PRUDENTIAL TAX MANAGED FUNDS, 485BPOS, 2001-01-16

PRUDENTIAL TAX MANAGED FUNDS
485BPOS, 2001-01-16

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 2001

REGISTRATION NO. 333-66895
811-09101
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM N-1A

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 / /

PRE-EFFECTIVE AMENDMENT NO. / /

POST-EFFECTIVE AMENDMENT NO. 11 /X/

AND/OR

REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /

AMENDMENT NO. 12 /X/

(Check appropriate box or boxes)

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

PRUDENTIAL TAX-MANAGED FUNDS
(Exact name of registrant as specified in charter)

GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices)(Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7525

MARGUERITE E.H. MORRISON, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Name and Address of Agent for Service)
Approximate date of proposed public offering:
As soon as practicable after the effective
date of the Registration Statement.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):

/X/ immediately upon filing pursuant to paragraph (b)

/ / on (date) pursuant to paragraph (b)

/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:

/ / this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.

Title of Securities Being Registered...Shares of Beneficial Interest, $.001
par value per share.

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<PAGE>

PROSPECTUS AND FINANCIAL PRIVACY NOTICE JANUARY 16, 2001

PRUDENTIAL
TAX-MANAGED EQUITY FUND

FUND TYPE Stock

OBJECTIVE Long-term after-tax growth of capital
Build on the Rock

As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the Fund's shares, nor has the SEC determined that this
prospectus is complete or accurate. It is a criminal offense to state otherwise.

[PRUDENTIAL LOGO]
<PAGE>
TABLE OF CONTENTS
-------------------------------------

<TABLE>
<S> <C>
1 RISK/RETURN SUMMARY
1 Investment Objective and Principal Strategies
1 Principal Risks
3 Evaluating Performance
4 Fees and Expenses

6 HOW THE FUND INVESTS
6 Investment Objective and Policies
7 Other Investments and Strategies
10 Investment Risks

13 HOW THE FUND IS MANAGED
13 Board of Trustees
13 Manager
13 Investment Adviser
13 Portfolio Managers
14 Distributor

15 FUND DISTRIBUTIONS AND TAX ISSUES
15 Distributions
16 Tax Issues
17 If You Sell or Exchange Your Shares

19 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND
19 How to Buy Shares
27 How to Sell Your Shares
31 How to Exchange Your Shares
32 Telephone Redemptions or Exchanges

34 FINANCIAL HIGHLIGHTS
34 Class A and Class B Shares
35 Class C and Class Z Shares

36 THE PRUDENTIAL MUTUAL FUND FAMILY

i Your Financial Security, Your Satisfaction & Your Privacy

FOR MORE INFORMATION (Back Cover)
</TABLE>

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PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
-------------------------------------

This section highlights key information about the PRUDENTIAL TAX-MANAGED EQUITY
FUND, which we refer to as "the Fund." The Fund is a series of Prudential
Tax-Managed Funds ("the Company"). Additional information follows this summary.

INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is LONG-TERM AFTER-TAX GROWTH OF CAPITAL. We seek
investments that will appreciate over time. We also try to reduce the taxes
shareholders pay on the Fund's investment income and capital gains. We normally
invest at least 65% of the Fund's total assets in common stock and convertible
securities of large and medium-sized U.S. companies. We try to limit taxes by
attempting to avoid short-term capital gains and by selling securities that have
fallen in value in order to generate losses that can be used to offset realized
capital gains on other securities. We also try to limit taxes on investment
income by investing in lower-yielding equity securities. We may use hedging
techniques to help limit taxable income and capital gains. We also may use
derivatives to improve the Fund's returns.

The Fund tries to outperform the returns of Standard & Poor's 500 Composite
Stock Price Index (S&P 500 Index) on an after-tax basis over the long term.
While we make every effort to achieve our objective, we can't guarantee success.

PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Since the Fund
invests primarily in common stock and convertible securities, there is the risk
that the price of a particular stock we own could go down, or the value of the
equity markets or a sector of them could go down. Stock markets are

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A DIVERSIFIED CORE HOLDING

A team of Prudential Investments' quantitative portfolio managers manages the
Fund using their judgment and a quantitative stock selection model to evaluate
growth potential, valuation, liquidity and investment risk. They try to select
common stock and convertible securities that will provide strong capital
appreciation, while trying to limit both the effects of taxation and the
differences in portfolio characteristics from those of the overall stock market.
The portfolio will normally consist of at least 200 securities selected from a
universe that presently consists of about 1,000 well-followed large and mid-
capitalization stocks.

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1
<PAGE>
RISK/RETURN SUMMARY
------------------------------------------------

volatile. Generally, the stock prices of large and medium-sized companies are
more stable than the stock prices of small companies. The Fund's holdings can
vary significantly from broad market indexes, and performance of the Fund can
deviate from the performance of such indexes.
Some of our investment strategies--such as using derivatives--involve
above-average risks. The Fund may use hedging techniques to help limit taxes,
preserve assets and enhance return, including using options and financial
futures or stock index futures contracts. Derivatives may not fully offset the
underlying positions and this could result in losses to the Fund that would not
otherwise have occurred.
Like any mutual fund, an investment in the Fund could lose value, and you
could lose money. For more detailed information about the risks associated with
the Fund, see "How the Fund Invests--Investment Risks."
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.

THE FUND IS DESIGNED FOR LONG-TERM TAXABLE INVESTORS.

If you are investing for the short term (less than one year), you may suffer
negative tax consequences. Market conditions may limit the Fund's ability to
generate tax losses or to avoid dividend income. Excessive shareholder
redemptions may require the Fund to sell securities and realize gains. While the
Fund tries to limit the extent to which shareholders incur taxes on Fund
distributions of income and net realized gains, the Fund expects to distribute
taxable income or capital gains from time to time.

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2 PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
------------------------------------------------

EVALUATING PERFORMANCE

A number of factors--including risk--can affect how the Fund performs. The
following bar chart shows the Fund's performance for its only full calendar year
of operation. The bar chart and table below demonstrate the risk of investing in
the Fund by showing how returns can change and by showing how the Fund's average
annual total returns compare with a stock index and a group of similar mutual
funds. Past performance does not mean that the Fund will achieve similar results
in the future.

ANNUAL RETURN* (CLASS A SHARES)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
2000 -6.11%
BEST QUARTER: 4.31% (1st quarter of 2000)
WORST QUARTER: -7.99% (4th quarter of 2000)
</TABLE>

* THE ANNUAL RETURN DOES NOT INCLUDE SALES CHARGES. IF THE SALES CHARGES WERE
INCLUDED, THE ANNUAL RETURN WOULD BE LOWER THAN THAT SHOWN. WITHOUT THE
DISTRIBUTION AND SERVICE (12b-1) FEE WAIVER, THE ANNUAL RETURN WOULD HAVE BEEN
LOWER, TOO.

AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-00)

<TABLE>
<CAPTION>
1 YR SINCE INCEPTION
<S> <C> <C>
Class A shares -10.81% 5.06% (since 3-3-99)
Class B shares -11.80% 5.18% (since 3-3-99)
Class C shares -8.47% 6.67% (since 3-3-99)
Class Z shares -5.93% 8.34% (since 3-3-99)
S&P 500 Index(2) -9.10% 4.81% (since 3-3-99)
Lipper Average(3) -8.96% 6.40% (since 3-3-99)
</TABLE>

1 THE FUND'S RETURNS ARE AFTER DEDUCTION OF SALES CHARGES AND EXPENSES.
WITHOUT THE DISTRIBUTION AND SERVICE (12b-1) FEE WAIVER FOR CLASS A SHARES,
THE RETURNS WOULD HAVE BEEN LOWER.
2 THE STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX (S&P 500 INDEX)--AN
UNMANAGED INDEX OF 500 STOCKS OF LARGE U.S. COMPANIES--GIVES A BROAD LOOK
AT HOW STOCK PRICES HAVE PERFORMED. THESE RETURNS DO NOT INCLUDE THE EFFECT
OF ANY SALES CHARGES OR OPERATING EXPENSES OF A MUTUAL FUND. THESE RETURNS
WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF SALES CHARGES AND OPERATING
EXPENSES. SOURCE: LIPPER INC.
3 THE LIPPER AVERAGE IS BASED ON THE AVERAGE RETURN OF ALL MUTUAL FUNDS IN
THE LIPPER LARGE-CAP CORE FUNDS CATEGORY AND DOES NOT INCLUDE THE EFFECT OF
ANY SALES CHARGES. AGAIN, THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE
EFFECT OF SALES CHARGES. SOURCE: LIPPER INC.

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3
<PAGE>
RISK/RETURN SUMMARY
------------------------------------------------

FEES AND EXPENSES

This table shows the sales charges, fees and expenses that you may pay if you
buy and hold shares of each share class of the Fund--Class A, B, C and Z. Each
share class has different sales charges--known as loads--and expenses, but
represents an investment in the same fund. Class Z shares are available only to
a limited group of investors. For more information about which share class may
be right for you, see "How to Buy, Sell and Exchange Shares of the Fund."

SHAREHOLDER FEES(1) (PAID DIRECTLY FROM YOUR INVESTMENT)

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Maximum sales charge (load)
imposed on purchases (as a
percentage of offering
price) 5% None 1% None
Maximum deferred sales
charge (load) (as a
percentage of the lower of
original purchase price or
sale proceeds) None 5%(2) 1%(3) None
Maximum sales charge (load)
imposed on reinvested
dividends and other
distributions None None None None
Redemption fees None None None None
Exchange fee None None None None
</TABLE>

ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Management fees .65% .65% .65% .65%
+ Distribution and service
(12b-1) fees .30%(4) 1.00% 1.00% None
+ Other expenses .19% .19% .19% .19%
= Total annual Fund
operating expenses 1.14% 1.84% 1.84% .84%
- Fee waiver or expense
reimbursement .05% None None None
= NET ANNUAL FUND OPERATING
EXPENSES 1.09%(4) 1.84% 1.84% .84%
</TABLE>

1 YOUR BROKER MAY CHARGE YOU A SEPARATE OR ADDITIONAL FEE FOR PURCHASES AND
SALES OF SHARES.
2 THE CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B SHARES DECREASES BY
1% ANNUALLY TO 1% IN THE FIFTH AND SIXTH YEARS AND 0% IN THE SEVENTH YEAR.
CLASS B SHARES CONVERT TO CLASS A SHARES APPROXIMATELY SEVEN YEARS AFTER
PURCHASE.
3 THE CDSC FOR CLASS C SHARES IS 1% FOR SHARES REDEEMED WITHIN 18 MONTHS OF
PURCHASE.
4 FOR THE FISCAL YEAR ENDING 10-31-01, THE DISTRIBUTOR OF THE FUND HAS
CONTRACTUALLY AGREED TO REDUCE ITS DISTRIBUTION AND SERVICE (12b-1) FEES
FOR CLASS A SHARES TO .25 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE
CLASS A SHARES.

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4 PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
------------------------------------------------

EXAMPLE
This example will help you compare the fees and expenses of the Fund's different
share classes and 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. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same, except for the Distributor's
reduction of distribution and service (12b-1) fees for Class A shares during the
first year. Although your actual costs may be higher or lower, based on these
assumptions, your costs would be:

<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $606 $839 $1,092 $1,813
Class B shares $687 $879 $1,095 $1,889
Class C shares $385 $673 $1,086 $2,237
Class Z shares $ 86 $268 $ 466 $1,037
</TABLE>

You would pay the following expenses on the same investment if you did not sell
your shares:

<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $606 $839 $1,092 $1,813
Class B shares $187 $579 $ 995 $1,889
Class C shares $285 $673 $1,086 $2,237
Class Z shares $ 86 $268 $ 466 $1,037
</TABLE>

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5
<PAGE>
HOW THE FUND INVESTS
-------------------------------------

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is LONG-TERM AFTER-TAX GROWTH OF CAPITAL. This
means we seek investments that will appreciate over time. We also try to limit
current and future taxes shareholders pay on the Fund's investment income and
capital gains. Our goal is to outperform the returns of the S&P 500 Index on an
after-tax basis over the long term. While we make every effort to achieve our
objective, we can't guarantee success.

In pursuing our objective, we normally invest at least 65% of the Fund's
total assets in COMMON STOCK and CONVERTIBLE SECURITIES of large and
medium-sized U.S. companies. We consider large and medium-sized companies to be
those with market capitalizations above $1.2 billion. Market capitalization is
measured at the time of initial purchase so that companies whose capitalization
no longer meets this definition after purchase continue to be considered large
and medium-sized for purposes of achieving our investment objective. We may
change the kind of companies we consider large and medium-sized to reflect
industry norms.
We use a quantitative stock selection model to help us decide which common
stocks to buy. The model evaluates growth potential, valuation, liquidity and
investment risk.
Convertible securities are securities--like bonds, corporate notes and
preferred stock--that we can convert into the company's common stock or some
other equity security. The Fund also invests in other equity-related securities,
including American Depositary Receipts (ADRs); nonconvertible preferred stock;
warrants and rights that can be exercised to obtain stock; investments in
various types of business ventures, including partnerships and joint ventures
and similar securities.
Our strategy is long-term capital appreciation while limiting the taxes you
incur from investment income and realized capital gains. Distributions of net
investment income and net realized short-term gains (on stocks held one year or
less) are taxed as ordinary income, at rates as high as 39.6%. Distributions of
realized long-term gains (on stocks held more than one year) are taxed at rates
up to 20%. Price appreciation (an unrealized gain)

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OUR TAX-MANAGED APPROACH
Taxes are a major influence on the net returns that you receive on your taxable
investments. We try to achieve long-term after-tax returns for you by managing
our investments so as to limit and defer the taxes you incur as a result of your
investment in the Fund.
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6 PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
------------------------------------------------

is not subject to current federal tax. We try to limit taxes by attempting to
avoid short-term capital gains. We also try to limit taxes on investment income
by investing in lower-yielding equity securities. However, a portion of the
Fund's securities may offer high potential capital appreciation and a yield
component.
When deciding whether to sell securities, we will consider the negative tax
impact of realizing capital gains and the positive tax impact of realizing
capital losses. We sometimes may defer the sale of a security until the realized
capital gain would qualify as a long-term capital gain. We also may sell a
security to realize a capital loss that can be used to offset realized capital
gains. When selling a portion of a holding, we may sell those securities with a
higher cost basis first. The portfolio managers may employ tax-advantaged
hedging techniques such as using options to protect the value of a holding
without selling the security.

For more information, see "Investment Risks" below and the Statement of
Additional Information, "Description of the Fund, Its Investments and Risks."
The Statement of Additional Information--which we refer to as the SAI--contains
additional information about the Fund. To obtain a copy, see the back cover page
of this prospectus.

The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board can change investment policies
that are not fundamental.

OTHER INVESTMENTS AND STRATEGIES
In addition to the principal strategies, we also may use the following
investment strategies to try to increase the Fund's returns or protect its
assets if market conditions warrant.

FOREIGN SECURITIES

We may invest in FOREIGN SECURITIES, including money market instruments and
other fixed-income securities, common stock and other equity-related securities.
We do not consider ADRs and other similar receipts or shares to be foreign
securities.

MONEY MARKET INSTRUMENTS

We may temporarily hold cash or high quality foreign or domestic money market
instruments until we invest the proceeds of new Fund sales or to meet ordinary
daily cash needs.

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7
<PAGE>
HOW THE FUND INVESTS
------------------------------------------------

REPURCHASE AGREEMENTS

The Fund may also use REPURCHASE AGREEMENTS, where a party agrees to sell a
security to the Fund and then repurchase it at an agreed-upon price at a stated
time. This creates a fixed return for the Fund and is, in effect, a loan by the
Fund. The Fund uses repurchase agreements for cash management purposes only.

TEMPORARY DEFENSIVE INVESTMENTS

In response to adverse market, economic or political conditions, we may
temporarily invest up to 100% of the Fund's assets in money market instruments.
Investing heavily in these securities limits our ability to achieve capital
appreciation, but can help to preserve the Fund's assets when the equity markets
are unstable.

DERIVATIVE STRATEGIES
TAX-ADVANTAGED HEDGING
To protect against price declines in our holdings that have developed large
accumulated capital gains, we may use hedging techniques to help reduce taxes,
including the purchase of put options on securities held, and financial and
stock index futures contracts. Using these techniques rather than selling these
securities may reduce exposure to price declines in certain securities without
realizing substantial capital gains under current tax law. Our ability to use
these strategies as a tax management technique for holdings of appreciated
securities is limited--certain hedging transactions must be closed out within 30
days after the end of the taxable year. Our ability to use different
tax-management strategies may be limited in the future by market volatility,
excessive shareholder redemptions or changes in tax law.
We expect that by using various tax management strategies, we can reduce the
extent to which you incur taxes on Fund distributions of income and net realized
gains. Even so, we expect to distribute taxable income or capital gains from
time to time.

OTHER DERIVATIVE STRATEGIES

We may use various derivative strategies to try to improve the Fund's returns.
We may use hedging techniques to try to protect the Fund's assets. We cannot
guarantee that these strategies will work, that the instruments necessary to
implement these strategies will be available or that the Fund will not lose
money. Derivatives--such as futures, options, foreign currency forward contracts
and options on futures--involve costs and can be volatile. With derivatives, the
investment adviser tries to predict whether the

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8 PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
------------------------------------------------

underlying investment--a security, market index, currency, interest rate or some
other benchmark--will go up or down at some future date. We may use derivatives
to try to reduce risk or to increase return consistent with the Fund's overall
investment objective. The investment adviser will consider other factors (such
as cost) in deciding whether to employ any particular strategy or use any
particular instrument. Any derivatives we use may not match the Fund's
underlying holdings.

OPTIONS. The Fund may purchase and sell put and call options on equity
securities and financial indexes traded on U.S. or foreign securities exchanges
or in the over-the-counter market. An OPTION is the right to buy or sell
securities in exchange for a premium. The Fund will sell only covered options.

FUTURES CONTRACTS AND RELATED OPTIONS
FOREIGN CURRENCY FORWARD CONTRACTS. The Fund may purchase and sell financial
futures contracts and related options on financial futures. A FUTURES CONTRACT
is an agreement to buy or sell a set quantity of an underlying product at a
future date, or to make or receive a cash payment based on the value of a
securities index. The Fund also may enter into foreign currency forward
contracts to protect the value of its assets against future changes in the level
of foreign exchange rates. A FOREIGN CURRENCY FORWARD CONTRACT is an obligation
to buy or sell a given currency on a future date at a set price.

For more information about these strategies, see the SAI, "Description of
the Fund, Its Investments and Risks--Risk Management and Return Enhancement
Strategies."

ADDITIONAL STRATEGIES

The Fund also follows certain policies when it BORROWS MONEY (the Fund can
borrow up to 33 1/3% of the value of its total assets); LENDS ITS SECURITIES to
others for cash management purposes (the Fund can lend up to 33 1/3% of the
value of its total assets, including collateral received in the transaction);
and HOLDS ILLIQUID SECURITIES (the Fund may hold up to 15% of its net assets in
illiquid securities, including securities with legal or contractual restrictions
on resale, those without a readily available market and repurchase agreements
with maturities longer than seven days). The Fund is subject to certain
investment restrictions that are fundamental policies, which means they cannot
be changed without shareholder approval. For more information about these
restrictions, see the SAI.

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9
<PAGE>
HOW THE FUND INVESTS
------------------------------------------------

INVESTMENT RISKS

As noted, all investments involve risk, and investing in the Fund is no
exception. Since the Fund's holdings can vary significantly from broad market
indexes, performance of the Fund can deviate from performance of the indexes.
This chart outlines the key risks and potential rewards of the Fund's principal
investments and certain other non-principal investments the Fund may make. The
investment types are listed in the order in which they normally will be used by
the portfolio managers. See, too, "Description of the Fund, Its Investments and
Risks" in the SAI.

INVESTMENT TYPE

<TABLE>
<CAPTION>
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
------------------------------------------------------------------------------------------------------------------------
TAX-RELATED INVESTING -- Sharply rising market may limit -- Lower current taxes and future
the ability to generate tax tax liability
AT LEAST 65% losses -- Higher after-tax returns
-- Sharply falling market may
create unavoidable increases
in dividend yield
-- Tax law changes may limit the
effectiveness of some
strategies
-- Excessive shareholder
redemptions may require
realizing unintended capital
gains
-- Lower pre-tax returns
------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND CONVERTIBLE SECURITIES -- Individual stocks could lose -- Historically, stocks have
OF U.S. COMPANIES value outperformed other investments
-- The equity markets could go over the long term
AT LEAST 65% down, resulting in a decline -- Generally, economic growth
in value of the Fund's means higher corporate
investments profits, which leads to an
-- Changes in economic or increase in stock prices,
political conditions, both known as capital appreciation
domestic and international,
may result in a decline in
value of the Fund's
investments
------------------------------------------------------------------------------------------------------------------------
</TABLE>

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10 PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
------------------------------------------------

INVESTMENT TYPE (CONT'D)

<TABLE>
<CAPTION>
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
------------------------------------------------------------------------------------------------------------------------
FOREIGN SECURITIES -- Foreign markets, economies and -- Investors can participate in
political systems may not be the growth of foreign markets
UP TO 35%; USUALLY LESS THAN 10% as stable as in the U.S. and companies operating in
-- Currency risk--changing values those markets
of foreign currencies can -- May profit from changing value
cause losses of foreign currencies
-- May be less liquid than U.S. -- Opportunities for
stocks and bonds diversification
-- Differences in foreign laws,
accounting standards, public
information, custody and
settlement practices provide
less reliable information on
foreign investments and
involve more risk
------------------------------------------------------------------------------------------------------------------------
DERIVATIVES -- Derivatives such as futures, -- Hedges that correlate well with
options and foreign currency the underlying positions can
PERCENTAGE VARIES; USUALLY LESS THAN 10% forward contracts that are reduce or eliminate investment
used for hedging purposes to income or capital gains at low
avoid taxes may not fully cost
offset the underlying -- The Fund could make money and
positions and this could protect against losses if the
result in losses to the Fund investment analysis proves
that would not have otherwise correct
occurred -- Derivatives that involve
-- Derivatives used for risk leverage could generate
management may not have the substantial gains at low cost
intended effects and may -- One way to manage the Fund's
result in losses or missed risk/return balance is by
opportunities locking in the value of an
-- The other party to a investment ahead of time
derivatives contract could
default
-- Derivatives that involve
leverage could magnify losses
-- Certain types of derivatives
involve costs to the Fund that
can reduce returns
------------------------------------------------------------------------------------------------------------------------
</TABLE>

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11
<PAGE>
HOW THE FUND INVESTS
------------------------------------------------

INVESTMENT TYPE (CONT'D)

<TABLE>
<CAPTION>
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
------------------------------------------------------------------------------------------------------------------------
ILLIQUID SECURITIES -- May be difficult to value -- May offer a more attractive
precisely yield or potential for growth
UP TO 15% OF NET ASSETS -- May be difficult to sell at the than more widely traded
time or price desired securities
------------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS -- Limits potential for capital -- May preserve the Fund's assets
appreciation
UP TO 100% ON A TEMPORARY BASIS -- Credit risk--the risk that the
default of an issuer would
leave the Fund with unpaid
interest or principal
-- Market risk--the risk that
instruments may lose value in
the market because interest
rates change or there is a
lack of confidence in a group
of borrowers or an industry
------------------------------------------------------------------------------------------------------------------------
</TABLE>

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12 PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
HOW THE FUND IS MANAGED
-------------------------------------

BOARD OF TRUSTEES
The Board of Trustees oversees the actions of the Manager, Investment Adviser
and Distributor and decides on general policies. The Board also oversees the
Company's officers, who conduct and supervise the daily business operations of
the Fund.

MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102-4077

Under a management agreement with the Fund, PIFM manages the Fund's
investment operations and administers its business affairs. PIFM also is
responsible for supervising the Fund's investment adviser. For the fiscal year
ended October 31, 2000, the Fund paid PIFM management fees of .65% of the Fund's
average net assets.

PIFM and its predecessors have served as manager or administrator to
investment companies since 1987. As of December 31, 2000, PIFM served as the
manager to all 39 of the Prudential mutual funds, and as manager or
administrator to 21 closed-end investment companies, with aggregate assets of
approximately $76 billion.

INVESTMENT ADVISER

The Prudential Investment Corporation, called Prudential Investments, is the
Fund's investment adviser and has served as an investment adviser to investment
companies since 1984. Its address is Prudential Plaza, 751 Broad Street, Newark,
NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and pays Prudential Investments for its
services at the annual rate of .325% of the Fund's average net assets up to
$500 million and .285% of the Fund's average net assets over $500 million.

PORTFOLIO MANAGERS

The Fund is co-managed by JAMES SCOTT, Ph.D., MARK STUMPP, Ph.D., and TED
LOCKWOOD. They have been portfolio managers since the Fund's inception.

James Scott, Ph.D., is a Senior Managing Director of Prudential Investments
Quantitative Management, a unit of Prudential Investments. He

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13
<PAGE>
HOW THE FUND IS MANAGED
------------------------------------------------

has managed balanced and equity portfolios for Prudential's pension plans and
institutional clients since 1987. Mr. Scott has 25 years of investment
experience. He received a B.A. from Rice University and an M.S. and a Ph.D. from
Carnegie Mellon University.

Mark Stumpp, Ph.D., is a Senior Managing Director of Prudential Investments.
He chairs the Quantitative Management group's Investment Policy Committee and is
responsible for its model portfolio. Mr. Stumpp developed the group's tactical
asset allocation algorithm. He also developed and oversees the methodology
underlying the group's actively managed equity portfolios. He has managed mutual
fund portfolios since 1995 and has managed investment portfolios for over
12 years. Mr. Stumpp has 20 years of investment experience. He received a B.A.
from Boston University and an M.A. and a Ph.D. from Brown University.

Ted Lockwood is Managing Director of Equity Management of Prudential
Investments, which includes quantitative equity, derivative and index funds. He
joined Prudential in 1988 and has over 14 years of investment experience.
Mr. Lockwood is also responsible for investment research, new product
development and managing balanced portfolios on behalf of institutional clients.
He received a B.S. from the State University of New York at Stony Brook and an
M.B.A. and an M.S. from Columbia University.

Messrs. Scott, Stumpp and Lockwood lead a team of 17 investment
professionals, eight of whom hold Ph.D.s, with over 200 years of combined
experience. The team is currently responsible for the management of over
$40 billion in assets.

DISTRIBUTOR

Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 of the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing the
Fund's Class A, B, C and Z shares and provides certain shareholder support
services. The Fund pays distribution and other fees to PIMS as compensation for
its services for each class of shares other than Class Z. These fees--known as
12b-1 fees--are shown in the "Fees and Expenses" tables.

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14 PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
-------------------------------------

Investors who buy shares of the Fund should be aware of some important tax
issues. For example, although the Fund tries to limit the amount of its taxable
distributions, the Fund distributes DIVIDENDS of ordinary income and any
realized net CAPITAL GAINS to shareholders. These distributions are subject to
taxes, unless you hold your shares in a 401(k) plan, an Individual Retirement
Account (IRA) or some other qualified or tax-deferred plan or account. Dividends
and distributions from the Fund also may be subject to state and local income
taxes. THE FUND IS DESIGNED FOR LONG-TERM TAXABLE INVESTORS.

Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless you hold your
shares in a qualified or tax-deferred plan or account.

The following briefly discusses some of the important federal tax issues you
should be aware of, but is not meant to be tax advice. For tax advice, please
speak with your tax adviser.

DISTRIBUTIONS
The Fund may realize taxable gains even though it tries to limit them. The Fund
also tries to limit taxable dividend distributions, but believes it will
distribute some taxable income.

The Fund distributes DIVIDENDS of any net investment income to
shareholders--typically once a year. For example, if the Fund owns ACME Corp.
stock and the stock pays a dividend, the Fund will pay out a portion of this
dividend to its shareholders, assuming the Fund's income is more than its costs
and expenses. The dividends you receive from the Fund will be taxed as ordinary
income, whether or not they are reinvested in the Fund.

The Fund also distributes realized net CAPITAL GAINS to shareholders--
typically once a year. Capital gains are generated when the Fund sells its
assets for a profit. For example, if the Fund bought 100 shares of ACME Corp.
stock for a total of $1,000 and more than one year later sold the shares for a
total of $1,500, the Fund has net long-term capital gains of $500, which it will
pass on to shareholders (assuming the Fund's total gains are greater than any
losses it may have). Capital gains are taxed differently depending on how long
the Fund holds the security--if a security is held more than one year before it
is sold, LONG-TERM capital gains are taxed at the rate of 20%, but if the
security is held one year or less, SHORT-TERM
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FUND DISTRIBUTIONS
AND TAX ISSUES
------------------------------------------------

capital gains are taxed at ordinary income rates of up to 39.6%. Different rates
apply to corporate shareholders.

For your convenience, Fund distributions of dividends and capital gains are
AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask us to
pay the distributions in cash, we will send you a check if your account is with
the Transfer Agent. Otherwise, if your account is with a broker, you will
receive a credit to your account. Either way, the distributions may be subject
to taxes, unless your shares are held in a qualified or tax-deferred plan or
account. For more information about automatic reinvestment and other shareholder
services, see "Step 4: Additional Shareholder Services" in the next section.

TAX ISSUES
FORM 1099

Every year, you will receive a FORM 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own shares
of the Fund as part of a qualified or tax-deferred plan or account, your taxes
are deferred, so you will not receive a Form 1099. However, you will receive a
Form 1099 when you take any distributions from your qualified or tax-deferred
plan or account.

Fund distributions are generally taxable to you in the calendar year they
are received, except when we declare certain dividends in the fourth quarter and
actually pay them in January of the following year. In such cases, the dividends
are treated as if they were paid on December 31 of the prior year. Corporate
shareholders generally are eligible for the 70% dividends-received deduction for
certain dividends.

WITHHOLDING TAXES
If federal tax law requires you to provide the Fund with your taxpayer
identification number and certifications as to your tax status, and you fail to
do this, or if you are otherwise subject to backup withholding, we will withhold
and pay to the U.S. Treasury 31% of your distributions and sale proceeds.
Dividends of net investment income and short-term capital gains paid to a
nonresident foreign shareholder generally will be subject to a U.S. withholding
tax of 30%. This rate may be lower, depending on any tax treaty the U.S. may
have with the shareholder's country.
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16 PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
------------------------------------------------

IF YOU PURCHASE JUST BEFORE RECORD DATE

If you buy shares of the Fund just before the record date (the date that
determines who receives the distribution), that distribution will be paid to
you. As explained above, the distribution may be subject to income or capital
gains taxes. You may think you've done well since you bought shares one day and
soon thereafter received a distribution. That is not so because when dividends
are paid out, the value of each share of the Fund decreases by the amount of the
dividend to reflect the payout although this may not be apparent because the
value of each share of the Fund also will be affected by market changes, if any.
The distribution you receive makes up for the decrease in share value. However,
the timing of your purchase does mean that part of your investment came back to
you as taxable income.

QUALIFIED AND TAX-DEFERRED RETIREMENT PLANS

Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax-free. Please contact your financial
adviser for information on a variety of Prudential mutual funds that are
suitable for retirement plans offered by Prudential.

IF YOU SELL OR EXCHANGE YOUR SHARES

If you sell any shares of the Fund for a profit, you have REALIZED A CAPITAL
GAIN, which is subject to tax unless you hold shares in a qualified or tax-
deferred plan or account. The amount of tax you pay depends on how long you
owned your shares. If you sell shares of the Fund for a loss, you may have a
capital loss, which you may use to offset certain capital gains you have.

--> +$ CAPITAL GAIN

(taxes owed)

RECEIPTS FROM SALE $ OR

--> -$ CAPITAL LOSS
(offset against gain)

If you sell shares and realize a loss, you will not be permitted to use the
loss to the extent you replace the shares (including pursuant to the
reinvestment of a dividend) within a 61-day period (beginning 30 days before the
sale of the shares). If you acquire shares of the Fund and sell
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FUND DISTRIBUTIONS
AND TAX ISSUES
------------------------------------------------

your shares within 90 days, you may not be allowed to include certain charges
incurred in acquiring the shares for purposes of calculating gain or loss
realized upon the sale of the shares.
Exchanging your shares of the Fund for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the taxes
described above.

Any gain or loss you may have from selling or exchanging Fund shares will
not be reported on Form 1099; however, proceeds from the sale or exchange will
be reported on Form 1099-B. Therefore, unless you hold your shares in a
qualified or tax-deferred plan or account, you or your financial adviser should
keep track of the dates on which you buy and sell--or exchange--Fund shares, as
well as the amount of any gain or loss on each transaction. For tax advice,
please see your tax adviser.

AUTOMATIC CONVERSION OF CLASS B SHARES

We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately seven years after
purchase--is not a "taxable event" because it does not involve an actual sale of
your Class B shares. This opinion, however, is not binding on the Internal
Revenue Service (IRS). For more information about the automatic conversion of
Class B shares, see "Class B Shares Convert to Class A Shares After
Approximately Seven Years" in the next section.

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18 PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
-------------------------------------

HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund
Services LLC (PMFS) at (800) 225-1852 or contact:

PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 8179
PHILADELPHIA, PA 19101

You may purchase shares by check or wire. We do not accept cash or money
orders. To purchase by wire, call the number above to obtain an application.
After PMFS receives your completed application, you will receive an account
number. We have the right to reject any purchase order (including an exchange
into the Fund) or suspend or modify the Fund's sale of its shares.

STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that better meets
your needs. With Class A shares, you pay the sales charge at the time of
purchase, but the operating expenses each year are lower than the expenses of
Class B and Class C shares. With Class B shares, you only pay a sales charge if
you sell your shares within six years (that is why it is called a Contingent
Deferred Sales Charge, or CDSC), but the operating expenses each year are higher
than Class A share expenses. With Class C shares, you pay a 1% front-end sales
charge and a 1% CDSC if you sell within 18 months of purchase, but the operating
expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:

-- The amount of your investment

-- The length of time you expect to hold the shares and the impact of
the varying distribution fees

-- The different sales charges that apply to each share class--
Class A's front-end sales charge vs. Class B's CDSC vs. Class C's low
front-end sales charge and low CDSC
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HOW TO BUY, SELL AND
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-- Whether you qualify for any reduction or waiver of sales charges

-- The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase

-- Whether you qualify to purchase Class Z shares.
See "How to Sell Your Shares" for a description of the impact of CDSCs.

SHARE CLASS COMPARISON. Use this chart to help you compare the Fund's different
share classes. The discussion following this chart will tell you whether you are
entitled to a reduction or waiver of any sales charges.

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Minimum purchase $1,000 $1,000 $2,500 None
amount(1)
Minimum amount for $100 $100 $100 None
subsequent
purchases(1)
Maximum initial sales 5% of the None 1% of the None
charge public offering public offering
price price
Contingent Deferred None If sold during: 1% on sales None
Sales Charge (CDSC)(2) Year 1 5% made within
Year 2 4% 18 months of
Year 3 3% purchase(2)
Year 4 2%
Year 5/6 1%
Year 7 0%
Annual distribution and .30 of 1% 1% 1% None
service (12b-1) fees (.25 of 1%
shown as a percentage currently)
of average net
assets(3)
</TABLE>

1 THE MINIMUM INVESTMENT REQUIREMENTS DO NOT APPLY TO CERTAIN RETIREMENT AND
EMPLOYEE SAVINGS PLANS AND CUSTODIAL ACCOUNTS FOR MINORS. THE MINIMUM
INITIAL AND SUBSEQUENT INVESTMENT FOR PURCHASES MADE THROUGH THE AUTOMATIC
INVESTMENT PLAN IS $50. FOR MORE INFORMATION, SEE "ADDITIONAL SHAREHOLDER
SERVICES--AUTOMATIC INVESTMENT PLAN."
2 FOR MORE INFORMATION ABOUT THE CDSC AND HOW IT IS CALCULATED, SEE "HOW TO
SELL YOUR SHARES--CONTINGENT DEFERRED SALES CHARGE (CDSC)."
3 THESE DISTRIBUTION AND SERVICE FEES ARE PAID FROM THE FUND'S ASSETS ON A
CONTINUOUS BASIS. OVER TIME, THE FEES WILL INCREASE THE COST OF YOUR
INVESTMENT AND MAY COST YOU MORE THAN PAYING OTHER TYPES OF SALES CHARGES.
THE SERVICE FEE FOR CLASS A, CLASS B AND CLASS C SHARES IS .25 OF 1%. THE
DISTRIBUTION FEE FOR CLASS A SHARES IS LIMITED TO .30 OF 1% (INCLUDING THE
.25 OF 1% SERVICE FEE) AND IS .75 OF 1% FOR CLASS B AND CLASS C SHARES. FOR
THE FISCAL YEAR ENDING 10-31-01, THE DISTRIBUTOR OF THE FUND HAS
CONTRACTUALLY AGREED TO REDUCE ITS DISTRIBUTION AND SERVICE (12b-1) FEES
FOR CLASS A SHARES TO .25 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE
CLASS A SHARES.

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20 PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------

REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid
paying Class A's initial sales charge.

INCREASE THE AMOUNT OF YOUR INVESTMENT. You can reduce Class A's sales
charge by increasing the amount of your investment. This table shows how
the sales charge decreases as the amount of your investment increases.

<TABLE>
<CAPTION>
SALES CHARGE AS % OF SALES CHARGE AS % OF DEALER
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED REALLOWANCE
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50% 4.71% 4.25%
$50,000 to $99,999 4.00% 4.17% 3.75%
$100,000 to $249,999 3.25% 3.36% 3.00%
$250,000 to $499,999 2.50% 2.56% 2.40%
$500,000 to $999,999 2.00% 2.04% 1.90%
$1 million and above* None None None
</TABLE>

* IF YOU INVEST $1 MILLION OR MORE, YOU CAN BUY ONLY CLASS A SHARES, UNLESS
YOU QUALIFY TO BUY CLASS Z SHARES.

To satisfy the purchase amounts above, you can:
-- Invest with an eligible group of related investors
-- Buy Class A shares of two or more Prudential mutual funds at the same
time
-- Use your RIGHTS OF ACCUMULATION, which allow you to combine the
current value of Prudential mutual fund shares you already own with
the value of the shares you are purchasing for purposes of
determining the applicable sales charge (note: you must notify the
Transfer Agent if you qualify for Rights of Accumulation)
-- Sign a LETTER OF INTENT, stating in writing that you or an eligible
group of related investors will purchase a certain amount of shares
in the Fund and other Prudential mutual funds within 13 months.

The Distributor may reallow Class A's sales charge to dealers.
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------

BENEFIT PLANS. Certain group retirement and savings plans may purchase Class A
shares without the initial sales charge if they meet the required minimum for
amount of assets, average account balance or number of eligible employees. For
more information about these requirements, call Prudential at (800) 353-2847.

MUTUAL FUND PROGRAMS. The initial sales charge will be waived for investors in
certain programs sponsored by broker-dealers, investment advisers and financial
planners who have agreements with Prudential Investments Advisory Group relating
to:
-- Mutual fund "wrap" or asset allocation programs where the sponsor
places Fund trades and charges its clients a management, consulting
or other fee for its services, or
-- Mutual fund "supermarket" programs where the sponsor links its
clients' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.

Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.

OTHER TYPES OF INVESTORS. Other investors pay no sales charge, including certain
officers, employees or agents of Prudential and its affiliates, the Prudential
mutual funds, the subadvisers of the Prudential mutual funds and registered
representatives and employees of brokers that have entered into a dealer
agreement with the Distributor. To qualify for a reduction or waiver of the
sales charge, you must notify the Transfer Agent or your broker at the time of
purchase. For more information, see the SAI, "Purchase, Redemption and Pricing
of Fund Shares--Reduction and Waiver of Initial Sales Charge--Class A Shares."

WAIVING CLASS C'S INITIAL SALES CHARGE
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at
(800) 353-2847.
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22 PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
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INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated (Prudential Securities) or one of its affiliates. These
purchases must be made within 60 days of the redemption. To qualify for this
waiver, you must do one of the following:
-- purchase your shares through an account at Prudential Securities,
-- purchase your shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation, or
-- purchase your shares through another broker.

This waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify either
the Transfer Agent or your broker, who may require any supporting documents they
consider appropriate.

QUALIFYING FOR CLASS Z SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares if
they meet the required minimum for amount of assets, average account balance or
number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.

MUTUAL FUND PROGRAMS. Class Z shares also can be purchased by participants in
any fee-based program or trust program sponsored by Prudential or an affiliate
that includes the Fund as an available option. Class Z shares also can be
purchased by investors in certain programs sponsored by broker-dealers,
investment advisers and financial planners who have agreements with Prudential
Investments Advisory Group relating to:

-- Mutual fund "wrap" or asset allocation programs where the sponsor
places Fund trades, links its clients' accounts to a master account
in the sponsor's name and charges its clients a management,
consulting or other fee for its services, or
-- Mutual fund "supermarket" programs, where the sponsor links its
clients' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
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HOW TO BUY, SELL AND
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------------------------------------------------

OTHER TYPES OF INVESTORS. Class Z shares also can be purchased by any of the
following:
-- Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available option,
-- Current and former Directors/Trustees of the Prudential mutual funds
(including the Company), and
-- Prudential, with an investment of $10 million or more.

In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares, up to 2% of the
purchase price for Class C shares and a finder's fee for Class A or Class Z
shares from their own resources based on a percentage of the net asset value of
shares sold or otherwise.

CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you received with reinvested dividends
and other distributions. Since the 12b-1 fees for Class A shares are lower than
for Class B shares, converting to Class A shares lowers your Fund expenses.
When we do the conversion, you will get fewer Class A shares than the number
of Class B shares converted if the price of the Class A shares is higher than
the price of Class B shares. The total dollar value will be the same, so you
will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Conversion Feature--Class B Shares."
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24 PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------

STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of the Fund is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE or NAV--is determined
by a simple calculation--it's the total value of the Fund (assets minus
liabilities) divided by the total number of shares outstanding. For example, if
the value of the investments held by Fund XYZ (minus its liabilities) is $1,000
and there are 100 shares of Fund XYZ owned by shareholders, the price of one
share of the fund--or the NAV--is $10 ($1,000 divided by 100). Portfolio
securities are valued based upon market quotations or, if not readily available,
at fair value as determined in good faith under procedures established by the
Company's Board. Most national newspapers report the NAVs of most mutual funds,
which allows investors to check the price of mutual funds daily.

We determine the NAV of our shares once each business day at 4:15 p.m. New
York time on days that the New York Stock Exchange (NYSE) is open for trading.
The NYSE is closed on most national holidays and Good Friday. Because the Fund
can invest in foreign securities, its NAV can change on days when you cannot buy
or sell shares. We do not determine the NAV on days when we have not received
any orders to purchase, sell or exchange Fund shares, or when changes in the
value of the Fund's portfolio do not materially affect the NAV.

WHAT PRICE WILL YOU PAY FOR SHARES OF THE FUND?
For Class A and Class C shares, you'll pay the public offering price, which is
the NAV next determined after we receive your order to purchase, plus an initial
sales charge (unless you're entitled to a waiver). For Class B and Class Z
shares, you will pay the NAV next determined after we receive your order to
purchase (remember, there are no up-front sales charges for these share
classes). Your broker may charge you a separate or additional fee for purchases
of shares.

-------------------------------------------------------------------
MUTUAL FUND SHARES
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds ACME Corp. stock in
its portfolio and the price of ACME stock goes up, while the value of the fund's
other holdings remains the same and expenses don't change, the NAV of Fund XYZ
will increase.
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25
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------

STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Fund shareholder, you can take advantage of the following services and
privileges:

AUTOMATIC REINVESTMENT. As we explained in the "Fund Distributions and Tax
Issues" section, the Fund pays out--or distributes--its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Fund at NAV without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date we
determine who receives dividends.

PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: ACCOUNT MAINTENANCE
P.O. BOX 8159
PHILADELPHIA, PA 19101

AUTOMATIC INVESTMENT PLAN. You can make regular purchases of the Fund for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.

RETIREMENT PLAN SERVICES. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs or SEP-IRAs for a one-person business,
please contact your financial adviser. If you are interested in opening a 401(k)
or other company-sponsored retirement plan (SIMPLES, SEP plans, Keoghs, 403(b)
plans, pension and profit-sharing plans), your financial adviser will help you
determine which retirement plan best meets your needs. Complete instructions
about how to establish and maintain your plan and how to open accounts for you
and your employees will be included in the retirement plan kit you receive in
the mail.

THE PRUTECTOR PROGRAM. Optional group term life insurance--which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. Eligible investors who apply for PruTector coverage after
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26 PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------

the initial 6-month enrollment period will need to provide satisfactory evidence
of insurability. This insurance is subject to other restrictions and is not
available in all states.

SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly, quarterly, semi-annual or annual redemption checks.
Remember, the sale of Class B and Class C shares may be subject to a CDSC.

REPORTS TO SHAREHOLDERS. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Fund. To reduce Fund expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household, unless you instruct us or your broker otherwise.

HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.

When you sell shares of the Fund--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer Agent,
the Distributor or your broker receives your order to sell. If your broker holds
your shares, your broker must receive your order to sell by 4:15 p.m. New York
time to process the sale on that day. Otherwise contact:

PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: REDEMPTION SERVICES
P.O. BOX 8149
PHILADELPHIA, PA 19101

Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the proceeds until your check clears, which can take up to 10
days from the purchase date. You can avoid delays if you
--------------------------------------------------------------------------------
27
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------

purchase shares by wire, certified check or cashier's check. Your broker may
charge you a separate or additional fee for sales of shares.

RESTRICTIONS ON SALES

There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. As permitted by the
Securities and Exchange Commission, this may happen during unusual market
conditions or emergencies when the Fund can't determine the value of its assets
or sell its holdings. For more information, see the SAI, "Purchase, Redemption
and Pricing of Fund Shares--Sale of Shares."

If you are selling more than $100,000 of shares, you want the redemption
proceeds payable to or sent to someone or some place that is not in our records
or you are a business or a trust and you hold your shares directly with the
Transfer Agent, you will need to have the signature on your sell order signature
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker-dealer or credit union. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Sale
of Shares--Signature Guarantee."

CONTINGENT DEFERRED SALES CHARGE (CDSC)
If you sell Class B shares within six years of purchase or Class C shares within
18 months of purchase, you will have to pay a CDSC. To keep the CDSC as low as
possible, we will sell amounts representing shares in the following order:
-- Amounts representing shares you purchased with reinvested dividends
and distributions
-- Amounts representing the increase in NAV above the total amount of
payments for shares made during the past six years for Class B shares
and 18 months for Class C shares
-- Amounts representing the cost of shares held beyond the CDSC period
(six years for Class B shares and 18 months for Class C shares).

Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
-------------------------------------------------------------------
28 PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------

Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the cost
of shares held for the longest period of time within the applicable CDSC period.
As we noted before in the "Share Class Comparison" chart, the CDSC for
Class B shares is 5% in the first year, 4% in the second, 3% in the third, 2% in
the fourth and 1% in the fifth and sixth years. The rate decreases on the first
day of the month following the anniversary date of your purchase, not on the
anniversary date itself. The CDSC is 1% for Class C shares--which is applied to
shares sold within 18 months of purchase. For both Class B and Class C shares,
the CDSC is calculated based on the lesser of the original purchase price or the
redemption proceeds. For purposes of determining how long you've held your
shares, all purchases during the month are grouped together and considered to
have been made on the last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding any
time shares were held in a money market fund.

WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:

-- After a shareholder is deceased or disabled (or, in the case of a
trust account, the death or disability of the grantor). This waiver
applies to individual shareholders, as well as shares held in joint
tenancy, provided the shares were purchased before the death or
disability

-- To provide for certain distributions--made without IRS penalty--from
a tax-deferred retirement plan, IRA or Section 403(b) custodial
account

-- On certain sales effected through a Systematic Withdrawal Plan.

For more information on the above and other waivers, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Waiver of Contingent Deferred Sales
Charge--Class B Shares."
--------------------------------------------------------------------------------
29
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------

WAIVER OF THE CDSC--CLASS C SHARES
BENEFIT PLANS. The CDSC will be waived for purchases by certain group retirement
plans for which Prudential or brokers not affiliated with Prudential provide
administrative or recordkeeping services. The CDSC also will be waived for
certain redemptions by benefit plans sponsored by Prudential and its affiliates.
For more information, call Prudential at (800) 353-2847.

REDEMPTION IN KIND
If the sales of Fund shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Fund's net assets, we can then give you
securities from the Fund's portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.

SMALL ACCOUNTS

If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your account.
We would do this to minimize the Fund's expenses paid by other shareholders. We
will give you 60 days' notice, during which time you can purchase additional
shares to avoid this action. This involuntary sale does not apply to
shareholders who own their shares as part of a 401(k) plan, an IRA or some other
qualified or tax-deferred plan or account.

90-DAY REPURCHASE PRIVILEGE

After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the same Fund and account
without paying an initial sales charge. Also, if you paid a CDSC when you
redeemed your shares, we will credit your new account with the appropriate
numbers of shares to reflect the amount of the CDSC you paid. In order to take
advantage of this one-time privilege, you must notify the Transfer Agent or your
broker at the time of the repurchase. See the SAI, "Purchase, Redemption and
Pricing of Fund Shares--Sale of Shares."

RETIREMENT PLANS
To sell shares and receive a distribution from a retirement account, call your
broker or the Transfer Agent for a distribution request form. There are
-------------------------------------------------------------------
30 PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------

special distribution and income tax withholding requirements for distributions
from retirement plans and you must submit a withholding form with your request
to avoid delay. If your retirement plan account is held for you by your employer
or plan trustee, you must arrange for the distribution request to be signed and
sent by the plan administrator or trustee. For additional information, see the
SAI.

HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Fund for shares of the same class in certain
other Prudential mutual funds--including certain money market funds--if you
satisfy the minimum investment requirements. For example, you can exchange Class
A shares of the Fund for Class A shares of another Prudential mutual fund, but
you can't exchange Class A shares for Class B, Class C or Class Z shares. Class
B and Class C shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund, Inc. After an exchange, at redemption the
CDSC will be calculated from the first day of the month after initial purchase,
excluding any time shares were held in a money market fund. We may change the
terms of the exchange privilege after giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:

PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 8157
PHILADELPHIA, PA 19101

There is no sales charge for such exchanges. However, if you exchange--and
then sell--Class B shares within approximately six years of your original
purchase or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Class B or Class C shares
into a money market fund, the time you hold the shares in the money market
account will not be counted in calculating the required holding periods for CDSC
liability.
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange
--------------------------------------------------------------------------------
31
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------

are worth more than the amount that you paid for them, you may have to pay
capital gains tax. For additional information about exchanging shares, see the
SAI, "Shareholder Investment Account--Exchange Privilege."

If you own Class B or Class C shares and qualify to purchase Class A shares
without paying an initial sales charge, we will automatically exchange your
Class B or Class C shares which are not subject to a CDSC for Class A shares. We
make such exchanges on a quarterly basis if you qualify for this exchange
privilege. We have obtained a legal opinion that this exchange is not a "taxable
event" for federal income tax purposes. This opinion is not binding on the IRS.

FREQUENT TRADING

Frequent trading of Fund shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Fund's investments. When market timing occurs, the Fund may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Fund's performance may be hurt. When large dollar amounts are
involved, market timing can also make it difficult to use long-term investment
strategies because we cannot predict how much cash the Fund will have to invest.
When, in our opinion, such activity would have a disruptive effect on portfolio
management, the Fund reserves the right to refuse purchase orders and exchanges
into the Fund by any person, group or commonly controlled account. The decision
may be based upon dollar amount, volume or frequency of trading. The Fund may
notify a market timer of rejection of an exchange or purchase order after the
day the order is placed. If the Fund allows a market timer to trade Fund shares,
it may require the market timer to enter into a written agreement to follow
certain procedures and limitations.

TELEPHONE REDEMPTIONS OR EXCHANGES

You may redeem or exchange your shares in any amount by calling the Fund at
(800) 225-1852. In order to redeem or exchange your shares by telephone, you
must call the Fund before 4:15 p.m. New York time. You will receive a redemption
or exchange amount based on that day's NAV.

The Fund's Transfer Agent will record your telephone instructions and
request specific account information before redeeming or exchanging

-------------------------------------------------------------------
32 PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------

shares. The Fund will not be liable if it follows instructions that it
reasonably believes are made by the shareholder. If the Fund does not follow
reasonable procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.

In the event of drastic economic or market changes, you may have difficulty
in redeeming or exchanging your shares by telephone. If this occurs, you should
consider redeeming or exchanging your shares by mail or through your broker.

The telephone redemption or exchange privilege may be modified or terminated
at any time. If this occurs, you will receive a written notice from the Fund.

--------------------------------------------------------------------------------
33
<PAGE>
FINANCIAL HIGHLIGHTS
-------------------------------------

The financial highlights will help you evaluate the Fund's financial performance
since its inception. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Fund, assuming
reinvestment of all dividends and other distributions. The information is for
each share class for the periods indicated.

Review each chart with the financial statements and report of independent
accountants which appear in the annual report and the SAI and are available upon
request. Additional performance information for each share class is contained in
the annual report, which you can receive at no charge.

CLASS A AND CLASS B SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified.

CLASS A AND CLASS B SHARES (FISCAL PERIODS ENDED 10-31)

<TABLE>
<CAPTION>
CLASS A CLASS B
PER SHARE OPERATING PERFORMANCE(2) 2000 1999(1) 2000 1999(1)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.27 $10.00 $11.22 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) --(5) .01 (.09) (.05)
Net realized and unrealized gain on investment
transactions 1.14 1.26 1.14 1.27
TOTAL FROM INVESTMENT OPERATIONS 1.14 1.27 1.05 1.22
NET ASSET VALUE, END OF PERIOD $12.41 $11.27 $12.27 $11.22
TOTAL RETURN(3) 10.12% 12.70% 9.36% 12.20%
--------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 2000 1999(1) 2000 1999(1)
<S> <C> <C> <C> <C>
NET ASSETS, END OF PERIOD (000) $92,685 $78,169 $214,700 $175,129
Average net assets (000) $91,064 $66,701 $205,175 $144,221
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution and
service (12b-1) fees(6) 1.09% 1.23%(4) 1.84% 1.98%(4)
Expenses, excluding distribution and
service (12b-1) fees .84% .98%(4) .84% .98%(4)
Net investment income (loss) .03% .09%(4) (.72)% (.67)%(4)
Portfolio turnover 94% 67% 94% 67%
-----------------------------------------------------------------------------------------------------------------
</TABLE>

1 INFORMATION SHOWN IS FOR THE PERIOD 3-3-99 (WHEN SHARES WERE FIRST OFFERED)
THROUGH 10-31-99.
2 BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
3 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED. TOTAL RETURNS FOR PERIODS OF LESS THAN A FULL YEAR ARE NOT
ANNUALIZED.
4 ANNUALIZED.
5 LESS THAN $.005 PER SHARE.
6 THE DISTRIBUTOR OF THE FUND AGREED TO LIMIT ITS DISTRIBUTION AND SERVICE
(12B-1) FEES TO .25 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A
SHARES.

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34 PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
------------------------------------------------

CLASS C AND CLASS Z SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified.

CLASS C AND CLASS Z SHARES (FISCAL PERIODS ENDED 10-31)

<TABLE>
<CAPTION>
CLASS C CLASS Z
PER SHARE OPERATING PERFORMANCE(2) 2000 1999(1) 2000 1999(1)
<S> <C> <C> <C> <C>
<CAPTION>
NET ASSET VALUE, BEGINNING OF PERIOD $11.22 $10.00 $11.30 $10.00
<S> <C> <C> <C> <C>
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (.09) (.05) .03 .02
Net realized and unrealized gain on investment transactions 1.14 1.27 1.15 1.28
TOTAL FROM INVESTMENT OPERATIONS 1.05 1.22 1.18 1.30
NET ASSET VALUE, END OF PERIOD $12.27 $11.22 $12.48 $11.30
TOTAL RETURN(3) 9.36% 12.20% 10.44% 13.00%
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 2000 1999(1) 2000 1999(1)
<S> <C> <C> <C> <C>
NET ASSETS, END OF PERIOD (000) $131,554 $110,895 $18,167 $13,653
Average net assets (000) $126,881 $91,235 $17,464 $12,627
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution and
service (12b-1) fees 1.84% 1.98%(4) .84% .98%(4)
Expenses, excluding distribution and
service (12b-1) fees .84% .98%(4) .84% .98%(4)
Net investment income (loss) (.72)% (.67)%(4) .28% .35%(4)
Portfolio turnover 94% 67% 94% 67%
--------------------------------------------------------------------------------------------------------------------
</TABLE>

--------------------------------------------------------------------------------
35
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
-------------------------------------

Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your financial adviser or call
us at (800) 225-1852. Read the prospectus carefully before you invest or send
money.

STOCK FUNDS

PRUDENTIAL EQUITY FUND, INC.

PRUDENTIAL INDEX SERIES FUND

PRUDENTIAL STOCK INDEX FUND

PRUDENTIAL REAL ESTATE SECURITIES FUND

PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL FINANCIAL SERVICES FUND
PRUDENTIAL HEALTH SCIENCES FUND
PRUDENTIAL TECHNOLOGY FUND
PRUDENTIAL UTILITY FUND

PRUDENTIAL SMALL COMPANY FUND, INC.

PRUDENTIAL TAX-MANAGED FUNDS

PRUDENTIAL TAX-MANAGED EQUITY FUND

PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC.
PRUDENTIAL 20/20 FOCUS FUND

PRUDENTIAL U.S. EMERGING GROWTH FUND, INC.

PRUDENTIAL VALUE FUND

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.

PRUDENTIAL JENNISON EQUITY OPPORTUNITY FUND

PRUDENTIAL JENNISON GROWTH FUND

NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
TARGET FUNDS
LARGE CAPITALIZATION GROWTH FUND
LARGE CAPITALIZATION VALUE FUND
SMALL CAPITALIZATION GROWTH FUND
SMALL CAPITALIZATION VALUE FUND
ASSET ALLOCATION/BALANCED FUNDS

PRUDENTIAL DIVERSIFIED FUNDS

CONSERVATIVE GROWTH FUND
MODERATE GROWTH FUND
HIGH GROWTH FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL ACTIVE BALANCED FUND
GLOBAL FUNDS
GLOBAL STOCK FUNDS

PRUDENTIAL EUROPE GROWTH FUND, INC.

PRUDENTIAL NATURAL RESOURCES FUND, INC.

PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.

PRUDENTIAL GLOBAL GROWTH FUND

PRUDENTIAL INTERNATIONAL VALUE FUND

PRUDENTIAL JENNISON INTERNATIONAL GROWTH FUND

GLOBAL UTILITY FUND, INC.
TARGET FUNDS
INTERNATIONAL EQUITY FUND

GLOBAL BOND FUND

PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.

-------------------------------------------------------------------
36 PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
-------------------------------------

BOND FUNDS
TAXABLE BOND FUNDS

PRUDENTIAL GOVERNMENT INCOME FUND, INC.

PRUDENTIAL HIGH YIELD FUND, INC.

PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.

PRUDENTIAL SHORT-TERM CORPORATE BOND FUND, INC.

INCOME PORTFOLIO

PRUDENTIAL TOTAL RETURN BOND FUND, INC.

TARGET FUNDS
TOTAL RETURN BOND FUND

TAX-EXEMPT BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
CALIFORNIA INCOME SERIES
PRUDENTIAL MUNICIPAL BOND FUND
HIGH INCOME SERIES
INSURED SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES

NEW JERSEY SERIES

NEW YORK SERIES

PENNSYLVANIA SERIES

PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.

MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
LIQUID ASSETS FUND
NATIONAL MONEY MARKET FUND
PRUDENTIAL GOVERNMENT SECURITIES TRUST
MONEY MARKET SERIES
U.S. TREASURY MONEY MARKET SERIES
PRUDENTIAL SPECIAL MONEY MARKET FUND, INC.
MONEY MARKET SERIES
PRUDENTIAL MONEYMART ASSETS, INC.

TAX-FREE MONEY MARKET FUNDS
PRUDENTIAL TAX-FREE MONEY FUND, INC.
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
PRUDENTIAL MUNICIPAL SERIES FUND

NEW JERSEY MONEY MARKET SERIES

NEW YORK MONEY MARKET SERIES

COMMAND FUNDS
COMMAND MONEY FUND
COMMAND GOVERNMENT FUND
COMMAND TAX-FREE FUND

INSTITUTIONAL MONEY MARKET FUND

PRUDENTIAL INSTITUTIONAL LIQUIDITY PORTFOLIO, INC.
INSTITUTIONAL MONEY MARKET SERIES

--------------------------------------------------------------------------------
37
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
-------------------------------------

Notes
-------------------------------------------------------------------
38 PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
-------------------------------------

Notes
--------------------------------------------------------------------------------
39
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
-------------------------------------

Notes
-------------------------------------------------------------------
40 PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
-------------------------------------

Notes
--------------------------------------------------------------------------------
41
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
-------------------------------------

Notes
-------------------------------------------------------------------
42 PRUDENTIAL TAX-MANAGED EQUITY FUND [TELEPHONE ICON] (800) 225-1852
<PAGE>
YOUR FINANCIAL SECURITY, YOUR SATISFACTION & YOUR PRIVACY

ACCESSING INFORMATION
Access to customer information is authorized for Prudential business
purposes only. Employees who have access to customer information are required to
protect it and keep it confidential.

COLLECTING INFORMATION TO CONDUCT BUSINESS
Prudential collects information about you to help us serve your financial
needs, provide customer service, offer new products or services, and fulfill
legal and regulatory requirements. The type of information that Prudential
collects varies according to the products or services you request, and may
include:
- information included on your application and related forms (such as name,
address, Social Security number, assets and income);
- information about your relationships with us (such as products or services
purchased, account balances and payment history);
- information from your employer, benefit plan sponsor, or association for
any Prudential group product you may have (such as name, address, Social
Security number, age and marital status);
- information from consumer reporting agencies (such as credit relationships
and history);
- information from other non-Prudential sources (such as motor vehicle
reports, medical information, and demographic information); and
- information from visitors to Prudential websites (such as that provided
through online forms, site visitorship data and online information
collecting devices known as "cookies").

SECURITY STANDARDS
We continue to assess new technology to provide additional protection of
your personal information. We safeguard customer information in accordance with
federal standards and established security procedures. Measures we take include
implementation of physical, electronic and procedural safeguards.

SHARING INFORMATION WITHIN PRUDENTIAL
We may disclose the previously described information about our customers and
former customers to other Prudential businesses, such as our securities
broker-dealers, our insurance companies and agencies, our banks and our real
estate brokerage franchise company. We may share information to:
- provide customer service or account maintenance; or
- tell you about other products or services offered by Prudential.

SHARING INFORMATION IN OTHER CIRCUMSTANCES
In compliance with federal and state laws, we may disclose some or all of
the information we collect about our customers and former customers, as
described above, to non-Prudential businesses, such as:
- companies that perform services for us or on our behalf (such as
responding to customer requests, providing you with information about our
products, or maintaining or developing software); or
- financial services companies (such as banks, insurance companies,
securities brokers or dealers) and non-financial companies (such as real
estate brokers or financial publications) with whom we have marketing
agreements.
We will not share medical information or motor vehicle reports for marketing
purposes.
Many employers or other plan sponsors restrict the information that can be
shared about their employees or members. In our business with institutions, we
always honor these restrictions. If you have a relationship with Prudential as a
result of products or services provided through an employer or other plan
sponsor, we will abide by the specific privacy rules imposed by that
organization.
We may also disclose information to non-affiliated parties as allowed by
law, such as in responding to a subpoena, preventing fraud, or complying with an
inquiry by a government agency or regulator.

IT'S YOUR CHOICE
Our customers periodically receive information about products and services
available from the Prudential family of companies, as well as from select
business partners, including financial services and non-financial services
companies with whom we have marketing agreements. Many of our customers
appreciate receiving this information. However, if you do not want us to share
your information for these purposes or communicate offers to you -- either by
phone or mail -- please complete the attached form and return it to us.
If there are multiple owners of an account, any one of them may request on
behalf of any or all of the others that their information not be disclosed and
their names be removed from our phone or mailing lists.
While you may receive more than one copy of this notice, if you choose to
limit the sharing of your information, you only need to inform us of your choice
once. Unless you modify this decision, we will continue to honor it.

NOT PART OF PROSPECTUS
i
<PAGE>
THIS NOTICE IS BEING PROVIDED ON BEHALF OF THE FOLLOWING PRUDENTIAL
AFFILIATES:

Prudential Insurance Company of America, The
Prudential Property and Casualty Insurance Company
Prudential Securities Incorporated
Prudential Investment Corporation, The
Prudential Bank and Trust Company, The
Prudential 20/20 Focus Fund
Prudential California Municipal Fund
Prudential Commercial Insurance Company
Prudential Commercial Insurance Company of New Jersey, The
Prudential Direct Insurance Agency of Texas, Inc.
Prudential Direct Insurance Agency of Alabama, Inc.
Prudential Direct Insurance Agency of Massachusetts, Inc.
Prudential Direct Insurance Agency of New Mexico, Inc.
Prudential Direct Insurance Agency of Ohio, Inc.
Prudential Direct Insurance Agency of Wyoming, Inc.
Prudential Direct, Inc.
Prudential Diversified Funds
Prudential Equity Fund, Inc.
Prudential Equity Investors, Inc.
Prudential Europe Growth Fund, Inc.
Prudential General Agency of Ohio, Inc.
Prudential General Insurance Agency of Florida, Inc.
Prudential General Insurance Agency of Kentucky, Inc.
Prudential General Insurance Agency of Massachusetts, Inc.
Prudential General Insurance Agency of Mississippi, Inc.
Prudential General Insurance Agency of Nevada, Inc.
Prudential General Insurance Agency of New Mexico, Inc.
Prudential General Insurance Agency of Texas, Inc.
Prudential General Insurance Agency of Wyoming, Inc.
Prudential General Insurance Company
Prudential General Insurance Company of New Jersey, The
Prudential Global Total Return Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Index Series Fund
Prudential Institutional Liquidity Portfolio, Inc.
Prudential Insurance Brokerage, Inc.
Prudential International Bond Fund, Inc.
Prudential Investment Management Services LLC
Prudential Investment Portfolios, Inc., The
Prudential Investments Fund Management LLC
Prudential MoneyMart Assets, Inc.
Prudential Municipal Bond Fund
Prudential Municipal Series Fund
Prudential National Municipal Funds, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Property and Casualty Insurance Company of New Jersey, The
Prudential Property and Casualty New Jersey Insurance Brokerage, Inc., The
Prudential Real Estate Securities Fund
Prudential Savings Bank, F.S.B., The
Prudential Sector Funds, Inc.
Prudential Select Life Insurance Company of America
Prudential Series Fund, Inc., The
Prudential Short-Term Corporate Bond Fund, Inc.
Prudential Small Company Fund, Inc.
Prudential Special Money Market Fund, Inc.
Prudential Tax-Free Money Fund, Inc.
Prudential Tax-Managed Funds
Prudential Tax-Managed Small-Cap Fund, Inc.
Prudential Total Return Bond Fund, Inc.
Prudential Trust Company
Prudential U.S. Emerging Growth Fund, Inc.
Prudential Value Fund
Prudential World Fund, Inc.
Pruco Life Insurance Company
Pruco Life Insurance Company of New Jersey
Pruco Securities Corporation
Asia Pacific Fund, Inc., The
Bache Insurance Agency Incorporated
Bache Insurance Agency of Alabama, Inc.
Bache Insurance Agency of Oklahoma, Inc.
Bache Insurance Agency of Texas, Inc.
Cash Accumulation Trust
COMMAND Government Fund
COMMAND Money Fund
COMMAND Tax-Free Fund
Duff & Phelps Utilities Tax-Free Income Fund, Inc.
First Financial Fund, Inc.
Global Utility Fund, Inc.
High Yield Income Fund, Inc., The
High Yield Plus Fund, Inc., The
Hochman & Baker Investment Advisory Services
Hochman & Baker Securities
Hochman & Baker, Inc.
Jennison Associates LLC
Merastar Insurance Company
Nicholas-Applegate Fund, Inc.
Quick Sure Auto Agency
Strategic Partners Series
Target Funds
Target Portfolio Trust, The
Titan Auto Agency, Inc.
Titan Auto Insurance
Titan Auto Insurance of Arizona, Inc.
Titan Auto Insurance of New Mexico
Titan Auto Insurance of Pennsylvania
Titan Auto Insurance, Inc.
Titan Indemnity Company
Titan Insurance Company
Titan Insurance Services, Inc.
Titan National Auto Call Center, Inc.
Victoria Automobile Insurance Company
Victoria Fire & Casualty Company
Victoria Insurance Agency, Inc.
Victoria National Insurance Company
Victoria Select Insurance Company
Victoria Specialty Insurance Company
W. I. of Florida, Inc.
WHI of New York, Inc.
Whitehall Insurance Agency of Texas, Inc.

Whitehall of Indiana, Inc.

In this notice, the phrase "third party" refers to any organization that is not
a Prudential affiliate.
The words "you" and "customer," as used in this notice, mean any individual who
obtains or has obtained a financial product or service from a Prudential
affiliate that is to be used primarily for personal, family, or household
purposes.
We will process your request as quickly as possible. In some cases, 6 to 8 weeks
may be required for your request(s) to become effective. Prudential will
continue to provide you with important information about your existing accounts,
including inserts enclosed with your account statements and other notices
regarding the Prudential products that you own. You may also receive
communications from your Prudential Professional or from independently owned and
operated franchisees of The Prudential Real Estate Affiliates, Inc.
If any of your information changes, please let us know so that we can update
your records and continue to serve you as you have requested.

NOT PART OF PROSPECTUS
ii
<PAGE>

WE WANT TO KNOW YOUR PREFERENCE
If you do not want us to share the previously described information with
Prudential businesses or non-Prudential businesses, to inform you of other
products or services we believe may be of interest to you, complete item #1. In
addition, if you do not want to receive communications regarding other products
or services by mail or phone, complete item #2.

1. / / Do not share my information to inform me of other products or services.

2. Please remove my name from Prudential's corporate marketing lists for
receiving information:

/ / by U.S. mail / / by telephone
TO ENABLE US TO PROCESS YOUR REQUEST, PLEASE PROVIDE YOUR ACCOUNT / POLICY
NUMBER EXACTLY AS IT APPEARS ON YOUR STATEMENT:

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Account/Policy Number (required for processing)

PLEASE PRINT YOUR NAME AND ADDRESS EXACTLY AS IT APPEARS ON YOUR STATEMENT:

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Last Name

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First Name

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Address (Line 1)

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Address (Line 2)

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City

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State ZIP Code

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(Area Code) Phone Number

MAIL TO:

PRUDENTIAL -- CUSTOMER PRIVACY
P.O. BOX 4600
TRENTON, NEW JERSEY 08650

NAMES OF JOINT OWNERS

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Last Name

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First Name

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Address (Line 1)

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Address (Line 2)

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City

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State ZIP Code

-
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Last Name

-
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First Name

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Address (Line 1)

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Address (Line 2)

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City

-
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State ZIP Code

IF THERE ARE JOINT OWNERS TO WHICH THIS REQUEST WILL APPLY PLEASE PROVIDE THEIR
INFORMATION ON THE BACK OF THIS FORM.

0001

NOT PART OF PROSPECTUS
iii
<PAGE>

FOR MORE INFORMATION

Please read this prospectus before you invest in the Fund and keep it for future
reference. For information or shareholder questions contact

PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 8098
PHILADELPHIA, PA 19101
(800) 225-1852
(732) 482-7555 (Calling from outside the U.S.)

Outside Brokers should contact

PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
P.O. BOX 8310
PHILADELPHIA, PA 19101
(800) 778-8769

Visit Prudential's website at

http://www.prudential.com
Additional information about the Fund can
be obtained without charge and can be
found in the following documents
STATEMENT OF ADDITIONAL INFORMATION (SAI)
(incorporated by reference into this prospectus)
ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance)
SEMI-ANNUAL REPORT

You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows

BY MAIL
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-0102
BY ELECTRONIC REQUEST
[email protected]
(The SEC charges a fee to copy documents.)
IN PERSON
Public Reference Room in Washington, DC
(For hours of operation, call
1-202-942-8090.)

VIA THE INTERNET
on the EDGAR Database at
http://www.sec.gov

CUSIP Numbers NASDAQ Symbols

Class A Shares--74437B103 PTMAX

Class B Shares--74437B202 PTMBX

Class C Shares--74437B301 PTMCX

Class Z Shares--74437B400 PTEZX

Investment Company Act File No. 811-09101

MF187A
[RECYCLED LOGO]
Printed on Recycled Paper
<PAGE>

PRUDENTIAL TAX-MANAGED EQUITY FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 16, 2001

Prudential Tax-Managed Equity Fund (the Fund) is a diversified series of
Prudential Tax-Managed Funds, an open-end, management investment company (the
Company). The investment objective of the Fund is long-term after-tax growth of
capital. It seeks to achieve this objective by investing primarily in common
stock and convertible securities of large and medium-sized U.S. companies. The
Fund seeks to maximize long-term capital appreciation and to limit taxable
distributions to its shareholders. There can be no assurance that the Fund's
investment objective will be achieved. See "Description of the Fund, Its
Investments and Risks."

The Company's address is Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey 07102-4077, and its telephone number is (800) 225-1852.

This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of the Fund dated January 16, 2001,
which may be obtained from the Company upon request.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Company History............................................. B-2
Description of the Fund, Its Investments and Risks.......... B-2
Investment Restrictions..................................... B-17
Management of the Company................................... B-19
Control Persons and Principal Holders of Securities......... B-22
Investment Advisory and Other Services...................... B-23
Brokerage Allocation and Other Practices.................... B-26
Capital Shares, Other Securities and Organization........... B-28
Purchase, Redemption and Pricing of Fund Shares............. B-29
Shareholder Investment Account.............................. B-37
Net Asset Value............................................. B-41
Taxes, Dividends and Distributions.......................... B-42
Performance Information..................................... B-45
Financial Statements........................................ B-47
Report of Independent Accountants........................... B-75
Appendix I--General Investment Information.................. I-1
Appendix II--Historical Performance Data.................... II-1
</TABLE>

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

MF187B
<PAGE>
COMPANY HISTORY

The Company was organized as a Delaware business trust on September 18,
1998. On December 21, 1999, the Board of Trustees authorized the creation of a
second series, Prudential Tax-Managed Growth Fund, and, in conjunction
therewith, approved a change in the Company's name from Prudential Tax-Managed
Equity Fund to Prudential Tax-Managed Funds, effective December 30, 1999.

DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS

CLASSIFICATION. The Company is an open-end, management investment company
currently offering shares of one series. The Fund is a diversified series of the
Company.

INVESTMENT STRATEGIES, POLICIES AND RISKS. The investment objective of the
Fund is long-term after-tax growth of capital. While the principal investment
policies and strategies for seeking to achieve this objective are described in
the Prospectus, the Fund may from time to time also use the securities,
instruments, policies and principal and non-principal strategies that are
further described below in seeking to achieve its objective. The Fund may not be
successful in achieving its objective and you could lose money.

EQUITY-RELATED SECURITIES

Under normal market conditions, the Fund invests primarily in common stock
and convertible securities of large and medium-sized U.S. companies. The Fund
also invests in other equity-related securities, including non-convertible
preferred stocks, equity investments in partnerships, joint ventures and other
forms of non-corporate investment, American Depositary Receipts (ADRs), American
Depositary Shares (ADSs) and warrants and rights exercisable for equity
securities. Purchased options are not considered equity securities for these
purposes. ADRs and ADSs are U.S. dollar-denominated certificates or shares
issued by a United States bank or trust company and represent the right to
receive securities of a foreign issuer deposited in a domestic bank or foreign
branch of a United States bank and traded on a United States exchange or in the
over-the-counter market. A convertible security is typically a bond, debenture,
corporate note or preferred stock or other similar security that may be
converted at a stated price within a specified period of time into a specified
number of shares of common stock or other equity securities of the same or a
different issuer. A warrant or right entitles the holder to purchase equity
securities at a specific price for a specific period of time.

AMERICAN DEPOSITARY RECEIPTS AND AMERICAN DEPOSITARY SHARES. Generally, ADRs
and ADSs are in registered form. There are no fees imposed on the purchase or
sale of ADRs and ADSs when purchased from the issuing bank or trust company in
the initial underwriting, although the issuing bank or trust company may impose
charges for the collection of dividends and the conversion of ADRs and ADSs into
the underlying securities. Investment in ADRs and ADSs has certain advantages
over direct investment in the underlying foreign securities since: (1) ADRs and
ADSs are U.S. dollar-denominated investments that are registered domestically,
easily transferable, and for which market quotations are readily available, and
(2) issuers whose securities are represented by ADRs and ADSs are usually
subject to auditing, accounting and financial reporting standards comparable to
those of domestic issuers.

WARRANTS AND RIGHTS. A warrant gives the holder thereof the right to
subscribe by a specified date to a stated number of shares of stock of the
issuer at a fixed price. Warrants tend to be more volatile than the underlying
stock, and if, at a warrant's expiration date, the stock is trading at a price
below the price set in the warrant, the warrant will expire worthless.
Conversely, if, at the expiration date, the underlying stock is trading at a
price higher than the price set in the warrant, the Fund can acquire the stock
at a price below its market value. Rights are similar to warrants but normally
have a shorter duration and are distributed directly by the issuer to
shareholders. Rights and warrants have no voting rights, receive no dividends
and have no rights with respect to the corporation issuing them.

U.S. GOVERNMENT SECURITIES

U.S. TREASURY SECURITIES. The Fund is permitted to invest in U.S. Treasury
securities, including bills, notes, bonds and other debt securities issued by
the U.S. Treasury. These instruments are direct obligations of the U.S.
government and, as such, are backed by the "full faith and credit" of the United
States. They differ primarily in their interest rates, the lengths of their
maturities and the dates of their issuances.

SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in securities issued by agencies of the
U.S. government or instrumentalities of the U.S. government. These obligations,
including those which are guaranteed by Federal agencies or instrumentalities,
may or may not be backed by the full faith and credit of the United States.
Obligations of the Government National Mortgage Association (GNMA), the Farmers
Home Administration and the Small Business

B-2
<PAGE>

Administration are backed by the full faith and credit of the United States. In
the case of securities not backed by the full faith and credit of the United
States, the Fund must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment and may not be able to assert a claim against
the United States if the agency or instrumentality does not meet its
commitments. Securities in which the Fund may invest which are not backed by the
full faith and credit of the United States include obligations such as those
issued by the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation
(FHLMC), the Federal National Mortgage Association, the Student Loan Marketing
Association, Resolution Funding Corporation and the Tennessee Valley Authority,
each of which has the right to borrow from the U.S. Treasury to meet its
obligations, and obligations of the Farm Credit System, the obligations of which
may be satisfied only by the individual credit of the issuing agency. FHLMC
investments may include collateralized mortgage obligations.

Obligations issued or guaranteed as to principal and interest by the U.S.
government may be acquired by the Fund in the form of custodial receipts that
evidence ownership of future interest payments, principal payments or both on
certain U.S. Treasury notes or bonds. Such notes and bonds are held in custody
by a bank on behalf of the owners. These custodial receipts are commonly
referred to as Treasury strips.

The values of U.S. government securities (like those of other fixed-income
securities generally) will change as interest rates fluctuate. During periods of
falling U.S. interest rates, the values of U.S. government securities generally
rise and, conversely, during periods of rising interest rates, the values of
such securities generally decline. The magnitude of these fluctuations will
generally be greater for securities with longer-term maturities.

REAL ESTATE INVESTMENT TRUSTS

The Fund may invest in securities of real estate investment trusts or REITs.
Unlike corporations, REITs do not have to pay income taxes if they meet certain
requirements of the Internal Revenue Code of 1986, as amended (Internal Revenue
Code). To qualify, a REIT must distribute at least 95% of its taxable income to
its shareholders and receive at least 75% of that income from rents, mortgages
and sales of property. REITs offer investors greater liquidity and
diversification than direct ownership of a handful of properties, as well as
greater income potential than an investment in common stock. Like any investment
in real estate, though, a REIT's performance depends on several factors, such as
its ability to find tenants for its properties, to renew leases and to finance
property purchases and renovations.

FIXED-INCOME INVESTMENTS

The Fund may invest up to 5% of its total assets in any type or quality of
debt obligations.

FOREIGN SECURITIES

The Fund may invest up to 35% of its total assets in foreign securities.

If the security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of the Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency declines after the Fund's income has been accrued and translated into
U.S. dollars, the Fund could be required to liquidate portfolio securities to
make such distributions, particularly in instances in which the amount of income
the Fund is required to distribute is not immediately reduced by the decline in
such currency. Similarly, if an exchange rate declines between the time the Fund
incurs expenses in U.S. dollars and the time such expenses are paid, the amount
of such currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in any such
currency of such expenses at the time they were incurred. The Fund may, but need
not, enter into foreign currency forward contracts, options on foreign
currencies and futures contracts on foreign currencies and related options, for
hedging purposes, including: locking-in the U.S. dollar price of the purchase or
sale of securities denominated in a foreign currency; locking-in the U.S. dollar
equivalent of dividends to be paid on such securities which are held by the
Fund; and protecting the U.S. dollar value of such securities which are held by
the Fund.

Under the Internal Revenue Code, changes in an exchange rate which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities will result in
foreign currency gains or losses that increase or decrease an investment
company's taxable income. The exchange rates between the U.S. dollar and other
currencies can be volatile and are determined by such factors as supply and
demand in the currency exchange markets, international balances of payments,
government intervention, speculation and other economic and political
conditions.

B-3
<PAGE>

Foreign securities include securities of any foreign country the investment
adviser considers appropriate for investment by the Fund. Foreign securities may
also include securities of foreign issuers that are traded in U.S. dollars in
the United States although the underlying security is usually denominated in a
foreign currency.

The costs attributable to foreign investing are higher than the costs of
domestic investing. For example, the cost of maintaining custody of foreign
securities generally exceeds custodian costs for domestic securities, and
transaction and settlement costs of foreign investing are frequently higher than
those attributable to domestic investing. Foreign investment income may be
subject to foreign withholding or other government taxes that could reduce the
return to the Fund on those securities. Tax treaties between the United States
and certain foreign countries may, however, reduce or eliminate the amount of
foreign tax to which the Fund would be subject.

RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN FOREIGN SECURITIES.
Investing in securities of foreign issuers and countries involves certain
considerations and risks which are not typically associated with investing in
securities of domestic companies. Foreign issuers are not generally subject to
uniform accounting, auditing and financial standards or other requirements
comparable to those applicable to U.S. companies. There may also be less
government supervision and regulation of foreign securities exchanges, brokers
and public companies than exist in the United States. Dividends and interest
paid by foreign issuers may be subject to withholding and other foreign taxes
which may decrease the net return on such investments as compared to dividends
and interest paid to the Fund by domestic companies. There may be the
possibility of expropriations, confiscatory taxation, political, economic or
social instability or diplomatic developments which could affect assets of the
Fund held in foreign countries. In addition, a portfolio containing foreign
securities may be adversely affected by fluctuations in the relative rates of
exchange between the currencies of different nations and by exchange control
regulations.

There may be less publicly available information about foreign issuers and
governments compared to reports and ratings published about U.S. companies.
Foreign securities markets have substantially less volume than, for example, the
New York Stock Exchange. Securities of some foreign issuers are less liquid and
more volatile than securities of comparable U.S. companies. Brokerage
commissions and other transaction costs of foreign securities exchanges are
generally higher than in the United States.

SPECIAL CONSIDERATIONS OF INVESTING IN EURO-DENOMINATED SECURITIES. On
January 1, 1999, 11 of the 15 member states of the European Monetary Union
introduced the "euro" as a common currency. During a three-year transitional
period, the euro will coexist with each member state's national currency. By
July 1, 2002, the euro is expected to become the sole legal tender of the member
states. During the transition period, the Fund will treat the euro as a separate
currency from the national currency of any member state.

The adoption by the member states of the euro will eliminate the substantial
currency risk among member states and will likely affect the investment process
and considerations of the Fund's investment adviser. To the extent the Fund
holds non-U.S. dollar-denominated securities, including those denominated in the
euro, the Fund will still be subject to currency risk due to fluctuations in
those currencies as compared to the U.S. dollar.

The medium- to long-term impact of the introduction of the euro in member
states cannot be determined with certainty at this time. In addition to the
effects described above, it is likely that more general long-term ramifications
can be expected, such as changes in economic environment and changes in behavior
of investors, all of which will impact the Fund's investments.

RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES

The Fund may also engage in various portfolio strategies, including using
derivatives, to seek to reduce certain risks of its investments, as a
tax-management strategy, for cash management purposes and to enhance return. The
Fund, and thus its investors, may lose money through any unsuccessful use of
these strategies. These strategies currently include the use of options on
equity securities and stock indexes, futures contracts and options thereon,
foreign currency forward contracts and currency futures. The Fund's ability to
use these strategies may be limited by market conditions, regulatory limits and
tax considerations and there can be no assurance that any of these strategies
will succeed. If new financial products and risk management techniques are
developed, the Fund may use them to the extent consistent with its investment
objective and policies.

Transactions in derivative instruments may be used as a substitute for the
purchase and sale of securities. Derivative transactions may be more
advantageous in a given circumstance than transactions involving securities due
to more favorable current tax treatment, lower transaction costs or greater
liquidity.

OPTIONS TRANSACTIONS

The Fund may purchase and write (that is, sell) put and call options on
equity securities and financial indexes that are traded on U.S. or foreign
securities exchanges or in the over-the-counter market to seek to enhance return
or to protect against adverse price fluctuations in securities in the Fund's
portfolio. The Fund may write covered put and call options to generate
additional

B-4
<PAGE>

income through the receipt of premiums, purchase put options in an effort to
protect the value of a security that it owns against a decline in market value
and purchase call options in an effort to protect against an increase in the
price of securities it intends to purchase. The Fund also may purchase put and
call options to offset previously written put and call options of the same
series, including combining the purchase of a put option with the sale of a call
option (an equity collar).

A call option gives the purchaser, in exchange for a premium paid, the
right, for a specified period of time, to purchase the securities subject to the
option at a specified price (the exercise price or strike price). The writer of
a call option, in return for the premium, has the obligation, upon exercise of
the option, to deliver the underlying securities of a specified amount of cash
to the purchaser upon receipt of the exercise price. When the Fund writes a call
option, the Fund gives up the potential for gain on the underlying securities in
excess of the exercise price of the option during the period that the option is
open.

A put option gives the purchaser, in return for a premium, the right, for a
specified period of time, to sell the securities subject to the option to the
writer of the put at the specified exercise price. The writer of the put option,
in return for the premium, has the obligation, upon exercise of the option, to
acquire the securities underlying the option at the exercise price. The Fund, as
the writer of a put option, might, therefore, be obligated to purchase the
underlying securities for more than their current market price. The Fund may
purchase put options on securities it holds that have developed large capital
gains, to protect against price declines. This alternative to selling the
securities may reduce exposure to price declines without realizing substantial
capital gains.

The Fund will write only "covered" options. An option is covered if, as long
as the Fund is obligated under the option, it (1) owns an offsetting position in
the underlying securities or securities that comprise the index or
(2) segregates cash or other liquid assets in an amount equal to or greater than
its obligation under the option. Under the first circumstance, the Fund's losses
are limited because it owns the underlying securities; under the second
circumstance, in the case of a written call option, the Fund's losses are
potentially unlimited.

OPTIONS ON SECURITIES INDEXES. The Fund may also purchase and sell put and
call options on securities indexes traded on U.S. or foreign securities
exchanges or traded in the over-the-counter markets. Options on securities
indexes are similar to options on securities except that, rather than the right
to take or make delivery of a security at a specified price, an option on a
securities index gives the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the securities index upon
which the option is based is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option expressed in dollars times a specified multiple (the
multiplier). The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. Unlike for equity securities options,
all settlements are in cash, and gain or loss depends on price movements in the
securities market generally (or in a particular industry or segment of the
market) rather than price movements in individual securities.

The multiplier for an index option performs a function similar to the unit
of trading for a stock option. It determines the total dollar value per contract
of each point in the difference between the exercise price of an option and the
current level of the underlying index. A multiplier of 100 means that a
one-point difference will yield $100. Options on different indexes may have
different multipliers. Because exercises of index options are settled in cash, a
call writer cannot determine the amount of its settlement obligations in advance
and, unlike call writing on specific stocks, cannot provide in advance for, or
cover, its potential settlement obligations by acquiring and holding the
underlying securities. In addition, unless a Fund has other liquid assets which
are sufficient to satisfy the exercise of a call, the Fund would be required to
liquidate portfolio securities or borrow in order to satisfy the exercise.

Because the value of an index option depends upon movements in the level of
the index rather than the price of a particular security, whether the Fund will
realize a gain or loss on the purchase or sale of an option on an index depends
upon movements in the level of securities prices in the market generally or in
an industry or market segment rather than movements in the price of a particular
security. Accordingly, successful use by the Fund of options on indexes would be
subject to the investment adviser's ability to predict correctly movements in
the direction of the securities market generally or of a particular industry.
This requires different skills and techniques than predicting changes in the
price of individual stocks. The investment adviser currently uses such
techniques in conjunction with the management of other mutual funds.

B-5
<PAGE>
RISKS OF TRANSACTIONS IN STOCK OPTIONS

An option position may be closed out only on an exchange, board of trade or
other trading facility which provides a secondary market for an option of the
same series. Although the Fund will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option, or at any particular time, and for some options no secondary
market on an exchange or otherwise may exist. In such event it might not be
possible to effect closing transactions in particular options, with the result
that the Fund would have to exercise its options in order to realize any profit
and would incur brokerage commissions upon the exercise of call options and upon
the subsequent disposition of underlying securities acquired through the
exercise of call options or upon the purchase of underlying securities for the
exercise of put options. If the Fund as a covered call option writer is unable
to effect a closing purchase transaction in a secondary market, it will not be
able to sell the underlying security until the option expires or it delivers the
underlying security upon exercise.

Reasons for the absence of a liquid secondary market on an exchange include
the following: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (4) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (5) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (6) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders. The Fund intends to purchase and sell only those options which are
cleared by clearinghouses whose facilities are considered to be adequate to
handle the volume of options transactions.

RISKS OF OPTIONS ON INDEXES

The Fund's purchase and sale of options on indexes will be subject to risks
described above under "Risks of Transactions in Stock Options." In addition, the
distinctive characteristics of options on indexes create certain risks that are
not present with stock options.

Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in the index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this occurred, the Fund would not be able to
close out options which it had purchased or written and, if restrictions on
exercise were imposed, may be unable to exercise an option it holds, which could
result in substantial losses to the Fund. It is the Fund's policy to purchase or
write options only on indexes which include a number of stocks sufficient to
minimize the likelihood of a trading halt in the index.

The ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop in all index option contracts. The
Fund will not purchase or sell any index option contract unless and until, in
the investment adviser's opinion, the market for such options has developed
sufficiently that the risk in connection with such transactions is not
substantially greater than the risk in connection with options on stocks or
securities in the index.

SPECIAL RISKS OF WRITING CALLS ON INDEXES

Because exercises of index options are settled in cash, a call writer such
as the Fund cannot determine the amount of its settlement obligations in advance
and, unlike call writing on specific stocks, cannot provide in advance for, or
cover, its potential settlement obligations by acquiring and holding the
underlying securities. However, the Fund will write call options on indexes only
under the circumstances described below under "Limitations on the Purchase and
Sale of Options on Stock Indexes and Futures Contracts and Options on Futures
Contracts."

Price movements in the Fund's portfolio probably will not correlate
precisely with movements in the level of the index and, therefore, the Fund
bears the risk that the price of the securities held by the Fund may not
increase as much as the index. In such event, the Fund would bear a loss on the
call which is not completely offset by movements in the price of the Fund's
portfolio. It is also possible that the index may rise when the Fund's portfolio
of stocks does not rise. If this occurred, the Fund would experience

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a loss on the call which is not offset by an increase in the value of its
portfolio and might also experience a loss in its portfolio. However, because
the value of a diversified portfolio will, over time, tend to move in the same
direction as the market, movements in the value of the Fund in the opposite
direction as the market would be likely to occur for only a short period or to a
small degree.

Unless the Fund has other liquid assets which are sufficient to satisfy the
exercise of a call, the Fund would be required to liquidate portfolio securities
in order to satisfy the exercise. Because an exercise must be settled within
hours after receiving the notice of exercise, if the Fund fails to anticipate an
exercise, it may have to borrow from a bank (in amounts not exceeding 20% of the
Fund's total assets) pending settlement of the sale of securities in its
portfolio and would incur interest charges thereon.

When the Fund has written a call, there is also a risk that the market may
decline between the time the Fund has a call exercised against it, at a price
which is fixed as of the closing level of the index on the date of exercise, and
the time the Fund is able to sell stocks in its portfolio. As with stock
options, the Fund will not learn that an index option has been exercised until
the day following the exercise date but, unlike a call on stock where the Fund
would be able to deliver the underlying securities in settlement, the Fund may
have to sell part of its investment portfolio in order to make settlement in
cash, and the price of such investments might decline before they can be sold.
This timing risk makes certain strategies involving more than one option
substantially more risky with index options than with stock options. For
example, even if an index call which a Fund has written is "covered" by an index
call held by the Fund with the same strike price, the Fund will bear the risk
that the level of the index may decline between the close of trading on the date
the exercise notice is filed with the clearing corporation and the close of
trading on the date the Fund exercises the call it holds or the time the Fund
sells the call which, in either case, would occur no earlier than the day
following the day the exercise notice was filed.

If the Fund holds an index option and exercises it before final
determination of the closing index value for that day, it runs the risk that the
level of the underlying index may change before closing. If such a change causes
the exercised option to fall out-of-the-money, the Fund will be required to pay
the difference between the closing index value and the exercise price of the
option (times the applicable multiplier) to the assigned writer. Although the
Fund may be able to minimize this risk by withholding exercise instructions
until just before the daily cutoff time or by selling rather than exercising an
option when the index level is close to the exercise price, it may not be
possible to eliminate this risk entirely because the cutoff times for index
options may be earlier than those fixed for other types of options and may occur
before definitive closing index values are announced.

FUTURES CONTRACTS AND OPTIONS THEREON

The Fund may purchase and sell stock index and interest rate futures
contracts and options thereon which are traded on a commodities exchange or
board of trade to reduce certain risks of its investments and to attempt to
enhance return in accordance with regulations of the Commodity Futures Trading
Commission (CFTC). The Fund, and thus its investors, may lose money if the Fund
is unsuccessful in its use of these strategies. These futures contracts and
related options will be on stock indexes and foreign currencies. A futures
contract is an agreement to purchase or sell an agreed amount of securities or
currencies at a set price for delivery in the future.

STOCK INDEX AND INTEREST RATE FUTURES. The Fund may use stock index and
interest rate futures traded on a commodities exchange or board of trade for
certain hedging and risk management purposes and to attempt to enhance return in
accordance with regulations of the CFTC. The Fund primarily intends to use stock
index and interest rate futures to facilitate new investments or funding
redemptions. The Fund may sell stock index futures contracts (rather than
securities) in an effort to protect against price declines in securities
holdings that have developed large accumulated capital gains.

A stock index futures contract is an agreement in which the writer (or
seller) of the contract agrees to deliver to the buyer an amount of cash equal
to a specific dollar amount times the difference between the value of a specific
stock index at the close of the last trading day of the contract and the price
at which the agreement is made. No physical delivery of the underlying stocks in
the index is made. When the futures contract is entered into, each party
deposits with a broker or in a segregated custodial account approximately 5% of
the contract amount, called the "initial margin." Subsequent payments to and
from the broker, called "variation margin," will be made on a daily basis as the
price of the underlying stock index fluctuates, making the long and short
positions in the futures contracts more or less valuable, a process known as
"marked-to-market."

OPTIONS ON STOCK INDEX AND INTEREST RATE FUTURES. The Fund may also purchase
and write options on stock index and interest rate futures for certain hedging,
return enhancement and risk management purposes. In the case of options on stock
index futures, the holder of the option pays a premium and receives the right,
upon exercise of the option at a specified price during the option period, to
assume a position in a stock index futures contract (a long position if the
option is a call and a short position if the option is a put). If the option is
exercised by the holder before the last trading day during the option period,
the option writer delivers the futures position, as well as any balance in the
writer's futures margin account, which represents the amount by which the market
price of the stock index futures contract at exercise exceeds, in the case of a
call, or is less than, in the case of a put, the

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<PAGE>
exercise price of the option on the stock index future. If it is exercised on
the last trading day, the option writer delivers to the option holder cash in an
amount equal to the difference between the option exercise price and the closing
level of the relevant index on the date the option expires.

FUTURES CONTRACTS ON FOREIGN CURRENCIES. The Fund may buy and sell futures
contracts on foreign currencies such as the euro, and purchase and write options
thereon for hedging and risk management purposes. The Fund will engage in
transactions in only those futures contracts and options thereon that are traded
on a commodities exchange or a board of trade. A "sale" of a futures contract on
foreign currency means the assumption of a contractual obligation to deliver the
specified amount of foreign currency at a specified price in a specified future
month. A "purchase" of a futures contract means the assumption of a contractual
obligation to acquire the currency called for by the contract at a specified
price in a specified future month. At the time a futures contract is purchased
or sold, the Fund must allocate cash or securities as initial margin.
Thereafter, the futures contract is valued daily and the payment of "variation
margin" may be required, resulting in the Fund's paying or receiving cash that
reflects any decline or increase, respectively, in the contract's value, that
is, "marked-to-market."

LIMITATIONS ON PURCHASES AND SALES OF FUTURES CONTRACTS AND OPTIONS
THEREON. Under the regulations of the Commodity Exchange Act, an investment
company registered under the Investment Company Act is exempt from the
definition of "commodity pool operator," subject to compliance with certain
conditions. The exemption is conditioned upon a Fund's purchasing and selling
futures contracts and options thereon for BONA FIDE hedging transactions, except
that the Fund may purchase and sell futures contracts and options thereon for
any other purpose to the extent that the aggregate initial margin and option
premiums do not exceed 5% of the market value of the Fund's total assets.

Futures contracts and related options are generally subject to the coverage
requirements of the CFTC and the segregation requirements of the Securities and
Exchange Commission (Commission). If a Fund does not hold the security or
currency underlying the futures contract, the Fund will be required to segregate
on an ongoing basis cash or other liquid assets in an amount at least equal to
the Fund's obligations with respect to such futures contracts. The Fund may
place and maintain cash, securities and similar investments with a futures
commission merchant in amounts necessary to effect the Fund's transactions in
exchange-traded futures contracts and options thereon, provided certain
conditions are satisfied.

The Fund's successful use of futures contracts and related options depends
upon the investment adviser's ability to predict the direction of the market and
is subject to various additional risks. The correlation between movements in the
price of a futures contract and the movements in the index or price of the
currencies underlying the futures contract is imperfect and there is a risk that
the value of the indexes or currencies underlying the futures contract may
increase or decrease at a greater rate than the related futures contracts,
resulting in losses to the Fund. The use of these instruments will hedge only
the currency risks associated with investments in foreign securities, not market
risks. Certain futures exchanges or boards of trade have established daily
limits on the amount that the price of futures contracts or related options may
vary, either up or down, from the previous day's settlement price. These daily
limits may restrict the Fund's ability to purchase or sell certain futures
contracts or related options on any particular day. In addition, if the Fund
purchases futures to hedge against market advances before it can invest in
common stock in an advantageous manner and the market declines, the Fund might
experience a loss on the futures contract. In addition, the ability of the Fund
to close out a futures position or an option depends on a liquid secondary
market. There is no assurance that at any particular time liquid secondary
markets will exist for any particular futures contract or option thereon.

FUTURES CONTRACTS. As a purchaser of a futures contract, the Fund incurs an
obligation to take delivery of a specified amount of the obligation underlying
the futures contract at a specified time in the future for a specified price. As
a seller of a futures contract, the Fund incurs an obligation to deliver the
specified amount of the underlying obligation at a specified time in return for
an agreed upon price. The Fund may purchase futures contracts on stock indexes
and foreign currencies. The Fund may purchase futures contracts on debt
securities, including U.S. government securities, aggregates of debt securities,
stock indexes and foreign currencies.

A "sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver the securities or currency
underlying the contract at a specified price at a specified future time. A
"purchase" of a futures contract (or a "long" futures position) means the
assumption of a contractual obligation to acquire the securities or currency
underlying the contract at a specified price at a specified future time. Certain
futures contracts are settled on a net cash payment basis rather than by the
sale and delivery of the securities or currency underlying the futures contract.
U.S. futures contracts have been designed by exchanges that have been designated
as "contract markets" by the CFTC and must be executed through a futures
commission merchant (that is, a brokerage firm) which is a member of the
relevant contract market. Futures contracts trade on these contract markets and
the exchange's affiliated clearing organization guarantees payment of margin as
between the clearing members of the exchange.

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<PAGE>

At the time a futures contract is purchased or sold, the Fund must allocate
cash or other liquid assets as a deposit payment (initial margin). It is
expected that the initial margin on U.S. exchanges will vary from one-half of 1%
to 4% of the total value of the contract. Under certain circumstances, however,
such as during periods of high volatility, the Fund may be required by an
exchange to increase the level of its initial margin payment. Thereafter, the
futures contract is valued daily and the payment in cash of "variation margin"
may be required, a process known as "mark-to-market." Each day the Fund is
required to provide or is entitled to receive variation margin in an amount
equal to any change in the value of the contract since the preceding day.
Initial margin requirements are established by the exchanges on which futures
contracts trade and may, from time to time, change. In addition, brokers may
establish margin deposit requirements in excess of those required by the
exchanges.

Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a brokers' client but is, rather, a good faith deposit on a futures
contract which will be returned to the Fund upon the proper termination of the
futures contract. The margin deposits made are marked-to-market daily and the
Fund may be required to make subsequent deposits into the segregated account,
maintained at its Custodian for that purpose, of cash or other liquid assets,
called "variation margin," in the name of the broker, which are reflective of
price fluctuations in the futures contract.

Although most futures contracts call for actual delivery or acceptance of
securities or cash, the contracts usually are closed out before the settlement
date without the making or taking of delivery. A futures contract sale is closed
out by effecting a futures contract purchase for the same aggregate amount of
the specific type of security and the same delivery date. If the sale price
exceeds the offsetting purchase price, the seller would be paid the difference
and would realize a gain. If the offsetting purchase price exceeds the sale
price, the seller would pay the difference and would realize a loss. Similarly,
a futures contract purchase is closed out by effecting a futures contract sale
for the same aggregate amount of the specific type of security (or currency) and
the same delivery date. If the offsetting sale price exceeds the purchase price,
the purchaser would realize a gain, whereas if the purchase price exceeds the
offsetting sale price, the purchaser would realize a loss. There is no assurance
that the Fund will be able to enter into a closing transaction.

The ordinary spreads between values in the cash and futures markets, due to
differences in the character of those markets, are subject to distortions. In
addition, futures contracts entail risks. First, all participants in the futures
market are subject to initial and variation margin requirements. Rather than
meeting additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of the
futures market depends on participants entering into offsetting transactions
rather than making or taking delivery. To the extent participants decide to make
or take delivery, liquidity in the futures market could be reduced, thus
producing price distortions. Third, from the point of view of speculators, the
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities market. Increased participation by speculators in
the futures market may cause temporary price distortions. Due to the possibility
of distortion, a correct forecast of general interest rate trends by the
investment adviser may still not result in a successful transaction.

OPTIONS ON FUTURES CONTRACTS

The Fund will also enter into options on futures contracts for certain BONA
FIDE hedging, return enhancement and risk management purposes. The Fund may
purchase put and call options and write (that is, sell) "covered" put and call
options on futures contracts that are traded on U.S. and foreign exchanges. An
option on a futures contract gives the purchaser the right, but not the
obligation, 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) at a specified
exercise price at any time during the option exercise period. The writer of the
option is required upon exercise to assume an offsetting futures position (a
short position if the option is a call and a long position if the option is a
put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by delivery
of the accumulated cash balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, 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 futures contract. Currently options can
be purchased or written with respect to futures contracts on various foreign
currencies, including the Australian Dollar, Canadian Dollar, Japanese Yen and
Swiss Franc. With respect to stock indexes, options are traded on futures
contracts for various U.S. and foreign stock indexes including the Standard &
Poor's (S&P) 500 Composite Stock Price Index and the New York Stock Exchange
(NYSE) Composite Index.

The holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guarantee that such closing
transactions can be effected.

The Fund may write (that is, sell) put and call options on futures contracts
only if they are covered. The Fund will be considered "covered" with respect to
a call option it writes on a futures contract if the Fund owns the securities or
currency which is deliverable under the futures contract or an option to
purchase that futures contract having a strike price equal to or less than the

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<PAGE>

strike price of the "covered" option and having an expiration date not earlier
than the expiration date of the "covered" option, or if it segregates and
maintains with its Custodian for the term of the option cash or other liquid
assets, equal to the fluctuating value of the optioned futures. The Fund will be
considered "covered" with respect to a put option it writes on a futures
contract if it owns an option to sell that futures contract having a strike
price equal to or greater than the strike price of the "covered" option and
having an expiration date not earlier than the expiration date of the "covered"
option, or if it segregates with its Custodian for the term of the option cash
or other liquid assets at all times equal in value to the exercise price of the
put (less any initial margin deposited by the Fund with its Custodian with
respect to such put option). There is no limitation on the amount of a Fund's
assets which can be segregated.

Writing a put option on a futures contract serves as a partial hedge against
an increase in the value of securities the Fund intends to acquire. If the
futures price at expiration of the option is above the exercise price, the Fund
will retain the full amount of the option premium which provides a partial hedge
against any increase that may have occurred in the price of the securities the
Fund intends to acquire. If the market price of the underlying futures contract
is below the exercise price when the option is exercised, the Fund will incur a
loss, which may be wholly or partially offset by the decrease in the value of
the securities the Fund intends to acquire.

Writing a call option on a futures contract serves as a partial hedge
against a decrease in the value of the Fund's portfolio securities. If the
market price of the underlying futures contract at expiration of a written call
option is below the exercise price, the Fund will retain the full amount of the
option premium, thereby partially hedging against any decline that may have
occurred in the Fund's holdings of securities. If the futures price when the
option is exercised is above the exercise price, however, the Fund will incur a
loss, which may be wholly or partially offset by the increase in the value of
the securities in the Fund's portfolio which were being hedged.

The Fund will purchase put options on futures contracts to hedge its
portfolio against the risk of a decline in the value of the securities it owns
as a result of market activity or fluctuating currency exchange rates. The Fund
will also purchase call options on futures contracts as a hedge against an
increase in the value of securities the Fund intends to acquire as a result of
market activity or fluctuating currency exchange rates.

FOREIGN CURRENCY FUTURES CONTRACTS AND OPTIONS THEREON

Generally, foreign currency futures contracts and options thereon are
similar to the futures contracts and options thereon discussed previously. By
entering into currency futures and options thereon on U.S. and foreign
exchanges, the Fund will seek to establish the rate at which it will be entitled
to exchange U.S. dollars for another currency at a future time. By selling
currency futures, the Fund will seek to establish the number of dollars it will
receive at delivery for a certain amount of a foreign currency. In this way,
whenever the Fund anticipates a decline in the value of a foreign currency
against the U.S. dollar, the Fund can attempt to "lock in" the U.S. dollar value
of some or all of the securities held in its portfolio that are denominated in
that currency. By purchasing currency futures, the Fund can establish the number
of dollars it will be required to pay for a specified amount of a foreign
currency in a future month. Thus if the Fund intends to buy securities in the
future and expects the U.S. dollar to decline against the relevant foreign
currency during the period before the purchase is effected, the Fund can attempt
to "lock in" the price in U.S. dollars of the securities it intends to acquire.

The purchase of options on currency futures will allow the Fund, for the
price of the premium and related transaction costs it must pay for the option,
to decide whether or not to buy (in the case of a call option) or to sell (in
the case of a put option) a futures contract at a specified price at any time
during the period before the option expires. If the investment adviser, in
purchasing an option, has been correct in its judgment concerning the direction
in which the market or the price of a foreign currency would move as against the
U.S. dollar, the Fund may exercise the option and thereby take a futures
position to hedge against the risk it had correctly anticipated or close out the
option position at a gain that will offset, to some extent, market or currency
exchange losses otherwise suffered by the Fund. If exchange rates move in a way
the investment adviser did not anticipate, however, the Fund will have incurred
the expense of the option without obtaining the expected benefit; any such
movement in exchange rates may also thereby reduce rather than enhance the
Fund's profits on its underlying securities transactions.

The Fund may also use European-style options. This means that the option is
only exercisable immediately prior to its expiration. This is in contrast to
American-style options, which are exercisable at any time prior to the
expiration date of the option.

ADDITIONAL RISKS OF OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS

Options, futures contracts and options on futures contracts on securities
and currencies may be traded on foreign exchanges. Such transactions may not be
regulated as effectively as similar transactions in the U.S., may not involve a
clearing mechanism and related guarantees, and are subject to the risk of
governmental actions affecting trading in, or the prices of, foreign securities.
The value of such positions also could be adversely affected by (1) other
complex foreign political, legal and economic

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<PAGE>
factors, (2) lesser availability than in the U.S. of data on which to make
trading decisions, (3) delays in the Fund's ability to act upon economic events
occurring in the foreign markets during non-business hours in the U.S., (4) the
imposition of different exercise and settlement terms and procedures and margin
requirements than in the U.S. and (5) lesser trading volume.

Exchanges on which options, futures and options on futures are traded may
impose limits on the positions that the Fund may take in certain circumstances.

SPECIAL RISK CONSIDERATIONS RELATING TO FUTURES AND OPTIONS THEREON

There are several risks in connection with the use of futures contracts as a
hedging device. Due to the imperfect correlation between the price of futures
contracts and movements in the currency or group of currencies, the price of a
futures contract may move more or less than the price of the currencies being
hedged. In the case of futures contracts on securities indexes, the correlation
between the price of the futures contract and the movements in the index may not
be perfect. Therefore, a correct forecast of currency rates, market trends or
international political trends by the investment adviser may still not result in
a successful hedging transaction.

The Fund's ability to establish and close out positions in futures contracts
and options on futures contracts will be subject to the development and
maintenance of liquid markets. Although the Fund generally will purchase or sell
only those futures contracts and options thereon for which there appears to be a
liquid market, there is no assurance that a liquid market on an exchange will
exist for any particular futures contract or option thereon at any particular
time. In the event no liquid market exists for a particular futures contract or
option thereon in which the Fund maintains a position, it will not be possible
to effect a closing transaction in that contract or to do so at a satisfactory
price and the Fund would have to either make or take delivery under the futures
contract or, in the case of a written option, wait to sell the underlying
securities until the option expires or is exercised or, in the case of a
purchased option, exercise the option. In the case of a futures contract or an
option on a futures contract which the Fund has written and which the Fund is
unable to close, the Fund would be required to maintain margin deposits on the
futures contract or option and to make variation margin payments until the
contract is closed.

Successful use of futures contracts and options thereon by the Fund is
subject to the ability of the investment adviser to predict correctly movements
in the direction of interest and foreign currency rates and the market
generally. If the investment adviser's expectations are not met, the Fund would
be in a worse position than if a hedging strategy had not been pursued. For
example, if the Fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of securities in its
portfolio and the price of such securities increases instead, the Fund will lose
part or all of the benefit of the increased value of its securities because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash to meet daily variation margin
requirements, it may have to sell securities to meet the requirements. These
sales may, but will not necessarily, be at increased prices which reflect the
rising market. The Fund may have to sell securities at a time when it is
disadvantageous to do so.

The hours of trading of futures contracts may not conform to the hours
during which the Fund may trade the underlying securities. To the extent that
the futures markets close before the securities markets, significant price and
rate movements can take place in the securities markets that cannot be reflected
in the futures markets.

RISKS OF RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES

Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transaction costs to which the Fund
would not be subject absent the use of these strategies. The Fund, and thus its
investors, may lose money through any unsuccessful use of these strategies. If
the investment adviser's predictions of movements in the direction of the
securities, foreign currency or interest rate markets are inaccurate, the
adverse consequences to the Fund may leave the Fund in a worse position than if
such strategies were not used. Risks inherent in the use of options, foreign
currency and futures contracts and options on futures contracts include
(1) dependence on the investment adviser's ability to predict correctly
movements in the direction of securities prices, interest rates and currency
markets; (2) imperfect correlation between the price of options and futures
contracts and options thereon and movements in the prices of the securities or
currencies being hedged; (3) the fact that skills needed to use these strategies
are different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any time;
(5) the risk that the counterparty may be unable to complete the transaction and
(6) the possible inability of the Fund to purchase or sell a portfolio security
at a time that otherwise would be favorable for it to do so, or the possible
need for the Fund to sell a portfolio security at a disadvantageous time, due to
the need for the Fund to maintain "cover" or to segregate assets in connection
with hedging transactions.

LIMITATIONS ON THE PURCHASE AND SALE OF OPTIONS ON STOCK INDEXES AND FUTURES
CONTRACTS AND OPTIONS ON FUTURES CONTRACTS

The Fund will engage in transactions in futures contracts and options
thereon only for BONA FIDE hedging, return enhancement and risk management
purposes, in each case in accordance with the rules and regulations of the CFTC,
and not for speculation.

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The Fund will write put options on stock indexes and futures contracts on
foreign currencies only if they are covered by segregating with the Fund's
Custodian an amount of cash or other liquid assets equal to the aggregate
exercise price of the puts. In accordance with CFTC regulations, the Fund may
not purchase or sell futures contracts or options thereon if the initial margin
and premiums for options on futures would exceed 5% of the market value of the
Fund's total assets after taking into account unrealized profits and unrealized
losses on such contracts; provided, however, that in the case of an option that
is in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The above restriction does not apply
to the purchase and sale of futures contracts and options thereon for BONA FIDE
hedging purposes within the meaning of the CFTC regulations. In instances
involving the purchase of futures contracts or call options thereon or the
writing of put options thereon by the Fund, an amount of cash and other liquid
assets equal to the market value of the futures contracts and options thereon
(less any related margin deposits), will be segregated with the Fund's Custodian
to cover the position, or alternative cover will be employed, thereby insuring
that the use of such instruments is unleveraged. The Fund does not intend to
purchase options on securities indexes if the aggregate premiums paid for such
outstanding options would exceed 10% of the Fund's total assets.

Except as described below, the Fund will write call options on indexes only
if on such date it holds a portfolio of stocks at least equal to the value of
the index times the multiplier times the number of contracts. When the Fund
writes a call option on a broadly-based stock market index, the Fund will
segregate with its Custodian, or pledge to a broker as collateral for the
option, cash or other liquid assets substantially replicating the movement of
the index, in the judgment of the Fund's investment adviser, with a market value
at the time the option is written of not less than 100% of the current index
value times the multiplier times the number of contracts.

If the Fund has written an option on an industry or market segment index, it
will segregate with its Custodian, or pledge to a broker as collateral for the
option, at least ten "qualified securities," all of which are stocks of issuers
in such industry or market segment, with a market value at the time the option
is written of not less than 100% of the current index value times the multiplier
times the number of contracts. Such stocks will include stocks which represent
at least 50% of the weighting of the industry or market segment index and will
represent at least 50% of the Fund's holdings in that industry or market
segment. No individual security will represent more than 15% of the amount so
segregated or pledged in the case of broadly-based stock market index options or
25% of such amount in the case of industry or market segment index options. If
at the close of business on any day the market value of such qualified
securities so segregated or pledged falls below 100% of the current index value
times the multiplier times the number of contracts, the Fund will so segregate
or pledge an amount in cash or other liquid assets equal in value to the
difference. In addition, when a Fund writes a call on an index which is
in-the-money at the time the call is written, the Fund will segregate with its
Custodian or pledge to the broker as collateral cash or other liquid assets
equal in value to the amount by which the call is in-the-money times the
multiplier times the number of contracts. Any amount segregated pursuant to the
foregoing sentence may be applied to the Fund's obligation to segregate
additional amounts in the event that the market value of the qualified
securities falls below 100% of the current index value times the multiplier
times the number of contracts. A "qualified security" is an equity security
which is listed on a national securities exchange or listed on NASDAQ against
which the Fund has not written a stock call option and which has not been hedged
by the Fund by the sale of stock index futures. However, if the Fund holds a
call on the same index as the call written where the exercise price of the call
held is equal to or less than the exercise price of the call written or greater
than the exercise price of the call written if the difference is segregated by
the Fund in cash or other liquid assets with its Custodian, it will not be
subject to the requirements described in this paragraph.

The Fund may engage in futures contracts and options on futures transactions
as a hedge against changes, resulting from market or political conditions, in
the value of the currencies to which the Fund is subject or to which the Fund
expects to be subject in connection with future purchases. The Fund may engage
in such transactions when they are economically appropriate for the reduction of
risks inherent in the ongoing management of the Fund. The Fund may write options
on futures contracts to realize through the receipt of premium income a greater
return than would be realized in the Fund's portfolio securities alone.

The Fund's purchase and sale of futures contracts and purchase and writing
of options on futures contracts will be for the purpose of protecting its
portfolio against anticipated future changes in foreign currency exchange rates
which might otherwise either adversely affect the value of the Fund's portfolio
securities or adversely affect the prices of securities that the Fund intends to
purchase at a later date, and to enhance the Fund's return. As an alternative to
BONA FIDE hedging as defined by the CFTC, the Fund may comply with a different
standard established by CFTC rules with respect to futures contracts and options
thereon purchased by the Fund incidental to the Fund's activities in the
securities markets, under which the value of the assets underlying such
positions will not exceed the sum of (1) cash or other liquid assets segregated
for this purpose, (2) cash proceeds on existing investments due within thirty
days and (3) accrued profits on the particular futures contract or option
thereon.

In addition, CFTC regulations may impose limitations on the Fund's ability
to engage in certain return enhancement and risk management strategies. There
are no limitations on the Fund's use of futures contracts and options on futures
contracts beyond the restrictions set forth above.

Although the Fund does not intend to purchase or sell futures and options on
futures only on exchanges where there appears to be an active market, there is
no guarantee that an active market will exist for any particular contract or at
any particular time. If there is not a liquid market at a particular time, it
may not be possible to close a futures position at such time, and, in the event
of

B-12
<PAGE>
adverse price movements, the Fund would continue to be required to make daily
cash payments of variation margin. However, if a futures contract has been used
to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of securities, if any, may partially or completely offset losses on the
futures contracts. However, there is no guarantee that the price movements of
the securities will, in fact, correlate with the price movements in the futures
contracts and thus provide an offset to losses on a futures contract.

POSITION LIMITS. Transactions by the Fund in futures contracts and options
will be subject to limitations, if any, established by each of the exchanges,
boards of trade or other trading facilities (including NASDAQ) governing the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written on the same or different exchanges, boards of trade or
other trading facilities or are held or written in one or more accounts or
through one or more brokers. Thus, the number of futures contracts and options
which the Fund may write or purchase may be affected by the futures contracts
and options written or purchased by other investment advisory clients of the
investment adviser. An exchange, board of trade or other trading facility may
order the liquidations of positions found to be in excess of these limits, and
it may impose certain other sanctions.

FOREIGN CURRENCY FORWARD CONTRACTS

The Fund may enter into foreign currency forward contracts to protect the
value of its assets against future changes in the level of currency exchange
rates. The Fund also may purchase and sell foreign currency forward contracts,
futures contracts on foreign currency, and options on futures contracts on
foreign currency to protect against the effect of adverse changes in foreign
currencies. The Fund may enter into such contracts on a spot, that is, cash,
basis at the rate then prevailing in the currency exchange market or on a
forward basis, by entering into a forward contract to purchase or sell currency.
A forward contract on foreign currency is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days agreed
upon by the parties from the date of the contract at a price set on the date of
the contract.

The Fund's dealings in forward contracts will be limited to hedging
involving either specific transactions or portfolio positions. The Fund may not
use forward contracts, options on foreign currencies, futures contracts on
foreign currencies and options on such contracts in order to generate income,
although the use of such contracts may incidentally generate income. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a different currency (cross hedge). Although there
are no limits on the number of forward contracts which the Fund may enter into,
the Fund may not position hedge (including cross hedges) with respect to a
particular currency for an amount greater than the aggregate market value
(determined at the time of making any sale of foreign currency) of the
securities being hedged.

RISKS RELATED TO FOREIGN CURRENCY FORWARD CONTRACTS

The Fund may enter into foreign currency forward contracts in several
circumstances. When the Fund enters into a contract for the purchase or sale of
a security denominated in a foreign currency, or when the Fund anticipates the
receipt in a foreign currency of dividends or interest payments on a security
which it holds, the Fund may desire to "lock-in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for a fixed amount of
dollars, for the purchase or sale of the amount of foreign currency involved in
the underlying transactions, the Fund may be able to protect itself against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the foreign currency during the period between the date on which
the security is purchased or sold, or on which the dividend or interest payment
is declared, and the date on which such payments are made or received.

Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the Fund's portfolio securities denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the successful execution of
a short-term hedging strategy is highly uncertain. If the Fund enters into a
hedging transaction as described above, the transaction will be "covered" by the
position being hedged, or the Fund's Custodian will segregate assets in an
amount equal to the value of the Fund's total assets committed to the
consummation of foreign currency forward contracts (less the value of the
covering positions, if any). If the value of the securities placed in the
segregated account declines, additional cash or securities will be placed in the
account so that the value of the account will, at all times, equal the amount of
the Fund's net commitments with respect to such contracts.

B-13
<PAGE>

The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.

It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the forward contract.
Accordingly, if a decision is made to sell the security and make delivery of the
foreign currency and if the market value of the security is less than the amount
of foreign currency that the Fund is obligated to deliver, then it would be
necessary for the Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase).

If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. Should forward contract prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent that the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward contract prices increase,
the Fund will suffer a loss to the extent that the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.

The Fund's dealing in foreign currency forward contracts will generally be
limited to the transactions described above. Of course, the Fund is not required
to enter into such transactions with regard to its foreign currency-denominated
securities. It also should be recognized that this method of protecting the
value of the Fund's portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities which are unrelated to exchange rates. Additionally, although such
contracts tend to minimize the risk of loss due to decline in the value of the
hedged currency, at the same time they tend to limit any potential gain which
might result should the value of such currency increase.

Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (the spread) between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.

FOREIGN CURRENCY STRATEGIES--SPECIAL CONSIDERATIONS

The Fund may use options on foreign currencies, futures on foreign
currencies, options on futures contracts on foreign currencies and foreign
currency forward contracts, to hedge against movements in the values of the
foreign currencies in which the Fund's securities are denominated. Such currency
hedges can protect against price movements in a security that the Fund owns or
intends to acquire that are attributable to changes in the value of the currency
in which it is denominated. Such hedges do not, however, protect against price
movements in the securities that are attributable to other causes.

The Fund might seek to hedge against changes in the value of a particular
currency when no futures contract, forward contract or option involving that
currency is available or one of such contracts is more expensive than certain
other contracts. In such cases, the Fund may hedge against price movements in
that currency by entering into a contract on another currency or basket of
currencies, the values of which the Fund's investment adviser believes will have
a positive correlation to the value of the currency being hedged. The risk that
movements in the price of the contract will not correlate perfectly with
movements in the price of the currency being hedged is magnified when this
strategy is used.

The value of futures contracts, options on futures contracts, forward
contracts and options on foreign currencies depends on the value of the
underlying currency relative to the U.S. dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of futures contracts, forward
contracts or options, the Fund could be disadvantaged by dealing in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.

There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirements that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the futures contracts or options until they
reopen.

Settlement of futures contracts, forward contracts and options involving
foreign currencies might be required to take place within the country issuing
the underlying currency. Thus, the Fund might be required to accept or make
delivery of the underlying

B-14
<PAGE>
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.

REPURCHASE AGREEMENTS

The Fund may enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually quite short, possibly
overnight or a few days, although it may extend over a number of months. The
resale price is in excess of the purchase price, reflecting an agreed-upon rate
of return effective for the period of time the Fund's money is invested in the
repurchase agreement. The Fund's repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily, and if the value of the
instruments declines, the Fund will require additional collateral. If the seller
defaults and the value of the collateral securing the repurchase agreement
declines, the Fund may incur a loss.

The Fund will enter into repurchase transactions only with parties meeting
creditworthiness standards approved by the investment adviser. In the event of a
default or bankruptcy by a seller, the Fund may liquidate the collateral.

The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Investments Fund Management LLC (PIFM) pursuant
to an order of the Commission. On a daily basis, any uninvested cash balances of
the Fund may be aggregated with those of such investment companies and invested
in one or more repurchase agreements. Each fund participates in the income
earned or accrued in the joint account based on the percentage of its
investment.

SHORT SALES AND SHORT SALES AGAINST-THE-BOX

The Fund may make short sales of securities (sales of securities the Fund
does not own made in anticipation of a decline in market value) or maintain a
short position, provided that at all times when a short position is open, the
Fund owns an equal amount of such securities or securities convertible into or
exchangeable for such securities; provided that if further consideration is
required in connection with the conversion or exchange, cash or other liquid
assets in an amount equal to such consideration must be segregated, for an equal
amount of the securities of the same issuer as the securities sold short (a
short sale against-the-box). Not more than 25% of a Fund's net assets
(determined at the time of the short sale) may be subject to such sales. The
Fund may invest up to 5% of its assets in uncovered short sales.

LENDING OF SECURITIES

Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that outstanding loans do not exceed in the aggregate 33 1/3% of the value of
the Fund's total assets and provided that such loans are callable at any time by
the Fund and are at all times secured by cash or equivalent collateral
(including a secured letter of credit) that is equal to at least the market
value, determined daily, of the loaned securities. The collateral is segregated
pursuant to applicable regulations. During the time portfolio securities are on
loan, the borrower will pay the Fund an amount equivalent to any dividend or
interest paid on such securities and the Fund may invest the cash collateral and
earn additional income, or it may receive an agreed-upon amount of interest
income from the borrower. The advantage of such loans is that the Fund continues
to receive payments in lieu of the interest and dividends on the loaned
securities, while at the same time earning interest either directly from the
borrower or on the collateral, which will be invested in short-term obligations.

A loan may be terminated by the borrower or by the Fund at any time. If the
borrower fails to maintain the requisite amount of collateral, the loan
automatically terminates, and the Fund could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement cost
over collateral. As with any extensions of credit, there are risks of delay in
recovery and in some cases loss of rights in the collateral should the borrower
of the securities fail financially. However, these loans of portfolio securities
will only be made to firms determined to be creditworthy pursuant to procedures
approved by the Board of Trustees of the Company. On termination of the loan,
the borrower is required to return the securities to the Fund, and any gain or
loss in the market price during the loan would inure to the Fund.

Since voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Fund's investment in the securities
which are the subject of the loan. The Fund will pay reasonable finders',
administrative and custodial fees in connection with a loan of its securities or
may share the interest earned on collateral with the borrower.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future in order to secure what is considered to be an advantageous
price and yield to the Fund at the time of entering into the transaction. The
Fund's Custodian will segregate cash or other liquid assets having a value equal
to or greater than the Fund's purchase

B-15
<PAGE>
commitments. The securities so purchased are subject to market fluctuation and
no interest accrues to the purchaser during the period between purchase and
settlement. At the time of delivery of the securities the value may be more or
less than the purchase price and an increase in the percentage of the Fund's
assets committed to the purchase of securities on a when-issued or delayed
delivery basis may increase the volatility of the Fund's net asset value.

BORROWING

The Fund may borrow up to 33 1/3% of the value of its total assets
(calculated at the time of the borrowing) from banks for temporary,
extraordinary or emergency purposes or for the clearance of transactions. Each
Fund may pledge up to 33 1/3% of its total assets to secure these borrowings. If
the Fund borrows to invest in securities, any investment gains made on the
securities in excess of interest paid on the borrowing will cause the net asset
value of the shares to rise faster than would otherwise be the case. On the
other hand, if the investment performance of the additional securities purchased
fails to cover their costs (including any interest paid on the money borrowed)
to the Fund, the net asset value of the Fund's shares will decrease faster than
would otherwise be the case. This is the speculative factor known as "leverage."
If the Fund's asset coverage for borrowings falls below 300%, the Fund will take
prompt action (within 3 days) to reduce its borrowings. If the 300% asset
coverage should decline as a result of market fluctuations or other reasons, the
Fund may be required to sell portfolio securities to reduce the debt and restore
the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time. The Fund will not
purchase portfolio securities when borrowings exceed 5% of the value of its
total assets.

ILLIQUID SECURITIES

The Fund may hold up to 15% of its net assets in illiquid securities. If the
Fund were to exceed this limit, the investment adviser would take prompt action
to reduce the Fund's holdings in illiquid securities to no more than 15% of its
net assets, as required by applicable law. Illiquid securities include
repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Repurchase agreements subject to
demand are deemed to have a maturity equal to the applicable notice period.

Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (Securities Act),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.

In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.

Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of 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.

Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and privately-placed commercial paper for which there is a
readily available market are treated as liquid only when deemed liquid under
procedures established by the Board of Trustees. The Fund's investment in
Rule 144A securities could have the effect of increasing illiquidity to the
extent that qualified institutional buyers become, for a limited time,
uninterested in purchasing Rule 144A securities. The investment adviser will
monitor the liquidity of such restricted securities subject to the supervision
of the Board of Trustees. In reaching liquidity decisions, the investment
adviser will consider, among others, the following factors: (1) the frequency of
trades and quotes for the security; (2) the number of dealers wishing to
purchase or sell the security and the number of other potential purchasers;
(3) dealer undertakings to make a market in the security and (4) the nature of
the security and the nature of the marketplace trades (for example, the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer). In addition, in order for commercial paper that is
issued in reliance on Section 4(2) of the Securities Act to be considered
liquid, (i) it

B-16
<PAGE>
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations (NRSRO), or if only one
NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable
quality in the view of the investment adviser; and (ii) it must not be "traded
flat" (that is, without accrued interest) or in default as to principal or
interest.

SECURITIES OF OTHER INVESTMENT COMPANIES

The Fund is permitted to invest up to 10% of its total assets in securities
of other investment companies and may purchase affiliated investment company
shares as permitted by the Commission. If the Fund does invest in securities of
other investment companies, shareholders of the Fund may be subject to duplicate
management and advisory fees. See "Investment Restrictions."

EXCHANGE-TRADED FUNDS. The Fund is permitted to invest in exchange-traded
funds. These securities are not traded at net asset value, i.e., they can be
sold at a premium or with a discount.

SEGREGATED ASSETS

The Fund will segregate with its Custodian, State Street Bank and Trust
Company (State Street), cash, U.S. government securities, equity securities
(including foreign securities), debt securities or other liquid, unencumbered
assets, equal in value to its obligations in respect of potentially leveraged
transactions. These include forward contracts, when-issued and delayed delivery
securities, futures contracts, written options and options on futures contracts
(unless otherwise covered). If collateralized or otherwise covered, in
accordance with Commission guidelines, these will not be deemed to be senior
securities. The assets segregated will be marked-to-market daily.

DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS

When conditions dictate a temporary defensive strategy or pending investment
of proceeds from sales of the Fund's shares, the Fund may invest without limit
in money market instruments, including commercial paper of corporations,
certificates of deposit, bankers' acceptances and other obligations of domestic
and foreign banks, non-convertible debt securities (corporate and government),
obligations issued or guaranteed by the U.S. government, its agencies or its
instrumentalities, repurchase agreements and cash (foreign currencies or United
States dollars). Such investments may be subject to certain risks, including
future political and economic developments, the possible imposition of
withholding taxes on interest income, the seizure or nationalization of foreign
deposits and foreign exchange controls or other restrictions.

PORTFOLIO TURNOVER

As a result of the investment policies described above, the Fund may engage
in a substantial number of portfolio transactions. The Fund's portfolio turnover
rate for the fiscal period ended October 31, 1999 was 67% and for the fiscal
year ended October 31, 2000 was 94%. The portfolio turnover rate is generally
the percentage computed by dividing the lesser of portfolio purchases or sales
(excluding all securities, including options, whose maturities or expiration
date at acquisition were one year or less) by the monthly average value of the
portfolio. High portfolio turnover (100% or more) involves correspondingly
greater brokerage commissions and other transaction costs, which are borne
directly by the Fund. In addition, high portfolio turnover may also mean that a
proportionately greater amount of distributions to shareholders will be taxed as
ordinary income rather than long-term capital gains compared to investment
companies with lower portfolio turnover. See "Brokerage Allocation and Other
Practices" and "Taxes, Dividends and Distributions."

INVESTMENT RESTRICTIONS

The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the Fund's
outstanding voting securities," when used in this Statement of Additional
Information, means the lesser of (1) 67% of the shares represented at a meeting
at which more than 50% of the outstanding voting shares are present in person or
represented by proxy or (2) more than 50% of the outstanding voting shares.

The Fund may not:

1. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow from banks up to 33 1/3% of the value of its total assets
(calculated when the loan is made) for temporary, extraordinary or emergency
purposes or for the clearance of transactions. The Fund may pledge up to 33 1/3%
of the value of its total assets to secure such borrowings. For purposes of this
restriction, the purchase or sale of securities on a when-issued or delayed
delivery basis, forward foreign currency exchange contracts and collateral
arrangements relating thereto, and collateral arrangements with respect to
futures contracts and options thereon and with respect to the writing of options
and obligations of the Fund to Trustees pursuant to deferred compensation
arrangements are not deemed to be a pledge of assets subject to this
restriction.

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<PAGE>

2. Purchase any security (other than obligations of the U.S. government, its
agencies or instrumentalities) if as a result, with respect to 75% of the Fund's
total assets, more than 5% of the Fund's total assets (determined at the time of
investment) would then be invested in securities of a single issuer.

3. Buy or sell real estate or interests in real estate, except that the Fund
may purchase and sell securities which are secured by real estate, securities of
companies which invest or deal in real estate and publicly traded securities of
real estate investment trusts.

4. Buy or sell commodities or commodity contracts, except that the Fund may
purchase and sell financial futures contracts and options thereon, and foreign
currency forward contracts.

5. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws.

6. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 33 1/3 of the Fund's total assets.

7. Purchase any security (other than obligations of the U.S. Government, its
agencies or instrumentalities) if as a result 25% or more of the Fund's total
assets (determined at the time of investment) would be invested in a single
industry.

Whenever any fundamental investment policy or investment restriction states
a maximum percentage of a Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that a Fund's asset
coverage for borrowings falls below 300%, the Fund will take prompt action to
reduce its borrowings, as required by applicable law.

Although not fundamental, the Fund has the following additional investment
restrictions.

The Fund may not:

1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Fund of initial or maintenance margin in
connection with futures or options is not considered the purchase of a security
on margin.

2. Invest for the purpose of exercising control or management.

3. Purchase more than 10% of all outstanding voting securities of any one
issuer.

4. Invest in securities of other investment companies, except: (i) purchases
in the open market involving only customary brokerage commissions and as a
result of which the Fund will not hold more than 3% of the outstanding voting
securities of any one investment company, will not have invested more than 5% of
its total assets in any one investment company and will not have invested more
than 10% of its total assets (determined at the time of investment) in such
securities of one or more investment companies, (ii) as part of a merger,
consolidation or other acquisition, or (iii) purchases of affiliated investment
company shares pursuant to and subject to such limits as the Commission may
impose by rule or order.

5. Make uncovered short sales of securities in excess of 5% of its total
assets. The Fund may use short sales "against-the-box".

B-18
<PAGE>
MANAGEMENT OF THE COMPANY

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) POSITION WITH COMPANY DURING PAST 5 YEARS
------------------------ --------------------- ---------------------
<S> <C> <C>

Saul K. Fenster, Ph.D. (67) Trustee President (since December 1978) of New Jersey
Institute of Technology; Commissioner (since 1998)
of the Middle States Association, Commission on
Higher Education; member (since 1985) of the New
Jersey Commission on Science and Technology;
formerly a director or trustee (1987-1999) of New
Jersey State Chamber of Commerce, Society of
Manufacturing Engineering Education Foundation,
the Research and Development Council of New
Jersey, Prosperity New Jersey, Inc., the Edison
Partnership, National Action Council for
Minorities in Engineering and IDT Corporation.

Delayne Dedrick Gold (63) Trustee Marketing and Management Consultant.

*Robert F. Gunia (54) Vice President and Executive Vice President and Chief Administrative
Trustee Officer (since June 1999) of Prudential
Investments; Corporate Vice President (since
September 1997) of The Prudential Insurance
Company of America (Prudential); Executive Vice
President and Treasurer (since December 1996) of
Prudential Investments Fund Management LLC (PIFM);
President (since April 1999) of Prudential
Investment Management Services LLC (PIMS);
formerly Senior Vice President (March 1987-May
1999) of Prudential Securities Incorporated
(Prudential Securities); Chief Administrative
Officer (July 1990-September 1996), Director
(January 1989-September 1996), Executive Vice
President, Treasurer and Chief Financial Officer
(June 1987-September 1996) of Prudential Mutual
Fund Management, Inc.

Douglas H. McCorkindale (61) Trustee Chairman (since June 2000) and President (since
September 1997) of Gannett Co. Inc. (publishing
and media); President and Chief Executive Officer
(since August 2000) of Central Newspapers, Inc.;
formerly Vice Chairman (March 1984-May 2000) of
Gannett Co. Inc.; Director of Gannett Co. Inc.,
Continental Airlines, Inc. and Global Crossing
Ltd.

W. Scott McDonald, Jr. (63) Trustee Vice President (since 1997) of Kaludis Consulting
Group, Inc., a Sallie Mae company serving higher
education; formerly Principal of Scott McDonald &
Associates (1995-1997); Chief Operating Officer
(1991-1995) of Fairleigh Dickinson University and
Executive Vice President and Chief Operating
Officer (1975-1991) of Drew University; Interim
President (1988-1990), Drew University; and a
founding director of School, College and
University Underwriters Ltd.

Thomas T. Mooney (59) Trustee President of the Greater Rochester Metro Chamber of
Commerce; former Rochester City Manager; former
Deputy Monroe County Executive; Trustee of Center
for Governmental Research, Inc.; Director of Blue
Cross of Rochester, Monroe County Water Authority
and Executive Service Corps of Rochester.

Stephen P. Munn (58) Trustee Chairman (since January 1994), Director and Chief
Executive Officer (since 1988) and former
President of Carlisle Companies Incorporated
(manufacturer of industrial products).
</TABLE>

B-19
<PAGE>

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) POSITION WITH COMPANY DURING PAST 5 YEARS
------------------------ --------------------- ---------------------
<S> <C> <C>
*David R. Odenath, Jr. (43) President and Trustee President (since June 1999) of Prudential
Investments; President, Chief Executive Officer
and Chief Operating Officer (since June 1999) of
PIFM; Senior Vice President (since June 1999) of
Prudential; formerly Senior Vice President (August
1993-May 1999) of PaineWebber Group, Inc.

Richard A. Redeker (57) Trustee Formerly President, Chief Executive Officer and
Director (October 1993-September 1996) of
Prudential Mutual Fund Management, Inc., Executive
Vice President, Director and Member of the
Operating Committee
(October 1993-September 1996) of Prudential
Securities; Director
(October 1993-September 1996) of Prudential
Securities Group, Inc.; Executive Vice President
(January 1994-September 1996) of The Prudential
Investment Corporation; Director
(January 1994-September 1996) of Prudential Mutual
Fund Distributors, Inc. and Prudential Mutual Fund
Services, Inc.; Senior Executive Vice President
and Director (September 1978-September 1993) of
Kemper Financial Services, Inc.

*Judy A. Rice (52) Trustee Executive Vice President (since 1999) of Prudential
Investments; Executive Vice President (since 1999)
of PIFM; formerly, various positions to Senior
Vice President (1992-1999), Prudential Securities
and various positions to Managing Director
(1975-1992), Shearson Lehman Advisors; Governor of
the Money Management Institute; Member of the
Prudential Securities Operating Council and Board
Member of the National Association for Variable
Annuities.

Robin B. Smith (61) Trustee Chairman and Chief Executive Officer (since
August 1996) of Publishers Clearing House;
formerly President and Chief Executive Officer
(January 1988-August 1996) and President and Chief
Operating Officer (September 1981-December 1988)
of Publishers Clearing House; Director of
BellSouth Corporation, Texaco Inc., Springs
Industries Inc. and Kmart Corporation.

Louis A. Weil, III (59) Trustee Formerly Chairman (January 1999-July 2000),
President and Chief Executive Officer
(January 1996-July 2000) and Director (since
September 1991) of Central Newspapers, Inc.;
Chairman of the Board (January 1996-July 2000),
Publisher and Chief Executive Officer
(August 1991-December 1995) of Phoenix
Newspapers, Inc.; Publisher
(May 1989-March 1991) of Time Magazine;
President, Publisher and Chief Executive Officer
(February 1986-August 1989) of The Detroit News;
member of the Advisory Board, Chase Manhattan
Bank-Westchester.

Clay T. Whitehead (62) Trustee President (since May 1983) of National Exchange
Inc. (new business development firm).

Grace C. Torres (41) Treasurer and Principal First Vice President (since December 1996) of PIFM;
Financial and First Vice President (since March 1994) of
Accounting Officer Prudential Securities; formerly First Vice
President (March 1994-September 1996) of
Prudential Mutual Fund Management, Inc.
</TABLE>

B-20
<PAGE>

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) POSITION WITH COMPANY DURING PAST 5 YEARS
------------------------ --------------------- ---------------------
<S> <C> <C>
Marguerite E. H. Morrison (44) Secretary Vice President and Corporate Counsel of Prudential
and Chief Legal Officer (since August 2000) of the
Mutual Funds Division of Prudential; Vice
President and Associate General Counsel (since
December 1996) of PIFM; formerly Vice President
and Associate General Counsel (September
1987-September 1996) of Prudential Securities;
Vice President and Associate General Counsel
(June 1991-September 1996) of Prudential Mutual
Fund Management, Inc.

William V. Healey (47) Assistant Secretary Assistant Secretary, Vice President and Corporate
Counsel of Prudential and Chief Legal Officer of
Prudential Investments, a business unit of
Prudential (since August 1998); Director, ICI
Mutual Insurance Company (since June 1999);
formerly Associate General Counsel of The Dreyfus
Corporation (Dreyfus), a subsidiary of Mellon
Bank, N.A. (Mellon Bank), and an officer and/or
director of various affiliates of Mellon Bank and
Dreyfus.

Jonathan D. Shain (42) Assistant Secretary Vice President and Corporate Counsel (since August
1998) of Prudential; formerly Attorney with Fleet
Bank, N.A. (January 1997-July 1998) and Associate
Counsel (August 1994-January 1997) of New York
Life Insurance Company.
</TABLE>

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

* "Interested" Trustee, as defined in the Investment Company Act, by reason of
affiliation with Prudential Securities, Prudential or PIFM.

** The address of the Trustees and officers is c/o Prudential Investments Fund
Management LLC, Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077.

The Company has Trustees who, in addition to overseeing the actions of the
Fund's Manager, investment adviser and Distributor, decide upon matters of
general policy. The Trustees also review the actions of the Fund's officers, who
conduct and supervise the daily business operations of the Fund.

The Trustees have adopted a retirement policy which calls for the retirement
of Trustees on December 31 of the year in which they reach the age of 75.

Pursuant to the terms of the Management Agreement with the Fund, the Manager
pays all compensation of officers and employees of the Fund as well as the fees
and expenses of all Trustees of the Fund who are affiliated persons of the
Manager. The amount of annual compensation paid to each Trustee who is not an
affiliated person of PIFM or the investment adviser may change as a result of
the introduction of additional funds on the boards of which the Trustee will be
asked to serve.

Trustees may receive their Trustees' fees pursuant to a deferred fee
agreement with the Company. Under the terms of the agreement, the Company
accrues daily the amount of Trustees' fees in installments which accrue interest
at a rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury
bills at the beginning of each calendar quarter or, pursuant to a Commission
exemptive order, at the daily rate of return of any Prudential mutual fund.
Payment of the interest so accrued is also deferred and accruals become payable
at the option of the Trustee. The Company's obligation to make payments of
deferred Trustees' fees, together with interest thereon, is a general obligation
of the Company.

B-21
<PAGE>

The following table sets forth the aggregate compensation paid by the
Company for the fiscal period ended October 31, 2000 to the Trustees who are not
affiliated with the Manager and the aggregate compensation paid to such Trustees
for service on the Company's Board and the boards of all other investment
companies managed by PIFM (Fund Complex) for the calendar year ended
December 31, 2000.

COMPENSATION TABLE

<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION TOTAL 2000 COMPENSATION
FROM FROM FUND COMPLEX
NAME OF TRUSTEE COMPANY PAID TO TRUSTEES
--------------- ------------ -----------------------
<S> <C> <C>
Edward D. Beach@............................................ $ 168 None
Saul K. Fenster@@........................................... $ 300 $ 36,700(27/82)*
Delayne Dedrick Gold........................................ $1,617 $173,000(38/58)*
Robert F. Gunia+............................................ None None
Douglas H. McCorkindale**................................... $1,617 $110,000(21/42)*
W. Scott McDonald, Jr.@@.................................... $ 300 $ 36,700(27/82)*
Thomas T. Mooney**.......................................... $1,617 $173,000(32/65)*
Stephen P. Munn............................................. $1,725 $114,000(24/41)*
David R. Odenath, Jr.+...................................... None None
Richard A. Redeker.......................................... $1,617 $110,000(24/41)*
Judy A. Rice+............................................... None None
Robin B. Smith**............................................ $1,617 $114,000(27/35)*
Louis A. Weil, III.......................................... $1,617 $114,000(24/41)*
Clay T. Whitehead........................................... $1,883 $173,000(35/59)*
</TABLE>

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

@ Former Trustee.

@@Messrs. Fenster and McDonald joined the Board in August 2000.

* Indicates number of funds/portfolios in Fund Complex to which aggregate
compensation relates.

** Total compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 2000, includes amounts deferred at the
election of Trustees under the funds' deferred compensation plans. Including
accrued interest, total compensation amounted to $124,810, $179,810 and
$106,992 for Messrs. McCorkindale and Mooney and Ms. Smith, respectively.

+ Interested Trustees do not receive compensation from the Company or any fund
in the Fund Complex.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

Trustees of the Company are eligible to purchase Class Z shares of the Fund,
which are sold without either an initial sales charge or contingent deferred
sales charge to a limited group of investors.

As of December 15, 2000, the Trustees and officers of the Company, as a
group, owned less than 1% of the outstanding shares of the Fund.

As of December 15, 2000, beneficial owners, directly or indirectly, of more
than 5% of any class of shares of the Fund were:

<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME ADDRESS CLASS (% OF CLASS)
---- --------------------------------------------- --------- ----------------
<S> <C> <C> <C>
Mark A. Davis.......... 6305 Churchill Downs Dr., Austin, TX 78746 A 476,232(6%)
Schusters of Texas..... P.O. Box 97, Goldthwaite, TX 76844 Z 144,402(6.6%)
</TABLE>

As of December 15, 2000, Prudential Securities was the record holder for
other beneficial owners of 6,962,485 Class A shares (approximately 87% of such
shares outstanding), 14,963,094 Class B shares (approximately 83% of such shares
outstanding), 9,944,537 Class C shares (approximately 91% of such shares
outstanding) and 2,171,742 Class Z shares (approximately 99% of such shares
outstanding) of the Fund. In the event of any meetings of shareholders,
Prudential Securities will forward, or cause the forwarding of, proxy materials
to beneficial owners for which it is the record holder.

B-22
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES

MANAGER AND INVESTMENT ADVISER

The manager of each Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM serves as manager to all of the other investment companies
that, together with the Fund, comprise the Prudential mutual funds. See "How the
Fund is Managed--Manager" in the Prospectus. As of December 31, 2000, PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $76 billion. According to the Investment
Company Institute, as of November 30, 2000, the Prudential mutual funds were the
23rd largest family of mutual funds in the United States.

PIFM is a wholly-owned subsidiary of PIFM Holdco, Inc., which is a
wholly-owned subsidiary of Prudential Asset Management Holding Company, which is
a wholly-owned subsidiary of Prudential. Prudential Mutual Fund Services LLC
(PMFS or the Transfer Agent), an affiliate of PIFM, serves as the transfer agent
and dividend distribution agent for the Prudential mutual funds and, in
addition, provides customer service, recordkeeping and management and
administration services to qualified plans.

Pursuant to the Management Agreement with the Company (the Management
Agreement), PIFM, subject to the supervision of the Company's Board of Trustees
and in conformity with the stated policies of the Fund, manages both the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention, disposition and loan of securities and other
assets. In connection therewith, PIFM is obligated to keep certain books and
records of the Fund. PIFM has hired The Prudential Investment Corporation, doing
business as Prudential Investments (PI, the investment adviser or the
Subadviser), to provide subadvisory services to the Fund. PIFM also administers
the Fund's business affairs and, in connection therewith, furnishes the Fund
with office facilities, together with those ordinary clerical and bookkeeping
services which are not being furnished by State Street Bank and Trust Company,
the Fund's custodian (the Custodian), and PMFS, the Fund's transfer and dividend
disbursing agent. The management services of PIFM for the Fund are not exclusive
under the terms of the Management Agreement and PIFM is free to, and does,
render management services to others.

For its services, PIFM receives, pursuant to a Management Agreement for the
Fund, a fee at an annual rate of .65 of 1% of the Fund's average daily net
assets up to $500 million and .60 of 1% of the Fund's average daily net assets
over $500 million. Prior to January 1, 2000, PIFM received an annual management
fee at the rate of .65 of 1% of the Fund's average daily net assets. These fees
are computed daily and payable monthly.

In connection with its management of the business affairs of the Fund, PIFM
bears the following expenses:

(a) the salaries and expenses of all personnel of the Fund and the Manager,
except the fees and expenses of Trustees who are not affiliated persons of PIFM
or the Fund's investment adviser;

(b) all expenses incurred by PIFM or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the Fund
as described below; and

(c) the costs and expenses payable to the investment adviser pursuant to the
subadvisory agreement between PIFM and PI (the Subadvisory Agreement).

Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b) the
fees and expenses of Trustees who are not affiliated persons of the Manager or
the Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer Agent, including the cost of providing records to the
Manager in connection with its obligation of maintaining required records of the
Fund and of pricing the Fund's shares, (d) the charges and expenses of legal
counsel and independent accountants for the Fund, (e) brokerage commissions and
any issue or transfer taxes chargeable to the Fund in connection with its
securities transactions, (f) all taxes and corporate fees payable by the Fund to
governmental agencies, (g) the fees of any trade associations of which the Fund
may be a member, (h) the cost of share certificates representing shares of the
Fund, (i) the cost of fidelity and liability insurance, (j) the fees and
expenses involved in registering and maintaining registration of the Fund and of
its shares with the Commission, including the preparation and printing of the
Company's registration statements and prospectuses for such purposes, and paying
the fees and expenses of notice filings made in accordance with state securities
laws, (k) allocable communications expenses with respect to investor services
and all expenses of shareholders' and Trustees' meetings and of preparing,
printing and mailing reports, proxy statements and prospectuses to shareholders
in the amount necessary for distribution to the shareholders, (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business and (m) distribution fees.

The Management Agreement provides that PIFM will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance,

B-23
<PAGE>

bad faith, gross negligence or reckless disregard of duty. The Management
Agreement provides that it will terminate automatically if assigned, and that it
may be terminated without penalty by either party upon not more than 60 days'
nor less than 30 days' written notice. The Management Agreement will continue in
effect for a period of more than two years from the date of execution only so
long as such continuance is specifically approved at least annually in
conformity with the Investment Company Act.

For the fiscal period ended October 31, 1999, and for the fiscal year ended
October 31, 2000, PIFM received management fees of $1,356,586 and $2,863,786,
respectively, from the Fund.

PIFM has entered into a Subadvisory Agreement with PI. The Subadvisory
Agreement provides that PI will furnish investment advisory services in
connection with the management of the Fund. In connection therewith, PI is
obligated to keep certain books and records of the Fund. Under the Subadvisory
Agreement, PI, subject to the supervision of PIFM, is responsible for managing
the assets of the Fund in accordance with its investment objective, investment
program and policies. PI determines what securities and other instruments are
purchased and sold for the Fund and is responsible for obtaining and evaluating
financial data relevant to the Fund. PIFM continues to have responsibility for
all investment advisory services pursuant to the Management Agreement. Under the
Subadvisory Agreement for the Fund, PI was reimbursed by PIFM for the reasonable
costs and expenses incurred by PI in furnishing those services. Effective
January 1, 2000, PI is paid by PIFM at an annual rate of .325 of 1% of the
Fund's average daily net assets up to $500 million and .285 of 1% of the Fund's
average daily net assets over $500 million.

The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Company, PIFM or the Subadviser upon not more than 60 days',
nor less than 30 days', written notice. The Subadvisory Agreement provides that
it will continue in effect for a period of more than two years from its
execution only so long as such continuance is specifically approved at least
annually in accordance with the requirements of the Investment Company Act.

PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12b-1 PLANS

Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Fund. The Distributor is a subsidiary of
Prudential.

Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the
Company on behalf of the Fund under Rule 12b-1 under the Investment Company Act
and a distribution agreement (the Distribution Agreement), the Distributor
incurs the expenses of distributing the Fund's Class A, Class B and Class C
shares, respectively. The Distributor also incurs the expenses of distributing
the Class Z shares under the Distribution Agreement, none of which are
reimbursed by or paid for by the Fund.

The expenses incurred under the Plans include commissions and account
servicing fees paid to, or on account of, brokers or financial institutions
which have entered into agreements with the Distributor, advertising expenses,
the cost of printing and mailing prospectuses to potential investors and
indirect and overhead costs of the Distributor associated with the sale of Fund
shares, including lease, utility, communications and sales promotion expenses.

Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.

The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis brokers in consideration for the distribution,
marketing, administrative and other services and activities provided by brokers
with respect to the promotion of the Fund's shares and the maintenance of
related shareholder accounts.

CLASS A PLAN. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related activities with respect to Class A shares at an annual
rate of up to .30 of 1% of the average net assets of the Class A shares. The
Class A Plan provides that (1) .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and the maintenance of
shareholder accounts (service fee) and (2) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1%. The Distributor has
contractually agreed to limit its distribution-related fees payable under each
Class A Plan to .25 of 1% of the average daily net assets of the Class A shares
for the fiscal year ending October 31, 2001 and contractually limited its
distribution-related fees for the fiscal year ended October 31, 2000 to .25 of
1% of the average daily net assets of the Fund's Class A shares.

For the fiscal year ended October 31, 2000, the Distributor received
payments of $227,659 under the Fund's Class A Plan and spent approximately
$227,659 in distributing the Fund's Class A shares. This amount was primarily
expended for payment of

B-24
<PAGE>

account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended October 31, 2000, the Distributor also
received approximately $319,000 in initial sales charges in connection with the
sale of the Fund's Class A shares.

CLASS B AND CLASS C PLANS. Under the Class B and Class C Plans, the Fund
pays the Distributor for its distribution-related activities with respect to
Class B and Class C shares at an annual rate of up to 1% of the average daily
net assets of each of the Class B and Class C shares. The Class B and Class C
Plans provide that (1) up to .25 of 1% of the average daily net assets of the
Class B and Class C shares, respectively, may be paid as a service fee and
(2) up to .75 of 1% (not including the service fee) may be paid for
distribution-related expenses with respect to the Class B and Class C shares,
respectively (asset-based sales charge). The service fee (.25 of 1% of average
daily net assets) is used to pay for personal service and/or the maintenance of
shareholder accounts. The Distributor also receives contingent deferred sales
charges from certain redeeming shareholders and, with respect to Class C shares,
an initial sales charge.

CLASS B PLAN. For the fiscal year ended October 31, 2000, the Distributor
received $2,051,746 from the Fund under the Class B Plan and spent approximately
$2,587,200 in distributing the Fund's Class B shares. It is estimated that of
the latter amount, approximately 0.7% ($16,800) was spent on printing and
mailing of prospectuses to other than current shareholders; 7.9% ($204,800) was
spent on compensation to broker-dealers for commissions to representatives and
other expenses, including an allocation on account of overhead and other branch
office distribution-related expenses incurred for distribution of Fund shares;
and 91.4% ($2,365,600) on the aggregate of (1) payments of commissions and
account servicing fees to financial advisers (46.8% or $1,211,400) and (2) an
allocation on account of overhead and other branch office distribution-related
expenses (44.6% or $1,154,200). The term "overhead and other branch office
distribution-related expenses" represents (a) the expenses of operating
Prudential Securities' and Pruco Securities Corporation's (Prusec's) branch
offices in connection with the sale of Fund shares, including lease costs, the
salaries and employee benefits of operations and sales support personnel,
utility costs, communications costs and the costs of stationery and supplies,
(b) the costs of client sales seminars, (c) expenses of mutual fund sales
coordinators to promote the sale of Fund shares and (d) other incidental
expenses relating to branch promotion of Fund sales.

The Distributor also receives the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of Class B shares. For the
fiscal year ended October 31, 2000, the Distributor received approximately
$825,600 in contingent deferred sales charges attributable to the Fund's Class B
shares.

CLASS C PLAN. For the fiscal year ended October 31, 2000, the Distributor
received $1,268,806 under the Fund's Class C Plan and spent approximately
$758,500 in distributing Class C shares. It is estimated that of the latter
amount, approximately 1.4% ($10,500) was spent on printing and mailing
prospectuses to other than current shareholders; 0.7% ($5,500) was spent on
compensation to broker-dealers for commissions to representatives and other
expenses, including an allocation of overhead and other branch office
distribution-related expenses incurred for distribution of Fund shares; and
97.9% ($742,500) on the aggregate of (1) payments of commissions and account
servicing fees to financial advisers (67.2% or $509,600) and (2) an allocation
on account of overhead and other branch office distribution-related expenses
(30.7% or $232,900).

The Distributor also receives initial sales charges and the proceeds of
contingent deferred sales charges paid by investors upon certain redemptions of
Class C shares. For the fiscal year ended October 31, 2000, the Distributor
received approximately $184,300 in contingent deferred sales charges
attributable to the Fund's Class C shares. For the fiscal year ended
October 31, 2000, the Distributor also received approximately $344,100 in
initial sales charges in connection with the sale of the Fund's Class C shares.

Distribution expenses attributable to the sale of Class A, Class B and
Class C shares of the Fund are allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.

The Class A, Class B and Class C Plans will continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Trustees, including a majority vote of the Trustees who are
not interested persons of the Company and who have no direct or indirect
financial interest in the operation of the Plans or in any agreement related to
the Plans (the Rule 12b-1 Trustees), at a meeting called for the purpose of
voting on such continuance. A Plan may be terminated at any time, without
penalty, by the vote of a majority of the Rule 12b-1 Trustees or by the vote of
the holders of a majority of the outstanding shares of the applicable class of
the Fund on not more than 60 days', nor less than 30 days', written notice to
any other party to the Plan. The Plans may not be amended to increase materially
the amounts to be spent for the services described therein without approval by
the shareholders of the applicable class, and all material amendments are
required to be approved by the Board of Trustees in the manner described above.
Each Plan will automatically terminate in the event of its assignment. The Fund
will not be contractually obligated to pay expenses incurred under any Plan if
it is terminated or not continued.

B-25
<PAGE>

Pursuant to each Plan, the Board of Trustees will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of the Fund by the Distributor. The report will include an itemization
of the distribution expenses and the purposes of such expenditures. In addition,
as long as the Plans remain in effect, the selection and nomination of
Rule 12b-1 Trustees shall be committed to the Rule 12b-1 Trustees.

Pursuant to the Distribution Agreement, the Fund has agreed to indemnify the
Distributor to the extent permitted by applicable law against certain
liabilities under the federal securities laws.

In addition to distribution and service fees paid by the Fund under the
Plans, the Manager (or one of its affiliates) may make payments to dealers
(including Prudential Securities) and other persons which distribute shares of
the Fund (including Class Z shares). Such payments may be calculated by
reference to the net asset value of shares sold by such persons or otherwise.

FEE WAIVERS/SUBSIDIES

PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. In addition,
the Distributor has contractually agreed to waive a portion of its distribution
and service (12b-1) fees for the Class A shares as described above. Fee waivers
and subsidies will increase the Fund's total return.

NASD MAXIMUM SALES CHARGE RULE

Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares. Interest charges
on unreimbursed distribution expenses equal to the prime rate plus one percent
per annum may be added to the 6.25% limitation. Sales from the reinvestment of
dividends and distributions are not included in the calculation of the 6.25%
limitation. The annual asset-based sales charge on shares of the Fund may not
exceed .75 of 1% per class. The 6.25% limitation applies to each class of the
Fund rather than on a per shareholder basis. If aggregate sales charges were to
exceed 6.25% of total gross sales of any class, all sales charges on shares of
that class would be suspended.

OTHER SERVICE PROVIDERS

State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Company. Subcustodians provide
custodial services for the Fund's foreign assets held outside the United States.

Prudential Mutual Fund Services LLC (PMFS), 194 Wood Avenue South, Iselin,
New Jersey 08830, serves as the transfer and dividend disbursing agent of the
Fund. PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary
transfer agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee per
shareholder account of $9.50, a new account set-up fee of $2.00 for each
manually established account and a monthly inactive zero balance account fee of
$0.20 per shareholder account. PMFS is also reimbursed for its out-of-pocket
expenses, including but not limited to postage, stationery, printing, allocable
communication expenses and other costs.

PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountants and in that capacity audits
the Fund's annual financial statements.

CODES OF ETHICS

The Board of Trustees of the Company has adopted a Code of Ethics. In
addition, PIFM, PI and PIMS have each adopted a Code of Ethics (the Codes). The
Codes permit personnel subject to the Codes to invest in securities, including
securities that may be purchased or held by the Fund. However, the protective
provisions of the Codes prohibit certain investments and limit such personnel
from making investments during periods when the Fund is making such investments.
The Codes are on public file with, and are available from, the Commission.

BROKERAGE ALLOCATION AND OTHER PRACTICES

The Manager is responsible for decisions to buy and sell securities, futures
and options on securities and futures for the Fund, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any. The term "Manager" as used in this
section includes the Subadviser. Broker-dealers may receive negotiated brokerage
commissions on Fund portfolio transactions, including options and the purchase
and sale of underlying

B-26
<PAGE>

securities upon the exercise of options. On foreign securities exchanges,
commissions may be fixed. Orders may be directed to any broker or futures
commission merchant including, to the extent and in the manner permitted by
applicable law, Prudential Securities and its affiliates. Brokerage commissions
on United States securities, options and futures exchanges or boards of trade
are subject to negotiation between the Manager and the broker or futures
commission merchant.

Equity securities traded in the over-the-counter market and bonds, including
convertible bonds, are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments and U.S.
government agency securities may be purchased directly from the issuer, in which
case no commissions or discounts are paid. The Fund will not deal with
Prudential Securities or any affiliate in any transaction in which Prudential
Securities or any affiliate acts as principal, except in accordance with
rules of the Commission. Thus, it will not deal in the over-the-counter market
with Prudential Securities acting as market maker, and it will not execute a
negotiated trade with Prudential Securities if execution involves Prudential
Securities' acting as principal with respect to any part of the Fund's order.

In placing orders for portfolio securities of the Fund, the Manager's
overriding objective is to obtain the best possible combination of favorable
price and efficient execution. The Manager seeks to effect each transaction at a
price and commission that provides the most favorable total cost or proceeds
reasonably attainable in the circumstances. The factors that the Manager may
consider in selecting a particular broker, dealer or futures commission merchant
(firms) are the Manager's knowledge of negotiated commission rates currently
available and other current transaction costs; the nature of the portfolio
transaction; the size of the transaction; the desired timing of the trade; the
activity existing and expected in the market for the particular transaction;
confidentiality; the execution, clearance and settlement capabilities of the
firms; the availability of research and research related services provided
through such firms; the Manager's knowledge of the financial stability of the
firms; the Manager's knowledge of actual or apparent operational problems of
firms; and the amount of capital, if any, that would be contributed by firms
executing the transaction. Given these factors, the Fund may pay transaction
costs in excess of that which another firm might have charged for effecting the
same transaction.

When the Manager selects a firm that executes orders or is a party to
portfolio transactions, relevant factors taken into consideration are whether
that firm has furnished research and research related products and/or services,
such as research reports, research compilations, statistical and economic data,
computer data bases, quotation equipment and services, research oriented
computer software, hardware and services, reports concerning the performance of
accounts, valuations of securities, investment related periodicals, investment
seminars and other economic services and consultants. Such services are used in
connection with some or all of the Manager's investment activities; some of such
services, obtained in connection with the execution of transactions for one
investment account, may be used in managing other accounts, and not all of these
services may be used in connection with the Fund.

The Manager maintains an internal allocation procedure to identify those
firms who have provided it with research and research related products and/or
services, and the amount that was provided, and to endeavor to direct sufficient
commissions to them to ensure the continued receipt of those services that the
Manager believes provides a benefit to the Fund and its other clients. The
Manager makes a good faith determination that the research and/or service is
reasonable in light of the type of service provided and the price and execution
of the related portfolio transactions.

When the Manager deems the purchase or sale of equities to be in the best
interests of the Fund or its other clients, including Prudential, the Manager
may, but is under no obligation to, aggregate the transactions in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the transactions, as well as the
expenses incurred in the transaction, will be made by the Manager in the manner
it considers to be most equitable and consistent with its fiduciary obligations
to its clients. The allocation of orders among firms and the commission rates
paid are renewed periodically by the Company's Board of Trustees. Portfolio
securities may not be purchased from any underwriting or selling syndicate of
which Prudential Securities, or an affiliate during the existence of the
syndicate, is a principal underwriter (as defined in the Investment Company
Act), except in accordance with rules of the Commission. This limitation, in the
opinion of the Fund, will not significantly affect the Fund's ability to pursue
its present investment objective. However, in the future in other circumstances,
the Fund may be at a disadvantage because of this limitation in comparison to
other funds with similar objectives but not subject to such limitations.

Subject to the above considerations, Prudential Securities (or any
affiliate) may act as a securities broker or futures commission merchant for the
Fund. In order for Prudential Securities (or any affiliate) to effect any
portfolio transactions for the Fund, the commissions, fees or other remuneration
received by Prudential Securities (or any affiliate) must be reasonable and fair
compared to the commissions, fees or other remuneration paid to other firms in
connection with comparable transactions involving similar securities or futures
being purchased or sold on an exchange during a comparable period of time. This
standard

B-27
<PAGE>

would allow Prudential Securities (or any affiliate) to receive no more than the
remuneration which would be expected to be received by an unaffiliated firm in a
commensurate arm's-length transaction. Furthermore, the Board of Trustees of the
Company, including a majority of the Trustees who are not "interested" persons,
has adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to Prudential Securities (or any
affiliate) are consistent with the foregoing standard. In accordance with
Section 11(a) of the Securities Exchange Act of 1934, as amended, Prudential
Securities may not retain compensation for effecting transactions on a national
securities exchange for the Fund unless the Fund has expressly authorized the
retention of such compensation. Prudential Securities must furnish to the Fund
at least annually a statement setting forth the total amount of all compensation
retained by Prudential Securities from transactions effected for the Fund during
the applicable period. Brokerage and futures transactions with Prudential
Securities (or any affiliate) are also subject to such fiduciary standards as
may be imposed by applicable law.

Transactions in options by the Fund will be subject to limitations
established by each of the exchanges governing the maximum number of options
which may be written or held by a single investor or group of investors acting
in concert, regardless of whether the options are written or held on the same or
different exchanges or are written or held in one or more accounts or through
one or more brokers. Thus, the number of options which the Fund may write or
hold may be affected by options written or held by the Manager and other
investment advisory clients of the Manager. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.

The table below sets forth information concerning the payment of commissions
by the Fund, including the amount of such commissions paid to Prudential
Securities for the fiscal period ended October 31, 1999 and the fiscal year
ended October 31, 2000.

<TABLE>
<CAPTION>
FISCAL YEAR FISCAL PERIOD
ENDED ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999
---------------- ----------------
<S> <C> <C>
Total brokerage commissions paid by the Fund................ $423,154 $436,786
Total brokerage commissions paid to Prudential Securities
and its foreign affiliates................................. none none
Percentage of total brokerage commissions paid to Prudential
Securities and its foreign affiliates...................... 0% 0%
</TABLE>

Of the total brokerage commissions paid during the fiscal year ended
October 31, 2000, none were paid to firms which provide research, statistical or
other services to PIFM.

The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company Act)
and their parents at October 31, 2000. As of October 31, 2000, the Fund held
equity securities of the following: ABN AMRO, Inc., $300,782; Bear, Stearns &
Co., $350,444; and UBS Warburg, Inc., $350,441. The Fund also held debt
securities of the following: Bear Stearns Co., Inc., $1,357,697; Lehman Brothers
Holdings, Inc., $3,521,700; and Morgan (J.P.) & Co., Inc., $3,872,700.

CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION

The Company is authorized to issue an unlimited number of shares of
beneficial interest, $.001 par value per share, currently of three series, each
of which are divided into four classes, designated Class A, Class B, Class C and
Class Z, although only shares of the Fund currently are being offered. Each
class of shares of the Fund represents an interest in the same assets of the
Fund and is identical in all respects except that (1) each class is subject to
different sales charges and distribution and/or service fees (except for
Class Z shares, which are not subject to any sales charges and distribution
and/or service fees), which may affect performance, (2) each class has exclusive
voting rights on any matter submitted to shareholders that relates solely to its
arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, (3) each class has a different exchange privilege, (4) only
Class B shares have a conversion feature and (5) Class Z shares are offered
exclusively for sale to a limited group of investors. In accordance with the
Company's Declaration of Trust, the Board of Trustees may authorize the creation
of additional series of shares and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.

Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances. Each share of
each class is equal as to earnings, assets and voting privileges, except as
noted above, and each class of shares (with the exception of Class Z shares,
which are not subject to any distribution or service fees) bears the expenses
related to the distribution of its shares. Except for the conversion feature
applicable to the Class B shares, there are no conversion, preemptive or other
subscription rights. In the event of liquidation, each share of the Fund is
entitled to its portion of all of the Fund's assets after all debts and expenses
of the Fund have been paid. Since Class B and Class C shares generally bear
higher distribution expenses than Class A shares, the liquidation

B-28
<PAGE>
proceeds to shareholders of those classes are likely to be lower than to
Class A shareholders and to Class Z shareholders, whose shares are not subject
to any distribution and/or service fees. The Company's shares do not have
cumulative voting rights for the election of Trustees.

The Company does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Company will not be required to hold meetings of
shareholders unless, for example, the election of Trustees is required to be
acted on by shareholders under the Investment Company Act. Shareholders have
certain rights, including the right to call a meeting upon a vote of 10% or more
of the Company's outstanding shares for the purpose of voting on the removal of
one or more Trustees or to transact any other business.

PURCHASE, REDEMPTION AND PRICING OF FUND SHARES

Shares of the Fund may be purchased at a price equal to the next determined
net asset value (NAV) per share plus a sales charge which, at the election of
the investor, may be imposed either (1) at the time of purchase (Class A or
Class C shares) or (2) on a deferred basis (Class B or Class C shares). Class Z
shares of the Fund are offered to a limited group of investors at NAV without
any sales charges.

PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must complete an application and telephone PMFS at (800) 225-1852 (toll-free) to
receive an account number. The following information will be requested: your
name, address, tax identification number, fund and class election, dividend
distribution election, amount being wired and wiring bank. Instructions should
then be given by you to your bank to transfer funds by wire to State Street Bank
and Trust Company (State Street), Boston, Massachusetts, Custody and Shareholder
Services Division, Attention: Prudential Tax-Managed Funds, specifying on the
wire the account number assigned by PMFS and your name and identifying the Fund
and the class in which you are investing (Class A, Class B, Class C or Class Z
shares).

If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day.

In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Tax-Managed
Funds, the Fund, Class A, Class B, Class C or Class Z shares and your name and
individual account number. It is not necessary to call PMFS to make subsequent
purchase orders using Federal Funds. The minimum amount which may be invested by
wire is $1,000.

ISSUANCE OF FUND SHARES FOR SECURITIES

Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations, (2) statutory mergers, or
(3) other acquisitions of portfolio securities that (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Fund's investment adviser.

B-29
<PAGE>
SPECIMEN PRICE MAKE-UP

Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold with a maximum sales charge of 5%, Class C*
shares are sold with a 1% sales charge and Class B* and Class Z shares are sold
at NAV. Using the NAV of the Fund at October 31, 2000, the maximum offering
price of the Fund's shares is as follows:

<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share...... $12.41
Maximum sales charge (5% of offering price)................. .65
------
Maximum offering price to public............................ $13.06
======
CLASS B
Net asset value, offering price and redemption price per
Class B share*............................................. $12.27
======
CLASS C
Net asset value and redemption price per Class C share*..... $12.27
Sales charge (1% of offering price)......................... .12
------
Offering price to public.................................... $12.39
======
CLASS Z
Net asset value, offering price and redemption price per
Class Z share.............................................. $12.48
======
</TABLE>

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

* Class B and Class C shares are subject to a contingent
deferred sales charge on certain redemptions.

SELECTING A PURCHASE ALTERNATIVE

The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:

If you intend to hold your investment in the Fund for less than 4 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to an initial sales charge of 5% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6 year period, you should
consider purchasing Class C shares over either Class A or Class B shares.

If you intend to hold your investment for longer than 4 years, but less than
5 years, and do not qualify for a reduced sales charge on Class A shares, you
should consider purchasing Class B or Class C shares over Class A shares. This
is because the initial sales charge plus the cumulative annual
distribution-related fee on Class A shares would exceed those of the Class B and
Class C shares if you redeem your investment during this time period. In
addition, more of your money would be invested initially in the case of Class C
shares, because of the relatively low initial sales charge, and all of your
money would be invested initially in the case of Class B shares, which are sold
at NAV.

If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual
distribution-related fee on Class A shares would be less than those of the
Class B and Class C shares.

If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested initially
because the sales charge on Class A shares is deducted at the time of purchase.

If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and for more than 5 years in the
case of Class C shares for the higher cumulative annual distribution-related fee
on those shares plus, in the case of Class C shares, the 1% initial sales charge
to exceed the initial sales charge plus the cumulative annual
distribution-related fees on Class A shares. This does not take into account the
time value of money, which further reduces the impact of the higher Class B or
Class C distribution-related fee on the investment, fluctuations in NAV, the
effect of the return on the investment over this period of time or redemptions
when the CDSC is applicable.

B-30
<PAGE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGE--CLASS A SHARES

BENEFIT PLANS. Certain group retirement and savings plans may purchase Class
A shares without the initial sales charge if they meet the required minimum for
amount of assets, average account balance or number of eligible employees. For
more information about these requirements, call Prudential at (800) 353-2847.

OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, without
the initial sales charge, through the Distributor or the Transfer Agent, by:

- officers of the Prudential mutual funds (including the Company),

- employees of the Distributor, Prudential Securities, PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent,

- employees of subadvisers of the Prudential mutual funds provided that
purchases at NAV are permitted by such person's employer,

- Prudential, employees and special agents of Prudential and its
subsidiaries and all persons who have retired directly from active service
with Prudential or one of its subsidiaries,

- members of the Board of Directors of Prudential,

- real estate brokers, agents and employees of real estate brokerage
companies affiliated with The Prudential Real Estate Affiliates who
maintain an account at Prudential Securities, Prusec or with the Transfer
Agent,

- registered representatives and employees of brokers who have entered into
a selected dealer agreement with the Distributor provided that purchases
at NAV are permitted by such person's employer,

- investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, or within one
year in the case of Benefit Plans, (2) the purchase is made with proceeds
of a redemption of shares of any open-end non-money market fund sponsored
by the financial adviser's previous employer (other than a fund which
imposes a distribution or service fee of .25 or 1% or less) and (3) the
financial adviser served as the client's broker on the previous purchase,

- investors in Individual Retirement Accounts, provided the purchase is made
in a directed rollover to such Individual Retirement Account or with the
proceeds of a tax-free rollover of assets from a Benefit Plan for which
Prudential provides administrative or recordkeeping services and further
provided that such purchase is made within 60 days of receipt of the
Benefit Plan distribution,

- orders placed by broker-dealers, investment advisers or financial planners
who have entered into an agreement with the Distributor, who place trades
for their own accounts or the accounts of their clients and who charge a
management, consulting or other fee for their services (for example,
mutual fund "wrap" or asset allocation programs), and

- orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the accounts
are linked to the master account of such broker-dealer, investment adviser
or financial planner and the broker-dealer, investment adviser or
financial planner charges its clients a separate fee for its services (for
example, mutual fund "supermarket" programs).

Broker-dealers, investment advisers or financial planners sponsoring
fee-based programs (such as mutual fund "wrap" or asset allocation programs and
mutual fund "supermarket" programs) may offer their clients more than one class
of shares in a Fund in connection with different pricing options for their
programs. Investors should consider carefully any separate transaction and other
fees charged by these programs in connection with investing in each available
share class before selecting a share class.

For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions.

B-31
<PAGE>

COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential mutual funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See "How to Buy, Sell and Exchange Shares of the
Fund--Reducing or Waiving Class A's Initial Sales Charge" in the Prospectus.

An eligible group of related Fund investors includes any combination of the
following:

- an individual

- the individual's spouse, their children and their parents

- the individual's and spouse's Individual Retirement Account (IRA)

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

- a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children

- a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse

- one or more employee benefit plans of a company controlled by an
individual.

In addition, an eligible group of related Fund investors may include 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 employer).

The Transfer Agent, the Distributor or your broker must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charge will be granted subject to confirmation of the investor's
holdings. The Combined Purchase and Cumulative Purchase Privilege does not apply
to individual participants in any retirement or group plans.

LETTERS OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors) who enter into a written Letter of Intent
providing for the purchase, within a thirteen-month period, of shares of the
Fund and shares of other Prudential mutual funds (Investment Letter of Intent).
Retirement and group plans no longer qualify to purchase Class A shares at NAV
by entering into a Letter of Intent.

For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential mutual funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent or
its affiliates and through your broker will not be aggregated to determine the
reduced sales charge.

An Investment Letter of Intent permits a purchaser to establish a total
investment goal to be achieved by any number of investments over a
thirteen-month period. Each investment made during the period will receive the
reduced sales charge applicable to the amount represented by the goal, as if it
were a single investment. Escrowed Class A shares totaling 5% of the dollar
amount of the Letter of Intent will be held by the Transfer Agent in the name of
the investor. The effective date of an Investment Letter of Intent may be
back-dated up to 90 days, in order that any investments made during this 90-day
period, valued at the purchaser's cost, can be applied to the fulfillment of the
Letter of Intent goal.

The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. In the event the Letter of Intent
goal is not satisfied within the thirteen-month period, the investor is required
to pay the difference between the sales charge otherwise applicable to the
purchases made during this period and sales charge actually paid. Such payment
may be made directly to the Distributor or, if not paid, the Distributor will
liquidate sufficient escrowed shares to obtain such difference. If the goal is
exceeded in an amount which qualifies for a lower sales charge, a price
adjustment is made by refunding to the purchaser the amount of excess sales
charge, if any, paid during the thirteen-month period. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.

The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. Letters of Intent are not
available to individual participants in any retirement or group plans.

B-32
<PAGE>
CLASS B SHARES

The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, your broker or the
Distributor. Although there is no sales charge imposed at the time of purchase,
redemptions of Class B shares may be subject to a CDSC. See "Sale of Shares--
Contingent Deferred Sales Charge" below.

The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to brokers, financial advisers and
other persons which sell Class B shares at the time of sale. This facilitates
the ability of a Fund to sell the Class B shares without an initial sales charge
being deducted at the time of purchase. The Distributor anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC and
the distribution fee.

CLASS C SHARES

The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 2% of the purchase
price at the time of the sale.

WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES

BENEFIT PLANS. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at
(800) 353-2847.

INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. Investors
may purchase Class C shares at NAV, without the initial sales charge, with the
proceeds from the redemption of shares of any unaffiliated registered investment
company which were not held through an account with any Prudential affiliate.
Such purchases must be made within 60 days of the redemption. Investors eligible
for this waiver include: (1) investors purchasing shares through an account at
Prudential Securities; (2) investors purchasing shares through an ADVANTAGE
Account or an Investor Account with Prusec; and (3) investors purchasing shares
through other brokers. This waiver is not available to investors who purchase
shares directly from the Transfer Agent. You must notify the Transfer Agent
directly or through your broker if you are entitled to this waiver and provide
the Transfer Agent with such supporting documents as it may deem appropriate.

CLASS Z SHARES

BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares if
they meet the required minimum for amount of assets, average account balance or
number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.

MUTUAL FUND PROGRAMS. Class Z shares also can be purchased by participants
in any fee-based program or trust program sponsored by Prudential or an
affiliate that includes mutual funds as investment options and the Fund as an
available option. Class Z shares also can be purchased by investors in certain
programs sponsored by broker-dealers, investment advisers and financial planners
who have agreements with Prudential Investments Advisory Group relating to:

- mutual fund "wrap" or asset allocation programs where the sponsor places
Fund trades, links its clients' accounts to a master account in the
sponsor's name and charges its clients a management, consulting or other
fee for its services

- mutual fund "supermarket" programs where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor charges
a fee for its services.

Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in a
Fund in connection with different pricing options for their programs. Investors
should consider carefully any separate transaction and other fees charged by
these programs in connection with investing in each available share class before
selecting a share class.

OTHER TYPES OF INVESTORS. Class Z shares also are available for purchase by
the following categories of investors:

- certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential Mutual Funds are an available investment option,

- current and former Director/Trustees of the Prudential mutual funds
(including the Company), or

- Prudential, with an investment of $10 million or more.

B-33
<PAGE>
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay brokers, financial advisers and other persons
which distribute shares a finder's fee, from its own resources, based on a
percentage of the net asset value of shares sold by such persons.

RIGHTS OF ACCUMULATION

Reduced sales charges are also available through rights of accumulation,
under which an investor or an eligible group of related investors, as described
above under "Combined Purchase and Cumulative Purchase Privilege," may aggregate
the value of their existing holdings of shares of the Fund and shares of other
Prudential mutual funds (excluding money market funds other than those acquired
pursuant to the exchange privilege) to determine the reduced sales charge.
Rights of accumulation may be applied across the classes of the Prudential
mutual funds. However, the value of shares held directly with the Transfer Agent
and through your broker will not be aggregated to determine the reduced sales
charge. The value of existing holdings for purposes of determining the reduced
sales charge is calculated using the maximum offering or price (NAV plus maximum
sales charge) as of the previous business day.

The Distributor or the Transfer Agent must be notified at the time of
purchase that the shareholder is entitled to a reduced sales charge. The reduced
sales charge will be granted subject to confirmation of the investor's holdings.
Rights of accumulation are not available to individual participants in any
retirement or group plans.

SALE OF SHARES

You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charge"
below. If you are redeeming your shares through a broker, your broker must
receive your sell order before the Fund computes its NAV for that day (that is,
4:15 P.M., New York time) in order to receive that day's NAV. Your broker will
be responsible for furnishing all necessary documentation to the Distributor and
may charge you for its services in connection with redeeming shares of the Fund.

If you hold shares of the Fund through Prudential Securities, you must
redeem your shares through Prudential Securities. Please contact your Prudential
Securities financial adviser.

If you hold shares in non-certificate form, a written request for redemption
signed by you exactly as the account is registered is required. If you hold
certificates, the certificates must be received by the Transfer Agent, the
Distributor or your broker in order for the redemption request to be processed.
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority acceptable to the Transfer Agent must be submitted
before such request will be accepted. All correspondence and documents
concerning redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
8149, Philadelphia, Pennsylvania 19101, the Distributor, or to your broker.

SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $100,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or
(4) are to be paid to a corporation, partnership, trust or fiduciary, and your
shares are held directly with the Transfer Agent, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office manager
of most Prudential Insurance and Financial Services or Preferred Services
offices. In the case of redemptions from a PruArray Plan, if the proceeds of the
redemption are invested in another investment option of the plan in the name of
the record holder and at the same address as reflected in the Transfer Agent's
records, a signature guarantee is not required.

Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the certificate and/or written request, except as indicated below. If you
hold shares through a broker, payment for shares presented for redemption will
be credited to your account at your broker, unless you indicate otherwise. Such
payment may be postponed or the right of redemption suspended at times (1) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (2) when trading on such Exchange is restricted, (3) when an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (4) during any other period
when the Commission, by order, so permits; provided that applicable rules and
regulations of the Commission shall govern as to whether the conditions
prescribed in (2), (3) or (4) exist.

B-34
<PAGE>

REDEMPTION IN KIND. If the Trustees determine that it would be detrimental
to the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Fund, in lieu of cash, in conformity with applicable rules of the
Commission. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. If your shares are redeemed in kind, you
would incur transaction costs in converting the assets into cash. The Fund,
however, has elected to be governed by Rule 18f-1 under the Investment Company
Act, under which the Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or 1% of the NAV of the Fund during any 90-day period for any
one shareholder.

INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Trustees may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.

90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. (If less than a full repurchase is made,
the credit will be on a PRO RATA basis.) You must notify the Transfer Agent,
either directly or through the Distributor or your broker, at the time the
repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales Charge"
below. Exercise of the repurchase privilege will generally not affect federal
tax treatment of any gain realized upon redemption. However, if the redemption
was made within a 30 day period of the repurchase and if the redemption resulted
in a loss, some or all of the loss, depending on the amount reinvested, may not
be allowed for federal income tax purposes.

CONTINGENT DEFERRED SALES CHARGE

Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within 18 months of purchase will be subject to a 1% CDSC. The CDSC
will be deducted from the redemption proceeds and reduce the amount paid to you.
The CDSC will be imposed on any redemption by you which reduces the current
value of your Class B or Class C shares to an amount which is lower than the
amount of all payments by you for shares during the preceding six years, in the
case of Class B shares, and 18 months, in the case of Class C shares. A CDSC
will be applied on the lesser of the original purchase price or the current
value of the shares being redeemed. Increases in the value of your shares
acquired through reinvestment of dividends or distributions are not subject to a
CDSC. The amount of any CDSC will be paid to and retained by the Distributor.

The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund.

The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:

<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------ -------------------
<S> <C>
First....................................................... 5.0%
Second...................................................... 4.0%
Third....................................................... 3.0%
Fourth...................................................... 2.0%
Fifth....................................................... 1.0%
Sixth....................................................... 1.0%
Seventh..................................................... None
</TABLE>

In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments for
the purchase of Class B shares made during the preceding six years or Class C
shares made during the preceding 18 months; then of amounts representing the
cost of shares held beyond the applicable CDSC period; and finally, of amounts
representing the cost of shares held for the longest period of time within the
applicable CDSC period.

B-35
<PAGE>
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.

For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.

WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. The CDSC will be
waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy, at the time of death or initial determination of disability, provided
that the shares were purchased prior to death or disability.

The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. For more information, call Prudential at (800) 353-2847.

Finally, the CDSC will be waived to the extent that the proceeds from shares
redeemed are invested in Prudential mutual funds, The Guaranteed Investment
Account, the Guaranteed Insulated Separate Account or units of The Stable Value
Fund.

SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% is reached.

In addition, the CDSC will be waived on redemptions of shares held by
Trustees of the Company.

You must notify the Transfer Agent either directly or through your broker,
at the time of redemption, that you are entitled to waiver of the CDSC and
provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement.

In connection with these waivers, the Transfer Agent will require you to
submit the supporting documentation set forth below.

<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
Death A copy of the shareholder's death certificate or, in
the case of a trust, a copy of the grantor's death
certificate, plus a copy of the trust agreement
identifying the grantor.

Disability--An individual will be A copy of the Social Security Administration award
considered disabled if he or she is letter or a letter from a physician on the
unable to engage in any substantial physician's letterhead stating that the shareholder
gainful activity by reason of any (or, in the case of a trust, the grantor (a copy of
medically determinable physical or the trust agreement identifying the grantor will be
mental impairment which can be expected required as well)) is permanently disabled. The
to result in death or to be of letter must also indicate the date of disability.
long-continued and indefinite duration.

Distribution from an IRA or A copy of the distribution form from the custodial
403(b) Custodial Account firm indicating (1) the date of birth of the
shareholder and (2) that the shareholder is over age
59 and is taking a normal distribution--signed by
the shareholder.

Distribution from Retirement Plan A letter signed by the plan administrator/trustee
indicating the reason for the distribution.

Excess Contributions A letter from the shareholder (for an IRA) or the
plan administrator/ trustee on company letterhead
indicating the amount of the excess and whether or
not taxes have been paid.
</TABLE>

The Transfer Agent reserves the right to request such additional documents as it
may deem appropriate.

B-36
<PAGE>
WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES

BENEFIT PLANS. The CDSC will be waived for redemptions by certain group
retirement plans for which Prudential or brokers not affiliated with Prudential
provide administrative or recordkeeping services. The CDSC also will be waived
for certain redemptions by benefit plans sponsored by Prudential and its
affiliates. For more information, call Prudential at (800) 353-2847.

CONVERSION FEATURE--CLASS B SHARES

Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.

Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula:
(1) the ratio of (a) the amounts paid for Class B shares purchased at least
seven years prior to the conversion date to (b) the total amount paid for all
Class B shares purchased and then held in your account (2) multiplied by the
total number of Class B shares purchased and then held in your account. Each
time any Eligible Shares in your account convert to Class A shares, all shares
or amounts representing Class B shares then in your account that were acquired
through the automatic reinvestment of dividends and other distributions will
convert to Class A shares.

For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (that is, $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.

Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A shares than
Class B shares converted.

For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year would not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.

The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (1) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (2) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended,
Class B shares of the Fund will continue to be subject, possibly indefinitely,
to their higher annual distribution and service fee.

SHAREHOLDER INVESTMENT ACCOUNT

Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which a record of the shares held is
maintained by the Transfer Agent. If a share certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to its
shareholders the following privileges and plans.

AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS

For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at net asset
value per share. An investor may direct the Transfer Agent in writing not less
than five full business days prior to the record date to have subsequent
dividends or distributions sent in cash rather than reinvested. In the case of
recently

B-37
<PAGE>
purchased shares for which registration instructions have not been received on
the record date, cash payment will be made directly to the broker. Any
shareholder who receives dividends or distributions in cash may subsequently
reinvest any such dividend or distribution at NAV by returning the check or the
proceeds to the Transfer Agent within 30 days after the payment date. Such
reinvestment will be made at the NAV per share next determined after receipt of
the check by the Transfer Agent. Shares purchased with reinvested dividends
and/or distributions will not be subject to any CDSC upon redemption.

EXCHANGE PRIVILEGE

The Fund makes available to its shareholders the privilege of exchanging
their shares for shares of certain other Prudential mutual funds, including one
or more specified money market funds, subject in each case to the minimum
investment requirements of the fund. Shares of such other Prudential mutual
funds may also be exchanged for shares of the Fund. All exchanges are made on
the basis of the relative NAV next determined after receipt of an order in
proper form. An exchange will be treated as a redemption and purchase for tax
purposes. For retirement and group plans having a limited menu of Prudential
mutual funds, the exchange privilege is available for those funds eligible for
investment in the particular program.

It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.

In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. Neither
the Fund nor its agents will be liable for any loss, liability or cost which
results from acting upon instructions reasonably believed to be genuine under
the foregoing procedures. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order.

If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser.

If you hold certificates, the certificates must be returned in order for the
shares to be exchanged.

You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 8157, Philadelphia, PA
19101.

In periods of severe market or economic conditions the telephone exchange of
shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services LLC, at the address noted above.

CLASS A. Shareholders of a Fund may exchange their Class A shares for shares
of certain other Prudential mutual funds and shares of the money market funds
specified below. No fee or sales load will be imposed upon the exchange.
Shareholders of money market funds who acquired such shares upon exchange of
Class A shares may use the exchange privilege only to acquire Class A shares of
the Prudential mutual funds participating in the exchange privilege.

The following money market funds participate in the Class A exchange
privilege:

Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.

CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential mutual funds and shares of Prudential Special Money Market Fund, Inc.
No CDSC will be payable upon such exchange, but a CDSC may be payable upon the
redemption of the Class B and Class C shares acquired as a result of the
exchange. The applicable sales charge will be that imposed by the fund in which
shares were initially purchased and the purchase date will be deemed to be the
first day of the month after the initial purchase, rather than the date of the
exchange.

B-38
<PAGE>

Class B and Class C shares of the Fund may also be exchanged for shares of
an eligible money market fund without imposition of any CDSC at the time of
exchange. Upon subsequent redemption from such money market fund or after
re-exchange into the Fund, such shares will be subject to the CDSC calculated
without regard to the time such shares were held in the money market fund. In
order to minimize the period of time in which shares are subject to a CDSC,
shares exchanged out of the money market fund will be exchanged on the basis of
their remaining holding periods, with the longest remaining holding periods
being transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month. Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.

At any time after acquiring shares of other funds participating in the
Class B or Class C exchange privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund, respectively, without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.

CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential mutual funds.

SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for shareholders
who qualify to purchase Class Z shares. Under this exchange privilege, amounts
representing any Class B and Class C shares which are not subject to a CDSC held
in such a shareholder's account will be automatically exchanged for Class A
shares for shareholders who qualify to purchase Class A shares at NAV on a
quarterly basis, unless the shareholder elects otherwise.

Shareholders who qualify to purchase Class Z shares will have their Class B
and Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. Eligibility for this exchange
privilege will be calculated on the business day prior to the date of the
exchange. Amounts representing Class B or Class C shares which are not subject
to a CDSC include the following: (1) amounts representing Class B or Class C
shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the NAV above the total
amount of payments for the purchase of Class B or Class C shares and
(3) amounts representing Class B or Class C shares held beyond the applicable
CDSC period. Class B and Class C shareholders must notify the Transfer Agent
either directly or through Prudential Securities, Prusec or another broker that
they are eligible for this special exchange privilege.

Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at NAV.

Additional details about the exchange privilege and prospectuses for each of
the Prudential mutual funds are available from the Transfer Agent, the
Distributor or your broker. The exchange privilege may be modified, terminated
or suspended on 60 days' notice, and any fund, including either Fund, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares.

DOLLAR COST AVERAGING

Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.

Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(1)

B-39
<PAGE>
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)

<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years.............................................. $ 105 $ 158 $ 210 $ 263
20 Years.............................................. 170 255 340 424
15 Years.............................................. 289 438 578 722
10 Years.............................................. 547 820 1,093 1,366
5 Years.............................................. 1,361 2,041 2,721 3,402
See "Automatic Investment Plan."
</TABLE>

--------------------------
(1)Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board for the 1993-1994 academic year.

(2)The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.

AUTOMATIC INVESTMENT PLAN (AIP)

Under AIP, an investor may arrange to have a fixed amount automatically
invested in shares of a Fund monthly by authorizing his or her bank account or
brokerage account (including a Prudential Securities Command Account) to be
debited to invest specified dollar amounts in shares of the Fund. The investor's
bank must be a member of the Automatic Clearing House System. Share certificates
are not issued to AIP participants.

Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.

SYSTEMATIC WITHDRAWAL PLAN

A systematic withdrawal plan is available to shareholders through the
Transfer Agent, the Distributor or your broker. Such withdrawal plan provides
for monthly, quarterly, semi-annual or annual redemption checks in any amount,
except as provided below, up to the value of the shares in the shareholder's
account. Withdrawals of Class B or Class C shares may be subject to a CDSC.

In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and
(3) the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at NAV on
shares held under this plan.

The Transfer Agent, the Distributor or your broker acts as agent for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the systematic withdrawal payment. The systematic withdrawal plan may
be terminated at any time, and the Distributor reserves the right to initiate a
fee of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.

Withdrawal payments should not be considered as dividends, yield or income.
If systematic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.

Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charges applicable to (1) the purchase of Class
A and Class C shares and (2) the redemption of Class B and Class C shares. Each
shareholder should consult his or her own tax adviser with regard to the tax
consequences of the plan, particularly if used in connection with a retirement
plan.

TAX-DEFERRED RETIREMENT PLANS

Various tax-deferred retirement plans, including a 401(k) plan,
self-directed individual retirement accounts and "tax-deferred accounts" under
Section 403(b)(7)of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, and the administration, custodial fees and other
details are available from the Distributor or the Transfer Agent.

B-40
<PAGE>
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.

TAX-DEFERRED RETIREMENT ACCOUNTS

INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.

<TABLE>
<CAPTION>
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
--------------------- -------- --------
<S> <C> <C>
10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
</TABLE>

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

(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated.
Earnings in a traditional IRA account will be subject to tax when withdrawn
from the account. Distributions from a Roth IRA which meet the conditions
required under the Internal Revenue Code will not be subject to tax upon
withdrawal from the account.

MUTUAL FUND PROGRAMS

From time to time, the Fund may be included in a mutual fund program with
other Prudential mutual funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, such as, to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.

The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not be
appropriate for all investors, investors should consult their financial adviser
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.

NET ASSET VALUE

The Fund's net asset value per share or NAV is determined by subtracting its
liabilities from the value of its assets and dividing the remainder by the
number of outstanding shares. NAV is calculated separately for each class. The
Fund will compute its NAV at 4:15 P.M., New York time, on each day the New York
Stock Exchange is open for trading except on days on which no orders to
purchase, sell or redeem Fund shares have been received or days on which changes
in the value of the Fund's portfolio securities do not affect NAV. In the event
the New York Stock Exchange closes early on any business day, the NAV of the
Fund's shares shall be determined at a time between such closing and 4:15 P.M.,
New York time. The New York Stock Exchange is closed on 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.

Under the Investment Company Act, the Board of Trustees is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Trustees, the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indexes) are valued at the
last sale price on such exchange or market on the day of valuation or, if there
was no sale on such day, at the mean between the last bid and asked prices on
such day or at the last bid price on such day in the absence of an asked price.
Corporate bonds (other than convertible debt securities) that are actively
traded in the over-the-counter market, including listed securities and
securities eligible for resale pursuant to Rule 144A under the Securities Act
for which the primary market is believed by the Manager in

B-41
<PAGE>

consultation with the Subadviser to be over-the-counter, are valued on the basis
of valuations provided by a pricing service or more than one principal market
maker that use information with respect to transactions in bonds, quotations
from bond dealers, agency ratings, market transactions in comparable securities
and various relationships between securities in determining value. U.S.
government securities for which market quotations are available shall be valued
at a price provided by an independent pricing agent or primary dealer.
Convertible debt securities that are actively traded in the over-the-counter
market, including listed convertible debt securities for which the primary
market is believed by the Manager in consultation with the Subadviser to be
over-the-counter, are valued at the mean between the last reported bid and asked
prices (or at the last bid price in the absence of an asked price) provided by
more than one principal market maker (if available, otherwise a primary market
dealer). Options on stock and stock indexes that are listed on an exchange and
futures contracts and options on futures contracts traded on an exchange or
board of trade are valued at the last sale price on such exchange or board of
trade or, if there was no sale on the applicable exchange or board of trade on
such day, at the mean between the most recently quoted bid and asked prices on
such exchange or board of trade (or at the last bid price in the absence of an
asked price). Quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents at the current rate obtained from a
recognized bank or dealer and foreign currency forward contracts are valued at
the current cost of covering or offsetting such contracts. Should an
extraordinary event, which is likely to affect the value of the security, occur
after the close of an exchange on which a portfolio security is traded, such
security will be valued at fair value considering factors determined in good
faith by an investment adviser under procedures established by and under the
general supervision of the Company's Board of Trustees.

Securities or other assets for which reliable market quotations are not
readily available or for which the pricing agent or principal market maker does
not provide a valuation or methodology or provides a valuation or methodology
that, in the judgment of the Manager or Subadviser (or Valuation Committee or
Board of Trustees), does not represent fair value, are valued by the Valuation
Committee or Board of Trustees in consultation with the Manager and Subadviser,
including its portfolio managers, traders, and its research and credit analysts,
on the basis of some or all of the following factors: the nature of any
restrictions on disposition of the securities; assessment of the general
liquidity/illiquidity of the securities; the issuer's financial condition and
the markets in which it does business; the cost of the investment; the size of
the holding and the capitalization of the issuer; the prices of any recent
transactions or bids/offers for such securities or any comparable securities;
any available analyst, media or other reports or information deemed reliable by
the Manager or Subadviser regarding the issuer or the markets or industry in
which it operates; other analytical data; and consistency with valuation of
similar securities held by other Prudential mutual funds. Short-term investments
are valued at cost, with interest accrued or discount amortized to the date of
maturity, if their original maturity was 60 days or less, unless this is
determined by the Board of Trustees not to represent fair value. Short-term
securities with remaining maturities of more than 60 days, for which market
quotations are readily available, are valued at their current market quotations
as supplied by an independent pricing agent or more than one principal market
maker.

Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. The
NAV of Class Z shares will generally be higher than the NAV of Class A, Class B
or Class C shares because Class Z shares are not subject to any distribution or
service fee. It is expected, however, that the NAV per share of each class will
tend to converge immediately after the recording of dividends, if any, which
will differ by approximately the amount of the distribution and/or service fee
expense accrual differential among the classes.

TAXES, DIVIDENDS AND DISTRIBUTIONS

The Fund is qualified as, intends to remain qualified as, and has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code. This relieves the Fund (but not its shareholders) from paying
federal income tax on income and capital gains which are distributed to
shareholders and permits net capital gains of the Fund (that is, the excess of
net long-term capital gains over net short-term capital losses) to be treated as
long-term capital gains of the shareholders, regardless of how long shareholders
have held their shares in the Fund. Net capital gains of the Fund which are
available for distribution to shareholders will be computed by taking into
account any capital loss carryforward of the Fund.

Qualification of the Fund as a regulated investment company under the
Internal Revenue Code requires, among other things, that (a) at least 90% of the
Fund's annual gross income (without reduction for losses from the sale or other
disposition of securities or foreign currency) be derived from interest,
dividends, payments with respect to securities loans and gains from the sale or
other disposition of securities or options thereon or foreign currencies, or
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
securities or currencies; (b) the Fund diversify its holdings so that, at the
end of each fiscal quarter (1) at least 50% of the value of the Fund's assets is
represented by cash, U.S. government securities and other securities limited in
respect of any one issuer to an amount not greater

B-42
<PAGE>

than 5% of the value of the Fund's assets and 10% of the outstanding voting
securities of such issuer, and (2) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than U.S. government
securities); and (c) the Fund distribute to its shareholders at least 90% of its
net investment income and net short-term capital gains (that is, the excess of
net short-term capital gains over net long-term capital losses) in each year.

In addition, the Fund is required to distribute 98% of its ordinary income
in the same calendar year in which it is earned. The Fund is also required to
distribute during the calendar year 98% of the capital gain net income it earned
during the 12 months ending on October 31 of such calendar year. In addition,
the Fund must distribute during the calendar year all undistributed ordinary
income and undistributed capital gain net income from the prior calendar year or
the twelve-month period ending on October 31 of such prior calendar year,
respectively. To the extent it does not meet these distribution requirements,
the Fund will be subject to a nondeductible 4% excise tax on the undistributed
amount. For purposes of this excise tax, income on which the Fund pays income
tax is treated as distributed. The Fund intends to distribute amounts sufficient
to avoid imposition of the excise tax.

Gains or losses on sales of securities by the Fund generally will be treated
as long-term capital gains or losses if the securities have been held by it for
more than one year except in certain cases where the Fund acquires a put or
writes a call thereon or otherwise holds an offsetting position with respect to
the securities. Other gains or losses on the sale of securities will be
short-term capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will be treated as gains and losses from
the sale of securities. If an option written by the Fund on securities lapses or
is terminated through a closing transaction, such as a repurchase by the Fund of
the option from its holder, the Fund will generally realize short-term capital
gain or loss. If securities are sold by the Fund pursuant to the exercise of a
call option written by it, the Fund will include the premium received in the
sale proceeds of the securities delivered in determining the amount of gain or
loss on the sale. Certain of the Fund's transactions may be subject to wash
sale, short sale, constructive sale, anti-conversion and straddle provisions of
the Internal Revenue Code which may, among other things, require the Fund to
defer recognition of losses.

Certain futures contracts and certain listed options (referred to as
Section 1256 contracts) held by the Fund will be required to be
"marked-to-market" for federal income tax purposes; that is, treated as having
been sold at their fair market value on the last day of the Fund's taxable year.
Except with respect to certain foreign currency forward contracts, 60% of any
gain or loss recognized on such deemed sales and on actual dispositions will be
treated as long-term capital gain or loss, and the remainder will be treated as
short-term capital gain or loss.

Gain or loss on the sale, lapse or other termination of options on stock and
on narrowly-based stock indexes will be capital gain or loss and will be
long-term or short-term depending upon the holding period of the option. In
addition, positions which are part of a straddle will be subject to certain wash
sale, short sale and constructive sale provisions of the Internal Revenue Code.
In the case of a straddle, the Fund may be required to defer the recognition of
losses on positions it holds to the extent of any unrecognized gain on
offsetting positions held by the Fund. The conversion transaction rules may
apply to certain transactions to treat all or a portion of the gain thereon as
ordinary income rather than as capital gain.

Under the Internal Revenue Code, gains or losses attributable to
fluctuations in exchange rates which occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities are treated as ordinary income or ordinary
loss. Similarly, gains or losses on forward foreign currency exchange contracts
or dispositions of debt securities denominated in a foreign currency
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the security and the date of disposition also may be
treated as ordinary gain or loss. These gains or losses, referred to under the
Internal Revenue Code as "Section 988" gains or losses, increase or decrease the
amount of the Fund's investment company taxable income available to be
distributed to its shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. If Section 988 losses
exceed other investment company taxable income during a taxable year, the Fund
would not be able to make any ordinary dividend distributions, or distributions
made before the losses were realized would be recharacterized as a return of
capital to shareholders, rather than as an ordinary dividend, thereby reducing
each shareholder's basis in his or her Fund shares.

The Fund may, from time to time, invest in "passive foreign investment
companies" (PFICs). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (a) at least 75% of its gross income is passive
or (b) an average of at least 50% of its assets produce, or are held for the
production of, passive income. If the Fund acquires and holds stock in a PFIC
beyond the end of the year of its acquisition, the Fund will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock or on any gain from disposition of the 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 the extent that income is distributed to its shareholders. The Fund
may make a "mark-to-market" election with respect to any marketable stock it
holds of a PFIC. If the election is in effect, at the end of the Fund's taxable
year the Fund will recognize the amount of gains, if any, as ordinary income

B-43
<PAGE>
with respect to PFIC stock. No loss will be recognized on PFIC stock, except to
the extent of gains recognized in prior years. Alternatively, the Fund, if it
meets certain requirements, may elect to treat any PFIC in which it invests as a
"qualified electing fund," in which case, 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 qualified electing fund's annual ordinary earnings and
net capital gain, even if they are not distributed to the Fund; those amounts
would be subject to the distribution requirements applicable to the Fund
described above.

Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the NAV of a share of the Fund on the reinvestment
date.

Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share NAV of the investor's shares by
the per share amount of the dividends or distributions. Furthermore, such
dividends, although in effect a return of capital, are subject to federal income
taxes. Dividends and capital gain distributions may also be subject to state and
local income taxes. Therefore, prior to purchasing shares of the Fund, the
investor should carefully consider the impact of dividends, including capital
gains distributions, which are expected to be or have been announced.

Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period beginning 30 days before the disposition of shares. Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.

A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.

Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Net capital gain distributions paid to a foreign
shareholder are generally not subject to withholding tax. A foreign shareholder
will, however, be required to pay U.S. income tax on any dividends and capital
gain distributions which are effectively connected with a U.S. trade or business
of the foreign shareholder. Foreign shareholders are advised to consult their
own tax advisers with respect to the particular tax consequences to them of an
investment in the Fund.

The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A and Class Z shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share distributions of net capital gains, if any, will be in the same amount for
Class A, Class B, Class C and Class Z shares. See "Net Asset Value."

Dividends received by corporate shareholders generally are eligible for a
dividends-received deduction of 70% to the extent the Fund's income is derived
from qualified dividends received by the Fund from domestic corporations.
Interest income, capital gain net income, gain or loss from Section 1256
contracts (described above), dividend income from foreign corporations and
income from other sources will not constitute qualified dividends. Individual
shareholders are not eligible for the dividends-received deduction.

Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject, since the amount of the Fund's
assets to be invested in various countries will vary. The Fund does not expect
to meet the requirements of the Internal Revenue Code for "passing-through" to
its shareholders any foreign income taxes paid.

Shareholders are advised to consult their own tax advisers with respect to
the federal, state and local income tax consequences resulting from their
investment in the Fund.

B-44
<PAGE>
PERFORMANCE INFORMATION

AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares.

Average annual total return is computed according to the following formula:

P(1+T)TO THE POWER OF n = ERV

<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment
made at the beginning of the 1, 5 or 10 year periods (or
fractional portion thereof).
</TABLE>

Average annual total return takes into account any applicable initial or
deferred sales charges but does not take into account any federal or state
income taxes that may be payable upon redemption. Below are the average annual
total returns for the Fund's share classes for the periods ended October 31,
2000.

<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION
-------- ----------------
<S> <C> <C>
Class A................................................... 4.61% 10.40% (3-3-99)
Class B................................................... 4.36% 10.85% (3-3-99)
Class C................................................... 7.26% 12.40% (3-3-99)
Class Z................................................... 10.44% 14.24% (3-3-99)
</TABLE>

AGGREGATE TOTAL RETURN. Each Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares.

Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:

ERV - P
-------
P

Where: P = a hypothetical initial payment of $1,000.

ERV = ending redeemable value of a hypothetical $1,000 investment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1, 5
or 10 year periods (or fractional portion thereof).

Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.

Below are the aggregate total returns for the Fund's share classes for the
periods ended October 31, 2000.

<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION
-------- ----------------
<S> <C> <C>
Class A................................................... 10.12% 24.10% (3-3-99)
Class B................................................... 9.36% 22.70% (3-3-99)
Class C................................................... 9.36% 22.70% (3-3-99)
Class Z................................................... 10.44% 24.80% (3-3-99)
</TABLE>

The Fund may use total return figures showing after-tax returns, including
comparisons to tax-deferred vehicles such as Individual Retirement Accounts
(IRAs) and variable annuities. In calculating after-tax returns, the Fund will,
in general, assume that its shareholders are U.S. individual taxpayers subject
to federal income taxes at the highest marginal rate then applicable to ordinary
income and long-term capital gains. After-tax returns may also be calculated
using different tax rate assumptions and taking into account state and local
income taxes as well as federal taxes. In calculating after-tax returns,
distributions made by the Fund are assumed to be reduced by the amount of taxes
payable on the distribution, and the after-tax proceeds of the distribution are
reinvested in the Fund at NAV on the reinvestment date.

B-45
<PAGE>

The Fund also may include comparative performance information in advertising
or marketing the Fund's shares. Such performance information may include data
from Lipper Inc., Morningstar Publications, Inc., other industry publications,
business periodicals and market indexes.

ADVERTISING. Advertising materials for the Fund may include biographical
information relating to its portfolio manager(s), and may include or refer to
commentary by the Fund's manager(s) concerning investment style, investment
discipline, asset growth, current or past business experience, business
capabilities, political, economic or financial conditions and other matters of
general interest to investors. Advertising materials for the Fund also may
include mention of The Prudential Insurance Company of America, its affiliates
and subsidiaries, and reference the assets, products and services of those
entities.

From time to time, advertising materials for the Fund may include
information concerning retirement and investing for retirement, may refer to the
approximate number of Fund shareholders and may refer to Lipper rankings or
Morningstar ratings, other related analysis supporting those ratings, other
industry publications, business periodicals and market indexes. In addition,
advertising materials may reference studies or analyses performed by the Manager
or its affiliates. Advertising materials for sector funds, funds that focus on
market capitalizations, index funds and international/global funds may discuss
the potential benefits and risks of that investment style. Advertising materials
for fixed-income funds may discuss the benefits and risks of investing in the
bond market including discussions of credit quality, duration and maturity.

Set forth below is a chart which compares the performance of different types
of investments over the long term and rate of inflation.(1)

PERFORMANCE COMPARISON OF DIFFERENT TYPES OF INVESTMENTS
OVER THE LONG TERM (12/31/25 - 12/31/99)

[CHART]

Common Stocks - 11.1%
Long-Term Gov't. Bonds - 5.3%
Inflation - 3.1%

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

(1)Source: Ibbotson Associates. All rights reserved. Used with permission.
Common stock returns are based on the Standard & Poor's 500 Composite Stock
Price Index, a market-weighted, unmanaged index of 500 common stocks in a
variety of industry sectors. It is a commonly used indicator of broad stock
price movements. This chart is for illustrative purposes only and is not
intended to represent the performance of any particular investment or fund.
Investors cannot invest directly in an index. Past performance is not a
guarantee of future results.

B-46
<PAGE>

PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Portfolio of Investments as of October 31, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
-------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 99.9%
COMMON STOCKS
-------------------------------------------------------------------------------------
AEROSPACE/DEFENSE 0.9%
37,100 Boeing Co. $ 2,515,844
22,600 General Dynamics Corp. 1,617,312
--------------
4,133,156
-------------------------------------------------------------------------------------
AIRLINES 0.9%
88,200 AMR Corp.(a) 2,888,550
12,600 Delta Air Lines, Inc. 595,350
16,300 Southwest Airlines Co. 464,550
--------------
3,948,450
-------------------------------------------------------------------------------------
ALUMINUM 0.4%
9,500 Alcan Aluminum Ltd. 299,844
54,500 Alcoa Inc. 1,563,468
--------------
1,863,312
-------------------------------------------------------------------------------------
AUTO & TRUCK 1.8%
1,000 ArvinMeritor, Inc. 16,750
2,500 BorgWarner, Inc. 94,375
58,608 Ford Motor Co. 1,531,134
48,500 General Motors Corp. 3,013,062
10,200 Harley-Davidson, Inc. 491,513
4,800 Johnson Controls, Inc. 286,200
3,200 PACCAR Inc. 134,600
142,700 Visteon Corp. 2,524,006
--------------
8,091,640
-------------------------------------------------------------------------------------
BANKING 3.6%
43,000 Astoria Financial Corp. 1,612,500
11,000 Bank of America Corp. 528,687
23,100 Bank of New York Co., Inc. 1,329,694
45,300 Chase Manhattan Corp. 2,061,150
22,700 Dime Bancorp, Inc. 554,731
3,650 Fifth Third Bancorp 187,519
9,864 Firstar Corp. 194,198
</TABLE>
See Notes to Financial Statements

B-47

<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Portfolio of Investments as of October 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
31,030 FleetBoston Financial Corp. $ 1,179,140
49,400 Golden West Financial Corp. 2,769,487
9,500 Mellon Financial Corp. 458,375
4,900 Northern Trust Corp. 418,338
18,900 PNC Financial Services Group 1,263,937
3,500 U.S. Bancorp 84,656
15,900 Washington Mutual, Inc. 699,600
64,800 Wells Fargo & Co. 3,001,050
--------------
16,343,062
-------------------------------------------------------------------------------------
BEVERAGES 1.9%
44,200 Anheuser-Busch Cos., Inc. 2,022,150
39,000 Coca-Cola Co. 2,354,625
92,400 PepsiCo, Inc. 4,475,625
--------------
8,852,400
-------------------------------------------------------------------------------------
BIOTECHNOLOGY 0.1%
4,600 PE Corp.-PE Biosystems Group 538,200
-------------------------------------------------------------------------------------
BUSINESS SERVICES 0.3%
22,700 Paychex, Inc. 1,286,806
-------------------------------------------------------------------------------------
CHEMICALS 0.5%
28,200 Air Products & Chemicals, Inc. 1,052,212
600 Ashland, Inc. 19,650
6,300 Dow Chemical Co. 192,938
21,085 E.I. du Pont de Nemours & Co. 956,732
3,800 Union Carbide Corp. 163,400
--------------
2,384,932
-------------------------------------------------------------------------------------
COMMERCIAL SERVICES
400 Cendant Corp.(a) 4,800
-------------------------------------------------------------------------------------
COMPUTERS 3.7%
29,200 Apple Computer, Inc.(a) 571,225
81,000 Hewlett-Packard Co. 3,761,438
5,300 InFocus Corp.(a) 234,194
</TABLE>
See Notes to Financial Statements

B-48

<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Portfolio of Investments as of October 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
54,400 International Business Machines Corp. $ 5,358,400
62,500 Sun Microsystems, Inc.(a) 6,929,687
--------------
16,854,944
-------------------------------------------------------------------------------------
COMPUTER NETWORKS 3.2%
236,600 Cisco Systems, Inc.(a) 12,746,825
15,200 Network Appliance, Inc.(a) 1,808,800
--------------
14,555,625
-------------------------------------------------------------------------------------
COMPUTER SOFTWARE & SERVICES 10.8%
40,800 Adobe Systems, Inc. 3,103,350
103,000 America Online, Inc.(a) 5,194,290
2,800 Cadence Design Systems, Inc.(a) 71,925
29,100 Comverse Technology, Inc.(a) 3,251,925
14,300 Electronic Data Systems Corp. 671,206
83,600 EMC Corp.(a) 7,445,625
41,700 Intuit, Inc.(a) 2,561,944
6,700 Macromedia, Inc.(a) 516,319
195,400 Microsoft Corp.(a) 13,458,175
6,000 NVIDIA Corp.(a) 372,844
221,000 Oracle Corp.(a) 7,293,000
3,600 Parametric Technology Corp.(a) 44,325
14,000 Rational Software Corp.(a) 835,625
4,200 Siebel Systems, Inc.(a) 440,737
28,300 VERITAS Software Corp.(a) 3,990,742
3,500 Yahoo! Inc.(a) 205,188
--------------
49,457,220
-------------------------------------------------------------------------------------
CONSUMER PRODUCTS 0.4%
900 American Greetings Corp. 16,369
2,900 Clorox Co. (The) 129,413
19,100 NIKE, Inc. 762,806
12,500 V.F. Corp. 341,406
18,400 Whirlpool Corp. 800,400
--------------
2,050,394
</TABLE>
See Notes to Financial Statements

B-49

<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Portfolio of Investments as of October 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
COSMETICS & SOAPS 0.9%
21,700 Avon Products, Inc. $ 1,052,450
33,100 Colgate-Palmolive Co. 1,944,956
9,000 Kimberly-Clark Corp. 594,000
4,800 Procter & Gamble Co. 342,900
--------------
3,934,306
-------------------------------------------------------------------------------------
DATA PROCESSING/MANAGEMENT 0.6%
23,700 Automatic Data Processing, Inc. 1,547,906
6,900 CSG Systems Int'l., Inc.(a) 320,419
11,200 First Data Corp. 561,400
7,600 Fiserv, Inc.(a) 398,525
400 SEI Investments Co. 36,300
--------------
2,864,550
-------------------------------------------------------------------------------------
DISTRIBUTION/ WHOLESALERS 0.2%
21,700 Costco Wholesale Corp.(a) 794,762
6,700 Tech Data Corp.(a) 278,888
500 W.W. Grainger, Inc. 15,969
--------------
1,089,619
-------------------------------------------------------------------------------------
DIVERSIFIED MANUFACTURING 6.2%
700 Ball Corp. 24,588
28,200 Corning, Inc. 2,157,300
2,100 Eaton Corp. 142,931
371,100 General Electric Co. 20,340,919
17,850 Honeywell Int'l., Inc. 960,553
4,200 Illinois Tool Works, Inc. 233,363
4,500 Liz Claiborne, Inc. 191,250
13,100 Minnesota Mining & Manufacturing Co. (3M) 1,265,787
26,600 National Service Industries, Inc. 543,637
12,100 Parker-Hannifin Corp. 500,638
6,000 Polycom, Inc.(a) 390,000
1,100 Symbol Technologies, Inc. 49,981
12,100 Trinity Industrial, Inc. 291,156
</TABLE>
See Notes to Financial Statements

B-50

<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Portfolio of Investments as of October 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
11,700 Tyco Int'l. Ltd. $ 663,244
7,600 Unilever N V (Netherlands) 386,175
--------------
28,141,522
-------------------------------------------------------------------------------------
DRUGS & MEDICAL SUPPLIES 4.9%
60,300 Abbott Laboratories 3,184,594
12,900 American Home Products Corp. 819,150
47,800 Amgen, Inc.(a) 2,769,412
12,450 Biomet, Inc. 450,534
64,700 Bristol-Myers Squibb Co. 3,942,656
18,900 Cardinal Health, Inc. 1,790,775
200 Express Scripts, Inc.(a) 13,438
13,000 Forest Laboratories, Inc.(a) 1,722,500
22,600 Genzyme Corp.(a) 1,604,600
58,500 Johnson & Johnson 5,389,312
4,400 MiniMed, Inc.(a) 320,925
600 Mylan Laboratories, Inc. 16,800
400 Quest Diagnostics, Inc.(a) 38,500
6,200 VISX, Inc.(a) 132,913
--------------
22,196,109
-------------------------------------------------------------------------------------
ELECTRONICS 1.2%
64,200 Agilent Technologies, Inc.(a) 2,973,263
6,100 ALLETE 131,531
16,400 Avnet, Inc. 440,750
15,900 Emerson Electric Co. 1,167,656
6,600 Linear Technology Corp. 426,113
6,300 Power-One, Inc.(a) 446,906
--------------
5,586,219
-------------------------------------------------------------------------------------
ELECTRONIC COMPONENTS 2.7%
36,400 Altera Corp.(a) 1,490,125
5,900 Arrow Electronics, Inc.(a) 188,800
28,500 Jabil Circuit, Inc.(a) 1,626,281
15,600 KLA-Tencor Corp.(a) 527,475
2,200 Molex Inc. 118,800
25,600 Sanmina Corp.(a) 2,926,400
</TABLE>
See Notes to Financial Statements

B-51

<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Portfolio of Investments as of October 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
7,600 Sawtek, Inc.(a) $ 386,650
66,800 Solectron Corp.(a) 2,939,200
32,900 Xilinx, Inc.(a) 2,383,194
--------------
12,586,925
-------------------------------------------------------------------------------------
ENTERTAINMENT 0.1%
12,500 Carnival Corp. 310,156
-------------------------------------------------------------------------------------
FINANCIAL SERVICES 9.2%
3,300 Ambac Financial Group, Inc. 263,381
70,600 American Express Co. 4,236,000
18,100 Associates First Capital Corp. 671,963
22,395 Bear Stearns Cos., Inc. 1,357,697
169,133 Citigroup, Inc. 8,900,624
24,000 Federal Home Loan Mortgage Corp. 1,440,000
36,400 Federal National Mortgage Association 2,802,800
11,700 Household Int'l., Inc. 588,656
54,600 Lehman Brothers Holdings, Inc. 3,521,700
111,300 MBNA Corp. 4,180,706
28,200 Merrill Lynch & Co., Inc. 1,974,000
5,000 MGIC Investment Corp. 340,625
23,400 Morgan (J.P.) & Co., Inc. 3,872,700
57,200 Morgan Stanley Dean Witter & Co. 4,593,875
9,600 PaineWebber Group, Inc. 684,000
24,800 Providian Financial Corp. 2,579,200
3,000 Stilwell Financial, Inc. 134,438
--------------
42,142,365
-------------------------------------------------------------------------------------
FOODS 0.8%
740 Archer-Daniels-Midland Co. 8,140
9,000 ConAgra Foods, Inc. 192,375
200 General Mills, Inc. 8,350
1,500 H.J. Heinz Co. 62,906
45,400 IBP, Inc. 933,537
3,700 International Multifoods Corp. 62,669
2,200 Quaker Oats Co. (The) 179,438
36,900 Sara Lee Corp. 795,656
</TABLE>
See Notes to Financial Statements

B-52
<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Portfolio of Investments as of October 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
19,000 Suiza Foods Corp.(a) $ 879,938
11,500 SYSCO Corp. 600,156
400 Wrigley (Wm.) Jr. Co. 31,675
--------------
3,754,840
-------------------------------------------------------------------------------------
FOREST PRODUCTS 0.3%
26,300 Weyerhaeuser Co. 1,234,456
-------------------------------------------------------------------------------------
GAS DISTRIBUTION 0.1%
18,900 Sempra Energy 390,994
-------------------------------------------------------------------------------------
GAS PIPELINES 1.5%
56,200 Dynegy Inc. 2,602,762
15,600 El Paso Energy Corp. 977,925
29,200 Enron Corp. 2,396,225
21,800 Williams Companies, Inc. (The) 911,513
--------------
6,888,425
-------------------------------------------------------------------------------------
HEALTH CARE 1.1%
17,900 Foundation Health Systems(a) 361,356
16,300 Tenet Healthcare Corp.(a) 640,794
4,200 Trigon Healthcare, Inc.(a) 301,087
33,800 UnitedHealth Group, Inc. 3,696,875
200 Wellpoint Health Networks Inc.(a) 23,388
--------------
5,023,500
-------------------------------------------------------------------------------------
HOUSING CONSTRUCTION 0.5%
26,700 Centex Corp. 987,900
100 Masco Corp. 1,869
29,100 Pulte Corp. 969,394
2,900 Southdown, Inc. 205,537
--------------
2,164,700
-------------------------------------------------------------------------------------
HUMAN RESOURCES
1,100 Robert Half Int'l., Inc.(a) 33,550
-------------------------------------------------------------------------------------
INSURANCE 4.5%
6,800 Aetna, Inc. 393,125
17,800 Allmerica Financial Corp. 1,122,512
</TABLE>
See Notes to Financial Statements

B-53
<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Portfolio of Investments as of October 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
106,600 Allstate Corp. $ 4,290,650
11,900 American General Corp. 957,950
88,000 American Int'l. Group, Inc. 8,624,000
14,400 Everest Re Group, Ltd. 844,200
6,800 Hartford Financial Services Group, Inc. (The) 506,175
3,600 Jefferson-Pilot Corp. 247,500
2,300 Loews Corp. 209,156
6,200 Marsh & McLennan Co., Inc. 810,650
23,900 Old Republic Int'l Corp. 621,400
8,100 PMI Group, Inc. (The) 598,388
25,800 St. Paul Companies, Inc. (The) 1,322,250
--------------
20,547,956
-------------------------------------------------------------------------------------
LODGING
300 Marriott Int'l., Inc. 12,150
-------------------------------------------------------------------------------------
MACHINERY 0.4%
700 Caterpillar, Inc. 24,544
16,100 Deere & Co. 592,681
6,900 Dover Corp. 292,819
5,800 Ingersoll-Rand Co. 218,950
26,200 McDermott Int'l., Inc.(a) 253,813
700 Milacron Inc. 11,156
14,100 Tecumseh Products Co. 562,237
--------------
1,956,200
-------------------------------------------------------------------------------------
MEDIA 2.7%
11,100 Comcast Corp.(a) 452,325
85,100 Disney (Walt) Co. 3,047,644
100 Donnelley (R.R.) & Sons Co. 2,150
6,800 Dow Jones & Co., Inc. 400,350
700 Gannett Co., Inc. 40,600
5,400 Interpublic Group of Companies, Inc. 231,863
2,100 Knight-Ridder, Inc. 105,525
5,900 McGraw-Hill Cos., Inc. 378,706
6,800 New York Times Co. 249,900
10,500 Omnicom Group Inc. 968,625
</TABLE>
See Notes to Financial Statements

B-54

<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Portfolio of Investments as of October 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
20,700 Seagram Co. Ltd. $ 1,182,487
54,200 Time Warner, Inc. 4,114,322
9,000 Tribune Co. 333,562
10,200 Viacom Inc.(a) 580,125
--------------
12,088,184
-------------------------------------------------------------------------------------
METALS
200 Phelps Dodge Corp. 9,350
-------------------------------------------------------------------------------------
MINING
900 Barrick Gold Corp. 12,038
-------------------------------------------------------------------------------------
MISCELLANEOUS BASIC INDUSTRY
5,000 Precision Castparts Corp. 188,750
-------------------------------------------------------------------------------------
OIL & GAS 1.0%
7,500 Amerada Hess Corp. 465,000
8,100 Baker Hughes, Inc. 278,438
8,300 Coastal Corp. 626,131
21,000 Schlumberger Ltd. 1,598,625
52,200 USX - Marathon Group 1,419,188
--------------
4,387,382
-------------------------------------------------------------------------------------
OIL & GAS EXPLORATION/PRODUCTION 0.5%
500 Anadarko Petroleum Corp. 32,025
5,100 Apache Corp. 282,094
7,600 Burlington Resources, Inc. 273,600
8,949 Conoco Inc. 243,301
8,000 ENSCO International, Inc. 266,000
11,200 Nabors Industries, Inc.(a) 570,080
30,200 Tosco Corp. 864,475
--------------
2,531,575
-------------------------------------------------------------------------------------
PAPER & PACKAGING 0.4%
10,500 Bowater Inc. 568,313
22,700 Georgia-Pacific Group 610,062
</TABLE>
See Notes to Financial Statements

B-55

<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Portfolio of Investments as of October 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
12,075 International Paper Co. $ 442,247
34,100 Louisiana-Pacific Corp. 289,850
--------------
1,910,472
-------------------------------------------------------------------------------------
PETROLEUM & COAL 5.8%
23,200 Chevron Corp. 1,905,300
125,903 Exxon Mobil Corp. 11,228,974
47,800 Phillips Petroleum Co. 2,951,650
110,600 Royal Dutch Petroleum Co. 6,566,875
63,500 Texaco Inc. 3,750,469
--------------
26,403,268
-------------------------------------------------------------------------------------
PHARMACEUTICALS 5.4%
7,300 Allergan, Inc. 613,656
6,100 ALZA Corp.(a) 493,719
49,300 Eli Lilly & Co. 4,406,188
87,500 Merck & Co., Inc. 7,869,531
197,275 Pfizer Inc. 8,519,814
55,100 Schering-Plough Corp. 2,847,981
--------------
24,750,889
-------------------------------------------------------------------------------------
PHOTOGRAPHY EQUIPMENT & SUPPLIES
300 Polaroid Corp. 3,019
-------------------------------------------------------------------------------------
RAILROADS 0.2%
21,600 Burlington Northern Santa Fe Corp. 573,750
6,700 Union Pacific Corp. 314,062
--------------
887,812
-------------------------------------------------------------------------------------
RETAIL 4.0%
16,700 Abercrombie & Fitch Co.(a) 393,494
6,300 Albertson's, Inc. 149,231
12,700 American Eagle Outfitters, Inc.(a) 437,356
34,800 Bed Bath & Beyond Inc.(a) 898,275
7,000 CDW Computer Centers, Inc.(a) 451,063
16,100 CVS Corp. 852,294
25,000 Federated Department Stores, Inc.(a) 814,062
23,000 Home Depot, Inc. 989,000
</TABLE>
See Notes to Financial Statements

B-56

<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Portfolio of Investments as of October 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
35,500 Kohl's Corp.(a) $ 1,923,656
6,200 Neiman Marcus Group, Inc.(a) 230,175
3,300 RadioShack Corp. 196,763
19,900 Safeway Inc.(a) 1,088,281
51,600 Sears, Roebuck & Co. 1,534,068
12,700 Target Corp. 350,838
15,200 Tiffany & Co. 648,850
123,000 Wal-Mart Stores, Inc. 5,581,125
38,100 Walgreen Co. 1,738,312
--------------
18,276,843
-------------------------------------------------------------------------------------
SEMICONDUCTORS 4.2%
6,700 Advanced Micro Devices, Inc.(a) 151,588
7,900 Analog Devices, Inc.(a) 513,500
43,000 Applied Materials, Inc.(a) 2,284,375
45,400 Atmel Corp.(a) 678,163
1,100 Broadcom Corp.(a) 244,613
247,100 Intel Corp. 11,119,500
1,300 Maxim Integrated Products, Inc.(a) 86,206
5,200 Micrel, Inc.(a) 235,300
17,500 Novellus Systems, Inc.(a) 716,406
2,800 Semtech Corp.(a) 90,300
32,200 Texas Instruments, Inc. 1,579,812
8,900 TranSwitch Corp.(a) 513,975
15,100 Vitesse Semiconductor Corp.(a) 1,056,056
--------------
19,269,794
-------------------------------------------------------------------------------------
STEEL - PRODUCERS
400 Nucor Corp. 13,875
-------------------------------------------------------------------------------------
Telecommunications 7.9%
3,000 ALLTEL Corp. 193,313
139,011 AT&T Corp. 3,223,318
3,625 Avaya, Inc. 48,711
75,900 BellSouth Corp. 3,666,919
2,100 CenturyTel, Inc. 80,850
49,200 JDS Uniphase Corp.(a) 4,003,650
13,800 Lucent Technologies, Inc. 321,712
</TABLE>
See Notes to Financial Statements

B-57
<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Portfolio of Investments as of October 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
134,300 Nortel Networks Corp. $ 6,110,650
8,600 Powerwave Technologies, Inc.(a) 413,875
500 Quanta Services, Inc.(a) 15,531
69,900 Qwest Communications Int'l., Inc.(a) 3,398,887
124,694 SBC Communications, Inc. 7,193,285
1,700 Sprint Corp. (PCS Group)(a) 43,350
64,800 Tellabs, Inc.(a) 3,235,950
69,596 Verizon Communications 4,023,519
10,750 WorldCom, Inc.(a) 255,312
--------------
36,228,832
-------------------------------------------------------------------------------------
TEXTILES 0.1%
14,400 Springs Industries, Inc. 339,300
-------------------------------------------------------------------------------------
TOBACCO 0.6%
45,300 Philip Morris Companies, Inc. 1,659,112
26,900 R.J. Reynolds Tobacco Holdings, Inc. 961,675
1,200 Universal Corp. 33,600
--------------
2,654,387
-------------------------------------------------------------------------------------
TRANSPORTATION
5,000 CNF Transportation, Inc. 133,438
1,600 FedEx Corp.(a) 74,976
--------------
208,414
-------------------------------------------------------------------------------------
UTILITIES 3.4%
18,900 Calpine Corp.(a) 1,491,919
2,000 Cinergy Corp. 61,250
6,673 Dominion Resources, Inc. 397,461
29,900 Duke Energy Corp. 2,584,481
42,800 Entergy Corp. 1,639,775
8,750 Exelon Corp. 526,094
13,100 Florida Progress Corp. 696,756
1,200 FPL Group, Inc. 79,200
17,400 GPU, Inc. 575,287
</TABLE>
See Notes to Financial Statements

B-58

<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Portfolio of Investments as of October 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
28,000 KeySpan Corp. $ 985,250
86,200 PG&E Corp. 2,322,012
6,600 Pinnacle West Capital Corp. 286,688
23,700 PPL Corp. 976,144
24,100 Public Service Company of New Mexico 664,256
40,900 Reliant Energy, Inc. 1,689,681
12,400 Southern Co. 364,250
--------------
15,340,504
-------------------------------------------------------------------------------------
WASTE MANAGEMENT
700 Waste Management, Inc. 14,000
--------------
Total long-term investments (cost $362,167,921) 456,742,171
--------------
SHORT-TERM INVESTMENTS 0.3%
<CAPTION>
PRINCIPAL
AMOUNT
(000)
<C> <S> <C>
-------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
$ 1,321 Joint Repurchase Agreement Account,
6.55%, 11/1/00
(cost $1,321,000; Note 5) 1,321,000
--------------
TOTAL INVESTMENTS 100.2%
(COST $363,488,921; NOTE 4) 458,063,171
Liabilities in excess of other assets (0.2%) (956,956)
--------------
NET ASSETS 100% $ 457,106,215
--------------
--------------
</TABLE>
--------------------------------------------------------------------------------
(a) Non-income producing security.
N.V.--Naamlooze Vennootschap (Dutch Corporation).
See Notes to Financial Statements

B-59

<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
OCTOBER 31, 2000
<S> <C>
-------------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $363,488,921) $458,063,171
Cash 111,792
Receivable for investments sold 6,712,461
Receivable for Fund shares sold 2,140,465
Dividends and interest receivable 284,480
Deferred expenses and other assets 3,011
----------------
TOTAL ASSETS 467,315,380
----------------
LIABILITIES
Payable for investments purchased 8,267,701
Payable for Fund shares reacquired 1,100,307
Distribution fee payable 303,512
Accrued expenses and other liabilities 293,576
Management fee payable 244,069
----------------
TOTAL LIABILITIES 10,209,165
----------------
NET ASSETS $457,106,215
----------------
----------------
Net assets were comprised of:
Shares of beneficial interest, at par $ 37,139
Paid-in capital in excess of par 385,241,284
----------------
385,278,423
Accumulated net realized gain (loss) on investments (22,746,458)
Net unrealized appreciation (depreciation) on investments 94,574,250
----------------
Net assets, October 31, 2000 $457,106,215
----------------
----------------
</TABLE>

See Notes to Financial Statements

B-60

<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Statement of Assets and Liabilities Cont'd.
<TABLE>
<CAPTION>
OCTOBER 31, 2000
<S> <C>
-------------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share
($92,684,974 / 7,466,784 shares of beneficial interest
issued and outstanding) $12.41
Maximum sales charge (5% of offering price) .65
----------------
Maximum offering price to public $13.06
----------------
----------------
Class B:
Net asset value, offering price and redemption price per
share ($214,699,795 / 17,496,155 shares of beneficial
interest issued and outstanding) $12.27
----------------
----------------
Class C:
Net asset value and redemption price per share
($131,554,218 / 10,720,269 shares of beneficial interest
issued and outstanding) $12.27
Sales charge (1% of offering price) .12
----------------
Offering price to public $12.39
----------------
----------------
Class Z:
Net asset value, offering price and redemption price per
share ($18,167,228 / 1,456,268 shares of beneficial
interest issued and outstanding) $12.48
----------------
----------------
</TABLE>

See Notes to Financial Statements

B-61

<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Statement of Operations
<TABLE>
<CAPTION>
YEAR
ENDED
OCTOBER 31, 2000
<S> <C>
-------------------------------------------------------------------------------------
NET INVESTMENT LOSS
Income
Dividends (net of foreign withholding taxes of $23,148) $ 4,895,271
Interest 47,318
----------------
TOTAL INCOME 4,942,589
----------------
Expenses
Management fee 2,863,786
Distribution fee--Class A 227,659
Distribution fee--Class B 2,051,746
Distribution fee--Class C 1,268,806
Transfer agent's fees and expenses 245,000
Reports to shareholders 160,000
Registration fees 150,000
Custodian's fees and expenses 112,000
Amortization of offering costs 110,000
Legal fees and expenses 30,000
Audit fee 26,000
Trustees' fees and expenses 14,000
Miscellaneous 8,574
----------------
TOTAL EXPENSES 7,267,571
----------------
Net investment loss (2,324,982)
----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS

Net realized gain (loss) on investment transactions (10,461,288)
Net change in unrealized appreciation/depreciation on
investments 50,679,291
----------------
Net gain on investments 40,218,003
----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 37,893,021
----------------
----------------
</TABLE>

See Notes to Financial Statements

B-62

<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR MARCH 3, 1999(a)
ENDED THROUGH
OCTOBER 31, 2000 OCTOBER 31, 1999
<S> <C> <C>
-------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
OPERATIONS
Net investment loss $ (2,324,982) $ (981,843)
Net realized gain (loss) on investments (10,461,288) (12,285,170)
Net change in unrealized
appreciation/depreciation of
investments 50,679,291 43,894,959
---------------- -------------------
Net increase in net assets resulting
from operations 37,893,021 30,627,946
---------------- -------------------
FUND SHARE TRANSACTIONS (NET OF SHARE
CONVERSION)
(NOTE 6)
Net proceeds from shares sold 153,203,379 391,486,386
Cost of shares reacquired (111,835,796) (44,368,721)
---------------- -------------------
Net increase in net assets from Fund
share transactions 41,367,583 347,117,665
---------------- -------------------
Total increase 79,260,604 377,745,611
NET ASSETS
Beginning of period 377,845,611 100,000
---------------- -------------------
End of period $457,106,215 $ 377,845,611
---------------- -------------------
---------------- -------------------
---------------
(a) Commencement of investment operations.
</TABLE>
See Notes to Financial Statements

B-63

<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Notes to Financial Statements

Prudential Tax-Managed Equity Fund (the "Fund") is a series of
Prudential Tax-Managed Funds (the "Trust"), which is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company. The Trust was organized as a business trust in Delaware
on September 18, 1998. The Fund had no significant operations other than the
issuance of 2,500 shares each of Class A, Class B, Class C and Class Z for
$100,000 on December 8, 1998 to Prudential Investments Fund Management LLC
("PIFM"). The Fund commenced investment operations on March 3, 1999.

The investment objective of the Fund is to seek long-term after-tax
growth of capital. The Fund pursues its objective by investing a majority of
the total assets in equity-related securities, such as common stock and
convertible securities of U.S. companies.

NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.

SECURITIES VALUATION: Securities listed on a securities exchange and
NASDAQ National Market System Securities are valued at the last sale price on
the day of valuation, or, if there was no sale on such day, at the mean
between the last bid and asked prices on such day or at the bid price on such
day in the absence of an asked price. Securities that are actively traded in
the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued by an
independent pricing agent or principal market makers. Securities for which
market quotations are not readily available or for which the pricing agent or
principal market maker does not provide a valuation methodology or provides a
valuation or methodology that does not represent fair value are valued in
accordance with procedures adopted by the Fund's Board of Trustees.

Short-term securities which mature in more than 60 days are valued at
current market quotations by a pricing service or principal market makers.
Short-term securities which mature in 60 days or less are valued at amortized
cost which approximates market value.

REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements with U.S. financial institutions, it is the Fund's policy that its
custodian or designated subcustodians under triparty repurchase agreements,
as the case may be, take possession of the underlying securities, the value
of which exceeds the principal amount of the repurchase transaction including
accrued interest to the extent that any repurchase transaction exceeds one
business day, the value of the collateral is marked-to-market on a daily
basis to ensure the adequacy of the collateral.

B-64
<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Notes to Financial Statements Cont'd.

If the seller defaults and the value of the collateral declines or if
bankruptcy proceedings are commenced with respect to the seller of the
security, realization of the collateral by the Fund may be delayed or limited.

All securities are valued as of 4:15 p.m., New York time.

SECURITIES TRANSACTIONS AND NET INVESTMENT INCOME: Securities
transactions are recorded on the trade date. Realized gains and losses on
sales of investment and currency transactions are calculated on the
identified cost basis. Dividend income is recorded on the ex-dividend date;
interest income is recorded on the accrual basis. Expenses are recorded on
the accrual basis which may require the use of certain estimates by
management.

Net investment income (loss), other than distribution fees, and
unrealized and realized gains or losses are allocated daily to each class of
shares of the Fund based upon the relative proportion of net assets of each
class at the beginning of the day.

DIVIDENDS AND DISTRIBUTIONS: The Fund expects to pay dividends of
net investment income and distributions of net realized capital and currency
gains, if any, annually. Dividends and distributions are recorded on the
ex-dividend date.

Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles.

RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts for and
reports distributions to shareholders in accordance with American Institute
of Certified Public Accountants Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gains,
and Return of Capital Distributions by Investment Companies. The effect of
applying this statement was to decrease undistributed net investment loss and
decrease paid-in capital by $2,324,982, due to the Fund experiencing net
operating losses and certain organizational expenses not deductible for tax
purposes during the fiscal year ended October 31, 2000. Net investment
income, net realized gains and net assets were not affected by this change.

TAXES: It is the intent of the Fund to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to shareholders. Therefore, no federal
income tax provision is required.

Withholding taxes on foreign dividends have been provided for in
accordance with the Fund's understanding of the applicable country's tax
rules and rates.

B-65

<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Notes to Financial Statements Cont'd.

DEFERRED OFFERING COST: The Fund incurred approximately $327,000 in
connection with the initial offering of the Fund. Offering costs have been
amortized over a period of 12 months ending in March 2000.

NOTE 2. AGREEMENTS
The Trust has a management agreement with Prudential Investments Fund
Management LLC ("PIFM"). Pursuant to this agreement, PIFM has responsibility
for all investment advisory services and supervises the subadviser's
performance of such services. PIFM has entered into a Subadvisory Agreement
with The Prudential Investment Corporation ("PIC"). The subadvisory agreement
provides that PIC will furnish investment advisory services in connection
with the management of the Fund. In connection therewith, PIC is obligated to
keep certain books and records of the Fund. PIFM continues to have
responsibility for all investment advisory services pursuant to the
management agreement and supervises PIC's performance of such services. PIFM
pays for the services of PIC, the cost of compensation of officers of the
Trust, occupancy and certain clerical and bookkeeping costs of the Fund. The
Fund bears all other costs and expenses.

For the period November 1, 1999 through December 31, 1999, the
management fee paid PIFM was computed daily and payable monthly at an annual
rate of .65 of 1% of the Fund's average daily net assets. Effective January
1, 2000, the management fee paid PIFM is computed daily and payable monthly
at an annual rate of .65 of 1% of the average daily net assets of the Fund up
to and including $500 million and .60 of 1% of such assets in excess of $500
million.

Effective January 1, 2000, the subadvisory fee paid to PIC by PIFM is
computed daily and payable monthly at an annual rate of .325 of 1% of the
average daily net assets of the Fund. Prior to January 1, 2000, PIC was
reimbursed by PIFM for reasonable costs and expenses incurred in furnishing
investment advisory services. The change in the subadvisory fee structure has
no impact on the management fee charged to the Fund or its shareholders.

The Trust has a distribution agreement with Prudential Investment
Management Services LLC ("PIMS"), which acts as the distributor of the Class
A, Class B, Class C and Class Z shares of the Fund. The Fund compensates PIMS
for distributing and servicing the Fund's Class A, Class B and Class C
shares, pursuant to plans of distribution (the "Class A, B and C Plans"),
regardless of expenses actually incurred by it. The distribution fees are
accrued daily and payable monthly. No distribution or service fees are paid
to PIMS as distributor of the Class Z shares of the Fund.

Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and
1%, of the

B-66

<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Notes to Financial Statements Cont'd.

average daily net assets of the Class A, B and C shares, respectively. Such
expenses were .25 of 1%, 1% and 1% of the average daily net assets of the
Class A, Class B and Class C shares, respectively, for the year ended October
31, 2000.

PIMS has advised the Fund that it received approximately $319,000 and
$344,100 in front-end sales charges resulting from sales of Class A and Class
C shares, respectively, during the year ended October 31, 2000. From these
fees, PIMS paid such sales charges to affiliated broker-dealers, which in
turn paid commissions to salespersons and incurred other distribution costs.

PIMS has advised the Fund that for the year ended October 31, 2000, it
received approximately $825,600 and $184,300 in contingent deferred sales
charges imposed upon certain redemptions by Class B and Class C shareholders,
respectively.

PIFM, PIMS and PIC are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America ("Prudential").

The Fund, along with other affiliated registered investment companies
(the "Funds"), entered into a syndicated credit agreement ("SCA") with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings will be at market rates. The purpose of the
agreement is to serve as an alternative source of funding for capital share
redemptions. The Funds pay a commitment fee at an annual rate of .080 of 1%
of the unused portion of the credit facility. The commitment fee is accrued
and paid quarterly on a pro rata basis by the Funds. The expiration date of
the SCA is March 9, 2001. Prior to March 9, 2000, the commitment fee was .065
of 1% of the unused portion of the credit facility. The Fund did not borrow
any amounts pursuant to the SCA during the year ended October 31, 2000.

NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned subsidiary of
PIFM, serves as the Fund's transfer agent. During the year ended October 31,
2000, the Fund incurred fees of approximately $235,100 for the services of
PMFS. As of October 31, 2000, approximately $20,100 of such fees were due to
PMFS. Transfer agent fees and expenses in the Statement of Operations include
certain out-of-pocket expenses paid to nonaffiliates.

NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term
investments, for the fiscal year ended October 31, 2000 were $453,511,584 and
$412,287,150, respectively.

B-67
<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Notes to Financial Statements Cont'd.

The cost basis of investments for federal income tax purposes as of
October 31, 2000 was $365,032,176 and, accordingly, net unrealized
appreciation for federal income tax purposes was $93,030,995 (gross
unrealized appreciation--$105,364,426; gross unrealized
depreciation--$12,333,431).

The Fund had a capital loss carryforward as of October 31, 2000, of
approximately $21,203,200, of which $11,454,800 expires in 2007 and
$9,748,400 expires in 2008. Accordingly, no capital gains distributions are
expected to be paid to shareholders until future net gains have been realized
in excess of such amounts.

NOTE 5. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund, along with other affiliated registered investment companies,
transfers uninvested cash into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements
collateralized by U.S. Treasury or federal agency obligations. As of October
31, 2000, the Fund had a .20% undivided interest in the repurchase agreements
in the joint account. The undivided interest for the Fund represents
$1,321,000 in principal amount. As of such date, each repurchase agreement in
the joint account and the collateral therefor were as follows:

ABN AMRO, Inc., 6.56%, in the principal amount of $150,000,000,
repurchase price $150,027,333, due 11/1/00. The value of the collateral
including accrued interest was $153,000,176.

Bear, Stearns & Co., Inc., 6.56%, in the principal amount of
$175,000,000, repurchase price $175,031,889, due 11/1/00. The value of the
collateral including accrued interest was $184,628,570.

Chase Securities, Inc., 6.56%, in the principal amount of $115,000,000,
repurchase price $115,020,956, due 11/1/00. The value of the collateral
including accrued interest was $117,304,831.

Merrill Lynch, Pierce, Fenner & Smith, Inc., 6.375%, in the principal
amount of $43,782,000, repurchase price $43,789,753, due 11/1/00. The value
of the collateral including accrued interest was $44,659,885.

UBS Warburg, Inc., 6.56%, in the principal amount of $175,000,000,
repurchase price $175,031,889, due 11/1/00. The value of the collateral
including accrued interest was $178,501,724.

NOTE 6. CAPITAL
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares
are sold with a front-end sales charge of up to 5%. Class B shares are sold
with a contingent deferred sales charge which declines from 5% to zero
depending on the period of time the shares are held. Class C shares are sold
with a front-end sales charge of 1% and a

B-68

<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Notes to Financial Statements Cont'd.

contingent deferred sales charge of 1% during the first 18 months. Class B
shares automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase. Class Z shares are not subject to
any sales or redemption charge and are offered exclusively for sale to a
limited group of investors.

The Fund has authorized an unlimited number of shares of beneficial
interest at $.001 par value.

Transactions in shares of beneficial interest were as follows:

<TABLE>
<CAPTION>
CLASS A SHARES AMOUNT
---------------------------------------------------------- ----------- -------------
<S> <C> <C>
Year ended October 31, 2000:
Shares sold 2,946,204 $ 35,336,218
Shares reacquired (2,771,616) (33,625,988)
----------- -------------
Net increase (decrease) in shares outstanding before
conversion 174,588 1,710,230
Shares issued upon conversion from Class B 355,164 4,412,297
----------- -------------
Net increase (decrease) in shares outstanding 529,752 $ 6,122,527
----------- -------------
----------- -------------
March 3, 1999(a) through October 31, 1999:
Shares sold 8,370,870 $ 86,651,084
Shares reacquired (1,531,309) (16,474,883)
----------- -------------
Net increase (decrease) in shares outstanding before
conversion 6,839,561 70,176,201
Shares issued upon conversion from Class B 94,971 1,036,253
----------- -------------
Net increase (decrease) in shares outstanding 6,934,532 $ 71,212,454
----------- -------------
----------- -------------
<CAPTION>
CLASS B
----------------------------------------------------------------------------------------
<S> <C> <C>
Year ended October 31, 2000:
Shares sold 5,292,530 $ 63,653,331
Shares reacquired (3,044,109) (36,839,619)
----------- -------------
Net increase (decrease) in shares outstanding before
conversion 2,248,421 26,813,712
Shares reacquired upon conversion into Class A (357,981) (4,412,297)
----------- -------------
Net increase (decrease) in shares outstanding 1,890,440 $ 22,401,415
----------- -------------
----------- -------------
March 3, 1999(a) through October 31, 1999:
Shares sold 16,918,477 $ 175,697,109
Shares reacquired (1,220,109) (13,250,878)
----------- -------------
Net increase (decrease) in shares outstanding before
conversion 15,698,368 162,446,231
Shares reacquired upon conversion into Class A (95,153) (1,036,253)
----------- -------------
Net increase (decrease) in shares outstanding 15,603,215 $ 161,409,978
----------- -------------
----------- -------------
</TABLE>
----------------------
(a) Commencement of investment operations.

B-69
<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Notes to Financial Statements Cont'd.
<TABLE>
<CAPTION>
CLASS C SHARES AMOUNT
---------------------------------------------------------- ----------- -------------
<S> <C> <C>
Year ended October 31, 2000:
Shares sold 3,271,233 $ 39,345,027
Shares reacquired (2,432,795) (29,332,942)
----------- -------------
Net increase (decrease) in shares outstanding 838,438 $ 10,012,085
----------- -------------
----------- -------------
March 3, 1999(a) through October 31, 1999:
Shares sold 10,842,964 $ 112,692,373
Shares reacquired (963,633) (10,448,107)
----------- -------------
Net increase (decrease) in shares outstanding 9,879,331 $ 102,244,266
----------- -------------
----------- -------------
<CAPTION>
CLASS Z
----------------------------------------------------------
<S> <C> <C>
Year ended October 31, 2000:
Shares sold 1,233,776 $ 14,868,803
Shares reacquired (986,072) (12,037,247)
----------- -------------
Net increase (decrease) in shares outstanding 247,704 $ 2,831,556
----------- -------------
----------- -------------
March 3, 1999(a) through October 31, 1999:
Shares sold 1,592,714 $ 16,445,820
Shares reacquired (386,650) (4,194,853)
----------- -------------
Net increase (decrease) in shares outstanding 1,206,064 $ 12,250,967
----------- -------------
----------- -------------
</TABLE>
---------------
(a) Commencement of investment operations.

B-70
<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Financial Highlights
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------
YEAR MARCH 3, 1999(a)
ENDED THROUGH
OCTOBER 31, 2000 OCTOBER 31, 1999
----------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:(d)
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.27 $ 10.00
-------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income --(e) 0.01
Net realized and unrealized gain on
investment transactions 1.14 1.26
-------- --------
Total from investment operations 1.14 1.27
-------- --------
Net asset value, end of period $ 12.41 $ 11.27
-------- --------
-------- --------
TOTAL RETURN(b): 10.12% 12.70%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 92,685 $ 78,169
Average net assets (000) $ 91,064 $ 66,701
Ratios to average net assets:
Expenses, including distribution and
service (12b-1) fees(f) 1.09% 1.23%(c)
Expenses, excluding distribution and
service (12b-1) fees 0.84% 0.98%(c)
Net investment income 0.03% 0.09%(c)
For Class A, B, C and Z shares:
Portfolio turnover 94% 67%
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Based on average shares outstanding during the period.
(e) Less than $.005 per share.
(f) The distributor of the Fund agreed to limit its distribution and service
(12b-1) fees to .25 of 1% of the average daily net assets of the Class A
shares.
See Notes to Financial Statements

B-71
<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------
YEAR MARCH 3, 1999(a)
ENDED THROUGH
OCTOBER 31, 2000 OCTOBER 31, 1999
---------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:(d)
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.22 $ 10.00
---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (0.09) (0.05)
Net realized and unrealized gain on
investment transactions 1.14 1.27
---------- ----------
Total from investment operations 1.05 1.22
---------- ----------
Net asset value, end of period $ 12.27 $ 11.22
---------- ----------
---------- ----------
TOTAL RETURN(b): 9.36% 12.20%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $214,700 $175,129
Average net assets (000) $205,175 $144,221
Ratios to average net assets:
Expenses, including distribution and
service (12b-1) fees 1.84% 1.98%(c)
Expenses, excluding distribution and
service (12b-1) fees 0.84% 0.98%(c)
Net investment income (0.72)% (0.67)%(c)
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Based on average shares outstanding during the period.
See Notes to Financial Statements

B-72

<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------
YEAR MARCH 3, 1999(a)
ENDED THROUGH
OCTOBER 31, 2000 OCTOBER 31, 1999
---------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:(d)
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.22 $ 10.00
---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (0.09) (0.05)
Net realized and unrealized gain on
investment transactions 1.14 1.27
---------- ----------
Total from investment operations 1.05 1.22
---------- ----------
Net asset value, end of period $ 12.27 $ 11.22
---------- ----------
---------- ----------
TOTAL RETURN(b): 9.36% 12.20%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $131,554 $110,895
Average net assets (000) $126,881 $ 91,235
Ratios to average net assets:
Expenses, including distribution and
service (12b-1) fees 1.84% 1.98%(c)
Expenses, excluding distribution and
service (12b-1) fees 0.84% 0.98%(c)
Net investment income (0.72)% (0.67)%(c)
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Based on average shares outstanding during the period.
See Notes to Financial Statements

B-73

<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
CLASS Z
---------------------------------------------
YEAR MARCH 3, 1999(a)
ENDED THROUGH
OCTOBER 31, 2000 OCTOBER 31, 1999
---------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:(d)
NET ASSET VALUE, BEGINNING OF YEAR $ 11.30 $ 10.00
-------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.03 0.02
Net realized and unrealized gain on
investment transactions 1.15 1.28
-------- --------
Total from investment operations 1.18 1.30
-------- --------
Net asset value, end of period $ 12.48 $ 11.30
-------- --------
-------- --------
TOTAL RETURN(b): 10.44% 13.00%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 18,167 $ 13,653
Average net assets (000) $ 17,464 $ 12,627
Ratios to average net assets(c):
Expenses, including distribution and
service (12b-1) fees 0.84% 0.98%(c)
Expenses, excluding distribution and
service (12b-1) fees 0.84% 0.98%(c)
Net investment income 0.28% 0.35%(c)
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes reinvestment
of dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(c) Annualized.
(d) Based on average shares outstanding during the period.
See Notes to Financial Statements

B-74

<PAGE>
PRUDENTIAL TAX-MANAGED FUNDS Prudential Tax-Managed Equity Fund
Report of Independent Accountants

To the Shareholders and Board of Trustees of
Prudential Tax-Managed Funds--
Prudential Tax-Managed Equity 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 Prudential
Tax-Managed Equity Fund (the "Fund") at October 31, 2000, the results of its
operations for the year then ended, and the changes in its net assets and the
financial highlights for each of the periods indicated, in conformity with
accounting principles generally accepted in the United States of America.
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 auditing standards generally accepted in the United States of
America, 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 October 31, 2000 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 15, 2000

B-75
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION

The following terms are used in mutual fund investing.

ASSET ALLOCATION

Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a strategy to gain exposure to better performing asset classes while
maintaining investment in other asset classes.

DIVERSIFICATION

Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.

DURATION

Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.

Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, that is, principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).

MARKET TIMING

Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.

POWER OF COMPOUNDING

Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.

STANDARD DEVIATION

Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.

I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA

The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.

This chart shows the long-term performance of various asset classes and the
rate of inflation.

EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY

[CHART]

Source: Ibbotson Associates. Used with permission. All rights reserved. This
chart is for illustrative purposes only and is not indicative of the past,
present, or future performance of any asset class or any Prudential mutual fund.

Generally, stock returns are due to capital appreciation and the reinvestment of
gains. Bond returns are due mainly to reinvesting interest. Also, stock prices
usually are more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the New
York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the
S&P 500 Composite Stock Price Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.

Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).

II-1
<PAGE>

Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1990
through 2000. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.

All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Risk/Return Summary--Fees and Expenses" in the prospectus.
The net effect of the deduction of the operating expenses of a mutual fund on
these historical total returns, including the compounded effect over time, could
be substantial.

HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS

<TABLE>
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0% (2.56)% 13.52%
--------------------------------------------------------------------------------------------------------------
U. S. GOVERNMENT
MORTGAGE
SECURITIES(2) 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0% 1.86% 11.16%
--------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.6% (1.96)% 9.39%
--------------------------------------------------------------------------------------------------------------
U.S.
HIGH YIELD
BONDS(4) (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6% 2.39% (5.86)%
--------------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)% 5.3% (5.07)% (2.63)%
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURNS PERCENT 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7% 17.1% 8.4% 7.46% 19.10%
</TABLE>

(1)LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.

(2)LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).

(3)LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year. Source: Lipper Inc.

(4)LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.

(5)SALOMON SMITH BARNEY WORLD GOVERNMENT INDEX (NON U.S.) includes over 800
bonds issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.

II-2
<PAGE>

This chart illustrates the performance of major world stock markets for the
period from December 31, 1985 through December 31, 2000. It does not represent
the performance of any Prudential mutual fund.

AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS (12/31/85 - 12/31/00)
IN U.S. DOLLARS

[CHART]

Source: Morgan Stanley Capital International (MSCI) and Lipper Inc. Used with
permission. Morgan Stanley Country indexes are unmanaged indices which include
those stocks making up the largest two-thirds of each country's total stock
market capitalization. Returns reflect the reinvestment of all distributions.
This chart is for illustrative purposes only and is not indicative of the past,
present or future performance of any specific investment. Investors cannot
invest directly in stock indexes.

This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 Composite Stock Price Index with and without
reinvested dividends.

[CHART]

Source: Lipper Inc. Used with permission. All rights reserved. This chart is
used for illustrative purposes only and is not intended to represent the past,
present or future performance of any Prudential mutual fund. Common stock total
return is based on the Standard & Poor's 500 Composite Stock Price Index, a
market-value-weighted index made up of 500 of the largest stocks in the U.S.
based upon their stock market value. Investors cannot invest directly in
indexes.

WORLD STOCK MARKET CAPITALIZATION BY REGION

WORLD TOTAL: $19.0 TRILLION

[CHART]

Source: Morgan Stanley Capital International, December 31, 2000. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of approximately
1600 companies in 22 countries (representing approximately 60% of the aggregate
market value of the stock exchanges). This chart is for illustrative purposes
only and does not represent the allocation of any Prudential mutual fund.

II-3
<PAGE>

This chart below shows the historical volatility of general interest rates
as measured by the long-term U.S. Treasury Bond.

LONG-TERM U.S. TREASURY BOND YIELD IN PERCENT (1926-2000)

[CHART]

Year-End

Source: Ibbotson Associates. Used with permission. All rights reserved. The
chart illustrates the historical yield of the long-term U.S. Treasury Bond from
1926-2000. Yields represent that of an annually renewed one-bond portfolio with
a remaining maturity of approximately 20 years. This chart is for illustrative
purposes and should not be construed to represent the yields of any Prudential
mutual fund.

II-4
<PAGE>
PART C
OTHER INFORMATION

ITEM 23. EXHIBITS.

<TABLE>
<S> <C> <C>
(a) (1) Agreement and Declaration of Trust. Incorporated by
reference to Exhibit (a)(1) to the Registration Statement on
Form N-1A (File No. 333-66895) filed on November 6, 1998.
(2) Certificate of Trust. Incorporated by reference to
Exhibit (a)(2) to the Registration Statement on Form N-1A
(File No. 333-66895) filed on November 6, 1998.
(3) First Amendment to Agreement and Declaration of Trust.*
(4) First Amendment to Certificate of Trust.*
(b) Amended By-Laws.*
(c) Instruments defining rights of shareholders. Incorporated by
reference to Exhibit (c) to the Registration Statement on
Form N-1A (File No. 333-66895) filed on November 6, 1998.
(d) (1) Management Agreement between the Registrant and Prudential
Investments Fund Management LLC. Incorporated by reference
to Exhibit (d)(1) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 333-66895)
filed on December 29, 1999.
(2) Amended and Restated Subadvisory Agreement between
Prudential Investments Fund Management LLC and The
Prudential Investment Corporation. Incorporated by reference
to Exhibit (d)(2) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 333-66895)
filed on December 29, 1999.
(e) (1) Distribution Agreement between the Registrant and Prudential
Investment Management Services LLC. Incorporated by
reference to Exhibit (e)(1) to Post-Effective Amendment
No. 1 to the Registration Statement on Form N-1A (File
No. 333-66895) filed on December 29, 1999.
(2) Form of Selected Dealer Agreement. Incorporated by reference
to Exhibit (e)(2) to the Registration Statement on
Form N-1A (File No. 333-66895) filed on November 6, 1998.
(g) (1) Custodian Contract between the Registrant and State Street
Bank and Trust Company. Incorporated by reference to
Exhibit (g) to the Registration Statement on Form N-1A (File
No. 333-66895) filed on November 6, 1998.
(2) Amendment to Custodian Contract. Incorporated by reference
to Exhibit (g)(2) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 333-66895)
filed on December 29, 1999.
(h) (1) Transfer Agency and Service Agreement between the Registrant
and Prudential Mutual Fund Services LLC. Incorporated by
reference to Exhibit (h) to the Registration Statement on
Form N-1A (File No. 333-66895) filed on November 6, 1998.
(2) Amendment to Transfer Agency Agreement. Incorporated by
reference to Exhibit (h)(2) to Post-Effective Amendment
No. 1 to the Registration Statement on Form N-1A (File
No. 333-66895) filed on December 29, 1999.
(i) Opinion and Consent of Counsel.*
(j) Consent of Independent Accountants.*
(m) (1) Distribution and Service Plan for Class A Shares.
Incorporated by reference to Exhibit (m)(1) to the
Registration Statement on Form N-1A (File No. 333-66895)
filed on November 6, 1998.
(2) Distribution and Service Plan for Class B Shares.
Incorporated by reference to Exhibit (m)(2) to the
Registration Statement on Form N-1A (File No. 333-66895)
filed on November 6, 1998.
(3) Distribution and Service Plan for Class C Shares.
Incorporated by reference to Exhibit (m)(3) to the
Registration Statement on Form N-1A (File No. 333-66895)
filed on November 6, 1998.
(n) Amended and Restated Rule 18f-3 Plan.*
(p) (1) Amended Code of Ethics of the Registrant.*
</TABLE>

C-1
<PAGE>

<TABLE>
<S> <C> <C>
(2) Amended Code of Ethics of The Prudential Investment
Corporation, Prudential Investments Fund Management LLC and
Prudential Investment Management Services LLC.*
</TABLE>

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

* Filed herewith.

ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

None.

ITEM 25. INDEMNIFICATION.

As permitted by Section 17(h) and (i) of the Investment Company Act of 1940,
as amended (the 1940 Act) and pursuant to Del. Code Ann. title 12 sec. 3817, a
Delaware business trust may provide in its governing instrument for the
indemnification of its officers and trustees from and against any and all claims
and demands whatsoever. Article VII, Section 2 of the Agreement and Declaration
of Trust (Exhibit (a)(1) to Registration Statement) states that (1) the
Registrant shall indemnify any present trustee or officer to the fullest extent
permitted by law against liability, and all expenses reasonably incurred by him
or her in connection with any claim, action, suit or proceeding in which he or
she is involved by virtue of his or her service as a trustee, officer or both,
and against any amount incurred in settlement thereof and (2) all persons
extending credit to, contracting with or having any claim against the Registrant
shall look only to the assets of the appropriate Series (or if no Series has yet
been established, only to the assets of the Registrant). Indemnification will
not be provided to a person adjudged by a court or other adjudicatory body to be
liable to the Registrant or its shareholders by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of his or her duties
(collectively "disabling conduct"). In the event of a settlement, no
indemnification may be provided unless there has been a determination, as
specified in the Declaration of Trust, that the officer or trustee did not
engage in disabling conduct. In addition, Article XI of Registrant's By-Laws
(Exhibit (b) to the Registration Statement) provides that any trustee, officer,
employee or other agent of Registrant shall be indemnified by the Registrant
against all liabilities and expenses subject to certain limitations and
exceptions contained in Article XI of the By-Laws. As permitted by
Section 17(i) of the 1940 Act, pursuant to Section 10 of the Distribution
Agreement (Exhibit (e)(1) to the Registration Statement), the Distributor of the
Registrant may be indemnified against liabilities which it may incur, except
liabilities arising from bad faith, gross negligence, willful misfeasance or
reckless disregard of duties.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1940 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 trustee, officer, or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
trustee, officer or controlling person in connection with the shares 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 1940 Act and will be governed by the final
adjudication of such issue.

The Registrant has purchased an insurance policy insuring its officers and
trustees against liabilities, and certain costs of defending claims against such
officers and trustees, to the extent such officers and trustees are not found to
have committed conduct constituting willful misfeasance, bad faith, gross
negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and directors under certain circumstances.

Section 9 of the Management Agreement (Exhibit (d)(1) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit (d)(2) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC

C-2
<PAGE>

(PIFM) and The Prudential Investment Corporation (PIC), respectively, to
liabilities arising from willful misfeasance, bad faith or gross negligence in
the performance of their respective duties or from reckless disregard by them of
their respective obligations and duties under the agreements.

The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws, Declaration of Trust and the Distribution Agreement
in a manner consistent with Release No. 11330 of the Securities and Exchange
Commission under the 1940 Act so long as the interpretation of Section 17(h) and
17(i) of such Act remain in effect and are consistently applied.

Under Section 17(h) of the 1940 Act, it is the position of the staff of the
Securities and Exchange Commission that if there is neither a court
determination on the merits that the defendant is not liable nor a court
determination that the defendant was not guilty of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of one's office, no indemnification will be permitted unless an
independent legal counsel (not including a counsel who does work for either the
Registrant, its investment adviser, its principal underwriter or persons
affiliated with these persons) determines, based upon a review of the facts,
that the person in question was not guilty of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his or her office.

Under its Declaration of Trust, the Registrant may advance funds to provide
for indemnification. Pursuant to the Securities and Exchange Commission staff's
position on Section 17(h) advances will be limited in the following respect:

(1) Any advances must be limited to amounts used, or to be used, for the
preparation and/or presentation of a defense to the action (including
cost connected with preparation of a settlement);

(2) Any advances must be accompanied by a written promise by, or on behalf
of, the recipient to repay that amount of the advance which exceeds the
amount to which it is ultimately determined that he is entitled to
receive from the Registrant by reason of indemnification;

(3) Such promise must be secured by a surety bond or other suitable
insurance; and

(4) Such surety bond or other insurance must be paid for by the recipient of
such advance.

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

(a) Prudential Investments Fund Management LLC (PIFM)

See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Investment Advisory and Other Services" in
the Statement of Additional Information constituting Part B of this Registration
Statement.

The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).

C-3
<PAGE>
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, 100 Mulberry Street, Newark, NJ
07102-4077.

<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATION
---------------- ------------------ --------------------
<S> <C> <C>
David R. Odenath, Jr. Officer in Charge, President, Chief Officer in Charge, President, Chief
Executive Officer and Chief Executive Officer and Chief
Operating Officer Operating Officer, PIFM; Senior
Vice President, The Prudential
Insurance Company of America
(Prudential)
Robert F. Gunia Executive Vice President and Chief Executive Vice President and Chief
Administrative Officer Administrative Officer, PIFM;
Corporate Vice President,
Prudential; President, Prudential
Investment Management Services LLC
(PIMS)
William V. Healey Executive Vice President, Chief Executive Vice President, Chief
Legal Officer and Secretary Legal Officer and Secretary, PIFM;
Vice President and Associate
General Counsel, Prudential;
Senior Vice President, Chief Legal
Officer and Secretary, PIMS
Theodore F. Kilkuskie Executive Vice President Executive Vice President, PIFM
Stephen Pelletier Executive Vice President Executive Vice President, PIFM
Judy A. Rice Executive Vice President Executive Vice President, PIFM
Ajay Sawhney Executive Vice President Executive Vice President, PIFM
Lynn M. Waldvogel Executive Vice President Executive Vice President, PIFM
</TABLE>

(b) The Prudential Investment Corporation (PIC)

See "How the Fund is Managed--Investment Adviser" in the Prospectus
constituting Part A of this Registration Statement and "Investment Advisory and
Other Services" in the Statement of Additional Information constituting Part B
of this Registration Statement.

The business and other connections of PIC's directors and executive officers
are as set forth below. The address of each person is Prudential Plaza, Newark,
NJ 07102.

<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATION
---------------- ----------------- --------------------
<S> <C> <C>
John R. Strangfeld, Jr. Chairman of the Board, President, Chief Executive Officer, Prudential
Chief Executive Officer and Securities Incorporated; Executive
Director Vice President, Prudential;
President, Prudential Global Asset
Management Group of Prudential;
Chairman of the Board, President,
Chief Executive Officer and
Director, PIC
Bernard Winograd Senior Vice President and Director Chief Executive Officer, Prudential
Real Estate Investors; Senior Vice
President and Director, PIC
</TABLE>

ITEM 27. PRINCIPAL UNDERWRITERS.

(a) Prudential Investment Management Services LLC (PIMS)

C-4
<PAGE>

PIMS is distributor for Cash Accumulation Trust, COMMAND Government Fund,
COMMAND Money Fund, COMMAND Tax-Free Fund, Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund),
Prudential California Municipal Fund, Prudential Diversified Funds, Prudential
Equity Fund, Inc., Prudential Europe Growth Fund, Inc., Prudential Global
Genesis Fund, Inc., Prudential Global Total Return Fund, Inc., Prudential
Government Income Fund, Inc., Prudential Government Securities Trust, Prudential
High Yield Fund, Inc., Prudential High Yield Total Return Fund, Inc., Prudential
Index Series Fund, Prudential Institutional Liquidity Portfolio, Inc.,
Prudential International Bond Fund, Inc., Prudential MoneyMart Assets, Inc.,
Prudential Municipal Bond Fund, Prudential Municipal Series Fund, Prudential
National Municipals Fund, Inc., Prudential Natural Resources Fund, Inc.,
Prudential Pacific Growth Fund, Inc., Prudential Real Estate Securities Fund,
Prudential Sector Funds, Inc., Prudential Short-Term Corporate Bond Fund, Inc.,
Prudential Small Company Fund, Inc., Prudential Special Money Market
Fund, Inc., Prudential Tax-Free Money Fund, Inc., Prudential Tax-Managed Funds,
Prudential Tax-Managed Small-Cap Fund, Inc., Prudential Total Return Bond
Fund, Inc., Prudential 20/20 Focus Fund, Prudential U.S. Emerging Growth Fund,
Inc., Prudential Value Fund, Prudential World Fund, Inc., Strategic Partners
Series, Target Funds, The Prudential Investment Portfolios, Inc. and The Target
Portfolio Trust.

PIMS is also distributor of the following unit investment trusts: Separate
Accounts: Prudential's Gibraltar Fund, Inc., The Prudential Variable Contract
Account-2, The Prudential Variable Contract Account-10, The Prudential Variable
Contract Account-11, The Prudential Variable Contract Account-24, The Prudential
Variable Contract GI-2, The Prudential Discovery Select Group Variable Contract
Account, The Pruco Life Flexible Premium Variable Annuity Account, The Pruco
Life of New Jersey Flexible Premium Variable Annuity Account, The Prudential
Individual Variable Contract Account and The Prudential Qualified Individual
Variable Contract Account.

(b) Information concerning the directors and officers of PIMS is set forth
below:

<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME (1) UNDERWRITER REGISTRANT
-------- ------------- -------------
<S> <C> <C>
Margaret Deverell................. Vice President and Chief Financial Officer None
Robert F. Gunia................... President Vice President and Trustee
Kevin Frawley..................... Senior Vice President and Compliance None
Officer
213 Washington Street
Newark, NJ 07102
William V. Healey................. Senior Vice President, Secretary and Chief Assistant Secretary
Legal Officer
John R. Strangfeld, Jr............ Advisory Board Member None
</TABLE>

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

(1) The address of each person named is Gateway Center Three, 100 Mulberry
Street, Newark, New Jersey 07102-4077 unless otherwise indicated.

ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.

All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, 02171, The Prudential Investment Corporation, Prudential Plaza,
751 Broad Street, Newark, New Jersey 07102, the Registrant, Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and Prudential Mutual
Fund Services LLC, 194 Wood Avenue South, Iselin, New Jersey 08830. Documents
required by Rules 31a-1(b)(5), (6), (7), (9), (10) and (11), 31a-1(f),
31a-1(b)(4) and (11) and 31a-1(d) will be kept at Gateway Center Three, 100
Mulberry Street, Newark, New

C-5
<PAGE>
Jersey 07102-4077 and the remaining accounts, books and other documents required
by such other pertinent provisions of Section 31(a) and the Rules promulgated
thereunder will be kept by State Street Bank and Trust Company and Prudential
Mutual Fund Services LLC.

ITEM 29. MANAGEMENT SERVICES.

Other than as set forth under the captions "How the Fund is
Managed--Manager," "How the Fund is Managed--Investment Adviser" and "How the
Fund is Managed--Distributor" in the Prospectus and the caption "Investment
Advisory and Other Services" in the Statement of Additional Information,
constituting Parts A and B, respectively, of this Post-Effective Amendment to
the Registration Statement, Registrant is not a party to any management-related
service contract.

ITEM 30. UNDERTAKING.

Not applicable.

C-6
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act and the Investment
Company Act, the Fund certifies that it meets all of the requirements for
effectiveness of this Post-Effective Amendment to the Registration Statement
pursuant to Rule 485(b) under the Securities Act and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, duly authorized, in the City of Newark, and State of
New Jersey, on the 16th day of January, 2001.

<TABLE>
<S> <C> <C>
PRUDENTIAL TAX-MANAGED FUNDS

By /s/ DAVID R. ODENATH, JR.
----------------------------------------------
David R. Odenath, Jr.
PRESIDENT
</TABLE>

Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.

<TABLE>
<S> <C> <C>
/s/ GRACE C. TORRES
------------------------------------------------ Treasurer and Principal Financial January 16, 2001
Grace C. Torres and Accounting Officer

/s/ SAUL K. FENSTER
------------------------------------------------ Trustee January 16, 2001
Saul K. Fenster

/s/ DELAYNE D. GOLD
------------------------------------------------ Trustee January 16, 2001
Delayne D. Gold

/s/ ROBERT F. GUNIA
------------------------------------------------ Trustee January 16, 2001
Robert F. Gunia

/s/ DOUGLAS H. MCCORKINDALE
------------------------------------------------ Trustee January 16, 2001
Douglas H. McCorkindale

/s/ W. SCOTT MCDONALD, JR.
------------------------------------------------ Trustee January 16, 2001
W. Scott McDonald, Jr.

/s/ THOMAS T. MOONEY
------------------------------------------------ Trustee January 16, 2001
Thomas T. Mooney

/s/ STEPHEN P. MUNN
------------------------------------------------ Trustee January 16, 2001
Stephen P. Munn

/s/ DAVID R. ODENATH, JR.
------------------------------------------------ President and Trustee January 16, 2001
David R. Odenath, Jr.

/s/ RICHARD A. REDEKER
------------------------------------------------ Trustee January 16, 2001
Richard A. Redeker

/s/ JUDY A. RICE
------------------------------------------------ Trustee January 16, 2001
Judy A. Rice

/s/ ROBIN B. SMITH
------------------------------------------------ Trustee January 16, 2001
Robin B. Smith

/s/ LOUIS A. WEIL, III
------------------------------------------------ Trustee January 16, 2001
Louis A. Weil, III

/s/ CLAY T. WHITEHEAD
------------------------------------------------ Trustee January 16, 2001
Clay T. Whitehead
</TABLE>

<PAGE>
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------------------- -----------
<C> <C> <S>
(a) (1) Agreement and Declaration of Trust. Incorporated by
reference to Exhibit (a)(1) to the Registration Statement on
Form N-1A (File No. 333-66895) filed on November 6, 1998.
(2) Certificate of Trust. Incorporated by reference to
Exhibit (a)(2) to the Registration Statement on Form N-1A
(File No. 333-66895) filed on November 6, 1998.
(3) First Amendment to Agreement and Declaration of Trust.*
(4) First Amendment to Certificate of Trust.*
(b) Amended By-Laws.*
(c) Instruments defining rights of shareholders. Incorporated by
reference to Exhibit (c) to the Registration Statement on
Form N-1A (File No. 333-66895) filed on November 6, 1998.
(d) (1) Management Agreement between the Registrant and Prudential
Investments Fund Management LLC. Incorporated by reference
to Exhibit (d)(1) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 333-66895)
filed on December 29, 1999.
(2) Amended and Restated Subadvisory Agreement between
Prudential Investments Fund Management LLC and The
Prudential Investment Corporation. Incorporated by reference
to Exhibit (d)(2) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 333-66895)
filed on December 29, 1999.
(e) (1) Distribution Agreement between the Registrant and Prudential
Investment Management Services LLC. Incorporated by
reference to Exhibit (e)(1) to Post-Effective Amendment
No. 1 to the Registration Statement on Form N-1A (File
No. 333-66895) filed on December 29, 1999.
(2) Form of Selected Dealer Agreement. Incorporated by reference
to Exhibit (e)(2) to the Registration Statement on
Form N-1A (File No. 333-66895) filed on November 6, 1998.
(g) (1) Custodian Contract between the Registrant and State Street
Bank and Trust Company. Incorporated by reference to
Exhibit (g) to the Registration Statement on Form N-1A (File
No. 333-66895) filed on November 6, 1998.
(2) Amendment to Custodian Contract. Incorporated by reference
to Exhibit (g)(2) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 333-66895)
filed on December 29, 1999.
(h) (1) Transfer Agency and Service Agreement between the Registrant
and Prudential Mutual Fund Services LLC. Incorporated by
reference to Exhibit (h) to the Registration Statement on
Form N-1A (File No. 333-66895) filed on November 6, 1998.
(2) Amendment to Transfer Agency Agreement. Incorporated by
reference to Exhibit (h)(2) to Post-Effective Amendment
No. 1 to the Registration Statement on Form N-1A (File
No. 333-66895) filed on December 29, 1999.
(i) Opinion and Consent of Counsel.*
(j) Consent of Independent Accountants.*
(m) (1) Distribution and Service Plan for Class A Shares.
Incorporated by reference to Exhibit (m)(1) to the
Registration Statement on Form N-1A (File No. 333-66895)
filed on November 6, 1998.
(2) Distribution and Service Plan for Class B Shares.
Incorporated by reference to Exhibit (m)(2) to the
Registration Statement on Form N-1A (File No. 333-66895)
filed on November 6, 1998.
(3) Distribution and Service Plan for Class C Shares.
Incorporated by reference to Exhibit (m)(3) to the
Registration Statement on Form N-1A (File No. 333-66895)
filed on November 6, 1998.
(n) Amended and Restated Rule 18f-3 Plan.*
(p) (1) Amended Code of Ethics of the Registrant.*
(2) Amended Code of Ethics of The Prudential Investment
Corporation, Prudential Investments Fund Management LLC and
Prudential Investment Management Services LLC.*
</TABLE>

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* Filed herewith.