PAINEWEBBER MASTER SERIES INC
485BPOS, 2000-12-28
Previous: BEAR STEARNS COMPANIES INC, S-3, EX-25, 2000-12-28
Next: PAINEWEBBER MASTER SERIES INC, 485BPOS, EX-5.(A), 2000-12-28





    As filed with the Securities and Exchange Commission on December 28, 2000
                                             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. 43 [ X ]
                                                   --  ---

      REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
                                                                       ---
                             Amendment No. 36 [ 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


                              AMY R. DOBERMAN, ESQ.
                     Mitchell Hutchins Asset Management Inc.
                           1285 Avenue of the Americas
                          New York, New York 10019-6028
                     (Name and address of agent for service)


                                   Copies to:

                             ELINOR W. GAMMON, 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 31, 2000 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

                                -----------------
                                   PROSPECTUS

                                DECEMBER 31, 2000

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





This prospectus offers Class A, Class B, Class C and Class Y shares in a
PaineWebber asset allocation fund. 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 the fund's shares or determined whether this prospectus
is complete or accurate. To state otherwise is a crime.

--------------------------------------------------------------------------------
On October 6, 2000, the fund's board of directors approved the submission to its
shareholders of an Agreement and Plan of Reorganization and Termination under
which the fund would transfer substantially all of its assets and liabilities to
PaineWebber Tactical Allocation Fund, a series of PaineWebber Investment Trust,
another open-end mutual fund. If the fund's shareholders approve its proposed
merger, you will receive like shares of Tactical Allocation Fund in exchange for
your fund shares and the fund will cease operations.

The merger is expected to be a tax-free reorganization, which means that you
will not realize any gain or loss on your receipt of Tactical Allocation Fund
shares in the merger and neither fund will realize any gain or loss. The proxy
solicitation materials to be mailed to the fund's shareholders will provide more
information about the proposed merger.

You may continue to buy, sell and exchange your fund shares as described in this
prospectus prior to the shareholder meeting. When you sell or exchange your fund
shares, however, you generally will be subject to federal income tax on any gain
you realize. If the merger proposal is approved, the fund expects to close to
new purchases and exchange purchases approximately five business days prior to
the date on which the merger is to be effected.
--------------------------------------------------------------------------------

<PAGE>

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

                                    Contents

                                    THE FUND

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

What every investor         3         Investment Objective, Strategies and Risks
should know about
the fund                    4         Performance
                            5         Expenses and Fee Tables
                            6         More About Risks and Investment
Strategies

                                 YOUR INVESTMENT

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


Information for             7         Managing Your Fund Account
managing your fund                    -- Flexible Pricing
account                               -- Buying Shares
                                      -- Selling Shares
                                      -- Exchanging Shares
                                      -- Pricing and Valuation

                             ADDITIONAL INFORMATION

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

Additional important       12         Management
information about
the fund                   13         Dividends and Taxes

                           14         Financial Highlights

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

Where to learn more                   Back cover
about PaineWebber
mutual funds


                          -----------------------------
                          The fund is not a complete or
                          balanced investment program.
                          -----------------------------

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

----------------------------=========================---------------------------
                            PaineWebber Balanced 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 asset classes:

o  stocks
o  bonds
o  cash (money market instruments)

The fund normally has investments in each asset class 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 (commonly known as "junk 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
asset class. Mitchell Hutchins also believes that prices of securities in each
asset class 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.

In buying and selling individual securities for the fund, Mitchell Hutchins uses
the following criteria:


o    STOCKS. The fund's stock portion is designed to track the performance of
     the Standard & Poor's 500 Composite Stock Price Index.


o    BONDS. The fund's bond portion is designed to track the performance of the
     Lehman Brothers Aggregate Bond Index.

PRINCIPAL RISKS


An investment in the fund is not guaranteed; you may lose money by investing in
the fund. The principal risks presented by the fund are:


o    ASSET ALLOCATION RISK - Mitchell Hutchins may not be successful in choosing
     the best allocation of the fund's assets among the three asset classes.


o    EQUITY RISK - Stocks and other equity securities generally fluctuate in
     value more than bonds. The fund could lose all of its investment in a
     company's stock.

o    INTEREST RATE RISK - The value of the fund's bond investments generally
     will fall when interest rates rise.


o    CREDIT RISK - Bond issuers may fail to make payments when due, or they may
     become less willing or less able to do so.


o    INDEX TRACKING RISK - The fund expects a close correlation between the
     performance of the portion of its assets allocated to stocks and bonds,
     respectively, and that of the benchmark index in both rising and falling
     markets. The performance of the fund's stock and bond investments, however,
     generally will not be identical to that of the benchmark index because of
     the fees and expenses borne by the fund and investor purchases and sales of
     fund shares, which can occur daily.


o    FOREIGN INVESTING RISK - The value of the fund's investments in foreign
     securities may fall due to adverse political, social and economic
     developments abroad. However, because the fund's foreign investments must
     be denominated U.S. dollars, it generally is not subject to the risk of
     changes in currency valuations.


o    DERIVATIVES RISK - The fund's investments in derivatives may rise or fall
     more rapidly than other investments.

More  information  about risks of an investment in the fund is provided below in
"More About Risks and Investment Strategies."


--------------------------------=================-------------------------------
                                Prospectus Page 3
<PAGE>

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

         [The table below represents a bar chart in the printed piece.]

                      CALENDAR YEAR           TOTAL RETURN
                         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%
                         1999                    1.66%



         Total return January 1, 2000 to September 30, 2000: 0.25%

         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, 1999


CLASS               CLASS A      CLASS B*       CLASS C      CLASS Y     S&P 500
(Inception Date)   (7/1/91)     (12/12/86)     (7/2/92)     (3/26/98)     Index
--------------       -----        -------        -----       ------      ------
One Year             (2.22)%       (2.95)%        0.84%       2.78%      21.03%
Five Years          15.41%         15.37%       15.61%         N/A       28.54%
Ten Years            N/A           10.92%        N/A           N/A       18.19%
Life of Class       11.38%          9.91%       11.28%        6.08%          **

----------
 * Assumes conversion of Class B shares to Class A shares 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 -- 20.29%, Class B -- 17.64%, Class C -- 21.24%
and Class Y -- 19.51%.


--------------------------------=================-------------------------------
                                Prospectus Page 4
<PAGE>

----------------------------=========================---------------------------
                            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)

                                             CLASS A  CLASS B  CLASS C  CLASS Y
                                              ------   ------   ------   ------
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 .............................    0.25     0.29     0.25     0.28
                                              ------   ------   ------   ------
Total Annual Fund Operating Expenses .......    1.25%    2.04%    2.00%    1.03%
                                              ======   ======   ======   ======


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 sell 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
                                              ------   ------   ------   ------
Class A ....................................  $  572   $  829   $1,105   $1,893
Class B (assuming sale of all shares
  at end of period) ........................     707      940    1,298    1,980
Class B (assuming no sale of shares) .......     207      640    1,098    1,980
Class C (assuming sale of all shares
  at end of period) ........................     303      627    1,078    2,327
Class C (assuming no sale of shares) .......     203      627    1,078    2,327
Class Y ....................................     105      328      569    1,259


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

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

                         MORE ABOUT RISKS AND INVESTMENT
                                   STRATEGIES

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

PRINCIPAL RISKS


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


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

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. The
fund may lose a substantial part, or even all, of its investment in a company's
stock.

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 the 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.

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.


INDEX TRACKING RISK. The fund expects a close correlation between the
performance of the portion of its assets allocated to stocks and bonds,
respectively, and that of the benchmark index in both rising and falling
markets. While the fund attempts to replicate, before the deduction of fees and
operating expenses, the results of an index, the fund's investment results
generally will not be identical to those of the index. Deviations from the
performance of an 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 an index.


FOREIGN INVESTING RISK. Foreign investing involves risks relating to political,
social and economic developments abroad to a greater extent than investing in
the securities of U.S. issuers. In addition, there are differences between U.S.
and foreign regulatory requirements and market practices.

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 the fund to lose more than the amount it invested in the
derivative. Options and futures contracts are examples of derivatives. The
fund's use of derivatives may not succeed for various reasons, including
unexpected changes in the values of the derivatives or the assets underlying
them. Also, if the fund uses derivatives to adjust or "hedge" the overall risk
of its portfolio, the hedge may not succeed if changes in the values of the
derivatives are not matched by opposite changes in the values of the assets
being hedged.

ADDITIONAL INVESTMENT STRATEGIES


DEFENSIVE POSITIONS; CASH RESERVES. In order to protect itself from adverse
market conditions, the 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 or transitional position may not be consistent with
achieving the fund's investment objective. The fund normally maintains a limited
amount of cash for liquidity purposes.


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

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

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



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

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


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

                           MANAGING YOUR FUND ACCOUNT

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

FLEXIBLE PRICING

The fund offers 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.


The 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 fees for providing services to
shareholders 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 the fund's
assets on an ongoing basis, over time they will increase the cost of your
investment and may cost you more than if you paid a front-end sales charge.


CLASS A SHARES

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

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

CLASS A SALES CHARGES


                                     SALES CHARGE             REALLOWANCE TO
                                  AS A PERCENTAGE OF:       SELECTED DEALERS AS
                               OFFERING      NET AMOUNT        PERCENTAGE OF
AMOUNT OF INVESTMENT             PRICE        INVESTED         OFFERING PRICE
----------------              ----------     ----------     -------------------
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)

----------

(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 the dealer.


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

----------------------------=========================---------------------------
                            PaineWebber Balanced 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 InsightOne(SM) Program brokerage
    account.


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:

                            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.

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


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


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 59 1/2 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;


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   The shares are held in trust and the death of the trustee requires
    liquidation of the trust; or

o   The shares are sold in connection with a transfer from an existing
    PaineWebber mutual funds SIMPLE IRA plan to another fund group's SIMPLE IRA
    plan.


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.


SALES CHARGE WAIVERS. You may be eligible to sell your Class C shares without
paying a contingent deferred sales charge if:

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

o   The shares are sold in connection with a transfer from an existing
    PaineWebber mutual funds SIMPLE IRA plan to another fund group's SIMPLE IRA
    plan.

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


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

CLASS Y SHARES

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

o   Buy shares through PaineWebber's PACE(SM) Multi Advisor Program;

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

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.

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


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



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 fund through the fund's 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 fund 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

The 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 fund's automatic investment plans.


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

SELLING SHARES

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

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

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

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

o   Your name and address;

o   The fund's name;

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 fund
    will not accept signature guarantees that are not a part of these programs.


--------------------------------==================------------------------------
                                Prospectus Page 10
<PAGE>


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


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

EXCHANGING SHARES

You may exchange Class A, Class B or Class C shares of the fund for shares of
the same class of 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. The fund will use the date
that you purchased the shares in the first fund to determine whether you must
pay a deferred sales charge when you sell the shares in the acquired fund.

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


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


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 "Selling Shares" for information on
    obtaining a signature guarantee.)

Mail the letter to:

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

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. The fund calculates net asset value on days that the New
York Stock Exchange is open. The fund calculates net asset value separately for
each class as of the close of regular trading on the NYSE (generally, 4:00 p.m.,
Eastern time). The NYSE normally is not open, and the fund does not price its
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
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.

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

--------------------------------==================------------------------------
                                Prospectus Page 11
<PAGE>


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


                                   MANAGEMENT

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

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

INVESTMENT ADVISER


Mitchell Hutchins Asset Management Inc. is the investment adviser and
administrator of the fund. Mitchell Hutchins is located at 51 West 52nd Street,
New York, New York 10019-6114, and is a wholly owned asset management subsidiary
of PaineWebber Incorporated, which is a wholly owned indirect subsidiary of UBS
AG, an internationally diversified organization with headquarters in Zurich,
Switzerland and operations in many areas of the financial services industry. On
November 30, 2000, Mitchell Hutchins was adviser or sub-adviser of 31 investment
companies with 75 separate portfolios and aggregate assets of approximately
$59.5 billion.


PORTFOLIO MANAGERS


T. Kirkham Barneby and Joe Baggett are responsible for the asset allocation
decisions for the fund. Mr. Barneby is a managing director and chief investment
officer for quantitative investments of Mitchell Hutchins. Mr. Baggett is a
first vice president of Mitchell Hutchins and a member of its quantitative
investments group. Prior to joining Mitchell Hutchins in 1996, Mr. Baggett
worked at PaineWebber in its economics group. Mr. Barneby first assumed
responsibility for the fund's asset allocation decisions in August 1995. Mr.
Baggett assumed his fund responsibilities on October 10, 2000.


Mr. Barneby and Frank Vallario assumed responsibility for the day-to-day
management of the fund's stock investments on October 10, 2000. Mr. Vallario is
a first vice president of Mitchell Hutchins and a member of its quantitative
investments group. Prior to joining Mitchell Hutchins in March 1996, Mr.
Vallario worked at PaineWebber in its capital markets group.

Heidi Kirmaier assumed responsibility for the day-to-day management of the
fund's bond investments on October 10, 2000. Ms. Kirmaier is a first vice
president of Mitchell Hutchins and a member of its quantitative investments
group. Ms. Kirmaier first joined Mitchell Hutchins in 1982.

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. She has held her fund responsibilities since August 1995.

ADVISORY FEES


The fund paid fees to Mitchell Hutchins for advisory and administrative services
during the last fiscal year at the annual rate of 0.75% of average daily net
assets.

OTHERS INFORMATION

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


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


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




                               DIVIDENDS AND TAXES

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

DIVIDENDS

The fund normally declares and pays dividends semi-annually 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 the 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 the 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 the 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.

The fund expects that its dividends will include capital gain distributions.
However, a portion of the fund's dividends will be 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.
The fund will tell you annually how you should treat its dividends for tax
purposes.

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


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


                              FINANCIAL HIGHLIGHTS

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


The following financial highlights table is intended to help you understand the
fund's 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 the fund (assuming reinvestment of all dividends).

This information in the financial highlights has been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report, along with
the fund's financial statements, is included in the fund's Annual Report to
Shareholders. The Annual Report may be obtained without charge by calling
1-800-647-1568.

<TABLE>
<CAPTION>
                                                                                         Class A
                                                          ----------------------------------------------------------------------
                                                                                                            For the
                                                                                                               Six      For the
                                                                                                             Months       Year
                                                                      For the Years Ended                     Ended       Ended
                                                                            August 31,                      August 31,  February 29,
                                                          --------------------------------------------
                                                          2000        1999        1998        1997        1996 (2)      1996
                                                          --------    --------    --------    --------    --------     --------
<S>                                                       <C>         <C>         <C>         <C>         <C>          <C>
Net asset value, beginning of period ...................  $  11.60    $  11.27    $  12.50    $  10.27    $  10.85     $   9.80
                                                          --------    --------    --------    --------    --------     --------
Net investment income ..................................      0.22++      0.22++      0.23++      0.23++      0.12++       0.27++
Net realized and unrealized gains (losses)
  from investments, futures and options ................      0.66++      1.56++      0.31++      2.79++     (0.12)++      1.84++
                                                          --------    --------    --------    --------    --------     --------
Net increase (decrease) from investment
  operations ...........................................      0.88        1.78        0.54        3.02        0.00         2.11
                                                          --------    --------    --------    --------    --------     --------
Dividends from net investment income ...................     (0.23)      (0.22)      (0.22)      (0.24)      (0.10)       (0.31)
Distributions from net realized gains
  from investment transactions .........................     (0.97)      (1.23)      (1.55)      (0.55)      (0.48)       (0.75)
                                                          --------    --------    --------    --------    --------     --------
Total dividends and distributions to
  shareholders .........................................     (1.20)      (1.45)      (1.77)      (0.79)      (0.58)       (1.06)
                                                          --------    --------    --------    --------    --------     --------
Net asset value, end of period .........................  $  11.28    $  11.60    $  11.27    $  12.50    $  10.27     $  10.85
                                                          ========    ========    ========    ========    ========     ========
Total investment return (1) ............................      8.27%      16.20%       4.69%      30.67%       0.03%       22.08%
                                                          ========    ========    ========    ========    ========     ========
Ratios/supplemental data:
Net assets, end of period (000's) ......................  $190,695    $196,684    $182,362    $176,403    $157,525     $171,609

Expenses to average net assets,
  net of waivers from adviser (3) ......................      1.25%       1.22%       1.26%       1.46%       1.34%*       1.29%

Net investment income to average net
  assets, net of waivers from adviser (3) ..............      2.03%       1.81%       1.88%       2.02%       2.19%*       2.55%

Portfolio turnover rate ................................       151%        234%        190%        188%        103%         188%
</TABLE>

----------
*   Annualized.
+   Commencement of issuance of shares.
++  Calculated using the average shares outstanding for the period.
(1) Total investment return is calculated assuming a $10,000 investment on the
    first day of each period reported, reinvestment of all dividends and
    distributions at net asset value on the payable dates and a sale at net
    asset value on the last day of each period reported. The figures do not
    include any applicable sales charges or program fees; results would be lower
    if they were included. Total investment return for periods less than one
    year has not been annualized.
(2) Fiscal year changed to August 31.
(3) During the years ended August 31, 2000 and 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 14
<PAGE>


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

                              FINANCIAL HIGHLIGHTS
                                   (continued)
--------------------------------------------------------------------------------


                             Class B
----------------------------------------------------------------
                                          For the
                                            Six       For the
        For the Years Ended                Months       Year
              August 31,                   Ended        Ended
--------------------------------------   August 31,  February 29,
  2000      1999      1998       1997      1996 (2)     1996
-------   -------   -------    -------    -------      -------
$ 11.84   $ 11.48   $ 12.70    $ 10.42    $ 11.00      $  9.90
-------   -------   -------    -------    -------      -------
   0.14++    0.13++    0.14++     0.14++     0.08++       0.19++

   0.67++    1.59++    0.31++     2.84++    (0.11)++      1.86++
-------   -------   -------    -------    -------      -------

   0.81      1.72      0.45       2.98      (0.03)        2.05
-------   -------   -------    -------    -------      -------
  (0.12)    (0.13)    (0.12)     (0.15)     (0.07)       (0.20)

  (0.97)    (1.23)    (1.55)     (0.55)     (0.48)       (0.75)
-------   -------   -------    -------    -------      -------

  (1.09)    (1.36)    (1.67)     (0.70)     (0.55)       (0.95)
-------   -------   -------    -------    -------      -------
$ 11.56   $ 11.84   $ 11.48    $ 12.70    $ 10.42      $ 11.00
=======   =======   =======    =======    =======      =======
   7.44%    15.28%     3.87%     29.70%     (0.30)%      21.20%
=======   =======   =======    =======    =======      =======

$22,197   $28,719   $26,425    $22,768    $22,307      $26,627
-------


   2.04%     1.98%     2.03%      2.22%      2.09%*       2.05%
-------


   1.22%     1.04%     1.13%      1.27%      1.43%*       1.81%
-------

    151%      234%      190%       188%       103%         188%
-------

<TABLE>
<CAPTION>
                            Class C                                               Class Y
----------------------------------------------------------------      ------------------------------
                                                                                           For the
                                            For the                        For the          Period
                                              Six        For the             Year          March 26,
                                             Months      Year                Ended           1998+
               August 31,                    Ended       Ended             August 31,       through
----------------------------------------   August 31, February 29,    ------------------   August 31,
 2000       1999       1998       1997      1996 (2)      1996          2000       1999       1998
-------    -------    -------    -------    -------      -------      -------    -------    -------
<S>        <C>        <C>        <C>        <C>          <C>          <C>        <C>        <C>
$ 11.60    $ 11.28    $ 12.52    $ 10.29    $ 10.88      $  9.82      $ 11.59    $ 11.27    $ 12.55
-------    -------    -------    -------    -------      -------      -------    -------    -------
   0.14++     0.14++     0.14++     0.14++     0.08++       0.19++       0.25++     0.26++     0.11++

   0.66++     1.56++     0.31++     2.80++    (0.12)++      1.84++       0.66++     1.55++    (1.28)++
-------    -------    -------    -------    -------      -------      -------    -------    -------

   0.80       1.70       0.45       2.94      (0.04)        2.03         0.91       1.81      (1.17)
-------    -------    -------    -------    -------      -------      -------    -------    -------
  (0.14)     (0.15)     (0.14)     (0.16)     (0.07)       (0.22)       (0.26)     (0.26)     (0.11)

  (0.97)     (1.23)     (1.55)     (0.55)     (0.48)       (0.75)       (0.97)     (1.23)        --
-------    -------    -------    -------    -------      -------      -------    -------    -------

  (1.11)     (1.38)     (1.69)     (0.71)     (0.55)       (0.97)       (1.23)     (1.49)     (0.11)
-------    -------    -------    -------    -------      -------      -------    -------    -------
$ 11.29    $ 11.60    $ 11.28    $ 12.52    $ 10.29      $ 10.88      $ 11.27    $ 11.59    $ 11.27
=======    =======    =======    =======    =======      =======      =======    =======    =======
   7.46%     15.34%      3.89%     29.70%     (0.38)%      21.12%        8.54%     16.42%     (9.41)%
=======    =======    =======    =======    =======      =======      =======    =======    =======

$20,371    $19,894    $14,581    $ 8,736    $ 6,979      $ 7,469      $   601    $   519    $   175
-------                                                               -------


   2.00%      1.95%      2.00%      2.21%      2.09%*       2.08%        1.03%      0.96%      0.89%*
-------                                                               -------


   1.29%      1.08%      1.18%      1.27%      1.44%*       1.77%        2.28%      2.11%      2.48%*
-------                                                               -------

    151%       234%       190%       188%       103%         188%         151%       234%       190%
-------                                                               -------
</TABLE>


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

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



TICKER SYMBOL:              Balanced Fund Class   A: PASAX
                                                  B: PASBX
                                                  C: PASCX
                                                  Y: None

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

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

ANNUAL/SEMI-ANNUAL REPORTS

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

STATEMENT OF ADDITIONAL INFORMATION (SAI)

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


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

You may review and copy information about the fund, including shareholder
reports and the SAI, at the Public Reference Room of the Securities and Exchange
Commission. You may obtain information about the operations of the SEC's Public
Reference Room by calling the SECat 1-202-942-8090. You may get copies of
reports and other information about the fund:


o   For a fee, by electronic request at [email protected] or by writing the
    SEC's Public Reference Section, Washington, D.C. 20549-0102; or

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




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


(C) 2000 PaineWebber Incorporated. All rights reserved.

--------------------------------==================------------------------------
<PAGE>


                            PAINEWEBBER BALANCED FUND
                               51 West 52nd Street
                          New York, New York 10019-6114

                       STATEMENT OF ADDITIONAL INFORMATION

    PaineWebber Balanced Fund is a diversified series of PaineWebber Master
Series, Inc., ("Corporation"), a professionally managed, open-end management
investment company organized as a Maryland corporation.

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

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

    This SAI is not a prospectus and should be read only in conjunction with the
fund's current Prospectus, dated December 31, 2000. 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 31, 2000.

                                TABLE OF CONTENTS


                                                                            PAGE
The Fund and Its Investment Policies .......................................   2
The Fund's Investments, Related Risks and Limitations ......................   2
Strategies Using Derivative Instruments ....................................  18
Organization of the Corporation; Board Members and Officers;
  Principal Holders and Management Ownership of Securities .................  25
Investment Advisory, Administration and Distribution Arrangements ..........  32
Portfolio Transactions .....................................................  36
Reduced Sales Charges, Additional Exchange and Redemption
  Information and Other Services ...........................................  38
Conversion of Class B Shares ...............................................  44
Valuation of Shares ........................................................  44
Performance Information ....................................................  44
Taxes ......................................................................  47
Other Information ..........................................................  50
Financial Statements .......................................................  51
Appendix ................................................................... A-1


<PAGE>

                      THE FUND AND ITS INVESTMENT POLICIES

     The fund's  investment  objective  may not be changed  without  shareholder
approval.  Except where noted, the other investment  policies of the fund may be
changed by its board without shareholder  approval.  As with other mutual funds,
there is no assurance that the fund will achieve its investment objective.

     The fund's  investment  objective is 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%.

     For its stock  investments,  the fund seeks to  replicate  (before fees and
expenses) the total return of the Standard &Poor's  Composite Stock Price Index.
For its bond investments, the fund seeks to replicate (before fees and expenses)
the total  return of the Lehman  Brothers  Aggregate  Bond Index.  To the extent
necessary to track the  performances  of these benchmark  indices,  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
also may 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 &Poor's, a division of
The McGraw-Hill  Companies,  Inc.  ("S&P"),  comparably  rated by another rating
agency or, if  unrated,  determined  by Mitchell  Hutchins  to be of  comparable
quality.  The fund's bond  investments  may include  zero coupon bonds and other
original issue discount securities.

     The money  market  instruments  in which the fund may invest  include  U.S.
Treasury  bills and other  obligations  issued or  guaranteed as to interest and
principal  by  the  U.S.   government,   its  agencies  and   instrumentalities;
obligations  of U.S.  banks  (including  certificates  of deposit  and  bankers'
acceptances)  having  total  assets  at the time of  purchase  in excess of $1.5
billion;  commercial paper and other short-term corporate obligations;  variable
and floating rate securities and repurchase agreements;  participation interests
in these  money  market  instruments;  and the  securities  of other  investment
companies that invest exclusively in money market instruments. The fund may also
hold cash.

     The commercial paper and other short-term corporate  obligations  purchased
by the 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.


     The 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 from banks or through reverse repurchase  agreements for temporary or
emergency  purposes,  but not in excess of 10% of its  total  assets.  The costs
associated with borrowing may reduce the fund's net income.  The fund may invest
in the securities of other investment  companies and may sell short "against the
box."


              THE FUND'S INVESTMENTS, RELATED RISKS AND LIMITATIONS

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

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

                                       2
<PAGE>

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

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

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

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

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

     Credit  ratings  attempt to evaluate the safety of  principal  and interest
payments,  but they do not  evaluate  the  volatility  of a bond's  value or its
liquidity and do not guarantee the  performance of the issuer.  Rating  agencies
may fail to make timely  changes in credit  ratings in  response  to  subsequent
events, so that an issuer's current  financial  condition may be better or worse
than the rating indicates.  There is a risk that rating agencies may downgrade a
bond's rating.  Subsequent to a bond's  purchase by the fund, it may cease to be
rated or its  rating  may be  reduced  below the  minimum  rating  required  for
purchase by the fund. It should be  emphasized  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
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

                                       3
<PAGE>

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.


     Non-investment  grade bonds  (commonly  known as "junk bonds" and sometimes
referred to as "high yield,  high risk bonds") are rated Ba or lower by Moody's,
BB or lower by S&P,  comparably  rated by another  rating agency or, if unrated,
determined  by  Mitchell  Hutchins  to  be of  comparable  quality.  The  fund's
investments  in  non-investment   grade  bonds  entail  greater  risk  than  its
investments  in  higher  rated  bonds.  Non-investment  grade  bonds,  which are
sometimes  referred  to as "high  yield  bonds,"  are  considered  predominantly
speculative  with  respect to the  issuer's  ability to pay  interest  and repay
principal  and may involve  significant  risk  exposure  to adverse  conditions.
Non-investment  grade bonds  generally  offer a higher  current  yield than that
available for investment grade issues;  however,  they involve greater risks, in
that they are  especially  sensitive  to adverse  changes  in  general  economic
conditions and in the industries in which the issuers are engaged, to changes in
the financial  condition of the issuers and to price fluctuations in response to
changes in  interest  rates.  During  periods  of  economic  downturn  or rising
interest rates,  highly leveraged  issuers may experience  financial stress that
could adversely  affect their ability to make payments of interest and principal
and increase the possibility of default. In addition,  such issuers may not have
more  traditional  methods of  financing  available to them and may be unable to
repay debt at maturity by  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 the  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.  U.S.  government  securities  include direct
obligations of the U.S.  Treasury (such as Treasury  bills,  notes or bonds) and
obligations  issued or  guaranteed  as to principal  and interest (but not as to
market  value) by the U.S.  government,  its agencies or its  instrumentalities.
U.S.  government  securities  include   mortgage-backed   securities  issued  or
guaranteed by government  agencies or  government-sponsored  enterprises.  Other
U.S.  government  securities  may be backed by the full  faith and credit of the
U.S. government or supported primarily or solely by the  creditworthiness of the
government-related  issuer  or, in the case of  mortgage-backed  securities,  by
pools of assets.

                                       4
<PAGE>


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


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


     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 the 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.

                                       5
<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 the 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,  "The  Fund's  Investments,   Related  Risks  and
Limitations -- 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 the 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,  the 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, the

                                       6
<PAGE>

fund  may  invest  in  mortgage-backed  securities  issued  by new  or  existing
governmental or private issuers other than those identified herein.

     GINNIE  MAE   CERTIFICATES  --  Ginnie  Mae  guarantees   certain  mortgage
pass-through certificates ("Ginnie Mae certificates") that are issued by Private
Mortgage Lenders and that represent  ownership  interests in individual pools of
residential  mortgage  loans.  These  securities are designed to provide monthly
payments of interest and principal to the investor.  Timely  payment of interest
and  principal  is backed by the full faith and  credit of the U.S.  government.
Each mortgagor's  monthly payments to his lending institution on his residential
mortgage are "passed through" to certificate  holders such as the 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  "The  Fund's
Investments,  Related Risks and  Limitations  --  Mortgage-Backed  Securities --
TYPES OF CREDIT ENHANCEMENT." These credit enhancements do not protect investors
from changes in market value.

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

     In a CMO, a series of bonds or certificates is issued in multiple  classes.
Each class of CMO,  also  referred  to as a  "tranche,"  is issued at a specific
fixed or floating  coupon rate and has a stated  maturity or final  distribution
date. Principal  prepayments on the Mortgage Assets may cause CMOs to be retired
substantially earlier than their

                                       7
<PAGE>

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

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

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

     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.  The  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.

                                       8
<PAGE>

Prepayments on a pool of mortgage loans are influenced by a variety of economic,
geographic,  social and other factors,  including changes in mortgagors' housing
needs,  job  transfers,  unemployment,  mortgagors'  net equity in the mortgaged
properties  and  servicing  decisions.   Generally,   however,   prepayments  on
fixed-rate  mortgage  loans will  increase  during a period of falling  interest
rates and decrease  during a period of rising  interest  rates.  Similar factors
apply to prepayments on asset-backed securities,  but the receivables underlying
asset-backed  securities  generally are of a shorter  maturity and thus are less
likely to experience substantial  prepayments.  Such securities,  however, often
provide that for a specified time period the issuers will replace receivables in
the pool that are repaid with comparable obligations. If the issuer is unable to
do so, repayment of principal on the asset-backed  securities may commence at an
earlier date.  Mortgage- and asset-backed  securities may decrease in value as a
result  of  increases  in  interest  rates  and  may  benefit  less  than  other
fixed-income  securities  from  declining  interest rates because of the risk of
prepayment.

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

     Yields on  pass-through  securities  are  typically  quoted  by  investment
dealers and vendors based on the maturity of the underlying  instruments and the
associated  average  life  assumption.  The average life of  pass-through  pools
varies with the maturities of the underlying  mortgage  loans. A pool's term may
be shortened by  unscheduled  or early  payments of principal on the  underlying
mortgages.  Because  prepayment rates of individual pools vary widely, it is not
possible to predict  accurately  the average life of a particular  pool.  In the
past,  a common  industry  practice was to assume that  prepayments  on pools of
fixed rate  30-year  mortgages  would  result in a 12-year  average life for the
pool.  At  present,  mortgage  pools,  particularly  those with loans with other
maturities or different characteristics,  are priced on an assumption of average
life determined for each pool. In periods of declining  interest 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

                                       9
<PAGE>

added to the mortgage loan  ("negative  amortization"),  which is repaid through
future payments.  If the monthly payment exceeds the sum of the interest accrued
at the applicable  mortgage  interest rate and the principal  payment that would
have been  necessary  to amortize  the  outstanding  principal  balance over the
remaining term of the loan, the excess reduces the principal  balance of the ARM
loan.  Borrowers under these mortgage loans experiencing  negative  amortization
may take longer to build up their equity in the  underlying  property and may be
more likely to default.

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

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

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

     DURATION. Duration is a measure of the expected life of a bond on a present
value basis.  Duration  incorporates the bond's yield, coupon interest payments,
final maturity and call features into one measures and is one of the fundamental
tools  used  by  Mitchell  Hutchins  in  portfolio  selection  and  yield  curve
positioning of the 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 the  scheduled  a final  payment on the
bond, taking no account of the pattern of payments prior to maturity.

     Duration  takes the length of the time  intervals  between the present time
and the time that the interest and  principal  payments are scheduled or, in the
case of a callable 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 the
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 the 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

                                       10
<PAGE>

changes in interest rates than indicated in the above example.  Moreover, in the
case of mortgage-backed and other complex securities,  duration calculations are
estimates  and are not  precise.  This is  particularly  true during  periods of
market  volatility.  Accordingly,  the net asset value of a fund's  portfolio of
bonds may vary in relation to interest  rates by a greater or lesser  percentage
than indicated by the above example.

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

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

     INVESTING  IN  FOREIGN  SECURITIES.  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. 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  fund  than is  available  concerning  U.S.
companies.  Foreign companies are not generally  subject to uniform  accounting,
auditing and financial reporting  standards or to other regulatory  requirements
comparable to those applicable to U.S. companies.

     The fund 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 the 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  depositary's  transaction  fees,  whereas  under  an  unsponsored
arrangement,  the foreign  issuer assumes no  obligations  and the  depositary's
transaction  fees  are paid  directly  by the ADR  holders.  In  addition,  less
information  is available in the United  States  about an  unsponsored  ADR than
about a sponsored ADR.

     Investment income and gains on certain foreign securities in which the fund
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 fund would be subject.

     ZERO COUPON AND OTHER OID 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

                                       11
<PAGE>

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") (I.E., the
difference  between the issue price and the value at  maturity)  may provide for
some interest to be paid make prior to maturity. OID 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 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 a fund that holds 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 fund receives no interest  payment on the
security  during the year.  These  distributions  would have to be made from the
fund's cash assets or, if  necessary,  from the  proceeds of sales of  portfolio
securities.  The 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.

     A  convertible  security may be subject to  redemption at the option of the
issuer  at  a  price  established  in  the  convertible   security's   governing
instrument. If a convertible security held by the fund is called for redemption,
the fund will be required to permit the issuer to redeem the  security,  convert
it into underlying common stock or sell it to a third party.

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

     TEMPORARY AND DEFENSIVE INVESTMENTS; MONEY MARKET INVESTMENTS. The fund may
invest in money market  investments  for  temporary or  defensive  purposes,  to
reinvest cash collateral from its securities  lending  activities 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

                                       12
<PAGE>

banks, savings and loan institutions,  insurance companies and mortgage bankers,
(3) commercial paper and notes, including those with variable and floating rates
of  interest,  (4) debt  obligations  of foreign  branches of U.S.  banks,  U.S.
branches of foreign  banks,  and foreign  branches  of foreign  banks,  (5) debt
obligations  issued or guaranteed by one or more foreign  governments  or any of
their foreign political subdivisions,  agencies or instrumentalities,  including
obligations of supranational  entities, (6) bonds issued by foreign issuers, (7)
repurchase  agreements  and (8)  securities of other  investment  companies that
invest  exclusively in money market  instruments and similar private  investment
vehicles.

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

     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  the 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 the 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.
The  fund may not be able to  readily  liquidate  its  investments  in  illiquid
securities and may have to sell other  investments if necessary to raise cash to
meet its  obligations.  The  lack of a  liquid  secondary  market  for  illiquid
securities  may make it more  difficult  for the 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,  the fund may be obligated to
pay all or part of the  registration  expenses  and a  considerable  period  may
elapse  between  the time of the  decision  to sell and the time the fund may be
permitted to sell a security  under an  effective  registration  statement.  If,
during such a period,  adverse market conditions were to develop, the fund might
obtain a less favorable price than prevailed when it decided to sell.

     Not all restricted  securities are illiquid.  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.

                                       13
<PAGE>

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

     The board has delegated the function of making day-to-day determinations of
liquidity to Mitchell  Hutchins  pursuant to  guidelines  approved by the board.
Mitchell  Hutchins takes into account a number of factors in reaching  liquidity
decisions,  including  (1) the  frequency  of trades for the  security,  (2) the
number of dealers that make quotes for the  security,  (3) the number of dealers
that have  undertaken to make a market in the security,  (4) the number of other
potential  purchasers  and (5) the  nature of the  security  and how  trading is
effected (E.G., the time needed to sell the security, how bids are solicited and
the  mechanics  of  transfer).  Mitchell  Hutchins  monitors  the  liquidity  of
restricted  securities in each fund's portfolio and reports periodically on such
decisions to the board.


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


     REPURCHASE AGREEMENTS.  Repurchase agreements are transactions in which the
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.
The  fund  maintains  custody  of the  underlying  obligations  prior  to  their
repurchase,   either  through  its  regular   custodian  or  through  a  special
"tri-party" custodian or sub-custodian that maintains separate accounts for both
the fund and its  counterparty.  Thus, the obligation of the counterparty to pay
the repurchase price on the date agreed to or upon demand is, in effect, secured
by such obligations.

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

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

                                       14
<PAGE>

     Reverse  repurchase  agreements  involve  the risk  that  the  buyer of the
securities  sold by the fund might be unable to deliver them when the fund seeks
to repurchase.  If the buyer of securities under a reverse repurchase  agreement
files for bankruptcy or becomes insolvent,  the buyer or trustee or receiver may
receive  an  extension  of time to  determine  whether  to  enforce  the  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.   The  fund  may  purchase
securities  on a  "when-issued"  basis or may  purchase or sell  securities  for
delayed  delivery,  I.E. , for  issuance  or delivery to the fund later than the
normal  settlement  date for such  securities at a stated price and yield.  When
issued securities  include TBA ("to be announced")  securities.  TBA securities,
which  are  usually  mortgage-backed  securities,  are  purchased  on a  forward
commitment  basis with an approximate  principal  amount and no defined maturity
date.  The  actual  principal  amount  and  maturity  date are  determined  upon
settlement  when the specific  mortgage  pools are assigned.  The fund generally
would not pay for such  securities or start earning  interest on them until they
are   received.   However,   when  the  fund   undertakes   a   when-issued   or
delayed-delivery  obligation,  it  immediately  assumes the risks of  ownership,
including  the risks of price  fluctuation.  Failure  of the issuer to deliver a
security  purchased by the 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,   the  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
the fund's net asset value.  When the fund commits to purchase  securities  on a
when-issued or delayed delivery basis, its custodian  segregates assets to cover
the amount of the  commitment.  See "The Fund's  Investments,  Related Risks and
Limitations -- Segregated Accounts." The fund's when-issued and delayed delivery
purchase  commitments  could  cause  its net  asset  value  per share to be more
volatile.  The fund may sell the right to acquire the security prior to delivery
if Mitchell  Hutchins deems it advantageous to do so, which may result in a gain
or loss to the fund.

     LENDING  OF  PORTFOLIO  SECURITIES.  The  fund is  authorized  to lend  its
portfolio securities to broker-dealers or institutional  investors that Mitchell
Hutchins deems qualified. Lending securities enables the 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.  The fund may reinvest any cash  collateral  in money market
investments or other short-term liquid  investments,  including other investment
companies.  The fund also may reinvest  cash  collateral  in private  investment
vehicles  similar to money  market  funds,  including  one  managed by  Mitchell
Hutchins.   In   determining   whether  to  lend   securities  to  a  particular
broker-dealer or institutional  investor,  Mitchell Hutchins will consider,  and
during  the  period  of  the  loan  will   monitor,   all  relevant   facts  and
circumstances,  including the  creditworthiness  of the borrower.  The fund will
retain  authority  to terminate  any of its loans at any time.  The 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.  The fund will receive amounts  equivalent to any dividends,
interest or other  distributions on the securities  loaned. The 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  the  fund's
securities  lending  program,  PaineWebber has been retained to serve as lending
agent for the fund. The board also has authorized the payment of fees (including
fees calculated as a percentage of invested cash  collateral) to PaineWebber for
these services.  The board  periodically  reviews all portfolio  securities loan
transactions for which PaineWebber acted as lending agent.  PaineWebber also has
been approved as a borrower under the fund's securities lending program.


                                       15
<PAGE>

     SHORT SALES  "AGAINST THE BOX." Short sales of securities  the 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 the fund, and the fund is obligated to
replace the  securities  borrowed  at a date in the future.  When the fund sells
short, it establishes a margin account with the broker  effecting the short sale
and deposits collateral with the broker. In addition,  the fund maintains,  in a
segregated  account with its  custodian,  the  securities  that could be used to
cover the short sale.  The fund incurs  transaction  costs,  including  interest
expense,  in  connection  with  opening,  maintaining  and  closing  short sales
"against the box."

     The 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 the fund owns,  either directly or indirectly,  and
in  the  case  where  the  fund  owns  convertible  securities,  changes  in the
investment values or conversion premiums of such securities.

     SEGREGATED  ACCOUNTS.  When the 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.

INVESTMENT LIMITATIONS OF THE FUND


     FUNDAMENTAL  LIMITATIONS.  The following  investment  limitations cannot be
changed for the fund without the affirmative vote of the lesser of (a) more than
50% of its  outstanding  shares or (b) 67% or more of the  shares  present  at a
shareholders' meeting if more than 50% of its outstanding shares are represented
at the meeting in person or by proxy. If a percentage  restriction is adhered to
at the time of an investment  or  transaction,  a later  increase or decrease in
percentage  resulting from changing values of portfolio  securities or amount of
total  assets  will  not be  considered  a  violation  of  any of the  following
limitations.  With regard to the borrowing limitation in fundamental  limitation
number 3, the fund will comply with the applicable restrictions of Section 18 of
the Investment Company Act.


     The fund will not:

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

     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.

                                       16
<PAGE>


   (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.

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

     The 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.

                                       17
<PAGE>

                     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.  The fund may enter into transactions
involving one or more types of Derivative Instruments under which the full value
of its portfolio is at risk. Under normal circumstances, however, the fund's use
of these  instruments  will place at risk a much smaller  portion of its assets.
The  fund  may use  all of the  instruments  identified  below.  The  particular
Derivative Instruments that may be used by the fund is described below.

     The fund 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, the 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 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.

                                       18
<PAGE>

     GENERAL  DESCRIPTION OF STRATEGIES USING DERIVATIVE  INSTRUMENTS.  The fund
may use  Derivative  Instruments  to attempt to hedge its  portfolio and also to
attempt to enhance  income or return or realize gains and to manage the duration
of its bond portfolio.  In addition,  the fund may use Derivative Instruments to
adjust its exposure to different asset classes or to maintain exposure to stocks
or bonds while maintaining a cash balance for fund management  purposes (such as
to provide  liquidity to meet anticipated  shareholder  sales of fund shares and
for fund operating  expenses).  The fund also may use Derivative  Instruments to
facilitate trading and to reduce transaction costs.

     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 the fund's portfolio.  Thus, in a short hedge the 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, the
fund might  purchase a put option on a  security  to hedge  against a  potential
decline in the value of that  security.  If the price of the  security  declined
below the exercise  price of the put,  the fund could  exercise 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,  the fund might be
able to close out the put option and realize a gain to offset the decline in the
value of the security.

     Conversely,  a long hedge is a purchase or sale of a 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,  the 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, the fund might purchase a call option on a
security  it intends to  purchase  in order to hedge  against an increase in the
cost of the security.  If the price of the security increased above the exercise
price of the  call,  the fund  could  exercise  the  call  and  thus  limit  its
acquisition  cost to the exercise  price plus the premium  paid and  transaction
costs.  Alternatively,  the fund might be able to offset the price  increase  by
closing out an appreciated call option and realizing a gain.

     The fund may purchase and write (sell)  covered  straddles on securities or
indices of  securities.  A long  straddle is a  combination  of a call and a put
option purchased on the same security or on the same futures contract, where the
exercise  price of the put is equal to the exercise  price of the call. The 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.  The 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  the 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  the fund's
exposure to different  asset classes  without  buying or selling the  underlying
instruments.  The 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,  the fund's
ability to use Derivative Instruments may be limited by tax considerations.  See
"Taxes."

                                       19
<PAGE>

     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 the 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 fund's  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 or interest
rate 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 the fund entered into a
short  hedge  because  Mitchell  Hutchins  projected a decline in the price of a
security  in the  fund's  portfolio,  and the price of that  security  increased
instead,  the gain from that increase  might be wholly or partially  offset by a
decline in the price of the 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,  the 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 the
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. The 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 the fund.

     COVER FOR  STRATEGIES  USING  DERIVATIVE  INSTRUMENTS.  Transactions  using
Derivative  Instruments,  other than purchased  options,  expose the funds to an
obligation to another party. The fund will not enter into any such  transactions
unless it owns either (1) an  offsetting  ("covered")  position in securities 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.  The 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.

                                       20
<PAGE>

     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 the
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 fund may  purchase  put and call  options,  and write  (sell)
covered  put or call  options  on  securities  in which it invests  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.  The 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 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  Fund's
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.

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

     The fund 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 that, in
effect,  guarantees completion of every exchange-traded  option transaction.  In
contrast,  over-the-counter  options  are  contracts  between  the  fund and its
counterparty   (usually  a  securities  dealer  or  a  bank)  with  no  clearing
organization   guarantee.   Thus,   when  the  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 fund's ability to establish and close out positions in  exchange-listed
options  depends  on the  existence  of a liquid  market.  The fund  intends  to
purchase or write only those exchange-traded  options for which there appears to
be a liquid  secondary  market.  However,  there can be no assurance that such 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
fund will enter into over-the-counter  options only with counterparties that are
expected  to be capable of entering  into  closing  transactions  with the fund,
there  is no  assurance  that  the  fund  will in fact be able to  close  out an
over-the-counter option

                                       21
<PAGE>

position at a favorable price prior to expiration. In the event of insolvency of
the  counterparty,  the fund  might be unable  to close out an  over-the-counter
option position at any time prior to its expiration.

     If the 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.

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

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

   (1)    The 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
the 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 and stock or bond indices and options on futures contracts) purchased
by the fund that are held at any time will not exceed 20% of its net assets.

     FUTURES.  The fund may purchase and sell securities index futures contracts
or interest rate futures contracts.  The 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, using a strategy similar to that used for writing
covered options on securities or indices. In addition,  the 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 the
fund's  bond  portfolio.  If  Mitchell  Hutchins  wishes to shorten  the average
duration of the 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.

     The 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.  The fund will engage in this
strategy only when it is more  advantageous  to the 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 the 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

                                       22
<PAGE>

with  applicable  exchange  rules.  Unlike  margin in  securities  transactions,
initial margin on futures  contracts does not represent a borrowing,  but rather
is in the nature of a performance bond or good-faith deposit that is returned to
the fund at the termination of the  transaction if all  contractual  obligations
have been  satisfied.  Under  certain  circumstances,  such as  periods  of high
volatility, the 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 the fund's  obligations  to or from a futures
broker.  When the fund  purchases an option on a futures  contract,  the premium
paid plus transaction  costs is all that is at risk. In contrast,  when the 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 the 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 fund intends to enter into futures  transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no  assurance  that such a market will exist for a  particular  contract at a
particular time.

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

     If the 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. The fund would continue to be subject
to market risk with respect to the position. In addition,  except in the case of
purchased  options,  the  fund  would  continue  to be  required  to make  daily
variation  margin  payments and might be required to maintain the position being
hedged by the future or option or to maintain cash or securities in a segregated
account.

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

     LIMITATIONS  ON THE USE OF FUTURES AND RELATED  OPTIONS.  The 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)    The  aggregate  initial  margin and premiums on futures  contracts and
options on futures  positions  that are not for bona fide  hedging  purposes (as
defined by the CFTC),  excluding the amount by which options are "in-the-money,"
may not exceed 5% of the fund's net assets.

                                       23
<PAGE>

   (2)    The  aggregate  premiums  paid on all  options  (including  options on
securities,  foreign  currencies and  securities  indices and options on futures
contracts)  purchased  by the 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 the fund will not exceed 5% of its total assets.

     SWAP TRANSACTIONS. The 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.  Equity swaps or other
swaps relating to securities or other instruments are also similar, but they are
based on changes in the value of the underlying  securities or instruments.  For
example,  an equity swap might  involve an exchange of the value of a particular
security  or  securities  index in a certain  notional  amount  for the value of
another  security or index or for the value of interest on that notional  amount
at a specified fixed or variable rate.

     The 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.

     The 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 "The Fund's
Investments,  Related Risks 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.

     The 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.

                                       24
<PAGE>

    ORGANIZATION OF THE FUND; BOARD MEMBERS AND OFFICERS; PRINCIPAL HOLDERS
                     AND MANAGEMENT OWNERSHIP 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 the fund).

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


                                 POSITION WITH THE      BUSINESS EXPERIENCE;
NAME AND ADDRESS; AGE                CORPORATION        OTHER DIRECTORSHIPS
---------------------            ------------------  ---------------------------
Margo N. Alexander*+; 53             Director        Mrs.  Alexander is Chairman
                                                     (since March  1999),  and a
                                                     director     of    Mitchell
                                                     Hutchins   (since   January
                                                     1995),   and  an  executive
                                                     vice    president   and   a
                                                     director   of   PaineWebber
                                                     (since March 1984). She was
                                                     chief executive  officer of
                                                     Mitchell    Hutchins   from
                                                     January   1995  to  October
                                                     2000.  Mrs.  Alexander is a
                                                     director  or  trustee of 30
                                                     investment   companies  for
                                                     which  Mitchell   Hutchins,
                                                     PaineWebber or one of their
                                                     affiliates     serves    as
                                                     investment adviser.

Richard Q. Armstrong; 65             Director        Mr.  Armstrong  is chairman
R.Q.A. Enterprises                                   and   principal  of  R.Q.A.
One Old Church Road                                  Enterprises     (management
Unit #6                                              consulting    firm   (since
Greenwich, CT 06830                                  April  1991  and  principal
                                                     occupation    since   March
                                                     1995).   He   is   also   a
                                                     director     of     AlFresh
                                                     Beverages  Canada,  Inc. (a
                                                     Canadian Beverage subsidary
                                                     of  AlFresh   Foods   Inc.)
                                                     (since October  2000).  Mr.
                                                     Armstrong  was  chairman of
                                                     the board,  chief executive
                                                     officer  and   co-owner  of
                                                     Adirondack        Beverages
                                                     (producer  and  distributor
                                                     of    soft    drinks    and
                                                     sparkling/still     waters)
                                                     (October  1993-March 1995).
                                                     He was a partner of The New
                                                     England   Consulting  Group
                                                     (management      consulting
                                                     firm)             (December
                                                     1992-September   1993).  He
                                                     was  managing  director  of
                                                     LVMH U.S. Corporation (U.S.
                                                     subsidiary  of  the  French
                                                     luxury goods  conglomerate,
                                                     Louis      Vuitton     Moet
                                                     Hennessey      Corporation)
                                                     (1987-1991) and chairman of
                                                     its   wine   and    spirits
                                                     subsidiary,  Schieffelin  &
                                                     Somerset            Company
                                                     (1987-1991).  Mr. Armstrong
                                                     is a director or trustee of
                                                     29 investment companies for
                                                     which  Mitchell   Hutchins,
                                                     PaineWebber or one of their
                                                     affiliates     serves    as
                                                     investment adviser.


                                       25
<PAGE>


                                 POSITION WITH THE      BUSINESS EXPERIENCE;
NAME AND ADDRESS; AGE                CORPORATION        OTHER DIRECTORSHIPS
---------------------            ------------------  ---------------------------
E. Garrett Bewkes, Jr.** +; 74      Director and     Mr.  Bewkes is a consultant
                                   Chairman of the   to  PaineWebber  (since May
                                 Board of Directors  1999).  Prior  to  November
                                                     2000,  he was a director of
                                                     Paine   Webber  Group  Inc.
                                                     ("PW Group")  (formerly the
                                                     holding      company     of
                                                     PaineWebber   and  Mitchell
                                                     Hutchins)   and   prior  to
                                                     1996,  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 40
                                                     investment   companies  for
                                                     which  Mitchell   Hutchins,
                                                     PaineWebber or one of their
                                                     affiliates     serves    as
                                                     investment adviser.


Richard R. Burt; 53                  Director        Mr. Burt is chairman of IEP
1275 Pennsylvania Ave., N.W.                         Advisors,   LLP   (interna-
Washington, DC 20004                                 tional    investments   and
                                                     consulting   firm)   (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),
                                                     six investment companies in
                                                     the Deutsche Bank family of
                                                     funds,    nine   investment
                                                     companies   in   the   Flag
                                                     Investors  family of funds,
                                                     The Central  European Fund,
                                                     Inc. and The Germany  Fund,
                                                     Inc.,   vice   chairman  of
                                                     Anchor   Gaming   (provides
                                                     technology  to  gaming  and
                                                     wagering  industry)  (since
                                                     July 1999) 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 29
                                                     investment   companies  for
                                                     which  Mitchell   Hutchins,
                                                     PaineWebber or one of their
                                                     affiliates     serves    as
                                                     investment adviser.

Meyer Feldberg; 58                   Director        Mr.  Feldberg  is Dean  and
Columbia University                                  Professor of  Management of
101 Uris Hall                                        the   Graduate   School  of
New York, NY 10027                                   Business,          Columbia
                                                     University.  Prior to 1989,
                                                     he  was   president of  the
                                                     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
                                                     37 investment companies for
                                                     which  Mitchell   Hutchins,
                                                     PaineWebber or one of their
                                                     affiliates     serves    as
                                                     investment adviser.

                                       26
<PAGE>

                                 POSITION WITH THE      BUSINESS EXPERIENCE;
NAME AND ADDRESS; AGE                CORPORATION        OTHER DIRECTORSHIPS
---------------------            ------------------  ---------------------------
George W. Gowen; 71                  Director        Mr.  Gowen is a partner  in
666 Third Avenue                                     the law firm of Dunnington,
New York, NY 10017                                   Bartholow  & Miller.  Prior
                                                     to  May  1994,   he  was  a
                                                     partner  in the law firm of
                                                     Fryer,  Ross &  Gowen.  Mr.
                                                     Gowen  is  a  director   or
                                                     trustee  of  37  investment
                                                     companies     for     which
                                                     Mitchell          Hutchins,
                                                     PaineWebber or one of their
                                                     affiliates     serves    as
                                                     investment         adviser.

Frederic V. Malek; 63                Director        Mr.  Malek is  chairman  of
1455 Pennsylvania Ave., N.W                          Thayer   Capital   Partners
Suite 350                                            (merchant     bank)     and
Washington, DC 20004                                 chairman  of  Thayer  Hotel
                                                     Investors  II  and  Lodging
                                                     Opportunities  Fund  (hotel
                                                     investment   partnerships).
                                                     From    January   1992   to
                                                     November   1992,   he   was
                                                     campaign     manager     of
                                                     Bush-Quayle  `92. From 1990
                                                     to   1992,   he  was   vice
                                                     chairman  and, from 1989 to
                                                     1990,  he was  president of
                                                     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  services),
                                                     CB  Richard   Ellis,   Inc.
                                                     (real estate services), FPL
                                                     Group,    Inc.    (electric
                                                     services),  Global Vacation
                                                     Group (packaged vacations),
                                                     HCR/Manor     Care,    Inc.
                                                     (health     care),     SAGA
                                                     Systems,   Inc.   (software
                                                     company)   and    Northwest
                                                     Airlines  Inc. Mr. Malek is
                                                     a director or trustee of 29
                                                     investment   companies  for
                                                     which  Mitchell   Hutchins,
                                                     PaineWebber or one of their
                                                     affiliates     serves    as
                                                     investment adviser.

                                       27
<PAGE>


                                 POSITION WITH THE      BUSINESS EXPERIENCE;
NAME AND ADDRESS; AGE                CORPORATION        OTHER DIRECTORSHIPS
---------------------            ------------------  ---------------------------
Carl W. Schafer; 64                  Director        Mr. Schafer is president of
66 Witherspoon Street, #1100                         the   Atlantic   Foundation
Princeton, NJ 08542                                  (charitable      foundation
                                                     supporting           mainly
                                                     oceanographic   exploration
                                                     and  research).   He  is  a
                                                     director  of  Labor  Ready,
                                                     Inc.             (temporary
                                                     employment),        Roadway
                                                     Express,  Inc.  (trucking),
                                                     The   Guardian   Group   of
                                                     Mutual Funds,  the Harding,
                                                     Loevner    Funds,    E.I.I.
                                                     Realty  Trust   (investment
                                                     company),   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 29 investment
                                                     companies     for     which
                                                     Mitchell          Hutchins,
                                                     PaineWebber or one of their
                                                     affiliates     serves    as
                                                     investment adviser.

Brian M. Storms*+; 46                Director        Mr.    Storms    is   chief
                                  and President      executive   officer  (since
                                                     October 2000) and president
                                                     of Mitchell Hutchins (since
                                                     March 1999). Mr. Storms was
                                                     president   of   Prudential
                                                     Investments    (1996-1999).
                                                     Prior      to       joining
                                                     Prudential,    he   was   a
                                                     managing     director    at
                                                     Fidelity  Investments.  Mr.
                                                     Storms is  president  and a
                                                     director  or  trustee of 30
                                                     investment   companies  for
                                                     which  Mitchell   Hutchins,
                                                     PaineWebber or one of their
                                                     affiliates     serves    as
                                                     investment adviser.

T. Kirkham Barneby*; 54           Vice President     Mr.  Barneby  is a managing
                                                     director and chief  invest-
                                                     ment  officer--quantitative
                                                     investments   of   Mitchell
                                                     Hutchins.  Mr. Barneby is a
                                                     vice    president   of   14
                                                     investment   companies  for
                                                     which  Mitchell   Hutchins,
                                                     PaineWebber or one of their
                                                     affiliates     serves    as
                                                     investment adviser.

Thomas Disbrow***, 34           Vice President and   Mr. Disbrow is a first vice
                               Assistant Treasurer   president   and  a   senior
                                                     manager of the mutual  fund
                                                     finance    department    of
                                                     Mitchell Hutchins. Prior to
                                                     November  1999,  he  was  a
                                                     vice      president      of
                                                     Zweig/Glaser  Advisers. Mr.
                                                     Disbrow is a vice president
                                                     and assistant  treasurer of
                                                     30 investment companies for
                                                     which  Mitchell   Hutchins,
                                                     PaineWebber or one of their
                                                     affiliates     serves    as
                                                     investment adviser.


                                       28
<PAGE>


                                 POSITION WITH THE      BUSINESS EXPERIENCE;
NAME AND ADDRESS; AGE                CORPORATION        OTHER DIRECTORSHIPS
---------------------            ------------------  ---------------------------
Amy R. Doberman**, 38               Vice President   Ms.  Doberman  is a  senior
                                                     vice  president and general
                                                     counsel     of     Mitchell
                                                     Hutchins.   From   December
                                                     1996 through July 2000, she
                                                     was   general   counsel  of
                                                     Aeltus           Investment
                                                     Management,  Inc.  Prior to
                                                     working  at   Aeltus,   Ms.
                                                     Doberman  was a Division of
                                                     Investment       Management
                                                     Assistant  Chief Counsel at
                                                     the SEC. Ms.  Doberman is a
                                                     vice    president   of   29
                                                     investment  companies and a
                                                     vice      president     and
                                                     secretary of one investment
                                                     company for which  Mitchell
                                                     Hutchins,   PaineWebber  or
                                                     one  of  their   affiliates
                                                     serves    as     investment
                                                     adviser.


John J. Lee***; 32              Vice President and   Mr. Lee is a vice president
                                Assistant Treasurer  and a manager of the mutual
                                                     fund finance  department of
                                                     Mitchell Hutchins. Prior to
                                                     September  1997,  he was an
                                                     audit    manager   in   the
                                                     financial services practice
                                                     of Ernst & Young  LLP.  Mr.
                                                     Lee is a vice president and
                                                     assistant  treasurer  of 30
                                                     investment   companies  for
                                                     which  Mitchell   Hutchins,
                                                     PaineWebber or one of their
                                                     affiliates     serves    as
                                                     investment adviser.


Kevin J. Mahoney***; 35          Vice President and  Mr. Mahoney is a first vice
                                 Assistant Treasurer president   and  a   senior
                                                     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 30  investment
                                                     companies     for     which
                                                     Mitchell          Hutchins,
                                                     PaineWebber or one of their
                                                     affiliates     serves    as
                                                     investment adviser.

Ann E. Moran***; 43             Vice President and   Ms.   Moran   is   a   vice
                                Assistant Treasurer  president  and a manager of
                                                     the  mutual  fund   finance
                                                     department    of   Mitchell
                                                     Hutchins.  Ms.  Moran  is a
                                                     vice      president     and
                                                     assistant  treasurer  of 30
                                                     investment   companies  for
                                                     which  Mitchell   Hutchins,
                                                     PaineWebber or one of their
                                                     affiliates     serves    as
                                                     investment adviser.

Dianne E. O'Donnell**; 48        Vice President and  Ms.  O'Donnell  is a senior
                                     Secretary       vice  president  and deputy
                                                     general counsel of Mitchell
                                                     Hutchins.  Ms. O'Donnell is
                                                     a   vice    president   and
                                                     secretary of 29  investment
                                                     companies      and     vice
                                                     president   and   assistant
                                                     secretary of one investment
                                                     company for which  Mitchell
                                                     Hutchins,   PaineWebber  or
                                                     one  of  their   affiliates
                                                     serves    as     investment
                                                     adviser.


Susan P. Ryan*; 40                 Vice President    Ms.  Ryan is a senior  vice
                                                     president  and a  portfolio
                                                     manager     of     Mitchell
                                                     Hutchins.  Ms.  Ryan  is  a
                                                     vice   president   of   six
                                                     investment   companies  for
                                                     which  Mitchell   Hutchins,
                                                     PaineWebber or one of their
                                                     affiliates     serves    as
                                                     investment adviser.


                                       29
<PAGE>


                                 POSITION WITH THE      BUSINESS EXPERIENCE;
NAME AND ADDRESS; AGE                CORPORATION        OTHER DIRECTORSHIPS
---------------------            ------------------  ---------------------------
Paul H. Schubert***; 37         Vice President and   Mr.  Schubert  is a  senior
                                     Treasurer       vice   president   and  the
                                                     director of the mutual fund
                                                     finance    department    of
                                                     Mitchell   Hutchins.    Mr.
                                                     Schubert    is    a    vice
                                                     president  and treasurer of
                                                     30 investment companies for
                                                     which  Mitchell   Hutchins,
                                                     PaineWebber or one of their
                                                     affiliates     serves    as
                                                     investment adviser.


Barney A. Taglialatela***; 39   Vice President and   Mr.  Taglialatela is a vice
                                Assistant Treasurer  president  and a manager of
                                                     the  mutual  fund   finance
                                                     department    of   Mitchell
                                                     Hutchins.  Mr. Taglialatela
                                                     is  a  vice  president  and
                                                     assistant  treasurer  of 30
                                                     investment   companies  for
                                                     which  Mitchell   Hutchins,
                                                     PaineWebber or one of their
                                                     affiliates     serves    as
                                                     investment adviser.


Keith A. Weller**; 39           Vice President and   Mr.  Weller is a first vice
                                Assistant Secretary  president     and    senior
                                                     associate  general  counsel
                                                     of Mitchell  Hutchins.  Mr.
                                                     Weller is a vice  president
                                                     and assistant  secretary of
                                                     30 investment companies for
                                                     which  Mitchell   Hutchins,
                                                     PaineWebber or one of their
                                                     affiliates     serves    as
                                                     investment adviser.


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

*    This person's  business address is 51 West 52nd Street,  New York, New York
     10019-6114.

**   This person's  business  address is 1285 Avenue of the Americas,  New York,
     New York 10019-6028.

***  This person's business address is Newport Center III, 499 Washington Blvd.,
     14th floor, Jersey City, New Jersey, 07310-1998.


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


          The  Corporation  pays each  board  member  who is not an  "interested
     person" of the  Corporation  $1,500  annually for the fund,  an  additional
     $1,000  annually  for the  Corporation's  second  series and up to $150 per
     series for  attending  each board  meeting and each  separate  meeting of a
     board  committee.  The  Corporation  thus 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.  Because  Mitchell  Hutchins and  PaineWebber  perform
     substantially  all of the  services  necessary  for  the  operation  of the
     Corporation  and the  fund,  the  Corporation  requires  no  employees.  No
     officer, director or employee of Mitchell Hutchins or PaineWebber presently
     receives any compensation from the Corporation for acting as a board member
     or officer.

          The  table  below  includes  certain   information   relating  to  the
compensation  by  the  Corporation  of  its  current  board  members,   and  the
compensation  of those  board  members  from all  PaineWebber  funds  during the
periods indicated.

                                       30
<PAGE>

                               COMPENSATION TABLE+


                                                AGGREGATE    TOTAL COMPENSATION
                                              COMPENSATION        FROM THE
                                                FROM THE     CORPORATION AND THE
       NAME OF PERSON, POSITION               CORPORATION*     FUND COMPLEX**
       ------------------------               ------------     --------------
Richard Q. Armstrong, Director.............      $4,060           $104,650
Richard R. Burt, Director..................       4,060            102,850
Meyer Feldberg, Director...................       4,060            143,650
George W. Gowen, Director..................       4,807            138,400
Frederic V. Malek, Director................       4,060            104,650
Carl W. Schafer, Director..................       4,000            104,650


------

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

     *    Represents fees paid by the Corporation to each board member indicated
          for the fiscal year ended August 31, 2000. These fees are allocated in
          part to the fund and in part to the other series of the Corporation.

     **   Represents  total  compensation  paid during the  calendar  year ended
          December  31,  1999,  by 31  investment  companies  (34 in the case of
          Messrs.  Feldberg and Gowen) for which Mitchell Hutchins,  PaineWebber
          or one of their affiliates  served as an investment  adviser.  No fund
          within the  PaineWebber  fund  complex  has a bonus,  pension,  profit
          sharing or retirement plan.

            PRINCIPAL HOLDERS AND MANAGEMENT OWNERSHIP OF SECURITIES

     As of November 30, 2000, directors and officers owned in the aggregate less
than 1% of the outstanding shares of any class of the fund.


     As of November 30, 2000, the following shareholders are shown in the fund's
records as owning 5% or more of the fund's Class Y shares.

                                                   PERCENTAGE OF CLASS Y SHARES
  NAME AND ADDRESS                                 OWNED AS OF NOVEMBER 30, 2000
  ----------------                                 -----------------------------

  Anne L. Solnit, Trustee of the
  Anne L. Solnit Trust dated 05/06/97                         12.99%

  PaineWebber Custodian
  Siegfried Richard Weigele                                    5.37%

  PaineWebber Custodian
  PaineWebber CDNFBO
  Fred Bruce IRA                                               5.16%


----------

     * The  shareholders  listed may be contacted  c/o Mitchell  Hutchins  Asset
Management Inc., 51 West 52nd Street, New York, NY 10019-6114.

                                       31
<PAGE>

        INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS


     INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS. Mitchell Hutchins acts
as the investment  adviser and  administrator of the fund pursuant to a contract
("Advisory  Contract") with the Corporation.  Under the Advisory  Contract,  the
fund pays Mitchell Hutchins an annual fee,  computed daily and paid monthly,  as
set forth below:

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

     During the fiscal years ended  August 31, 2000,  August 31, 1999 and August
31, 1998,  Mitchell Hutchins earned (or accrued) advisory and adminstration fees
of $1,697,170, $1,890,996 and $1,709,264, respectively.

     Under the  terms of the  Advisory  Contract,  the fund  bears all  expenses
incurred  in its  operation  that  are  not  specifically  assumed  by  Mitchell
Hutchins.  General  expenses  of the  Corporation  not readily  identifiable  as
belonging  to 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 the  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  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 the Advisory  Contract,  Mitchell Hutchins will not be liable for any
error of  judgment  or  mistake of law or for any loss  suffered  by the fund in
connection  with  the  performance  of  the  Advisory  Contract,  except  a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Mitchell Hutchins in the performance of its duties or from reckless disregard of
its  duties  and  obligations  thereunder.   The  Advisory  Contract  terminates
automatically  upon its assignment and is terminable at any time without penalty
by the board or by vote of the holders of a majority  of the fund's  outstanding
voting  securities,  on 60 days'  written  notice  to  Mitchell  Hutchins  or by
Mitchell Hutchins on 60 days' written notice to the fund.


     SECURITIES  LENDING.  During the fiscal years ended August 31, 2000, August
31, 1999 and August 31, 1998,  the fund paid (or accrued)  $12,738,  $17,852 and
$28,144,  respectively,  to PaineWebber  for its services as securities  lending
agent.


                                       32
<PAGE>

     NET ASSETS.  The  following  table shows the  approximate  net assets as of
November 30, 2000, 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)...........................      $ 7,949
     Global......................................................        4,526
     Equity/Balanced.............................................        8,456
     Fixed Income (excluding Money Market).......................        4,019
            Taxable Fixed Income.................................        2,631
            Tax-Free Fixed Income................................        1,387
     Money Market Funds..........................................       47,003

     PERSONAL TRADING POLICIES. The fund and Mitchell Hutchins each have adopted
a code of ethics under rule 17f-1 of the  Investment  Company Act, which permits
personnel  covered by the rule to invest in securities  that may be purchased or
held by the fund but prohibits fraudulent,  deceptive or manipulative conduct in
connection with that personal investing.

     DISTRIBUTION  ARRANGEMENTS.  Mitchell  Hutchins acts as the  distributor of
each class of shares of the fund  under a  distribution  contract  with the fund
("Distribution  Contract"). The Distribution Contract requires Mitchell Hutchins
to use its best efforts, consistent with its other businesses, to sell shares of
the fund. Shares of the fund are offered continuously.  Under a dealer agreement
between  Mitchell  Hutchins and PaineWebber  relating to each class of shares of
the fund ("PW Dealer  Agreement"),  PaineWebber and its correspondent firms sell
the fund's  shares.  Mitchell  Hutchins is located at 51 West 52nd  Street,  New
York,  New York  10019-6114  and  PaineWebber  is located at 1285  Avenue of the
Americas, New York, New York 10019-6028.


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

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


     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 the fund's
          Class B and Class C shares, respectively.

     o    Offset the 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.

                                       33
<PAGE>

     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  Contract  for Class A, Class B and
Class C shares specify that the fund must pay service and  distribution  fees to
Mitchell Hutchins for its service- and distribution-related  activities,  not as
reimbursement  for  specific  expenses  incurred.  Therefore,  even if  Mitchell
Hutchins' expenses exceed the service or distribution fees it receives, the fund
will not be  obligated  to pay more  than  those  fees.  On the other  hand,  if
Mitchell  Hutchins'  expenses  are less than such fees,  it will retain its full
fees and realize a profit.  Expenses in excess of service and distribution  fees
received or accrued  through the  termination  date of any Plan will be Mitchell
Hutchins'  sole  responsibility  and not that of the fund.  Annually,  the board
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 board at least  quarterly,  and the board  members  will  review,
reports regarding all amounts expended under the Plan and the purposes for which
such  expenditures  were made, (2) the Plan will continue in effect only so long
as it is approved  at least  annually,  and any  material  amendment  thereto is
approved,  by the board,  including  those board members who are not "interested
persons"  of the  Corporation  and who  have no  direct  or  indirect  financial
interest  in the  operation  of the Plan or any  agreement  related to the Plan,
acting in person at a meeting called for that purpose,  (3) payments by the fund
under the Plan shall not be materially increased without the affirmative vote of
the holders of a majority of the  outstanding  shares of the relevant  class and
(4) while the Plan remains in effect,  the  selection  and  nomination  of board
members who are not "interested  persons" of the Corporation  shall be committed
to the discretion of the board members who are not  "interested  persons" of the
Corporation.


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

     The fund 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, 2000:


     Class A................................................    $461,035
     Class B................................................     233,944
     Class C................................................     179,819


     Mitchell   Hutchins   estimates   that  it  and  its  parent   corporation,
PaineWebber,    incurred   the   following   shareholder   service-related   and
distribution-related  expenses  with  respect to the fund during the fiscal year
ended August 31, 2000:


     CLASS A
     Marketing and advertising..............................    $278,493
     Amortization of commissions............................       - 0 -
     Printing of prospectuses and SAIs......................       1,225
     Branch network costs allocated and interest expense....     564,748
     Service fees paid to PaineWebber Financial Advisors....     177,525


                                       34
<PAGE>


     CLASS B
     Marketing and advertising..............................     $35,341
     Amortization of commissions............................      91,470
     Printing of prospectuses and SAIs......................         143
     Branch network costs allocated and interest expense....      85,048
     Service fees paid to PaineWebber Financial Advisors....      22,544

     CLASS C
     Marketing and advertising..............................     $27,167
     Amortization of commissions............................      51,937
     Printing of prospectuses and SAIs......................         131
     Branch network costs allocated and interest expense....      56,022
     Service fees paid to PaineWebber Financial Advisors....      17,311


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

     In  approving   the  fund's   overall   Flexible   Pricing(SM)   system  of
distribution,   the   board   considered   several   factors,   including   that
implementation  of Flexible  Pricing  would (1) enable  investors  to choose the
purchasing option best suited to their individual situation, thereby encouraging
current  shareholders to make additional  investments in 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, the board considered all the features of the
distribution  system,  including  (1) the  conditions  under which initial sales
charges would be imposed and the amount of such charges,  (2) Mitchell Hutchins'
belief  that the  initial  sales  charge  combined  with a service  fee would be
attractive to PaineWebber Financial Advisors and correspondent firms,  resulting
in  greater  growth  of the fund  than  might  otherwise  be the  case,  (3) the
advantages to the  shareholders  of economies of scale  resulting from growth in
the fund's assets and potential  continued growth,  (4) the services provided to
the fund and its shareholders by Mitchell Hutchins, (5) the services provided by
PaineWebber  pursuant to its PW Dealer Agreement with Mitchell  Hutchins and (6)
Mitchell Hutchins' shareholder service-related expenses and costs.

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

     In approving the Class C Plan, the board considered all the features of the
distribution  system,  including  (1) the  advantage  to  investors in having no
initial sales charges deducted from fund purchase payments and instead

                                       35
<PAGE>

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 PW Dealer  Agreement
with  Mitchell  Hutchins and (7)  Mitchell  Hutchins'  shareholder  service- and
distribution-related  expenses and costs. The board members also recognized that
Mitchell  Hutchins'  willingness  to  compensate  PaineWebber  and its Financial
Advisors,  without the concomitant receipt by Mitchell Hutchins of initial sales
charges or  contingent  deferred  sales charges upon  redemption  after one year
following  purchase was conditioned  upon its  expectation of being  compensated
under the Class C Plan.


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

     Under the  Distribution  Contract for Class A shares,  for the fiscal years
set forth below,  Mitchell Hutchins earned the following  approximate amounts of
sales  charges  and  retained  the  following   approximate   amounts,   net  of
reallowances to PaineWebber as dealer.

                                              FISCAL YEARS ENDED AUGUST 31,
                                               2000      1999        1998
                                             -------    -------    --------
     Earned .............................    $24,562    $91,158    $368,103
     Retained ...........................      7,332      8,956      16,048


     Mitchell  Hutchins  earned and retained the following  contingent  deferred
sales charges paid upon certain  redemptions of shares for the fiscal year ended
August 31, 2000:


     Class A ............................           $- 0 -
     Class B ............................           57,916
     Class C.............................            4,710


                             PORTFOLIO TRANSACTIONS


     Subject  to  policies  established  by  the  board,  Mitchell  Hutchins  is
responsible  for the  execution  of the fund's  portfolio  transactions  and the
allocation  of  brokerage  transactions.  In executing  portfolio  transactions,
Mitchell Hutchins seeks to obtain the best net results for the 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 fund 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
ended  August 31,  2000,  August 31,  1999 and  August 31,  1998,  the fund paid
$246,379, $367,133 and $290,954, respectively in brokerage commissions.


                                       36
<PAGE>


     The fund has no  obligation  to deal with any broker or group of brokers in
the execution of portfolio transactions.  The fund contemplates that, consistent
with the policy of obtaining the best net results, brokerage transactions may be
conducted  through Mitchell Hutchins or its affiliates,  including  PaineWebber.
The board 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
Contract  authorize Mitchell Hutchins and any of its affiliates that is a member
of a national securities exchange to effect portfolio  transactions for the fund
on  such  exchange  and  to  retain   compensation   in  connection   with  such
transactions.  Any such transactions  will be effected and related  compensation
paid only in accordance with applicable SEC regulations. During the fiscal years
ended  August 31,  2000,  August 31,  1999 and  August 31,  1998,  the fund paid
$10,324,  $14,808  and  $1,038,   respectively,   in  brokerage  commissions  to
PaineWebber.

     During the fiscal year ended August 31,  2000,  the  brokerage  commissions
paid by the fund to PaineWebber  represented 4.19% of the total commissions paid
by the fund and 5.45% 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
fund's  procedures  in  selecting  FCMs to execute its  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 fund and
subject  to the  review  of the  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 fund 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 the fund and its other clients.

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


     For the  fund's  fiscal  year  ended  August 31,  2000,  Mitchell  Hutchins
directed  $42,727,369 in portfolio  transactions  to brokers chosen because they
provided research services, for which the fund paid $58,665 in commissions.


     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 its  investment
processes.  Information  and research  services  furnished by brokers or dealers
through which or with which the fund effects securities transactions may be used
by  Mitchell  Hutchins in advising  other  funds or  accounts  and,  conversely,
research  services  furnished  to  Mitchell  Hutchins  by  brokers or dealers in
connection  with other funds or accounts that it advises may be used in advising
the fund.


                                       37
<PAGE>

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

     The fund 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 fund's 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 the fund's  annual  sales or purchases of
portfolio  securities  (exclusive  of  purchases  or sales of  securities  whose
maturities  at the time of  acquisition  were  one year or less) by the  monthly
average  value of  securities  in the  portfolio  during  the year.  The  fund's
portfolio  turnover  rates for the fiscal years ended August 31, 2000 and August
31, 1999 were 151% and 234%, respectively.

            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
          the 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.

                                       38
<PAGE>

     In addition,  reduced sales charges on Class A shares are available through
the combined  purchase plan or through rights of accumulation  described  below.
Class A share  purchases  of $1  million  or more are not  subject to an initial
sales charge; however, if a shareholder sells these shares within one year after
purchase,  a contingent deferred sales charge of 1% of the offering price or the
net asset value of the shares at the time of sale by the shareholder,  whichever
is less, is imposed.

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

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

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

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

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

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

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

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

     (g)  an employer (or 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  fund  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 the 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

                                       39
<PAGE>

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.

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

     PURCHASES OF CLASS Y SHARES  THROUGH THE PACE(SM) MULTI ADVISOR PROGRAM. An
investor who  participates  in the PACE(SM) Multi Advisor Program is eligible to
purchase  Class Y shares.  The  PACE(SM)  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(SM)  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(SM) Multi Advisor Program.

     PURCHASES OF CLASS A SHARES THROUGH THE PAINEWEBBER INSIGHTONE(SM) PROGRAM.
Investors who purchase shares through the PaineWebber InsightOne(SM) Program are
eligible  to  purchase  Class A shares  without a sales  load.  The  PaineWebber
InsightOne(SM)   Program  offers  a   nondiscretionary   brokerage   account  to
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.


     PURCHASES  AND SALES OF CLASS Y SHARES FOR  PARTICIPANTS  IN PW 401(k) PLUS
PLAN.  The trustee of the PW 401(k) Plus Plan, a defined  contribution  plan for
employees of PaineWebber and certain of its  affiliates,  buys and sells Class Y
shares of the funds that are included as  investment  options  under the Plan to
implement  the  investment  choices of individual  participants  with respect to
their Plan  contributions.  Individual  Plan  participants  should  consult  the
Summary  Plan  Description  and other plan  material  of the PW 401(k) Plus Plan
(collectively,  "Plan  Documents")  for a  description  of  the  procedures  and
limitations applicable to making and changing investment choices.  Copies of the
Plan  Documents are available  from the Benefits  Connection,  100 Halfday Road,
Lincolnshire,  IL  60069  or  by  calling  1-888-Pwebber  (1-888-793-2237).   As
described  in the Plan  Documents,  the price at which Class Y shares are bought
and sold by the  trustee  of PW 401(k)  Plus Plan might be more or less than the
price per share at the time the participants made their investment choices.


     ADDITIONAL  EXCHANGE  AND  REDEMPTION  INFORMATION.  As  discussed  in  the
Prospectus,  eligible  shares  of the fund 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,  the fund reserves
the right to honor any request for  redemption by making  payment in whole or in
part in  securities  chosen by the fund and valued in the same way as they would
be valued  for  purposes  of  computing  the fund's  net asset  value.  Any such
redemption  in kind  will be made with  readily  marketable  securities,  to the
extent  available.  If payment is made in  securities,  a shareholder  may incur
brokerage  expenses  in  converting  these  securities  into cash.  The 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


                                       40
<PAGE>

to the lesser of $250,000 or 1% of its net asset value during any 90-day  period
for one  shareholder.  This election is  irrevocable  unless the SEC permits its
withdrawal.

     The fund 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.  The 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.  The
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 the 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 the 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.  An investor  should also consider  whether a large,  single
investment would qualify for sales load reductions.

     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 the 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

                                       41
<PAGE>

will arrange for redemption by the fund of sufficient fund shares to provide the
withdrawal   payments   specified  by  participants  in  the  fund's  systematic
withdrawal plan. The payments  generally are mailed  approximately five Business
Days (defined under "Valuation of Shares") after the redemption date. Withdrawal
payments  should  not be  considered  dividends,  but  redemption  proceeds.  If
periodic   withdrawals   continually  exceed  reinvested   dividends  and  other
distributions,  a shareholder's  investment may be  correspondingly  reduced.  A
shareholder  may change the amount of the  systematic  withdrawal  or  terminate
participation  in the systematic  withdrawal  plan at any time without charge or
penalty by written  instructions  with  signatures  guaranteed to PaineWebber or
PFPC Inc.  Instructions to participate in the plan, change the withdrawal amount
or terminate  participation  in the plan will not be  effective  until five days
after written  instructions  with  signatures  guaranteed  are received by PFPC.
Shareholders  may request the forms needed to establish a systematic  withdrawal
plan from their PaineWebber  Financial Advisors,  correspondent firms or PFPC at
1-800-647-1568.

     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 the  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 PLAN(SM);
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

                                       42
<PAGE>

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. In deciding whether to use dollar cost averaging,  an investor should also
consider  whether a large,  single  investment  would  qualify  for  sales  load
reductions.

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

     o    monthly Premier account  statements that itemize all account activity,
          including  investment  transactions,  checking  activity  and Platinum
          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    Platinum  MasterCard(R),  with  or  without  a line of  credit,  which
          provides RMA  accountholders  with direct access to their accounts and
          can be used with automatic teller machines worldwide. Purchases on the
          Platinum  MasterCard(R)  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
Platinum MasterCard(R), with an additional fee of $40 if the investor selects an
optional line of credit with the Platinum MasterCard(R).

                                       43
<PAGE>

                          CONVERSION OF CLASS B SHARES

     Class B shares of the fund will  automatically  convert  to Class A shares,
based on the relative  net asset values per share of the two classes,  as of the
close of business on the first  Business  Day (as defined  under  "Valuation  of
Shares") of the month in which the sixth  anniversary of the initial issuance of
such Class B shares occurs.  For the purpose of  calculating  the holding period
required for  conversion of Class B shares,  the date of initial  issuance shall
mean (1) the date on which  such Class B shares  were  issued or (2) for Class B
shares obtained through an exchange, or a series of exchanges, the date on which
the original  Class B shares were issued.  For purposes of conversion to Class A
shares, Class B shares purchased through the reinvestment of dividends and other
distributions  paid in  respect  of  Class B shares  will be held in a  separate
sub-account.  Each time any Class B shares in the shareholder's  regular account
(other  than those in the  sub-account)  convert  to Class A shares,  a pro rata
portion of the Class B shares in the  sub-account  will also  convert to Class A
shares. The portion will be determined by the ratio that the shareholder's Class
B shares converting to Class A shares bears to the  shareholder's  total Class B
shares not acquired through dividends and other distributions.

     The  conversion  feature is subject to the  continuing  availability  of an
opinion of counsel to the effect that the dividends and other distributions paid
on Class A and Class B shares will not result in "preferential  dividends" under
the Internal  Revenue Code and that the conversion of shares does not constitute
a taxable event. If the conversion  feature ceased to be available,  the Class B
shares  would not be  converted  and would  continue to be subject to the higher
ongoing  expenses  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

     The 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  and other assets are valued based upon market  quotations  when
those quotations are readily available unless, in Mitchell  Hutchins'  judgment,
those  quotations  do not  adequately  reflect  the fair value of the  security.
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  (other than short-term  investments that mature in
60 days or less,  which are valued as described  further below).  Securities and
assets for which market quotations are not readily available may be 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 assets are valued at fair value as determined in good faith
by or under the direction of the board.  It should be  recognized  that judgment
often plays a greater role in valuing thinly traded  securities,  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 board determines that
this does not represent fair value.

                             PERFORMANCE INFORMATION

     The fund's  performance  data quoted in advertising  and other  promotional
materials ("Performance  Advertisements") represent past performance and are not
intended to indicate future performance. The investment

                                       44
<PAGE>

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 the  fund's  Performance  Advertisements  are
calculated according to the following formula:

                  n
          P(1 + T)   = ERV
       where:      P = a hypothetical initial payment of $1,000 to purchase
                       shares of a 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.

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

     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
fund's shares outstanding for the periods indicated.  All returns for periods of
more than one year are expressed as an average annual return.


         CLASS                            CLASS A   CLASS B   CLASS C   CLASS Y
         (INCEPTION DATE)                 (7/1/91) (12/12/86) (7/2/92)  3/26/98)
         ----------------                 -------- ---------- --------  --------
     Year ended August 31, 2000:
              Standardized Return* .......   3.37%    2.56%      6.49%   8.54%
              Non-Standardized Return ....   8.27%    7.44%      7.46%   8.54%
     Five Years ended August 31, 2000:
              Standardized Return* .......  12.22%   12.19%     12.43%    N/A
              Non-Standardized Return* ...  13.27%   12.44%     12.43%    N/A
     Ten Years ended August 31, 2000:
              Standardized Return ........    N/A    11.49%       N/A     N/A
              Non-Standardized Return ....    N/A    11.49%       N/A     N/A
     Inception to August 31, 2000:
              Standardized Return* .......  10.87%    9.65%     10.64%   5.70%
              Non-Standardized Return ....  11.43%    9.65%     10.64%   5.70%


----------

*    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

                                       45
<PAGE>

     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 fund may compare its
Standardized Return and/or their Non-Standardized  Return with data published by
Lipper Inc. ("Lipper") CDA Investment Technologies,  Inc. ("CDA"),  Wiesenberger
Investment  Companies Service  ("Wiesenberger"),  Investment  Company Data, Inc.
("ICD") or Morningstar  Mutual Funds  ("Morningstar"),  with the  performance of
recognized  stock,  bond and other indices,  including the Standard & Poor's 500
Composite Stock Price Index ("S&P 500"), the Dow Jones Industrial  Average,  the
International   Finance  Corporation  Global  Total  Return  Index,  the  Nasdaq
Composite  Index,  the Russell 2000 Index,  the Wilshire 5000 Index,  the Lehman
Bond Index, the Morgan Stanley Capital  International  Perspective  Indices, the
Morgan Stanley Capital International Energy Sources Index, the Standard & Poor's
Oil Composite Index, the Morgan Stanley Capital  International  World Index, the
Lehman   Brothers   20+  Year   Treasury   Bond  Index,   the  Lehman   Brothers
Government/Corporate  Bond  Index,  other  similar  Lehman  Brothers  indices or
components  thereof,  the Salomon Smith Barney  Non-U.S.  World  Government Bond
Index,  and  changes  in the  Consumer  Price  Index  as  published  by the U.S.
Department of Commerce. The fund also may refer in such materials to mutual fund
performance  rankings and other data, such as comparative asset, expense and fee
levels, published by Lipper, CDA, Wiesenberger, ICD or Morningstar.  Performance
Advertisements also may refer to discussions of the funds and comparative mutual
fund data and ratings  reported in independent  periodicals,  including THE WALL
STREET JOURNAL,  MONEY MAGAZINE,  SMART MONEY,  MUTUAL FUNDS,  FORBES,  BUSINESS
WEEK,  FINANCIAL  WORLD,  BARRON'S,  FORTUNE,  THE NEW YORK  TIMES,  THE CHICAGO
TRIBUNE,  THE  WASHINGTON  POST  and  THE  KIPLINGER  LETTERS.   Comparisons  in
Performance Advertisements may be in graphic form.

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


     The fund may also  compare its  performance  with the  performance  of bank
certificates  of deposit  (CDs) as  measured by the CDA  Certificate  of Deposit
Index, the Bank Rate Monitor National Index and the averages of yields of CDs of
major banks  published by  Banxquote(R)  Money Markets.  In comparing the fund's
performance to CD performance,  investors  should keep in mind that bank CDs are
insured in whole or in part by an agency of the U.S.  government and offer fixed
principal and fixed or variable  rates of interest,  and that bank CD yields may
vary  depending on the  financial  institution  offering  the CD and  prevailing
interest  rates.  Shares of the fund are not insured or  guaranteed  by the U.S.
government and returns and net asset values will fluctuate.  The debt securities
held by the fund 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.


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

                                       46
<PAGE>


        [The table below represents a line chart in the printed piece.]

                    COMMON      LONG-TERM                   TREASURY
        YEAR        STOCKS     GOV'T BONDS  INFLATION/CPI     BILLS
        ----        ------     -----------  -------------     -----
        1925       $10,000       $10,000       $10,000       $10,000
        1926       $11,162       $10,777       $ 9,851       $10,327
        1927       $15,347       $11,739       $ 9,646       $10,649
        1928       $22,040       $11,751       $ 9,553       $11,028
        1929       $20,185       $12,153       $ 9,572       $11,552
        1930       $15,159       $12,719       $ 8,994       $11,830
        1931       $ 8,590       $12,044       $ 8,138       $11,957
        1932       $ 7,886       $14,073       $ 7,300       $12,072
        1933       $12,144       $14,062       $ 7,337       $12,108
        1934       $11,969       $15,472       $ 7,486       $12,128
        1935       $17,674       $16,243       $ 7,710       $12,148
        1936       $23,669       $17,464       $ 7,803       $12,170
        1937       $15,379       $17,504       $ 8,045       $12,207
        1938       $20,165       $18,473       $ 7,821       $12,205
        1939       $20,082       $19,570       $ 7,784       $12,208
        1940       $18,117       $20,761       $ 7,859       $12,208
        1941       $16,017       $20,955       $ 8,622       $12,216
        1942       $19,275       $21,629       $ 9,423       $12,248
        1943       $24,267       $22,080       $ 9,721       $12,291
        1944       $29,060       $22,702       $ 9,926       $12,332
        1945       $39,649       $25,139       $10,149       $12,372
        1946       $36,449       $25,113       $11,993       $12,416
        1947       $38,529       $24,454       $13,073       $12,478
        1948       $40,649       $25,285       $13,426       $12,580
        1949       $48,287       $26,916       $13,184       $12,718
        1950       $63,601       $26,932       $13,948       $12,870
        1951       $78,875       $25,873       $14,767       $13,063
        1952       $93,363       $26,173       $14,898       $13,279
        1953       $92,439       $27,125       $14,991       $13,521
        1954       $141,084      $29,075       $14,916       $13,638
        1955       $185,614      $28,699       $14,972       $13,852
        1956       $197,783      $27,096       $15,400       $14,193
        1957       $176,457      $29,117       $15,866       $14,639
        1958       $252,975      $27,342       $16,145       $14,864
        1959       $283,219      $26,725       $16,387       $15,303
        1960       $284,549      $30,407       $16,629       $15,711
        1961       $361,060      $30,703       $16,741       $16,045
        1962       $329,545      $32,818       $16,946       $16,483
        1963       $404,685      $33,216       $17,225       $16,997
        1964       $471,388      $34,381       $17,430       $17,598
        1965       $530,081      $34,625       $17,765       $18,289
        1966       $476,737      $35,889       $18,361       $19,159
        1967       $591,038      $32,594       $18,920       $19,966
        1968       $656,415      $32,509       $19,814       $21,005
        1969       $600,590      $30,860       $21,024       $22,388
        1970       $624,653      $34,596       $22,179       $23,849
        1971       $714,058      $39,173       $22,924       $24,895
        1972       $849,559      $41,400       $23,706       $25,851
        1973       $725,003      $40,942       $25,792       $27,643
        1974       $533,110      $42,725       $28,939       $29,855
        1975       $731,443      $46,653       $30,969       $31,588
        1976       $905,842      $54,470       $32,458       $33,193
        1977       $840,766      $54,095       $34,656       $34,893
        1978       $895,922      $53,458       $37,784       $37,398
        1979       $1,061,126    $52,799       $42,812       $41,279
        1980       $1,405,137    $50,715       $48,120       $45,917
        1981       $1,336,161    $51,657       $52,421       $52,671
        1982       $1,622,226    $72,507       $54,451       $58,224
        1983       $1,987,451    $72,979       $56,518       $63,347
        1984       $2,111,991    $84,274       $58,753       $69,586
        1985       $2,791,166    $110,371      $60,968       $74,960
        1986       $3,306,709    $137,446      $61,657       $79,580
        1987       $3,479,675    $133,716      $64,376       $83,929
        1988       $4,064,583    $146,650      $67,221       $89,257
        1989       $5,344,555    $173,215      $70,345       $96,728
        1990       $5,174,990    $183,924      $74,640       $104,286
        1991       $6,755,922    $219,420      $76,927       $110,121
        1992       $7,274,115    $237,092      $79,159       $113,982
        1993       $8,000,785    $280,339      $81,334       $117,284
        1994       $8,105,379    $258,556      $83,510       $121,862
        1995       $11,139,184   $340,435      $85,630       $128,680
        1996       $13,709,459   $337,265      $88,475       $135,381
        1997       $18,272,762   $390,735      $89,897       $142,496
        1998       $23,495,420   $441,777      $91,513       $149,416
        1999       $28,456,286   $402,177      $93,998       $156,414


Source:  STOCKS, BONDS, BILLS AND INFLATION 1999 YEARBOOK(TM),  Ibbotson Assoc.,
Chi., (annual updates work by Roger G. Ibbotson & Rex A. Sinquefield).

     The chart is shown for  illustrative  purposes  only and does not represent
any 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, 1999,  stocks beat all
other  traditional  asset classes.  A $10,000  investment in the S&P 500 grew to
$28,456,286, significantly more than any other investment.

                                      TAXES

     BACKUP WITHHOLDING.  The 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.

     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 the fund's  shares for shares of another  PaineWebber  mutual  fund
generally will have similar tax consequences.  In addition, if the 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.

                                       47
<PAGE>

     SPECIAL  RULE FOR CLASS A  SHAREHOLDERS.  A special tax rule applies when a
shareholder  sells or  exchanges  Class A shares  of the 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.  The fund  intends  to
continue to qualify for  treatment  as a regulated  investment  company  ("RIC")
under the Internal Revenue Code. To so qualify,  the fund must distribute to its
shareholders  for each  taxable  year at  least  90% of its  investment  company
taxable income (consisting generally of net investment income and net short-term
capital  gain)  ("Distribution  Requirement")  and must meet several  additional
requirements.  For the fund, these requirements  include the following:  (1) the
fund  must  derive  at least  90% of its gross  income  each  taxable  year from
dividends,  interest,  payments with respect to securities  loans and gains from
the sale or other  disposition of securities,  or other income  (including gains
from  options 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 the fund failed to qualify for treatment as a RIC for any taxable
year, (1) it would be taxed as an ordinary corporation on its taxable income for
that  year  without  being  able to  deduct  the  distributions  it makes to its
shareholders  and (2) the  shareholders  would  treat all  those  distributions,
including distributions 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 the fund declares in
December  of any year that are  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  (whether paid in cash or in additional  shares)
from the  fund's  investment  company  taxable  income may be  eligible  for the
dividends-received  deduction allowed to corporations.  The eligible portion for
the fund may not exceed the aggregate  dividends  received by the fund from U.S.
corporations.  However,  dividends  received  by  a  corporate  shareholder  and
deducted  by  it  pursuant  to  the  dividends-received  deduction  are  subject
indirectly to the federal alternative minimum tax.

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

     The 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 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

                                       48
<PAGE>

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 the fund  invests in a PFIC and elects to treat the PFIC as a "qualified
electing  fund"  ("QEF"),  then  in  lieu  of the  foregoing  tax  and  interest
obligation,  the fund will be  required  to include in income  each year its pro
rata share of the QEF'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.

     The  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.


     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 the fund  realizes in connection
therewith.  Gains from  options and futures  derived by the fund with respect to
its business of investing in securities will qualify as permissible income under
the Income Requirement.


     Certain  futures  contracts  in which the fund may invest may be subject to
section  1256 of the Internal  Revenue  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 the 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.  The 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 the  fund may  constitute  a  "straddle"  for
federal  income tax  purposes.  Straddles  are subject to certain rules that may
affect the  amount,  character  and timing of the 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

                                       49
<PAGE>

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

     If the  fund has an  "appreciated  financial  position"  --  generally,  an
interest  (including an interest  through an option or 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
the 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 the 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).


     If the fund acquires zero coupon or other  securities  issued with original
issue discount ("OID") and/or Treasury inflation-protected  securities ("TIPS"),
on which  principal is adjusted based on changes in the Consumer Price Index, it
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
it receives no corresponding  payment on them during the year. Similar treatment
applies with respect to securities purchased at a discount from their face value
("market discount"). Because the 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 fund and its shareholders. No attempt
is made to present a complete  explanation  of the federal tax  treatment of the
fund's  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 fund and to
dividends and other distributions therefrom.

                                OTHER INFORMATION

     CLASSES  OF  SHARES.  A share  of each  class  of the  fund  represents  an
identical  interest in the 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

                                       50
<PAGE>

and other  expenses  applicable to the  different  classes of shares of the fund
will affect the performance of those classes. Each share of the 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 the fund are entitled to one vote for each
full share held and fractional votes for fractional  shares held.  Voting rights
are not  cumulative  and,  as a result,  the holders of more than 50% of all the
shares of the  Corporation  may elect all its board  members.  The shares of the
fund will be voted together,  except that only the  shareholders of a particular
class of the fund may vote on matters  affecting  only that  class,  such as the
terms of a Rule 12b-1 Plan as it relates to the class. The shares of each series
of the Corporation  will be voted  separately,  except when an aggregate vote of
all the series is required by law.

     The fund does not hold annual  meetings.  Shareholders of record of no less
than two-thirds of the outstanding  shares of the 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 Corporation.

     CLASS-SPECIFIC  EXPENSES. The 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.


     CUSTODIAN  AND  RECORDKEEPING  AGENT;  TRANSFER AND DIVIDEND  AGENT.  State
Street Bank and Trust  Company,  located at 1776 Heritage  Drive,  North Quincy,
Massachusetts  02171,  serves as custodian and recordkeeping agent for the fund.
PFPC Inc.,  a subsidiary  of PNC Bank,  N.A,  serves as the fund's  transfer and
dividend disbursing agent. It is located at 400 Bellevue Parkway, Wilmington, DE
19809.


     COUNSEL.  The law firm of  Kirkpatrick & Lockhart  LLP, 1800  Massachusetts
Avenue,  N.W.,  Washington,  D.C.  20036-1800,  serves as  counsel  to the fund.
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 the fund's independent accountants.

                              FINANCIAL STATEMENTS

     The fund's Annual Report to  Shareholders  for the fiscal year ended August
31,  2000 is a  separate  document  supplied  with this SAI,  and the  financial
statements,  accompanying notes and report of independent  accountants appearing
therein are incorporated herein by this reference.

                                       51
<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

                                       A-1
<PAGE>

financial  commitment  on  the  obligation.,  Adverse  business,  financial,  or
economic  conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation; CCC. An obligation rated CCC is
currently  vulnerable to nonpayment and is dependent  upon  favorable  business,
financial  and  economic  conditions  for  the  obligor  to meet  its  financial
commitment on the obligation.  In the event of adverse business,  financial,  or
economic conditions,  the obligor is not likely to have the capacity to meet its
financial commitment on the obligation;  CC. An obligation rated CC is currently
highly  vulnerable  to  nonpayment;  C.  The C  rating  may be used  to  cover a
situation where a bankruptcy  petition has been filed or similar action has been
taken, but payments on this obligation are 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>


Investors  should rely only on the  information  contained in the Prospectus and
this Statement of Additional  Information.  The fund and its distributor has not
authorized  anyone  to  provide  you with  information  that is  different.  The
Prospectus and this Statement of Additional Information are not an offer to sell
shares of the fund in any jurisdiction where the fund or its distributor may not
lawfully sell those shares.


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




(C)2000 PaineWebber Incorporated. All rights reserved.






                                                                     PaineWebber
                                                                   Balanced Fund

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

                                             Statement of Additional Information
                                                               December 31, 2000
                                    --------------------------------------------




<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)      Form of Distribution Contract (filed herewith)

                  (b)      Form of Dealer Agreement (filed herewith)

         (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 3/

                  (b)      Plan of Distribution pursuant to Rule 12b-1 with
                           respect to Class B Shares 3/

                  (c)      Plan of Distribution pursuant to Rule 12b-1 with
                           respect to Class C Shares 3/


         (14)     Multiple Class Plan pursuant to Rule 18f-3 4/

         (15)     Code of Ethics for Registrant, its investment adviser and
                  its principal distributor 5/

         (16)     Power of Attorney for Mr. Storms (filed herewith)


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. 35 to the
         registration statement, SEC File No. 33-2524, filed November 23, 1998.

4/       Incorporated by reference from Post-Effective Amendment No. 42 to the
         registration statement, SEC File No. 33-2524, filed November 1, 2000.

5/       Incorporated by reference from Post-Effective Amendment No. 29 to the
         registration statement of PaineWebber Mutual Fund Trust, SEC File No.
         2-98149, filed June 27, 2000.



Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
         None.


<PAGE>

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
("Advisory 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 Advisory 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 Advisory 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 the 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, as amended ("1933 Act"). Section 9
of the Distribution Contract also provides that Mitchell Hutchins agrees to
indemnify, defend and hold the Registrant, its officers and directors free and
harmless of any claims arising out of any alleged untrue statement or any
alleged omission of material fact contained in information furnished by Mitchell
Hutchins for use in the Registration Statement or arising out of an agreement
between Mitchell Hutchins and any retail dealer, or arising out of supplementary
literature or advertising used by Mitchell Hutchins in connection with the
Distribution Contract.

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

         Insofar as indemnification for liabilities arising under the 1933 Act,
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


                                      C-2


<PAGE>

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 an indirect
wholly owned subsidiary of UBS AG. 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.
                  INSURED MUNICIPAL INCOME FUND, INC.
                  INVESTMENT GRADE MUNICIPAL INCOME FUND, INC.
                  MANAGED HIGH YIELD PLUS FUND INC.
                  MITCHELL HUTCHINS LIR MONEY SERIES

                  MITCHELL HUTCHINS SECURITIES TRUST
                  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
                  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 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

                                      C-3

<PAGE>

                  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 AND OFFICES WITH REGISTRANT     DEALER

<S>                           <C>                                      <C>
Margo N. Alexander*           Director                                 Chairman and a Director of Mitchell Hutchins and
                                                                       an Executive Vice President and a Director of
                                                                       PaineWebber

Brian M. Storms*              Director and President                   Chief Executive Officer and President of
                                                                       Mitchell Hutchins

T. Kirkham Barneby*           Vice President                           Managing Director and Chief Investment Officer -
                                                                       Quantitative Investments of Mitchell Hutchins

Thomas Disbrow***             Vice President and Assistant Treasurer   First Vice President and a Senior Manager of the
                                                                       Mutual Fund Fund Finance Department of Mitchell
                                                                       Hutchins

Amy R. Doberman**             Vice President                           Senior Vice President and General Counsel 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

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

Susan P. Ryan*                Vice President                           Senior Vice President and a Portfolio Manager of
                                                                       Mitchell Hutchins

Paul H. Schubert***           Vice President and Treasurer             Senior Vice President and the Director of the
                                                                       Mutual Fund Finance Department 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

Keith A. Weller**             Vice President and Assistant Secretary   First Vice President and Senior Associate
                                                                       General Counsel of Mitchell Hutchins
</TABLE>

-----------------
*     This person's business address is 51 West 52nd Street, New York, New York
      10019-6114.
**    This person's business address is 1285 Avenue of the Americas, New York,
      New York 10019-6028.
***   This person's business address is Newport Center III, 499 Washington
      Blvd., Jersey City, New Jersey 07310-1998.

          c) None


                                      C-4
<PAGE>

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 at 1285
          Avenue of the Americas, New York, New York 10019-6028 and 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 27th day of December, 2000.

                                            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/ BRIAN M. STORMS                           President and Director                  December 27, 2000
------------------------------------          (Chief Executive Officer)
Brian M. Storms*

/S/ E. GARRETT BEWKES, JR.                    Director and Chairman                   December 27, 2000
---------------------------                   of the Board of Directors
E. Garrett Bewkes, Jr. **

/S/ MARGO N. ALEXANDER                        Director                                December 27, 2000
------------------------------------
Margo N. Alexander **

/S/ RICHARD Q. ARMSTRONG                      Director                                December 27, 2000
---------------------------
Richard Q. Armstrong **

/S/ RICHARD R. BURT                           Director                                December 27, 2000
------------------------------------
Richard R. Burt **

/S/ MEYER FELDBERG                            Director                                December 27, 2000
------------------------------------
Meyer Feldberg **

/S/ GEORGE W. GOWEN                           Director                                December 27, 2000
------------------------------------
George W. Gowen **

/S/ FREDERIC V. MALEK                         Director                                December 27, 2000
------------------------------------
Frederic V. Malek **

/S/ CARL W. SCHAFER                           Director                                December 27, 2000
------------------------------------
Carl W. Schafer **

/S/ PAUL H. SCHUBERT                          Vice President and Treasurer (Chief     December 27, 2000
------------------------------------          Financial and Accounting Officer)
Paul H. Schubert
</TABLE>



<PAGE>

                             SIGNATURES (Continued)

*        Signature affixed by Elinor W. Gammon pursuant to power of attorney
         dated November 13, 2000 and filed herewith.

**       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.

<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)      Form of Distribution Contract (filed herewith)
                  (b)      Form of Dealer Agreement (filed herewith)

         (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 3/

                  (b)      Plan of Distribution pursuant to Rule 12b-1 with
                           respect to Class B Shares 3/

                  (c)      Plan of Distribution pursuant to Rule 12b-1 with
                           respect to Class C Shares 3/

         (14)     Multiple Class Plan pursuant to Rule 18f-3 4/

         (15)     Code of Ethics for Registrant, its investment adviser and its
                  principal distributor 5/

         (16)     Power of Attorney for Mr. Storms (filed herewith)


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. 35 to the
         registration statement, SEC File No. 33-2524, filed November 23, 1998.


4/       Incorporated by reference from Post-Effective Amendment No. 42 to the
         registration statement, SEC File No. 33-2524, filed November 1, 2000.


5/       Incorporated by reference from Post-Effective Amendment No. 29 to the
         registration statement of PaineWebber Mutual Fund Trust, SEC File No.
         2-98149, filed June 27, 2000.



© 2022 IncJournal is not affiliated with or endorsed by the U.S. Securities and Exchange Commission