PAINEWEBBER SECURITIES TRUST, N-30D, 1997-09-30

PAINEWEBBER SECURITIES TRUST
N-30D, 1997-09-30

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<PAGE>

PAINEWEBBER SMALL CAP FUND ANNUAL REPORT

PERFORMANCE AT A GLANCE

Comparison of the change of a $10,000 investment in PaineWebber Small Cap Fund,
the Russell 2000 Stock Index and the Standard & Poor's (S&P) 600 Index.

The following graph depicts the performance of PaineWebber Small Cap Fund versus
the Russell 2000 Stock Index and the S&P 600 Index. It is important to note the
PaineWebber Small Cap Fund is a professionally managed mutual fund, while the
indices are not available for investment and are unmanaged. The comparison is
shown for illustrative purposes only.

Russell
PaineWebber Small Cap Fund 2000 S&P 600
Class A Class B Class C Index Index

2/1/93 9550 10000 10000 10000 10000
7/31/93 9732 10151 10151 10696 10413
1/31/94 10234 10641 10636 12139 11841
7/31/94 9907 10261 10263 11188 10629
1/31/95 10153 10476 10468 11410 10861
7/31/95 11472 11787 11780 13984 13602
1/31/96 11736 12017 12011 14827 14348
7/31/96 11989 12225 12219 14952 14828
1/31/97 14130 14352 14348 17640 17657
7/31/97 16319 16527 16511 19946 20596

Past performance is not predictive of future performance.
The performance of Class Y shares will vary form the performance of the classes
shown based on the difference in sales charges and fees paid by shareholders
investing in different classes.

AVERAGE ANNUAL TOTAL RETURN

Commencement of
Twelve Months Operations
Ended 7/31/97 Through 7/31/97+

% Return Without Deducting Class A* 36.11% 12.79%
Maximum Sales Charge Class B** 35.16% 11.94%
Class C*** 35.09% 11.92%

% Return After Deducting Class A* 30.01% 11.64%
Maximum Sales Charge Class B** 30.16% 11.64%
Class C*** 34.09% 11.92%

* Maximum sales charge for Class A shares is 4.5% of the public offering
price. Class A shares bear ongoing 12b-1 services fees.
** Maximum contingent deferred sales charge for Class B shares is 5.0% and is
reduced to 0% after six years. Class B shares bear ongoing 12b-1
distribution and service fees.
*** Maximum contingent deferred sales charge for Class C is 1% and is reduced to
0% after 1 year. Class C shares bear ongoing 12b-1 distribution and service
fees.
+ Commencement of operations was February 1, 1993 for Class A, Class B and
Class C shares.

Note: The Fund offers Class Y shares to certain eligible investors, including
INSIGHT Investment Advisory Program Participants. For the year ended July 31,
1997, and since inception, July 26, 1996 through July 31, 1997, Class Y shares
have had an average annual total return of 36.65% and 35.81%, respectively.
Class Y shares do not have initial or contingent deferred sales charges or
ongoing distribution and service fees.
The data above represents past performance of the Fund's shares, which is no
guarantee of future results. The principal value of an investment in the Fund
will fluctuate, so that an investor's shares, when redeemed, may be worth more
or less than their original cost.

<PAGE>

September 15, 1997
PAINEWEBBER SMALL CAP FUND

Dear Shareholder,

We are pleased to present you with the annual report for PaineWebber Small Cap
Fund for the year ended July 31, 1997. Over the period of time covered by this
report, the Fund easily outperformed the average return of its Lipper Peer
Group, as well as the return of one of its benchmark indices, the Russell 2000
Index. A more in-depth discussion of the Fund's performance can be found in the
"Portfolio Review" section.

GENERAL MARKET OVERVIEW

For a brief period of time early in the summer of 1996, a spate of
disappointing earnings announcements contributed to the first meaningful overall
stock market correction since 1994. By August, however, growing investor
confidence began to return money to the market, propelling the Standard & Poor's
500 Stock Index, a commonly used measure of stock market performance, to a
series of record highs through the fall months (a circumstance which underscores
the hazards of market timing). During this time, small capitalization stocks
("small caps"), which have lagged large-caps since the beginning of 1995, also
turned in a strong performance. This was taken as a sign by Wall Street that the
bull market run was poised to broaden to include small cap issues.

While early winter was characterized by significant gains in the stock

market, inflation fears grew quickly in the wake of stronger than expected
economic growth and rising employment. This in turn prompted the Federal Reserve
(the "Fed") to raise interest rates by 25 basis points in March 1997 in a
preemptive strike against inflation, and volatile and difficult financial
markets ensued. However, stocks once again rallied on signs that economic growth
was decelerating and that the Fed would not move again on interest rates. Better
than anticipated corporate earnings, combined with a significant inflow of
capital into equity mutual funds, also helped drive stock prices steadily
higher.

Proof of the market's all-encompassing health during this time was the fact
that a diverse range of sectors--most notably financials, technology and
healthcare--participated in the market's upward movement. And, as hinted at
mid-period, the market did broaden to include smaller capitalization stocks,
which came back especially strong and rose almost as much as large-caps over the
last three months of the period.

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

PAINEWEBER
SMALL CAP FUND

Top Five Sectors
(as a % of net assets as of July 31, 1997)

Other Insurance 12.0%

Information and Computer Services 8.4%

Banks 7.5%

Real Property 5.2%

Electrical Equipment 5.1%

<PAGE>

PAINEWEBBER SMALL CAP FUND ANNUAL REPORT

PORTFOLIO REVIEW

PERFORMANCE
PaineWebber Small Cap Fund's (the "Fund") total return (the net asset value
change with dividends reinvested) for the fiscal year ended July 31, 1997,
without deducting sales charges, was 36.11% for Class A shares, 35.16% for Class
B shares, 35.09% for Class C shares and 36.65% for Class Y shares. For
shareowners who purchased or redeemed Fund shares during the period the Fund's
total return may be lower; for example, after deducting the maximum applicable
sales charges, the Fund's total return for the period was 30.01% for Class A
shares, 30.16% for Class B shares, 34.09% for Class C shares and 36.65% for

Class Y shares.

It has been fifteen months since the Fund's current investment discipline,
which utilizes a computer model known as the Factor Valuation Model (the
"Model") to identify attractive sectors and stocks, was first employed. Over
this period of time, its impact on the Fund's performance has been significant.
For the 12-month period ended July 31, 1997, the Fund's Class A shares handily
outperformed the Lipper Small Cap Peer Group Average of 31.98%, as well as the
31.16% return of one of its benchmark indices, the Russell 2000 Index. It only
slightly underperformed the 37.60% return of its other small cap benchmark
index, the Standard & Poor's 600 Index ("S&P 600").

PORTFOLIO HIGHLIGHTS
A sector-specific area of strong performance during the fiscal year was the
financial sector, which constituted approximately 24% of the portfolio as of
July 31, 1997. Our allocation to this sector was significantly more than the 16%
weighting designated by the S&P 600. However, our position proved profitable for
the Fund as improving valuations, the buoying effects of industry consolidation
and the increasing number of baby boomers who are soliciting the services of
financial services companies helped contribute to the sector's strong showing.
Two noteworthy examples of companies held within the sector are Frontier
Insurance Group Inc. (1.5% of net assets as of July 31, 1997), a consolidation
play whose earnings growth prospects improved as a result of its recent
acquisitions of insurance companies, and Silicon Valley Bancshares (1.5%), an
attractively valued company that benefited from a recovery in the technology and
life science industries.

Our position in technology (18% of net assets as of July 31, 1997) also
proved advantageous for the Fund, and perhaps best serves as an example of the
way in which the Model can help posture the Fund to benefit from changing
industry environments. When the fiscal year began, the portfolio was
substantially underweighted in technology given that the industry was at the
tail end of a slump brought about by overbuilding in 1995. Early in 1997,
however, the Model began to identify attractive technology stocks, including DII
Group Inc. and Oshap Technologies Ltd. (0.3% and 2.0% of net assets,
respectively), which led us to increase our allocation to its present weighting.
Concurrently, the technology sector entered a recovery period, and earnings
growth

- --------------------------------------------------------------------------------
PAINEWEBBER
SMALL CAP FUND
FUND PROFILE

o Goal:
Long-term capital appreciation through small-cap investing

o Portfolio Manager:
Donald R. Jones, MH Asset Management Inc.

o Total Net Assets:
$95.3 million as of July 31, 1997

o Dividend Payments:
Annually

<PAGE>

ANNUAL REPORT

within the sector improved. This is reflected in the 116% and 127% respective
gains experienced by DII and Oshap for the year ended July 31,1997.

Recovery from depressed conditions, particularly that taking place in the
oil services industry, also enhanced performance of the Fund's position in
energy (6.1% of net assets as of July 31, 1997). Overbuilding throughout the
early 1980s plunged the energy sector into a depressed state from which it is
now only recently emerging. Recovery in oil services, perhaps one of the
hardest-hit segments of the sector, has been a case study in the laws of supply
and demand. This is best illustrated when considering the story of Cliffs
Drilling Co. (0.5%), a rental agent of shallow water rigs. Oversupply of these
rigs had, in the past, led to weak pricing. However, recent diminishing supply
and healthy demand have resulted in increased day rates. Cliffs Drilling has
benefited greatly in this environment and, as a result, the price of this
position in the Fund is up 275% for the year ended July 31, 1997.

GALOOB LEWIS TOYS INC--A FOLLOW-UP
As you may recall, in our last annual report we cited Galoob Lewis Toys Inc.
(1.8% of net assets as of July 31, 1997), maker of the Star Wars toy product
line, as an undervalued company that was likely to report a positive earnings
surprise. Initially, our expectations regarding this company were met as the
pending re-release of the Star Wars series of movies generated sales growth for
the company. However, despite its high-profile product line, Galoob was not
immune to a difficult Christmas season--one that resulted in earnings
disappointments for most retailers. Galoob's stock dropped 52% during the month
of December, as expectations over the company leveled out.

This outcome is more a reflection of the overtly sensitive nature of small
caps in general--they tend to be more affected by changes in investor sentiment
than larger capitalization stocks. We still view the stock favorably,
particularly in light of the fact that prequels to the Star Wars series are
believed to be imminent. As such, we continue to include the company within our
portfolio.

<PAGE>

PAINEWEBBER SMALL CAP FUND ANNUAL REPORT

OUTLOOK

- --------------------------------------------------------------------------------
Going forward, we believe that the general environment for small cap stocks
is positive.

Near-term, two factors should encourage small cap performance. A strong
dollar overseas is already having a negative impact on the earnings growth of
many large cap companies--they are more likely to be involved with international
operations. Additionally, a change in the capital gains tax laws may serve as
impetus for renewed investor interest in small cap stocks. Traditionally, small
cap stocks provide returns via capital gains, while large caps do so through a
blend of capital gains and dividends. Under the revised capital gains tax,
long-term capital gains will be taxed at a maximum rate of 20%; dividends,
however, will continue to be taxed at a maximum rate of 39.6%. Although past
performance is no guarantee of future results, historically small caps have
generally outperformed the S&P 500 following a capital gains tax cut.

Longer term, we believe reasonable valuations and superior earnings growth
prospects continue to point to the existence of buying opportunities within the
small-cap market. We will continue to seek investments in relatively less
volatile stocks, particularly within the financial sector. It is our belief that
select regional banks and insurance companies will continue to benefit from
relatively low valuations, ongoing industry consolidation and the
ever-increasing patronage of the baby boomers.

Our ultimate objective in managing your investments is to help you
successfully meet your financial goals. We thank you for your continued support,
and welcome any comments or questions you may have.

Sincerely,

/s/ Margo N. Alexander /s/ Mark A. Tincher
- ---------------------- -------------------
MARGO N. ALEXANDER MARK A. TINCHER
President, Managing Director and
Mitchell Hutchins Asset Management Inc. Chief Investment Officer--
Equity Investments,
Mitchell Hutchins Asset Management Inc.

This letter is intended to assist shareholders in understanding how the Fund
performed during the fiscal year ended July 31, 1997, and reflects our views at
the time we are writing this report. Of course, these views may change in
response to changing circumstances. We encourage you to consult your investment
executive regarding your personal investment program.

5
<PAGE>

PAINEWEBBER SMALL CAP FUND

PERFORMANCE RESULTS(unaudited)

Net Asset Value Total Return 1
----------------------------------------- -------------------------------
12 Months 6 months
07/31/97 01/31/97 07/31/96 Ended 07/31/97 Ended 07/31/97
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $13.42 $11.62 $10.22 36.11% 15.49%
- -----------------------------------------------------------------------------------------------------------------
Class B Shares 13.00 11.29 9.98 35.16 15.15
- -----------------------------------------------------------------------------------------------------------------
Class C Shares 12.98 11.28 9.97 35.09 15.07
- -----------------------------------------------------------------------------------------------------------------
</TABLE>

Performance Summary Class A Shares

Net Asset Value
------------------------
Capital Gains Dividends Total
Period Covered Beginning Ending Distributed Paid Return 1
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
02/01/93-12/31/93 $10.00 $10.62 $0.0168 $0.1281 7.68%
- -----------------------------------------------------------------------------------------------------------------
1994 10.62 9.97 0.5208 -- (1.20)
- -----------------------------------------------------------------------------------------------------------------
1995 9.97 10.81 0.8306 -- 16.81
- -----------------------------------------------------------------------------------------------------------------
1996 10.81 11.40 1.1566 -- 17.45
- -----------------------------------------------------------------------------------------------------------------
01/01/97-07/31/97 11.40 13.42 -- -- 17.72
- -----------------------------------------------------------------------------------------------------------------
Total: $2.5248 $0.1281
- -----------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 07/31/97: 71.82%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>

Performance Summary Class B Shares

<S> <C> <C> <C> <C> <C>
02/01/93-12/31/93 $10.00 $10.61 $0.0168 $0.0631 6.91%
- -----------------------------------------------------------------------------------------------------------------
1994 10.61 9.88 0.5208 -- (1.96)
- -----------------------------------------------------------------------------------------------------------------
1995 9.88 10.62 0.8306 -- 15.90
- -----------------------------------------------------------------------------------------------------------------
1996 10.62 11.08 1.1566 -- 16.50
- -----------------------------------------------------------------------------------------------------------------
01/01/97-07/31/97 11.08 13.00 -- -- 17.33
- -----------------------------------------------------------------------------------------------------------------
Total: $2.5248 $0.0631
- -----------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 07/31/97: 66.11%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>

Performance Summary Class C Shares

Net Asset Value
------------------------
Capital Gains Dividends Total
Period Covered Beginning Ending Distributed Paid Return 1
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
02/01/93-12/31/93 $10.00 $10.61 $0.0168 $0.0682 6.97%
- -----------------------------------------------------------------------------------------------------------------
1994 10.61 9.88 0.5208 -- (1.96)
- -----------------------------------------------------------------------------------------------------------------
1995 9.88 10.61 0.8306 -- 15.84
- -----------------------------------------------------------------------------------------------------------------
1996 10.61 11.07 1.1566 -- 16.52
- -----------------------------------------------------------------------------------------------------------------
01/01/97-07/31/97 11.07 12.98 -- -- 17.25
- -----------------------------------------------------------------------------------------------------------------
Total: $2.5248 $0.0682
- -----------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 07/31/97: 65.97%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>

- ----------

1 Figures assume reinvestment of all dividends and distributions at net asset
value on the payable dates and do not include sales charges; results for each
class would be lower if sales charges were included.

Note: The Fund offers Class Y shares to a limited group of eligible investors,
including the INSIGHT Investment Advisory Program participants. For the year

ended July 31, 1997 and since inception, July 26, 1996 through July 31, 1997,
Class Y shares had a total return of 36.65% and 36.38%, respectively. Class Y
shares do not have initial or contingent deferred sales charges or ongoing
distribution and service fees.

The data above represents past performance of the Fund's shares, which is no
guarantee of future results. The principal value of an investment in the Fund
will fluctuate, so that an investor's shares, when redeemed, may be worth more
or less than their original cost.

<PAGE>

PAINEWEBBER SMALL CAP FUND

PORTFOLIO OF INVESTMENTS JULY 31, 1997

Number of
Shares Value
- -------------- ----------

COMMON STOCK--97.74%

Agriculture, Food & Beverage--0.69%
32,000 Creative Bakeries, Inc.* ............... $ 72,000
4,500 Farmer Brothers Co. .................... 585,000
----------
657,000
----------

Apparel, Retail--1.25%
70,000 Paul Harris Stores Inc.* ............... 1,191,094
----------

Apparel, Textiles--1.85%
150,000 Vans Inc.* ............................. 1,762,500
----------

Banks--7.46%
20,000 Banknorth Group Inc. ................... 970,000
5,000 CCB Financial Corp. .................... 416,250
25,000 Cullen Frost Bankers Inc. .............. 1,168,750
7,500 Netbank Inc.* .......................... 87,891
25,000 Provident Bankshares Corp. ............. 1,190,625
28,000 Silicon Valley Bancshares* ............. 1,396,500
13,000 Texas Regional Bankshares Inc. ......... 529,750
17,000 Westamerica Bancorporation ............. 1,347,250
----------
7,107,016
----------

Chemicals--1.35%
27,000 Cambrex Corp. .......................... 1,289,250
----------

Computer Hardware--2.45%
25,000 Ciprico Inc.* .......................... 418,750
225,000 Oshap Technologies Ltd.* ............... 1,912,500
----------
2,331,250
----------

Computer Software--0.43%
13,000 SPSS Inc.* ............................. 412,750
----------

Consumer Durables--1.04%
48,000 Furniture Brands International Inc.* ... 987,000
----------

Diversified Retail--1.36%
45,000 Shopko Stores Inc. ..................... 1,299,375
----------

Drugs & Medicine--0.81%
50,000 Bio Technology General Corp.* .......... 656,250
60,000 IVC Industries Inc.* ................... 118,125
----------
774,375
----------

Electrical Equipment--5.11%
70,000 Brown & Sharpe Manufacturing Co.* ...... 927,500
5,000 DII Group Inc.* ........................ 256,250
52,000 IFR Systems Inc.* ...................... 1,014,000
30,000 Kemet Corp.* ........................... 768,750
25,000 Orbotech Ltd.* ......................... 890,625
31,000 Tadiran Ltd. ADR ....................... 995,875
2,000 Wandel and Goltermann Technology
Inc.* ................................ 19,750
----------
4,872,750
----------

Electrical Power--2.48%
15,000 AFC Cable Systems Inc.* ................ 429,375
27,000 Hughes Supply Inc. ..................... 695,250
40,000 Kuhlman Corp. .......................... 1,240,000
----------
2,364,625
----------

Electronic Components--0.40%
10,000 CHS Electronics Inc.* .................. 381,875
----------

Energy Reserves & Production--2.52%
38,000 Benton Oil & Gas Co.* .................. 577,125
40,000 KCS Energy Inc. ........................ 870,000
43,000 Lomak Petroleum Inc. ................... 741,750
50,000 Offshore Energy Development Corp.* ..... 212,500
----------
2,401,375
----------

Entertainment--0.29%
10,000 Imax Corp.*(1) ......................... 271,250
----------

Environmental Services--0.28%
135,000 Thermatrix Inc.* ....................... 270,000
----------

Financial Services--3.10%
90,000 Cash America International Inc. ........ 1,018,125
130,000 First Cash Inc.* ....................... 780,000
10,000 Litchfield Financial Corp. ............. 185,000
2,000 Markel Corp.* .......................... 294,000
16,000 Student Loan Corp. ..................... 679,000
----------
2,956,125
----------

Forest Products, Paper--2.80%
48,000 Greif Brothers Corp. ................... 1,488,000
20,000 Mercer International Inc. .............. 195,000
35,998 Mosinee Paper Corp. .................... 980,945
----------
2,663,945
----------

Freight--Air, Sea & Land--1.67%
130,000 Smithway Motor Xpress Corp.* ........... 1,592,500
----------

Heavy Machinery--3.04%
50,000 Cascade Corp. .......................... 884,375
7,500 Manitowoc Inc. ......................... 288,750
100,000 Titan International Inc. ............... 1,725,000
----------
2,898,125
----------

Hotels--1.83%
95,000 Prime Hospitality Corp.*(1) ............ 1,745,625
----------

Industrial Parts--2.52%
110,000 Powell Industries Inc.* ................ 1,815,000

17,000 Robbins & Myers Inc. ................... 586,500
----------
2,401,500
----------
7
<PAGE>

PAINEWEBBER SMALL CAP FUND

Number of
Shares Value
- -------------- ----------

COMMON STOCKS--(continued)

Industrial Services/Supplies--1.82%
45,000 Cornell Corrections Inc.* .............. $ 691,875
55,000 Wackenhut Corp., Class B ............... 1,038,125
----------
1,730,000
----------

Information & Computer Services--8.41%
8,000 Barra Inc.* ............................ 272,000
35,000 Comdisco Inc. .......................... 977,812
10,000 Computer Data Systems Inc. ............. 292,500
30,000 Executive Telecard Ltd.* ............... 238,125
46,900 Factset Research Systems Inc.* ......... 1,286,819
75,000 Lanvision Systems Inc.* ................ 393,750
50,000 Physicians Computer Network Inc.* ...... 381,250
37,000 Pomeroy Computer Resources* ............ 1,184,000
73,000 Union Corp.* ........................... 1,752,000
137,500 Walsh International Inc.* .............. 1,237,500
----------
8,015,756
----------

Leisure--3.57%
75,000 Galoob Lewis Toys Inc.* ................ 1,715,625
16,000 Harman International Industries Inc. ... 636,000
35,000 Meade Instruments Corp.* ............... 284,375
26,250 Movado Group Inc. ...................... 761,250
----------
3,397,250
----------

Life Insurance--1.46%
3,000 Life Re Corp. .......................... 164,250
20,000 Life USA Holdings Inc.* ................ 295,000
16,000 Reinsurance Group of America, Inc. ..... 934,000
----------
1,393,250
----------

Long Distance & Phone Companies--0.66%
25,000 General Communication Inc. ............. 190,625
25,000 Norstan Inc.* .......................... 437,500
----------
628,125
----------

Manufacturing--High Technology--0.33%
15,000 En Pointe Technologies Inc.* ........... 193,125
5,000 Galileo Technology Ltd.* ............... 121,875
----------
315,000
----------

Medical Products--1.12%
30,000 American Science & Engineering Inc.* ... 281,250
46,000 Conmed Corp.* .......................... 787,750
----------
1,069,000
----------

Medical Providers--3.12%
87,500 Counsel Corp.* ......................... 1,356,250
15,000 Hooper Holmes Inc. ..................... 408,750
5,100 Medical Assurance Inc.* ................ 243,525
25,000 Physicians Specialty Corp.* ............ 201,562
100,000 Stericycle Inc.* ....................... 762,500
----------
2,972,587
----------

Mining & Metals--3.24%
30,000 Atchison Casting Corp.* ................ 577,500
23,000 Texas Industries Inc. .................. 747,500
70,000 Valmont Industries Inc. ................ 1,369,375
15,000 Wyman Gordon Co.*(1) ................... 397,500
----------
3,091,875
----------

Motor Vehicles--1.06%
20,000 A.O. Smith Corp. ....................... 716,250
15,000 Donnelly Corp. ......................... 292,500
----------
1,008,750
----------

Oil Services--3.62%
80,000 American Oilfield Divers Inc.* ......... 1,190,000
10,000 Cliffs Drilling Co.* ................... 523,750
20,000 Domain Energy Corp.* ................... 277,500
55,000 Pride International Inc.* .............. 1,454,062
----------

3,445,312
----------

Other Insurance--11.98%
10,000 American Bankers Insurance Group Inc. .. 676,875
15,000 CMAC Investment Corp. .................. 707,813
35,600 Capital Re Corp. ....................... 1,891,250
10,000 Fidelity National Financial Inc. ....... 179,375
9,000 First American Financial Corp. ......... 381,375
15,000 Fremont General Corp. .................. 641,250
46,000 Frontier Insurance Group Inc.(1) ....... 1,434,625
105,000 Gainsco Inc. ........................... 964,687
35,000 Lawyers Title Corp. .................... 756,875
9,000 Leucadia National Corp. ................ 298,125
10,000 MFC Bancorp Ltd. ....................... 76,250
26,000 Orion Capital Corp. .................... 1,087,125
3,000 Philadelphia Consolidated Holding Corp.* 117,750
7,000 RLI Corp. .............................. 262,500
26,000 Stewart Information Services Corp. ..... 593,125
35,000 Terra Nova Bermuda Holdings Ltd.(1) .... 813,750
10,000 Vesta Insurance Group Inc. ............. 532,500
----------
11,415,250
----------
Publishing--0.17%
10,000 CCC Information Services Group, Inc.* .. 160,000
----------

Railroads--0.33%
25,000 Greenbrier Companies Inc. .............. 317,188
----------

<PAGE>

PAINEWEBBER SMALL CAP FUND

Number of
Shares Value
- -------------- ----------

COMMON STOCKS--(concluded)

Real Property--5.16%
90,000 D.R. Horton Inc. .......................$ 1,080,000
40,000 Granite Construction Inc. .............. 830,000
30,000 Griffon Corp.* ......................... 438,750
22,000 Newhall Land & Farming Co. ............. 495,000
59,000 Nobility Homes Inc.* ................... 715,375
45,000 Watsco Inc. ............................ 1,355,625
----------
4,914,750
----------

Restaurants--0.94%
75,000 Casa Ole Restaurants Inc.* ............. 670,313
80,000 Diedrich Coffee Inc.*(1) ............... 225,000
----------
895,313
----------

Semiconductor--1.27%
10,000 Electro Scientific Industries Inc.* .... 500,000
40,000 Tower SemiConductor Ltd. ............... 710,000
----------
1,210,000
----------

Specialty Retail--1.79%
20,000 Florsheim Group Inc.* .................. 295,000
15,000 Inacom Corp.* .......................... 500,625
10,000 Piercing Pagoda Inc.* .................. 290,000
53,000 West Coast Entertainment Corp.* ........ 185,500
20,000 Zale Corp.* ............................ 435,000
----------
1,706,125
----------

Tobacco--1.19%
33,000 Universal Corp. ........................ $1,136,438
----------

Wireless Telecommunications--1.77%
90,000 Smartalk Teleservices Inc.* ............ 1,597,500
20,000 Viatel Inc.* ........................... 92,500
----------
1,690,000
----------
Total Common Stocks (cost--$76,851,257) ................ 93,143,274
----------

Investments of Cash Collateral for
Securities Loaned--4.09%

3,408,209 Liquid Assets Portfolio ................ 3,408,209
3,700 Prime Portfolio ........................ 3,700
3,962 TempCash Portfolio ..................... 3,962
483,629 TempFund Portfolio ..................... 483,629
----------

Total Investments of Cash Collateral for Securities
Loaned (cost--$3,899,500) ........................... 3,899,500
----------

Number of
Warrants
- ----------------
Warrants--0.52%

Agriculture, Food & Beverage--0.52%

500,000 William Greenberg Jr. Desserts &
Cafes *(2) (cost--$550,000) .......... 495,000
----------
<TABLE>
<CAPTION>

Principal
Amount
(000) Maturity Date Interest Rate
--------- ------------- -------------
<S> <C> <C> <C>
Repurchase Agreement--0.99%
$ 940 Repurchase Agreement dated 07/31/97 with
State Street Bank & Trust Company, collateralized
by $959,212 U.S. Treasury Bills, 7.250% due
02/15/98; proceeds: $940,131 (cost--$940,000) ...... 08/01/97 5.000% 940,000
-------------
Total Investments (cost--$82,240,757)--103.34% ................. 98,477,774
Liabilities in excess of other assets--(3.34)% ................. (3,182,146)
-------------
Net Assets--100.00% ............................................ $ 95,295,628
=============

</TABLE>

- --------
* Non-Income producing security
ADR American Depositary Receipt
(1) Security, or a portion thereof, was on loan at July 31,1997.
(2) Illiquid security represents 0.52% of Net Assets.

See accompanying notes to financial statements

<PAGE>

PAINEWEBBER SMALL CAP FUND

STATEMENT OF ASSETS AND LIABILITIES JULY 31, 1997

<S> <C>
Assets

Investments, at value (cost--$82,240,757) .................................................... $98,477,774
Cash ......................................................................................... 97,614
Receivable for investments sold .............................................................. 1,630,899
Receivable for shares of beneficial interest sold ............................................ 163,131

Dividends and interest receivable ............................................................ 39,101
Deferred organizational expenses ............................................................. 69,270
Other assets ................................................................................. 59,888
-----------
Total assets ................................................................................. 100,537,677
-----------

Liabilities

Collateral for securities loaned ............................................................. 3,899,500
Payable for investments purchased ............................................................ 764,940
Payable for shares of beneficial interest repurchased ........................................ 104,271
Payable to affiliate ......................................................................... 137,292
Accrued expenses and other liabilities ....................................................... 336,046
-----------
Total liabilities ............................................................................ 5,242,049
-----------
Net Assets

Beneficial interest shares of $0.001 par value outstanding (unlimited amount authorized) ..... 70,267,182
Accumulated net investment income ............................................................ 605
Accumulated net realized gains from investments .............................................. 8,790,824
Net unrealized appreciation of investments ................................................... 16,237,017
-----------
Net assets ................................................................................... $95,295,628
===========

Class A:

Net assets ................................................................................... $32,967,627
-----------
Shares outstanding ........................................................................... 2,456,190
-----------

Net asset and redemption value per share ..................................................... $13.42
======

Maximum offering price per share (net asset value plus sales charge of 4.50% of offering price) $14.05
======

Class B:

Net assets ................................................................................... $40,748,654
-----------
Shares outstanding ........................................................................... 3,135,502
-----------
Net asset value and offering price per share ................................................. $13.00
======

Class C:

Net assets ................................................................................... $18,811,711
-----------
Shares outstanding ........................................................................... 1,449,392

-----------
Net asset value and offering price per share ................................................. $12.98
======

Class Y:

Net assets ................................................................................... $ 2,767,636
-----------
Shares outstanding ........................................................................... 205,669
-----------
Net asset value, offering price and redemption value per share ............................... $13.46
======

</TABLE>

See accompanying notes to financial statements

<PAGE>

PAINEWEBBER SMALL CAP FUND

STATEMENT OF OPERATIONS

For the Year
Ended
July 31, 1997
-------------
Investment income:

Dividends (net of foreign withholding taxes of $2,771) ............ $ 640,774
Interest .......................................................... 89,525
-----------
730,299
-----------

Expenses:

Investment advisory and administration fees ....................... 873,636
Services fees--Class A ............................................ 75,231
Service and distribution fees--Class B ............................ 367,939
Service and distribution fees--Class C ............................ 177,393
Transfer agency and service fees .................................. 127,565
Federal and state registration fees ............................... 123,935
Reports and notices to shareholders ............................... 120,695
Legal and audit ................................................... 106,416
Amortization of organizational expenses ........................... 94,515
Custody and accounting ............................................ 64,661
Trustees' fees and expenses ....................................... 13,500
Other expenses .................................................... 6,509
-----------

2,151,995
-----------
Net investment loss ............................................... (1,421,696)
-----------
Realized and unrealized gains from investment transactions:

Net realized gains from investment transactions ................... 11,923,735
Net change in unrealized appreciation/depreciation of investments . 16,401,189
-----------
Net realized and unrealized gains from investment transactions .... 28,324,924
-----------
Net increase in net assets resulting from operations .............. $26,903,228
-----------

See accompanying notes to financial statements

11
<PAGE>

PAINEWEBBER SMALL CAP FUND

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>

For the Years
Ended July 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
From operations:

Net investment loss .................................................................. $ (1,421,696) $ (408,651)
Net realized gains from investment transactions ...................................... 11,923,735 7,823,052
Net change in unrealized appreciation/depreciation of investments .................... 16,401,189 (4,208,066)
------------ ------------
Net increase in net assets resulting from operations ................................. 26,903,228 3,206,335
------------ ------------
Distributions to shareholders from:

Net realized gains from investment transactions-Class A .............................. (1,065,273) (2,580,753)
Net realized gains from investment transactions-Class B .............................. (1,348,187) (5,623,020)
Net realized gains from investment transactions-Class C .............................. (663,541) (1,514,097)
Net realized gains from investment transactions-Class Y .............................. (94,831) --
------------ ------------
(3,171,832) (9,717,870)
------------ ------------
From beneficial interest transactions:

Net proceeds from the sale of shares ................................................. 21,265,021 6,234,900
Shares issued in connection with the acquisition of PaineWebber
Small Cap Growth Fund .............................................................. -- 27,156,461
Cost of shares repurchased ........................................................... (41,414,621) (27,176,983)

Proceeds from dividends reinvested ................................................... 3,020,513 9,091,388
------------ ------------
Net increase (decrease) in net assets from beneficial interest transactions .......... (17,129,087) 15,305,766
------------ ------------
Net increase in net assets ........................................................... 6,602,309 8,794,231

Net Assets:

Beginning of period .................................................................. 88,693,319 79,899,088
------------ ------------
End of period (including undistributed net investment income of $605 at July 31, 1997) $ 95,295,628 $ 88,693,319
============ ============

</TABLE>

See accompanying notes to financial statements

<PAGE>

NOTES TO FINANCIAL STATEMENTS

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

PaineWebber Small Cap Fund (the "Fund") is a diversified series of
PaineWebber Securities Trust ("Trust"), which was organized under Massachusetts
law by a Declaration of Trust dated December 3, 1992 and registered with the
Securities and Exchange Commission under the Investment Company Act of 1940, as
amended, as an open-end management investment company. The Trust currently
offers another series of shares, PaineWebber Strategic Income Fund, whose
financial statements are not included herein. The Fund incurred costs in
connection with its organization and the registration of its shares. Such costs
have been deferred and are being amortized using the straight-line method over a
period of benefit of 60 months, beginning with the commencement of investment
operations of the Fund.

The Fund offers Class A, Class B, Class C and Class Y shares. Each class
represents interests in the same assets of the Fund, and the classes are
identical except for differences in their sales charge structures, ongoing
service and distribution charges and certain transfer agency expenses. In
addition, Class B shares and all corresponding dividend reinvested shares
automatically convert to Class A shares approximately six years after initial
issuance. All classes of shares have equal voting privileges, except that Class
A, Class B and Class C shares have exclusive voting rights with respect to their
service and/or distribution plan, if any.

The preparation of financial statements in accordance with generally accepted
accounting principles requires Fund management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates. The following is a summary of
significant accounting policies:

Valuation of Investments--Securities which are listed on U.S. and foreign
stock exchanges are valued at the last sale price on the day the securities are
being valued or, lacking any sales on such day, at the last available bid price.
In cases where securities are traded on more than one exchange, the securities
are generally valued on the exchange designated as the primary market by
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
subsidiary of PaineWebber Incorporated ("PaineWebber"), and investment adviser
and administrator of the Fund. Securities traded in the over-the-counter ("OTC")
market and listed on The Nasdaq Stock Market, Inc. ("Nasdaq") are valued at the
last trade price on Nasdaq prior to the time of valuation; other OTC securities
(other than short term debt securities described below) are valued at the last
quoted bid price in the OTC Market. The amortized cost method of valuation,
which approximates market value, is used to value short-term debt instruments
with sixty days or less remaining to maturity unless the Fund's board of
trustees determines that this does not represent fair value. Securities and
assets for which market quotations are not readily available (including
restricted securities subject to limitations as to their sale) are valued at
fair value as determined in good faith by or under the direction of the Fund's
board of trustees.

Repurchase Agreements--The Fund's custodian takes possession of the
collateral pledged for investments in repurchase agreements. The underlying
collateral is valued daily on a mark-to-market basis to ensure that the value,
including accrued interest, is at least equal to the repurchase price. In the
event of default of the obligation to repurchase, the Fund has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings. The Fund occasionally
participates in joint repurchase agreement transactions with other funds managed
by Mitchell Hutchins.

<PAGE>

NOTES TO FINANCIAL STATEMENTS

Investment Transactions and Investment Income--Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions are calculated using the identified cost method. Interest income is
recorded on an accrual basis and dividend income is recorded on the ex-dividend
date.

Income, expenses (excluding class-specific expenses) and realized/unrealized
gains/losses are allocated proportionately to each class of shares based upon
the relative net asset value of outstanding shares (or the value of
dividend-eligible shares, as appropriate) of each class at the beginning of the
day (after adjusting for current capital share activity of the respective
classes). Class-specific expenses are charged directly to the applicable class
of shares.

Dividends and Distributions--Dividends and distributions to shareholders are

recorded on the ex-dividend date. The amount of dividends and distributions are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification.

Acquisition of PaineWebber Small Cap Growth Fund

Effective as of the close of business on July 26, 1996 (the "Acquisition
Date"), the Fund acquired all of the assets and assumed all of the liabilities
of PaineWebber Small Cap Growth Fund ("Small Cap Growth Fund"). The acquisition
was accomplished by tax-free exchanges of 1,404,733 Class A, 63,270 Class B,
936,155 Class C and 274,241 Class Y shares of the Fund for 1,450,092 Class A,
65,772 Class B, 969,172 Class C and 280,828 Class Y shares of Small Cap Growth
Fund outstanding on the Acquisition Date. Small Cap Growth Fund's net assets at
that date, valued at $27,156,461, including accumulated net realized losses of
$3,287 and net unrealized depreciation of investments of $1,297,019, were
combined with those of the Fund.

Concentration of Risk

Small cap companies may be more vulnerable than larger companies to adverse
business or economic developments. Small cap companies may also have limited
product lines, markets or financial resources, and may be dependent on a
relatively small management group. Securities of such companies may be less
liquid and more volatile than securities of larger companies or the market
averages in general and therefore may involve greater risk than investing in
larger companies. In addition, small cap companies may not be well-known to the
investing public, may not have institutional ownership and may have only
cyclical, static or moderate growth prospects.

Investment Adviser and Administrator

The Fund has an Investment Advisory and Administration Contract ("Advisory
Contract") with Mitchell Hutchins under which Mitchell Hutchins serves as
investment adviser and administrator of the Fund. In accordance with the
Advisory Contract the Fund pays Mitchell Hutchins an investment advisory and
administration fee, which is accrued daily and payable monthly, at the annual
rate of 1.00% of the Fund's average daily net assets. At July 31, 1997, the Fund
owed Mitchell Hutchins $78,577 in investment advisory and administration fees.

<PAGE>

NOTES TO FINANCIAL STATEMENTS

For the year ended July 31, 1997, the Fund paid $3,900 in brokerage
commissions to PaineWebber for transactions executed on behalf of the Fund.

DISTRIBUTION PLANS

Mitchell Hutchins is the distributor of the Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. Under separate
plans of distribution pertaining to Class A, Class B and Class C shares, the
Fund pays Mitchell Hutchins monthly service fees at an annual rate of 0.25% of
the average daily net assets of Class A, Class B and Class C shares and monthly
distribution fees at the annual rate of 0.75% of the average daily net assets of
Class B and Class C shares. At July 31, 1997, the Fund owed Mitchell Hutchins
$55,906 in service and distribution fees.

Mitchell Hutchins also receives the proceeds of the initial sales charges
paid by shareholders upon the purchase of Class A shares and the contingent
deferred sales charges paid by the shareholders upon certain redemptions of
Class A, Class B and Class C shares. Mitchell Hutchins has informed the Fund
that for the year ended July 31, 1997, it received $124,635 in sales charges.

SECURITY LENDING

The Fund may lend up to 33 1/3% of its total assets to qualified
institutions. The loans are secured at all times by cash or U.S. government
securities in an amount at least equal to the market value of the securities
loaned, plus accrued interest and dividends, determined on a daily basis and
adjusted accordingly. The Fund will regain record ownership of loaned securities
to exercise certain beneficial rights; however, the Fund may bear the risk of
delay in recovery of, or even loss of rights in, the securities loaned should
the borrower fail financially. The Fund receives compensation for lending its
securities from interest earned on the cash or U.S. government securities held
as collateral, net of fee rebates paid to the borrower plus reasonable
administrative and custody fees. The Fund's lending agent is PaineWebber, who
received $2,847 as compensation from the Fund for the year ended July 31, 1997.

As of July 31, 1997, the Fund's custodian held cash and cash equivalents
having an aggregate value of $3,899,500 as collateral for portfolio securities
loaned having a market value of $3,737,650.

TRANSFER AGENCY SERVICE FEES

The Fund pays PaineWebber an annual fee of $4.00 per active PaineWebber
shareholder account for certain services not provided by the Fund's transfer
agent. For these services for the year ended July 31, 1997, PaineWebber earned
$35,040 from the Fund. At July 31, 1997, the Fund owed PaineWebber $2,809 for
shareholder service fees.

INVESTMENTS IN SECURITIES

For federal income tax purposes, the cost of securities owned at July 31,
1997 was substantially the same as the cost of securities for financial
statement purposes.

At July 31, 1997, the components of net unrealized appreciation of
investments were as follows:

<TABLE>
<S> <C>
Gross appreciation (investments having an excess of value over cost) ....... $22,076,531

Gross depreciation (investments having an excess of cost over value) ....... (5,839,514)
-----------
Net unrealized appreciation of investments ................................. $16,237,017
===========
</TABLE>

For the year ended July 31, 1997, aggregate purchases and sales of portfolio
securities, excluding short-term securities, were $46,499,152 and $68,837,784,
respectively.
15

<PAGE>

NOTES TO FINANCIAL STATEMENTS

FEDERAL INCOME TAX STATUS

The Fund intends to distribute substantially all of its taxable income and to
comply with the other requirements of the Internal Revenue Code applicable to
regulated investment companies. Accordingly, no provision for federal income
taxes is required. In addition, by distributing during each calendar year
substantially all of its net investment income, capital gains and certain other
amounts, if any, the Fund intends not to be subject to a federal excise tax.

To reflect reclassifications arising from permanent "book/tax" differences
for the year ended July 31, 1997, the Fund`s accumulated net realized gains were
reduced by $1,409,605; accumulated net investment loss was reduced by $1,422,301
and beneficial interest was reduced by $12,696. Permanent book/tax differences
are primarily attributable to net operating losses.

SHARES OF BENEFICIAL INTEREST

There was an unlimited amount of $0.001 par value shares of beneficial
interest authorized. Transactions in shares of beneficial interest were as
follows:

Class A Class B Class C Class Y
Year Ended --------------------- --------------------- --------------------- --------------------
July 31, 1997: Shares Amount Shares Amount Shares Amount Shares Amount
-------- ----------- -------- ----------- -------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold ......... 899,879 $10,405,245 304,294 $3,473,458 640,060 $7,143,793 21,510 $242,525
Shares repurchased .. (1,607,499) (18,331,478) (885,194) (9,720,897) (1,115,991) (12,256,753) (98,489) (1,105,493)
Shares converted from
Class B to Class A .. 68,557 783,133 (70,514) (783,133) -- -- -- --
Dividends reinvested 92,573 1,029,415 117,090 1,265,749 58,505 631,858 8,407 93,491
-------- ----------- -------- ----------- -------- ----------- ------- ---------
Net decrease ........ (546,490) $(6,113,685) (534,324) $(5,764,823) (417,426) $(4,481,102) (68,572) $(769,477)
======== =========== ======== =========== ======== =========== ======= =========

Class A Class B Class C Class Y
Year Ended --------------------- --------------------- --------------------- --------------------
July 31, 1996: Shares Amount Shares Amount Shares Amount Shares Amount
-------- ----------- -------- ----------- -------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold ......... 162,734 $1,784,341 246,297 $2,708,345 158,976 $1,742,214 -- --
Shares issued in
connection with the
acquisition of
PaineWebber Small
Cap Growth Fund .... 1,404,733 14,374,663 63,270 632,216 936,155 9,344,754 274,241 $2,804,828
Shares repurchased .. (729,600) (8,163,423) (1,173,417) (12,903,027) (554,588) (6,110,533) -- --
Shares converted from
Class B to Class A .. 114,185 1,313,683 (115,951) (1,313,683) -- -- -- --
Dividends reinvested 236,526 2,470,300 511,372 5,228,853 136,084 1,392,235 -- --
--------- ----------- -------- ----------- ------- ---------- ------- ----------
Net increase (decrease) 1,188,578 $11,779,564 (468,429) $(5,647,296) 676,627 $6,368,670 274,241 $2,804,828
========= =========== ======== =========== ======= ========== ======= ==========
</TABLE>

<PAGE>

[This Page Intentionally Left Blank]

17
<PAGE>

PAINEWEBBER SMALL CAP FUND

FINANCIAL HIGHLIGHTS

Selected data for a beneficial interest outstanding throughout each period is
presented below:

Class A
-----------------------------------------------------

For the Years Ended For the For the
July 31, Period Year
---------------------------- Ended Ended
July 31, January 31,
1997 1996# 1995 1994+ 1994
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>

Net asset value, beginning of period ............................ $ 10.22 $ 11.30 $ 10.27 $ 10.61 $ 10.00
-------- ------- ------- ------- -------
Net investment income (loss) .................................... (0.14) 0.00@ 0.05 0.02 0.13
Net realized and unrealized gains (losses) from investments ..... 3.75 0.50@ 1.50 (0.36) 0.62
-------- ------- ------- ------- -------
Net increase (decrease) from investment operations .............. 3.61 0.50 1.55 (0.34) 0.75
-------- ------- ------- ------- -------
Dividends from net investment income ............................ -- -- -- -- (0.12)
Distributions from net realized gains from investments .......... (0.41) (1.58) (0.52) -- (0.02)
-------- ------- ------- ------- -------
Total dividends and distributions ............................... (0.41) (1.58) (0.52) 0.00 (0.14)
-------- ------- ------- ------- -------
Net asset value, end of period .................................. $ 13.42 $ 10.22 $ 11.30 $ 10.27 $ 10.61
======== ======= ======= ======= =======
Total investment return (1) ..................................... 36.11 % 4.69% 15.80% (3.20)% 7.58%
======== ======= ======= ======= =======
Ratios/Supplemental Data:
Net assets, end of period (000's) ............................... $ 32,968 $30,675 $20,494 $22,848 $25,226
Expenses to average net assets .................................. 2.00% 2.11% 1.98% 1.91 %* 1.75%
Net investment income (loss) to average net assets .............. (1.16)% 0.02% 0.41% 0.41 %* 1.41%
Portfolio turnover .............................................. 54 % 84% 19% 20 % 98%
Average commission rate paid (2) ................................ $0.0597 -- -- -- --

</TABLE>

- ----------
* Annualized
+ For the period February 1, 1994 to July 31, 1994.
# Effective April 1, 1996, Mitchell Hutchins took over day-to-day management
of the Fund's assets.
@ Calculated using the average shares outstanding for the period.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates, and a sale
at net asset value on the last day of each period reported. The figures do
not include sales charges; results for each class would be lower if sales
charges were included. Total investment returns for periods of less than one
year have not been annualized.
(2) Effective for fiscal years beginning on or after September 1, 1995, the Fund
is required to disclose the average commission rate paid per share of common
stock investments purchased or sold.

<PAGE>

Class B
-----------------------------------------------------

For the Years Ended For the For the
July 31, Period Year

---------------------------- Ended Ended
July 31, January 31,
1997 1996# 1995 1994+ 1994
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ............................ $9.98 $11.15 $10.22 $10.60 $10.00
----- ---- ----- ----- ----
Net investment income (loss) .................................... (0.23) (0.09)@ (0.04) (0.02) 0.06
Net realized and unrealized gains (losses) from investments ..... 3.66 0.50 @ 1.49 (0.36) 0.62
----- ---- ----- ----- ----
Net increase (decrease) from investment operations .............. 3.43 0.41 1.45 (0.38) 0.68
----- ---- ----- ----- ----
Dividends from net investment income ............................ -- -- -- -- (0.06)
Distributions from net realized gains from investments .......... (0.41) (1.58) (0.52) -- (0.02)
----- ---- ----- ----- ----
Total dividends and distributions ............................... (0.41) (1.58) (0.52) 0.00 (0.08)
----- ---- ----- ----- ----
Net asset value, end of period .................................. $13.00 $9.98 $11.15 $10.22 $10.60
===== ==== ===== ===== ====
Total investment return (1) ..................................... 35.16% 3.90 % 14.86 % (3.58)% 6.81%
===== ==== ===== ===== ====

Ratios/Supplemental Data:
Net assets, end of period (000's) ............................... $40,749 $36,612 $46,142 $52,624 $59,993
Expenses to average net assets .................................. 2.75 % 2.90 % 2.74 % 2.69 %* 2.50%
Net investment income (loss) to average net assets .............. (1.91)% (0.78)% (0.35)% (0.37)%* 0.67%
Portfolio turnover .............................................. 54 % 84 % 19 % 20 % 98%
Average commission rate paid (2) ................................ $0.0597 -- -- -- --

</TABLE>

Class C
-----------------------------------------------------

Net asset value, beginning of period ............................ $9.97 $11.14 $10.22 $10.59 $10.00
------ ----- ------ ------ ------
Net investment income (loss) .................................... (0.24) (0.08)@ (0.05) (0.02) 0.06
Net realized and unrealized gains (losses) from investments ..... 3.66 0.49 @ 1.49 (0.35) 0.62
------ ----- ------ ------ ------
Net increase (decrease) from investment operations .............. 3.42 0.41 1.44 (0.37) 0.68
------ ----- ------ ------ ------
Dividends from net investment income ............................ -- -- -- -- (0.07)
Distributions from net realized gains from investments .......... (0.41) (1.58) (0.52) -- (0.02)

------ ----- ------ ------ ------
Total dividends and distributions ............................... (0.41) (1.58) (0.52) 0.00 (0.09)
------ ----- ------ ------ ------
Net asset value, end of period .................................. $12.98 $9.97 $11.14 $10.22 $10.59
====== ===== ====== ====== ======
Total investment return (1) ..................................... 35.09 % 3.90 % 14.76 % (3.49)% 6.77%
====== ===== ====== ====== ======
Ratios/Supplemental Data:
Net assets, end of period (000's) ............................... $18,812 $18,606 $13,263 $16,285 $20,941
Expenses to average net assets .................................. 2.77 % 2.91 % 2.73 % 2.69 %* 2.50%
Net investment income (loss) to average net assets .............. (1.93)% (0.77)% (0.34)% (0.36)%* 0.64%
Portfolio turnover .............................................. 54 % 84 % 19 % 20 % 98%
Average commission rate paid (2) ................................ $0.0597 -- -- -- --

</TABLE>

<PAGE>

PAINEWEBBER SMALL CAP FUND

FINANCIAL HIGHLIGHTS

Selected data for a share of beneficial interest outstanding throughout each
period is presented below:

Class Y
------------------------------
For the For the
Year Ended Period Ended
July 31, 1997 July 31, 1996+
------------- --------------

<S> <C> <C>
Net asset value, beginning of period ...................... $10.21 $10.23
------ ------
Net investment income (loss) .............................. (0.11) 0.00 @
Net realized and unrealized gains (losses) from investments 3.77 (0.02)@
------ ------
Net increase (decrease) from investment operations ........ 3.66 (0.02)
------ ------
Dividends from net investment income ...................... -- --
Distributions from net realized gains from investments .... (0.41) --
------ ------
Total dividends and distributions ......................... (0.41) 0.00
------ ------
Net asset value, end of period ............................ $13.46 $10.21
====== ======
Total investment return (1) ............................... 36.65 % (0.20)%

====== ======
Ratios/Supplemental Data:
Net assets, end of period (000's) ......................... $2,768 $2,801
Expenses to average net assets ............................ 1.72 % 1.72 %*
Net investment income (loss) to average net assets ........ (0.88)% 0.07 %*
Portfolio turnover ........................................ 54 % 84 %
Average commission rate paid (2) .......................... $0.0597 --

</TABLE>

- ----------
* Annualized
+ For the period July 26,1996 (commencement of offering shares) to July
31,1996.
@ Calculated using the average shares outstanding for the period.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates, and a sale
at net asset value on the last day of each period reported. Total investment
return for period of less than one year has not been annualized.
(2) Effective for fiscal years beginning on or after September 1, 1995, the Fund
is required to disclose the average commission rate paid per share of common
stock investments purchased or sold.

<PAGE>

PAINEWEBBER SMALL CAP FUND

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Trustees of
PaineWebber Small Cap Fund

In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of PaineWebber Small Cap Fund (the
"Fund") at July 31, 1997, the results of its operations for the year then ended,
the changes in its net assets for each of the two years in the period then ended
and the financial highlights for each of the periods indicated, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at July 31, 1997 by

correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.

PRICE WATERHOUSE LLP

1177 Avenue of the Americas
New York, New York 10036
September 17, 1997

<PAGE>

PAINEWEBBER SMALL CAP FUND

TAX INFORMATION (unaudited)

We are required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Fund's fiscal year end (July 31,
1997), as to the federal tax status of distributions received by shareholders
during such fiscal year. Accordingly, we are advising you that the distributions
for Class A, Class B, Class C and Class Y shares made during the fiscal year
were derived from short-term and long-term capital gains in the amount of
$0.1443 per share and $0.2623 per share, respectively. Additionally, 51.14% of
the distributions paid qualifies for the dividend received deduction available
to corporate shareholders.

Dividends received by tax-exempt recipients need not be reported as taxable
income. Some retirement trusts (e.g., corporate Keogh and 403(b)(7) plans) may
need this information for their annual reporting.

Because the Fund's fiscal year is not the calendar year, another notification
will be sent in respect of calendar year 1997. The second notification, which
reflects the amount to be used by calendar year taxpayers on their federal
income tax returns, is made in conjunction with Form 1099 DIV and will be mailed
in January 1998. Shareholders are advised to consult their own tax advisers with
respect to the tax consequences of their investment in the Fund.

<PAGE>

TRUSTEES

E. Garrett Bewkes, Jr.
Chairman

Margo N. Alexander
Richard Q. Armstrong
Richard R. Burt
Mary C. Farrell
Meyer Feldberg

George W. Gowen
Frederic V. Malek
Carl W. Schafer

PRINCIPAL OFFICERS

Margo N. Alexander
President

Victoria E. Schonfeld
Vice President

Dianne E. O'Donnell
Vice President and Secretary

Paul H. Schubert
Vice President and Treasurer

Mark A. Tincher
Vice President

Donald R. Jones
Vice President

INVESTMENT ADVISER,
ADMINISTRATOR AND DISTRIBUTOR

Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019

A prospectus containing more complete information for any of the Funds listed on
the back cover can be obtained from a PaineWebber investment executive or
corresponding firm. Read the prospectus carefully before investing.

This report is not to be used in conjunction with the offering of shares of the
Fund unless accompanied or preceded by an effective prospectus.

<PAGE>

PaineWebber offers a family of 22 funds which encompass a diversified range of
investment goals.

BOND FUNDS
o High Income Fund
o Investment Grade Income Fund
o Low Duration U.S. Government Income Fund
o Strategic Income Fund
o U.S. Government Income Fund

TAX-FREE BOND FUNDS
o California Tax-Free Income Fund
o Municipal High Income Fund
o National Tax-Free Income Fund
o New York Tax-Free Income Fund

STOCK FUNDS
o Capital Appreciation Fund
o Financial Services Growth Fund
o Growth Fund
o Growth and Income Fund
o Small Cap Fund
o Utility Income Fund

ASSET ALLOCATION FUNDS
o Balanced Fund
o Tactical Allocation Fund

GLOBAL FUNDS
o Asia Pacific Growth Fund
o Emerging Markets Equity Fund
o Global Equity Fund
o Global Income Fund

PAINEWEBBER MONEY MARKET FUND

PaineWebber
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SMALL
CAP
FUND

July 31, 1997

ANNUAL REPORT