PRUDENTIAL TAX FREE MONEY FUND INC
497, 1997-03-05
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Prudential Tax-Free Money Fund, Inc.

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Prospectus dated February 28, 1997

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Prudential Tax-Free Money Fund, Inc. (the Fund), is an open-end diversified
management investment company whose investment objective is to attain for
investors the highest level of current income that is exempt from federal income
taxes, consistent with liquidity and the preservation of capital. The Fund will
invest in short-term tax-exempt debt securities of state and local governments.
There can be no assurance that the Fund's investment objective will be achieved.
See "How the Fund Invests--Investment Objective and Policies." The Fund's
address is Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077, and its telephone number is (800) 225-1852.


An investment in the Fund is neither insured nor guaranteed by the U.S.
Government and there can be no assurance that the Fund will be able to maintain
a stable net asset value of $1.00 per share. See "How the Fund Values its
Shares."

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This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated February 28, 1997, which information
is incorporated herein by reference (is legally considered a part of this
Prospectus) and available without charge upon request to the Fund at the address
or telephone number noted above.


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Investors are advised to read this Prospectus and retain it for future
reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<PAGE>

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                                 FUND HIGHLIGHTS
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     The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.

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WHAT IS PRUDENTIAL TAX-FREE MONEY FUND, INC.?

     Prudential Tax-Free Money Fund, Inc. is a mutual fund. A mutual fund pools
the resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, diversified
management investment company.

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

     The investment objective of the Fund is to attain for investors the highest
level of current income that is exempt from federal income taxes, consistent
with liquidity and the preservation of capital. The Fund will seek to achieve
its investment objective by investing in a diversified portfolio of short-term
debt obligations issued by states, territories and possessions of the United
States and by the District of Columbia, and their political subdivisions, duly
constituted authorities and corporations, the interest from which is wholly
exempt from federal income tax in the opinion of bond counsel to the issuer.
There can be no assurance that the Fund's investment objective will be achieved.
See "How the Fund Invests--Investment Objective and Policies" at page 6.

WHAT ARE THE FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?

     It is anticipated that the Fund's net asset value will remain constant at
$1.00 per share, although this cannot be assured. In order to maintain such
constant net asset value, the Fund will value its portfolio securities at
amortized cost. While this method provides certainty in valuation, it may result
in periods during which the value of a security in its portfolio, as determined
by amortized cost, is higher or lower than the price the Fund would receive if
it sold such securities. See "How the Fund Values its Shares" at page 11.

WHO MANAGES THE FUND?

     Prudential Mutual Fund Management LLC (PMF or the Manager) is the Manager
of the Fund and is compensated for its services at an annual rate of .50 of 1%
of the Fund's average daily net assets up to $750 million, .425 of 1% of the
Fund's average daily net assets between $750 million and $1.5 billion and .375
of 1% in excess of $1.5 billion. As of January 31, 1997, PMF served as manager
or administrator to 62 investment companies, including 40 mutual funds, with
aggregate assets of approximately $55.8 billion. The Prudential Investment
Corporation, doing business as Prudential Investments (PI, the investment
adviser or the Subadviser), furnishes investment advisory services in connection
with the management of the Fund under a Subadvisory Agreement with PMF. See "How
the Fund is Managed--Manager" at page 9.

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                                       2
<PAGE>

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WHO DISTRIBUTES THE FUND'S SHARES?

     Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's shares and is paid an annual service fee at the rate
of .125 of 1% of the average daily net assets of the Fund's shares. See "How the
Fund is Managed--Distributor" at page 9.

WHAT IS THE MINIMUM INVESTMENT?


     Except as otherwise provided, the minimum initial investment is $1,000. The
minimum subsequent investment is $100. Prudential Securities reserves the right
to impose a higher minimum subsequent amount from time to time as it may deem
appropriate. There is no minimum investment requirement for certain employee
savings plans. For purchases made through the Automatic Savings Accumulation
Plan the minimum initial and subsequent investment is $50. See "Shareholder
Guide--How to Buy Shares of the Fund" at page 13 and "Shareholder
Guide--Shareholder Services" at page 20.


HOW DO I PURCHASE SHARES?


     You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent) at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities. PSI has automatic
investment procedures pursuant to which it will make automatic investments of
free cash balances (Eligible Cash Balances) held in a client's brokerage account
if the Fund is designated as your primary Money Sweep Fund. See "Shareholder
Guide--How to Buy Shares of the Fund" at page 13.


HOW DO I SELL MY SHARES?

     You may redeem shares of the Fund at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order. See
"Shareholder Guide--How to Sell Your Shares" at page 17.

HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?

     The Fund expects to declare daily and pay monthly dividends of net
investment income and short-term capital gains, if any, and make distributions
annually of any net long-term capital gains. Dividends and distributions will be
automatically reinvested in additional shares of the Fund at NAV unless you
request that they be paid to you in cash. See "Taxes, Dividends and
Distributions" at page 12.

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                                       3
<PAGE>

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                                  FUND EXPENSES
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SHAREHOLDER TRANSACTION EXPENSES

     Maximum Sales Load Imposed on Purchases ................    None

     Maximum Sales Load Imposed on Reinvested Dividends .....    None

     Deferred Sales Load ....................................    None

     Redemption Fees ........................................    None

     Exchange Fee ...........................................    None

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

     Management Fees ........................................   .500%

     12b-1 Fees .............................................   .125%

     Other Expenses .........................................   .175%
                                                                -----
     Total Fund Operating Expenses ..........................   .800%
                                                                =====


<TABLE>
<CAPTION>
EXAMPLE                                                           1 YEAR      3 YEARS     5 YEARS     10 YEARS
- -------                                                           ------      -------     -------     --------
<S>                                                                 <C>         <C>         <C>           <C>

You would pay the following expenses on a $1,000 investment,
 assuming (1) 5% annual return and (2) redemption at the end
 of each time period:                                               $8          $26         $44           $99
</TABLE>

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     The above example is based on data for the Fund's fiscal year ended
December 31, 1996. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

     The purpose of this table is to assist an investor in understanding the
various costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Fund is Managed." "Other Expenses" include operating
expenses of the Fund, such as Directors' and professional fees, registration
fees, reports to shareholders, transfer agency and custodian fees.


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                                       4
<PAGE>

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                              FINANCIAL HIGHLIGHTS
        (FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE YEARS INDICATED)
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     The following financial highlights with respect to each of the five years
ended December 31, 1996, have been audited by Price Waterhouse LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for each
of the periods indicated. The information is based on data contained in the
financial statements.

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<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                  ----------------------------------------------------------------------------------------------
                                  1996      1995     1994       1993      1992      1991      1990    1989       1988(b)    1987
                                  ----      ----     ----       ----      ----      ----      ----    ----       ----       ----
<S>                              <C>       <C>       <C>        <C>       <C>       <C>       <C>      <C>        <C>      <C>
PER SHARE OPERATING
 PERFORMANCE:
Net asset value, beginning
 of year .....................   $  1.00   $  1.00   $   1.00   $  1.00   $  1.00   $  1.00   $  1.00 $  1.00    $  1.00   $  1.00
Net investment income and
 realized gains ..............      .028      .031       .023      .018      .026      .041      .053     .056      .047      .040
Dividends and distributions to
 shareholders ................     (.028)    (.031)     (.023)    (.018)    (.026)    (.041)    (.053)   (.056)    (.047)    (.040)
                                 -------   -------   --------   -------   -------   -------   ------- -------    -------   -------
Net asset value, end of year .   $  1.00   $  1.00   $   1.00   $  1.00   $  1.00   $  1.00   $  1.00 $  1.00    $  1.00   $  1.00
                                 =======   =======   ========   =======   =======   =======   ======= =======    =======   =======
TOTAL RETURN:(a) .............      2.84%     3.15%      2.31%     1.86%     2.63%     4.22%     5.42%    5.74%     4.83%     4.11%
RATIOS/SUPPLEMENTAL DATA:
 Net assets, end of year
  (000) ......................   $333,808  $387,651  $487,290   $601,622  $614,333  $616,867  $700,859 $653,268  $628,034  $630,822
 Average net assets (000) ....   $403,230  $470,370  $644,481   $726,571  $669,588  $725,844  $701,869 $644,820  $705,161  $719,244
Ratios to average net assets:(c)
 Expenses, including
  distribution fee ...........        .80%      .85%      .75%       .74%      .74%      .75%      .74%     .78%      .77%     .77%
 Expenses, excluding
  distribution fee ...........        .67%      .72%      .63%       .62%      .62%      .63%      .61%     .66%      .64%     .64%
   
 Net investment income .......       2.83%     3.14%     2.26%      1.84%     2.60%     4.15%     5.30%    5.65%     4.79%    4.08%
    

</TABLE>


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(a)  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.


(b)  On May 2, 1988, Prudential Mutual Fund Management, Inc. succeeded The
     Prudential Insurance Company of America as investment adviser and since
     then has acted as manager of the Fund. See "Manager" in the Statement of
     Additional Information.

(c)  The ratios of expenses to average net assets for the fiscal years ended
     December 31, 1995 and 1996 reflect an arrangement with the Fund's custodian
     whereby uninvested monies earn credits which reduce the fees charged by the
     custodian.


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                                       5
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                              CALCULATION OF YIELD
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     THE FUND CALCULATES ITS "CURRENT YIELD" based on the net change, exclusive
of realized and unrealized gains or losses, in the value of a hypothetical
account over a seven calendar day base period. THE FUND ALSO CALCULATES ITS
"EFFECTIVE ANNUAL YIELD" assuming weekly compounding AND ITS "TAX-EQUIVALENT
YIELD." Tax-equivalent yield shows the taxable yield an investor would have to
earn from a fully taxable investment in order to equal an after-tax equivalent
to the Fund's tax-free yield and is calculated by dividing the Fund's current or
effective yield by the result of one minus the maximum federal tax rate. The
following are examples of the current yield, effective annual yield and tax
equivalent yield calculations as of December 31, 1996:

<TABLE>
     <S>                                                                        <C>
     Value of hypothetical account at end of period ........................    $1.000619027
     Value of hypothetical account at beginning of period ..................     1.000000000
                                                                                ------------
     Base period return ....................................................    $ .000619027
                                                                                ============
     Current yield (.000619027  x (366/7)) .................................           3.24%
     Effective annual yield, assuming weekly compounding ...................           3.29%
     Tax equivalent yield (3.24% / (1-.396)) ...............................           5.36%
</TABLE>


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     The yield will fluctuate from time to time and is not necessarily
representative of future income or dividends.


     The weighted average life to maturity of the Fund's portfolio on December
31, 1996 was 59 days.

     Yield is computed in accordance with a standardized formula described in
the Statement of Additional Information. In addition, comparative performance
information may be used from time to time in advertising or marketing the Fund's
shares, including data from Lipper Analytical Services, Inc., Morningstar
Publications, Inc., IBC Financial Data, Inc., The Bank Rate Monitor, other
industry publications, business periodicals, rating services and market indices.


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                              HOW THE FUND INVESTS
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INVESTMENT OBJECTIVE AND POLICIES

     THE INVESTMENT OBJECTIVE OF THE FUND IS TO ATTAIN FOR INVESTORS THE HIGHEST
LEVEL OF CURRENT INCOME THAT IS EXEMPT FROM FEDERAL INCOME TAXES, CONSISTENT
WITH LIQUIDITY AND THE PRESERVATION OF CAPITAL. THE ACHIEVEMENT OF THE FUND'S
INVESTMENT OBJECTIVE WILL DEPEND ON MARKET CONDITIONS GENERALLY AND ON THE
ANALYTICAL AND PORTFOLIO MANAGEMENT SKILLS OF THE FUND'S INVESTMENT ADVISER.
THERE IS NO ASSURANCE THAT THE FUND'S INVESTMENT OBJECTIVE WILL BE ACHIEVED.

     THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S
OUTSTANDING VOTING SECURITIES, AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). POLICIES THAT ARE NOT FUNDAMENTAL MAY
BE MODIFIED BY THE BOARD OF DIRECTORS.

     THE FUND WILL SEEK TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING IN A
DIVERSIFIED PORTFOLIO OF SHORT-TERM DEBT OBLIGATIONS ISSUED BY STATES,
TERRITORIES AND POSSESSIONS OF THE UNITED STATES AND BY THE DISTRICT OF
COLUMBIA, AND THEIR POLITICAL SUBDIVISIONS, DULY CONSTITUTED AUTHORITIES AND
CORPORATIONS, THE INTEREST FROM WHICH IS WHOLLY EXEMPT FROM FEDERAL INCOME TAX
IN THE OPINION OF BOND COUNSEL TO THE ISSUER. SUCH SECURITIES ARE GENERALLY
KNOWN AS "MUNICIPAL BONDS" OR "MUNICIPAL NOTES." INTEREST ON CERTAIN MUNICIPAL
BONDS AND MUNICIPAL NOTES MAY BE A PREFERENCE ITEM FOR PURPOSES OF THE FEDERAL
ALTERNATIVE MINIMUM TAX (AMT PAPER). THE FUND MAY INVEST UP TO 20% OF ITS NET
ASSETS IN AMT PAPER. SEE "TAXES, DIVIDENDS AND DISTRIBUTIONS." The Fund will
maintain a dollar-weighted average maturity of its portfolio of 90 days or less.



                                       6
<PAGE>

     THE FUND WILL INVEST IN HIGH QUALITY MUNICIPAL BONDS AND NOTES WITH
SHORT-TERM MATURITIES, AS FOLLOWS:

     1. Municipal Bonds with remaining maturities of thirteen months or less
which have been rated, at the time of purchase, Aaa or Aa by Moody's Investors
Service, Inc. ("Moody's") or AAA or AA by Standard & Poor's Ratings Group
("S&P"), or, if not rated, are of comparable quality in the judgment of the
investment adviser under the direction of the Board of Directors; or

     2. Municipal Notes with remaining maturities of thirteen months or less
which have been rated, at the time of purchase, MIG-1 or MIG-2 by Moody's; P-1
or P-2 by Moody's; SP-1 or SP-1 + by S&P; A-1 or A-2 by S&P; or, if not rated,
are of comparable quality in the judgment of the investment adviser under the
direction of the Board of Directors; or

     3. Municipal Bonds or Notes with remaining maturities of thirteen months or
less which depend directly or indirectly on the credit of the United States
Government.


     The Fund utilizes the amortized cost method of valuation in accordance with
regulations issued by the Securities and Exchange Commission (SEC). See "How the
Fund Values its Shares." Accordingly, the Fund will limit its portfolio
investments to those instruments which present minimal credit risks and which
are of "eligible quality" as determined by the Fund's investment adviser under
the supervision of the Board of Directors in accordance with regulations of the
SEC, as they may from time to time be amended. "Eligible quality" for this
purpose means a security (i) rated in one of the two highest short-term rating
categories (a) by at least two nationally recognized statistical rating
organizations assigning a rating to the security or issuer or, (b) if only one
rating organization assigned a rating, by that rating organization or (ii) if
unrated, of comparable quality as determined by the investment adviser under the
supervision of the Board of Directors.


     See Appendix A in the Statement of Additional Information for a description
of tax-exempt security ratings.

     IN ADDITION TO CONSIDERING RATINGS ASSIGNED BY THE RATING SERVICES IN ITS
SELECTION OF PORTFOLIO SECURITIES FOR THE FUND, THE INVESTMENT ADVISER WILL
CONSIDER, AMONG OTHER THINGS, INFORMATION CONCERNING THE FINANCIAL HISTORY AND
CONDITION OF THE ISSUER, ITS REVENUE AND EXPENSE PROSPECTS AND, IN THE CASE OF
REVENUE BONDS, THE FINANCIAL HISTORY AND CONDITION OF THE SOURCE OF REVENUE TO
SERVICE THE BONDS. In the event that a Municipal Bond or Note held by the Fund
is assigned a lower rating or ceases to be rated, the investment adviser, under
the supervision of the Board of Directors, will promptly reassess whether such
security presents minimal credit risks and whether the Fund should continue to
hold the security in its portfolio. If a portfolio security no longer presents
minimal credit risks or is in default, the Fund will dispose of the security as
soon as reasonably practicable unless the Board of Directors determines that to
do so is not in the best interests of the Fund.

     VARIABLE RATE AND FLOATING RATE SECURITIES

     The Fund may invest in Municipal Bonds and Notes which are "variable rate"
and "floating rate" obligations. The interest rates on such obligations
fluctuate generally with changes in market interest rates and the Fund is
typically able to demand repayment of the principal amount of such obligations
at par plus accrued interest either, in some cases, at specified intervals of
less than one year, or, in other cases, upon not less than seven days' notice.
For additional information concerning variable rate and floating rate
obligations, see "Investment Objective and Policies" in the Statement of
Additional Information.

     PUTS

     The Fund may also purchase Municipal Bonds or Notes together with the right
to resell such Bonds or Notes at an agreed-upon price or yield within a
specified period prior to the maturity date of the Bonds or Notes. Such a right
to resell is commonly known as a "put" or a "tender option," and the aggregate
price which the Fund pays for Municipal Bonds or Notes with puts or tender
options is higher than the price which would otherwise be paid for the Bonds or
Notes. For a more detailed description of Municipal Bonds and Notes, and puts
thereon, see "Investment Objective and Policies" in the Statement of Additional
Information.

     WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

     The Fund may purchase municipal obligations on a when-issued or delayed
delivery basis, in each case without limit. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the 


                                       7
<PAGE>


commitment to purchase is made, but delivery and payment for such securities
take place at a later date. During the period between purchase and settlement,
no interest accrues to the purchaser. In the case of purchases of such
securities by the Fund, the price that the Fund is required to pay on the
settlement date may be in excess of the market value of the municipal
obligations on that date. While securities may be sold prior to the settlement
date, the Fund intends to purchase these securities with the purpose of actually
acquiring them unless a sale would be desirable for investment reasons. At the
time the Fund makes the commitment to purchase a municipal obligation on a
when-issued or delayed delivery basis, it will record the transaction and
reflect the value of the obligation, each day, in determining its net asset
value. This value may fluctuate from day to day in the same manner as values of
municipal obligations otherwise held by the Fund. If the seller defaults on the
sale, the Fund could fail to realize the appreciation, if any, that had
occurred. The Fund will establish a segregated account with its Custodian in
which it will maintain cash and other liquid assets equal in value to its
commitments for when-issued or delayed delivery securities.


     REPURCHASE AGREEMENTS


     Up to 5% of the Fund's assets may be invested in repurchase agreements
whereby the seller of a security agrees to repurchase that security from the
Fund at a mutually agreed-upon time and price. The period of maturity 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 security. 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
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 participates in a joint repurchase
account with other investment companies managed by PMF pursuant to an order of
the Securities and Exchange Commission (SEC).


     ILLIQUID SECURITIES

     The Fund may hold up to 10% of its net assets in illiquid securities,
including 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. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (the Securities Act), privately placed commercial paper and
municipal lease obligations if in each case such investments have a readily
available market are not considered illiquid for purposes of this limitation.
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 time, uninterested in purchasing Rule 144A securities. The investment
adviser will monitor the liquidity of such restricted securities under the
supervision of the Board of Directors. Repurchase agreements subject to demand
are deemed to have a maturity equal to the applicable notice period.

OTHER INVESTMENTS AND POLICIES

     The Fund intends to hold portfolio securities to maturity; however, it may
sell any security at any time in order to meet redemption requests or if such
action, in the judgment of the investment adviser, is appropriate based on the
investment adviser's evaluation of the issuer or of market conditions.

     The Fund anticipates being as fully invested as practicable in Municipal
Bonds and Notes; however, because the Fund invests in securities exempt from
federal income tax, there may be occasions when, as a result of maturities of
portfolio securities or sales of Fund shares or in order to meet anticipated
redemption requests, the Fund may hold cash which is not earning income. In
addition, there may be occasions when, in order to raise cash to meet
redemptions, the Fund might be required to sell securities at a loss.

     The Fund does not presently intend to borrow money except to the extent
that the entry into reverse repurchase agreements may be considered borrowing.

     From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal bonds and notes and for providing state and local
governments with federal credit assistance. Reevaluation of the Fund's
investment objective and structure might be necessary in the future due to
market conditions which may result from future changes in the tax laws.


                                       8
<PAGE>

INVESTMENT RESTRICTIONS

     The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.

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                             HOW THE FUND IS MANAGED
- --------------------------------------------------------------------------------

     THE FUND HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW,
DECIDES UPON MATTERS OF GENERAL POLICY. THE FUND'S OFFICERS CONDUCT AND
SUPERVISE THE DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER
FURNISHES DAILY INVESTMENT ADVISORY SERVICES.


     For the year ended December 31, 1996, total expenses of the Fund as a
percentage of average net assets were .80%. See "Financial Highlights."


MANAGER


     PRUDENTIAL MUTUAL FUND MANAGEMENT LLC (PMF OR THE MANAGER), GATEWAY CENTER
THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER OF THE
FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE
FUND'S AVERAGE DAILY NET ASSETS UP TO $750 MILLION, .425 OF 1% OF THE FUND'S
AVERAGE DAILY NET ASSETS BETWEEN $750 MILLION AND $1.5 BILLION AND .375 OF 1% IN
EXCESS OF $1.5 BILLION. PMF is organized as a New York limited liability
company. It is the sucessor of Prudential Mutual Fund Management, Inc., which
transferred its assets to PMF in September 1996. For the fiscal year ended
December 31, 1996, the Fund paid management fees to PMF of .50% of the average
net assets of the Fund. See "Manager" in the Statement of Additional
Information.

     As of January 31, 1997, PMF served as the manager to 40 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $55.8 billion.


     UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.


     UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION, DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE INVESTMENT
ADVISER OR THE SUBADVISER OR THE INVESTMENT ADVISER), A WHOLLY-OWNED SUBSIDIARY
OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (PRUDENTIAL), PIC FURNISHES
INVESTMENT ADVISORY SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND
IS REIMBURSED BY PMF FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING
SUCH SERVICES. Under the Management Agreement, PMF continues to have
responsibility for all investment advisory services and supervises PI's
performance of such services.

     PMF and PI are indirect, wholly-owned subsidiaries of Prudential, a major
diversified insurance and financial services company.


DISTRIBUTOR

     PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE
SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE
LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE FUND'S
SHARES. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.

     UNDER A DISTRIBUTION AND SERVICE PLAN (THE PLAN) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AND SERVICE
AGREEMENT (THE DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE 


                                       9
<PAGE>


EXPENSES OF DISTRIBUTING SHARES OF THE FUND. These expenses include account
servicing fees paid to, or on account of, financial advisers of Prudential
Securities and representatives of Pruco Securities Corporation (Prusec),
affiliated broker-dealers, account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) 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 Prudential Securities and Prusec associated with the sale
of the Fund's shares, including lease, utility, communications and sales
promotion expenses.


     Under the Plan, the Fund is obligated to pay a service fee 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.

     UNDER THE PLAN, THE FUND PAYS THE DISTRIBUTOR FOR ITS DISTRIBUTION-RELATED
ACTIVITIES AT AN ANNUAL RATE OF .125 OF 1% OF THE FUND'S AVERAGE DAILY NET
ASSETS. Account servicing fees are paid based on the average balance of the
Fund's shares held in the accounts of customers of financial advisers. The
entire distribution fee may be used to pay account servicing fees.


     For the fiscal year ended December 31, 1996, the Fund paid distribution
expenses of .125 of 1% of the average daily net assets of its shares. The Fund
records all payments made under the Plan as expenses in the calculation of its
net investment income.


     The Plan provides that it shall continue in effect from year to year,
provided that each such continuance is approved annually by a majority vote of
the Board of Directors of the Fund, including a majority of the directors who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the operation of the Plan or any agreements related to the
Plan. The Board of Directors is provided with and reviews quarterly reports of
expenditures under the Plan. The Plan may be terminated at any time by vote of a
majority of the Rule 12b-1 Directors or of a majority of the Fund's outstanding
shares. The Fund will not be obligated to pay expenses incurred under the Plan
if it is terminated or not continued.


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


     On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the National
Association of Securities Dealers, Inc. (NASD) to resolve allegations that from
1980 through 1990 PSI sold certain limited partnership interests in violation of
securities laws to persons for whom such securities were not suitable and
misrepresented the safety, potential returns and liquidity of these investments.
Without admitting or denying the allegations asserted against it, PSI consented
to the entry of an SEC Administrative Order which stated that PSI's conduct
violated the federal securities laws, directed PSI to cease and desist from
violating the federal securities laws, pay civil penalties, and adopt certain
measures to address the violations.

     Pursuant to the terms of the SEC settlement, PSI agreed to the imposition
of a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.

     In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement,


                                       10
<PAGE>

provided that PSI complies with the terms of the agreement. If, upon completion
of the three year period, PSI has complied with the terms of the agreement, no
prosecution will be instituted by the United States for the offenses charged in
the complaint. If on the other hand, during the course of the three year period,
PSI violates the terms of the agreement, the U.S. Attorney can then elect to
pursue these charges. Under the terms of the agreement, PSI agreed, among other
things, to pay an additional $330,000,000 into the fund established by the SEC
to pay restitution to investors who purchased certain PSI limited partnership
interests.


     For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.


  The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.

PORTFOLIO TRANSACTIONS

     Prudential Securities may act as broker for the Fund, provided that the
commissions, fees or other remuneration it receives are fair and reasonable. See
"Portfolio Transactions and Brokerage" in the Statement of Additional
Information.

CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT

     State Street Bank and Trust Company (State Street or the Custodian), 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
Fund. Its mailing address is P.O. Box 1713, Boston, Massachusetts 02105.


     Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), Raritan
Plaza One, Edison, New Jersey 08837, serves as Transfer and Dividend Disbursing
Agent, and in those capacities maintains certain books and records for the Fund.
PMFS is a wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005,
New Brunswick, New Jersey 08906-5005.


- --------------------------------------------------------------------------------
                         HOW THE FUND VALUES ITS SHARES
- --------------------------------------------------------------------------------

     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. THE BOARD OF DIRECTORS HAS FIXED THE SPECIFIC TIME
OF DAY FOR THE COMPUTATION OF THE NAV TO BE AS OF 4:30 P.M., NEW YORK TIME,
IMMEDIATELY AFTER THE DECLARATION OF DIVIDENDS.

     The Fund will compute its NAV once daily on days that 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 materially affect the NAV. The New
York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.


     The Fund determines the value of its portfolio securities by the amortized
cost method. This method involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Fund would receive if it sold the instrument.
During these periods, the yield to a shareholder may differ somewhat from that
which could be obtained from a similar fund which marks its portfolio securities
to market each day. For example, during periods of declining interest rates, if
the use of the amortized cost method resulted in lower value of the Fund's
portfolio on a given day, a prospective investor in the Fund would be able to
obtain a somewhat higher yield and existing shareholders would receive
correspondingly less income. The converse would apply during periods of rising
interest rates. The Board of Directors has established procedures designed to
stabilize, to the extent reasonably possible, the Fund's NAV at $1.00 per share.
See "Net Asset Value" in the Statement of Additional Information.



                                       11
<PAGE>

- --------------------------------------------------------------------------------
                       TAXES, DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------

TAXATION OF THE FUND

     The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under the Internal Revenue Code. Accordingly, the
Fund will not be subject to federal income taxes on its net investment income
and capital gains, if any, that it distributes to shareholders. In addition, the
Fund intends to invest its assets so that dividends payable from net tax-exempt
interest earned from Municipal Bonds and Notes will qualify as exempt-interest
dividends and thus be excluded from a shareholder's gross income under the
Internal Revenue Code. See "Taxes, Dividends and Distributions" in the Statement
of Additional Information.

TAXATION OF SHAREHOLDERS

     Distributions of net tax-exempt interest earned on Municipal Bonds and
Municipal Notes will be excluded from a shareholder's gross income under the
Internal Revenue Code. Distributions of net investment income (excluding such
exempt-interest dividends) and realized net short-term capital gains in excess
of net long-term capital losses of the Fund are taxable to shareholders of the
Fund as ordinary income, whether such distributions are received in cash or
reinvested in additional shares.


     Interest on certain "private activity" tax-exempt obligations (as defined
in the Internal Revenue Code) issued on or after August 8, 1986 is a preference
item for purposes of the alternative minimum tax. The portion of an
exempt-interest dividend of the Fund that is allocable to such municipal
obligations will be treated as a preference item for purposes of the alternative
minimum tax. In addition, a portion of the tax-exempt dividend interest received
by corporate shareholders with respect to tax-exempt obligations, whether or not
private activity bonds, will be taken into account in computing the alternative
minimum tax. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.


     Distributions of net long-term capital gains (i.e., the excess of net
long-term capital gains over net short-term capital losses) are taxable to
shareholders as long-term capital gains regardless of how long a shareholder has
held shares in the Fund. The Fund does not expect to realize long-term capital
gains or losses. In determining the amount of capital gains to be distributed,
any capital loss carryovers from prior years will be offset against capital
gains.


     Neither distributions of net investment income nor distributions of capital
gains, if any, will be eligible for the dividends received deduction allowed
to corporate shareholders. The maximum long-term capital gains rate for
individuals is currently 28%. The maximum long-term capital gains rate for
corporate shareholders is currently the same as the maximum tax rate for
ordinary income.


     Distributions may be subject to state and local taxes. Shareholders are
advised to consult their own tax advisers regarding specific questions as to
federal, state or local taxes. See "Taxes, Dividends and Distributions" in the
Statement of Additional Information.

WITHHOLDING TAXES

     Under the Internal Revenue Code, the Fund is generally required to withhold
and remit to the U.S. Treasury 31% of taxable dividends and capital gain
distributions payable to individuals and certain noncorporate shareholders who
fail to furnish correct tax identification numbers on IRS Form W-9 (or IRS Form
W-8 in the case of certain foreign shareholders). Withholding at this rate is
also required from dividends and capital gains distributions (but not redemption
proceeds) payable to shareholders who are otherwise subject to backup
withholding. Dividends from taxable net investment income and short-term capital
gains paid to a foreign shareholder will generally be subject to U.S.
withholding tax at the rate of 30% (or lower treaty rate).

DIVIDENDS AND DISTRIBUTIONS


     THE FUND EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME AND SHORT-TERM CAPITAL GAINS, IF ANY, AND MAKE DISTRIBUTIONS
ANNUALLY OF ANY NET LONG-TERM CAPITAL GAINS. A SHAREHOLDER GENERALLY BEGINS TO
EARN 



                                       12
<PAGE>


dividends on the first business day after his or her order is placed with the
Fund, as described above, and continues to earn dividends through the day on
which his or her shares are redeemed. In the case of certain redemptions,
however, Prudential Securities clients will not be entitled to dividends
declared on the date of redemption. See "How to Sell Your Shares--Redemption of
Shares Purchased Through Prudential Securities."

     DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE FUND
BASED ON THE NET ASSET VALUE OF THE FUND'S SHARES ON THE PAYMENT DATE, UNLESS
THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
PAYMENT DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services LLC, Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
your shares through Prudential Securities, you should contact your financial
adviser to elect to receive dividends and distributions in cash. The Fund will
notify each shareholder after the close of the Fund's taxable year both of the
dollar amount and taxable status of that year's dividends and distributions on a
per share basis.


- --------------------------------------------------------------------------------
                               GENERAL INFORMATION
- --------------------------------------------------------------------------------

DESCRIPTION OF COMMON STOCK


     THE FUND WAS INCORPORATED IN MARYLAND ON MARCH 22, 1979, AND ITS AUTHORIZED
CAPITAL STOCK CONSISTS OF THREE BILLION SHARES OF COMMON STOCK OF $.01 PAR
VALUE, CURRENTLY DIVIDED INTO TWO CLASSES OF SHARES, DESIGNATED CLASS A
(INCLUDING SHARES OUTSTANDING PRIOR TO FEBRUARY 25, 1997) AND CLASS Z SHARES,
EACH CLASS CONSISTING OF 1.5 BILLION SHARES. CURRENTLY THE FUND ONLY OFFERS ONE
CLASS OF SHARES, THE CLASS A SHARES. Shares of the Fund, when issued, are fully
paid, nonassessable, fully transferable and redeemable at the option of the
shareholder. Shares are also redeemable at the option of the Fund. See
"Shareholder Guide--How to Sell Your Shares." All shares are equal as to
earnings, assets and voting privileges. There are no conversion, pre-emptive or
other subscription rights. In the event of liquidation, each share of common
stock of the Fund is entitled to its portion of all of the Fund's assets after
all debts and expenses have been paid. The shares of the Fund do not have
cumulative voting rights for the election of directors.


     THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD ANNUAL MEETINGS
OF SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS 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% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.

ADDITIONAL INFORMATION

     This Prospectus, including the Statement of Additional Information which
has been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.

- --------------------------------------------------------------------------------
                                SHAREHOLDER GUIDE
- --------------------------------------------------------------------------------

HOW TO BUY SHARES OF THE FUND


GENERAL INFORMATION

     YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES OR PRUSEC
OR DIRECTLY FROM THE FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC, ATTENTION: INVESTMENT SERVICES, P.O. BOX 15020, NEW



                                       13
<PAGE>


BRUNSWICK, NEW JERSEY 08906-5020. Shareholders of the Fund who are clients of
Prudential Securities are subject to the procedures under "Purchases through
Prudential Securities" below.

     Except as otherwise provided below, the minimum initial investment is
$1,000 and the minimum subsequent investment is $100. All minimum investment
requirements are waived for certain retirement and employee savings plans and
custodial accounts for the benefit of minors. For purchases made through the
Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Services" below. For automatic purchases
made through Prudential Securities, the minimum initial investment requirement
is $1,000 and there is no minimum subsequent investment requirement.

     Shares of the Fund are sold through the Transfer Agent, without a sales
charge, at the NAV next determined after receipt and acceptance by the Transfer
Agent of a purchase order and payment in proper form (i.e., a check or Federal
Funds wired to State Street Bank and Trust Company (State Street), the Fund's
custodian). See "How the Fund Values its Shares." When payment is received by
the Transfer Agent prior to 4:30 P.M., New York time, in proper form, a share
purchase order will be entered at the price determined as of 4:30 P.M., on that
day, and the shares will begin to earn dividends on the following business day.
See "Taxes, Dividends and Distributions." If your purchase is made through an
account at Prudential Securities or through Prusec or another dealer, your
dealer will forward a purchase order and payment to the Fund.

     Investors who purchase their shares through a dealer other than Prudential
Securities or Prusec, which dealer has a clearing arrangement with respect to
shares of the Fund, may be able to participate in the automatic sweep feature
described below under "Purchases through Prudential Securities--Automatic
Investment (Autosweep)" and "How to Sell Your Shares--Redemptions of Shares
Purchased through Prudential Securities." For further information, contact your
dealer.

     Application forms for Prusec and direct account with the Transfer Agent
(e.g., non-Prudential Securities accounts) can be obtained from PMFS or Prusec.
If a stock certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive stock certificates.
Shareholders cannot utilize Expedited Redemption or Check Redemption or have a
Systematic Withdrawal Plan if they have been issued certificates.

     The Fund reserves the right, in its discretion, to reject any purchase
order (including an exchange into the Fund) or to suspend or modify the
continuous offering of its shares. See "How to Sell Your Shares" below.

     Transactions in Fund shares may be subject to postage and other charges
imposed by your dealer.


     AN INVESTMENT IN THE FUND MAY NOT BE APPROPRIATE FOR TAX-EXEMPT OR
TAX-DEFERRED INVESTORS. SUCH INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS.


PURCHASES THROUGH PRUDENTIAL SECURITIES

  AUTOMATIC INVESTMENT (AUTOSWEEP)

     Prudential Securities has advised the Fund that it has automatic investment
procedures (Autosweep) pursuant to which it will make automatic investments of
free credit cash balances (Eligible Credit Balances) held in a client's
brokerage account in shares of the Fund, if the Fund is your Primary Money Sweep
Fund. You may designate the Fund (or certain other Prudential money market
funds) as your Primary Money Sweep Fund. If you do not designate a Primary Money
Sweep Fund, the Primary Money Sweep Fund will be Prudential MoneyMart Assets,
Inc. (If you are a client of Prudential Securities at the time this change in
Autosweep is instituted and you hold a money market fund position in your
account other than Prudential MoneyMart Assets, Inc., that other fund will be
your Primary Money Sweep Fund.) Prudential Securities' clients who have a
Primary Money Sweep Fund can purchase shares of such fund only through the
automatic investment procedures described herein; no manual purchase orders will
be accepted for such fund. A Prudential Securities client has the option to
change his or her Primary Money Sweep Fund at any time by notifying his or her
Prudential Securities financial adviser. Under certain circumstances, you may
elect not to have a money market sweep feature for your account when you open
your account.

  For accounts other than IRAs and Benefit Plans, as defined below, shares of
the Fund will be purchased by Prudential Securities as follows: in the case of
Eligible Credit Balances of $1,000 or more resulting from the proceeds of a
securities sale, maturity of a bond or 



                                       14
<PAGE>


call and Eligible Credit Balances of $10,000 or more resulting from a non-trade
related credit (e.g., receipt of a dividend or interest payment or a cash
payment into the securities account), orders to purchase shares will be placed
on the business day after such Eligible Credit Balances become available in your
account. For Eligible Credit Balances of $1.00 or more not otherwise described
above, orders to purchase shares will be placed monthly on the last business day
of the month. For IRAs and Benefit Plans, having Eligible Credit Balances of
$1.00 or more, orders to purchase shares of the Fund will be placed by
Prudential Securities (i) on the settlement date of the securities sale, in the
case of Eligible Credit Balances resulting from the proceeds of a securities
sale, and (ii) on the business day after receipt by Prudential Securities of the
non-trade related credit (including the maturity of a bond or a call), in the
case of Eligible Credit Balances resulting from a non-trade related credit. Each
time an order resulting from the settlement of a securities sale is placed, any
non-trade related credit in the client's account will also be invested.

     The following chart shows the frequency and amount of the sweep for
accounts other than IRAs and Benefit Plans.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
                                                                                DAILY               MONTHLY
- --------------------------------------------------------------------------------------------------------------
 <S>                                                                       <C>                   <C>
 Eligible Credit Balances resulting from the proceeds of a
  securities sale, maturity of a bond or call                               $1,000 or more
- --------------------------------------------------------------------------------------------------------------
 Eligible Credit Balances resulting from a non-trade related credit        $10,000 or more
- --------------------------------------------------------------------------------------------------------------
 Remaining Eligible Credit Balances                                                              $1.00 or more
- --------------------------------------------------------------------------------------------------------------
</TABLE>

     All shares purchased pursuant to these automatic investment procedures will
be issued at the NAV computed on the business day the order is entered and will
begin earning dividends on the following business day. Purchases through
Autosweep are subject to the Fund's minimum initial investment requirement of
$1,000, which is waived for certain retirement and employee savings plans and
custodial accounts for the benefit of minors. Prudential Securities will have
the use of, and will retain the benefits of, Eligible Credit Balances in a
client's brokerage account until monies are delivered to the Fund. (Prudential
Securities delivers federal funds on the business day after settlement).
Eligible Credit Balances for purposes of Autosweep are measured as of the close
of business on the previous business day.

     For the purposes of Autosweep, "Benefit Plans" include (i) employee benefit
plans as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974 (ERISA) other than governmental plans as defined in Section 3(32) of
ERISA and church plans as defined in Section 3(33) of ERISA, (ii) pension,
profit-sharing or other employee benefit plans qualified under Section 401 of
the Internal Revenue Code and (iii) deferred compensation and annuity plans
under Section 457 or 403(b)(7) of the Internal Revenue Code. "IRAs" are
Individual Retirement Accounts as defined in Section 408(a) of the Internal
Revenue Code.

MANUAL INVESTMENT

     Prudential Securities will accept manual purchase orders for Prudential
money market fund shares only for those clients (i) who are purchasing shares of
a Prudential money market fund which is not their Primary Money Sweep Fund or
(ii) who do not have a money market sweep feature in their account, as described
above under "Automatic Investment (Autosweep)."

     Prudential Securities clients eligible to make manual purchases, as
described above, are subject to the minimum initial investment of $1,000 and the
minimum subsequent investment of $100, except that all minimum investment
requirements are waived for certain retirement and employee savings plans and
custodial accounts for the benefit of minors. On the business day after the
purchase order is received, Prudential Securities will place the order for
shares of the Fund for settlement that day. Shares will be issued at the NAV
determined on that day and will begin earning dividends the next business day,
which is the second business day after receipt of the purchase order by
Prudential Securities. Prudential Securities will have the use of, and will
retain the benefits of, Eligible Credit Balances in the client's brokerage
account until monies are delivered to the Fund. (Prudential Securities delivers
federal funds on the business day after settlement).



                                       15
<PAGE>

PURCHASE THROUGH PRUSEC

     You may purchase shares of the Fund by placing an order with your Prusec
registered representative accompanied by payment for the purchase price of such
shares and, in the case of a new account, a completed application form. You
should also submit an IRS Form W-9. The Prusec registered representative will
then forward these items to PMFS. See "Purchase by Mail" below.

PURCHASE BY WIRE

     For an initial purchase of shares of the Fund by wire, you must first
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, 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, Boston, Massachusetts, Custody and
Shareholder Services Division, Attention: Prudential Tax-Free Money Fund,
specifying on the wire the account number assigned by PMFS and your name.

     If you arrange for receipt by State Street of Federal Funds prior to 4:30
P.M., New York time, on a business day, you may purchase Fund shares as of that
day and earn dividends commencing on the next business 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-Free Money
Fund and your name and individual account number. It is not necessary to call
PMFS to make subsequent purchase orders by wire. The minimum amount which may be
invested by wire is $1,000.

PURCHASE BY MAIL


     Purchase orders for which remittance is to be made by check or money order
may be submitted directly by mail to Prudential Mutual Fund Services LLC,
Attention: Investment Services, P.O. Box 15020, New Brunswick, NJ 08906-5020,
together with payment for the purchase price of such shares and, in the case of
a new account, a completed application form. You should also submit an IRS Form
W-9. If PMFS receives an order to purchase shares of the Fund prior to 4:30
P.M., New York time, and payment by check, the purchase order will be effective
that day and you will be entitled to dividends the following business day. See
"Taxes, Dividends and Distributions." Checks should be made payable to
Prudential Tax-Free Money Fund. Certified checks are not necessary, but checks
must be drawn on a bank located in the United States. There are restrictions on
the redemption of shares purchased by check while funds are being collected. See
"How to Sell Your Shares."


PURCHASE BY HOLDERS OF PRUDENTIAL SECURITIES UNIT TRUSTS

     Holders of Prudential sponsored Unit Trusts may elect to have monthly
distributions paid by such Unit Trusts reinvested in shares of the Fund without
compliance with the investment minimums described under "How to Buy Shares of
the Fund."

THE PRUDENTIAL ADVANTAGE ACCOUNT PROGRAM

     Shares of the Fund are offered to participants in the Prudential Advantage
Account Program (the Advantage Account Program), a financial services program
available to clients of Pruco Securities Corporation. Investors participating in
the Advantage Account Program may select the Fund as their primary investment
vehicle. Such investors will have the cash balances of $1.00 or more in their
Securities Account (Available Cash) (a component of the Advantage Account
Program carried through Prudential Securities) automatically invested in shares
of the Fund. Specifically, an order to purchase shares of the Fund is placed (i)
in the case of Available Cash resulting from the proceeds of securities sales,
on the settlement date of the securities sale, and (ii) in the case of Available
Cash resulting from non-trade related credits (i.e., receipt of dividends and
interest payments, or a cash payment by the participant into his or her
Securities Account), on the business day after receipt by Prudential Securities
of the non-trade related credit.

     All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Fund at 4:30
P.M. on the day the order is placed and cause payment to be made in federal
funds for the shares prior to 4:30 P.M. on the next business day. Prudential
Securities will have the use of free credit cash balances until delivery to the
Fund.


                                       16
<PAGE>

     Redemptions will be automatically effected by Prudential Securities to
satisfy debit balances in a Securities Account created by activity therein or
existing under the Advantage Account Program, such as those incurred by use of
the Visa(R) Account, including Visa purchases, cash advances and Visa Account
checks. Each Advantage Account Program Securities Account will be automatically
scanned for debits each business day as of the close of business on that day and
after application of any free credit cash balances in the account to such
debits, a sufficient number of shares of the Fund (if selected as the primary
fund) and, if necessary, shares of other Advantage Account funds owned by the
Advantage Account Program participant which have not been selected as his or her
primary fund or shares of a participant's money market funds managed by PMF
which are not primary Advantage Account funds will be redeemed as of that
business day to satisfy any remaining debits in the Securities Account. Shares
may not be purchased until all debits, overdrafts and other requirements in the
Securities Account are satisfied.

     Advantage Account Program charges and expenses are not reflected in the
Table of Fund Expenses. See "Fund Expenses."

     For information on participation in the Advantage Account Program, you
should telephone (800) 235-7637 (toll-free).

HOW TO SELL YOUR 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 BY THE TRANSFER AGENT OR
PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."

     Shares for which a redemption request is received by PMFS prior to 4:30
P.M., New York time, are entitled to a dividend on the day on which the request
is received. By pre-authorizing Expedited Redemption, you may arrange to have
payment for redeemed shares made in Federal Funds wired to your bank, normally
on the next bank business day following the date of receipt of the redemption
instructions. Should you redeem all of your shares, you will receive the amount
of all dividends declared for the month-to-date on those shares. See "Taxes,
Dividends and Distributions."


     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 15010, New Brunswick, New Jersey 08906-5010.

     If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records or (d) are to be paid to a
corporation, partnership, trust or fiduciary, 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 offices. In the case of redemptions from a benefit plan that
participates in the Prudential PruArray or Smartpath Program, if the proceeds of
the redemption are invested in another investment option of such 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.

     NORMALLY, THE FUND MAKES PAYMENT ON THE NEXT BUSINESS DAY FOR ALL SHARES
REDEEMED, BUT IN ANY EVENT, PAYMENT IS MADE WITHIN SEVEN DAYS AFTER RECEIPT BY
PMFS OF STOCK CERTIFICATES AND/OR OF A REDEMPTION REQUEST IN PROPER FORM.
However, the Fund may suspend the right of redemption or postpone the date of
payment (a) for any periods during which the New York Stock Exchange is closed
(other than for customary weekend or holiday closings), (b) for any periods when
trading in the markets which the Fund normally utilizes is closed or restricted
or an emergency exists as determined by the SEC so that disposal of the Fund's
investments or determination of its NAV is not reasonably practicable, or (c)
for such other periods as the SEC may permit for protection of the Fund's
shareholders; provided that applicable rules and regulations of the SEC shall
govern as to whether the conditions in (b) or (c) exist.


     PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.


                                       17
<PAGE>

REDEMPTION OF SHARES PURCHASED THROUGH PRUDENTIAL SECURITIES


     Prudential Securities has advised the Fund that it has established
procedures pursuant to which shares of the Fund held by a Prudential Securities
client having a deficiency in his or her Prudential Securities account will be
redeemed automatically to the extent of that deficiency to the nearest highest
dollar. The amount of the redemption will be the lesser of (a) the total net
asset value of Fund shares held in the client's Prudential Securities account or
(b) the deficiency in the client's Prudential Securities account at the close of
business on the date such deficiency is due. Accordingly, a Prudential
Securities client who wishes to pay for a securities transaction or satisfy any
other debit balance in his or her account other than through such automatic
redemption procedure must do so prior to the day of settlement for such
securities transaction or the date the debit balance is incurred. In the case of
certain automatic redemptions, where Prudential Securities cannot anticipate
debits in the brokerage account (e.g., checks written against the account),
Prudential Securities clients will not be entitled to dividends declared on the
date of redemption; such dividends will be retained by Prudential Securities.


REDEMPTION OF SHARES PURCHASED THROUGH PMFS

     If you purchase shares of the Fund through PMFS, you may use Check
Redemption, Expedited Redemption or Regular Redemption. Prudential Securities
clients for whom Prudential Securities has purchased shares may not use such
services.

     REGULAR REDEMPTION. You may redeem your shares by sending a written
request, accompanied by duly endorsed share certificates, if issued, to PMFS,
Attention: Redemption Services, P.O. Box 15010, New Brunswick, NJ 08906-5010. In
this case, all share certificates must be endorsed by you with signature
guaranteed, as described above. PMFS may request further documentation from
corporations, executors, administrators, trustees or guardians. Regular
redemption is made by check sent to the shareholder's address.


     EXPEDITED REDEMPTION. By pre-authorizing Expedited Redemption, you may
arrange to have payment for redeemed shares made in Federal Funds wired to the
shareholder's bank, normally on the next business day following redemption. In
order to use Expedited Redemption, you may so designate at the time the initial
application form is filed or at a later date. Once the Expedited Redemption
authorization form has been completed, the signature on the authorization form
guaranteed as set forth below and the form returned to Prudential Mutual Fund
Services LLC, Attention: Redemption Services, P.O. Box 15010, New Brunswick, NJ
08906-5010, requests for redemption may be made by telegraph, letter or
telephone. To request Expedited Redemption by telephone, a shareholder should
call PMFS at (800) 225-1852. Calls must be received by PMFS before 4:30 P.M.,
New York time to permit redemption as of such date. Requests by letter should be
addressed to Prudential Mutual Fund Services LLC, at the address set forth
above.


     A signature guarantee is not required under Expedited Redemption once the
authorization form is properly completed and returned. The Expedited Redemption
privilege may be used only to redeem shares in an amount of $200 or more, except
that, if an account for which Expedited Redemption is requested has a net asset
value of less than $200, the entire account must be redeemed. The proceeds of
redeemed shares in the amount of $1,000 or more are transmitted by wire to your
account at a domestic commercial bank which is a member of the Federal Reserve
System. Proceeds of less than $1,000 are forwarded by check to your designated
bank account.

     DURING PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, EXPEDITED
REDEMPTION MAY BE DIFFICULT TO IMPLEMENT, AND YOU SHOULD REDEEM SHARES BY MAIL
AS DESCRIBED ABOVE.

     Check Redemption. At your request, State Street will establish a personal
checking account for you. Checks drawn on this account can be made payable to
the order of any person in any amount greater than $500. When such check is
presented to State Street for payment, State Street presents the check to the
Fund as authority to redeem a sufficient number of shares of the Fund in your
account to cover the amount of the check. If insufficient shares are in the
account, or if the purchase was made by check within 10 days, the check will be
returned marked "insufficient funds." Checks in an amount less than $500 will
not be honored. Shares for which certificates have been issued cannot be
redeemed by check. PMFS reserves the right to impose a service charge to
establish a checking account and order checks.

     INVOLUNTARY REDEMPTION

     Because of the relatively high cost of maintaining an account, the Fund
reserves the right to redeem, upon 60 days' written notice, an account which is
reduced by a shareholder to an NAV of $500 or less due to redemption. You may
avoid such redemption by increasing the NAV of your account to an amount in
excess of $500.


                                       18
<PAGE>

     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 net asset value next determined after
the order is received, which must be within 90 days after the date of the
redemption. Any contingent deferred sales charge (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 Fund's Transfer Agent, either directly or through Prudential
Securities, 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. Exercise of the
repurchase privilege may affect federal tax treatment of any gain realized upon
redemption.


     CLASS B AND CLASS C PURCHASE PRIVILEGE


     You may direct that the proceeds of a redemption of Fund shares be invested
in Class B or Class C shares of any Prudential Mutual Fund offering such classes
of shares by calling your Prudential Securities financial adviser or the
Transfer Agent at (800) 225-1852. The transaction will be effected on the basis
of the relative NAV.


HOW TO EXCHANGE YOUR SHARES

     AS A SHAREHOLDER OF THE FUND, YOU MAY EXCHANGE YOUR SHARES FOR SHARES OF
CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING MONEY MARKET FUNDS AND FUNDS
SOLD WITH AN INITIAL SALES CHARGE, SUBJECT TO THE MINIMUM INVESTMENT
REQUIREMENTS OF SUCH FUNDS ON THE BASIS OF RELATIVE NAV. You may exchange your
shares for Class A shares of the Prudential Mutual Funds on the basis of the
relative NAV plus the applicable sales charge. No additional sales charge is
imposed in connection with subsequent exchanges. You may not exchange your
shares for Class B shares of the Prudential Mutual Funds, except that shares
acquired prior to January 22, 1990 subject to a contingent deferred sales charge
can be exchanged for Class B shares. You may not exchange your shares for Class
C shares of the Prudential Mutual Funds. See "How to Sell Your Shares--Class B
and Class C Purchase Privilege" above and "Shareholder Investment
Account--Exchange Privilege" in the Statement of Additional Information. An
exchange will be treated as a redemption and purchase for tax purposes.


     IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN CONSENT 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, 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. The Exchange Privilege is available only in states where the
exchange may legally be made.


     IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
EXCHANGE YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.


     You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.

     IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE
OF SHARES OF THE FUND 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.

     The Exchange Privilege is not a right and may be suspended, modified or
terminated at any time on 60 days' notice to shareholders.



                                       19
<PAGE>

SHAREHOLDER SERVICES

     In addition to the exchange privilege, as a shareholder in the Fund, you
can take advantage of the following additional services and privileges:

     o AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS. For your
convenience, all dividends and distributions are automatically reinvested in
full and fractional shares of the Fund at NAV. You may direct the Transfer Agent
in writing not less than 5 full business days prior to the record date to have
subsequent dividends and/or distributions sent in cash rather than reinvested.
If you hold shares through Prudential Securities, you should contact your
financial adviser.

     o AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of Fund shares in amounts as little as $50 via an automatic
charge to a bank account or Prudential Securities account (not including a
Command Account). For additional information about this service, you may contact
your Prudential Securities financial adviser, Prusec registered representative
or the Transfer Agent directly.

     o SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available for
shareholders having shares of the Fund which provides for monthly or quarterly
checks. For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.


     o MULTIPLE ACCOUNTS. Special procedures have been designed for banks and
other institutions that wish to open multiple accounts. An institution may open
a single master account by filing an Application Form with Prudential Mutual
Fund Services LLC (PMFS or the Transfer Agent), Attention: Customer Service,
P.O. Box 15005, New Brunswick, New Jersey 08906, signed by personnel authorized
to act for the institution. Individual sub-accounts may be opened at the time
the master account is opened by listing them, or they may be added at a later
date by written advice or by filing forms supplied by the Fund. Procedures are
available to identify sub-accounts by name and number within the master account
name. The investment minimums set forth above are applicable to the aggregate
amounts invested by a group and not to the amount credited to each sub-account.

     o REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses the Fund will provide one annual report and semi-annual shareholder
report and annual prospectus per household. You may request additional copies of
such reports by calling (800) 225-1852 or by writing to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077.

     o SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone at (800) 225-1852 (toll free) or, from outside the U.S.A., at (908)
417-7555 (collect).


     For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.


                                       20
<PAGE>

- --------------------------------------------------------------------------------
                        THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------

     Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec registered representative or telephone
the Fund at (800) 225-1852 for a free prospectus. Read the prospectus carefully
before you invest or send money.

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

       ------------------
       TAXABLE BOND FUNDS
       ------------------

Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
 Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
 Income Portfolio
The BlackRock Government Income Trust

       ---------------------
       TAX-EXEMPT BOND FUNDS
       ---------------------

Prudential California Municipal Fund
 California Series
 California Income Series
Prudential Municipal Bond Fund
 High Yield Series
 Insured Series
 Intermediate Series
Prudential Municipal Series Fund
 Florida Series
 Hawaii Income Series
 Maryland Series
 Massachusetts Series
 Michigan Series
 New Jersey Series
 New York Series
 North Carolina Series
 Ohio Series
 Pennsylvania Series
Prudential National Municipals Fund, Inc.

             ------------
             GLOBAL FUNDS
             ------------

Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
 Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.

Prudential Natural Resources Fund, Inc.

Prudential Pacific Growth Fund, Inc.

Prudential World Fund, Inc.
 Global Series
 International Stock Series

Global Utility Fund, Inc.
The Global Government Plus Fund, Inc.
The Global Total Return Fund, Inc.

          ------------
          EQUITY FUNDS
          ------------

Prudential Allocation Fund
 Balanced Portfolio
 Strategy Portfolio

Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
 Prudential Active Balanced Fund
 Prudential Stock Index Fund
Prudential Emerging Growth Fund, Inc.

Prudential Equity Fund, Inc.
Prudential Equity Income Fund

Prudential Jennison Series Fund, Inc.
 Prudential Jennison Growth Fund
 Prudential Jennison Growth & Income Fund

Prudential Multi-Sector Fund, Inc.

Prudential Small Companies Fund, Inc.

Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
 Nicholas-Applegate Growth Equity Fund

         MONEY MARKET FUNDS

o  Taxable Money Market Funds
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.
o  Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
 California Money Market Series
Prudential Municipal Series Fund
 Connecticut Money Market Series
 Massachusetts Money Market Series
 New Jersey Money Market Series
 New York Money Market Series

o  Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund

o  Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
 Institutional Money Market Series

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

                                      A-1
<PAGE>

No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.

                                TABLE OF CONTENTS
                                                    Page


FUND HIGHLIGHTS                                       2
 What are the Fund's Risk Factors and
  Special Characteristics                             2
FUND EXPENSES                                         4
FINANCIAL HIGHLIGHTS                                  5
CALCULATION OF YIELD                                  6
HOW THE FUND INVESTS                                  6
 Investment Objective and Policies                    6
 Other Investments and Policies                       8
 Investment Restrictions                              9
HOW THE FUND IS MANAGED                               9
 Manager                                              9
 Distributor                                          9
 Portfolio Transactions                              11
 Custodian and Transfer and
  Dividend Disbursing Agent                          11
HOW THE FUND VALUES ITS SHARES                       11
TAXES, DIVIDENDS AND DISTRIBUTIONS                   12
GENERAL INFORMATION                                  13
 Description of Common Stock                         13
 Additional Information                              13
SHAREHOLDER GUIDE                                    13
 How to Buy Shares of the Fund                       13
 How to Sell Your Shares                             17
 How to Exchange Your Shares                         19
 Shareholder Services                                20
THE PRUDENTIAL MUTUAL FUND FAMILY                   A-1
- --------------------------------------------------------------------------------


103A                                            444030H
- --------------------------------------------------------------------------------

                Class A: CUSIP No. 74436P-10-3

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

                                   PRUDENTIAL

                                 TAX-FREE MONEY

                                   FUND, INC.

PROSPECTUS

FEBRUARY 28, 1997

[Logo] Prudential Investments
<PAGE>

                      PRUDENTIAL TAX-FREE MONEY FUND, INC.


                       Statement of Additional Information
                             dated February 28, 1997

     Prudential Tax-Free Money Fund, Inc. (the Fund), is an open-end diversified
management investment company whose investment objective is to attain for
investors the highest level of current income that is exempt from federal income
taxes, consistent with liquidity and the preservation of capital. The Fund will
invest in short-term tax-exempt debt securities of state and local governments.
There can be no assurance that the Fund's investment objective will be achieved.
See "Investment Objective and Policies." The Fund'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. It is
intended to be read in conjunction with the Fund's Prospectus, dated February
28, 1997. A copy of the Prospectus may be obtained from the Fund at the address
or telephone number noted above.


                                TABLE OF CONTENTS

                                                                Cross-reference
                                                                  to page in
                                                         Page      Prospectus
                                                         ----   ---------------
General Information ....................................  B-2         13
Investment Objective and Policies ......................  B-2          6
Investment Restrictions ................................  B-5          9
Directors and Officers .................................  B-6          9
Manager ................................................  B-9          9
Distributor ............................................  B-11         9
Portfolio Transactions and Brokerage ...................  B-12        11
Purchase and Redemption of Fund Shares .................  B-13        13
Shareholder Investment Account .........................  B-14        20
Net Asset Value ........................................  B-17        11
Calculation of Yield ...................................  B-17         6
Taxes, Dividends and Distributions .....................  B-18        12
Custodian and Transfer and Dividend Disbursing Agent ...  B-19        11
Financial Statements ...................................  B-20        --
Report of Independent Accountants ......................  B-28        --
Appendix A--Description of Tax-Exempt Security Ratings .  A-1         --
Appendix B--Information Relating to The Prudential......  B-1         --

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

103B                                                                   4440076
<PAGE>

                               GENERAL INFORMATION

     At a meeting of shareholders held on May 2, 1995, the Board of Directors
approved an amendment to the Fund's Articles of Incorporation to change the
Fund's name from Prudential-Bache Tax-Free Money Fund, Inc. to Prudential
Tax-Free Money Fund, Inc.

                        INVESTMENT OBJECTIVE AND POLICIES

     The investment objective of the Fund is to attain for investors the highest
level of current income that is exempt from federal income taxes, consistent
with liquidity and the preservation of capital. The Fund will seek to achieve
its investment objective by investing in a diversified portfolio of short-term
debt obligations issued by states, territories and possessions of the United
States and by the District of Columbia, and their political subdivisions, duly
constituted authorities and corporations, the interest from which is
wholly-exempt from federal income tax in the opinion of bond counsel to the
issuer. Such securities are generally known as "Municipal Bonds" or "Municipal
Notes." Interest on certain Municipal Bonds and Municipal Notes may be a
preference item for purposes of the federal alternative minimum tax (AMT Paper).
The Fund may invest up to 20% of its net assets in AMT Paper. See "Taxes,
Dividends & Distributions." There can be no assurance that the Fund's investment
objective will be achieved.

     The investment policies of the Fund other than its investment objective and
those described under "Investment Restrictions" may be changed by the Board of
Directors of the Fund without shareholder approval.

MUNICIPAL BONDS AND NOTES

     MUNICIPAL BONDS. Municipal Bonds are generally issued to obtain funds for
various public purposes, including construction of public facilities such as
airports, bridges, highways, housing, hospitals, mass transportation, schools,
streets and water and sewer works. They may also be issued to refund outstanding
obligations, to meet general operating expenses or to obtain funds to lend to
other public institutions and facilities. Municipal Bonds also include bonds
issued by or on behalf of public authorities in order to obtain funds with which
to provide privately operated housing facilities, sports facilities, pollution
control facilities, convention or trade show facilities, industrial, port or
parking facilities and facilities for water supply, gas, electricity or waste
disposal. These bonds typically are revenue bonds and generally do not carry the
pledge of the issuer's credit.

     Municipal Bonds may be general obligation or revenue bonds. General
obligation bonds are secured by the issuer's pledge of its faith, credit and
taxing power for the payment of principal and interest. Revenue bonds are
payable from the revenues derived from a particular facility or class of
facilities or from the proceeds of a special excise tax or other specific
revenue source but not from the general taxing power.

     MUNICIPAL NOTES. Municipal Notes are short-term obligations generally with
a maturity, at the time of issuance, ranging from six months to three years. The
principal types of Municipal Notes include tax anticipation notes, bond
anticipation notes and revenue anticipation notes. Municipal Notes sold in
anticipation of collection of taxes, a bond sale, or receipt of other revenues,
are usually general obligations of the issuing municipality or agency.

     Municipal Notes also include tax-exempt or municipal commercial paper,
which is likely to be issued to meet seasonal working capital needs of a
municipality or interim construction financing and to be paid from general
revenues of the municipality or refinanced with long-term debt. In most cases
municipal commercial paper is backed by letters of credit, lending agreements,
note repurchase agreements or other credit facility agreements offered by banks
or other institutions.

     The Fund will treat an investment in a municipal security refunded with
escrowed U.S. Government securities as U.S. Government securities for purposes
of the Investment Company Act's diversification requirements provided: (i) the
escrowed securities are "government securities" as defined in the Investment
Company Act, (ii) the escrowed securities are irrevocably pledged only to
payment of debt service on the refunded securities, except to the extent there
are amounts in excess of funds necessary for such debt service, (iii) principal
and interest on the escrowed securities will be sufficient to satisfy all
scheduled principal, interest and any premiums on the refunded securities and a
verification report prepared by a party acceptable to a nationally recognized
statistical rating agency, or counsel to the holders of the refunded securities,
so verifies, (iv) the escrow agreement provides that the issuer of the refunded
securities grants and assigns to the escrow agent, for the equal and ratable
benefit of the holders of the refunded securities, an express first lien on,
pledge of and perfected security interest in the escrowed securities and the
interest income thereon, (v) the escrow agent had no lien of any type with
respect to the escrowed securities for payment of its fees or expenses except to
the extent there are excess securities, as described in (ii) above. The Fund
will not, however, invest more than 25% of its total assets in pre-refunded
bonds of the same municipal issuer.


                                      B-2
<PAGE>

     VARIABLE RATE AND FLOATING RATE SECURITIES. The interest rates payable on
certain Municipal Bonds and Municipal Notes are not fixed and may fluctuate
based upon changes in market rates. Municipal Bonds and Notes of this type are
called "variable rate" or "floating rate" obligations. The interest rate payable
on a variable rate obligation is adjusted at predesignated intervals and that
payable on a floating rate obligation is adjusted whenever there is a change in
the market rate of interest on which the interest rate payable is based. Other
features of these obligations typically include the right of the Fund to demand,
in some cases, at specified intervals of less than one year or, in other cases,
upon not less than seven days' notice, prepayment of the principal amount of the
obligation prior to its stated maturity (a demand feature). In addition, the
issuer may have the right, at similar intervals or upon similar notice, to
prepay the principal amount prior to maturity. The principal benefit of variable
and floating rate obligations is that the interest rate adjustment minimizes
changes in the market value of the obligations. As a result, the purchase of
such obligations should enhance the ability of the Fund to maintain a stable net
asset value per share (see Net Asset Value) and to sell an obligation prior to
maturity at a price approximating the full principal amount of the obligation.
The payment of principal and interest by issuers of certain Municipal Bonds and
Notes purchased by the Fund may be guaranteed by letters of credit or other
credit facilities offered by banks or other financial institutions. Such
guarantees will be considered in determining whether a Municipal Bond or Note
meets the Fund's investment quality requirements.

     PUTS. The Fund may purchase Municipal Bonds or Notes together with the
right to resell the Municipal Bonds or Notes to the seller at an agreed-upon
price or yield within a specified period prior to the maturity date of the Bonds
or Notes. Such a right to resell is commonly known as a "put" or "tender
option," and the aggregate price which the Fund pays for Municipal Bonds or
Notes with puts or tender options is higher than the price which otherwise would
be paid for the Bonds or Notes. Consistent with the Fund's investment objective
and subject to the supervision of the Board of Directors, the primary purpose of
this practice is to permit the Fund to be fully invested in securities the
interest on which is exempt from federal income taxes while preserving the
necessary liquidity to purchase securities on a when-issued basis, to meet
unusually large redemptions and to purchase, at a later date, securities other
than those subject to the put. The Fund's policy is generally to exercise the
puts or tender options on their expiration date when the exercise price is
higher than the current market price for related Municipal Bonds or Notes. Puts
or tender options may be exercised prior to the expiration date in order to fund
obligations to purchase other securities or to meet redemption requests. These
obligations may arise during periods in which proceeds from sales of Fund shares
and from recent sales of portfolio securities are insufficient to meet such
obligations or when the funds available are otherwise allocated for investment.
In addition, puts may be exercised prior to the expiration date in the event the
Fund's investment adviser revises its evaluation of the creditworthiness of the
issuer of the underlying security. In determining whether to exercise puts or
tender options prior to their expiration date and in selecting which puts or
tender options to exercise in such circumstances, the investment adviser
considers, among other things, the amount of cash available to the Fund, the
expiration dates of the available puts or tender options, any future commitments
for securities purchases, the yield, quality and maturity dates of the
underlying securities, alternative investment opportunities and the desirability
of retaining the underlying securities in the Fund's portfolio.

     The Fund values Municipal Bonds and Notes which are subject to puts or
tender options at amortized cost; no value is assigned to the put or tender
option. The cost of the put or tender option is carried as an unrealized loss
from the time of purchase until it is exercised or expires. The value of the put
or tender option is dependent on the ability of the put writer to meet its
obligation of repurchase, and it is the Fund's general policy to enter into put
or tender option transactions only with such brokers, dealers or other financial
institutions which present minimal credit risks. There is a credit risk
associated with the purchase of puts or tender options in that the broker,
dealer or financial institution might default on its obligation to repurchase an
underlying security. The Fund has received a ruling of the Internal Revenue
Service to the effect that the Fund will be considered the owner of the
Municipal Bonds or Notes subject to the puts or tender options so that the
interest on the Bonds or Notes will be tax-exempt income to the Fund.

     WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Municipal Bonds and Notes are
frequently offered on a when-issued or delayed delivery basis. When so offered,
the price and coupon rate are fixed at the time the commitment to purchase is
made, but delivery and payment for the when-issued securities take place at a
later date. Normally, the settlement date occurs within one week of the purchase
of Municipal Notes and within one month of the purchase of Municipal Bonds. The
purchase price and the interest rate payable on the securities are fixed on the
transaction date. The securities so purchased are subject to market fluctuation
and, during the period between purchase and settlement, no interest accrues to
the purchaser. While securities may be sold prior to the settlement date, the
Fund intends to purchase such securities with the purpose of actually acquiring
them unless a sale would be desirable for investment reasons. At the time the
Fund makes the commitment to purchase a Municipal Bond or Note on a when-issued
or delayed delivery basis, it will record the transaction and reflect the value
of the Bond or Note in determining its net asset value. The Fund will also
establish a segregated account with its custodian bank in which it will maintain
cash and other Municipal Bonds or Notes equal in value to commitments for


                                      B-3
<PAGE>

when-issued or delayed delivery securities. Such Municipal Bonds or Notes will
either mature on or about the settlement date or will be Bonds or Notes as to
which the Fund has a put exercisable on or about the settlement date. If the
Fund chooses to dispose of the right to acquire a when-issued or delayed
delivery security prior to the settlement date, it could, as with the
disposition of any other portfolio obligation, incur a gain or loss due to
market fluctuation. The Fund does not believe that its net asset value or net
investment income will be adversely affected by its purchase of Municipal Bonds
or Notes on a when-issued or delayed delivery basis. The Fund may invest in
when-issued or delayed delivery securities without other limitation.


SECURITIES OF OTHER INVESTMENT COMPANIES

     The Fund may invest up to 10% of its total assets in shares of other
investment companies. Generally, the Fund does not intend to invest more than 5%
of its total assets in such securities. To the extent the Fund does invest in
securities of other investment companies, shareholders may be subject to
duplicate management and advisory fees.


ILLIQUID SECURITIES

     The Fund may not hold more than 10% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market or legal or contractual restrictions on resale.
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 and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or 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. (NASD).

     Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act, commercial paper and municipal lease obligations for which there
is a readily available market will not be deemed to be illiquid. The investment
adviser will monitor the liquidity of such restricted securities subject to the
supervision of the Board of Directors. In reaching liquidity decisions, the
investment adviser will consider, inter alia, 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 (e.g., the
time needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer). With respect to municipal lease obligations, the
investment adviser will also consider: (1) the willingness of the municipality
to continue, annually or biannually, to appropriate funds for payment of the
lease; (2) the general credit quality of the municipality and the essentiality
to the municipality of the property covered by the lease; (3) in the case of
unrated municipal lease obligations, an analysis of factors similar to that
performed by nationally recognized statistical rating organizations in
evaluating the credit quality of a municipal lease obligation, including (i)
whether the lease can be cancelled; (ii) if applicable, 


                                      B-4
<PAGE>

what assurance there is that the assets represented by the lease can be sold;
(iii) the strength of the lessee's general credit (e.g., its debt,
administrative, economic and financial characteristics); (iv) the likelihood
that the municipality will discontinue appropriating funding for the leased
property because the property is no longer deemed essential to the operations of
the municipality (e.g., the potential for an event of nonappropriation); (v) the
legal recourse in the event of failure to appropriate; and (4) any other factors
unique to municipal lease obligations as determined by the investment adviser.
With respect to commercial paper that is issued in reliance on Section 4(2) of
the Securities Act (1) it 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 (2) it must not be "traded flat" (i.e., without accrued interest) or in
default as to principal or interest. Repurchase agreements subject to demand are
deemed to have a maturity equal to the notice period.

     OTHER MATTERS. For purposes of diversification under the Investment Company
Act of 1940, as amended (the Investment Company Act), the identification of the
issuer of Municipal Bonds or Notes depends on the terms and conditions of the
obligation. If the assets and revenues of an agency, authority, instrumentality
or other political subdivision are separate from those of the government
creating the subdivision, and the obligation is backed only by the assets and
revenues of the subdivision, such subdivision would be regarded as the sole
issuer. Similarly, in the case of a private activity revenue bond or pollution
control revenue bond, if the bond is backed only by the assets and revenues of
the nongovernmental user, the nongovernmental user would be regarded as the sole
issuer. If in either case the creating government or another entity guarantees
an obligation, the guarantee would be regarded as a separate security and
treated as an issue of such government or entity.

PORTFOLIO TURNOVER

     Portfolio turnover rate is defined as the lesser of the amount of the
securities purchased or securities sold, excluding all securities whose maturity
or expiration date at the time of acquisition was one year or less, divided by
the average monthly value of such securities owned during the year. Because the
Fund's portfolio will contain only securities maturing within one year, the Fund
does not expect to have a turnover rate as so defined. However, because of the
short-term nature of the Fund's portfolio, it expects to have substantial
amounts of portfolio transactions. The Fund does not expect to pay any material
amounts of brokerage commissions, but transaction costs exist in the form of
spreads between bid and asked price.

                             INVESTMENT RESTRICTIONS

     The following investment 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 Fund's voting shares represented
at a meeting at which more than 50% of the outstanding shares are present in
person or represented by proxy, or (2) more than 50% of the Fund's outstanding
voting shares.

     The Fund may not:

     (1) Invest more than 5% of the market or other fair value of its total
assets in the securities of any one issuer (other than obligations of, or
guaranteed by, the United States Government, its agencies or instrumentalities
or secured by such obligations). See "Municipal Bonds and Notes" under
"Investment Objective and Policies" for definition of an issuer.

     (2) Make short sales of securities.

     (3) Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of purchases and sales of portfolio securities.

     (4) Borrow money, except that the Fund may borrow for temporary purposes in
amounts not exceeding 5% of the market or other fair value (taken at the lower
of cost or current value) of its total assets (not including the amount
borrowed). Any such borrowings will be made only from banks. Secured temporary
borrowings may take the form of reverse repurchase agreements, pursuant to which
the Fund would sell portfolio securities for cash and simultaneously agree to
repurchase them at a specified date for the same amount of cash plus an interest
component. The Fund would maintain, in a segregated account with its custodian,
liquid assets equal in value to the amount owed.

     (5) Pledge its assets or assign or otherwise encumber them in excess of 10%
of its assets (taken at market or other fair value at the time of pledging) and
then only to secure borrowings effected within the limitations set forth in
restriction (4).

     (6) Engage in the underwriting of securities.


                                      B-5
<PAGE>

     (7) Purchase or sell real estate mortgage loans, although it may purchase
Municipal Bonds or Notes secured by interests in real estate.


     (8) Make loans of money or securities, except through the purchase of debt
obligations or repurchase agreements.

     (9) Purchase securities of other investment companies, except in the open
market involving only customary brokerage commissions and as a result of which
not more than 10% of its total assets (determined at the time of investment)
would be invested in such securities or except in connection with a merger,
consolidation, reorganization or acquisition of assets.


     (10) Invest for the purpose of exercising control or management of another
company.

     (11) Purchase industrial revenue bonds if, as a result of such purchase,
more than 5% of total Fund assets would be invested in industrial revenue bonds
where payment of principal and interest are the responsibility of companies with
less than three years of operating history.

     Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the 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 the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.

                             DIRECTORS AND OFFICERS


                           POSITION WITH           PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1)       FUND               DURING PAST FIVE YEARS
- ------------------------   -------------          ----------------------
Edward D. Beach (72)      Director      President and Director of BMC Fund,
                                         Inc., a closed-end investment company;
                                         prior thereto, Vice Chairman of
                                         Broyhill Furniture Industries, Inc.;
                                         Certified Public Accountant; Secretary
                                         and Treasurer of Broyhill Family
                                         Foundation, Inc.; Chairman of the Board
                                         of Trustees of Mars Hill College;
                                         President, Treasurer and Director of
                                         First Financial Fund, Inc. and The High
                                         Yield Plus Fund, Inc.; Director of The
                                         High Yield Income Fund, Inc.

Stephen C. Eyre (74)      Director      Executive Director of The John A.
                                         Hartford Foundation, Inc. (charitable
                                         foundation) (since May 1985); Director
                                         of Faircom, Inc.; Trustee Emeritus of
                                         Pace University.

Delayne Dedrick Gold (58) Director      Marketing and Management Consultant;
                                         Director of The High Yield Income Fund,
                                         Inc.

* Robert F. Gunia (50)    Director      Comptroller, Prudential Investments
                                         (since May 1996); Senior Vice President
                                         (since March 1987) of Prudential
                                         Securities Incorporated (Prudential
                                         Securities); Executive Vice President
                                         and Treasurer (since December 1996) of
                                         PMF, and formerly 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 PMF; Management,
                                         Inc., Vice President and Director of
                                         The Asia Pacific Fund, Inc. (since May
                                         1989); Director of The High Yield 
                                         Income Fund, Inc.

Don G. Hoff (61)          Director      Chairman and Chief Executive Officer of
                                         Intertec, Inc. (investments) since
                                         1980; Chairman and CEO of EHS, Inc.;
                                         Director of Innovative Capital
                                         Management, Inc. and The Greater China
                                         Fund, Inc.; Chairman and Director of
                                         The Asia Pacific Fund, Inc.

Robert E. LaBlanc (62)    Director      President of Robert E. LaBlanc
                                         Associates, Inc. (telecommunications)
                                         since 1981; formerly General Partner at
                                         Salomon Brothers; formerly
                                         Vice-Chairman of Continental Telecom;
                                         Director of Storage Technology
                                         Corporation, Titan Corporation and
                                         Tribune Company; Trustee of Manhattan
                                         College.



                                  B-6
<PAGE>


                           Position with           Principal Occupations
Name, Address and Age(1)       Fund               During Past Five Years
- ------------------------   -------------          ----------------------
* Mendel A. Melzer,      Director       Chief Investment Officer (since         
  CFA, ChFC, CLU (35)                    September 1996); formerly Chief        
  751 Broad Street                       Financial Officer (November            
  Newark, NJ 07102                       1995-October 1996) of Prudential       
                                         Investments; formerly Senior Vice      
                                         President and Chief Financial Officer  
                                         of Prudential Preferred Financial      
                                         Services (April 1993- November 1995);  
                                         Managing Director of Prudential        
                                         Investment Advisors (April 1991-April  
                                         1993); Senior Vice President of        
                                         Prudential Capital Corporation (July   
                                         1989-April 1991); Chairman and Director
                                         of Prudential Series Fund, Inc.;       
                                         Director of The High Yield Income Fund,
                                         Inc.                                   

* Richard A. Redeker (53) President     Employee of Prudential Investments;
  751 Broad Street         and Director  formerly President, Chief Executive
  Newark, NJ 07102                       Officer and Director (October
                                         1993-September 1996) of PMF; formerly
                                         Executive Vice President, Director and
                                         Member of the Operating Committee
                                         (1993-September 1996), Prudential
                                         Securities; formerly Director (October
                                         1993-September 1996) of Prudential
                                         Securities Group, Inc.; formerly Senior
                                         Executive Vice President and Director
                                         of Kemper Financial Services, Inc.
                                         (September 1978- September 1993);
                                         President and Director of The High
                                         Yield Income Fund, Inc.

Robin B. Smith (57)    Director         Chairman (since August 1996) and Chief
                                         Executive Officer (since January 1988),
                                         formerly President (September
                                         1981-August 1996) of Publishers
                                         Clearing House; Director of BellSouth
                                         Corporation, The Omnicom Group, Inc.,
                                         Texaco Inc., Springs Industries Inc.
                                         and Kmart Corporation.

Stephen Stoneburn (53) Director         President and Chief Executive Officer of
                                         Quadrant Media Corp. (a publishing
                                         company) (since June 1996); formerly
                                         President of Argus Integrated Media,
                                         Inc. (June 1995-June 1996); formerly
                                         Senior Vice President and Managing
                                         Director, Cowles Business Media
                                         (January 1993-1995); prior thereto,
                                         Senior Vice President (January
                                         1991-1992) and Publishing Vice
                                         President (May 1989- December 1990) of
                                         Gralla Publications (a division of
                                         United Newspapers, U.K.); formerly
                                         Senior Vice President of Fairchild
                                         Publications, Inc.

Nancy H. Teeters (66)  Director         Economist; formerly Vice President and
                                         Chief Economist (March 1986-June 1990)
                                         of International Business Machines
                                         Corporation; formerly Member of the
                                         Board of Governors of the Horace
                                         Rackham School of Graduate Studies of
                                         the University of Michigan; Director of
                                         Inland Steel Corporation (since July
                                         1991) and First Financial Fund, Inc.

Susan C. Cote (42)     Vice President   Executive Vice President and Chief
                                         Financial Officer of PMF (since May
                                         1996); formerly Chief Operating Officer
                                         & Managing Director of Prudential 
                                         Investments (March 1995-May 1996) and
                                         formerly Senior Vice President-Fund
                                         Administration (September 1983-February
                                         1995) of PMF.

Thomas A. Early (42)   Vice President  Executive Vice President, Secretary and
                                        General Counsel of PMF (since Decembe
                                        1996); Senior Vice President and
                                        Assistant Secretary of Prudential
                                        Mutual Fund Services LLC (since December
                                        1996); Vice President and General
                                        Counsel of Prudential Retirement 
                                        Services (since March 1994); formerly 
                                        Associate General Counsel and Chief
                                        Financial Services Officer, Frank
                                        Russell Company (1988-1994).
                                       
S. Jane Rose (51)      Secretary        Senior Vice President and Senior Counsel
                                         of PMF; Senior Vice President and
                                         Senior Counsel of Prudential Securities
                                         (since July 1992); formerly  Vice
                                         President and Associate General Counsel
                                         of Prudential Securities.



                                  B-7
<PAGE>


                           Position with           Principal Occupations
Name, Address and Age(1)       Fund               During Past Five Years
- ------------------------   -------------          ----------------------
Ellyn C. Vogin (36)      Assistant      Vice President and Associate General
                         Secretary       Counsel of Prudential Securities
                                         and PMF (since March 1995); prior
                                         thereto, associated with the law
                                         firm of Fulbright & Jaworski L.L.P.

Grace C. Torres (38)     Treasurer and  First Vice President (since March 1994)
                         Principal       of PMF; First Vice President (since
                         Financial and   March 1994) of Prudential Securities;
                         Accounting      Vice President of Bankers Trust (July
                         Officer         1989-March 1994).

Stephen M. Ungerman (44) Assistant      First Vice President (since February
                         Treasurer       1993) of PMF; Tax Director of
                                         Prudential Investments and the Private
                                         Asset Group of The Prudential Insurance
                                         Company of America (since March 1996);
                                         Assistant Treasurer of PMFS (since
                                         December 1996); prior thereto, Senior
                                         Tax Manager of Price Waterhouse LLP
                                         (1981-January 1993).

- ----------
(1)  Unless otherwise noted the address for each of the above persons is c/o
     Prudential Mutual Fund Management LLC, Gateway Center Three, 100 Mulberry
     Street, Newark, New Jersey 07102-4077.

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

     Directors and officers of the Fund are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Securities.

     The officers conduct and supervise the daily business operations of the
Fund, while the Directors, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.

     The Board of Directors has adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors who were age 68
or older as of December 31, 1993. Under this phase-in provision, Messrs. Beach
and Eyre are scheduled to retire on December 31, 1999 and 1998, respectively.

     Pursuant to 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 Directors of the Fund who are affiliated persons of the Manager.

     The Fund pays each of its Directors who is not an affiliated person of PMF 
or The Prudential Investment Corporation, doing business as Prudential          
Investments (PI), annual compensation of $2,000, plus expenses.                 
                                                                                
     Directors may receive their Director's fee pursuant to a deferred fee      
agreement with the Fund. Under the terms of the agreement, the Fund accrues     
daily the amount of such Director's fee 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 an exemptive    
order of the Securities and Exchange Commission (SEC), at the daily rate of     
return of the Fund (the Fund rate). Payment of the interest so accrued is also  
deferred and accruals become payable at the option of the Director. The Fund's  
obligation to make payments of deferred Directors' fees, together with interest 
thereon, is a general obligation of the Fund.                                   
                                                                                
     The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended December 31, 1996 to the Directors who are not
affiliated with the Manager and the aggregate compensation paid to such
Directors for service on the Fund's Board and that of all other funds managed by
PMF (Fund Complex) for the calendar year ended December 31, 1996. In October
1996, shareholders elected a new Board of Directors. Below is listed all
Directors who have served the Fund during its most recent fiscal year, as well
as the new Directors who took office after the shareholder meeting in October.



                                      B-8
<PAGE>

                               COMPENSATION TABLE


<TABLE>
<CAPTION>
                                                                                                            Total
                                                                       Pension or                        Compensation
                                                                       Retirement                          From Fund
                                                       Aggregate    Benefits Accrued  Estimated Annual      and Fund
                                                     Compensation    As Part of Fund    Benefits Upon     Complex Paid
                 Name and Position                     From Fund        Expenses         Retirement     to Directors (2)
                 -----------------                   ------------   ----------------  ----------------  ----------------
<S>                                                      <C>               <C>              <C>         <C>
Edward D. Beach--Director ......................           --              None             N/A         $166,000(21/39)*
Stephen C. Eyre--Director ......................           --              None             N/A         $ 34,250( 4/ 5)*
Delayne D. Gold--Director ......................         $ 6,000           None             N/A         $175,308(21/42)*
Robert F. Gunia (1)--Director ..................           --              None             N/A               --
Arthur Hauspurg--Former Director ...............         $ 6,000           None             N/A         $ 38,250( 5/ 7)*
Don G. Hoff--Director ..........................           --              None             N/A         $ 50,042( 5/ 7)*
Robert F. LaBlanc--Director ....................           --              None             N/A         $ 34,542( 4/ 6)*
Mendel A. Melzer (1)--Director .................           --              None             N/A               --
Stephen P. Munn--Former Director ...............         $ 6,000           None             N/A         $ 49,125( 6/ 8)*
Richard A. Redeker (1)--Director ...............           --              None             N/A               --
Robin B. Smith--Director .......................           --              None             N/A         $109,294(11/20)*
Stephen Stoneburn--Director ....................           --              None             N/A         $ 30,375( 4/ 6)*
Nancy H. Teeters--Director .....................           --              None             N/A         $103,583(11/28)*
Louis A. Weil, III--Former Director ............         $ 6,000           None             N/A         $ 24,375( 2/ 2)*
</TABLE>


- ---------- 
*    Indicates number of funds/portfolios in Fund Complex (including the Fund)
     to which aggregate compensation relates.


(1)  Robert F. Gunia, Mendel A. Melzer and Richard A. Redeker, who are
     interested Directors, do not receive compensation from the Fund or any fund
     in the Fund Complex.

(2)  Total compensation from all of the funds in the Fund Complex for the
     calendar year ended December 31, 1996, including amounts deferred at the
     election of Directors under the funds' Deferred Compensation Plans.
     Including accrued interest, total deferred compensation amounted to
     $109,294 for Robin B. Smith. Currently, Ms. Smith has agreed to defer some
     of her fees at the T-Bill rate and other fees at the Fund rate.

     As of February 14, 1997, the Directors and officers of the Fund, as a
group, owned less than 1% of the outstanding common stock of the Fund.

     As of February 14, 1997, Prudential Securities was the record holder for
other beneficial owners of 337,615,773 shares (or approximately 94%) of the
outstanding common stock of the Fund. In the event of any meetings of
shareholders, Prudential Securities will forward, or cause the forwarding of,
proxy materials to the beneficial owners for which it is the record holder.


                                     MANAGER


     The manager of the Fund is Prudential Mutual Fund Management LLC, Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077 (PMF or the
Manager). PMF serves as manager of the other investment companies that, together
with the Fund, comprise the "Prudential Mutual Funds." See "How the Fund is
Managed" in the Prospectus. As of January 31, 1997, PMF managed and/or
administered open-end and closed-end management investment companies with assets
of approximately $55.8 billion. According to the Investment Company Institute,
as of December 31, 1996, the Prudential Mutual Funds were the 15th largest
family of mutual funds in the United States.

     PMF is a subsidiary of Prudential Securities Incorporated and The
Prudential Insurance Company of America (Prudential). Prudential Mutual Fund
Services LLC (PMFS or the Transfer Agent) is a wholly-owned subsidiary of PMF
and serves as the transfer 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 Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Board of Directors 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. In 


                                      B-9
<PAGE>

connection therewith, PMF is obligated to keep certain books and records of the
Fund. PMF also administers the Fund's corporate 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, PMFS, the Fund's
transfer and dividend disbursing agent. The management services of PMF for the
Fund are not exclusive under the terms of the Management Agreement and PMF is
free to, and does, render management services to others.


     For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the Fund's average daily net assets up to $750
million, .425 of 1% of the Fund's average daily net assets between $750 million
and a $1.5 billion and .375 of 1% in excess of $1.5 billion. The fee is computed
daily and payable monthly. The Management Agreement provides that, in the event
the expenses of the Fund (including the fees payable to PMF, but excluding
interest, taxes, brokerage commissions, distribution fees and litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business) for any fiscal year exceed the lowest
applicable annual expense limitation established and enforced pursuant to the
statutes or regulations of any jurisdiction in which shares of the Fund are then
qualified for offer and sale, the compensation due to PMF will be reduced by the
amount of such excess. Reductions in excess of the total compensation payable to
PMF will be paid by PMF to the Fund. No such reductions were required during the
fiscal year ended December 31, 1996. Currently, the Fund believes that there are
no such expense limitations.


     In connection with its management of the corporate affairs of the Fund, PMF
bears the following expenses:

     (a) the salaries and expenses of its and the Fund's personnel except the
fees and expenses of Directors who are not affiliated persons of PMF or the
Fund's investment adviser;

     (b) all expenses incurred by PMF 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 PI pursuant to a subadvisory
agreement between PMF 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 Directors who are not affiliated with the Manager or
the Fund's investment adviser, (c) the fees and certain expenses of the Fund's
Custodian and Transfer and Dividend Disbursing 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 the Fund's legal counsel and independent
accountants, (e) brokerage commissions and any issue or transfer taxes
chargeable to the Fund in connection with its securities and futures
transactions, (f) all taxes and corporate fees payable by the Fund to
governmental agencies, (g) the fees of any trade association of which the Fund
is a member, (h) the cost of stock certificates representing and/or
non-negotiable share deposit receipts evidencing 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
SEC and registering the Fund and qualifying its shares under state securities
laws, including the preparation and printing of the Fund's registration
statements and prospectuses for such purposes, (k) allocable communications
expenses with respect to investor services and all expenses of shareholders' and
Directors' meetings and of preparing, printing and mailing reports, proxy
statements and prospectuses to 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 PMF will not be liable for any error
of judgment or any loss suffered by the Fund in connection with the matters to
which the Management Agreement relates, except a loss resulting from willful
misfeasance, 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
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.

     For the fiscal years ended December 31, 1996, 1995 and 1994, the Fund paid
management fees to PMF (or its predecessors) of $2,016,151, $2,351,851 and
$3,222,405, respectively.

     PMF has entered into the Subadvisory Agreement with PI (the Subadviser), a
wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
PIC 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. PMF continues to have 



                                      B-10
<PAGE>


responsibility for all investment advisory services pursuant to the Management
Agreement and supervises PI's performance of such services. PI is reimbursed
by PMF for the reasonable costs and expenses incurred by the PI in furnishing
services to PMF.

     The Subadviser maintains a credit unit which provides credit analysis and
research on tax-exempt fixed-income securities. The portfolio manager consults
routinely with the credit unit in managing the Fund's portfolio. The credit unit
reviews on an ongoing basis issuers of tax-exempt fixed-income obligations,
including prospective purchases and portfolio holdings of the Fund. Credit
analysts have broad access to research and financial reports, data retrieval
services and industry analysts. They review financial and operating statements
supplied by state and local governments and other issuers of municipal
securities to evaluate revenue projections and the financial soundness of
municipal issuers. They study the impact of economic and political developments
on state and local governments, evaluate industry sectors and meet periodically
with public officials and other representatives of state and local governments
and other tax-exempt issuers to discuss such matters as budget projections, debt
policy, the strength of the regional economy and, in the case of revenue bonds,
the demand for facilities. They also make site inspections to review specific
projects and to evaluate the progress of construction or the operation of a
facility.

     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 Fund, PMF or PI 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.


                                   DISTRIBUTOR

     Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, acts as the distributor of the shares
of the Fund. Prior to January 2, 1996, Prudential Mutual Fund Distributors, Inc.
(PMFD), One Seaport Plaza, New York, New York 10292, acted as distributor of the
shares of the Fund.

Distribution and Service Plan


     Under the Fund's Distribution and Service Plan (the Plan) and the
Distribution Agreement with Prudential Securities, the Fund pays Prudential
Securities, as distributor, a distribution fee of .125 of 1% of the average
daily net assets of the Fund, computed daily and payable monthly. See "How the
Fund is Managed--Distributor" in the Prospectus.

     For the fiscal year ended December 31, 1996, PMFD and PSI incurred
distribution expenses in the aggregate of $504,038 all of which was recovered
through the distribution fee paid by the Fund to PMFD and PSI. It is estimated
that all this amount was spent on commission credits to Prudential Securities
and Prusec for payments of account servicing fees to financial advisers and an
allocation of overhead and other branch office distribution-related expenses.
The term "overhead and other branch office distribution-related expenses"
represents (a) the expenses of operating Prudential Securities' and 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) travel 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 Plan continues in effect from year to year, provided that each such
continuance is approved at least annually by a vote of the Board of Directors,
including a majority vote of the directors who are not interested persons of the
Fund and who have no direct or indirect financial interest in the operation of
the Plan (as defined in the Investment Company Act), cast in person at a meeting
called for the purpose of voting on such continuance. The Plan may be terminated
at any time, without penalty, by the vote of a majority of the Directors who are
not interested persons or by the vote of the holders of a majority of the
outstanding voting securities of the Fund on not more than 60 days' written
notice to any other party to the Plan. The Plan may not be amended to increase
materially the amounts to be spent by the Fund thereunder without shareholder
approval, and all material amendments are required to be approved by the Board
of Directors in the manner described above. The Plan will automatically
terminate in the event of its assignment.


     Pursuant to the Plan, the Directors will be provided with, and will review,
at least quarterly, a written report of the distribution expenses incurred on
behalf of the Fund by Prudential Securities. The report will include an
itemization of the distribution expenses and the purpose of such expenditures.
In addition, as long as the Plan remains in effect, the selection and nomination
of directors who are not interested persons of the Fund shall be committed to
the Directors who are not interested persons of the Fund or a committee thereof.


                                      B-11
<PAGE>


     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 Securities Act of 1933, as amended.


     On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including the
establishment of a Compliance Committee of its Board of Directors. Pursuant to
the terms of the SEC settlement, PSI established a settlement fund in the amount
of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.

     On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.


     On October 27, 1994, Prudential Securities Group, Inc. and PSI entered into
agreements with the United States Attorney deferring prosecution (provided PSI
complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director serves as an independent "ombudsman" whom PSI employees
can call anonymously with complaints about ethics and compliance. PSI reports
any allegations or instances of criminal conduct and material improprieties to
the new director. The new director submits compliance reports which identify all
such allegations or instances of criminal conduct and material improprieties
every three months and will continue to do so for a three-year period.


                      PORTFOLIO TRANSACTIONS AND BROKERAGE

     The Manager is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect transactions and the
negotiation of brokerage commissions, if any. The term "Manager" as used in this
section includes the "Subadviser." Fixed-income securities 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. The Fund will
not deal with Prudential Securities in any transaction in which Prudential
Securities acts as principal. Purchases and sales of securities on a securities
exchange, while infrequent, will be effected through brokers who charge a
commission for their services. Orders may be directed to any broker including,
to the extent and in the manner permitted by applicable law, Prudential
Securities.

     In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, which provides the most favorable
total cost or proceeds reasonably attainable in the circumstances. 


                                      B-12
<PAGE>


     While the Manager generally seeks reasonably competitive spreads or
commissions, the Fund will not necessarily be paying the lowest spread or
commission available. Within the framework of the policy of obtaining most
favorable price and efficient execution, the Manager will consider research and
investment services provided by brokers or dealers who effect or are parties to
portfolio transactions of the Fund, the Manager or the Manager's other clients.
Such research and investment services are those which brokerage houses
customarily provide to institutional investors and include statistical and
economic data and research reports on particular municipalities and industries.
Such services are used by the Manager in connection with all of its investment
activities, and some of such services obtained in connection with the execution
of transactions for the Fund may be used in managing other investment accounts.
Conversely, brokers furnishing such services may be selected for the execution
of transactions of such other accounts, whose aggregate assets are far larger
than the Fund, and the services furnished by such brokers may be used by the
Manager in providing investment management for the Fund. Commission rates are
established pursuant to negotiations with the broker based on the quality and
quantity of execution services provided by the broker in light of generally
prevailing rates. The Manager is authorized to pay higher commissions on
brokerage transactions for the Fund to brokers other than Prudential Securities
in order to secure the research and investment services described above, subject
to the primary consideration of obtaining the most favorable price and efficient
execution in the circumstances and subject to review by the Fund's Board of
Directors from time to time as to the extent and continuation of this practice.
The allocation of orders among brokers and the commission rates paid are
reviewed periodically.

     Subject to the above considerations, the Manager may use Prudential
Securities as a broker for the Fund. In order for Prudential Securities to
effect any portfolio transactions for the Fund, the commissions, fees or other
remuneration received by Prudential Securities must be reasonable and fair
compared to the commissions, fees or other remuneration paid to other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable period of time.
This standard would allow Prudential Securities to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker in
a commensurate arm's length transaction. Furthermore, the Board of Directors of
the Fund, including a majority of the Directors who are not "interested"
directors, has adopted procedures which are reasonably designed to provide that
any commissions, fees or other remuneration paid to Prudential Securities are
consistent with the foregoing standard. Brokerage transactions with Prudential
Securities are also subject to such fiduciary standards as may be imposed upon
Prudential Securities by applicable law.

     The Fund paid no brokerage commissions for the years ended December 31,
1996, 1995 and 1994.


                     PURCHASE AND REDEMPTION OF FUND SHARES

How To Purchase Shares


     The Fund's shares are sold, without a sales charge, on a continuing basis
on each business day at their net asset value next determined (see "How the Fund
Values its Shares" in the Prospectus) after a purchase order becomes effective.
Shares of the Fund may be purchased by investors directly through Prudential
Mutual Fund Services LLC (PMFS), or by Prudential Securities clients through an
account at Prudential Securities. Shares may also be purchased through Pruco
Securities Corporation (Prusec). Prudential Securities clients who hold Fund
shares through Prudential Securities may benefit through administrative
conveniences afforded them as Prudential Securities clients, but may be subject
to certain additional restrictions imposed by Prudential Securities. See
"Shareholder Guide--How to Buy Shares of the Fund" in the Prospectus.


How To Redeem Shares

     The Fund effects redemption orders received by PMFS by 4:30 P.M., New York
time, on each business day at the net asset value determined as of 4:30 P.M.,
New York time. General information concerning redemption of shares is found in
the Prospectus under "Shareholder Guide--How to Sell Your Shares."

     Investors who purchase shares directly from PMFS may use the following
procedures:

     Check Redemption. At a shareholder's request, State Street Bank and Trust
Company (State Street) will establish a personal checking account for the
shareholder. Checks drawn on this account can be made payable to the order of
any person in any amount greater than $500. The payee of the check may cash or
deposit it like any other check drawn on a bank. When such check is presented to
State Street for payment, State Street presents the check to the Fund as
authority to redeem a sufficient number of shares in the shareholder's account
to cover the amount of the check. This enables the shareholder to continue
earning daily dividends until the check is cleared. Canceled checks are returned
to the shareholder by State Street.

     Shareholders are subject to State Street's rules and regulations governing
such checking accounts, including the right of State Street not to honor checks
in amounts exceeding the value of the shareholder's account at the time the
check is presented for payment.


                                      B-13
<PAGE>

     Shares for which certificates have been issued are not available for
redemption to cover checks. A shareholder should be certain that adequate shares
for which certificates have not been issued are in his or her account to cover
the amount of the check. Also, shares purchased by check are not available to
cover checks until 15 calendar days after receipt of the purchase check by PMFS.
See "Shareholder Guide--How to Buy Shares of the Fund" in the Prospectus. If
insufficient shares are in the account, or if the purchase was made by check
within 10 calendar days, the check will be returned marked "insufficient funds."
Since the dollar value of an account is constantly changing, it is not possible
for a shareholder to determine in advance the total value of his or her account
so as to write a check for the redemption of the entire account.

     PMFS reserves the right to impose a service charge to establish a checking
account and to order checks. State Street, the Fund and PMFS have reserved the
right to modify this checking account privilege or to place a charge for each
check presented for payment for any individual account or for all accounts in
the future.


     The Fund, PMFS or State Street may terminate Check Redemption at any time
upon 30 days' notice to participating shareholders. To receive further
information, contact Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, NJ 08906-5010.


     Expedited Redemption. In order to use Expedited Redemption, a shareholder
may so designate at the time the initial application form is filed, or at a
later date. Once the Expedited Redemption authorization form has been completed,
the signature(s) on the authorization form guaranteed as set forth below and the
Form returned to PMFS, requests for redemption may be made by telegraph, letter
or telephone. The proceeds of redeemed shares in the amount of $1,000 or more
are transmitted by wire to the shareholder's account at a domestic commercial
bank which is a member of the Federal Reserve System. Proceeds of less than
$1,000 are forwarded by check to the shareholder's designated bank account. The
minimum amount that may be redeemed by Expedited Redemption is $200, except
that, if an account for which Expedited Redemption is requested has a net asset
value of less than $200, the entire account may be redeemed. The Fund does not
forward redemption proceeds with respect to shares purchased by check until 15
calendar days after receipt of the purchase check by PMFS.

     To request Expedited Redemption by telephone, a shareholder should call
PMFS at 800-225-1852. Calls must be received by PMFS before 4:30 P.M., New York
time in order for the redemption to be effective on that day. Requests by letter
should be addressed to Prudential Mutual Funds Services, Inc., at the address
set forth above.

     Each shareholder's signature on the authorization form must be guaranteed
by: (a) a commercial bank which is a member of the Federal Deposit Insurance
Corporation; (b) a trust company; or (c) a member firm of a domestic securities
exchange. Guarantees must be signed by an authorized signatory of the bank,
trust company or member firm, and "Signature Guaranteed" should appear with the
signature. Signature guarantees by savings banks, savings and loan associations
and notaries will not be accepted. PMFS may request further documentation from
corporations, executors, administrators, trustees or guardians. In order to
change the name of the commercial bank or account designated to receive
redemption proceeds, it is necessary to execute a new Expedited Redemption
authorization form and submit it to PMFS at the address set forth above. See
"Shareholder Guide--How to Sell Your Shares" in the Prospectus for additional
information on Expedited Redemption.

     Regular Redemption. Shareholders may redeem their shares by sending to
PMFS, at the address set forth above, a written request, accompanied by duly
endorsed share certificates, if issued. All written requests for redemption, and
any share certificates, must be endorsed by the shareholder with signature
guaranteed, as described above under "Expedited Redemption." PMFS may request
further documentation from corporations, executors, administrators, trustees or
guardians. Redemption proceeds are sent to a shareholder's address by check.

                         SHAREHOLDER INVESTMENT ACCOUNT

     Upon the initial purchase of shares of the Fund, a Shareholder Investment
Account is established for each investor under which a record of the share 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. Whenever a transaction
takes place in the Shareholder Investment Account, the shareholder will be
mailed a statement showing the transaction and the status of such account.

Procedure for Multiple Accounts

     Special procedures have been designed for banks and other institutions that
wish to open multiple accounts. An institution may open a single master account
by filing an Application and Order Form with PMFS, signed by personnel


                                      B-14
<PAGE>

authorized to act for the institution. Individual sub-accounts may be opened at
the time the master account is opened by listing them, or they may be added at a
later date by written advice or by filing forms supplied by PMFS. Procedures are
available to identify sub-accounts by name and number within the master account
name. The investment minimums described in the Prospectus under "Shareholder
Guide--How to Buy Shares of the Fund" are applicable to the aggregate amounts
invested by a group, and not to the amount credited to each sub-account.

     PMFS provides each institution with a written confirmation for each
transaction in a sub-account and, to each institution on a monthly basis, a
statement which sets forth for each master account its share balance and income
earned for the month. In addition, each institution receives a statement for
each individual account setting forth transactions in the sub-account for the
year-to-date, the total number of shares owned as of the dividend payment date
and the dividends paid for the current month, as well as for the year-to-date.
For further information on the sub-accounting system and procedures, contact
PMFS.

Automatic Reinvestment of Dividends and Distributions

     For the convenience of investors, all dividends and distributions are
automatically invested in full and fractional shares of the Fund at net asset
value. An investor may direct the Transfer Agent in writing not less than 5 full
business days prior to the payable date to have subsequent dividends and/or
distributions sent in cash rather than invested. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payment will be made directly to the dealer. Any
shareholder who receives a cash payment representing a dividend or distribution
may reinvest such dividend or distribution at net asset value by returning the
check or the proceeds to the Transfer Agent within 30 days after the payment
date. Such investment will be made at the net asset value per share next
determined after receipt of the check or proceeds by the Transfer Agent.

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 such funds. Class A shares of such other Prudential
Mutual Funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of relative net asset value next determined after receipt of
an order in proper form plus the applicable sales charge. An exchange will be
treated as a redemption and purchase for tax purposes. Shares may be exchanged
for shares of another fund only if shares of such fund may legally be sold under
applicable state laws.

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

     Shareholders of the Fund may exchange their shares for Class A shares of
the Prudential Mutual Funds and shares of the money market funds specified
below.

     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
           (Connecticut Money Market Series)
           (Massachusetts Money Market Series)
           (New Jersey Money Market Series)
           (New York Money Market Series)

          Prudential MoneyMart Assets, Inc.

          Prudential Tax-Free Money Fund, Inc.


     Shareholders of the Fund may not exchange their shares for Class B or Class
C shares of the Prudential Mutual Funds or shares of Prudential Special Money
Market Fund, Inc., a money market fund, except that shares acquired prior to
January 22, 1990 subject to a contingent deferred sales charge may be exchanged
for Class B shares.


                                      B-15
<PAGE>

     Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on sixty days' notice, and any fund, including the Fund,
or the Distributor, has the right to reject any exchange application relating to
such fund's shares.

Automatic Savings Accumulation Plan (ASAP)

     Under ASAP, an investor may arrange to have a fixed amount automatically
invested in Fund shares each month by authorizing his or her bank account or
Prudential Securities Account (not including a 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 ASAP participants.

     Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.

     In addition, an investor may direct the Transfer Agent to redeem on a
monthly or other periodic basis specified amounts (minimum of $100) of shares of
the Fund and invest the proceeds of such redemptions in shares of any Prudential
Mutual Fund pursuant to the "Exchange Privilege" or the "Class B and Class C
Purchase Privilege."

Systematic Withdrawal Plan

     A withdrawal plan is available for shareholders having shares of the Fund
held through Prudential Securities or the Transfer Agent. Such withdrawal plan
provides for monthly or quarterly checks in any amount, except as provided
below, up to the value of the shares in the shareholder's account.

     In the case of shares held through the Transfer Agent, (i) a $10,000
minimum account value applies, (ii) withdrawals may not be for less than $100
and (iii) the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment
Account--Automatic Reinvestment of Dividends and Distributions" above.

     Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The 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 periodic 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. 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.

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 promoted collectively. Typically, these programs are
created with an investment theme, e.g., 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
the program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, individuals should consult their Prudential
Securities Financial Advisor or Prudential/Pruco Securities Representative
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.


                                      B-16
<PAGE>

                                 NET ASSET VALUE

     The net asset value per share is the net worth of the Fund (assets,
including securities at value, minus liabilities) divided by the number of
shares outstanding.

     The Fund uses the amortized cost method to determine the value of its
portfolio securities. The amortized cost method involves valuing a security at
its cost and amortizing any discount or premium over the period until maturity.
The method does not take into account unrealized capital gains and losses which
may result from the effect of fluctuating interest rates on the market value of
the security.

     The Fund maintains a dollar-weighted average portfolio maturity of 90 days
or less, purchases instruments having remaining maturities of thirteen months or
less and invests only in securities determined by the investment adviser under
the supervision of the Board of Directors to present minimal credit risks and to
be of "eligible quality" in accordance with regulations of the SEC. The Board
has established procedures designed to stabilize, to the extent reasonably
possible, the Fund's price per share as computed for the purpose of sales and
redemptions at $1.00. Such procedures include review of the Fund's portfolio
holdings by the Board of Directors, at such intervals as it may deem
appropriate, to determine whether the Fund's net asset value calculated by using
available market quotations deviates from $1.00 per share based on amortized
cost. The extent of any deviation will be examined by the Board of Directors. If
such deviation exceeds 1/2 of 1%, the Board will promptly consider what action,
if any, will be initiated. In the event the Board determines that a deviation
exists which may result in material dilution or other unfair results to
investors or existing shareholders, the Board will take such corrective action
which it regards as necessary and appropriate, including the sale of portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity, the withholding of dividends, redemptions of shares
in kind, or the use of available market quotations to establish a net asset
value per share.

     The Fund will calculate its net asset value at 4:30 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 series shares have been received or days
on which changes in the value of the Fund's securities do not affect net asset
value.

                              CALCULATION OF YIELD

     The Fund will prepare a current quotation of yield from time to time. The
yield quoted will be the simple annualized yield for an identified seven
calendar day period. The yield calculation will be based on a hypothetical
account having a balance of exactly one share at the beginning of the seven-day
period. The base period return will be the change in the value of the
hypothetical account during the seven-day period, including dividends declared
on any shares purchased with dividends on the share but excluding any capital
changes. The yield will vary as interest rates and other conditions affecting
money market instruments change. Yield also depends on the quality, length of
maturity and type of instruments in the Fund's portfolio, and its operating
expenses. The Fund may also prepare an effective annual yield computed by
compounding the unannualized seven-day period return as follows: by adding 1 to
the unannualized 7-day period return, raising the sum to a power equal to 366
divided by 7, and subtracting 1 from the result.

     Effective yield = [(base period return + 1)^(366/7)]-1

     The Fund may also calculate the tax equivalent yield over a 7-day period.
The tax equivalent yield will be determined by first computing the current yield
as discussed above. The Fund will then determine what portion of the yield is
attributable to securities, the income of which is exempt for federal income tax
purposes. This portion of the yield will then be divided by one minus 39.6% (the
assumed maximum tax rate for individual taxpayers not subject to Alternative
Minimum Tax) and then added to the portion of the yield that is attributable to
other securities.

     Comparative performance information may be used from time to time in
advertising or marketing the Fund's shares, including data from Lipper
Analytical Services, Inc., Donoghue's Money Fund Report, The Bank Rate Monitor,
other industry publications, business periodicals, rating services and market
indices.

     The Fund's yield fluctuates, and an annualized yield quotation is not a
representation by the Fund as to what an investment in the Fund will actually
yield for any given period. Yield for the Fund will vary based on a number of
factors including changes in market conditions, the level of interest rates and
the level of Fund income and expenses.


                                      B-17
<PAGE>

                       TAXES, DIVIDENDS AND DISTRIBUTIONS

     The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended ("Internal Revenue Code"). Qualification as a regulated
investment company under the Internal Revenue Code requires, among other things,
that the Fund (a) derive at least 90% of its annual gross income (without offset
for losses from the sale or other disposition of securities or foreign
currencies) from interest, payments with respect to securities loans, dividends
and gains from the sale or other disposition of securities or foreign currencies
and certain financial futures, options and forward contracts thereon; (b) derive
less than 30% of its annual gross income from gains from the sale or other
disposition of securities or options thereon held for less than three months;
and (c) diversify its holdings so that, at the end of each quarter of the
taxable year, (i) at least 50% of the market 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 than 5% of the Fund's assets
and 10% of the outstanding voting securities of such issuer, and (ii) 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). In addition, in order not to be
subject to federal income tax on amounts distributed to shareholders, the Fund
must distribute to its shareholders as ordinary dividends at least 90% of its
net investment income and net short-term capital gains in excess of its net
long-term capital losses earned in each year.

     The Fund generally will be subject to a nondeductible excise tax of 4% to
the extent that it does not meet certain minimum distribution requirements as of
the end of each calendar year. The Fund intends to make timely distributions of
the Fund's income in compliance with these requirements. As a result, it is
anticipated that the Fund will not be subject to the excise tax.

     The Fund intends to invest its assets so that dividends payable from net
tax-exempt interest income will qualify as exempt-interest dividends and be
excluded from a shareholder's gross income under the Internal Revenue Code. In
order for its dividends to qualify as tax-exempt income, (i) at least 50 percent
of the value of the total assets of the Fund at the close of each quarter of its
taxable year must consist of certain tax-exempt government obligations and (ii)
the Fund must designate the dividend as an exempt-interest dividend in a written
notice mailed to shareholders not later than sixty days after the end of its
taxable year.

     Exempt-interest dividends attributable to interest on certain "private
activity" tax-exempt obligations are a preference item for purposes of computing
the alternative minimum tax for both individuals and corporations. Moreover,
interest on tax-exempt obligations, whether or not private activity bonds, that
are held by corporations will be taken into account (i) in determining the
alternative minimum tax imposed on 75% of the excess of adjusted current
earnings over alternative minimum taxable income, (ii) in calculating the
environmental tax equal to 0.12 percent of a corporation's modified alternative
minimum taxable income in excess of $2 million, and (iii) in determining the
foreign branch profits tax imposed on the effectively connected earnings and
profits (with adjustments) of United States branches of foreign corporations.

     Interest on indebtedness incurred or continued by a shareholder, whether a
corporation or an individual, to purchase or carry shares of the Fund is not
deductible. Shareholders who have held their shares for six months or less may
be subject to a disallowance of losses from the sale or exchange of those shares
to the extent of any exempt-interest dividends received by the shareholder with
respect to the shares and if such losses are not disallowed, they will be
treated as long-term capital losses to the extent of any distribution of
long-term capital gains received by the shareholder with respect to such shares.
Moreover, any loss realized on a sale or exchange will be disallowed to the
extent the shares disposed of are replaced within a period of 61 days beginning
30 days before and ending 30 days after the disposition, such as pursuant to a
dividend reinvestment in shares. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss. Entities or persons
who are "substantial users" (or related persons) of facilities financed by
private activity bonds should consult their tax advisers before purchasing
shares of the Fund.


     Under tax proposals in the Clinton Administration's budget plan, a portion
of the interest expense of a corporation that receives tax-exempt interest
income (including exempt-interest dividends paid by a regulated investment
company) would be nondeductible. The fraction of the corporation's interest
expense that is nondeductible would generally equal the ratio of the average
adjusted bases of the corporation's tax-exempt obligations (including shares of
any regulated investment company from which the corporation receives
exempt-interest dividends) to the average adjusted bases of all the assets used
in a trade or business of the corporation. It is uncertain whether, when or in
what form this proposal or similar legislation will be enacted into law.


     The Fund does not expect to realize long-term capital gains or losses.



                                      B-18
<PAGE>


     The Fund may be subject to state or local tax in certain other states where
it is deemed to be doing business. Further, in those states which have income
tax laws, the tax treatment of the Fund and of shareholders of the Fund with
respect to distributions by the Fund may differ from federal tax treatment. The
exemption of interest income for federal income tax purposes may not result in
similar exemption under the laws of a particular state or local taxing
authority. The Fund will report annually to its shareholders the percentage and
source, on a state-by-state basis, of interest income on Municipal Bonds
received by the Fund during the preceding year and on other aspects of the
federal income tax status of distributions made by the Fund.


              CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT,
                           AND INDEPENDENT ACCOUNTANTS

     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 agreements with the Fund.


     Prudential Mutual Fund Services LLC, Raritan Plaza One, Edison, New Jersey
08837 (PMFS), serves as the Transfer and Dividend Disbursing Agent of the Fund.
It is a wholly-owned subsidiary of PMF. 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, payment of dividends and distributions, and related functions. For
these services, PMFS receives an annual fee per shareholder account, a new
account set-up fee for each manually-established account and a monthly inactive
zero balance account fee per shareholder account. PMFS is also reimbursed for
its out-of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communications expenses and other costs. For the fiscal year
ended December 31, 1996, the Fund incurred fees of $321,000 for the services of
PMFS.


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


                                      B-19

<PAGE>
Portfolio of Investments            PRUDENTIAL TAX-FREE
as of December 31, 1996             MONEY FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                  Moody's                               Principal
                                                                   Rating      Interest     Maturity     Amount         Value
Description(a)                                                  (Unaudited)      Rate         Date        (000)        (Note 1)
<S>                                                             <C>            <C>         <C>          <C>          <C>
- ------------------------------------------------------------------------------------------------------------------------------
Arizona--4.5%
Maricopa Cnty. Ind. Dev. Auth., Grand Canyon Univ., F.R.W.D.    SP-1+*            4.20%       1/02/97    $ 9,700     $  9,700,000
Pima Cnty. Ind. Dev. Auth. Rev., F.R.W.D., Ser. 96A             A-1+*             4.35        1/02/97      5,445        5,445,000
                                                                                                                     ------------
                                                                                                                       15,145,000
- ------------------------------------------------------------------------------------------------------------------------------
Arkansas--1.2%
Arkansas Dev. Fin. Auth., Single Family Mtg. Rev., Ser. 96I     A-1+*             3.80       11/05/97      4,000        4,000,000
- ------------------------------------------------------------------------------------------------------------------------------
California--1.5%
California Higher Ed. Ln. Auth., Student Ln. Rev.,
   A.N.N.M.T.,
   Ser. 87A                                                     VMIG1             3.95        7/01/97      5,000        5,000,000
- ------------------------------------------------------------------------------------------------------------------------------
Colorado--13.6%
Arapahoe Cnty. Multifamily Rev., Var. Ref. Hsg., Stratford
   Sta. Proj., F.R.D.D., Ser. 94                                A-2*              5.55        1/02/97      1,055        1,055,000
Colorado Hlth. Facs. Auth. Rev., Frasier Meadows Manor,
   F.R.W.D.,
   Ser. 94                                                      NR                4.20        1/02/97      7,200        7,200,000
Colorado Hsg. Fin. Auth.,
   Eagle Trust, F.R.W.D.S., Ser. 94C                            A-1*              4.26        1/02/97     12,000       12,000,000
   Var. Ref. Multifamily Hsg. Rev., Central Park, Ser. 96C      A-1*              4.30        1/02/97     13,960       13,960,000
   Var. Ref. Multifamily Hsg. Rev., Huntington-J, Ser. 96J      A-1*              4.30        1/02/97      6,560        6,560,000
Denver City & Cnty. of Airport Sys. Rev., F.R.W.D., Ser. 91B    VMIG1             4.35        1/02/97      4,600        4,600,000
                                                                                                                     ------------
                                                                                                                       45,375,000
- ------------------------------------------------------------------------------------------------------------------------------
Connecticut--0.3%
Connecticut Hsg. Fin. Auth., Hsg. Mtg. Fin. Pgm., A.N.N.M.T.,
   Ser. A-4                                                     VMIG1             3.65        4/10/97      1,100        1,099,880
- ------------------------------------------------------------------------------------------------------------------------------
District Of Columbia--3.4%
District of Columbia Rev., F.R.D.D., Ser. 92A-2                 VMIG1             5.00        1/02/97      6,900        6,900,000
Metro Washington Airport-PVC Rev. Notes                         A-1*              3.65        5/20/97      4,500        4,500,000
                                                                                                                     ------------
                                                                                                                       11,400,000
- ------------------------------------------------------------------------------------------------------------------------------
Florida--1.3%
Pasco Cnty. School Bd. Cert., M.T.H.O.T., Ser. 96               VMIG1             4.10        1/09/97      4,370        4,370,000
- ------------------------------------------------------------------------------------------------------------------------------
Georgia--8.9%
Burke County Dev. Auth. Poll., Adj. Oglethorpe Pwr. Corp.,
   Ser. 96                                                      NR                3.87 5      5/15/97     10,000       10,000,000
Cobb Cnty. Dev. Auth., Inst. of Nuclear Pwr., F.R.W.D., Ser.
   92                                                           NR                3.20        1/08/97      6,430        6,430,000
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements.


                                      B-20





<PAGE>
Portfolio of Investments            PRUDENTIAL TAX-FREE
as of December 31, 1996             MONEY FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                  Moody's                               Principal
                                                                   Rating      Interest     Maturity     Amount         Value
Description(a)                                                  (Unaudited)      Rate         Date        (000)        (Note 1)
<S>                                                             <C>            <C>         <C>          <C>          <C>
- ------------------------------------------------------------------------------------------------------------------------------
Georgia (cont'd.)
Fulton Cnty. Dev. Auth.,
   Atlanta Jewish Federation, Ser. 96                           VMIG1             4.15%       1/02/97    $ 5,345     $  5,345,000
   Siemen's Energy Inc., F.R.W.D., Ser. 94                      VMIG1             4.20        1/02/97      7,750        7,750,000
                                                                                                                     ------------
                                                                                                                       29,525,000
- ------------------------------------------------------------------------------------------------------------------------------
Illinois--9.0%
Illinois Dev. Fin. Auth., Orleans Proj. Multifamily Hsg.
   Rev., F.R.W.D., Ser.92                                       A-1*              4.50        1/03/97     10,120       10,120,000
Illinois Hlth. Fac. Auth.,
   Evanston Hsp., S.E.M.M.T., Ser. 95                           VMIG1             3.75        5/15/97      7,000        7,000,000
   Evanston Hsp., S.E.M.M.T., Ser. 92                           VMIG1             3.70       12/01/97      8,000        8,000,000
Vlg. of Schaumburg, Multifamily Hsg. Rev., Windsong Apts.
   Proj., F.R.W.D., Ser. 95                                     A-2*              4.61        1/02/97      5,000        5,000,000
                                                                                                                     ------------
                                                                                                                       30,120,000
- ------------------------------------------------------------------------------------------------------------------------------
Indiana--2.1%
Gary Indiana, Miller Partnership, LP, F.R.W.D., Ser. 96A        VMIG1             4.35        1/02/97      7,000        7,000,000
- ------------------------------------------------------------------------------------------------------------------------------
Iowa--2.1%
Iowa School Corps Warrants Certificates, Ser. 95-6A             MIG1              4.75        6/27/97      7,000        7,024,243
- ------------------------------------------------------------------------------------------------------------------------------
Kentucky--4.5%
Louisville & Jefferson Cnty., Swr. & Drainage Proj.,
   F.R.W.D., Ser. 96A                                           A-1*              4.30        1/02/97     15,000       15,000,000
- ------------------------------------------------------------------------------------------------------------------------------
Maryland--2.2%
Maryland Econ. Dev. Corp., F.R.W.D., Ser.95                     A-1*              4.30        1/02/97      7,500        7,500,000
- ------------------------------------------------------------------------------------------------------------------------------
Michigan--2.2%
Grand Rapids Econ. Dev. Corp., Ind. Dev. Rev. Rfdg.,
   F.R.W.D., Ser. 92                                            NR                4.15        1/02/97      7,500        7,500,000
- ------------------------------------------------------------------------------------------------------------------------------
Nevada--1.0%
Washoe Cnty. Wtr. Fac. Rev., Sierra Pacific Co. Proj., Ser.
   90                                                           P-1               5.05        1/02/97      3,300        3,300,000
- ------------------------------------------------------------------------------------------------------------------------------
New Jersey--1.7%
Jersey City, School Promissory Notes                            SP-1+*            3.75        3/07/97      5,600        5,604,340
</TABLE>
- --------------------------------------------------------------------------------
- -----                                        See Notes to Financial Statements.



                                      B-21


<PAGE>
Portfolio of Investments            PRUDENTIAL TAX-FREE
as of December 31, 1996             MONEY FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                  Moody's                               Principal
                                                                   Rating      Interest     Maturity     Amount         Value
Description(a)                                                  (Unaudited)      Rate         Date        (000)        (Note 1)
<S>                                                             <C>            <C>         <C>          <C>          <C>
- ------------------------------------------------------------------------------------------------------------------------------
New York--2.7%
New York City, Gen. Oblig., T.E.C.P., Ser. 94H-2                VMIG1             3.65%       1/10/97    $ 9,000     $  9,000,000
- ------------------------------------------------------------------------------------------------------------------------------
North Carolina--2.2%
Rockingham Cnty. Ind. Facs., Phillip Morris Rev.                P-1               4.15        1/02/97      7,200        7,200,000
- ------------------------------------------------------------------------------------------------------------------------------
Ohio--6.4%
Eastlake Indl. Dev. Rev., Adj. Astro Model Dev. Corp. Ser. 96   NR                4.30        1/02/97      6,100        6,100,000
Ohio Hsg. Agcy. Res. Mtg. Rev., A.N.N.M.T., Ser. 96A-3          A-1+*             3.40        3/03/97      8,000        8,000,000
Ohio Wtr. Dev. Auth., Ohio Edison Co., A.N.N.O.T., Ser. 88A     VMIG1             3.80        5/01/97      7,280        7,280,000
                                                                                                                     ------------
                                                                                                                       21,380,000
- ------------------------------------------------------------------------------------------------------------------------------
Oklahoma--2.6%
Tulsa Pkg. Auth. Rev., Williams Ctr. Proj., S.E.M.M.T., Ser.
   87A                                                          VMIG1             3.70        5/15/97      8,625        8,625,000
- ------------------------------------------------------------------------------------------------------------------------------
Pennsylvania--3.0%
Emmaus Gen. Auth. Rev., F.R.W.D., Ser. 96                       A-1+*             5.00        1/02/97      5,000        5,000,000
Northeastern Pa. Hosp. & Ed. Auth. Rev., Allhealth Pooled
   Fing
   Prog., Ser. 96                                               VMIG1             4.30        1/02/97      5,100        5,100,000
                                                                                                                     ------------
                                                                                                                       10,100,000
- ------------------------------------------------------------------------------------------------------------------------------
South Carolina--1.4%
York Cnty. Nat'l. Rural Coop. Fin. Corp., S.E.M.O.T., North
   Carolina Electric, Ser. 84N-4                                VMIG1             3.80        3/15/97      4,500        4,500,000
- ------------------------------------------------------------------------------------------------------------------------------
South Dakota--1.4%
South Dakota Hsg. Dev. Auth., F.R.W.D.S., Ser. PT-85            A-1+*             4.30        1/02/97      4,800        4,800,000
- ------------------------------------------------------------------------------------------------------------------------------
Tennessee--2.8%
Memphis Hlth. Edl. & Hsg., Wesley Hsg. Corp., F.R.W.D., Ser.
   89                                                           VMIG1             4.50        1/03/97      9,320        9,320,000
- ------------------------------------------------------------------------------------------------------------------------------
Texas--10.8%
Bexar Cnty. Hsg. Fin. Corp., Var. Ref. Windridge Apts. Proj.,
   F.R.W.D., Ser. 95                                            A-1+*             4.25        1/02/97      6,270        6,270,000
Boatmens St. Louis Grantor Trust, Port Arthur TX IDC, CTF
   Part.,
   Ser. 96A                                                     A-1*              4.35        1/02/97      3,670        3,670,000
Greater Texas Student Ln. Rev., A.N.N.M.T., Ser. 96A            VMIG1             3.35        3/01/97      5,000        5,000,000
Gulf Coast Ind. Dev. Auth., Citgo Petroleum., F.R.D.D., Ser.
   95,                                                          VMIG1             5.10        1/02/97        400          400,000
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements.


                                      B-22



<PAGE>
Portfolio of Investments            PRUDENTIAL TAX-FREE
as of December 31, 1996             MONEY FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                  Moody's                               Principal
                                                                   Rating      Interest     Maturity     Amount         Value
Description(a)                                                  (Unaudited)      Rate         Date        (000)        (Note 1)
<S>                                                             <C>            <C>         <C>          <C>          <C>
- ------------------------------------------------------------------------------------------------------------------------------
Texas (cont'd.)
Houston, Gen. Oblig., T.E.C.P., Ser. A                          P-1               3.50%       4/30/97    $ 8,600     $  8,600,000
Southeast Texas Hsg. Fin. Corp., Banc One Tax Exempt Trust,
   F.R.W.D.S., Ser. 91D                                         Aaa*              4.38        1/02/97      4,200        4,200,000
Texas Tax & Rev. Anticipation Notes, Ser. 96                    MIG1              4.75        8/29/97      8,000        8,039,455
                                                                                                                     ------------
                                                                                                                       36,179,455
- ------------------------------------------------------------------------------------------------------------------------------
Utah--1.2%
Intermountain Pwr. Agy., Utah Pwr. Supply Rev., A.N.N.O.T.,
   Ser. 85E                                                     VMIG1             3.93        6/16/97      4,000        4,000,000
- ------------------------------------------------------------------------------------------------------------------------------
Virginia--2.0%
Chesterfield Cnty. Ind. Dev. Auth., Philip Morris Proj.,
   F.R.W.D.                                                     P-1               4.15        1/02/97      6,500        6,500,000
- ------------------------------------------------------------------------------------------------------------------------------
Wisconsin--4.7%
Middleton Cross Plains Area Sch., T.R.A.N., Ser. 95             NR                4.25        8/27/97      5,500        5,508,943
Whitewater Ind. Dev. Rev., Trek Bicycle, F.R.W.D., Ser. 95      NR                4.30        1/02/97      4,270        4,270,000
Wisconsin Hsg. Econ. Dev. Auth., Eagle Tax Exempt Trust, Ser.
   96(d)                                                        NR                3.65        3/01/97      5,800        5,800,000
                                                                                                                     ------------
                                                                                                                       15,578,943
                                                                                                                     ------------
Total Investments--100.7%
(cost $336,146,861(c))                                                                                                336,146,861
Other assets in excess of liabilities--(0.7)%                                                                          (2,338,173)
                                                                                                                     ------------
Net Assets--100%                                                                                                     $333,808,688
                                                                                                                     ------------
                                                                                                                     ------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
    A.N.N.M.T.--Annual Mandatory Tender(b)
    A.N.N.O.T.--Annual Optional Tender(b)
    F.R.D.D.--Floating Rate (Daily) Demand Note(b)
    F.R.W.D.--Floating Rate (Weekly) Demand Note(b)
    F.R.W.D.S.--Floating Rate (Weekly) Demand Note Synthetic(b)
    M.T.H.O.T.--Monthly Optional Tender(b)
    S.E.M.M.T.--Semi-Annual Mandatory Tender(b)
    S.E.M.O.T.--Semi-Monthly Optional Tender Offer(b)
    T.E.C.P.--Tax-Exempt Commercial Paper
    T.R.A.N.--Tax & Revenue Anticipation Note
(b) For purposes of amortized cost valuation, the maturity date of these
    instruments is considered to be the later of the next date on which the
    security can be redeemed at par, or the next date on which the rate of
    interest is adjusted.
(c) The cost of securities for federal income tax purposes is substantially the
    same as for financial reporting purposes.
(d) Indicates illiquid security.
 * Standard & Poor's Rating.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description
of Moody's and Standard and Poor's ratings.
- --------------------------------------------------------------------------------
- -----                                        See Notes to Financial Statements.



                                      B-23


<PAGE>
Statement of Assets and Liabilities        PRUDENTIAL TAX-FREE MONEY FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets                                                                                                        December 31, 1996
                                                                                                              -----------------
<S>                                                                                                            <C>
Investments, at amortized cost which approximates market value..........................................        $ 336,146,861
Cash....................................................................................................               60,080
Receivable for Fund shares sold.........................................................................            7,706,620
Interest receivable.....................................................................................            2,285,107
Receivable for investments sold.........................................................................              480,000
Deferred expenses.......................................................................................               10,626
                                                                                                              -----------------
   Total assets.........................................................................................          346,689,294
                                                                                                              -----------------
Liabilities
Payable for investments purchased.......................................................................            6,430,564
Payable for Fund shares reacquired......................................................................            5,816,340
Dividends payable.......................................................................................              242,658
Accrued expenses........................................................................................              211,994
Management fee payable..................................................................................              157,547
Distribution fee payable................................................................................               21,503
                                                                                                              -----------------
   Total liabilities....................................................................................           12,880,606
                                                                                                              -----------------
Net Assets..............................................................................................        $ 333,808,688
                                                                                                              -----------------
                                                                                                              -----------------
Net assets were comprised of:
   Common Stock, $.01 par value.........................................................................        $   3,339,030
   Paid-in capital in excess of par.....................................................................          330,469,658
                                                                                                              -----------------
Net assets, December 31, 1996...........................................................................        $ 333,808,688
                                                                                                              -----------------
                                                                                                              -----------------
Net asset value, offering price and redemption price
   per share ($333,808,688 / 333,902,966)...............................................................                  $1.00
                                                                                                              -----------------
                                                                                                              -----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 


                                      B-24
                   


<PAGE>

PRUDENTIAL TAX-FREE MONEY FUND, INC.
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
<S>                                         <C>
                                               Year Ended
Net Investment Income                       December 31, 1996
Income
   Interest..............................      $14,644,737
                                            -----------------
Expenses
   Management fee........................        2,016,151
   Distribution fee......................          504,038
   Transfer agent's fees and expenses....          323,000
   Reports to shareholders...............          161,000
   Registration fees.....................           94,400
   Audit fee and expenses................           47,000
   Legal fees and expenses...............           35,000
   Custodian's fees and expenses.........           31,000
   Directors' fees and expenses..........           24,200
   Insurance expenses....................            3,500
   Miscellaneous.........................            1,028
                                            -----------------
   Total expenses........................        3,240,317
   Less: custodian fee credit............          (15,287)
                                            -----------------
   Net expenses..........................        3,225,030
                                            -----------------
Net investment income....................       11,419,707
                                            -----------------
Realized Gain on Investments
Net realized gain on investment
   transactions..........................            2,446
                                            -----------------
Net Increase in Net Assets
Resulting from Operations................      $11,422,153
                                            -----------------
                                            -----------------
</TABLE>

PRUDENTIAL TAX-FREE MONEY FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease)                 Year Ended December 31,
in Net Assets                       1996               1995
<S>                            <C>                <C>
Operations
   Net investment income.....  $    11,419,707    $    14,779,107
   Net realized gain on
      investment
      transactions...........            2,446                 --
                               ---------------    ---------------
   Net increase in net assets
      resulting from
      operations.............       11,422,153         14,779,107
                               ---------------    ---------------
Dividends and distributions
   to shareholders...........      (11,422,153)       (14,779,107)
                               ---------------    ---------------
Fund share transactions
   (at $1 per share)
   Proceeds from shares
      subscribed.............    1,087,199,969      1,402,761,534
   Net asset value of shares
      issued to shareholders
      in reinvestment of
      dividends and
      distributions..........       10,887,534         14,035,315
   Cost of shares
      reacquired.............   (1,151,929,658)    (1,516,436,457)
                               ---------------    ---------------
   Net decrease in net assets
      from Fund share
      transactions...........      (53,842,155)       (99,639,607)
                               ---------------    ---------------
Total decrease...............      (53,842,155)       (99,639,607)
Net Assets
Beginning of year............      387,650,843        487,290,450
                               ---------------    ---------------
End of year..................  $   333,808,688    $   387,650,843
                               ===============    ===============
                               
</TABLE>

- --------------------------------------------------------------------------------
- -----                                         See Notes to Financial Statements.


                                      B-25


<PAGE>

Notes to Financial Statements              PRUDENTIAL TAX-FREE MONEY FUND, INC.
- -------------------------------------------------------------------------------
Prudential Tax-Free Money Fund, Inc. (the ``Fund''), is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The investment objective of the Fund is to attain the highest level of
current income that is exempt from federal income taxes, consistent with
liquidity and preservation of capital. The Fund will invest in short-term
tax-exempt debt securities of state and local governments. The ability of the
issuers of the securities held by the Fund to meet their obligations may be
affected by economic or political developments in a specific state, industry or
region.
- ------------------------------------------------------------
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: Portfolio securities are valued at amortized cost, which
approximates market value. The amortized cost method involves valuing a security
at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of any discount or premium.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on an identified cost basis. Interest income is recorded on an
accrual basis. The cost of portfolio securities for federal income tax purposes
is substantially the same as for financial reporting purposes. Expenses are
recorded on the accrual basis which may require the use of certain estimates by
management.
Federal Income Taxes: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its net income to its shareholders. For this
reason, no federal income tax provision is required.
Dividends: The Fund declares dividends daily from net investment income. Payment
of dividends is made monthly.
Custody Fee Credits: The Fund has an arrangement with its custodian bank,
whereby uninvested monies earn credits which reduce the fees charged by the
custodian.
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management LLC
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the cost of the subadviser's
services, the compensation of officers of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the Fund's average daily net assets up to $750 million,
 .425 of 1% of the next $750 million of average daily net assets and .375 of 1%
of average daily net assets in excess of $1.5 billion.
The Fund has a distribution agreement with Prudential Securities Incorporated
(``PSI''). The Fund compensated PSI for distributing and servicing the Fund's
shares pursuant to the plan of distribution at an annual rate of .125% of 1% of
the Fund's average daily net assets. The distribution fee is accrued daily and
payable monthly.
PSI, PMF and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services LLC (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and during the year ended December 31,
1996, the Fund incurred fees of $321,000 for the services of PMFS. As of
December 31, 1996, approximately $26,000 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 non-affiliates.
- --------------------------------------------------------------------------------
                                                                         

                                      B-26



<PAGE>
Financial Highlights                       PRUDENTIAL TAX-FREE MONEY FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                            Year Ended December 31,
                                                                                -----------------------------------------------
                                                                                  1996         1995         1994         1993
<S>                                                                             <C>          <C>          <C>          <C>
                                                                                --------     --------     --------     --------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year..........................................    $   1.00     $   1.00     $   1.00     $   1.00
Net investment income and realized gains....................................        .028         .031         .023         .018
Dividends and distributions to shareholders.................................       (.028)       (.031)       (.023)       (.018)
                                                                                --------     --------     --------     --------
Net asset value, end of year................................................    $   1.00     $   1.00     $   1.00     $   1.00
                                                                                --------     --------     --------     --------
                                                                                --------     --------     --------     --------
TOTAL RETURN(a):............................................................        2.84%        3.15%        2.31%        1.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)...............................................    $333,808     $387,651     $487,290     $601,622
Average net assets (000)....................................................    $403,230     $470,370     $644,481     $726,571
Ratios to average net assets:
   Expenses, including distribution fee.....................................         .80%         .85%         .75%         .74%
   Expenses, excluding distribution fee.....................................         .67%         .72%         .63%         .62%
   
   Net investment income....................................................        2.83%        3.14%        2.26%        1.84%
    

<CAPTION>

                                                                                1992
<S>                                                                             <C>
                                                                              --------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year..........................................  $   1.00
Net investment income and realized gains....................................      .026
Dividends and distributions to shareholders.................................     (.026)
                                                                              --------
Net asset value, end of year................................................  $   1.00
                                                                              --------
                                                                              --------
TOTAL RETURN(a):............................................................      2.63%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)...............................................  $614,333
Average net assets (000)....................................................  $669,588
Ratios to average net assets:
   Expenses, including distribution fee.....................................       .74%
   Expenses, excluding distribution fee.....................................       .62%
   Net investment income....................................................      2.60%
</TABLE>

- ---------------
(a) 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
    less than a full year are not annualized.

- --------------------------------------------------------------------------------
                                             See Notes to Financial Statements.


                                      B-27


<PAGE>
Report of Independent Accountants          PRUDENTIAL TAX-FREE MONEY FUND, INC.
- -------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
Prudential Tax-Free Money Fund, Inc.
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-Free Money Fund,
Inc. (``the Fund'') at December 31, 1996, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
``financial statements'') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1996 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 24, 1997



                                      B-28



<PAGE>

                                   APPENDIX A
                   DESCRIPTION OF TAX-EXEMPT SECURITY RATINGS

Corporate and Tax-Exempt Bond Ratings

     The four highest ratings of Moody's Investors Service, Inc. ("Moody's") for
tax-exempt and corporate bonds are Aaa, Aa, A and Baa. Bonds rated Aaa are
judged to be of the "best quality." The rating of Aa is assigned to bonds which
are of "high quality by all standards," but as to which margins of protection or
other elements make long-term risks appear somewhat larger than Aaa rated bonds.
The Aaa and Aa rated bonds comprise what are generally known as "high grade
bonds." Bonds which are rated A by Moody's possess many favorable investment
attributes and are considered "upper medium grade obligations." Factors giving
security to principal and interest of A rated bonds are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime in
the future. Bonds rated Baa are considered as "medium grade" obligations. They
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well. Moody's applies numerical modifiers "1",
"2", and "3" in each generic rating classification from Aa through B in its
corporate bond rating system. The modifier "1" indicates that the security ranks
in the higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category. The foregoing ratings for tax-exempt
bonds are sometimes presented in parentheses preceded with a "con" indicating
the bonds are rated conditionally. Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed or (d) payments to which some
other limiting condition attaches. Such parenthetical rating denotes the
probable credit stature upon completion of construction or elimination of the
basis of the condition.

     The four highest ratings of Standard & Poor's Ratings Group ("Standard &
Poor's") for tax-exempt and corporate bonds are AAA, AA, A and BBB. Bonds rated
AAA bear the highest rating assigned by Standard & Poor's to a debt obligation
and indicate an extremely strong capacity to pay principal and interest. Bonds
rated AA also qualify as high-quality debt obligations. Capacity to pay
principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree. Bonds rated A have a strong
capacity to pay principal and interest, although they are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions. The BBB rating, which is the lowest "investment grade" security
rating by Standard & Poor's, indicates an adequate capacity to pay principal and
interest. Whereas they normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay principal and interest for bonds in this category than
for bonds in the A category. The foregoing ratings are sometimes followed by a
"p" indicating that the rating is provisional. A provisional rating assumes the
successful completion of the project being financed by the bonds being rated and
indicates that payment of debt service requirements is largely and entirely
dependent upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of default upon
failure of, such completion.

Tax-Exempt Note Ratings

     The ratings of Moody's for tax-exempt notes are MIG 1, MIG 2, MIG 3 and MIG
4. Notes bearing the designation MIG 1 are judged to be of the best quality,
enjoying strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both. Notes bearing the designation MIG 2 are judged to be of
high quality, with margins of protection ample although not so large as in the
preceding group. Notes bearing the designation MIG 3 are judged to be of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Market access for refinancing, in
particular, is likely to be less well established. Notes bearing the designation
MIG 4 are judged to be of adequate quality, carrying specific risk but having
protection commonly regarded as required of an investment security and not
distinctly or predominantly speculative.

     The ratings of Standard & Poor's for municipal notes issued on or after
July 29, 1984 are "SP-1", "SP-2" and "SP-3." Prior to July 29, 1984, municipal
notes carried the same symbols as municipal bonds. The designation "SP-1"
indicates a very strong capacity to pay principal and interest. A "+" is added
for those issues determined to possess overwhelming safety characteristics. An
"SP-2" designation indicates a satisfactory capacity to pay principal and
interest while an "SP-3" designation indicates speculative capacity to pay
principal and interest.


                                      A-1
<PAGE>

Corporate and Tax-Exempt Commercial Paper Ratings

     Moody's and Standard & Poor's rating grades for commercial paper, set forth
below, are applied to Municipal Commercial Paper as well as taxable commercial
paper.

     Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers: Prime-1, superior capacity; Prime-2, strong capacity; and
Prime-3, acceptable capacity.


     Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Issues assigned A ratings are
regarded as having the greatest capacity for timely payment. Issues in this
category are further refined with the designation 1, 2 or 3 to indicate the
relative degree of safety. The "A-1" designation indicates the degree of safety
regarding timely payment is very strong. A "+" designation is applied to those
issues rated "A-1" which possess an overwhelming degree of safety. The "A-2"
designation indicates that capacity for timely payment is strong. However, the
relative degree of safety is not as overwhelming as for issues designated "A-1."
The "A-3" designation indicates that the capacity for timely payment is
satisfactory. Such issues, however, are somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations. Issues rated "B" are regarded as having only an adequate capacity
for timely payment and such capacity may be impaired by changing conditions or
short-term adversities.



                                      A-2
<PAGE>


                                                                      APPENDIX B

                     INFORMATION RELATING TO THE PRUDENTIAL

     Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "How the Fund Is Managed--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1995 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PlC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.

Information about Prudential

     The Manager and PlC(1) are subsidiaries of Prudential, which is one of the
largest diversfied financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December
31,1995. Its primary business is to offer a full range of products and services
in three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs more
than 92,000 persons worldwide, and maintains a sales force of approximately
13,000 agents and 5,600 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the Rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.

     lnsurance. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to more than 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 19 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($11.4 billion) of any life insurance company in
the United States. The Prudential provides auto insurance for more than 1.7
million cars and insures more than 1.4 million homes.

     Money Management. The Prudential is one of the largest pension fund
managers in the country, providing pension services to 1 in 3 Fortune 500 firms.
It manages $36 billion of individual retirement plan assets, such as 401(k)
plans. In July 1996, Institutional Investor ranked Prudential the fifth largest
institutional money manager of the 300 largest money management organizations in
the United States as of December 31,1995. As of December 31,1995, Prudential had
more than $314 billion in assets under management. Prudential Investments, a
business group of Prudential (of which Prudential Mutual Funds is a key part),
manages over $190 billion in assets of institutions and individuals.

     Real Estate. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 34,000 brokers and
agents and more than 1,100 offices in the United States.(2)

     Healthcare. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.

     Financial Services. The Prudential Bank, a wholly-owned subsidiary of the
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.

Information about the Prudential Mutual Funds

     Prudential Mutual Fund Management is one of the seventeen largest mutual
fund companies in the country, with over 2.5 million shareholders invested in
more than 50 mutual fund portfolios and variable annuities with more than 3.7
million shareholder accounts.

     The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.

- ----------
(1) Prudentlal Investments, a business group of PIC, serves as the Subadviser to
substantially all of the Prudential Mutual Funds. Wellington Management Company
serves as the subadviser to Global Utility Fund, Inc., Nicholas-Applegate
Capital Management as the subadviser to Nicholas-Applegate Fund, Inc., Jennison
Associates Capital Corp. as the subadviser to Prudential Jennison Series Fund,
Inc. and Prudential Active Balanced Fund, a portfolio of Prudential Dryden Fund
and Mercator Asset Management L.P. as subadviser to International Stock Series a
portfolio of Prudential World Fund, Inc. and BlackRock Financial Management Inc.
as subadviser to The BlackRock Government Income Trust. There are multiple
subadvisers for The Target Portfolio Trust.
(2) As of December 31, 1994.



                                      B-1
<PAGE>


     From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRON'S AND USA TODAY.

     Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28,1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PlC. In 1995,
Prudential Securities introduced Prudential Jennison Growth Fund, a growth-style
equity fund managed by Jennison Associates Capital Corp., a premier
institutional equity manager and a subsidiary of Prudential.

     High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of its
kind in the country) along with 100 or so other high yield bonds, which may be
considered for purchase.(3) Non-investment grade bonds, also known as junk bonds
or high yield bonds, are subject to a greater risk of loss of principal and
interest including default risk than higher-rated bonds. Prudential high yield
portfolio managers and analysts meet face-to-face with almost every bond issuer
in the High Yield Fund's portfolio annually, and have additional telephone
contact throughout the year.

     Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.

     Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from PULP AND PAPER FORECASTER to WOMEN'S
WEAR DAILY--to keep them informed of the industries they follow.

     Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential Mutual
Fund.

     Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PlC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.

     Prudential Mutual Funds' portfolio managers and analysts met with over
1,200 companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.

     Prudential Mutual Funds' global equity managers conducted many of their
visits overseas, often holding private meetings with a company in a foreign
language (our global equity managers speak 7 different languages, including
Mandarin Chinese).

     Trading Data.(4) On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.(5) Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.(6)

- ----------
(3) As of December 31,1995. The number of bonds and the size of the Fund are
subject to change.
(4) Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PlC serves as the subadviser, portfolios of
the Prudential Series Fund and institutional and non-U.S. accounts managed by
Prudential Mutual Fund Investment Management, a division of PIC, for the year
ended December 31, 1995.
(5) Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, IntermedIate U.S.
Government, Short Investment Grade Debt, Intermediate Investment Grade Debt,
General U.S. Treasury, General U.S. Government and Mortgage funds.
(6) As of December 31, 1994.



                                      B-2
<PAGE>


     Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services LLC, the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.

Information about Prudential Securities

     Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion.

     During 1994, over 28,000 new customer accounts were opened each month at
PSI.(7)

     Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
Prudential Securities is the only Wall Street firm to have its own in-house
Certified Financial Planner (CFP) program. In the December 1995 issue of
REGISTERED REP, an industry publication, Prudential Securities' Financial
Advisor training programs received a grade of A- (compared to an industry
average of B+).

     In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey. Five
Prudential Securities' analysts were ranked as first-team finishers.(8)

     In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect, a state-of-the-art asset allocation software program which
helps Financial Advisors to evaluate a client's objectives and overall financial
plan, and a comprehensive mutual fund information and analysis system that
compares different mutual funds.

     For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.

- ----------
(7) As of December 31, 1994.
(8) On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research directors,
asking them to evaluate analysts in 76 industry sectors. Scores are produced by
taking the number of votes awarded to an individual analyst and weighing them
based on the size of the voting institution. In total, the magazine sends its
survey to approximately 2,000 institutions and a group of European and Asian
institutions.




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