund's assets among asset classes
before prices fully reflect the consensus view.

Mitchell Hutchins uses the following process to select individual securities for
each asset class:

o STOCKS. Mitchell Hutchins uses its own Factor Valuation Model to identify
companies that appear undervalued. The model ranks companies based on
"value" factors, such as dividends, cash flows, earnings and book values, as
well as on "growth" factors, such as earnings momentum and industry
performance forecasts. Mitchell Hutchins then applies fundamental analysis
to select specific stocks from among those identified by the model.

o BONDS. Mitchell Hutchins selects bonds based on its analysis of their
maturity and risk structures (comparing yields on U.S. Treasury bonds to
yields on riskier types of bonds).

As of February 28, 1999, the fund's portfolio assets were allocated 45.6% to
stocks, 41.1% to bonds and 13.3% to cash. As of August 31, 1999, the fund's
portfolio assets were allocated 55.2% to stocks, 32.7% to bonds and 12.1% to
cash. As of November 30, 1999, the fund's portfolio assets were allocated 52.6%
to stocks, 31.8% to bonds and 15.6% to cash.

PRINCIPAL RISKS

An investment in the fund is not guaranteed; investors may lose money by
investing in the fund.

Mitchell Hutchins may not be successful in choosing the best allocation among
the three investment sectors. Because it invests in both stocks and bonds, the
fund is subject to both equity risk and interest rate risk. Equities, such as
common stocks, generally fluctuate in price more than other investments. The
fund could lose all of its investment in a company's stock. Interest rate risk
means that the value of the fund's bonds generally will fall when interest rates
rise.

More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies." In particular,
see the following headings:
o Sector Allocation Risk

o Equity Risk

o Interest Rate Risk

o Credit Risk

o Foreign Securities Risk

o Derivatives Risk

INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).

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Prospectus Page 3
<PAGE>

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PaineWebber Balanced Fund

PERFORMANCE

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

RISK/RETURN BAR CHART AND TABLE

The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.

The bar chart shows how the fund's performance has varied from year to year. The
chart shows Class B shares because they have a longer performance history than
any other class of fund shares. The chart does not reflect the effect of sales
charges; if it did, the total returns shown would be lower.

The table that follows the chart shows the average annual returns over several
time periods for each class of the fund's shares. The table does reflect fund
sales charges. The table compares fund returns to returns on a broad-based
market index. The index is unmanaged and, therefore, does not reflect any sales
charges or expenses.

The fund's past performance does not necessarily indicate how the fund will
perform in the future.

TOTAL RETURN ON CLASS B SHARES

<TABLE>
<CAPTION>
[GRAPH]

Calendar
Years Percentages
- ------- -----------
<S> <C>
1989 10.84%
1990 1.95%
1991 18.52%
1992 4.46%
1993 14.66%
1994 -10.51%
1995 22.23%
1996 13.81%
1997 23.63%
1998 18.02%
</TABLE>

Total return January 1 to September 30, 1999 -- (4.68)%

Best quarter during years shown: 4th quarter, 1998-- 15.09%

Worst quarter during years shown: 3rd quarter, 1998 -- (8.21)%

AVERAGE ANNUAL TOTAL RETURNS*
as of December 31, 1998

CLASS CLASS A CLASS B** CLASS C S&P 500
(INCEPTION DATE) (7/1/91) (12/12/86) (7/2/92) INDEX
- ---------------- -------- ---------- -------- -------
One Year 13.56% 13.02% 17.04% 28.60%
Five Years 12.50% 12.43% 12.68% 24.05%
Ten Years N/A 11.73% N/A 19.19%
Life of Class 12.63% 10.50% 12.82% ***

- ----------

* No return is shown for Class Y shares because they were not in existence for
a full calendar year.

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

*** Average annual total returns for the S&P 500 Index for the life of each
class shown were as follows: Class A -- 20.19%, Class B -- 17.36% and Class
C -- 21.27%.

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Prospectus Page 4
<PAGE>

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PaineWebber Balanced Fund

EXPENSES AND FEE TABLES

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

FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.

SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investment)
<TABLE>
<CAPTION>

CLASS A CLASS B CLASS C CLASS Y
------ ------ ------ ------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a % of offering price) ..................................... 4.5% None None None
Maximum Contingent Deferred Sales Charge (Load) (CDSC)
(as a % of offering price)` .................................... None 5% 1% None
Exchange Fee ..................................................... None None None None

ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)

CLASS A CLASS B CLASS C CLASS Y
------ ------ ------ ------
Management Fees .................................................. 0.75% 0.75% 0.75% 0.75%
Distribution and/or Service (12b-1) Fees ......................... 0.25 1.00 1.00 None
Other Expenses ................................................... 0.22 0.23 0.20 0.21
---- ---- ---- ----
Total Annual Fund Operating Expenses ............................. 1.22% 1.98% 1.95% 0.96%
==== ==== ==== ====

</TABLE>

EXAMPLE

This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.

The example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A ......................................................... $569 $820 $1,090 $1,861
Class B (assuming sale of all shares at end of period) .......... 701 921 1,268 1,930
Class B (assuming no sale of shares) ............................ 201 621 1,068 1,930
Class C (assuming sale of all shares at end of period) .......... 298 612 1,052 2,275
Class C (assuming no sale of shares) ............................ 198 612 1,052 2,275
Class Y 98 306 531 1,178
</TABLE>

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Prospectus Page 5
<PAGE>

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PaineWebber Tactical Allocation Fund

Tactical Allocation Fund

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- --------------------------------------------------------------------------------

FUND OBJECTIVE

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

PRINCIPAL INVESTMENT STRATEGIES

The fund allocates its assets between

o a stock portion that is designed to track the performance of the S&P 500
Composite Stock Price Index and

o a fixed income portion that consists of either five-year U.S. Treasury notes
or U.S. Treasury bills with remaining maturities of 30 days.

Mitchell Hutchins Asset Management Inc., the fund's investment adviser,
reallocates the fund's assets in accordance with the recommendations of its own
Tactical Allocation Model on the first business day of each month.

The Tactical Allocation Model attempts to track the performance of the S&P 500
Index in periods of strong market performance. The Model attempts to take a more
defensive posture by reallocating assets to bonds or cash when the Model signals
a potential bear market, prolonged downturn in stock prices or significant loss
in value. The Model can recommend stock allocations of 100%, 75%, 50%, 25% or
0%.

The fund may (but is not required to) use options and futures and other
derivatives to adjust its exposure to different asset classes or to maintain
exposure to stocks or bonds while maintaining a cash balance for fund management
purposes. Mitchell Hutchins also may use these instruments to reduce the risk of
adverse price movements while investing in cash received when investors buy fund
shares, to facilitate trading and to reduce transaction costs.

As of February 28, 1999, and as of August 31, 1999 the fund's portfolio assets
were allocated 100% to stocks. As of December 1, 1999, the fund's portfolio
assets were allocated 75% to stocks and 25% to cash.

PRINCIPAL RISKS

An investment in the fund is not guaranteed; investors may lose money by
investing in the fund.

The fund is subject to sector allocation risk, in that the Tactical Allocation
Model may not correctly predict the appropriate times to shift the fund's assets
from one asset class to another. Equities, such as common stocks, generally
fluctuate in price more than other investments. The fund could lose all of its
investment in a company's stock. The S&P 500 Index includes some U.S.
dollar-denominated foreign securities. To the extent the fund invests in bonds,
it is subject to interest rate risk, which means that the value of these
investments generally will fall when interest rates rise.

More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies." In particular,
see the following headings:

o Sector Allocation Risk

o Equity Risk

o Index Tracking Risk

o Interest Rate Risk

o Derivatives Risk

o Foreign Securities Risk

INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).

- --------------------------------------------------------------------------------
Prospectus Page 6
<PAGE>

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PaineWebber Tactical Allocation Fund

PERFORMANCE

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

RISK/RETURN BAR CHART AND TABLE

The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.

The bar chart shows how the fund's performance has varied from year to year. The
chart shows Class C shares because they have a longer performance history than
any other class of fund shares. The chart does not reflect the effect of sales
charges; if it did, the total returns shown would be lower.

The fund's past performance does not necessarily indicate how the fund will
perform in the future.

TOTAL RETURN ON CLASS C SHARES (1993 is the fund's first full calendar year of
operations.)

<TABLE>
<CAPTION>
[GRAPH]

Calendar
Years Percentages
- ------- -----------
<S> <C>
1993 7.64%
1994 -1.28%
1995 34.09%
1996 20.66%
1997 31.01%
1998 26.78%
</TABLE>

Total return January 1 to September 30, 1999 -- 4.07%

Best quarter during years shown: 4th quarter, 1998-- 20.82%

Worst quarter during years shown: 3rd quarter, 1998 -- (10.33)%

AVERAGE ANNUAL TOTAL RETURNS*
as of December 31, 1998

CLASS CLASS A CLASS B** CLASS C CLASS Y S&P 500
(INCEPTION DATE) (5/10/93) (1/30/96) (7/22/92) (5/10/93) INDEX
- ---------------- --------- --------- --------- --------- -----
<S> <C> <C> <C> <C> <C>

One Year ..................... 22.01% 21.77% 25.78% 28.15% 28.60%
Five Years ................... 21.33% N/A 21.55% 22.79% 24.05%
Life of Class ................ 19.99% 25.25% 18.85% 21.30% *

</TABLE>

- ----------

* Average annual total returns for the S&P 500 Index for the life of each class
shown were as follows: Class A -- 22.60%, Class B -- 27.63%, Class C --
20.81% and Class Y --22.60%.

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

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

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PaineWebber Tactical Allocation Fund

EXPENSES AND FEE TABLES

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

FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.

SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investment)
<TABLE>
<CAPTION>

CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a % of offering price) ......................................... 4.5% None None None
Maximum Contingent Deferred Sales Charge (Load) (CDSC)
(as a % of offering price) ......................................... None 5% 1% None
Exchange Fee ......................................................... None None None None

ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)

CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
Management Fees ...................................................... 0.46% 0.46% 0.46% 0.46%
Distribution and/or Service (12b-1) Fees ............................. 0.25 1.00 1.00 None
Other Expenses ....................................................... 0.13 0.13 0.14 0.12
---- ---- ---- ----
Total Annual Fund Operating Expenses ................................. 0.84% 1.59% 1.60% 0.58%
==== ==== ==== ====

</TABLE>

EXAMPLE

This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A ................................................................ $ 532 $ 706 $ 895 $1,440
Class B (assuming sale of all shares at end of period) ................. 662 802 1,066 1,503
Class B (assuming no sale of shares) ................................... 162 502 866 1,503
Class C (assuming sale of all shares at end of period) ................. 263 505 871 1,900
Class C (assuming no sale of shares) ................................... 163 505 871 1,900
Class Y ................................................................ 59 186 324 726
</TABLE>

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Prospectus Page 8
<PAGE>

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PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund

MORE ABOUT RISKS AND INVESTMENT
STRATEGIES
- --------------------------------------------------------------------------------

PRINCIPAL RISKS

The main risks of investing in one or both of the funds are described below. Not
all of these risks apply to each fund. You can find a list of the main risks
that apply to a particular fund by looking under the "Investment Objective,
Strategies and Risks" heading for that fund.

Other risks of investing in a fund, along with further detail about some of the
risks described below, are discussed in the funds' Statement of Additional
Information ("SAI"). Information on how you can obtain the SAI is on the back
cover of this prospectus.

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

DERIVATIVES RISK. The value of "derivatives" - so-called because their value
"derives" from the value of an underlying asset, reference rate or index - may
rise or fall more rapidly than other investments. For some derivatives, it is
possible for a fund to lose more than the amount it invested in the derivative.
Options and futures contracts are examples of derivatives. If a fund uses
derivatives to adjust or "hedge" the overall risk of its portfolio, it is
possible that the hedge will not succeed. This may happen for various reasons,
including unexpected changes in the value of the derivatives that are not
matched by opposite changes in the value of the rest of the fund's portfolio.

EQUITY RISK. The prices of common stocks and other equity securities generally
fluctuate more than those of other investments. They reflect changes in the
issuing company's financial condition and changes in the overall market. A fund
may lose a substantial part, or even all, of its investment in a company's
stock.

FOREIGN SECURITIES RISK. Foreign securities involve risks that normally are not
associated with securities of U.S. issuers. These include risks relating to
political, social and economic developments abroad and differences between U.S.
and foreign regulatory requirements and market practices.

INDEX TRACKING RISK. Tactical Allocation Fund expects a close correlation
between the performance of the portion of its assets allocated to stocks and
that of the S&P 500 Index in both rising and falling markets. While the fund
attempts to replicate, before deduction of fees and operating expenses, the
investment results of the Index, the fund's investment results generally will
not be identical to those of the Index. Deviations from the performance of the
Index may result from shareholder purchases and sales of shares that can occur
daily. In addition, the fund must pay fees and expenses that are not borne by
the Index.

INTEREST RATE RISK. The value of bonds can be expected to fall when interest
rates rise and to rise when interest rates fall. Interest rate risk is the risk
that interest rates will rise, so that the value of a fund's investments in
bonds will fall. Because interest rate risk is the primary risk presented by
U.S. government and other very high quality bonds, changes in interest rates may
actually have a larger effect on the value of those bonds than on lower quality
bonds.

SECTOR ALLOCATION RISK. Mitchell Hutchins may not be successful in choosing the
best allocation among market sectors. A fund that allocates its assets among
market sectors is more dependent on Mitchell Hutchins' ability to successfully
assess the relative values in each sector than are funds that do not do so.

The Mitchell Hutchins Tactical Allocation Model may not correctly predict the
times to shift Tactical Allocation Fund's assets from one type of investment to
another.

ADDITIONAL RISKS

YEAR 2000 RISK. The funds could be adversely affected by problems relating to
the inability of computer systems used by Mitchell Hutchins and the funds' other
service providers to recognize the year 2000. While year 2000-related computer
problems could have a negative effect on the funds, Mitchell Hutchins is working
to avoid these

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Prospectus Page 9
<PAGE>

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PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund

problems with respect to its own computer systems and to obtain assurances from
service providers that they are taking similar steps.

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

ADDITIONAL INVESTMENT STRATEGIES

DEFENSIVE POSITIONS; CASH RESERVES. In order to protect itself from adverse
market conditions, a fund may take a temporary defensive position that is
different from its normal investment strategy. This means that the fund may
temporarily invest a larger-than-normal part, or even all, of its assets in cash
or money market instruments. Since these investments provide relatively low
income, a defensive position may not be consistent with achieving a fund's
investment objective. Balanced Fund may invest in money market instruments on an
unlimited basis as part of its ordinary investment strategy. Tactical Allocation
Fund may invest all or any portion of its total assets in U.S. Treasury bills
when recommended by the Mitchell Hutchins Tactical Allocation Model. The funds
normally maintains a limited amount of cash for liquidity purposes.

PORTFOLIO TURNOVER. Each fund may engage in frequent trading to achieve its
investment objective. Frequent trading can result in portfolio turnover of 100%
or more (high portfolio turnover).

Frequent trading may increase a fund's capital gains that are realized for tax
purposes in any given year. This may increase the fund's taxable dividends in
that year. Frequent trading also may increase the portion of a fund's realized
capital gains that are considered "short-term" for tax purposes. Shareholders
will pay higher taxes on dividends that represent net short-term capital gains
than they would pay on dividends that represent net long-term capital gains.
Frequent trading also may result in higher fund expenses due to transaction
costs.

The funds do not restrict the frequency of trading to limit expenses or the tax
effect that the fund's dividends may have on shareholders.

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Prospectus Page 10

<PAGE>

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PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund

YOUR INVESTMENT
MANAGING YOUR FUND ACCOUNT
- --------------------------------------------------------------------------------

FLEXIBLE PRICING

The funds offer four classes of shares - Class A, Class B, Class C and Class Y.
Each class has different sales charges and ongoing expenses. You can choose the
class that is best for you, based on how much you plan to invest and how long
you plan to hold your fund investment. Class Y shares are only available to
certain types of investors.

Each fund has adopted a plan under rule 12b-1 for its Class A, Class B and Class
C shares that allows it to pay service and (for Class B and Class C shares)
distribution fees for the sale of its shares and services provided to
shareholders. Because the 12b-1 distribution fees for Class B and Class C shares
are paid out of a fund's assets on an ongoing basis, over time they will
increase the cost of your investment and may cost you more than if you paid a
front-end sales charge.

CLASS A SHARES

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

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

CLASS A SALES CHARGES
<TABLE>
<CAPTION>

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

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

(2) Mitchell Hutchins pays 1% to PaineWebber.

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Prospectus Page 11
<PAGE>

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PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund

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

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

o your spouse, parents or children under age 21;

o your Individual Retirement Accounts (IRAs);

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

o a company that you control;

o a trust that you created;

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

o accounts with the same adviser.

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

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

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

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

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

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

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

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

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

o Acquire fund shares through a PaineWebber InsightOneSM Program brokerage
account.

NOTE: See the funds' SAI for some other sales charge waivers. If you think you
qualify for any sales charge reductions or waivers, you will need to provide
documentation to PaineWebber or the fund. For more information, you should
contact your PaineWebber Financial Advisor or correspondent firm or call
1-800-647-1568. If you want information on the funds' Systematic Withdrawal
Plan, see the SAI or contact your PaineWebber Financial Advisor or correspondent
firm.

CLASS B SHARES

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

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

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

- --------------------------------------------------------------------------------
Prospectus Page 12
<PAGE>

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

PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund

PERCENTAGE BY WHICH THE
IF YOU SELL SHARES' NET ASSET
SHARES WITHIN: VALUE IS MULTIPLIED:
- ------------- -----------------------
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

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

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

o First, Class B shares representing reinvested dividends, and

o Second, Class B shares that you have owned the longest.

Sales Charge Waivers. You may qualify for a waiver of the deferred sales charge
on a sale of shares if:

o You participate in the Systematic Withdrawal Plan;

o You are older than 591/2 and are selling shares to take a distribution from
certain types of retirement plans;

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

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

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

o You are eligible to invest in certain offshore investment pools offered by
PaineWebber, your shares are sold before March 31, 2000 and the proceeds are
used to purchase interests in one or more of these pools.

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

CLASS C SHARES

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

Class C shares pay an annual 12b-1 distribution fee of 0.75% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
Class C shares do not convert to another class of shares. This means that you
will pay the 12b-1 fees for as long as you own your shares.

Class C shares also have a contingent deferred sales charge. You may have to pay
the deferred sales charge if you sell your shares within one year of the date
you purchased them. We calculate the deferred sales charge on sales of Class C
shares by multiplying 1.00% by the lesser of the net asset value of the Class C
shares at the time of purchase or the net asset value at the time of sale. We
will not impose the deferred sales charge on Class C shares representing
reinvestment of dividends or on withdrawals in the first year after purchase, of
up to 12% of the value of your Class C shares under the Systematic Withdrawal
Plan.

You may be eligible to sell your Class C shares without paying a contingent
deferred sales charge if you:

o Are a 401(k) or 403(b) qualified employee benefit plan with fewer than 100
employees or less than $1 million in assets, or

o Are eligible to invest in certain offshore investment pools offered by
PaineWebber, your shares are sold before March 31, 2000 and the proceeds are
used to purchase interests in one or more of those pools.

NOTE: If you want information on the funds' Systematic Withdrawal Plan, see the
SAI or contact your PaineWebber Financial Advisor or correspondent firm.

CLASS Y SHARES

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

o Buy shares through PaineWebber's PACE Multi-Advisor Program;

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

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

PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund

o Buy $10 million or more of PaineWebber fund shares at any one time;

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

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

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

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

BUYING SHARES

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

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

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

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

o Mailing an application with a check; or

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

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

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

MINIMUM INVESTMENTS
- -------------------
To open an account ................... $1,000
To add to an account ................. $ 100

Each fund may waive or reduce these amounts for:

o Employees of PaineWebber or its affiliates; or

o Participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the funds' automatic investment plans.

FREQUENT TRADING. The interests of a fund's long-term shareholders and its
ability to manage its investments may be adversely affected when its shares are
repeatedly bought and sold in response to short-term market fluctuations -- also
known as "market timing." When large dollar amounts are involved, the fund may
have difficulty implementing long-term investment strategies, because it cannot
predict how much cash it will have to invest. Market timing also may force the
fund to sell portfolio securities at disadvantageous times to raise the cash
needed to buy a market timer's fund shares. These factors may hurt the fund's
performance and its shareholders. When Mitchell Hutchins believes frequent
trading would have a disruptive effect on a fund's ability to manage its
investments, Mitchell Hutchins and the fund may reject purchase orders and
exchanges into the fund by any person, group or account that Mitchell Hutchins
believes to be a market timer. A fund may notify the market timer that a
purchase order or an exchange has been rejected after the day the order is
placed.

SELLING SHARES

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

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

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

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

o Your name and address;

o The fund's name;

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

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

PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund

o The fund account number;

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

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

Mail the letter to:

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

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

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

EXCHANGING SHARES

You may exchange Class A, Class B or Class C shares of each fund for shares of
the same class of most other PaineWebber funds. You may not exchange Class Y
shares.

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

Other PaineWebber funds may have different minimum investment amounts. You may
not be able to exchange your shares if your exchange is not as large as the
minimum investment amount in that other fund.

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

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

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

o Your name and address;

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

o Your account number;

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

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

Mail the letter to:

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

A fund may modify or terminate the exchange privilege at any time.

PRICING AND VALUATION

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

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

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

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

PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund

responsible for making sure that your order is promptly sent to the fund.

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

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

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

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

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

PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund

MANAGEMENT
- --------------------------------------------------------------------------------

INVESTMENT ADVISER

Mitchell Hutchins Asset Management Inc. is the investment adviser and
administrator of the funds. Mitchell Hutchins is located at 51 West 52nd Street,
New York, New York 10019-6114. It is a wholly owned asset management subsidiary
of PaineWebber Incorporated, which is wholly owned by Paine Webber Group Inc., a
publicly owned financial services holding company. On October 31, 1999, Mitchell
Hutchins was adviser or sub-adviser of 33 investment companies with 76 separate
portfolios and aggregate assets of approximately $48.9 billion.

PORTFOLIO MANAGERS

BALANCED FUND. T. Kirkham Barneby is responsible for the asset allocation
decisions for Balanced Fund. 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 1995 to March 1998, 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. McCauly 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 assists Mr. McCauley in managing Balanced Fund's debt securities.
Mr. Singh has been a senior vice president of Mitchell Hutchins since September
1993.

Susan Ryan is responsible for the day-to-day management of the portion of
Balanced Fund's assets invested in money market instruments. Ms. Ryan 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.

TACTICAL ALLOCATION FUND. T. Kirkham Barneby is responsible for the asset
allocation decisions for 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.

ADVISORY FEES

The funds paid advisory and administration fees to Mitchell Hutchins for the
most recent fiscal year ended August 31, 1999 at the following annual rates,
based on average daily net assets:

Balanced Fund ..................................... 0.75%(1)
Tactical Allocation Fund .......................... 0.46%(1)
- ----------
(1) During the year ended August 31, 1999 Mitchell Hutchins waived a portion of
its advisory and administration fees. The percentages excluding the waiver
are the same since the fee waiver represents less than 0.005%.

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

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

PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund

MANAGEMENT
- --------------------------------------------------------------------------------

OTHER INFORMATION

The funds have received an exemptive order from the SEC that permits their
boards to appoint and replace sub-advisers and to amend sub-advisory contracts
without obtaining shareholder approval. A fund's shareholders must approve this
policy before its board may implement it. As of the date of this prospectus, the
funds have not asked their shareholders to do so.

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

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PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund

DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------

DIVIDENDS

Balanced Fund normally declares and pays dividends semi-annually and distributes
any gains annually. Tactical Allocation Fund normally declares and pays
dividends and distributes any gains annually.

Classes with higher expenses are expected to have lower dividends. For example,
Class B and Class C shares are expected to have the lowest dividends of any
class of a fund's shares, while Class Y shares are expected to have the highest.

You will receive dividends in additional shares of the same class unless you
elect to receive them in cash. Contact your Financial Advisor at PaineWebber or
one of its correspondent firms if you prefer to receive dividends in cash.

TAXES

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

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

Each fund expects that its dividends will include capital gain distributions.
However, a portion of Balanced Fund's dividends will be taxed as ordinary
income, and Tactical Allocation Fund may also distribute dividends that are
taxed as ordinary income. A distribution of capital gains will be taxed at a
lower rate than ordinary income if the fund held the assets that generated the
gains for more than 12 months. Your fund will tell you how you should treat its
dividends for tax purposes.

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

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PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

The following financial highlights tables are intended to help you understand
the funds' financial performance for the past 5 years. Shorter periods are shown
for classes of fund shares that have existed for less than 5 years. Certain
information reflects financial results for a single fund share. In the tables,
"total investment return" represents the rate that an investor would have earned
(or lost) on an investment in a fund (assuming reinvestment of all dividends).

This information in the financial highlights has been audited by
PricewaterhouseCoopers LLP, independent accountants for Balanced Fund, and Ernst
& Young LLP, independent auditors for Tactical Allocation Fund, whose reports,
along with the funds' financial statements, are included in the funds' Annual
Reports to Shareholders. Annual Reports may be obtained without charge by
calling 1-800-647-1568.

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

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

<PAGE>

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

PaineWebber Balanced Fund

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

CLASS A
----------------------------------------------------------------------------------------
FOR THE
SIX FOR THE FOR THE
FOR THE YEARS ENDED MONTHS YEAR YEAR
AUGUST 31, ENDED ENDED ENDED
--------------------------------------- AUGUST 31, FEBRUARY 29, FEBRUARY 28,
1999 1998 1997 1996 (2) 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ........... $ 11.27 $ 12.50 $ 10.27 $ 10.85 $ 9.80 $ 12.04
-------- -------- -------- -------- -------- --------
Net investment income ........... 0.22++ 0.23++ 0.23++ 0.12++ 0.27++ 0.26
Net realized and unrealied
gains (losses) from
investments, futures
and options ................... 1.56++ 0.31++ 2.79++ (0.12)++ 1.84++ (1.07)
-------- -------- -------- -------- -------- --------
Net increase (decrease)
from investment
operations .................... 1.78 0.54 3.02 0.00 2.11 (0.81)
-------- -------- -------- -------- -------- --------
Dividends from net
investment income ............. (0.22) (0.22) (0.24) (0.10) (0.31) (0.23)
Distributions from
net realized gains
from investment
transactions .................. (1.23) (1.55) (0.55) (0.48) (0.75) (1.20)
-------- -------- -------- -------- -------- --------
Total dividends and
distributions to
shareholders .................. (1.45) (1.77) (0.79) (0.58) (1.06) (1.43)
-------- -------- -------- -------- -------- --------
Net asset value,
end of period ................. $ 11.60 $ 11.27 $ 12.50 $ 10.27 $ 10.85 $ 9.80
======== ======== ======== ======== ======== ========
Total investment return (1) ..... 16.20% 4.69% 30.67% 0.03% 22.08% (6.02)%
======== ======== ======== ======== ======== ========
Ratios/supplemental data:
Net assets, end
of period (000's) ............. $196,684 $182,362 $176,403 $157,525 $171,609 $174,761
Expenses to average
net assets, net of
waivers from adviser (3) ...... 1.22% 1.26% 1.46% 1.34%* 1.29% 1.26%
Net investment income
to average net assets,
net of waivers from
adviser (3) ................... 1.81% 1.88% 2.02% 2.19%* 2.55% 2.41%
Portfolio turnover rate ......... 234% 190% 188% 103% 188% 107%

</TABLE>

- ----------
* Annualized.
+ Commencement of issuance of shares.
++ Calculated using the average shares outstanding for the period.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results would be lower if sales charges were
included. Total investment return for periods of less than one year has not
been annualized.
(2) Fiscal year changed to August 31.
(3) During the year ended August 31, 1999 Mitchell Hutchins waived a portion of
its advisory and administration fees. The ratios excluding the waiver would
be the same since the fee waiver represents less than 0.005%.

- --------------------------------------------------------------------------------
Prospectus Page 22
<PAGE>

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PaineWebber Balanced Fund

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

CLASS B
----------------------------------------------------------------------------------------
FOR THE
SIX FOR THE FOR THE
FOR THE YEARS ENDED MONTHS YEAR YEAR
AUGUST 31, ENDED ENDED ENDED
--------------------------------------- AUGUST 31, FEBRUARY 29, FEBRUARY 28,
1999 1998 1997 1996 (2) 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ........... $ 11.48 $ 12.70 $ 10.42 $ 11.00 $ 9.90 $ 12.10
-------- -------- -------- -------- -------- --------
Net investment income ........... 0.13++ 0.14++ 0.14++ 0.08++ 0.19++ 0.44

Net realized and unrealied
gains (losses) from
investments, futures
and options ................... 1.59++ 0.31++ 2.84++ (0.11)++ 1.86++ (1.32)
-------- -------- -------- -------- -------- --------

Net increase (decrease)
from investment
operations .................... 1.72 0.45 2.98 (0.03) 2.05 (0.88)
-------- -------- -------- -------- -------- --------
Dividends from net
investment income ............. (0.13) (0.12) (0.15) (0.07) (0.20) (0.12)

Distributions from
net realized gains
from investment
transactions .................. (1.23) (1.55) (0.55) (0.48) (0.75) (1.20)
-------- -------- -------- -------- -------- --------
Total dividends and
distributions to
shareholders .................. (1.36) (1.67) (0.70) (0.55) (0.95) (1.32)
-------- -------- -------- -------- -------- --------
Net asset value,
end of period ................. $ 11.84 $ 11.48 $ 12.70 $ 10.42 $ 11.00 $ 9.90
======== ======== ======== ======== ======== ========
Total investment return (1) ..... 15.28% 3.87% 29.70% (0.30)% 21.20% (6.68)%
======== ======== ======== ======== ======== ========

Ratios/supplemental data:
Net assets, end
of period (000's) ............. $ 28,719 $ 26,425 $ 22,768 $ 22,307 $ 26,627 $ 37,104

Expenses to average
net assets, net of
waivers from adviser (3) ...... 1.98% 2.03% 2.22% 2.09%* 2.05% 1.98%

Net investment income
to average net assets,
net of waivers from
adviser (3) ................... 1.04% 1.13% 1.27% 1.43%* 1.81% 1.60%
Portfolio turnover rate ......... 234% 190% 188% 103% 188% 107%

CLASS C
----------------------------------------------------------------------------------------
FOR THE
SIX FOR THE FOR THE
FOR THE YEARS ENDED MONTHS YEAR YEAR
AUGUST 31, ENDED ENDED ENDED
--------------------------------------- AUGUST 31, FEBRUARY 29, FEBRUARY 28,
1999 1998 1997 1996 (2) 1996 1995
-------- -------- -------- -------- -------- --------

Net asset value,
beginning of period ........... $ 11.28 $ 12.52 $ 10.29 $ 10.88 $ 9.82 $ 12.03
-------- -------- -------- -------- -------- --------
Net investment income ........... 0.14++ 0.14++ 0.14++ 0.08++ 0.19++ 0.19

Net realized and unrealied
gains (losses) from
investments, futures
and options ................... 1.56++ 0.31++ 2.80++ (0.12)++ 1.84++ (1.07)
-------- -------- -------- -------- -------- --------

Net increase (decrease)
from investment
operations .................... 1.70 0.45 2.94 (0.04) 2.03 (0.88)
-------- -------- -------- -------- -------- --------
Dividends from net
investment income ............. (0.15) (0.14) (0.16) (0.07) (0.22) (0.13)

Distributions from
net realized gains
from investment
transactions .................. (1.23) (1.55) (0.55) (0.48) (0.75) (1.20)
-------- -------- -------- -------- -------- --------
Total dividends and
distributions to
shareholders .................. (1.38) (1.69) (0.71) (0.55) (0.97) (1.33)
-------- -------- -------- -------- -------- --------
Net asset value,
end of period ................. $ 11.60 $ 11.28 $ 12.52 $ 10.29 $ 10.88 $ 9.82
======== ======== ======== ======== ======== ========

Total investment return (1) ..... 15.34% 3.89% 29.70% (0.38)% 21.12% (6.69)%
======== ======== ======== ======== ======== ========

Ratios/supplemental data:
Net assets, end
of period (000's) ............. $ 19,894 $ 14,581 $ 8,736 $ 6,979 $ 7,469 $ 8,525

Expenses to average
net assets, net of
waivers from adviser (3) ...... 1.95% 2.00% 2.21% 2.09%* 2.08% 2.01%

Net investment income
to average net assets,
net of waivers from
adviser (3) ................... 1.08% 1.18% 1.27% 1.44%* 1.77% 1.62%
Portfolio turnover rate ......... 234% 190% 188% 103% 188% 107%

</TABLE>

<TABLE>
<CAPTION>
CLASS Y
-------------------------------
FOR THE
FOR THE PERIOD
YEAR MARCH 26, 1998+
ENDED THROUGH
AUGUST 31, AUGUST 31,
1999 1998
----------- ---------------
<S> <C> <C>
Net asset value,
beginning of period ........... $ 11.27 $ 12.55
-------- --------
Net investment income ........... 0.26++ 0.11++

Net realized and unrealied
gains (losses) from
investments, futures
and options ................... 1.55++ (1.28)++
-------- --------
Net increase (decrease)
from investment
operations .................... 1.81 (1.17)
-------- --------
Dividends from net
investment income ............. (0.26) (0.11)

Distributions from
net realized gains
from investment
transactions .................. (1.23) --
-------- --------
Total dividends and
distributions to
shareholders .................. (1.49) (0.11)
-------- --------
Net asset value,
end of period ................. $ 11.59 $ 11.27
======== ========
Total investment return (1) ..... 16.42% (9.41)%
======== ========
Ratios/supplemental data:
Net assets, end
of period (000's) ............. $ 519 $ 175

Expenses to average
net assets, net of
waivers from adviser (3) ...... 0.96% 0.89%*

Net investment income
to average net assets,
net of waivers from
adviser (3) ................... 2.11% 2.48%*
Portfolio turnover rate ......... 234% 190%
</TABLE>

- --------------------------------------------------------------------------------
Prospectus Page 23
<PAGE>

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

PaineWebber Tactical Allocation Fund

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

CLASS A
----------------------------------------------------------------------
FOR THE YEARS ENDED
AUGUST 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995**
-------- -------- -------- -------- --------

<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .......... $ 23.55 $ 22.23 $ 16.15 $ 14.86 $ 13.78
-------- -------- -------- -------- --------
Net investment income (loss) .................. 0.15 0.15 0.18@ 0.18 0.22
Net realized and unrealized gains
from investments ............................ 8.84 1.47 6.12@ 2.31 2.05
-------- -------- -------- -------- --------
Net increase from investment operations ....... 8.99 1.62 6.30 2.49 2.27
-------- -------- -------- -------- --------
Dividends from net
investment income ........................... (0.17) (0.12) (0.14) (0.14) (0.22)
Distributions from net realized gains
from investments transactions .............. (0.58) (0.18) (0.08) (1.06) (0.97)
-------- -------- -------- -------- --------
Total dividends and distributions
to shareholders ............................. (0.75) (0.30) (0.22) (1.20) (1.19)
-------- -------- -------- -------- --------
Net asset value, end of period ................ $31.79 $ 23.55 $ 22.23 $ 16.15 $ 14.86
======== ======== ======== ======== ========

Total investment return(1) .................... 38.65% 7.31% 39.26% 17.35% 18.43%
======== ======== ======== ======== ========
Ratios/supplemental data:
Net assets, end of period (000's) ............. $702,580 $340,245 $170,759 $ 23,551 $1,944
Expenses to average net assets,
net of waivers from adviser(2) .............. 0.84% 0.95% 0.99% 1.17% 1.46%
Net investment income (loss) to average net
assets, net of waivers from adviser(2) ...... 0.56% 0.74% 0.88% 1.12% 1.60%
Portfolio turnover rate ....................... 6% 33% 6% 6% 53%

</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.
@ Calculated using the average shares outstanding for the period.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges or program fees; results would be lower if sales
charges or program fees were included. Total investment return for periods
of less than one year has not been annualized.
(2) During the year ended August 31, 1999, Mitchell Hutchins waived a portion of
its advisory and administration fees. The ratios excluding the waiver would
be the same since the fee waiver represents less than 0.005%.
# Actual amount is less than $0.005.

- --------------------------------------------------------------------------------
Prospectus Page 24
<PAGE>

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

PaineWebber Tactical Allocation Fund

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

CLASS B
-------------------------------------------------------
FOR THE
PERIOD
FOR THE YEARS ENDED JANUARY 30,
AUGUST 31, 1996+ TO
--------------------------------------- AUGUST 31,
1999 1998 1997 1996
-------- -------- -------- --------

<S> <C> <C> <C> <C>
Net asset value, beginning of period .......... $ 23.32 $ 22.08 $ 16.13 $ 15.54
-------- -------- -------- --------
Net investment income (loss) .................. (0.04) 0.00 0.03@ 0.02
Net realized and unrealized gains
from investments ............................ 8.73 1.43 6.09@ 0.57
-------- -------- -------- --------

Net increase from investment operations ....... 8.69 1.43 6.12 0.59
-------- -------- -------- --------
Dividends from net investment income .......... (0.02) (0.01) (0.09) --
Distributions from net realized gains
from investments transactions ............... (0.58) (0.18) (0.08) --
-------- -------- -------- --------
Total dividends and distributions
to shareholders ............................. (0.60) (0.19) (0.17) 0.00
-------- -------- -------- --------
Net asset value, end of period ................ $ 31.41 $ 23.32 $ 22.08 $ 16.13
======== ======== ======== ========

Total investment return(1) .................... 37.61% 6.49% 38.14% 3.80%
======== ======== ======== ========
Ratios/supplemental data:
Net assets, end of period (000's) ............. $964,933 $483,068 $239,836 $ 28,495
Expenses to average net assets,
net of waivers from adviser(2) .............. 1.59% 1.71% 1.74% 1.84%*
Net investment income (loss) to average net
assets, net of waivers from adviser (2) ..... (0.20)% (0.02)% 0.13% 0.47%*
Portfolio turnover rate ....................... 6% 33% 6% 6%

</TABLE>

CLASS C
----------------------------------------------------------------------
FOR THE YEARS ENDED
AUGUST 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995**
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .......... $ 23.45 $ 22.18 $ 16.12 $ 14.87 $ 13.78
-------- -------- -------- -------- --------
Net investment income (loss) .................. (0.06) (0.01) 0.03@ 0.06 0.12
Net realized and unrealized gains
from investments ............................ 8.79 1.45 6.11@ 2.32 2.06
-------- -------- -------- -------- --------

Net increase from investment operations ....... 8.73 1.44 6.14 2.38 2.18
-------- -------- -------- -------- --------
Dividends from net investment income .......... (0.00)# -- -- (0.07) (0.12)
Distributions from net realized gains
from investments transactions ............... (0.58) (0.17) (0.08) (1.06) (0.97)
-------- -------- -------- -------- --------
Total dividends and distributions
to shareholders ............................. (0.58) (0.17) (0.08) (1.13) (1.09)
-------- -------- -------- -------- --------
Net asset value, end of period ................ $ 31.60 $ 23.45 $ 22.18 $ 16.12 $ 14.87
======== ======== ======== ======== ========

Total investment return(1) .................... 37.58% 6.49% 38.20% 16.52% 17.57%
======== ======== ======== ======== ========
Ratios/supplemental data:
Net assets, end of period (000's) ............. $738,781 $397,767 $233,044 $ 73,630 $ 48,105
Expenses to average net assets,
net of waivers from adviser(2) .............. 1.60% 1.70% 1.75% 1.95% 2.22%
Net investment income (loss) to average net
assets, net of waivers from adviser(2) ..... (0.20)% (0.01)% 0.14% 0.35% 0.86%
Portfolio turnover rate ....................... 6% 33% 6% 6% 53%

CLASS Y
----------------------------------------------------------------------
FOR THE YEARS ENDED
AUGUST 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995**
-------- -------- -------- -------- --------
Net asset value, beginning of period .......... $ 23.68 $ 22.33 $ 16.20 $ 14.88 $ 13.79
-------- -------- -------- -------- --------
Net investment income (loss) .................. 0.22 0.21 0.23@ 0.30 0.23
Net realized and unrealized gains
from investments ............................ 8.91 1.49 6.13@ 2.24 2.09
-------- -------- -------- -------- --------
Net increase from investment operations ....... 9.13 1.70 6.36 2.54 2.32
-------- -------- -------- -------- --------
Dividends from net investment income .......... (0.24) (0.17) (0.15) (0.16) (0.26)
Distributions from net realized gains
from investments transactions ............... (0.58) (0.18) (0.08) (1.06) (0.97)
-------- -------- -------- -------- --------
Total dividends and distributions
to shareholders ............................. (0.82) (0.35) (0.23) (1.22) (1.23)
-------- -------- -------- -------- --------
Net asset value, end of period ................ $ 31.99 $ 23.68 $ 22.33 $ 16.20 $ 14.88
======== ======== ======== ======== ========

Total investment return(1) .................... 39.03% 7.62% 39.55% 17.70% 18.79%
======== ======== ======== ======== ========
Ratios/supplemental data:
Net assets, end of period (000's) ............. $129,893 $ 74,872 $ 36,467 $ 12,803 $ 2,506
Expenses to average net assets, net
of waivers from adviser(2) .................. 0.58% 0.67% 0.74% 0.95% 1.23%
Net investment income (loss) to average net
assets, net of waivers from adviser(2) ...... 0.82% 1.03% 1.16% 1.38% 1.86%
Portfolio turnover rate ....................... 6% 33% 6% 6% 53%

</TABLE>

- --------------------------------------------------------------------------------
Prospectus Page 25
<PAGE>

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

PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund

TICKER SYMBOL: Balanced Fund Class A: PASAX Tactical Allocation Fund Class: A: PWTAX
B: PASBX B: PWTBX
C: PASCX C: KPAAX
Y: None Y: None
</TABLE>

If you want more information about the funds, the following documents are
available free upon request:

ANNUAL/SEMI-ANNUAL REPORTS

Additional information about the funds' investments is available in the funds'
annual and semi-annual reports to shareholders. In the funds' annual reports,
you will find a discussion of the market conditions and investment strategies
that significantly affected the funds' performance during the last fiscal year.

STATEMENT OF ADDITIONAL INFORMATION (SAI)

The SAI provides more detailed information about the funds and is incorporated
by reference into this prospectus.

You may discuss your questions about the funds by contacting your PaineWebber
Financial Advisor. You may obtain free copies of annual and semi-annual reports
and the SAI by contacting the funds directly at 1-800-647-1568.

You may review and copy information about the funds, including shareholder
reports and the SAI, at the Public Reference Room of the Securities and Exchange
Commission. You can get text-only copies of reports and other information about
the funds and about the operations of the SEC's Public Reference Room:

o For a fee, by writing to or calling the SEC's Public Reference Room,
Washington, D.C. 20549-6009, Telephone:1-800-SEC-0330

o Free, from the SEC's Internet website at: http://www.sec.gov

Paine Webber Master Series, Inc.
- - Paine Webber Balanced Fund
Investment Company Act File No. 811-4448

Paine Webber Investment Trust
- - Paine Webber Tactical Allocation Fund
Investment Company Act File No. 811-6292

<PAGE>

PAINEWEBBER BALANCED FUND
PAINEWEBBER TACTICAL ALLOCATION FUND
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114

STATEMENT OF ADDITIONAL INFORMATION

Each of the funds named above is a series of a diversified,
professionally managed, open-end management investment company. PaineWebber
Balanced Fund is a series of PaineWebber Master Series, Inc., a Maryland
corporation ("Corporation"). PaineWebber Tactical Allocation Fund is a series of
PaineWebber Investment Trust, a Massachusetts business trust ("Trust").

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

Portions of each fund's Annual Report to Shareholders are
incorporated by reference into this Statement of Additional Information ("SAI").
The Annual Reports accompany this SAI. You may obtain an additional copy of a
fund's Annual Report by calling toll-free 1-800-647-1568.

This SAI is not a prospectus and should be read only in conjunction
with the funds' current Prospectus, dated December 10, 1999. A copy of the
Prospectus may be obtained by calling any PaineWebber Financial Advisor or
correspondent firm or by calling toll-free 1-800-647-1568. This SAI is dated
December 10, 1999.

<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----
<S> <C>
The Funds and Their Investment Policies ................................................... 2
The Funds' Investments, Related Risks and Limitations ..................................... 3
Strategies Using Derivative Instruments .................................................... 18
Organization; Board Members, Officers and Principal Holders of Securities .................. 25
Investment Advisory, Administration and Distribution Arrangements .......................... 33
Portfolio Transactions 38
Reduced Sales Charges, Additional Exchange and Redemption Information and Other Services ... 41
Conversion of Class B Shares ............................................................... 46
Valuation of Shares ....................................................................... 46
Performance Information ................................................................... 47
Taxes ...................................................................................... 50
Other Information 53
Financial Statements ...................................................................... 54
Appendix ................................................................................... A-1
</TABLE>

<PAGE>

THE FUNDS AND THEIR INVESTMENT POLICIES

Neither fund's investment objective may be changed without
shareholder approval. Except where noted, the other investment policies of each
fund may be changed by its board without shareholder approval. As with other
mutual funds, there is no assurance that a fund will achieve its investment
objective.

BALANCED FUND has an investment objective of high total return with
low volatility. The fund invests primarily in a combination of three asset
classes: stocks (equity securities), bonds (investment grade bonds) and cash
(money market instruments) and maintains a fixed income allocation (including
bonds and cash) of at least 25%.

Balanced 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, U.S. government securities, convertible
securities and money market instruments. The 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 market. The fund may also invest
up to 10% of its assets in bonds and other securities (including convertible
securities) rated below investment grade but rated at least B by Moody's
Investors Service, Inc. ("Moody's") or Standard and Poor's a division of The
McGraw-Hill Companies, Inc. ("S&P"), comparably rated by another rating agency
or determined by Mitchell Hutchins to be of comparable quality.

The money market instruments in which Balanced 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) having total assets at the time of purchase in excess
of $1.5 billion; commercial paper and other short-term corporate obligations;
and variable and floating rate securities and repurchase agreements. The fund
may also hold cash.

The commercial paper and other short-term corporate obligations
purchased by Balanced Fund will consist only of obligations of U.S. corporations
that are (1) rated at least Prime-2 by Moody's or A-2 by S&P, (2) comparably
rated by another rating agency or (3) unrated and determined by Mitchell
Hutchins to be of comparable quality. These obligations may include variable
amount master demand notes, which are unsecured obligations redeemable upon
notice that permit investment of fluctuating amounts at varying rates of
interest pursuant to direct arrangements with the issuer of the instrument. Such
obligations are usually unrated by a rating agency.

Balanced Fund may invest up to 10% of its net assets in illiquid
securities. The fund may purchase securities on a when-issued or delayed
delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow for temporary or emergency purposes, but not
in excess of 10% of its total assets. The fund may invest in the securities of
other investment companies and may sell short "against the box."

TACTICAL ALLOCATION FUND has an investment objective of total return,
consisting of long-term capital appreciation and current income. The fund seeks
to achieve its objective by using the Tactical Allocation Model, a systematic
investment strategy that allocates its investments between an equity portion
designed to track the performance of the S&P 500 Composite Stock Price Index
("S&P 500 Index") and a fixed income portion that generally will be comprised of
either five-year U.S. Treasury notes or 30-day U.S. Treasury bills.

Tactical Allocation Fund seeks to achieve total return during all
economic and financial market cycles, with lower volatility than that of the S&P
500 Index. Mitchell Hutchins allocates the fund's assets based on the Tactical
Allocation Model's quantitative assessment of the projected rates of return for
each asset class. Mitchell Hutchins allocates the fund's assets based on the
Model's quantitative assessment of the projected rates of return for each asset
class. The Model attempts to track the S&P 500 Index in periods of strongly
positive market performance but attempts to take a more defensive posture by
reallocating assets to bonds or cash when the Model signals a potential bear
market, prolonged downtown in stock prices or significant loss in value.

<PAGE>

The basic premise of the Tactical Allocation Model is that investors
accept the risk of owning stocks, measured as volatility of return, because they
expect a return advantage. This expected return advantage of owning stocks is
called the equity risk premium ("ERP"). The Model projects the stock market's
expected ERP based on several factors, including the current price of stocks and
their expected future dividends and the yield-to-maturity of the one-year U.S.
Treasury bill. When the stock market's ERP is high, the Model signals the fund
to invest 100% in stocks. Conversely, when the ERP decreases below certain
threshold levels, the Model signals the fund to reduce its exposure to stocks.
The Model can recommend stock allocations of 100%, 75%, 50%, 25% or 0%.

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

Tactical Allocation Fund deviates from the recommendations of the
Tactical Allocation 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 other distributions on
its shares and to meet anticipated redemptions of shares.

In its stock portion, Tactical Allocation Fund attempts to duplicate,
before the deduction of operating expenses, the investment results of the S&P
500 Index. Securities in the S&P 500 Index are selected, and may change from
time to time, based on a statistical analysis of such factors as the issuer's
market capitalization (the S&P 500 Index emphasizes large capitalization
stocks), the security's trading activity and its adequacy as a representative of
stocks in a particular industry section. The fund's investment results for its
stock portion will not be identical to those of the S&P 500 Index. Deviations
from the performance of the S&P 500 Index may result from purchases and
redemptions of fund shares that may occur daily, as well as from expenses borne
by the fund. Instead, the fund attempts to achieve a correlation of at least
0.95 between the performance of the fund's stock portion, before the deduction
of operating expenses, and that of the S&P 500 Index (a correlation of 1.00
would mean that the net asset value of the stock portion increased or decreased
in exactly the same proportion as changes in the S&P 500 Index). The S&P 500
Index can include U.S. dollar-denominated equity securities of foreign issuers
and the fund invests in the securities to the extent needed to track the
performance of the S&P 500 Index.

Asset reallocations are made, if required, on the first business day
of each month. In addition to any reallocation of assets directed by the
Tactical Allocation Model, any material amounts resulting from appreciation or
receipt of dividends, other distributions, interest payments and proceeds from
securities maturing in each of the asset classes are reallocated (or
"rebalanced") to the extent practicable to establish the Model's recommended
asset mix. Any cash maintained to pay fund operating expenses, pay dividends and
other distributions and to meet share redemptions is invested on a daily basis.

Tactical Allocation Fund may invest up to 10% of its net assets in
illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of its
total assets. The fund may borrow for temporary or emergency purposes, but not
in excess of 20% of its total assets. The fund may invest in the securities of
other investment companies and may sell short "against the box."

THE FUNDS' INVESTMENTS, RELATED RISKS AND LIMITATIONS

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

EQUITY SECURITIES. Equity securities include common stocks, most
preferred stocks and securities that are convertible into them, including common
stock purchase warrants and rights, equity interests in trusts, partnerships,

<PAGE>

joint ventures or similar enterprises and depositary receipts. Common stocks,
the most familiar type, represent an equity (ownership) interest in a
corporation.

Preferred stock has certain fixed income features, like a bond, but
is actually equity in a company, like common stock. Convertible bonds include
debentures, notes and similar securities that may be converted into or exchanged
for a prescribed amount of common stock of the same or a different issuer within
a particular period of time at a specified price or formula. Preferred stock
also may be converted into or exchanged for common stock. Depository receipts
typically are issued by banks or trust companies and evidence ownership of
underlying equity securities.

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

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

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

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

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

In addition to ratings assigned to individual bond issues, Mitchell
Hutchins will analyze interest rate trends and developments that may affect
individual issuers, including factors such as liquidity, profitability and asset

4
<PAGE>

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

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

High yield bonds (commonly known as "junk bonds") are non-investment
grade bonds. This means they are rated Ba or lower by Moody's, BB or lower by
S&P, comparably rated by another rating agency or determined by Mitchell
Hutchins to be of comparable quality. A fund's investments in non-investment
grade bonds entail greater risk than its investments in higher rated bonds.
Non-investment grade bonds are considered predominantly speculative with respect
to the issuer's ability to pay interest and repay principal and may involve
significant risk exposure to adverse conditions. Non-investment grade bonds
generally offer a higher current yield than that available for investment grade
issues; however, they involve higher risks, in that they are especially
sensitive to adverse changes in general economic conditions and in the
industries in which the issuers are engaged, to changes in the financial
condition of the issuers and to price fluctuations in response to changes in
interest rates. During periods of economic downturn or rising interest rates,
highly leveraged issuers may experience financial stress which could adversely
affect their ability to make payments of interest and principal and increase the
possibility of default. In addition, such issuers may not have more traditional
methods of financing available to them and may be unable to repay debt at
maturity by refinancing. The risk of loss due to default by such issuers is
significantly greater because such securities frequently are unsecured by
collateral and will not receive payment until more senior claims are paid in
full.

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

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

U.S. GOVERNMENT SECURITIES include direct obligations of the U.S.
Treasury (such as Treasury bills, notes or bonds) and obligations issued or
guaranteed as to principal and interest (but not as to market value) by the U.S.
government, its agencies or its instrumentalities. U.S. government

<PAGE>

securities include mortgage-backed securities issued or guaranteed by government
agencies or government-sponsored enterprises. Other U.S. government securities
may be backed by the full faith and credit of the U.S. government or
supported primarily or solely by the creditworthiness of the government-related
issuer or, in the case of mortgage-backed securities, by pools of assets.

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

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

ASSET-BACKED SECURITIES. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed in more
detail below. However, the underlying assets are not first lien mortgage loans
or interests therein, but include assets such as motor vehicle installment sales
contracts, other installment sales contracts, home equity loans, leases of
various types of real and personal property and receivables from revolving
credit (credit card) agreements. Such assets are securitized through the use of
trusts or special purpose corporations. Payments or distributions of principal
and interest may be guaranteed up to a certain amount and for a certain time
period by a letter of credit or pool insurance policy issued by a financial
institution unaffiliated with the issuer, or other credit enhancements may be
present.

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

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

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

6
<PAGE>

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

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

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

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

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

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

7
<PAGE>

GINNIE MAE CERTIFICATES -- Ginnie Mae guarantees certain mortgage
pass-through certificates ("Ginnie Mae certificates") that are issued by Private
Mortgage Lenders and that represent ownership interests in individual pools of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. Timely payment of interest
and principal is backed by the full faith and credit of the U.S. government.
Each mortgagor's monthly payments to his lending institution on his residential
mortgage are "passed through" to certificate holders such as Balanced Fund.
Mortgage pools consist of whole mortgage loans or participations in loans. The
terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. Lending institutions that originate
mortgages for the pools are subject to certain standards, including credit and
other underwriting criteria for individual mortgages included in the pools.

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

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

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

COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE
PASS-THROUGHS -- CMOs are debt obligations that are collateralized by mortgage
loans or mortgage pass-through securities (collectively "Mortgage Assets"). CMOs
may be issued by Private Mortgage Lenders or by government entities such as
Fannie Mae or Freddie Mac. Multi-class mortgage pass-through securities are
interests in trusts that are comprised of Mortgage Assets and that have multiple
classes similar to those in CMOs. Unless the context indicates otherwise,
references herein to CMOs include multi-class mortgage pass-through securities.
Payments of principal of, and interest on, the Mortgage Assets (and in the case
of CMOs, any reinvestment income thereon) provide the funds to pay the debt
service on the CMOs or to make scheduled distributions on the multi-class
mortgage pass-through securities.

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

8
<PAGE>

until all other classes having an earlier stated maturity or final distribution
date have been paid in full. In some CMO structures, all or a portion of the
interest attributable to one or more of the CMO classes may be added to the
principal amounts attributable to such classes, rather than passed through to
certificateholders on a current basis, until other classes of the CMO are paid
in full.

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

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

TYPES OF CREDIT ENHANCEMENT -- To lessen the effect of failures by
obligors on Mortgage Assets to make payments, mortgage-backed securities may
contain elements of credit enhancement. Such credit enhancement falls into two
categories: (1) liquidity protection and (2) loss protection. Loss protection
relates to losses resulting after default by an obligor on the underlying assets
and collection of all amounts recoverable directly from the obligor and through
liquidation of the collateral. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets (usually the
bank, savings association or mortgage banker that transferred the underlying
loans to the issuer of the security), to ensure that the receipt of payments on
the underlying pool occurs in a timely fashion. Loss protection ensures ultimate
payment of the obligations on at least a portion of the assets in the pool. Such
protection may be provided through guarantees, insurance policies or letters of
credit obtained by the issuer or sponsor, from third parties, through various
means of structuring the transaction or through a combination of such
approaches. Balanced Fund will not pay any additional fees for such credit
enhancement, although the existence of credit enhancement may increase the price
of a security. Credit enhancements do not provide protection against changes in
the market value of the security. Examples of credit enhancement arising out of
the structure of the transaction include "senior-subordinated securities"
(multiple class securities with one or more classes subordinate to other classes
as to the payment of principal thereof and interest thereon, with the result
that defaults on the underlying assets are borne first by the holders of the
subordinated class), creation of "spread accounts" or "reserve funds" (where
cash or investments, sometimes funded from a portion of the payments on the
underlying assets, are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed that required to make payment of the
securities and pay any servicing or other fees). The degree of credit
enhancement provided for each issue generally is based on historical information
regarding the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that anticipated could adversely affect the
return on an investment in such a security.

SPECIAL CHARACTERISTICS OF MORTGAGE- AND ASSET-BACKED SECURITIES --
The yield characteristics of mortgage- and asset-backed securities differ from
those of traditiona1 debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other obligations generally may be prepaid at any time. Prepayments on a pool
of mortgage loans are influenced by a variety of economic, geographic, social
and other factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Similar factors apply to prepayments
on asset-backed securities, but the receivables underlying asset-backed
securities generally are of a shorter maturity and thus are less likely to
experience substantial prepayments. Such securities, however, often provide that
for a specified time period the issuers will replace receivables in the pool
that are repaid with

9
<PAGE>

comparable obligations. If the issuer is unable to do so, repayment of principal
on the asset-backed securities may commence at an earlier date. Mortgage- and
asset-backed securities may decrease in value as a result of increases in
interest rates and may benefit less than other fixed-income securities from
declining interest rates because of the risk of prepayment.

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

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

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

ARM loans also may be subject to a greater rate of prepayments in a
declining interest rate environment. For example, during a period of declining
interest rates, prepayments on these mortgage loans could increase

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<PAGE>

because the availability of fixed mortgage loans at competitive interest rates
may encourage mortgagors to "lock-in" at a lower interest rate. Conversely,
during a period of rising interest rates, prepayments on ARM loans might
decrease. The rate of prepayments with respect to ARM loans has fluctuated in
recent years.

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

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

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

The funds may invest in foreign securities by purchasing American
Depositary Receipts ("ADRs"). ADRs are receipts typically issued by a U.S. bank
or trust company evidencing ownership of the underlying securities. They
generally are in registered form, are denominated in U.S. dollars and are
designed for use in the U.S. securities markets. For purposes of each fund's
investment policies, ADRs generally are deemed to have the same classification
as the underlying securities they represent. Thus, an ADR representing ownership
of common stock will be treated as common stock.

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

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

INVESTMENTS IN OTHER INVESTMENT COMPANIES. The funds may invest in
securities of other investment companies, subject to Investment Company Act of
1940, as amended ("Investment Company Act") limitations which at present
restrict these investments in registered investment companies to no more than
10% of a fund's total assets. The shares of other investment companies are
subject to the management fees and other expenses of those funds, and the
purchase of shares of some investment companies requires the payment of sales
loads and sometimes substantial premiums above the value of such companies'
portfolio securities. At the same time, a fund would continue to pay its own
management fees and expenses with respect to all its investments, including the
securities of other investment companies. Balanced Fund may invest in the shares
of other investment companies when, in the

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judgment of Mitchell Hutchins, the potential benefits of such investment
outweigh the payment of any management fees and expenses and, where applicable,
premium or sales load.

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

Other securities are sold with original issue discount ("OID"), a
term that means the securities are issued at a price that is lower than their
value at maturity, even though interest on the securities may be paid make prior
to maturity. In addition, payment-in-kind ("PIK") securities pay interest in
additional securities, not in cash. OID and PIK securities usually trade at a
discount from their face value.

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

Federal tax law requires that the holder of a zero coupon security or
other OID security include in gross income each year the OID that accrues on the
security for the year, even though the holder receives no interest payment on
the security during the year. Similarly, while PIK securities may pay interest
in the form of additional securities rather than cash, that interest must be
included in a fund's current income. These distributions would have to be made
from the fund's cash assets or, if necessary, from the proceeds of sales of
portfolio securities. A fund would not be able to purchase additional securities
with cash used to make such distributions and its current income and the value
of its shares would ultimately be reduced as a result.

Certain zero coupon securities are U.S. Treasury notes and bonds that
have been stripped of their unmatured interest coupon receipts or interests in
such U.S. Treasury securities or coupons. This technique is frequently used with
U.S. Treasury bonds to create CATS (Certificate of Accrual Treasury Securities),
TIGRs (Treasury Income Growth Receipts) and similar securities.

CONVERTIBLE SECURITIES. A convertible security is a bond, preferred
stock or other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. A convertible security entitles
the holder to receive interest or dividends until the convertible security
matures or is redeemed, converted or exchanged. Convertible securities have
unique investment characteristics in that they generally (1) have higher yields
than common stocks, but lower yields than comparable non-convertible securities,
(2) are less subject to fluctuation in value than the underlying stock because
they have fixed income characteristics and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases. While
no securities investment is without some risk, investments in convertible
securities generally entail less risk than the issuer's common stock. However,
the extent to which such risk is reduced depends in large measure upon the
degree to which the convertible security sells above its value as a fixed income
security.

WARRANTS. Warrants are securities permitting, but not obligating,
holders to subscribe for other securities. Warrants do not carry with them the
right to dividends or voting rights with respect to the securities that they
entitle their holder to purchase, and they do not represent any rights in the
assets of the issuer. As a result, warrants may be considered more speculative
than certain other types of investments. In addition, the value of a

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warrant does not necessarily change with the value of the underlying securities,
and a warrant ceases to have value if it is not exercised prior to its
expiration date.

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

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

Restricted securities are not registered under the Securities Act of
1933, as amended ("Securities Act"), and may be sold only in privately
negotiated or other exempted transactions or after a Securities Act registration
statement has become effective. Where registration is required, a fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time a fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, a fund
might obtain a less favorable price than prevailed when it decided to sell.

However, not all restricted securities are illiquid. A large
institutional market has developed for many U.S. and foreign securities that are
not registered under the Securities Act. Institutional investors generally will
not seek to sell these instruments to the general public, but instead will often
depend either on an efficient institutional market in which such unregistered
securities can be readily resold or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not dispositive of
the liquidity of such investments.

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

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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 , (5) the nature of the security and how
trading is effected (e.g., the time needed to sell the security, how bids are
solicited and the mechanics of transfer) and (6) the existence of demand
features or similar liquidity enhancements. Mitchell Hutchins monitors the
liquidity of restricted securities in each fund's portfolio and reports
periodically on such decisions to the board.

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

Repurchase agreements carry certain risks not associated with direct
investments in securities, including a possible decline in the market value of
the underlying obligations. Repurchase agreements involving obligations other
than U.S. government securities (such as commercial paper and corporate bonds)
may be subject to special risks and may not have the benefit of certain
protections in the event of the counterparty's insolvency. If the seller or
guarantor becomes insolvent, the fund may suffer delays, costs and possible
losses in connection with the disposition of collateral. If their value becomes
less than the repurchase price, plus any agreed-upon additional amount, the
counterparty must provide additional collateral so that at all times the
collateral is at least equal to the repurchase price plus any agreed-upon
additional amount. The difference between the total amount to be received upon
repurchase of the obligations and the price that was paid by a fund upon
acquisition is accrued as interest and included in its net investment income.
Each fund intends to enter into repurchase agreements only with counterparties
in transactions believed by Mitchell Hutchins to present minimum credit risks .

REVERSE REPURCHASE AGREEMENTS. Balanced Fund may enter into reverse
repurchase agreements with banks and securities dealers . Reverse repurchase
agreements involve the sale of securities held by a fund subject to its
agreement to repurchase the securities at an agreed-upon date or upon demand and
at a price reflecting a market rate of interest and are subject to the fund's
limitation on borrowings. While a reverse repurchase agreement is outstanding, a
fund will maintain, in a segregated account with its custodian, cash or liquid
securities, marked to market daily, in an amount at least equal to its
obligations under the reverse repurchase agreement.

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

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each fund may purchase
securities on a "when-issued" basis or may purchase or sell securities for
delayed delivery, that is, for issuance or delivery to the fund later than the
normal settlement date for such securities at a stated price and yield. When
issued securities include TBA ("to be assigned") securities. TBA securities,
which are usually mortgage-backed securities, are purchased on a forward
commitment basis with an approximate principal amount and no defined maturity
date. The actual principal amount and maturity date are determined upon
settlement when the specific mortgage pools are assigned. A fund generally would
not pay for such securities or start earning interest on them until they are
received. However, when a fund undertakes a when-issued or delayed-delivery
obligation, it immediately assumes the risks of ownership, including

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the risks of price fluctuation. Failure of the issuer to deliver a security
purchased by a fund on a when-issued or delayed-delivery basis may result in the
fund's incurring or missing an opportunity to make an alternative investment.
Depending on market conditions, a fund's when-issued and delayed-delivery
purchase commitments could cause its net asset value per share to be more
volatile, because such securities may increase the amount by which the fund's
total assets, including the value of when-issued and delayed-delivery securities
held by that fund, exceeds its net assets.

A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in market
value, generally based upon changes in the level of interest rates. Thus,
fluctuation in the value of the security from the time of the commitment date
will affect a fund's net asset value. When a fund commits to purchase securities
on a when-issued or delayed delivery basis, its custodian segregates assets to
cover the amount of the commitment. A fund may sell the right to acquire the
security prior to delivery if Mitchell Hutchins, as applicable, deems it
advantageous to do so, which may result in a gain or loss to the fund.

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

Duration takes the length of the time intervals between the present
time and the time that the interest and principal payments are scheduled or, in
the case of a callable debt security, expected to be made, and weights them by
the present values of the cash to be received at each future point in time. For
any debt security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. For example, depending on its
coupon and the level of market yields, a Treasury note with a remaining maturity
of five years might have a duration of 4.5 years. For mortgage-backed and other
securities that are subject to prepayments, put or call features or adjustable
coupons, the difference between the remaining stated maturity and the duration
is likely to be much greater.

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

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

There are some situations in which the standard duration calculation
does not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example

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where the interest rate exposure is not properly captured by the standard
duration calculation is the case of mortgage-backed securities. The stated final
maturity of such securities is generally 30 years, but current prepayment rates
are critical in determining the securities' interest rate exposure. In these and
other similar situations, Mitchell Hutchins will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its duration and, therefore, its interest rate exposure.

LENDING OF PORTFOLIO SECURITIES. Each fund is authorized to lend its
portfolio securities in an amount up to 33-1/3% of its total assets to
broker-dealers or institutional investors that Mitchell Hutchins deems
qualified. Lending securities enables a fund to earn additional income but could
result in a loss or delay in recovering these securities. The borrower of a
fund's portfolio securities must maintain acceptable collateral with the fund's
custodian in an amount, marked to market daily, at least equal to the market
value of the securities loaned, plus accrued interest and dividends. Acceptable
collateral is limited to cash, U.S. government securities and irrevocable
letters of credit that meet certain guidelines established by Mitchell Hutchins.
Each fund may reinvest any cash collateral in money market investments or other
short-term liquid investments. In determining whether to lend securities to a
particular broker-dealer or institutional investor, Mitchell Hutchins will
consider, and during the period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. Each fund will
retain authority to terminate any of its loans at any time. Each fund may pay
reasonable fees in connection with a loan and may pay the borrower or placing
broker a negotiated portion of the interest earned on the reinvestment of cash
held as collateral. A fund will receive amounts equivalent to any dividends,
interest or other distributions on the securities loaned. Each fund will regain
record ownership of loaned securities to exercise beneficial rights, such as
voting and subscription rights, when regaining such rights is considered to be
in the fund's interest.

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

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

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

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

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INVESTMENT LIMITATIONS OF THE FUNDS

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

Each fund will not:

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

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

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

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

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

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

(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.

<PAGE>

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

Each fund will not:

(1) invest more than 10% of its net assets in illiquid securities.

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

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

(4) purchase securities of other investment companies, except to the
extent permitted by the Investment Company 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.

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

STRATEGIES USING DERIVATIVE INSTRUMENTS

GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. Mitchell Hutchins may
use a variety of financial instruments ("Derivative Instruments"), including
certain options, futures contracts (sometimes referred to as "futures"), options
on futures contracts and swap transactions to attempt to hedge each fund's
portfolio and also to attempt to enhance income or return or realize gains and
to manage the duration of its bond portfolio, including adjusting a fund's
exposure to different asset classes or maintaining exposure to stocks or bonds
while maintaining a cash balance for fund management purposes (such as to
provide liquidity to meet anticipated shareholder sales of fund shares and for
fund operating expenses). A fund may enter into transactions involving one or
more types of Derivative Instruments under which the full value of its portfolio
is at risk, and Tactical Allocation Fund, in particular, may use Derivative
Instruments to this extent in reallocating its exposure to different asset
classes when the Tactical Allocation Model's recommends asset allocation mix
changes. Under normal circumstances, however, each fund's use of these
instruments will place at risk a much smaller portion of its assets. Balanced
Fund may also enter into certain interest rate protection transactions. Balanced
Fund may use all of the instruments identified below. Tactical Allocation Fund
is limited to stock index options and futures, futures on five-year U.S.
Treasury notes and options on these permitted futures contracts. The particular
Derivative Instruments that may be used by the funds are described below.

The funds might not use any Derivative Instruments or derivative
strategies, and there can be no assurance that using any strategy will succeed.
If Mitchell Hutchins is incorrect in its judgment on market values, interest
rates or other economic factors in using a Derivative Instrument or strategy, a
fund may have lower net income and a net loss on the investment.

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

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on the type of option involved. The writer of the put option, who receives the
premium, has the obligation, upon exercise of the option during the option term,
to buy the underlying security at the exercise price.

OPTIONS ON SECURITIES INDICES. A securities index assigns relative
values to the securities included in the index and fluctuates with changes in
the market values of those securities. A securities index option operates in the
same way as a more traditional securities option, except that exercise of a
securities index option is effected with cash payment and does not involve
delivery of securities. Thus, upon exercise of a securities index option, the
purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the securities
index.

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

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

OPTIONS ON FUTURES CONTRACTS. Options on futures contracts are
similar to options on securities or currency, except that an option on a futures
contract gives the purchaser the right, in return for the premium, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell a
security or currency, at a specified price at any time during the option term.
Upon exercise of the option, the delivery of the futures position to the holder
of the option will be accompanied by delivery of the accumulated balance that
represents the amount by which the market price of the futures contract exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the future. The writer of an option, upon exercise, will assume
a short position in the case of a call and a long position in the case of a put.

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

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

A fund may purchase and write (sell) covered straddles on securities
or indices of securities. A long straddle is a combination of a call and a put
option purchased on the same security or on the same futures contract, where the

19
<PAGE>

exercise price of the put is equal to the exercise price of the call. A fund
might enter into a long straddle when Mitchell Hutchins believes it likely that
the prices of the securities will be more volatile during the term of the option
than the option pricing implies. A short straddle is a combination of a call and
a put written on the same security where the exercise price of the put is equal
to the exercise price of the call. A fund might enter into a short straddle when
Mitchell Hutchins believes it unlikely that the prices of the securities will be
as volatile during the term of the option as the option pricing implies.

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

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

The use of Derivative Instruments is subject to applicable
regulations of the SEC, the several options and futures exchanges upon which
they are traded and the Commodity Futures Trading Commission ("CFTC"). In
addition, a fund's ability to use Derivative Instruments may be limited by tax
considerations. See "Taxes."

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

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

(1) Successful use of most Derivative Instruments depends upon the
ability of Mitchell Hutchins to predict movements of the overall securities,
interest rate or currency exchange markets, which requires different skills than
predicting changes in the prices of individual securities. While Mitchell
Hutchins is experienced in the use of Derivative Instruments, there can be no
assurance that any particular strategy adopted will succeed.

(2) There might be imperfect correlation, or even no correlation,
between price movements of a Derivative Instrument and price movements of the
investments that are being hedged. For example, if the value of a Derivative
Instrument used in a short hedge increased by less than the decline in value of
the hedged investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors affecting the markets in which Derivative
Instruments are traded, rather than the value of the investments being hedged.
The effectiveness of hedges using Derivative Instruments on indices will depend
on the degree of correlation between price movements in the index and price
movements in the securities being hedged.

(3) Hedging strategies, if successful, can reduce risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can also
reduce opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a fund entered into a short
hedge because Mitchell Hutchins projected a decline in the price of a security
in that fund's portfolio, and the price of that security increased instead, the
gain from that increase might be wholly

20
<PAGE>

or partially offset by a decline in the price of the Derivative Instrument.
Moreover, if the price of the Derivative Instrument declined by more than the
increase in the price of the security, the fund could suffer a loss. In either
such case, the fund would have been in a better position had it not hedged at
all.

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

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

Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding Derivative Instrument is open, unless
they are replaced with similar assets. As a result, committing a large portion
of a fund's assets to cover positions or to segregated accounts could impede
portfolio management or the fund's ability to meet redemption requests or other
current obligations.

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

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

A fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, a fund may terminate
its obligation under a call or put option that it had written by

21
<PAGE>

purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, a fund may terminate a position in a put or call option
it had purchased by writing an identical put or call option; this is known as a
closing sale transaction. Closing transactions permit a fund to realize profits
or limit losses on an option position prior to its exercise or expiration.

The funds may purchase and write both exchange-traded and
over-the-counter options. Currently, many options on equity securities (stocks)
are exchange-traded. Exchange markets for options on bonds exist but are
relatively new, and these instruments are primarily traded on the
over-the-counter market. Exchange-traded options in the United States are issued
by a clearing organization affiliated with the exchange on which the option is
listed which, in effect, guarantees completion of every exchange-traded option
transaction. In contrast, over-the-counter options are contracts between a fund
and its counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when a fund purchases or writes an
over-the-counter option, it relies on the counterparty to make or take delivery
of the underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by the fund
as well as the loss of any expected benefit of the transaction.

The funds' ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The funds
intend to purchase or write only those exchange-traded options for which there
appears to be a liquid secondary market. However, there can be no assurance that
such a market will exist at any particular time. Closing transactions can be
made for over-the-counter options only by negotiating directly with the
counterparty, or by a transaction in the secondary market if any such market
exists. Although the funds will enter into over-the-counter options only with
counterparties that are expected to be capable of entering into closing
transactions with the funds, there is no assurance that a fund will in fact be
able to close out an over-the-counter option position at a favorable price prior
to expiration. In the event of insolvency of the counterparty, a fund might be
unable to close out an over-the-counter option position at any time prior to its
expiration.

If a fund were unable to effect a closing transaction for an option
it had purchased, it would have to exercise the option to realize any profit.
The inability to enter into a closing purchase transaction for a covered put or
call option written by the fund could cause material losses because the fund
would be unable to sell the investment used as cover for the written option
until the option expires or is exercised.

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

LIMITATIONS ON THE USE OF OPTIONS. Each fund's use of options is
governed by the following guidelines, which can be changed by its board without
shareholder vote:

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

(2) The aggregate value of securities underlying put options
written by a fund, determined as of the date the put options are written, will
not exceed 50% of its net assets.

(3) The aggregate premiums paid on all options (including options
on securities, foreign currencies and securities indices and options on futures
contracts) purchased by a fund that are held at any time will not exceed 20% of
its net assets.

FUTURES. The funds may purchase and sell securities index futures
contracts or interest rate future contracts. A fund may purchase put and call
options, and write covered put and call options, on futures in which it is
allowed to invest. The purchase of futures or call options thereon can serve as
a long hedge, and the sale of futures or the purchase of put options thereon can
serve as a short hedge. Writing covered call options on futures contracts can
serve as a limited short hedge, and writing covered put options on futures
contracts can serve as a limited long hedge,

22
<PAGE>

using a strategy similar to that used for writing covered options on securities
or indices. In addition, a fund may purchase or sell futures contracts or
purchase options thereon to increase or reduce its exposure to an asset class
without purchasing or selling the underlying securities, either as a hedge or to
enhance return or realize gains.

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

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

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

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

Holders and writers of futures positions and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The funds intend to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.

Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or related option can vary from
the previous day's settlement price; once that limit is reached, no trades may
be made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a fund were unable to liquidate a futures or related options
position due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses. A fund would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, a fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to maintain cash or securities in a segregated
account.

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<PAGE>

Certain characteristics of the futures market might increase the risk
that movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.

LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. Each fund's
use of futures and related options is governed by the following guidelines,
which can be changed by its board without shareholder vote:

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

(2) The aggregate premiums paid on all options (including options on
securities, foreign currencies and securities indices and options on futures
contracts) purchased by each fund that are held at any time will not exceed 20%
of its net assets.

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

SWAP TRANSACTIONS. Balanced Fund may enter into swap transactions,
which include swaps, caps, floors and collars relating to interest rates,
securities or other instruments. Interest rate swaps involve an agreement
between two parties to exchange payments that are based, for example, on
variable and fixed rates of interest and that are calculated on the basis of a
specified amount of principal (the "notional principal amount") for a specified
period of time. Interest rate cap and floor transactions involve an agreement
between two parties in which the first party agrees to make payments to the
counterparty when a designated market interest rate goes above (in the case of a
cap) or below (in the case of a floor) a designated level on predetermined dates
or during a specified time period. Interest rate collar transactions involve an
agreement between two parties in which payments are made when a designated
market interest rate either goes above a designated ceiling level or goes below
a designated floor level on predetermined dates or during a specified time
period. The fund intends to use these transactions as a hedge and not as a
speculative investment. Interest rate protection transactions are subject to
risks comparable to those described above with respect to other hedging
strategies.

Balanced Fund may enter into interest rate swap transactions to
preserve a return or spread on a particular investment or portion of its bond
portfolio or to protect against any increase in the price of securities it
anticipates purchasing at a later date. The fund may use interest rate swaps,
caps, floors and collars as a hedge on either an asset-based or liability-based
basis, depending on whether it is hedging its assets or its liabilities.
Interest rate swap transactions are subject to risks comparable to those
described above with respect to other derivatives strategies.

Balanced Fund will usually enter into swaps on a net basis, i.e., the
two payment streams are netted out, with the fund receiving or paying, as the
case may be, only the net amount of the two payments. Since segregated accounts
will be established with respect to such transactions, Mitchell Hutchins
believes such obligations do not constitute senior securities and, accordingly,
will not treat them as being subject to the fund's borrowing restrictions. The
net amount of the excess, if any, of the fund's obligations over its
entitlements with respect to each swap will be accrued on a daily basis, and
appropriate fund assets having an aggregate net asset value at least equal to
the accrued excess will be maintained in a segregated account as described above
in "Investment Policies and Restrictions--Segregated Accounts." The fund also
will establish and maintain such segregated accounts with respect to its total
obligations under any swaps that are not entered into on a net basis.

24
<PAGE>

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

ORGANIZATION; BOARD MEMBERS, OFFICERS AND PRINCIPAL HOLDERS OF SECURITIES

The Corporation was organized on October 29, 1985, as a Maryland
corporation. The Corporation has two operating series and has authority to issue
10 billion shares of common stock of separate series, par value $0.001 per share
(four billion shares are designated as shares of Balanced Fund). The Trust was
formed on March 28, 1991, as a business trust under the laws of the Commonwealth
of Massachusetts and has two operating series. The Trust is authorized to issue
an unlimited number of shares of beneficial interest, par value of $0.001 per
share.

<PAGE>

The Trust and the Corporation are each governed by a board of
trustees or directors, which oversees its operations . The trustees or directors
("board members") and executive officers of the Trust and the Corporation, their
ages, business addresses and principal occupations during the past five years
are:

Richard Q. Armstrong; 64 Trustee/Director Mr. Armstrong is chairman and principal of
R.Q.A. Enterprises R.Q.A. Enterprises (management and consulting
One Old Church Road firm) (since April 1991 and principal occupation
Unit #6 since March 1995). Mr. Armstrong was chairman of
Greenwich, CT 06830 the board, chief executive officer and co-owner
of Adirondack Beverages (producer and distributor
of soft drinks and sparkling/still waters)
(October 1993-March 1995). He was a partner of The
New England Consulting Group (management
consulting firm) (December 1992-September 1993).
He was managing director of LVMH U.S. Corporation
(U.S. subsidiary of the French luxury goods
conglomerate, Louis Vuitton Moet Hennessey
Corporation) (1987-1991) and chairman of its wine
and spirits subsidiary, Schieffelin & Somerset
Company (1987-1991). Mr. Armstrong is a director
or trustee of 31 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.

E. Garrett Bewkes, Jr.**+; 73 Trustee/Director and Mr. Bewkes is a director of Paine Webber Group
Chairman of the Board of Inc. ("PW Group") (holding company of PaineWebber
Trustees/Directors and Mitchell Hutchins). Prior to December 1995, he
was a consultant to PW Group. Prior to 1988, he
was chairman of the board, president and chief
executive officer of American Bakeries Company.
Mr. Bewkes is a director of Interstate Bakeries
Corporation. Mr. Bewkes is a director or trustee
of 35 investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.
</TABLE>

26
<PAGE>

<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------- ----------------------------------------
TRUST/CORPORATION
-----------------
<S> <C> <C>
Richard R. Burt; 52 Trustee/Director Mr. Burt is chairman of IEP Advisors, Inc.
1275 Pennsylvania Ave., N.W. (international investments and consulting firm)
Washington, DC 20004 (since March 1994) and a partner of McKinsey &
Company (management consulting firm) (since 1991).
He is also a director of Archer-Daniels-Midland
Co. (agricultural commodities), Hollinger
International Co. (publishing), Homestake Mining
Corp. (gold mining), Powerhouse Technologies Inc.
(provides technology to gaming and wagering
industry) and Chairman of Weirton Steel Corp.
(makes and finishes steel products) since April
1996. He was the chief negotiator in the Strategic
Arms Reduction Talks with the former Soviet Union
(1989-1991) and the U.S. Ambassador to the Federal
Republic of Germany (1985-1989). Mr. Burt is a
director or trustee of 31 investment companies for
which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.

Mary C. Farrell**+; 50 Trustee/Director Ms. Farrell is a managing director, senior
investment strategist and member of the Investment
Policy Committee of PaineWebber. Ms. Farrell
joined PaineWebber in 1982. She is a member of the
Financial Women's Association and Women's Economic
Roundtable and appears as a regular panelist on
Wall $treet Week with Louis Rukeyser. She also
serves on the Board of Overseers of New York
University's Stern School of Business. Ms. Farrell
is a director or trustee of 30 investment
companies for which Mitchell Hutchins, PaineWebber
or one of their affiliates serves as investment
adviser.

Meyer Feldberg; 57 Trustee/Director Mr. Feldberg is Dean and Professor of Management
Columbia University of the Graduate School of Business, Columbia
101 Uris Hall University. Prior to 1989, he was president of the
New York, NY 10027 Illinois Institute of Technology. Dean Feldberg is
also a director of Primedia, Inc. (publishing),
Federated Department Stores, Inc. (operator of
department stores) and Revlon, Inc. (cosmetics).
Dean Feldberg is a director or trustee of 34
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
</TABLE>

27
<PAGE>

Frederic V. Malek; 62 Trustee/Director Mr. Malek is chairman of Thayer Capital Partners
1455 Pennsylvania Ave., N.W. (merchant bank). From January 1992 to November
Suite 350 1992, he was campaign manager of Bush-Quayle `92.
Washington, DC 20004 From 1990 to 1992, he was vice chairman and, from
1989 to 1990 he was president of Northwest
Airlines Inc. and NWA Inc. (holding company of
Northwest Airlines Inc.). Prior to 1989, he was
employed by the Marriott Corporation (hotels,
restaurants, airline catering and contract
feeding), where he most recently was an executive
vice president and president of Marriott Hotels
and Resorts. Mr. Malek is also a director of Aegis
Communications, Inc. (tele-services), American
Management Systems, Inc. (management consulting
and computer related services), Automatic Data
Processing, Inc. (computing), CB Richard Ellis,
Inc. (real estate services), FPL Group, Inc.
(electric services), Global Vacation Group
(packaged vacations), HCR/Manor Care, Inc. (health
care) and Northwest Airlines Inc. Mr. Malek is a
director or trustee of 31 investment companies for
which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.

Carl W. Schafer; 63 Trustee/Director Mr. Schafer is president of the Atlantic
66 Witherspoon Street, #1100 Foundation (charitable foundation supporting
Princeton, NJ 08542 mainly oceanographic exploration and research). He
is a director of EII Realty Trust (investment
company), Labor Ready, Inc. (temporary
employment), Roadway Express, Inc. (trucking), The
Guardian Group of Mutual Funds, the Harding,
Loevner Funds, Evans Systems, Inc. (motor fuels,
convenience store and diversified company),
Electronic Clearing House, Inc. (financial
transactions processing), Frontier Oil Corporation
and Nutraceutix, Inc. (bio-technology company).
Prior to January 1993, he was chairman of the
Investment Advisory Committee of the Howard Hughes
Medical Institute. Mr. Schafer is a director or
trustee of 31 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
</TABLE>

28
<PAGE>

T. Kirkham Barneby*; 53 Vice President Mr. Barneby is a managing director and chief
investment officer--quantitative investments of
Mitchell Hutchins. Prior to September 1994, he was
a senior vice president at Vantage Global
Management. Mr. Barneby is a vice president of
seven investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.

John J. Lee**; 31 Vice President and Mr. Lee is a vice president and a manager of the
Assistant Treasurer mutual fund finance department of Mitchell
Hutchins. Prior to September 1997, he was an audit
manager in the financial services practice of
Ernst & Young LLP. Mr. Lee is a vice president and
assistant treasurer of 32 investment companies for
which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.

Kevin J. Mahoney**; 34 Vice President and Assistant Mr. Mahoney is a first vice president and a senior
Treasurer manager of the mutual fund finance department of
Mitchell Hutchins. From August 1996 through March
1999, he was the manager of the mutual fund
internal control group of Salomon Smith Barney.
Prior to August 1996, he was an associate and
assistant treasurer for BlackRock Financial
Management L.P. Mr. Mahoney is a vice president
and assistant treasurer of 32 investment companies
for which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.

Dennis McCauley*; 52 Vice President Mr. McCauley is a managing director and chief
(Corporation only) investment officer--fixed income of Mitchell
Hutchins. Prior to December 1994, he was director
of fixed income investments of IBM Corporation.
Mr. McCauley is a vice president of 22 investment
companies for which Mitchell Hutchins, PaineWebber
or one of their affiliates serves as investment
adviser.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------- ----------------------------------------
TRUST/CORPORATION
-----------------
<S> <C> <C>
Ann E. Moran**; 42 Vice President and Ms. Moran is a vice president and a manager of the
Assistant Treasurer mutual fund finance department of Mitchell
Hutchins. Ms. Moran is a vice president and
assistant treasurer of 32 investment companies for
which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.

Dianne E. O'Donnell**; 47 Vice President and Secretary Ms. O'Donnell is a senior vice president and
deputy general counsel of Mitchell Hutchins. Ms.
O'Donnell is a vice president and secretary of 31
investment companies and a vice president and
assistant secretary of one investment company for
which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.

Emil Polito*; 39 Vice President Mr. Polito is a senior vice president and director
of operations and control for Mitchell Hutchins.
Mr. Polito is a vice president of 32 investment
companies for which Mitchell Hutchins, PaineWebber
or one of their affiliates serves as investment
adviser.

Susan P. Ryan*; 39 Vice President Ms. Ryan is a senior vice president and portfolio
(Corporation only) manager of Mitchell Hutchins and has been with
Mitchell Hutchins since 1982. Ms. Ryan is a vice
president of five investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.

Victoria E. Schonfeld**; 49 Vice President Ms. Schonfeld is a managing director and general
counsel of Mitchell Hutchins (since May 1994) and
a senior vice president of PaineWebber (since July
1995). Ms. Schonfeld is a vice president of 31
investment companies and a vice president and
secretary of one investment company for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.

Paul H. Schubert**; 36 Vice President and Mr. Schubert is a senior vice president and
Treasurer director of the mutual fund finance department of
Mitchell Hutchins. Mr. Schubert is a vice
president and treasurer of 32 investment companies
for which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.

Nirmal Singh*; 43 Vice President Mr. Singh is a senior vice president and a
(Corporation only) portfolio manager of Mitchell Hutchins. Mr. Singh
is a vice president of four investment companies
for which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------- ----------------------------------------
TRUST/CORPORATION
-----------------
<S> <C> <C>
Barney A. Taglialatela**; 38 Vice President and Mr. Taglialatela is a vice president and a manager
Assistant Treasurer of the mutual fund finance department of Mitchell
Hutchins. Prior to February 1995, he was a manager
of the mutual fund finance division of Kidder
Peabody Asset Management, Inc. Mr. Taglialatela is
a vice president and assistant treasurer of 32
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.

Mark A. Tincher*; 44 Vice President Mr. Tincher is a managing director and chief
investment officer--equities of Mitchell Hutchins.
Prior to March 1995, he was a vice president and
directed the U.S. funds management and equity
research areas of Chase Manhattan Private Bank.
Mr. Tincher is a vice president of 13 investment
companies for which Mitchell Hutchins, PaineWebber
or one of their affiliates serves as investment
adviser.

Keith A. Weller**; 38 Vice President and Mr. Weller is a first vice president and associate
Assistant Secretary general counsel of Mitchell Hutchins. Prior to May
1995, he was an attorney in private practice. Mr.
Weller is a vice president and assistant secretary
of 31 investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.
</TABLE>

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

* The business address of each listed person is 51 West 52nd Street, New
York, New York 10019-6114.

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

+ Mrs. Alexander, Mr. Bewkes, Ms. Farrell and Mr. Storms are "interested
persons" of each fund as defined in the Investment Company Act by virtue of
their positions with Mitchell Hutchins, - PaineWebber, and/or PW Group.

The Corporation and the Trust each pays board members who are not
"interested persons" of the Corporation/Trust ("disinterested trustees")
$1,500 annually for Balanced Fund or Tactical Allocation Fund, as
applicable, an additional $1,000 for the Corporation's or Trust's second
series and up to $150 per series for each board meeting and each separate
meeting of a board committee. The Corporation and the Trust thus each pays
an independent board member $2,500 annually plus any additional annual
amounts due for board or committee meetings. Each chairman of the audit and
contract review committees of individual funds within the PaineWebber fund
complex receives additional compensation, aggregating $15,000 annually from
the relevant funds. All board members are reimbursed for any expenses
incurred in attending meetings. Board members and officers own in the
aggregate less than 1% of the outstanding shares of any class of each fund.
Because Mitchell Hutchins and PaineWebber perform substantially all of the
services necessary for the operation of the Trust, the Corporation and each
fund, the Trust and the Corporation require no employees. No officer,
director or employee of Mitchell Hutchins or PaineWebber presently receives
any compensation from the Trust or the Corporation for acting as a board
member or officer.

<PAGE>

The table below includes certain information relating to the
compensation of the current board members who held office with the Trust or the
Corporation during the funds' fiscal year ended August 31, 1999, and the
compensation of those board members from all PaineWebber funds during the 1998
calendar year.

COMPENSATION TABLE(1)

<TABLE>
<CAPTION>
TOTAL COMPENSATION
AGGREGATE AGGREGATE FROM THE
COMPENSATION COMPENSATION CORPORATION/TRUST
FROM THE FROM THE AND THE FUND
NAME OF PERSON, POSITION CORPORATION++ TRUST++ COMPLEX+
------------------------ ------------- ------- --------
<S> <C> <C> <C>
Richard Q. Armstrong,
Trustee/Director ..................... $4,120 $4,120 $101,372

Richard R. Burt,
Trustee/Director...................... 4,120 4,060 101,372

Meyer Feldberg,
Trustee/Director...................... 4,120 5,424 116,222

George W. Gowen,
Trustee/Director...................... 4,945 4,120 108,272

Frederic V. Malek,
Trustee/Director...................... 4,120 4,120 101,372

Carl W. Schafer,
Trustee/Director...................... 4,120 4,120 101,372
</TABLE>

- --------------------
(1) Only independent board members are compensated by the funds and identified
above; board members who are "interested persons," as defined by the
Investment Company Act, do not receive compensation from the funds.

* Represents fees paid to each board member indicated for the fiscal year
ended August 31, 1999.

+ Represents total compensation paid to each board member during the calendar
year ended December 31, 1998; no fund within the fund complex has a bonus,
pension, profit sharing or retirement plan.

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

PRINCIPAL HOLDERS OF SECURITIES

As of November 30, 1999, the funds' records showed no shareholders as
owning 5% or more of any class of a fund's shares.

INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS

INVESTMENT ADVISORY AND ADMINISTRATIVE ARRANGEMENTS. Mitchell
Hutchins acts as the investment adviser and administrator pursuant to a separate
contract (each an "Advisory Contract") with each fund. The Advisory Contract for
Balanced Fund is dated August 4, 1988. The Advisory Contract for Tactical
Allocation Fund is dated April 13, 1995. Under the Advisory Contracts, the funds
pay Mitchell Hutchins an annual fee, computed daily and paid monthly, as set
forth below:

BALANCED FUND
ANNUAL
AVERAGE DAILY NET ASSETS RATE
- ------------------------ ----
Up to $500 million.......................................... 0.750%
In excess of $500 million up to $1.0 billion................ 0.725
In excess of $1.0 billion up to $1.5 billion................ 0.700
In excess of $1.5 billion up to $2.0 billion................ 0.675

<PAGE>

Over $2.0 billion........................................... 0.650

TACTICAL ALLOCATION FUND
ANNUAL
AVERAGE DAILY NET ASSETS RATE
- ------------------------ ----
Up to $250 million.......................................... 0.500%
Over $250 million........................................... 0.450

During the fiscal years indicated, Mitchell Hutchins earned (or
accrued) advisory and administration fees in the amounts set forth below:

<TABLE>
<CAPTION>
FISCAL YEARS ENDED AUGUST 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balanced $1,890,996 $1,709,264 $1,465,166
---------- ---------- ----------
Fund.......................................
Tactical Allocation Fund .................. 9,214,743 4,895,190 1,756,146
--------- --------- ---------
</TABLE>

Prior to August 1, 1997, pursuant to a service agreement, PaineWebber
provided certain services to Balanced Fund not otherwise provided by the fund's
transfer agent PFPC Inc. ("PFPC"). No such service agreement was in effect with
respect to Tactical Allocation Fund. Pursuant to the service agreement between
PaineWebber and Balanced Fund, during the period September 1, 1996 to August 1,
1997, PaineWebber earned fees in the amounts of $54,420 . Subsequent to August
1, 1997, PFPC (not the funds) pays PaineWebber for certain transfer agency
related services relating to both funds that PFPC has delegated to PaineWebber.

Under the terms of the applicable Advisory Contract, each fund bears
all expenses incurred in its operation that are not specifically assumed by
Mitchell Hutchins. General expenses of the Trust or Corporation not readily
identifiable as belonging to a specific series are allocated among series by or
under the direction of the board in such manner as the board deems fair and
equitable. Expenses borne by each fund include the following: (1) the cost
(including brokerage commissions, if any) 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 under federal and state securities laws and
maintenance of such registrations and qualifications; (5) fees and salaries
payable to board members who are not interested persons of the Trust/Corporation
or Mitchell Hutchins; (6) all expenses incurred in connection with the board
members' services, including travel expenses; (7) taxes (including any income or
franchise taxes) and governmental fees; (8) costs of any liability,
uncollectible items of deposit and other insurance or fidelity bonds; (9) any
costs, expenses or losses arising out of a liability of or claim for damages or
other relief asserted against the fund for violation of any law; (10) legal,
accounting and auditing expenses, including legal fees of special counsel for
the independent board members; (11) charges of custodians, transfer agents and
other agents; (12) costs of preparing share certificates; (13) expenses of
setting in type and printing prospectuses and supplements thereto, statements of
additional information and supplements thereto, reports and proxy materials for
existing shareholders and costs of mailing such materials to existing
shareholders; (14) any extraordinary expenses (including fees and disbursements
of counsel) incurred by the fund; (15) fees, voluntary assessments and other
expenses incurred in connection with membership in investment company
organizations; (16) costs of mailing and tabulating proxies and costs of
meetings of shareholders, the board and any committees thereof; (17) the cost of
investment company literature and other publications provided to trustees and
officers; and (18) costs of mailing, stationery and communications equipment.

Under each Advisory Contract, Mitchell Hutchins will not be liable
for any error of judgment or mistake of law or for any loss suffered by a fund
in connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Mitchell Hutchins in the performance of its duties or from reckless disregard of
its duties and obligations thereunder. Each Advisory Contract terminates
automatically upon its assignment and is terminable at any time without penalty
by the board or by vote of the

33
<PAGE>

holders of a majority of a fund's outstanding voting securities, on 60 days'
written notice to Mitchell Hutchins or by Mitchell Hutchins on 60 days' written
notice to a fund.

SECURITIES LENDING. During the fiscal year ended August 31, 1999 and
August 31, 1998, the funds paid (or accrued) the following fees to PaineWebber
for its services as securities lending agent:

FISCAL YEARS ENDED AUGUST 31,
-----------------------------
1999 1998
---- ----
Balanced Fund $17,852 $28,144
Tactical Allocation Fund $176,811 $134,065

NET ASSETS. The following table shows the approximate net assets as
of October 31, 1999, sorted by category of investment objective, of the
investment companies as to which Mitchell Hutchins serves as adviser. An
investment company may fall into more than one of the categories below.

NET ASSETS
INVESTMENT CATEGORY ($MIL)
------------------- -----
Domestic (excluding Money Market) ................ $7,873.9
Global........................................... 4,651.4
Equity/Balanced................................... 7,822.0
Fixed Income (excluding Money Market)............. 3,233.7
Taxable Fixed Income ..................... 4,703.3
Tax-Free Fixed Income .................... 1,469.6
Money Market Funds ............................... 36,069.2

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

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

Under separate plans of distribution pertaining to the Class A, Class
B and Class C shares of each fund adopted by the Trust or the Corporation in the
manner prescribed under Rule 12b-1 under the Investment Company Act (each,
respectively, a "Class A Plan," "Class B Plan" and "Class C Plan," and
collectively, "Plans"), each fund pays Mitchell Hutchins a service fee, accrued
daily and payable monthly, at the annual rate of 0.25% of the average daily net
assets of each class of shares. Under the Class B Plan and the Class C Plan,
each fund pays Mitchell Hutchins a distribution fee, accrued daily and payable
monthly, at the annual rate of 0.75% of the average daily net assets of the
Class B shares. There is no distribution plan with respect to the funds' Class Y
shares.

Mitchell Hutchins uses the service fees under the Plans for Class A,
B and C shares primarily to pay PaineWebber for shareholder servicing, currently
at the annual rate of 0.25% of the aggregate investment amounts maintained in
each fund by PaineWebber clients. PaineWebber then compensates its Financial
Advisors for

34
<PAGE>

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:

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

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

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

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

The Plans and the related Distribution Contracts for Class A, Class B
and Class C shares 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.

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

In reporting amounts expended under the Plans to the board members,
Mitchell Hutchins allocates expenses attributable to the sale of each class of
each fund's 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
a fund's shares will not be used to subsidize the sale of any other class of
fund shares.

The funds paid (or accrued) the following service and/or distribution
fees to Mitchell Hutchins under the Class A, Class B and Class C Plans during
the fiscal year ended August 31, 1999:

BALANCED TACTICAL ALLOCATION
FUND FUND
-------- ----
Class A ................ $505,425 $1,365,214
Class B ................ 305,401 7,645,352
Class C ................ 190,716 6,022,973

35
<PAGE>

Mitchell Hutchins estimates that it and its parent corporation,
PaineWebber, incurred the following shareholder service-related and
distribution-related expenses with respect to each fund during the fiscal year
ended August 31, 1999:

<TABLE>
<CAPTION>
TACTICAL ALLOCATION
BALANCE FUND FUND
------------ ----
<S> <C> <C>
CLASS A
Marketing and advertising ........................... $232,019 $1,466,338
Amortization of commissions ......................... 0 0
Printing of prospectuses and SAIs ................... 2,410 17,072
Branch network costs allocated and interest
expense .......................................... 563,791 831,595
Service fees paid to PaineWebber Financial
Advisors ............................................ 196,647 526,906

CLASS B
Marketing and advertising ........................... $34,986 $2,055,505
Amortization of commissions ......................... 109,390 2,798,288
Printing of prospectuses and SAIs ................... 364 23,928
Branch network costs allocated and interest
expense .......................................... 100,438 1,592,568
Service fees paid to PaineWebber Financial
Advisors ............................................ 29,401 737,560

CLASS C
Marketing and advertising ........................... $22,495 $1,621,777
Amortization of commissions ......................... 55,130 1,742,839
Printing of prospectuses and SAIs ................... 226 18,880
Branch network costs allocated and interest
expense ........................................... 53,715 935,065
Service fees paid to PaineWebber Financial
Advisors ............................................ 18,376 580,946
</TABLE>

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

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

In approving the Class A Plan, each board considered all the features
of the distribution system, including (1) the conditions under which initial
sales charges would be imposed and the amount of such charges, (2) Mitchell
Hutchins' belief that the initial sales charge combined with a service fee would
be attractive to PaineWebber Financial Advisors and correspondent firms,
resulting in greater growth of the fund than might otherwise be the case, (3)
the advantages to the shareholders of economies of scale resulting from growth
in the fund's assets and potential continued growth, (4) the services provided
to the fund and its shareholders by Mitchell Hutchins, (5) the services

<PAGE>

provided by PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell
Hutchins and (6) Mitchell Hutchins' shareholder service-related expenses and
costs.

In approving the Class B Plan, the board of each fund considered all
the features of the distribution system, including (1) the conditions under
which contingent deferred sales charges would be imposed and the amount of such
charges, (2) the advantage to investors in having no initial sales charges
deducted from fund purchase payments and instead having the entire amount of
their purchase payments immediately invested in fund shares, (3) Mitchell
Hutchins' belief that the ability of PaineWebber Financial Advisors and
correspondent firms to receive sales commissions when Class B shares are sold
and continuing service fees thereafter while their customers invest their entire
purchase payments immediately in Class B shares would prove attractive to the
Financial Advisors and correspondent firms, resulting in greater growth of the
fund than might otherwise be the case, (4) the advantages to the shareholders of
economies of scale resulting from growth in the fund's assets and potential
continued growth, (5) the services provided to the fund and its shareholders by
Mitchell Hutchins, (6) the services provided by PaineWebber pursuant to its
Exclusive Dealer Agreement with Mitchell Hutchins and (7) Mitchell Hutchins'
shareholder service- and distribution-related expenses and costs. The board
members also recognized that Mitchell Hutchins' willingness to compensate
PaineWebber and its Financial Advisors, without the concomitant receipt by
Mitchell Hutchins of initial sales charges, was conditioned upon its expectation
of being compensated under the Class B Plan.

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

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

Under the Distribution Contract between each fund and Mitchell
Hutchins for the Class A shares for the fiscal years (or periods) set forth
below, Mitchell Hutchins earned the following approximate amounts of sales
charges and retained the following approximate amounts, net of concessions to
PaineWebber as exclusive dealer.

<TABLE>
<CAPTION>
FISCAL YEARS ENDED AUGUST 31,
-----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
BALANCED FUND
Earned ...................................... $ 91,158 $ 368,103 $ 61,774
Retained .................................... 8,956 16,048 2,215
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
TACTICAL ALLOCATION FUND
<S> <C> <C> <C>
Earned ...................................... $4,648,952 $3,764,774 $2,887,643
Retained .................................... 245,303 243,663 182,132
</TABLE>

Mitchell Hutchins earned and retained the following contingent
deferred sales charges paid upon certain redemptions of shares for the fiscal
year ended August 31, 1999:

TACTICAL ALLOCATION
BALANCED FUND FUND
------------- ----
Class A...................... $0 $0
Class B...................... 79,720 2,216,429
Class C...................... 6,858 232,272

PORTFOLIO TRANSACTIONS

Subject to policies established by each board, Mitchell Hutchins is
responsible for the execution of the funds' portfolio transactions and the
allocation of brokerage transactions. In executing portfolio transactions,
Mitchell Hutchins seeks to obtain the best net results for a fund, taking into
account such factors as the price (including the applicable brokerage commission
or dealer spread), size of order, difficulty of execution and operational
facilities of the firm involved. While Mitchell Hutchins generally seeks
reasonably competitive commission rates, payment of the lowest commission is not
necessarily consistent with obtaining the best net results. Prices paid to
dealers in principal transactions generally include a "spread," which is the
difference between the prices at which the dealer is willing to purchase and
sell a specific security at the time. The funds may invest in securities traded
in the over-the-counter market and will engage primarily in transactions
directly with the dealers who make markets in such securities, unless a better
price or execution could be obtained by using a broker. During the fiscal years
indicated, the funds paid the brokerage commissions set forth below:

FISCAL YEARS ENDED AUGUST 31,
--------------------------------------------
1999 1998 1997
---- ---- ----
Balanced Fund...................... $367,133 $290,954 $249,609
Tactical Allocation Fund........... 363,697 440,215 211,116

The funds have no obligation to deal with any broker or group of
brokers in the execution of portfolio transactions. The funds contemplate that,
consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through Mitchell Hutchins or its affiliates,
including PaineWebber. Each board has adopted procedures in conformity with Rule
17e-1 under the Investment Company Act to ensure that all brokerage commissions
paid to PaineWebber are reasonable and fair. Specific provisions in the Advisory
Contracts authorize Mitchell Hutchins and any of its affiliates that is a member
of a national securities exchange to effect portfolio transactions for the funds
on such exchange and to retain compensation in connection with such
transactions. Any such transactions will be effected and related compensation
paid only in accordance with applicable SEC regulations. For the fiscal years
indicates, the funds paid brokerage commissions to PaineWebber as follows:

FISCAL YEARS ENDED AUGUST 31,
--------------------------------------
1999 1998 1997
----- ---- ----
Balanced Fund..................... $14,808 $1,038 $15,564
Tactical Allocation Fund........... 3,571 5,496 2,422

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<PAGE>

During the fiscal year ended August 31, 1999, the brokerage
commissions paid by Balanced Fund to PaineWebber represented 4.03% of the total
commissions paid by the fund and 3.30% of the aggregate dollar amount of
transactions involving brokerage commission payments. During the same period,
the brokerage commissions paid by Tactical Allocation Fund to PaineWebber
represented 0.98% of the total commissions paid by the fund and 1.09% of the
aggregate dollar amount of transactions involving brokerage commission payments.

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

In selecting brokers, Mitchell Hutchins will consider the full range
and quality of a broker's services. Consistent with the interests of the funds
and subject to the review of each board, Mitchell Hutchins may cause a fund to
purchase and sell portfolio securities through brokers who provide Mitchell
Hutchins with brokerage or research services. The funds may pay those brokers a
higher commission than may be charged by other brokers, provided that Mitchell
Hutchins determines in good faith that the commission is reasonable in terms
either of that particular transaction or of the overall responsibility of
Mitchell Hutchins to that fund and its other clients.

Research services obtained from brokers may include written reports,
pricing and appraisal services, analysis of issues raised in proxy statements,
educational seminars, subscriptions, portfolio attribution and monitoring
services, and computer hardware, software and access charges which are directly
related to investment research. Research services may be received in the form of
written reports, online services, telephone contacts and personal meetings with
securities analysts, economists, corporate and industry spokespersons and
government representatives.

For Balanced Fund's fiscal year ended August 31, 1999 Mitchell
Hutchins directed $78,679,767 in portfolio transactions to brokers chosen
because they provided research services, for which Balanced Fund paid $100,667
in commissions. For Tactical Allocation Fund's fiscal year ended August 31,
1999, Mitchell Hutchins directed no transactions to brokers chosen for research
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 these
transactions, it will not purchase securities at a higher price or sell
securities at a lower price than would otherwise be paid if no weight was
attributed to the services provided by the executing dealer. Mitchell Hutchins
may engage in agency transactions in over-the-counter equity and debt securities
in return for research and execution services. These transactions are entered
into only pursuant to procedures that are designed to ensure that the
transaction (including commissions) is at least as favorable as it would have
been if effected directly with a market-maker that did not provide research or
execution services.

Research services and information received from brokers or dealers
are supplemental to Mitchell Hutchins' own research efforts and, when utilized,
are subject to internal analysis before being incorporated into their investment
processes. Information and research services furnished by brokers or dealers
through which or with which the funds effect securities transactions may be used
by Mitchell Hutchins in advising other funds or accounts and, conversely,
research services furnished to Mitchell Hutchins by brokers or dealers in
connection with other funds or accounts that either of them advises may be used
in advising the funds.

Investment decisions for a fund and for other investment accounts
managed by Mitchell Hutchins are made independently of each other in light of
differing considerations for the various accounts. However, the same investment
decision may occasionally be made for a fund and one or more accounts. In those
cases, simultaneous transactions are inevitable. Purchases or sales are then
averaged as to price and allocated between that fund and the other account(s) as
to amount according to a formula deemed equitable to the fund and the other
account(s). While in some cases this practice could have a detrimental effect
upon the price or value of the security as far as a fund is

39
<PAGE>

concerned, or upon its ability to complete its entire order, in other cases it
is believed that simultaneous transactions and the ability to participate in
volume transactions will benefit the fund.

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

PORTFOLIO TURNOVER. The funds' annual portfolio turnover rates may
vary greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate is
calculated by dividing the lesser of a fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of securities in the portfolio during the year.

The funds' respective portfolio turnover rates for the fiscal years
shown were:

FISCAL YEARS ENDED AUGUST 31,
-----------------------------
1999 1998
---- ----
Balanced Fund....................... 234% 190%
Tactical Allocation Fund............ 6% 33%

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

WAIVERS OF SALES CHARGES/CONTINGENT DEFERRED SALES CHARGES -- CLASS A
SHARES. The following additional sales charge waivers are available for Class A
shares if you:

o Purchase shares through a variable annuity offered only to
qualified plans. For investments made pursuant to this waiver,
Mitchell Hutchins may make payments out of its own resources to
PaineWebber and to the variable annuity's sponsor, adviser or
distributor in a total amount not to exceed l% of the amount
invested;

o Acquire shares through an investment program that is not
sponsored by PaineWebber or its affiliates and that charges
participants a fee for program services, provided that the
program sponsor has entered into a written agreement with
PaineWebber permitting the sale of shares at net asset value to
that program. For investments made pursuant to this waiver,
Mitchell Hutchins may make a payment to PaineWebber out of its
own resources in an amount not to exceed 1% of the amount
invested. For subsequent investments or exchanges made to
implement a rebalancing feature of such an investment program,
the minimum subsequent investment requirement is also waived;

o Acquire shares in connection with a reorganization pursuant to
which a fund acquires substantially all of the assets and
liabilities of another fund in exchange solely for shares of the
acquiring fund; or

o Acquire shares in connection with the disposition of proceeds
from the sale of shares of Managed High Yield Plus Fund Inc. that
were acquired during that fund's initial public offering of
shares and that meet certain other conditions described in its
prospectus.

In addition, reduced sales charges on Class A shares are available
through the combined purchase plan or through rights of accumulation described
below. Class A share purchases of $1 million or more are not subject to an
initial sales charge; however, if a shareholder sells these shares within one
year after purchase, a contingent deferred

40
<PAGE>

sales charge of 1% of the offering price or the net asset value of the shares
at the time of sale by the shareholder, whichever is less, is imposed.

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

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

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

(b) an individual and his or her individual retirement account
("IRA");

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

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

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

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

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

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

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

REINSTATEMENT PRIVILEGE -- CLASS A SHARES. Shareholders who have
redeemed Class A shares of a fund may reinstate their account without a sales
charge by notifying the transfer agent of such desire and forwarding a check for
the amount to be purchased within 365 days after the date of redemption. The
reinstatement will be made at the net asset value per share next computed after
the notice of reinstatement and check are received. The amount of a purchase
under this reinstatement privilege cannot exceed the amount of the redemption
proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised, although a loss arising out of a
redemption might not be deductible under certain circumstances. See "Taxes"
below.

<PAGE>

WAIVERS OF CONTINGENT DEFERRED SALES CHARGES -- CLASS B SHARES. The
maximum 5% contingent deferred sales charge applies to sales of shares during
the first year after purchase. The charge generally declines by 1% annually,
reaching zero after six years. Among other circumstances, the contingent
deferred sales charge on Class B shares is waived where a total or partial
redemption is made within one year following the death of the shareholder. The
contingent deferred sales charge waiver is available where the decedent is
either the sole shareholder or owns the shares with his or her spouse as a joint
tenant with right of survivorship. This waiver applies only to redemption of
shares held at the time of death.

NON-RESIDENT ALIEN WAIVER OF CONTINGENT DEFERRED SALES CHARGE. Until
March 31, 2000, investors who are non-resident aliens will be able to sell their
fund shares without incurring a contingent deferred sales charge, if they use
the sales proceeds to immediately purchase shares of certain offshore investment
pools available through PaineWebber. The fund will waive the contingent deferred
sales charge that would otherwise apply to a sale of Class A, Class B or Class C
shares of the fund. Fund shareholders who want to take advantage of this waiver
should review the offering documents of the offshore investment pools for
further information, including investment minimums, and fees and expenses.
Shares of the offshore investment pools are available only in those
jurisdictions where the sale is authorized and are not available to any U.S.
person, including, but not limited to, any citizen or resident of the United
States, and U.S. partnership or U.S. trust, and are not available to residents
of certain other countries. For more information on how to take advantage of the
deferred sales charge waiver, investors should contact their PaineWebber
Financial Advisors.

PURCHASES OF CLASS Y SHARES THROUGH THE PACE MULTI ADVISOR PROGRAM.
An investor who participates in the PACE Multi Advisor Program is eligible to
purchase Class Y shares. The PACE Multi Advisor Program is an advisory program
sponsored by PaineWebber that provides comprehensive investment services,
including investor profiling, a personalized asset allocation strategy using an
appropriate combination of funds, and a quarterly investment performance review.
Participation in the PACE Multi Advisor Program is subject to payment of an
advisory fee at the effective maximum annual rate of 1.5% of assets. Employees
of PaineWebber and its affiliates are entitled to a waiver of this fee. Please
contact your PaineWebber Financial Advisor or PaineWebber's correspondent firms
for more information concerning mutual funds that are available through the PACE
Multi Advisor Program.

PURCHASES OF CLASS A SHARES THROUGH THE PAINEWEBBER INSIGHTONEsm
PROGRAM. Investors who purchase shares through the PaineWebber InsightOneSM
Program are eligible to purchase Class A shares without a sales load. The
PaineWebber InsightOneSM Program offers a nondiscretionary brokerage account to
PaineWebber clients for an asset-based fee at an annual rate of up to 1.50% of
the assets in the account. Account holders may purchase or sell certain
investment products without paying commissions on other markups/markdowns.

ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of the funds may be exchanged for shares of the
corresponding class of most other PaineWebber mutual funds. Class Y shares are
not eligible for exchange. Shareholders will receive at least 60 days' notice of
any termination or material modification of the exchange offer, except no notice
need be given if, under extraordinary circumstances, either redemptions are
suspended under the circumstances described below or a fund temporarily delays
or ceases the sales of its shares because it is unable to invest amounts
effectively in accordance with the fund's investment objective, policies and
restrictions.

If conditions exist that make cash payments undesirable, each fund
reserves the right to honor any request for redemption by making payment in
whole or in part in securities chosen by the fund and valued in the same way as
they would be valued for purposes of computing the fund's net asset value. Any
such redemption in kind will be made with readily marketable securities, to the
extent available. If payment is made in securities, a shareholder may incur
brokerage expenses in converting these securities into cash. Each fund has
elected, however, to be governed by Rule 18f-1 under the Investment Company Act,
under which it is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of its net asset value during any 90-day period for one
shareholder. This election is irrevocable unless the SEC permits its withdrawal.

<PAGE>

The funds may suspend redemption privileges or postpone the date of
payment during any period (1) when the New York Stock Exchange is closed or
trading on the New York Stock Exchange is restricted as determined by the SEC,
(2) when an emergency exists, as defined by the SEC, that makes it not
reasonably practicable for a fund to dispose of securities owned by it or fairly
to determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of a fund's portfolio at the time.

SERVICE ORGANIZATIONS. A fund may authorize service organizations,
and their agents, to accept on its behalf purchase and redemption orders that
are in "good form" in accordance with the policies of those service
organizations. A fund will be deemed to have received these purchase and
redemption orders when a service organization or its agent accepts them. Like
all customer orders, these orders will be priced based on the fund's net asset
value next computed after receipt of the order by the service organizations or
their agents. Service organizations may include retirement plan service
providers who aggregate purchase and redemption instructions received from
numerous retirement plans or plan participants.

AUTOMATIC INVESTMENT PLAN. PaineWebber offers an automatic investment
plan with a minimum initial investment of $1,000 through which a fund will
deduct $50 or more on a monthly, quarterly, semi-annual or annual basis from the
investor's bank account to invest directly in the fund. Participation in the
automatic investment plan enables an investor to use the technique of "dollar
cost averaging." When an investor invests the same dollar amount each month
under the plan, the investor will purchase more shares when a fund's net asset
value per share is low and fewer shares when the net asset value per share is
high. Using this technique, an investor's average purchase price per share over
any given period will be lower than if the investor purchased a fixed number of
shares on a monthly basis during the period. Of course, investing through the
automatic investment plan does not assure a profit or protect against loss in
declining markets. Additionally, because the automatic investment plan involves
continuous investing regardless of price levels, an investor should consider his
or her financial ability to continue purchases through periods of both low and
high price levels.

SYSTEMATIC WITHDRAWAL PLAN. The systematic withdrawal plan allows
investors to set up monthly, quarterly (March, June, September and December),
semi-annual (June and December) or annual (December) withdrawals from their
PaineWebber Mutual Fund accounts. Minimum balances and withdrawals vary
according to the class of shares:

o Class A and Class C shares. Minimum value of fund shares is
$5,000; minimum withdrawals of $100.

o Class B shares. Minimum value of fund shares is $10,000; minimum
monthly, quarterly, and semi-annual and annual withdrawals of
$100, $200, $300 and $400, respectively.

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

An investor's participation in the systematic withdrawal plan will
terminate automatically if the "Initial Account Balance" (a term that means the
value of the fund account at the time the investor elects to participate in the
systematic withdrawal plan), less aggregate redemptions made other than pursuant
to the systematic withdrawal plan, is less than the minimum values specified
above. Purchases of additional shares of a fund concurrent with withdrawals are
ordinarily disadvantageous to shareholders because of tax liabilities and, for
Class A shares, initial sales charges. On or about the 20th of a month for
monthly, quarterly, semi-annual and annual plans, PaineWebber will arrange for
redemption by the funds of sufficient fund shares to provide the withdrawal
payments specified by participants in the funds' systematic withdrawal plan. The
payments generally are mailed approximately five Business Days (defined under
"Valuation of Shares") after the redemption date. Withdrawal payments should not
be considered dividends, but redemption proceeds. If periodic withdrawals
continually exceed reinvested dividends and other distributions, a shareholder's
investment may be correspondingly reduced. A shareholder may change the

43
<PAGE>

amount of the systematic withdrawal or terminate participation in the systematic
withdrawal plan at any time without charge or penalty by written instructions
with signatures guaranteed to PaineWebber or PFPC Inc. Instructions to
participate in the plan, change the withdrawal amount or terminate participation
in the plan will not be effective until five days after written instructions
with signatures guaranteed are received by PFPC. Shareholders may request the
forms needed to establish a systematic withdrawal plan from their PaineWebber
Financial Advisors, correspondent firms or PFPC at 1-800-647-1568.

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

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

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

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

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

The terms of the Plan, or an RMA accountholder's participation in the
Plan, may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW funds and/or mutual funds other than the PW funds may
be offered through the Plan.

PERIODIC INVESTING AND DOLLAR COST AVERAGING. Periodic investing in
the PW funds or other mutual funds, whether through the Plan or otherwise, helps
investors establish and maintain a disciplined approach to accumulating assets
over time, de-emphasizing the importance of timing the market's highs and lows.
Periodic investing also permits an investor to take advantage of "dollar cost
averaging." By investing a fixed amount in mutual fund shares at established
intervals, an investor purchases more shares when the price is lower and fewer
shares when the price is higher, thereby increasing his or her earning
potential. Of course, dollar cost averaging does not guarantee a profit or
protect against a loss in a declining market, and an investor should consider
his or her financial ability to continue investing through periods of both low
and high share prices. However, over time, dollar cost averaging generally
results in a lower average original investment cost than if an investor invested
a larger dollar amount in a mutual fund at one time.

<PAGE>

PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT. In order to enroll in the
Plan, an investor must have opened an RMA account with PaineWebber or one of its
correspondent firms. The RMA account is PaineWebber's comprehensive asset
management account and offers investors a number of features, including the
following:

o monthly Premier account statements that itemize all account
activity, including investment transactions, checking activity
and Gold MasterCard(R)transactions during the period, and provide
unrealized and realized gain and loss estimates for most
securities held in the account;

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

o automatic "sweep" of uninvested cash into the RMA accountholder's
choice of one of the six RMA money market funds - RMA Money
Market Portfolio, RMA U.S. Government Portfolio, RMA Tax-Free
Fund, RMA California Municipal Money Fund, RMA New Jersey
Municipal Money Fund and RMA New York Municipal Money Fund. AN
INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY. ALTHOUGH A MONEY MARKET FUND SEEKS TO PRESERVE THE VALUE
OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN A MONEY MARKET FUND;

o check writing, with no per-check usage charge, no minimum amount
on checks and no maximum number of checks that can be written.
RMA accountholders can code their checks to classify
expenditures. All canceled checks are returned each month;

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

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

o unlimited electronic funds transfers and bill payment service for
an additional fee;

o expanded account protection for the net equity securities balance
in the event of the liquidation of PaineWebber. This protection
does not apply to shares of funds that are held at PFPC and not
through PaineWebber; and

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

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

CONVERSION OF CLASS B SHARES

Class B shares of a fund will automatically convert to Class A shares
of that fund, based on the relative net asset values per share of the two
classes, as of the close of business on the first Business Day (as defined under
"Valuation of Shares") of the month in which the sixth anniversary of the
initial issuance of such Class B shares occurs. For the purpose of calculating
the holding period required for conversion of Class B shares, the date of
initial issuance shall mean (i) the date on which such Class B shares were
issued or (ii) for Class B shares obtained through an exchange, or a series of
exchanges, the date on which the original Class B shares were issued. For
purposes of conversion to Class A shares, Class B shares purchased through the
reinvestment of dividends and other distributions paid in respect of Class B
shares will be held in a separate sub-account. Each time any Class B shares in
the shareholder's regular account (other than those in the sub-account) convert
to Class A shares, a pro rata portion of the Class B shares in the sub-account
will also convert to Class A shares. The portion will be determined by the ratio

<PAGE>

that the shareholder's Class B shares converting to Class A shares bears to the
shareholder's total Class B shares not acquired through dividends and other
distributions.

The conversion feature is subject to the continuing availability of
an opinion of counsel to the effect that the dividends and other distributions
paid on Class A and Class B shares will not result in "preferential dividends"
under the Internal Revenue Code and that the conversion of shares does not
constitute a taxable event. If the conversion feature ceased to be available,
the Class B shares would not be converted and would continue to be subject to
the higher ongoing expenses of the Class B shares beyond six years from the date
of purchase. Mitchell Hutchins has no reason to believe that this condition will
not continue to be met.

VALUATION OF SHARES

Each fund determines its net asset value per share separately for
each class of shares, normally as of the close of regular trading (usually 4:00
p.m., Eastern time) on the New York Stock Exchange on each Business Day, which
is defined as each Monday through Friday when the New York Stock Exchange is
open. Prices will be calculated earlier when the New York Stock Exchange closes
early because trading has been halted for the day. Currently the New York Stock
Exchange is closed on the observance of the following holidays: New Year's Day,
Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.

Securities that are listed on exchanges normally are valued at the
last sale price on the day the securities are valued or, lacking any sales on
such day, at the last available bid price. In cases where securities are traded
on more than one exchange, the securities are generally valued on the exchange
considered by Mitchell Hutchins as the primary market. Securities traded in the
over-the-counter market and listed on the Nasdaq Stock Market ("Nasdaq")
normally are valued at the last available sale price on Nasdaq prior to
valuation; other over-the-counter securities are valued at the last bid price
available prior to valuation. Where market quotations are readily available,
portfolio securities are valued based upon market quotations, provided those
quotations adequately reflect, in the judgment of Mitchell Hutchins, the fair
value of the security. Where those market quotations are not readily available,
securities are valued based upon appraisals received from a pricing service
using a computerized matrix system or based upon appraisals derived from
information concerning the security or similar securities received from
recognized dealers in those securities. All other securities and other assets
are valued at fair value as determined in good faith by or under the direction
of the applicable board. It should be recognized that judgment often plays a
greater role in valuing thinly traded securities, including many lower rated
bonds, than is the case with respect to securities for which a broader range of
dealer quotations and last-sale information is available. The amortized cost
method of valuation generally is used to value debt obligations with 60 days or
less remaining until maturity, unless the applicable board determines that this
does not represent fair value.

PERFORMANCE INFORMATION

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

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

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

<PAGE>

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

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

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

The following tables show performance information for each class of
the funds' shares outstanding for the periods indicated. All returns for periods
of more than one year are expressed as an average annual return.

BALANCED FUND

CLASS CLASS A CLASS B CLASS CLASS Y
INCEPTION DATE) (7/1/91) (12/12/86) (7/2/92) (3/26/98)
------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Year ended August 31, 1999:
Standardized Return* .......................... 10.98% 10.28% 14.34% 16.42%
Non-Standardized Return ....................... 16.20% 15.28% 15.34% 16.42%
Five Years ended August 31, 1999:
Standardized Return* .......................... 13.17% 13.14% 13.37% N/A
Non-Standardized Return* ..................... 14.23% 13.38% 13.37% N/A
Ten Years ended August 31, 1999:
Standardized Return ........................... N/A 10.49% N/A N/A
Non-Standardized Return ...................... N/A 10.49% N/A N/A
Inception to August 31, 1999:
Standardized Return* .......................... 11.20% 9.76% 11.09% 3.78%
Non-Standardized Return ...................... 11.83% 9.76% 11.09% 3.78%
</TABLE>

TACTICAL ALLOCATION FUND

CLASS CLASS A CLASS B CLASS CLASS Y
INCEPTION DATE) (5/10/93) (1/30/96) 7/22/92) (5/10/93)
------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Year ended August 31, 1999:
Standardized Return*................. 32.41% 32.61% 36.58% 39.03%
Non-Standardized Return........... 38.65% 37.61% 37.58% 39.03%
Five Years ended August 31, 1999
Standardized Return*................. 22.42% N/A 22.63% 23.09%
Non-Standardized Return........... 23.56% N/A 22.63% 23.90%
Inception to August 31,1999:
Standardized Return*................. 19.09% 22.65% 18.09% 20.29%
Non-Standardized Return........... 19.97% 22.98% 18.09% 20.29%
</TABLE>

47
<PAGE>

-------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charges imposed on a redemption of shares held for the
period. Class Y shares do not impose an initial or contingent deferred sales
charge; therefore, the performance information is the same for both
standardized return and non-standardized return for the periods indicated.

OTHER INFORMATION. In Performance Advertisements, the funds may
compare their Standardized Return and/or their Non-Standardized Return with data
published by Lipper Inc. ("Lipper") for U.S. government funds, corporate bond
(BBB) funds and high yield funds, CDA Investment Technologies, Inc. ("CDA"),
Wiesenberger Investment Companies Service ("Wiesenberger"), Investment Company
Data, Inc. ("ICD") or Morningstar Mutual Funds ("Morningstar"), or with the
performance of recognized stock, bond and other indices, including the Municipal
Bond Buyers Indices, Lehman Bond Index, the Standard & Poor's 500 Composite
Stock Price Index ("S&P 500"), the Dow Jones Industrial Average, Merrill Lynch
Municipal Bond Indices, the Morgan Stanley Capital International World Index,
the Lehman Brothers Treasury Bond Index, Lehman Brothers Government/Corporate
Bond Index, the Salomon Brothers World Government Bond Index and changes in the
Consumer Price Index as published by the U.S. Department of Commerce. Each fund
also may refer in these materials to mutual fund performance rankings and other
data, such as comparative asset, expense and fee levels, published by Lipper,
CDA, Wiesenberger, ICD or Morningstar. Performance Advertisements also may refer
to discussions of the funds and comparative mutual fund data and ratings
reported in independent periodicals, including 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 funds 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 in
additional fund shares, any future income or capital appreciation of a 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 a fund investment would increase more quickly than if dividends or other
distributions had been paid in cash.

The funds may also compare their performance with the performance of
bank certificates of deposit (CDs) as measured by the CDA Certificate of Deposit
Index, the Bank Rate Monitor National Index and the averages of yields of CDs of
major banks published by Banxquote(R) Money Markets. In comparing the funds'
performance to CD performance, investors should keep in mind that bank CDs are
insured in whole or in part by an agency of the U.S. government and offer fixed
principal and fixed or variable rates of interest, and that bank CD yields may
vary depending on the financial institution offering the CD and prevailing
interest rates. Shares of the funds are not insured or guaranteed by the U.S.
government and returns and net asset values will fluctuate. The debt securities
held by the funds generally have longer maturities than most CDs and may reflect
interest rate fluctuations for longer term debt securities. An investment in any
fund involves greater risks than an investment in either a money market fund or
a CD.

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

[OBJECT OMITTED-See plot points below}
<TABLE>
<CAPTION>
YEAR Common Stocks Long-Term Gov't Bonds Inflation/CPI Treasury Bills
<S> <C> <C> <C> <C>
1925 $10,000 $10,000 $10,000 $10,000
1926 $11,162 $10,777 $9,851 $10,327
1927 $15,347 $11,739 $9,646 $10,649
1928 $22,040 $11,751 $9,553 $11,028
1929 $20,185 $12,153 $9,572 $11,552
1930 $15,159 $12,719 $8,994 $11,830
1931 $8,590 $12,044 $8,138 $11,957
1932 $7,886 $14,073 $7,300 $12,072
1933 $12,144 $14,062 $7,337 $12,108
1934 $11,969 $15,472 $7,486 $12,128
1935 $17,674 $16,243 $7,710 $12,148
1936 $23,669 $17,464 $7,803 $12,170
1937 $15,379 $17,504 $8,045 $12,207
1938 $20,165 $18,473 $7,821 $12,205
1939 $20,082 $19,570 $7,784 $12,208
1940 $18,117 $20,761 $7,859 $12,208
1941 $16,017 $20,955 $8,622 $12,216
1942 $19,275 $21,629 $9,423 $12,248
1943 $24,267 $22,080 $9,721 $12,291
1944 $29,060 $22,702 $9,926 $12,332
1945 $39,649 $25,139 $10,149 $12,372
1946 $36,449 $25,113 $11,993 $12,416
1947 $38,529 $24,454 $13,073 $12,478
1948 $40,649 $25,285 $13,426 $12,580
1949 $48,287 $26,916 $13,184 $12,718
1950 $63,601 $26,932 $13,948 $12,870
1951 $78,875 $25,873 $14,767 $13,063
1952 $93,363 $26,173 $14,898 $13,279
1953 $92,439 $27,125 $14,991 $13,521
1954 $141,084 $29,075 $14,916 $13,638
1955 $185,614 $28,699 $14,972 $13,852
1956 $197,783 $27,096 $15,400 $14,193
1957 $176,457 $29,117 $15,866 $14,639
1958 $252,975 $27,342 $16,145 $14,864
1959 $283,219 $26,725 $16,387 $15,303
1960 $284,549 $30,407 $16,629 $15,711
1961 $361,060 $30,703 $16,741 $16,045
1962 $329,545 $32,818 $16,946 $16,483
1963 $404,685 $33,216 $17,225 $16,997
1964 $471,388 $34,381 $17,430 $17,598
1965 $530,081 $34,625 $17,765 $18,289
1966 $476,737 $35,889 $18,361 $19,159
1967 $591,038 $32,594 $18,920 $19,966
1968 $656,415 $32,509 $19,814 $21,005
1969 $600,590 $30,860 $21,024 $22,388
1970 $624,653 $34,596 $22,179 $23,849
1971 $714,058 $39,173 $22,924 $24,895
1972 $849,559 $41,400 $23,706 $25,851
1973 $725,003 $40,942 $25,792 $27,643
1974 $533,110 $42,725 $28,939 $29,855
1975 $731,443 $46,653 $30,969 $31,588
1976 $905,842 $54,470 $32,458 $33,193
1977 $840,766 $54,095 $34,656 $34,893
1978 $895,922 $53,458 $37,784 $37,398
1979 $1,061,126 $52,799 $42,812 $41,279
1980 $1,405,137 $50,715 $48,120 $45,917
1981 $1,336,161 $51,657 $52,421 $52,671
1982 $1,622,226 $72,507 $54,451 $58,224
1983 $1,987,451 $72,979 $56,518 $63,347
1984 $2,111,991 $84,274 $58,753 $69,586
1985 $2,791,166 $110,371 $60,968 $74,960
1986 $3,306,709 $137,446 $61,657 $79,580
1987 $3,479,675 $133,716 $64,376 $83,929
1988 $4,064,583 $146,650 $67,221 $89,257
1989 $5,344,555 $173,215 $70,345 $96,728
1990 $5,174,990 $183,924 $74,640 $104,286
1991 $6,755,922 $219,420 $76,927 $110,121
1992 $7,274,115 $237,092 $79,159 $113,982
1993 $8,000,785 $280,339 $81,334 $117,284
1994 $8,105,379 $258,556 $83,510 $121,862
1995 $11,139,184 $340,435 $85,630 $128,680
1996 $13,709,459 $337,265 $88,475 $135,381
1997 $18,272,762 $390,735 $89,897 $142,496
1998 $23,495,420 $441,777 $91,513 $149,416
</TABLE>
- ---------------------

** Source: Stocks, BONDS, BILLS AND INFLATION 1998 YEARBOOK(TM), Ibbotson
Assoc., Chi., (annual updates work by Roger G. Ibbotson & Rex A. Sinquefield).

The chart is shown for illustrative purposes only and does not
represent either fund's performance. These returns consist of income and capital
appreciation (or depreciation) and should not be considered an indication or
guarantee of future investment results. Year-to-year fluctuations in certain
markets have been significant and negative returns have been experienced in
certain markets from time to time. Stocks are measured by the S&P 500, an
unmanaged weighted index comprising 500 widely held common stocks and varying in
composition. Unlike investors in bonds and U.S. Treasury bills, common stock
investors do not receive fixed income payments and are not entitled to repayment
of principal. These differences contribute to investment risk. Returns shown for
long-term government bonds are based on U.S. Treasury bonds with 20-year
maturities. Inflation is measured by the Consumer Price Index. The indexes are
unmanaged and are not available for investment.

Over time, although subject to greater risks and higher volatility,
stocks have outperformed all other investments by a wide margin, offering a
solid hedge against inflation. From January 1, 1926 to December 31, 1998, stocks
beat all other traditional asset classes. A $10,000 investment in the stocks
comprising the S&P 500 grew to $23,495,420, significantly more than any other
investment.

TAXES

BACKUP WITHHOLDING. 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 or PaineWebber with a correct taxpayer identification number. Withholding
at that rate also is required from dividends and capital gain distributions
payable to those shareholders who otherwise are subject to backup withholding.

<PAGE>

SALE OR EXCHANGE OF FUND SHARES. A shareholder's sale (redemption) of
fund shares may result in a taxable gain or loss, depending on whether the
shareholder receives more or less than his or her adjusted basis for the shares
(which normally includes any initial sales charge paid on Class A shares). An
exchange of either 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 RULE FOR CLASS A SHAREHOLDERS. A special tax rule applies
when a shareholder sells or exchanges Class A shares of a fund within 90 days of
purchase and subsequently acquires Class A shares of the same fund or another
PaineWebber mutual fund without paying a sales charge due to the 365-day
reinstatement privilege or the exchange privilege. In these cases, any gain on
the sale or exchange of the original Class A shares would be increased, or any
loss would be decreased, by the amount of the sales charge paid when those
shares were bought, and that amount would increase the basis of the PaineWebber
mutual fund shares subsequently acquired.

CONVERSION OF CLASS B SHARES. A shareholder will recognize no gain or
loss as a result of a conversion of Class B shares to Class A shares.

QUALIFICATION AS A REGULATED INVESTMENT COMPANY. To continue to
qualify for treatment as a RIC under the Internal Revenue Code, each fund must
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net investment income
and net short-term capital gain ) ("Distribution Requirement") and must meet
several additional requirements. These additional requirements include the
following: (1) the fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of securities , or other income
(including gains from options or futures) derived with respect to its business
of investing in securities ("Income Requirement"); (2) at the close of each
quarter of the fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities,
securities of other RICs and other securities that are limited, in respect of
any one issuer, to an amount that does not exceed 5% of the value of the fund's
total assets and that does not represent more than 10% of the issuer's
outstanding voting securities; and (3) at the close of each quarter of the
fund's taxable year, not more than 25% of the value of its total assets may be
invested in securities (other than U.S. government securities or the securities
of other RICs) of any one issuer. If a fund failed to qualify for treatment as a
RIC for any taxable year, (a) it would be taxed as an ordinary corporation on
its taxable income for that year without being able to deduct the distributions
it makes to its shareholders and (b) the shareholders would treat all those
distributions, including distributions of net capital gain (the excess of net
long-term capital gain over net short-term capital loss), as dividends (that is,
ordinary income) to the extent of the fund's earnings and profits. In addition,
the fund could be required to recognize unrealized gains, pay substantial taxes
and interest and make substantial distributions before requalifying for RIC
treatment.

OTHER INFORMATION. Dividends and other distributions declared by a
fund in December of any year and payable to shareholders of record on a date in
that month will be deemed to have been paid by the fund and received by the
shareholders on December 31 if the distributions are paid by the fund during the
following January.

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

If fund shares are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received thereon. Investors also
should be aware that if shares are purchased shortly before the record date for
a dividend or capital gain distribution, the shareholder will pay full price for
the shares and receive some portion of the price back as a taxable distribution.

50
<PAGE>

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

The use of hedging strategies involving Derivative Instruments, such
as writing (selling) and purchasing options and futures contracts , involves
complex rules that will determine for income tax purposes the amount, character
and timing of recognition of the gains and losses a fund realizes in connection
therewith. Gains from options and futures derived by a fund with respect to its
business of investing in securities will qualify as permissible income under the
Income Requirement.

Balanced Fund may invest in the stock of "passive foreign investment
companies" ("PFICs") if that stock is a permissible investment. A PFIC is any
foreign corporation (with certain exceptions) that, in general, meets either of
the following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, the fund will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock of a PFIC or of any gain from disposition of that stock (collectively
"PFIC income"), plus interest thereon, even if the fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in the fund's investment company taxable income and,
accordingly, will not be taxable to it to the extent it distributes that income
to its shareholders.

If Balanced Fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the fund will be required to include in income each year
its pro rata share of the QEF's annual ordinary earnings and net capital gain
(which it may have to distribute to satisfy the Distribution Requirement and
avoid imposition of the Excise Tax) even if the QEF does not distribute those
earnings and gain to the fund. In most instances it will be very difficult, if
not impossible, to make this election because of certain of its requirements.

Balanced Fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
the fund's adjusted basis therein as of the end of that year. Pursuant to the
election, the fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included by the fund for
prior taxable years under the election (and under regulations proposed in 1992
that provided a similar election with respect to the stock of certain PFICs).
The fund's adjusted basis in each PFIC's stock with respect to which it has made
this election will be adjusted to reflect the amounts of income included and
deductions taken thereunder.

Certain futures contracts in which a fund may invest may be subject
to section 1256 of the Code ("section 1256 contracts"). Any section 1256
contracts a fund holds at the end of each taxable year generally must be
"marked-to-market" (that is, treated as having been sold at that time for their
fair market value) for federal income tax purposes, with the result that
unrealized gains or losses will be treated as though they were realized. Sixty
percent of any net gain or loss recognized on these deemed sales, and 60% of any
net realized gain or loss from any actual sales of section 1256 contracts, will
be treated as long-term capital gain or loss, and the balance will be treated as
short-term capital gain or loss. These rules may operate to increase the amount
that a fund must distribute to satisfy the Distribution Requirement (I.E., with
respect to the portion treated as short-term capital gain), which will be
taxable to its shareholders as ordinary income, and to increase the net capital
gain a fund recognizes, without in either case increasing the cash available to
the fund. A fund may elect not to have the foregoing rules apply to any "mixed
straddle" (that is, a straddle, clearly identified by the fund in accordance
with the regulations, at least one (but not all) of the positions of which are
section 1256 contracts), although doing so may have the effect of increasing the
relative proportion of net short-term capital gain (taxable as ordinary income)
and thus increasing the amount of dividends that must be distributed.

Offsetting positions in any actively traded security, option or
futures contract entered into or held by a fund may constitute a "straddle" for
federal income tax purposes. Straddles are subject to certain rules that may

<PAGE>

affect the amount, character and timing of a fund's gains and losses with
respect to positions of the straddle by requiring, among other things, that (1)
loss realized on disposition of one position of a straddle be deferred to the
extent of any unrealized gain in an offsetting position until the latter
position is disposed of, (2) the fund's holding period in certain straddle
positions not begin until the straddle is terminated (possibly resulting in gain
being treated as short-term rather than long-term capital gain) and (3) losses
recognized with respect to certain straddle positions, that otherwise would
constitute short-term capital losses, be treated as long-term capital losses.
Applicable regulations also provide certain "wash sale" rules, which apply to
transactions where a position is sold at a loss and a new offsetting position is
acquired within a prescribed period, and "short sale" rules applicable to
straddles. Different elections are available to the funds, which may mitigate
the effects of the straddle rules, particularly with respect to mixed straddles.

When a covered call option written (sold) by a fund expires, it
realizes a short-term capital gain equal to the amount of the premium it
received for writing the option. When a fund terminates its obligations under
such an option by entering into a closing transaction, it realizes a short-term
capital gain (or loss), depending on whether the cost of the closing transaction
is less (or more) than the premium it received when it wrote the option. When a
covered call option written by a fund is exercised, the fund is treated as
having sold the underlying security, producing long-term or short-term capital
gain or loss, depending on the holding period of the underlying security and
whether the sum of the option price received on the exercise plus the premium
received when it wrote the option is more or less than the basis of the
underlying security.

If a fund has an "appreciated financial position"-- generally, an
interest (including an interest through an option, futures contract or short
sale) with respect to any stock, debt instrument (other than "straight debt") or
partnership interest the fair market value of which exceeds its adjusted
basis--and enters into a "constructive sale" of the position, the fund will be
treated as having made an actual sale thereof, with the result that gain will be
recognized at that time. A constructive sale generally consists of a short sale,
an offsetting notional principal contract or a futures contract entered into by
a fund or a related person with respect to the same or substantially identical
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
identical property will be deemed a constructive sale. The foregoing will not
apply, however, to a fund's transaction during any taxable year that otherwise
would be treated as a constructive sale if the transaction is closed within 30
days after the end of that year and the fund holds the appreciated financial
position unhedged for 60 days after that closing (i.e., at no time during that
60-day period is the fund's risk of loss regarding that position reduced by
reason of certain specified transactions with respect to substantially identical
or related property, such as having an option to sell, being contractually
obligated to sell, making a short sale or granting an option to buy
substantially identical stock or securities).

Balanced Fund may acquire zero coupon or other securities issued with
original issue discount ("OID") and/or Treasury inflation-protected securities
("TIPS"), on which principal is adjusted based on changes in the Consumer Price
Index. The fund must include in its gross income the OID that accrues on those
securities, and the amount of any principal increases on TIPS, during the
taxable year, even if the fund receives no corresponding payment on them during
the year. Similarly, a fund that invests in payment-in-kind ("PIK") securities
must include in its gross income securities it receives as "interest" on those
securities. Each fund has elected similar treatment with respect to securities
purchased at a discount from their face value ("market discount"). Because a
fund annually must distribute substantially all of its investment company
taxable income, including any accrued OID, market discount and other non-cash
income, to satisfy the Distribution Requirement and avoid imposition of the
Excise Tax, it may be required in a particular year to distribute as a dividend
an amount that is greater than the total amount of cash it actually receives.
Those distributions would have to be made from the fund's cash assets or from
the proceeds of sales of portfolio securities, if necessary. The fund might
realize capital gains or losses from those sales, which would increase or
decrease its investment company taxable income and/or net capital gain.

The foregoing is only a general summary of some of the important
federal tax considerations generally affecting the funds and their shareholders.
No attempt is made to present a complete explanation of the federal tax
treatment of the funds' activities, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors are urged
to consult their own tax advisers for more detailed information and for
information regarding any state, local or foreign taxes applicable to the funds
and to dividends and other distributions therefrom.

52
<PAGE>

OTHER INFORMATION

MASSACHUSETTS BUSINESS TRUST. The Trust is an entity of the type
commonly known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of Tactical Allocation Fund could, under certain circumstances, be
held personally liable for the obligations of the fund or its Trust. However,
the Trust's Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust or the fund and requires that notice of such disclaimer
be given in each note, bond, contract, instrument, certificate or undertaking
made or issued by the board members or by any officers or officer by or on
behalf of the Trust or the fund, the board members or any of them in connection
with the Trust. The Declaration of Trust provides for indemnification from the
fund's property for all losses and expenses of any shareholder held personally
liable for the obligations of the fund. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the fund itself would be unable to meet its obligations,
a possibility that Mitchell Hutchins believes is remote and not material. Upon
payment of any liability incurred by a shareholder solely by reason of being or
having been a shareholder, the shareholder paying such liability would be
entitled to reimbursement from the general assets of the fund. The board members
intend to conduct each fund's operations in such a way as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the fund.

CLASSES OF SHARES. A share of each class of a fund represents an
identical interest in that fund's investment portfolio and has the same rights,
privileges and preferences. However, each class may differ with respect to sales
charges, if any, distribution and/or service fees, if any, other expenses
allocable exclusively to each class, voting rights on matters exclusively
affecting that class, and its exchange privilege, if any. The different sales
charges and other expenses applicable to the different classes of shares of the
funds will affect the performance of those classes. Each share of a fund is
entitled to participate equally in dividends, other distributions and the
proceeds of any liquidation of that fund. However, due to the differing expenses
of the classes, dividends and liquidation proceeds on Class A, B, C and Y shares
will differ.

VOTING RIGHTS. Shareholders of each fund are entitled to one vote for
each full share held and fractional votes for fractional shares held. Voting
rights are not cumulative and, as a result, the holders of more than 50% of all
the shares of the Trust or the Corporation may elect all its board members . The
shares of a fund will be voted together, 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 Rule 12b-1 Plan as it relates to the class. The shares of each
series of the Trust or Corporation will be voted separately, except when an
aggregate vote of all the series is required by law.

The funds do not hold annual meetings. Shareholders of record of no
less than two-thirds of the outstanding shares of the Trust or Corporation may
remove a board member through a declaration in writing or by vote cast in person
or by proxy at a meeting called for that purpose. A meeting will be called to
vote on the removal of a board member at the written request of holders of 10%
of the outstanding shares of the Trust or Corporation.

CLASS-SPECIFIC EXPENSES. Each fund may determine to allocate certain
of its expenses (in addition to service and distribution fees) to the specific
classes of its shares to which those expenses are attributable. For example,
Class B and Class C shares bear higher transfer agency fees per shareholder
account than those borne by Class A or Class Y shares. The higher fee is imposed
due to the higher costs incurred by the transfer agent in tracking shares
subject to a contingent deferred sales charge because, upon redemption, the
duration of the shareholder's investment must be determined in order to
determine the applicable charge. Although the transfer agency fee will differ on
a per account basis as stated above, the specific extent to which the transfer
agency fees will differ between the classes as a percentage of net assets is not
certain, because the fee as a percentage of net assets will be affected by the
number of shareholder accounts in each class and the relative amounts of net
assets in each class.

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

53
<PAGE>

CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT. State
Street Bank and Trust Company, located at One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian and recordkeeping agent for each fund.
PFPC Inc., a subsidiary of PNC Bank, N.A., located at 400 Bellevue Parkway,
Wilmington, DE 19809, serves as each fund's transfer and dividend disbursing
agent.

COMBINED PROSPECTUS. Although each fund is offering only its own
shares, it is possible that a fund might become liable for a misstatement in the
Prospectus about the other fund. The board of each fund has considered this
factor in approving the use of a single, combined Prospectus.

COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800
Massachusetts Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to
the funds. Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and
Mitchell Hutchins in connection with other matters.

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

FINANCIAL STATEMENTS

Each fund's Annual Report to Shareholders for its last fiscal year
ended August 31, 1999 is a separate document supplied with this SAI, and the
financial statements, accompanying notes and report of independent auditors or
independent accountants appearing therein are incorporated herein by this
reference.

<PAGE>

APPENDIX

RATINGS INFORMATION

DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS

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

Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from AA through CAA. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category, the modifier
2 indicates a mid-range ranking, and the modifier 3 indicates a ranking in the
lower end of that generic rating category.

DESCRIPTION OF S&P CORPORATE DEBT RATINGS

AAA. An obligation rated AAA has the highest rating assigned by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong; A. An obligation rated A is
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than obligations in higher rated categories. However, the
obligor's capacity to meet its financial commitment on the obligation is still
strong; BBB. An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation; BB, B, CCC, CC, C. Obligations rated BB, B, CCC, CC and C are
regarded as having significant speculative characteristics. BB indicates the
least degree of speculation and C the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions; BB. An
obligation rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing certainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation; B. An
obligation rated B is more vulnerable to nonpayment than obligations rated BB,
but the obligor currently has the capacity to meet its financial commitment on
the obligation., Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation; CCC. An obligation rated CCC is currently

A-1

<PAGE>

vulnerable to nonpayment and is dependent upon favorable business, financial and
economic conditions for the obligor to meet its financial commitment on the
obligation. In the event of adverse business, financial, or economic conditions,
the obligor is not likely to have the capacity to meet its financial commitment
on the obligation; CC. An obligation rated CC is currently highly vulnerable to
nonpayment; C. The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are not being continued; D. An obligation rated D is in payment
default. The D rating category is used when payments on an obligation are not
made on the date due even if the applicable grace period has not expired, unless
S&P believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on a obligation are jeopardized.

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

R. This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk-such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.

A-2

<PAGE>

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED
OR REFERRED TO IN THE PROSPECTUS AND THIS
STATEMENT OF ADDITIONAL INFORMATION. THE FUNDS AND
THEIR DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE TO PaineWebber
PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. Balanced Fund
THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL
INFORMATION ARE NOT AN OFFER TO SELL SHARES OF THE PaineWebber
FUNDS IN ANY JURISDICTION WHERE THE FUNDS OR THEIR Tactical Allocation Fund
DISTRIBUTOR MAY NOT LAWFULLY SELL THOSE SHARES.

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

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

Statement of Additional Information

December 10, 1999

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

PAINEWEBBER

<PAGE>

PART C. OTHER INFORMATION

Item 23. Exhibits

(1) Restated Articles of Incorporation 1/

(2) Restated By-Laws 1/

(3) Instruments defining the rights of holders of the Registrant's
common stock 2/

(4) Investment Advisory and Administration Contract 1/

(5) (a) Distribution Contract with respect to Class A shares 1/

(b) Distribution Contract with respect to Class B shares 1/

(d) Distribution Contract with respect to Class Y shares 3/

(e) Exclusive Dealer Agreement with respect to Class A
shares 1/

(f) Exclusive Dealer Agreement with respect to Class B
shares 1/

(g) Exclusive Dealer Agreement with respect to Class C
shares 3/

(h) Exclusive Dealer Agreement with respect to Class Y
shares 3/

(6) Bonus, profit sharing or pension plans - none

(7) Custodian Agreement 1/

(8) Transfer Agency Agreement 1/

(9) Opinion and consent of counsel (filed herewith)

(10) Other opinions, appraisals, rulings and consents: Accountant's
Consent (filed herewith)

(11) Financial statements omitted from prospectus - none

(12) Letter of investment intent 1/

(13) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class A Shares 4/

(b) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class B Shares 4/

(14) and

(27) Financial Data Schedule (not applicable)

(15) Plan pursuant to Rule 18f-3 5/
- -------------

1/ Incorporated by reference from Post-Effective Amendment No. 34 to the
registration statement, SEC File No. 33-2524, filed June 29, 1998.

2/ Incorporated by reference from Articles Sixth, Seventh, Eighth,
Eleventh and Twelfth of the Registrant's Restated Articles of
Incorporation and from Articles II, VIII, X, XI and XII of the
Registrant's Restated By-Laws.

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

C-1
<PAGE>

4/ Incorporated by refernece from Post-Effective Amendment No. 35 to the
registration statement, SEC File No. 33-2524, filed
November 23, 1998.

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

Item 24. Persons Controlled by or under Common Control with Registrant

None.

Item 25. Indemnification

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

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

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

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

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

C-2
<PAGE>

free and harmless of any claims arising out of any alleged untrue statement or
any alleged omission of material fact contained in information furnished by
Mitchell Hutchins for use in the Registration Statement or arising out of an
agreement between Mitchell Hutchins and any retail dealer, or arising out of
supplementary literature or advertising used by Mitchell Hutchins in connection
with each Distribution Contract.

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

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

Item 26. Business and Other Connections of Investment Adviser

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

Item 27. Principal Underwriters

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

ALL-AMERICAN TERM TRUST, INC.
GLOBAL HIGH INCOME DOLLAR FUND, INC.
GLOBAL SMALL CAP FUND, INC.
INSURED MUNICIPAL INCOME FUND, INC.
INVESTMENT GRADE MUNICIPAL INCOME FUND, INC.
MANAGED HIGH YIELD FUND, INC.
MANAGED HIGH YIELD PLUS FUND INC.
MITCHELL HUTCHINS LIR MONEY SERIES
MITCHELL HUTCHINS PORTFOLIOS
MITCHELL HUTCHINS SERIES TRUST
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND, INC.
PAINEWEBBER INDEX TRUST
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER MASTER SERIES, INC.
PAINEWEBBER MUNICIPAL SERIES

C-3
<PAGE>

PAINEWEBBER MUTUAL FUND TRUST
PAINEWEBBER OLYMPUS FUND
PAINEWEBBER SECURITIES TRUST
STRATEGIC GLOBAL INCOME FUND, INC.
2002 TARGET TERM TRUST, INC.

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

<TABLE>
<CAPTION>
Position and Offices With Underwriter or
Name Position With Registrant Exclusive Dealer
- ---- ------------------------ ----------------
<S> <C> <C>
Margo N. Alexander* Director and President Chairman, Chief Executive Officer and a Director of
Mitchell Hutchins and an Executive Vice President and a
Director of PaineWebber
Mary C. Farrell** Director Managing Director, Senior Investment Strategist and
member of the Investment Policy Committee of PaineWebber
Brian M. Storms* Director President and Chief Operating Officer of Mitchell Hutchins
T. Kirkham Barneby* Vice President Managing Director and Chief Investment Officer -
Quantitative Investments of Mitchell Hutchins
John J. Lee** Vice President and Assistant Treasurer Vice President and a Manager of the Mutual Fund Finance
Department of Mitchell Hutchins
Kevin J. Mahoney** Vice President and Assistant Treasurer First Vice President and a Senior Manager of the Mutual
Fund Finance Department of Mitchell Hutchins
Dennis McCauley* Vice President Managing Director and Chief Investment Officer - Fixed
Income of Mitchell Hutchins
Ann E. Moran** Vice President and Assistant Treasurer Vice President and a Manager of the Mutual Fund Finance
Department of Mitchell Hutchins
Dianne E. O'Donnell** Vice President and Secretary Senior Vice President and Deputy General Counsel of
Mitchell Hutchins
Emil Polito* Vice President Senior Vice President and Director of Operations and
Control for Mitchell Hutchins
Susan Ryan* Vice President Senior Vice President and a Portfolio Manager of Mitchell
Hutchins

C-4
<PAGE>

<CAPTION>
Position and Offices With Underwriter or
Name Position With Registrant Exclusive Dealer
- ---- ------------------------ ----------------
Victoria E. Schonfeld** Vice President Managing Director and General Counsel of Mitchell
Hutchins and a Senior Vice President of PaineWebber
Paul H. Schubert** Vice President and Treasurer Senior Vice President and Director of the Mutual Fund
Finance Department of Mitchell Hutchins
Nirmal Singh* Vice President Senior Vice President and a Portfolio Manager of Mitchell
Hutchins
Barney A. Taglialatela ** Vice President and Assistant Treasurer Vice President and a Manager of the Mutual Fund Finance
Department of Mitchell Hutchins
Mark A. Tincher* Vice President Managing Director and Chief Investment Officer - Equities
of Mitchell Hutchins
Keith A. Weller** Vice President and Assistant Secretary First Vice President and Associate General Counsel of
Mitchell Hutchins
</TABLE>
- -----------------
* The business address of this person is 51 West 52nd Street, New York,
New York 10019-6114.
** The business address of this person is 1285 Avenue of the Americas, New York,
New York 10019.

c) None

Item 28. Location of Accounts and Records

The books and other documents required by paragraphs (b)(4), (c) and
(d) of Rule 31a-1 under the Investment Company Act of 1940 are
maintained in the physical possession of Mitchell Hutchins, 1285
Avenue of the Americas, New York, New York 10019 and Mitchell
Hutchins, 51 West 52nd Street, New York, New York 10019-6114. All
other accounts, books and documents required by Rule 31a-1 are
maintained in the physical possession of Registrant's transfer agent
and custodian.

Item 29. Management Services

Not applicable.

Item 30. Undertakings

None.

C-5
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York and State of
New York, on the 8th day of December, 1999.

PAINEWEBBER MASTER SERIES, INC.

By: /s/ Dianne E. O'Donnell
------------------------------
Dianne E. O'Donnell
Vice President and Secretary

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Margo N. Alexander President and Director December 8, 1999
- ------------------------------------------ (Chief Executive Officer)
Margo N. Alexander*

/s/ E. Garrett Bewkes, Jr. Director and Chairman December 8, 1999
- ------------------------------------------ of the Board of Directors
E. Garrett Bewkes, Jr.*

/s/ Richard Q. Armstrong Director December 8, 1999
- ------------------------------------------
Richard Q. Armstrong*

/s/ Richard R. Burt Director December 8, 1999
- ------------------------------------------
Richard R. Burt*

/s/ Mary C. Farrell Director December 8, 1999
- ------------------------------------------
Mary C. Farrell*

/s/ Meyer Feldberg Director December 8, 1999
- ------------------------------------------
Meyer Feldberg*

/s/ George W. Gowen Director December 8, 1999
- ------------------------------------------
George W. Gowen*

/s/ Frederic V. Malek Director December 8, 1999
- ------------------------------------------
Frederic V. Malek*

/s/ Carl W. Schafer Director December 8, 1999
- ------------------------------------------
Carl W. Schafer*

/s/ Brian M. Storms Director December 8, 1999
- ------------------------------------------
Brian M. Storms**

/s/ Paul H. Schubert Vice President and Treasurer (Chief December 8, 1999
- ------------------------------------------ Financial and Accounting Officer)
Paul H. Schubert
</TABLE>

<PAGE>

SIGNATURES (CONTINUED)

* Signature affixed by Elinor W. Gammon pursuant to powers of attorney
dated May 21, 1996 and incorporated by reference from Post-Effective
Amendment No. 25 to the registration statement of PaineWebber RMA
Tax-Free Fund, Inc., SEC File 2-78310, filed June 27, 1996.

** Signature affixed by Elinor W. Gammon pursuant to power of attorney
dated May 14, 1999 and incorporated by reference from Post-Effective
Amendment No. 38 to the registration statement of PaineWebber
Cashfund, Inc., SEC File 2-60655, filed May 28, 1999.

<PAGE>

PAINEWEBBER MASTER SERIES, INC.

EXHIBIT INDEX

Exhibit
Number
- ------
(1) Restated Articles of Incorporation 1/

(2) Restated By-Laws 1/

(3) Instruments defining the rights of holders of the
Registrant's common stock 2/

(4) Investment Advisory and Administration Contract 1/

(5) (a) Distribution Contract with respect to Class A shares 1/

(b) Distribution Contract with respect to Class B shares 1/

(d) Distribution Contract with respect to Class Y shares 3/

(e) Exclusive Dealer Agreement with respect to Class A
shares 1/

(f) Exclusive Dealer Agreement with respect to Class B
shares 1/

(g) Exclusive Dealer Agreement with respect to Class C
shares 3/

(h) Exclusive Dealer Agreement with respect to Class Y
shares 3/
(6) Bonus, profit sharing or pension plans - none

(7) Custodian Agreement 1/

(8) Transfer Agency Agreement 1/

(9) Opinion and consent of counsel (filed herewith)

(10) Other opinions, appraisals, rulings and consents:
Accountant's Consent (filed herewith)

(11) Financial statements omitted from prospectus - none

(12) Letter of investment intent 1/

(13) (a) Plan of Distribution pursuant to Rule 12b-1 with
respect to Class A Shares 4/

(b) Plan of Distribution pursuant to Rule 12b-1 with
respect to Class B Shares 4/

(14) and

(27) Financial Data Schedule (not applicable)

(15) Plan pursuant to Rule 18f-3 5/
- -------------

1/ Incorporated by reference from Post-Effective Amendment No. 34 to
the registration statement, SEC File No. 33-2524, filed
June 29, 1998.

<PAGE>

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

4/ Incorporated by refernece from Post-Effective Amendment No. 35 to the
registration statement, SEC File No. 33-2524, filed
November 23, 1998.

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

Exhibit No. 9
KIRKPATRICK & LOCKHART LLP
1800 MASSACHUSETTS AVENUE, N.W.
2ND FLOOR
WASHINGTON, D.C. 20036-1800
TELEPHONE 202-778-9000

December 8, 1999

PaineWebber Master Series, Inc.
51 West 52nd Street
New York, New York 10019-6114

Ladies and Gentlemen:

You have requested our opinion, as counsel to PaineWebber Master
Series, Inc. ("Fund"), as to certain matters regarding the issuance of certain
Shares of the Fund. As used in this letter, the term "Shares" means the Class A,
Class B, Class C and Class Y shares of common stock of the series of the Fund
listed below that may be issued during the time that Post-Effective Amendment
No. 40 to the Fund's Registration Statement on Form N-1A ("PEA") is effective
and has not been superseded by another post-effective amendment. The series of
the Fund is PaineWebber Balanced Fund.

As such counsel, we have examined certified or other copies, believed
by us to be genuine, of the Fund's Articles of Incorporation and by-laws and
such resolutions and minutes of meetings of the Fund's Board of Directors as we
have deemed relevant to our opinion, as set forth herein. Our opinion is limited
to the laws and facts in existence on the date hereof, and it is further limited
to the laws (other than the conflict of law rules) of the State of Maryland that
in our experience are normally applicable to the issuance of shares by
registered investment companies organized as corporations under the laws of that
State and to the Securities Act of 1933 ("1933 Act"), the Investment Company Act
of 1940 ("1940 Act") and the regulations of the Securities and Exchange
Commission ("SEC") thereunder.

Based on the foregoing, we are of the opinion that the issuance of
the Shares has been duly authorized by the Fund and that, when sold, the Shares
will have been validly issued, fully paid and non-assessable, provided that (1)
the Shares are sold in accordance with the terms contemplated by the PEA,
including receipt by the Fund of full payment for the Shares and compliance with
the 1933 Act and the 1940 Act, and (2) the aggregate number of Shares issued,
when combined with all other then-outstanding shares, does not exceed the number
of shares that the Fund is authorized to issue.

We hereby consent to this opinion accompanying the PEA when it is
filed with the SEC and to the reference to our firm in the statement of
additional information that is being filed as part of the PEA.

Very truly yours,

/s/ Kirkpatrick & Lockhart LLP
------------------------------
KIRKPATRICK & LOCKHART LLP

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A of our report dated October 25, 1999, relating to the
financial statements and financial highlights which appears in the August 31,
1999 Annual Report to Shareholders of PaineWebber Balanced Fund, which is also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the headings "Financial Highlights" in the Prospectus
and "Other Information-Auditors" in the Statement of Additional Information.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
December 9, 1999