PRUDENTIAL SMALL COMPANIES FUND INC, 497, 1997-02-11

PRUDENTIAL SMALL COMPANIES FUND INC
497, 1997-02-11

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<PAGE>
[PRUDENTIAL SMALL COMPANIES FUND, INC.]
- --------------------------------------------------------------------------------

PROSPECTUS DATED JANUARY 24, 1997

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

Prudential Small Companies Fund, Inc. (the Fund) is an open-end, diversified
management investment company whose objective is capital growth. The Fund
intends to invest principally in a carefully selected portfolio of common
stocks--generally small company stocks having prospects of a high return on
equity, increasing earnings and increasing dividends (or an expectation of
dividends). The Fund's purchase and sale of put and call options and related
short-term trading may result in a high portfolio turnover rate. These
activities may be considered speculative and may result in higher risks and
costs to the Fund. The Fund may also buy and sell options on stocks, stock
indices and foreign currencies, forward foreign currency exchange contracts and
futures contracts on stock indices and foreign currencies and options thereon in
accordance with limits described herein. 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.

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 January 24, 1997, which information
is incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund, at the
address or telephone number noted above.

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

INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS

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.

WHAT IS PRUDENTIAL SMALL COMPANIES FUND, INC.?

Prudential Small Companies 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 Fund's investment objective is capital growth. It seeks to achieve this
objective by investing primarily in a carefully selected portfolio of common
stocks--generally small company stocks having prospects of a high return on
equity, increasing earnings, increasing dividends (or an expectation of
dividends), and price-earnings ratios which are not excessive. There can be no
assurance that the Fund's objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies" at page 9.

RISK FACTORS AND SPECIAL CHARACTERISTICS

In seeking to achieve its investment objective, the Fund has generally
invested in common stocks with smaller market capitalizations than those of the
stocks included in the Dow Jones Industrial Average or the largest stocks
included in the Standard & Poor's 500 Composite Stock Index. As a result, the
Fund's portfolio has generally been made up of common stocks issued by smaller,
less well known companies selected by the investment adviser on the basis of
fundamental investment analysis. Companies in which the Fund is likely to invest
may have limited product lines, markets or financial resources and may lack
management depth. The securities of these companies may have limited
marketability and may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. As with an investment in any mutual fund, an investment in this Fund
can decrease in value and you can lose money. See "How the Fund
Invests--Investment Objective and Policies" at page 9. The Fund may also engage
in various hedging and return enhancement strategies, including derivatives. See
"How the Fund Invests--Hedging and Return Enhancement Strategies--Risks of
Hedging and Return Enhancement Strategies" at page 13. In addition, the Fund may
invest up to 15% of its total assets in foreign securities. Investing in
securities of foreign companies and countries involves certain considerations
and risks not typically associated with investing in securities of domestic
companies. See "How the Fund Invests--Other Investments and Policies-- Foreign
Investments" at page 14.

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 .70 of 1% of
the Fund's average daily net assets. As of October 31, 1996, PMF served as
manager or administrator to 60 investment companies, including 38 mutual funds,
with aggregate assets of approximately $53 billion. The Prudential Investment
Corporation (PIC 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 16.

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 Class A, Class B, Class C and Class Z shares. PSI is
paid a distribution and service fee at the rate of .25 of 1% of the average
daily net assets of the Class A shares and 1% of the average daily net assets of
each of the Class B and Class C shares. PSI incurs the expense of distributing
the Fund's Class Z shares under a Distribution Agreement with the Fund, none of
which is paid for or reimbursed by the Fund.

See "How the Fund is Managed--Distributor" at page 16.

2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?

The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares. The minimum subsequent investment is $100 for Class
A, Class B and Class C shares. Class Z shares are not subject to any minimum
investment requirements. There is no minimum investment requirement for certain
retirement and employee savings plans or 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 Guide--How to
Buy Shares of the Fund" at page 22 and "Shareholder Guide--Shareholder Services"
at page 32.

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, Inc. (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 plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Class Z shares are offered to a
limited group of investors at net asset value without any sales charge. See "How
the Fund Values its Shares" at page 19 and "Shareholder Guide--How to Buy Shares
of the Fund" at page 22.

WHAT ARE MY PURCHASE ALTERNATIVES?

The Fund offers four classes of shares:

- Class A Shares: Sold with an initial sales charge of up to 5% of
the offering price.

- Class B Shares: Sold without an initial sales charge but are
subject to a contingent deferred sales charge or
CDSC (declining from 5% to zero of the lower of
the amount invested or the redemption proceeds)
which will be imposed on certain redemptions made
within six years of purchase. Although Class B
shares are subject to higher ongoing
distribution-related expenses than Class A shares,
Class B shares will automatically convert to Class
A shares (which are subject to lower ongoing
distribution-related expenses) approximately seven
years after purchase.

- Class C Shares: Sold without an initial sales charge and, for one
year after purchase, are subject to a 1% CDSC on
redemptions. Like Class B shares, Class C shares
are subject to higher ongoing distribution-related
expenses than Class A shares but do not convert to
another class.

- Class Z Shares: Sold without either an initial or contingent
deferred sales charge to a limited group of
investors. Class Z shares are not subject to any
ongoing service or distribution-related expenses.

See "Shareholder Guide--Alternative Purchase Plan" at page 23.

HOW DO I SELL MY SHARES?

You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 27.

HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?

The Fund expects to pay dividends of net investment income, if any,
semi-annually and make distributions of any net capital gains at least annually.
Dividends and distributions will be automatically reinvested in additional
shares of the Fund at NAV without a sales charge unless you request that they be
paid to you in cash. See "Taxes, Dividends and Distributions" at page 20.

3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION
EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------------- ------------------------------ ------------------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed
on Purchases (as a
percentage of offering
price).................. 5% None None
Maximum Sales Load or
Deferred Sales Load
Imposed on Reinvested
Dividends............... None None None
Deferred Sales Load (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower)..... None 5% during the first year, 1% on redemptions made within
decreasing by 1% annually to one year of purchase
1% in the fifth and sixth
years and 0% the seventh year*
Redemption Fees........... None None None
Exchange Fee.............. None None None

<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------------- ------------------------------ ------------------------------
<S> <C> <C> <C>
(as a percentage of average
net assets)
Management Fees........... .70% .70% .70%
12b-1 Fees (after
reduction).............. .25++ 1.00 1.00
Other Expenses............ .29 .29 .29
-------------------- ------------------------------ ------------------------------
Total Fund Operating
Expenses................ 1.24% 1.99% 1.99%
-------------------- ------------------------------ ------------------------------
-------------------- ------------------------------ ------------------------------

<CAPTION>
SHAREHOLDER TRANSACTION
EXPENSES+ CLASS Z SHARES
---------------
<S> <C>
Maximum Sales Load Imposed
on Purchases (as a
percentage of offering
price).................. None
Maximum Sales Load or
Deferred Sales Load
Imposed on Reinvested
Dividends............... None
Deferred Sales Load (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower)..... None

Redemption Fees........... None
Exchange Fee.............. None
ANNUAL FUND OPERATING EXPENSES CLASS Z SHARES
---------------
<S> <C>
(as a percentage of average
net assets)
Management Fees........... .70%
12b-1 Fees (after
reduction).............. None
Other Expenses............ .29%
---------------
Total Fund Operating
Expenses................ .99%
---------------
---------------
</TABLE>

<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:
Class A................................................. $ 62 $ 87 $ 115 $ 192
Class B................................................. $ 70 $ 92 $ 117 $ 203
Class C................................................. $ 30 $ 62 $ 107 $ 232
Class Z**............................................... $ 10 $ 32 $ 55 $ 121
You would pay the following expenses on the same investment,
assuming no redemption:
Class A................................................. $ 62 $ 87 $ 115 $ 192
Class B................................................. $ 20 $ 62 $ 107 $ 203
Class C................................................. $ 20 $ 62 $ 107 $ 232
Class Z**............................................... $ 10 $ 32 $ 55 $ 121
The above example is based on data for the Fund's fiscal year ended September 30, 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 investors 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"
includes operating expenses of the Fund, such as directors' and professional fees, registration
fees, reports to shareholders, transfer agency and custodian fees and franchise taxes.
<FN>

------------------
*Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
**Estimated based on expenses expected to have been incurred if Class Z
shares had been in existence throughout the fiscal year ended September
30, 1996.
+Pursuant to rules of the National Association of Securities Dealers,
Inc., the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Fund may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation
is imposed on the Fund rather than on a per shareholder basis. Therefore,
long-term shareholders of the Fund may pay more in total sales charges
than the economic equivalent of 6.25% of such shareholders' investment in
such shares. See "How the Fund is Managed--Distributor."
++Although the Class A Distribution and Service Plan provides that the Fund
may pay a distribution fee of up to .30 of 1% per annum of the average
daily net assets of the Class A shares, the Distributor has agreed to
limit its distribution fees with respect to Class A shares of the Fund to
no more than .25 of 1% of the average daily net assets of the Class A
shares for the fiscal year ending September 30, 1997. Total operating
expenses without such limitation would be 1.29%. See "How the Fund is
Managed--Distributor."
</TABLE>

4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)

<TABLE>
<CAPTION>
JANUARY 22,
1990 (a)
YEAR ENDED SEPTEMBER 30, THROUGH
------------------------------------------------------------ SEPTEMBER 30,
1996 (d) 1995 (d) 1994 (d) 1993 (d) 1992 (d) 1991 1990
-------- -------- -------- -------- -------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 14.18 $ 12.40 $ 13.06 $ 11.25 $ 10.16 $ 7.36 $ 8.55
-------- -------- -------- -------- -------- ------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .04 .05 -- .03 .02 .05 .09
Net realized and unrealized gain (loss) on
investment transactions.......................... 1.75 2.57 .13 3.14 1.47 2.82 (1.20)
-------- -------- -------- -------- -------- ------- -------------
Total from investment operations.................. 1.79 2.62 .13 3.17 1.49 2.87 (1.11)
-------- -------- -------- -------- -------- ------- -------------
LESS DISTRIBUTIONS:
Dividends from net investment income.............. -- -- -- -- -- (.07) (.08)
Distributions from net realized capital gains on
investment transactions.......................... (.67) (.84) (.79) (1.36) (.40) -- --
-------- -------- -------- -------- -------- ------- -------------
Total distributions............................... (.67) (.84) (.79) (1.36) (.40) (.07) (.08)
-------- -------- -------- -------- -------- ------- -------------
Net asset value, end of period.................... $ 15.30 $ 14.18 $ 12.40 $ 13.06 $ 11.25 $ 10.16 $ 7.36
-------- -------- -------- -------- -------- ------- -------------
-------- -------- -------- -------- -------- ------- -------------
TOTAL RETURN (c):................................. 13.38% 23.29% 1.13% 30.42% 15.39% 39.39% (13.19)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $237,306 $242,231 $103,078 $94,842 $44,845 $25,165 $17,222
Ratios to average net assets:
Expenses, including distribution fees........... 1.24% 1.33% 1.33% 1.17% 1.33% 1.50% 1.61%(b)
Expenses, excluding distribution fees........... .99% 1.08% 1.09% .97% 1.13% 1.30% 1.42%(b)
Net investment income (loss).................... .33% .30% .00% .26% .19% .59% 1.54%(b)
Portfolio turnover................................ 53% 64% 82% 68% 99% 111% 79%
Average commission rate per share................. $ .0515 -- -- -- -- -- --
<FN>

------------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions.
(d) Calculated based upon weighted average shares outstanding during the
period.
</TABLE>

5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B SHARES)

The following financial highlights with respect to the five years ended
September 30, 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 Class B share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. The information is based on data contained in
the financial statements. Further performance information is contained in the
Fund's annual report, which may be obtained without charge. See "Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------
1996 (b) 1995 (b) 1994 (b) 1993 (b) 1992 (b)
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
year.............................. $ 13.56 $ 11.99 $ 12.74 $ 11.08 $ 10.11
--------- --------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)....... (.06) (.06) (.09) (.06) (.07)
Net realized and unrealized gain
(loss) on investment
transactions...................... 1.66 2.47 .13 3.08 1.44
--------- --------- -------- -------- --------
Total from investment operations... 1.60 2.41 .04 3.02 1.37
--------- --------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment
income............................ -- -- -- -- --
Distributions from net realized
capital gains on investment
transactions...................... (.67) (.84) (.79) (1.36) (.40)
--------- --------- -------- -------- --------
Total distributions................ (.67) (.84) (.79) (1.36) (.40)
--------- --------- -------- -------- --------
Net asset value, end of year....... $ 14.49 $ 13.56 $ 11.99 $ 12.74 $ 11.08
--------- --------- -------- -------- --------
--------- --------- -------- -------- --------
TOTAL RETURN (c):.................. 12.56% 22.37% .34% 29.40% 14.27%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)...... $378,861 $361,873 $425,502 $376,068 $172,018
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.99% 2.08% 2.09% 1.97% 2.13%
Expenses, excluding distribution
fees........................... .99% 1.08% 1.09% .97% 1.13%
Net investment income (loss)..... (.42)% (.51)% (.76)% (.54)% (.61)%
Portfolio turnover................. 53% 64% 82% 68% 99%
Average commission rate per
share............................. $ .0515 -- -- -- --

1991 1990 1989 (a) 1988 1987
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
year.............................. $ 7.34 $ 9.11 $ 7.47 $ 9.58 $ 9.09
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)....... (.02) .07 .06 .08(d) --
Net realized and unrealized gain
(loss) on investment
transactions...................... 2.82 (1.75) 1.65 (1.34) 2.40
--------- --------- --------- --------- ---------
Total from investment operations... 2.80 (1.68) 1.71 (1.26) 2.40
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment
income............................ (.03) (.09) (.07) (.03) --
Distributions from net realized
capital gains on investment
transactions...................... -- -- -- (.82) (1.91)
--------- --------- --------- --------- ---------
Total distributions................ (.03) (.09) (.07) (.85) (1.91)
--------- --------- --------- --------- ---------
Net asset value, end of year....... $ 10.11 $ 7.34 $ 9.11 $ 7.47 $ 9.58
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL RETURN (c):.................. 38.33% (18.63)% 23.20% (10.72)% 31.61%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)...... $118,660 $86,440 $160,995 $143,263 $186,655
Ratios to average net assets:
Expenses, including distribution
fees........................... 2.30% 2.18% 1.79% 1.66%(d) 1.61%
Expenses, excluding distribution
fees........................... 1.30% 1.28% 1.17% 1.05%(d) 1.07%
Net investment income (loss)..... (.21)% .91% .74% 1.07%(d) .08%
Portfolio turnover................. 111% 79% 79% 76% 113%
Average commission rate per
share............................. -- -- -- -- --
<FN>

------------------
(a) On January 31, 1989, 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.
(b) Calculated based upon weighted average shares outstanding during the
year.
(c) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions.
(d) Net of expense reimbursement.
</TABLE>

6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS C SHARES)

The following financial highlights 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 Class C share of
common stock outstanding, total return, ratios to average net assets and other
supplemental data for the period indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the Fund's annual report, which may be obtained without charge.
See "Shareholder Services--Reports to Shareholders."

<TABLE>
<CAPTION>
AUGUST 1,
Year Ended 1994 (a)
September 30, Through
------------------- September 30,
1996 (d) 1995 (d) 1994 (d)
-------- -------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period...... $13.56 $11.99 $11.61
-------- -------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss....................... (.06) (.06) (.01)
Net realized and unrealized gain on
investment transactions.................. 1.66 2.47 .39
-------- -------- ------
Total from investment operations.......... 1.60 2.41 .38
-------- -------- ------
LESS DISTRIBUTIONS:
Distributions from net realized capital
gains on investment transactions......... (.67) (.84) --
-------- -------- ------
Total distributions..................... (.67) (.84) --
-------- -------- ------
Net asset value, end of period............ $14.49 $13.56 $11.99
-------- -------- ------
-------- -------- ------
TOTAL RETURN (c):........................ 12.56% 22.37% 3.19%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........... $4,323 $1,545 $ 269
Ratios to average net assets:
Expenses, including distribution fees... 1.99% 2.08% 2.22%(b)
Expenses, excluding distribution fees... .99% 1.08% 1.22%(b)
Net investment loss..................... (.42)% (.46)% (.31)%(b)
Portfolio turnover........................ 53% 64% 82%
Average commission rate per share......... $.0515 -- --
<FN>

------------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(d) Calculated based upon weighted average shares outstanding during the
period.
</TABLE>

7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS Z SHARES)
The following financial highlights 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 Class Z share of
common stock outstanding, total return, ratios to average net assets and other
supplemental data for the period indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the Fund's annual report, which may be obtained without charge.
See "Shareholder Services--Reports to Shareholders."

<TABLE>
<CAPTION>
MARCH 1,
1996 (a)
Through
September 30,
1996 (d)
--------------
<S> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period..................... $13.69
-------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................... .05
Net realized and unrealized gain on investment
transactions............................................ 1.58
-------
Total from investment operations......................... 1.63
-------
Net asset value, end of period........................... $15.32
-------
-------
TOTAL RETURN (c):........................................ 11.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................... $68,516
Ratios to average net assets:
Expenses............................................... .99%(b)
Net investment income (loss)........................... .58%(b)
Portfolio turnover....................................... 53%
Average commission rate per share........................ $.0515
<FN>

------------------
(a) Commencement of offering of Class Z shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(d) Calculated based upon weighted average shares outstanding during the
period.
</TABLE>

8
<PAGE>
HOW THE FUND INVESTS

INVESTMENT OBJECTIVE AND POLICIES

THE FUND'S INVESTMENT OBJECTIVE IS CAPITAL GROWTH. THE FUND WILL ATTEMPT TO
ACHIEVE THIS OBJECTIVE BY INVESTING PRINCIPALLY IN A CAREFULLY SELECTED
PORTFOLIO OF COMMON STOCKS. INVESTMENT INCOME IS OF INCIDENTAL IMPORTANCE, AND
THE FUND MAY INVEST IN SECURITIES WHICH DO NOT PRODUCE ANY INCOME. HOWEVER,
THERE MAY BE PERIODS WHEN, IN THE JUDGMENT OF THE FUND'S INVESTMENT ADVISER,
MARKET OR GENERAL ECONOMIC CONDITIONS JUSTIFY A TEMPORARY DEFENSIVE POSITION.
THERE CAN BE NO ASSURANCE THAT SUCH OBJECTIVE WILL BE ACHIEVED. See "Investment
Objective and Policies" in the Statement of Additional Information.

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). FUND POLICIES THAT ARE NOT FUNDAMENTAL
MAY BE MODIFIED BY THE BOARD OF DIRECTORS.

The stocks which the Fund's investment adviser generally expects to select
for the Fund's portfolio are those which, in the investment adviser's judgment,
have prospects of a high return on equity, increasing earnings and increasing
dividends (or an expectation of dividends). These criteria are not rigid, and
other stocks may be included in the Fund's portfolio if they are expected to
help the Fund attain its objective. These criteria can be changed by the Fund's
Board of Directors.

THE FUND MAY ALSO INVEST IN PREFERRED STOCKS AND BONDS, WHICH HAVE EITHER
ATTACHED WARRANTS OR A CONVERSION PRIVILEGE INTO COMMON STOCKS, AND IN WARRANTS.
IN ADDITION, THE FUND MAY PURCHASE AND SELL PUT AND CALL OPTIONS ON STOCKS,
STOCK INDICES AND FOREIGN CURRENCIES, AND MAY PURCHASE AND SELL FORWARD FOREIGN
CURRENCY EXCHANGE CONTRACTS AND FUTURES CONTRACTS ON FOREIGN CURRENCIES AND
STOCK INDICES AND OPTIONS THEREON TO HEDGE ITS PORTFOLIO AND TO ATTEMPT TO
ENHANCE RETURN. SEE "HEDGING AND RETURN ENHANCEMENT STRATEGIES" BELOW. THE FUND
MAY ALSO INVEST UP TO 15% OF ITS TOTAL ASSETS IN FOREIGN SECURITIES, WHICH MAY
INVOLVE ADDITIONAL RISKS. SUCH INVESTMENT RISKS INCLUDE FUTURE ADVERSE POLITICAL
AND ECONOMIC DEVELOPMENTS, POSSIBLE SEIZURE OR NATIONALIZATION OF THE COMPANY IN
WHOSE SECURITIES THE FUND HAS INVESTED AND POSSIBLE ESTABLISHMENT OF EXCHANGE
CONTROLS OR OTHER LAWS THAT MIGHT ADVERSELY AFFECT THE REPATRIATION OF ASSETS OR
THE PAYMENT OF DIVIDENDS. IN ADDITION, A PORTFOLIO OF FOREIGN SECURITIES MAY BE
ADVERSELY AFFECTED BY FLUCTUATIONS IN THE RELATIVE RATES OF EXCHANGE BETWEEN THE
CURRENCIES OF DIFFERENT NATIONS AND BY EXCHANGE CONTROL REGULATIONS. SEE "OTHER
INVESTMENTS AND POLICIES -- FOREIGN INVESTMENTS" BELOW.

IN SEEKING TO ACHIEVE ITS INVESTMENT OBJECTIVE, THE FUND HAS GENERALLY
INVESTED IN COMMON STOCKS WITH SMALLER MARKET CAPITALIZATIONS THAN THOSE OF THE
STOCKS INCLUDED IN THE DOW JONES INDUSTRIAL AVERAGE OR THE LARGEST STOCKS
INCLUDED IN THE STANDARD & POOR'S 500 COMPOSITE STOCK INDEX. As a result, the
Fund's portfolio has generally been made up of common stocks issued by smaller,
less well known companies (with market capitalizations typically less than $1
billion or a corresponding market capitalization in foreign markets) selected by
the investment adviser on the basis of fundamental investment analysis. The Fund
may, however, invest in the securities of any issuer without regard to its size
or the market capitalization of its common stock. Companies in which the Fund is
likely to invest may have limited product lines, markets or financial resources
and may lack management depth. The securities of these companies may have
limited marketability and may be subject to more abrupt or erratic market
movements than securities of larger, more established companies or the market
averages in general.

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THE FUND MAY ALSO INVEST WITHOUT LIMIT IN HIGH QUALITY MONEY MARKET
INSTRUMENTS (A) WHEN CONDITIONS DICTATE A TEMPORARY DEFENSIVE STRATEGY, (B)
UNTIL THE PROCEEDS FROM THE SALE OF THE FUND'S SHARES HAVE BEEN INVESTED OR (C)
DURING TEMPORARY PERIODS OF PORTFOLIO RESTRUCTURING. Such instruments may
include commercial paper of domestic corporations, certificates of deposit,
repurchase agreements, bankers' acceptances and other obligations of domestic
banks, and obligations issued or guaranteed by the U.S. Government, its
instrumentalities or its agencies.

HEDGING AND RETURN ENHANCEMENT STRATEGIES

THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN, BUT NOT FOR SPECULATION. These strategies include the use of
derivatives, such as options, futures contracts and options thereon. The Manager
will use such techniques as market conditions warrant. The Fund's ability to use
these strategies may be limited by market conditions, regulatory limits and tax
considerations and there can be no assurance that any of these strategies will
succeed. See "Investment Objective and Policies" in the Statement of Additional
Information. The Fund, and thus the investor, may lose money if the Fund is
unsuccessful in its use of these strategies. New financial products and risk
management techniques continue to be developed and the Fund may use these new
investments and techniques to the extent consistent with its investment
objective and policies.

OPTIONS TRANSACTIONS

THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON EQUITY
SECURITIES AND STOCK INDICES THAT ARE TRADED ON U.S. OR FOREIGN SECURITIES
EXCHANGES OR IN THE OVER-THE-COUNTER (OTC) MARKET TO ATTEMPT TO ENHANCE RETURN
OR TO HEDGE ITS PORTFOLIO. THESE OPTIONS WILL BE ON EQUITY SECURITIES AND STOCK
INDICES (E.G., S&P 500). THE FUND MAY WRITE PUT AND CALL OPTIONS TO GENERATE
ADDITIONAL INCOME THROUGH THE RECEIPT OF PREMIUMS, PURCHASE PUT OPTIONS IN AN
EFFORT TO PROTECT THE VALUE OF SECURITIES THAT IT OWNS AGAINST A DECLINE IN
MARKET VALUE AND PURCHASE CALL OPTIONS IN AN EFFORT TO PROTECT AGAINST AN
INCREASE IN THE PRICE OF SECURITIES (OR CURRENCIES) IT INTENDS TO PURCHASE. THE
FUND MAY ALSO PURCHASE PUT AND CALL OPTIONS TO OFFSET PREVIOUSLY WRITTEN PUT AND
CALL OPTIONS OF THE SAME SERIES.

A CALL OPTION ON EQUITY SECURITIES GIVES THE PURCHASER, IN EXCHANGE FOR A
PREMIUM PAID, THE RIGHT FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE
SECURITIES SUBJECT TO THE OPTION AT A SPECIFIED PRICE (THE "EXERCISE PRICE" OR
"STRIKE PRICE"). The writer of a call option, in return for the premium, has the
obligation, upon exercise of the option, to deliver, depending upon the terms of
the option contract, the underlying securities to the purchaser upon receipt of
the exercise price. When the Fund writes a call option, the Fund gives up the
potential for gain on the underlying securities in excess of the exercise price
of the option during the period that the option is open.

A PUT OPTION ON EQUITY SECURITIES GIVES THE PURCHASER, IN RETURN FOR A
PREMIUM, THE RIGHT, FOR A SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES
SUBJECT TO THE OPTION TO THE WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE.
The writer of the put option, in return for the premium, has the obligation,
upon exercise of the option, to acquire the securities underlying the option at
the exercise price. The Fund as the writer of a put option might, therefore, be
obligated to purchase underlying securities for more than their current market
price.

THE FUND WILL WRITE ONLY "COVERED" OPTIONS AND OPTIONS FOR WHICH THE FUND
MAINTAINS IN A SEGREGATED ACCOUNT CASH OR LIQUID SECURITIES WITH A VALUE
EQUIVALENT AT ALL TIMES TO ITS OBLIGATIONS UNDER THE OPTION. An option is
covered if the Fund, so long as it is obligated under the option, owns an
offsetting position in the underlying security or has an absolute and immediate
right to acquire the underlying security without additional consideration. When
the Fund writes a "covered" option, its losses are limited to the current value
of the offsetting position of the underlying security. When the Fund otherwise
writes an option, its losses are potentially unlimited. See "Investment
Objective and Policies--Limitation on Purchase and Sale of Stock Options,
Options on Stock Indices and Stock Index Futures" in the Statement of Additional
Information.

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PURCHASES AND SALES OF OTC OPTIONS SUBJECT THE FUND TO RISKS NOT PRESENT
WITH RESPECT TO EXCHANGE TRADED OPTIONS. Unlike exchange traded options, OTC
options are contracts between the Fund and its counterparty without the
interposition of any clearing organization. As a result, the Fund is subject to
the risk that the counterparty will default on, or be unable to complete, due to
bankruptcy or otherwise, its obligation on the option. Consequently, the value
of an OTC option to the Fund is dependent on the financial viability of the OTC
counterparty. See "Investment Objective and Policies--Limitations on Purchase
and Sale of Stock Options, Options on Stock Indices and Stock Index
Futures--Additional Risks of Purchasing OTC Options" in the Statement of
Additional Information.

OPTIONS ON FOREIGN CURRENCIES

The Fund may purchase and write put and call options on foreign currencies
traded on securities exchanges or boards of trade (foreign and domestic) for
hedging purposes in a manner similar to that in which forward foreign currency
exchange contracts and futures contracts on foreign currencies will be employed.
Options on foreign currencies are similar to options on stock, except that the
Fund has the right to take on or make delivery of a specified amount of foreign
currency, rather than stock.

The Fund may purchase and write options to hedge the Fund's portfolio
securities denominated in foreign currencies. If there is a decline in the
dollar value of a foreign currency in which the Fund's portfolio securities are
denominated, the dollar value of such securities will decline even though the
foreign currency value remains the same. See "Risks of Hedging and Return
Enhancement Strategies" below. To hedge against the decline of the foreign
currency, the Fund may purchase put options on such foreign currency. If the
value of the foreign currency declines, the gain realized on the put option
would offset, in whole or in part, the adverse effect such decline would have on
the value of the portfolio securities. Alternatively, the Fund may write a call
option on the foreign currency. If the value of the foreign currency declines,
the option would not be exercised and the decline in the value of the portfolio
securities denominated in such foreign currency would be offset in part by the
premium the Fund received for the option.

If, on the other hand, the investment adviser anticipates purchasing a
foreign security and also anticipates a rise in the value of such foreign
currency (thereby increasing the cost of such security), the Fund may purchase
call options on the foreign currency. The purchase of such options could offset,
at least partially, the effects of the adverse movements of the exchange rates.
Alternatively, the Fund could write a put option on the currency and, if the
exchange rates move as anticipated, the option would expire unexercised.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are traded in the
interbank market conducted directly between currency traders (typically large
commercial banks) and their customers. A forward contract generally has no
deposit requirements and commissions are charged for such trades.

When the Fund invests in foreign securities, the Fund may enter into forward
contracts in several circumstances to protect the value of its portfolio. The
Fund may not use forward contracts to generate income, although the use of such
contracts may incidentally generate income. There is no limitation on the value
of forward contracts into which the Fund may enter. However, the Fund's dealings
in forward contracts will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of a forward contract with respect to specific receivables or payables of the
Fund generally arising in connection with the purchase or sale of its portfolio
securities and accruals of interest or dividends receivable and Fund expenses.
Position hedging is the sale of a foreign currency with respect to portfolio
security positions denominated or

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<PAGE>
quoted in that currency. The Fund will not speculate in forward contracts. The
Fund may not position hedge with respect to a particular currency for an amount
greater than the aggregate market value (determined at the time of making any
sale of a forward contract) of securities held in its portfolio denominated or
quoted in, or currently convertible into such currency.

When the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, or when the Fund anticipates the receipt in a
foreign currency of dividends or interest payments on a security which it holds,
the Fund may desire to "lock in" the U.S. dollar price of the security or the
U.S. dollar equivalent of such dividend or interest payment, as the case may be.
By entering into a forward contract for a fixed amount of dollars for the
purchase or sale of the amount of foreign currency involved in the underlying
transaction, the Fund will be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date on which the
security is purchased or sold, or on which the dividend or interest payment is
declared, and the date on which such payments are made or received.
Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract, for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the portfolio securities of the Fund denominated in such foreign
currency. Requirements under the Internal Revenue Code for qualification as a
regulated investment company may limit the Fund's ability to engage in
transactions in forward contracts. See "Investment Objective and Policies--
Risks Related to Forward Foreign Currency Exchange Contracts" and "Taxes" in the
Statement of Additional Information.

FUTURES CONTRACTS AND OPTIONS THEREON

THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS THEREON
WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE TO REDUCE CERTAIN
RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN IN ACCORDANCE WITH
REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION (CFTC). THE FUND, AND
THUS THE INVESTOR, MAY LOSE MONEY IF THE FUND IS UNSUCCESSFUL IN ITS USE OF
THESE STRATEGIES. These futures contracts and related options will be on stock
indices and foreign currencies. A futures contract is an agreement to purchase
or sell an agreed amount of securities or currencies at a set price for delivery
in the future. A stock index futures contract is an agreement to purchase or
sell cash equal to a specific dollar amount times the difference between the
value of a specific stock index at the close of the last trading day of the
contract and the price at which the agreement is made. No physical delivery of
the underlying stocks in the index is made. The Fund may purchase and sell
futures contracts or related options as a hedge against changes in market
conditions.

The Fund may not purchase or sell futures contracts and related options to
attempt to enhance return, if immediately thereafter the sum of the amount of
initial margin deposits on the Fund's existing futures and options on futures
and premiums paid for such related options would exceed 5% of the liquidation
value of the Fund's total assets. The Fund may purchase and sell futures
contracts and related options, without limitation, for bona fide hedging
purposes in accordance with regulations of the CFTC (I.E., to reduce certain
risks of its investments). The value of all futures contracts sold will not
exceed the total market value of the Fund's portfolio.

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

THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET AND
IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements in the
price of a futures contract and the movements in the index or price of the
currencies underlying the futures contract is imperfect and there is a risk that
the value of the indices or currencies underlying the futures contract may
increase or

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<PAGE>
decrease at a greater rate than the related futures contracts resulting in
losses to the Fund. Certain futures exchanges or boards of trade have
established daily limits on the amount that the price of futures contracts or
related options may vary, either up or down, from the previous day's settlement
price. These daily limits may restrict the Fund's ability to purchase or sell
certain futures contracts or related options on any particular day.

THE FUND'S ABILITY TO ENTER INTO FUTURES CONTRACTS AND OPTIONS THERON IS
LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE FOR QUALIFICATION AS A
REGULATED INVESTMENT COMPANY. SEE "TAXES" AND "INVESTMENT OBJECTIVE AND
POLICIES" IN THE STATEMENT OF ADDITIONAL INFORMATION.

RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES

PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS INVOLVES INVESTMENT RISKS AND
TRANSACTION COSTS TO WHICH THE FUND WOULD NOT BE SUBJECT ABSENT THE USE OF THESE
STRATEGIES. THE FUND, AND THUS THE INVESTOR, MAY LOSE MONEY IF THE FUND IS
UNSUCCESSFUL IN ITS USE OF THESE STRATEGIES. If the investment adviser's
prediction of movements in the direction of the securities markets is
inaccurate, the adverse consequences to the Fund may leave the Fund in a worse
position than if such strategies were not used. Risks inherent in the use of
options and stock index futures include (1) dependence on the investment
adviser's ability to predict correctly movements in the direction of specific
securities being hedged or the movement in stock indices; (2) imperfect
correlation between the price of options and stock index futures and options
thereon and movements in the prices of the securities being hedged; (3) the fact
that skills needed to use these strategies are different from those needed to
select portfolio securities; (4) the possible absence of a liquid secondary
market for any particular instrument at any time; and (5) the possible need to
defer closing out certain hedged positions to avoid adverse tax consequences.
See "Investment Objective and Policies" and "Taxes" in the Statement of
Additional Information.

Additionally, the Fund's successful use of forward foreign currency exchange
contracts, options on foreign currencies, futures contracts on foreign
currencies and options on such contracts depends upon the investment adviser's
ability to predict the direction of the market and political conditions, which
requires different skills and techniques than predicting changes in the
securities markets generally. For instance, if the value of the securities being
hedged moves in a favorable direction, the advantage to the Fund would be wholly
or partially offset by a loss in the forward contracts or futures contracts.
Further, if the value of the securities being hedged does not change, the Fund's
net income would be less than if the Fund had not hedged since there are
transactional costs associated with the use of these investment practices.

These practices are subject to various additional risks. The correlation
between movements in the price of options and futures contracts and the price of
the currencies being hedged is imperfect. The use of these instruments will
hedge only the currency risks associated with investments in foreign securities,
not market risks. In addition, if the Fund purchases these instruments to hedge
against currency advances before it invests in securities denominated in such
currency and the currency market declines, the Fund might incur a loss on the
futures contract. The Fund's ability to establish and maintain positions will
depend on market liquidity. The ability of the Fund to close out a futures
position or an option depends upon a liquid secondary market. There is no
assurance that liquid secondary markets will exist for any particular futures
contract or option at any particular time. There can be no assurance that the
Fund will be able to successfully hedge its portfolio or that foreign exchange
rates will be sufficiently predictable to enable the investment advisor to
employ hedging (including cross-hedging) techniques.

The Fund will generally purchase options and futures on an exchange only if
there appears to be a liquid secondary market for such options or futures; the
Fund will generally purchase OTC options only if management believes that the
other party to the options will continue to make a market for such options.

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<PAGE>
OTHER INVESTMENTS AND POLICIES

FOREIGN INVESTMENTS

The Fund may invest up to 15% of its total assets in securities of foreign
issuers (including securities of issuers domiciled outside of the U.S. which
trade on a national securities exchange, obligations of foreign branches of
domestic banks and American Depositary Receipts).

Investing in securities of foreign companies and countries involves certain
considerations and risks which are not typically associated with investing in
securities of domestic companies. Foreign companies are not generally subject to
uniform accounting, auditing and financial standards and requirements comparable
to those applicable to U.S. companies. There may also be less government
supervision and regulation of foreign securities exchanges, brokers and public
companies than exists in the United States. Dividends and interest paid by
foreign issuers may be subject to withholding and other foreign taxes which may
decrease the net return on such investments as compared to dividends and
interest paid to the Fund by domestic companies. There may be the possibility of
expropriations, confiscatory taxation, political, economic or social instability
or diplomatic developments which could affect assets of the Fund held in foreign
countries. There may be less publicly available information about foreign
companies and governments compared to reports and ratings published about U.S.
companies. Foreign securities markets have substantially less volume than, for
example, the New York Stock Exchange and securities of some foreign companies
are less liquid and more volatile than securities of comparable U.S. companies.
Brokerage commissions and other transaction costs of foreign securities
exchanges are generally higher than in the United States. In addition, a
portfolio of foreign securities may be adversely affected by fluctuations in the
relative rates of exchange between the currencies of different nations and by
exchange control regulations.

The financial condition and results of operations of many domestic issuers
in which the Fund is permitted to invest may be affected by some of the
foregoing factors to the extent that their sales are made and/or their
operations are conducted outside the U.S.

REPURCHASE AGREEMENTS

The Fund may on occasion enter into 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 Prudential Mutual Fund Management LLC,
pursuant to an order of the Securities and Exchange Commission (SEC).

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

The Fund may purchase or sell securities on a when-issued or delayed delivery
basis. When-issued or delayed delivery transactions arise when securities are
purchased or sold by the Fund with payment and delivery taking place as much as
a month or more in the future in order to secure what is considered to be an
advantageous price and yield to the Fund at the time of entering into the
transaction. The Fund's Custodian will maintain, in a segregated account of the
Fund, cash or liquid securities having a value equal to or greater than the
Fund's purchase commitments; the Custodian will likewise segregate securities
sold on a delayed delivery basis. The securities so purchased are subject to
market fluctuation and no interest accrues to the purchaser during the period
between purchase and settlement. At the time of delivery of the securities the
value may be more or less than the purchase price and an increase in the
percentage of the Fund's assets committed to the purchase of securities on a
when-issued or delayed delivery basis may increase the volatility of the Fund's
net asset value.

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BORROWING

The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) from banks for temporary,
emergency or extraordinary purposes or for the clearance of transactions. The
Fund may pledge up to 20% of its total assets to secure these borrowings.
However, the Fund will not purchase portfolio securities when borrowings exceed
5% of the value of the Fund's total assets.

SHORT SALES AGAINST-THE-BOX

The Fund may make short sales of securities or maintain a short position,
provided that at all times when a short position is open the Fund owns an equal
amount of such securities or securities convertible into or exchangeable,
without payment of any further consideration, for an equal amount of the
securities of the same issuer as the securities sold short (a short sale
against-the-box), and that not more than 25% of the Fund's net assets
(determined at the time of the short sale) may be subject to such sales. Short
sales will be made primarily to defer realization of gain or loss for federal
tax purposes. The Fund does not intend to have more than 5% of its net assets
(determined at the time of the short sale) subject to short sales
against-the-box during the coming year. Legislation proposed by the Clinton
Administration could prevent or substantially limit the use of short sales
against-the-box to defer realization of gain or loss for Federal income tax
purposes. It is uncertain whether, when and in what form this proposal or
similar legislation will be enacted into law.

ILLIQUID SECURITIES

The Fund may hold up to 15% 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) and privately placed commercial paper,
that have a readily available market are not considered illiquid for purposes of
this limitation. The investment adviser will monitor the liquidity of such
restricted securities under the supervision of the Board of Directors. The
Fund's investment in Rule 144A securities could have the effect of increasing
illiquidity to the extent that qualified institutional buyers become, for a
limited time, uninterested in purchasing Rule 144A securities. Repurchase
agreements subject to demand are deemed to have a maturity equal to the
applicable notice period.

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 MANAGER CONDUCTS AND SUPERVISES THE
DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY
INVESTMENT ADVISORY SERVICES.

For the fiscal year ended September 30, 1996, the Fund's total expenses as a
percentage of average net assets for the Fund's Class A, Class B, Class C and
Class Z shares were 1.24%, 1.99%, 1.99%, and .99% (annualized), respectively.
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 .70 OF 1% OF THE
FUND'S AVERAGE DAILY NET ASSETS. PMF is organized as a limited liability
company. It is the successor to Prudential Mutual Fund Management, Inc., which
transferred its assets to PMF in September 1996. For the fiscal year ended
September 30, 1996, the Fund paid management fees to PMF of .70% of the Fund's
average net assets. See "Manager" in the Statement of Additional Information.

As of October 31, 1996, PMF served as the manager to 38 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 $53 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 (PIC OR THE SUBADVISER), 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 PIC's performance of such services.

The current portfolio manager of the Fund is Roger E. Ford, a Managing
Director of PIC. Mr. Ford has responsibility for the day-to-day management of
the Fund's portfolio. Mr. Ford has managed the Fund's portfolio since July 1995
and manages a number of other portfolios advised by PIC. Mr. Ford has been
employed by PIC as a portfolio manager since 1972.

PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance
Company of America (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 CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED
SUBSIDIARY OF PRUDENTIAL.

UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES INCURS THE EXPENSE OF
DISTRIBUTING THE FUND'S CLASS A,

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CLASS B AND CLASS C SHARES. PRUDENTIAL SECURITIES ALSO INCURS THE EXPENSE OF
DISTRIBUTING THE FUND'S CLASS Z SHARES UNDER THE DISTRIBUTION AGREEMENT, NONE OF
WHICH IS PAID FOR OR REIMBURSED BY THE FUND. These expenses include commissions
and account servicing fees paid to, or on account of, financial advisers of
Prudential Securities and representatives of Pruco Securities Corporation
(Prusec), an affiliated broker-dealer, commissions and 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 PSI, 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 Fund shares, including lease, utility, communications and sales
promotion expenses. The State of Texas requires that shares of the Fund may be
sold in that state only by dealers or other financial institutions which are
registered there as broker-dealers.

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

UNDER THE CLASS A PLAN, THE FUND MAY PAY PSI FOR ITS DISTRIBUTION-RELATED
ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The Class A Plan provides
that (i) up to .25 of 1% of the average daily net assets of the Class A shares
may be used to pay for personal service and/ or the maintenance of shareholder
accounts (service fee) and (ii) total distribution fees (including the service
fee of .25 of 1%) may not exceed .30 of 1% of the average daily net assets of
the Class A shares. PSI has agreed to limit its distribution-related fees
payable under the Class A Plan to .25 of 1% of the average daily net assets of
the Class A shares for the fiscal year ending September 30, 1997.

UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS PRUDENTIAL SECURITIES FOR
ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C SHARES
AT AN ANNUAL RATE OF 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE CLASS B
AND CLASS C SHARES. The Class B and Class C Plans provide for the payment to
Prudential Securities of (i) an asset-based sales charge of .75 of 1% of the
average daily net assets of each of the Class B and Class C shares, and (ii) a
service fee of .25 of 1% of the average daily net assets of each of the Class B
and Class C shares. The service fee is used to pay for personal service and/or
the maintenance of shareholder accounts. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."

For the fiscal year ended September 30, 1996, the Fund paid distribution
expenses of .25%, 1% and 1% of the average net assets of the Class A, Class B
and Class C shares, respectively. The Fund records all payments made under the
Plans as expenses in the calculation of net investment income. See "Distributor"
in the Statement of Additional Information.

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

Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to the
Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each Plan
may be terminated at any time by vote of a majority of the Rule 12b-1 Directors
or of a majority of the outstanding shares of the applicable class of the Fund.
The Fund will not be obligated to pay expenses incurred under any plan if it is
terminated or not continued.

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

17
<PAGE>
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.

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 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 remedial 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 $5,000,000 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, 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 changes. 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 a broker or futures commission merchant 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, 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 LCC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent 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.

18
<PAGE>
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. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
BOARD OF DIRECTORS HAS FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE
FUND'S NAV TO BE AS OF 4:15 P.M., NEW YORK TIME.

Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.

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 shares have been received by the Fund 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.

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

HOW THE FUND CALCULATES PERFORMANCE

FROM TIME TO TIME THE FUND MAY ADVERTISE ITS TOTAL RETURN (INCLUDING "AVERAGE
ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) AND YIELD IN ADVERTISEMENTS
OR SALES LITERATURE. TOTAL RETURN AND YIELD ARE CALCULATED SEPARATELY FOR CLASS
A, CLASS B, CLASS C AND CLASS Z SHARES. THESE FIGURES ARE BASED ON HISTORICAL
EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "total return"
shows how much an investment in the Fund would have increased (decreased) over a
specified period of time (I.E., one, five or ten years or since inception of the
Fund) assuming that all distributions and dividends by the Fund were reinvested
on the reinvestment dates during the period and less all recurring fees. The
"aggregate" total return reflects actual performance over a stated period of
time. "Average annual" total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. "Average annual" total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither "average
annual" total return nor "aggregate" total return takes into account any federal
or state income taxes which may be payable upon redemption. The "yield" refers
to the income generated by an investment in the Fund over a one-month or 30-day
period. This income is then "annualized;" that is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each 30-day period for twelve periods and is shown as a percentage of the
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. The Fund also may include comparative
performance information in advertising or marketing the Fund's shares. Such
performance information may include data from Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., other industry publications, business
periodicals and market indices. See "Performance Information" in the Statement
of Additional Information. Further performance information is contained in the
Fund's annual and semi-annual reports to shareholders, which may be obtained
without charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."

19
<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 ITS SHAREHOLDERS. See "Taxes"
in the Statement of Additional Information.

TAXATION OF SHAREHOLDERS

Any dividends out of net investment income, together with distributions of
net short-term capital gains (I.E., the excess of net short-term capital gains
over net capital losses), will be taxable as ordinary income to the shareholder
whether or not reinvested. Any net long-term capital gains (I.E., the excess of
net long-term capital gains over net short-term capital losses) distributed to
shareholders will be taxable as such to the shareholders, whether or not
reinvested and regardless of the length of time a shareholder has owned his or
her shares. The maximum long-term capital gains rate for individuals is 28%. The
maximum long-term capital gains rate for corporate shareholders is currently the
same as the maximum tax rate for ordinary income.

Dividends paid by the Fund are eligible for the 70% dividends-received
deduction for corporate shareholders, to the extent that the Fund's income is
derived from certain dividends received from domestic corporations. Capital gain
distributions are not eligible for the 70% dividends-received deduction. Under
legislation proposed by the Clinton Administration, the dividends-received
deduction allowed in respect of eligible dividends paid by the Fund would be
reduced from 70% to 50%. It is uncertain whether, when and in what form this
proposal or similar legislation will be enacted into law.

Any gain or loss realized upon a sale or redemption (including any exchange
of Fund shares for property other than fund shares of another class) of Fund
shares by a shareholder who is not a dealer in securities will generally be
treated as a long-term capital gain or loss if the shares have been held for
more than one year and otherwise as a short-term capital gain or loss. Any such
loss on shares that are held for six months or less, however, will be treated as
a long-term capital loss to the extent of any capital gain distributions
received by the shareholder with respect to those shares.

The Fund has obtained opinions of counsel to the effect that (i) the
conversion of Class B shares into Class A shares or (ii) the exchange of any
class of the Fund's shares for any other class of its shares does not constitute
a taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.

Shareholders should consult their own tax advisers regarding specific
questions as to federal, state or local taxes.

WITHHOLDING TAXES

Under the Internal Revenue Code, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividends, capital gain distributions and redemption
proceeds payable to individuals and certain other 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) with the required
certifications regarding the shareholder's status under the federal income tax
laws. 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 of net investment income and
short-term capital gains to a foreign shareholder will generally be subject to
U.S. withholding tax at the rate of 30% (or lower treaty rate).

20
<PAGE>
DIVIDENDS AND DISTRIBUTIONS

THE FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY,
SEMI-ANNUALLY AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET CAPITAL GAINS.
Dividends paid by the Fund with respect to each class of shares, to the extent
any dividends are paid, will be calculated in the same manner, at the same time,
on the same day and will be in the same amount except that each class will bear
its own distribution charges. This generally will result in lower dividends for
Class B and Class C shares in relation to Class A and Class Z shares and lower
dividends for Class A shares in relation to Class Z shares. Distributions of net
capital gains, if any, will be paid in the same amount for each class of shares.
See "How the Fund Values its Shares."

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

WHEN THE FUND GOES "EX-DIVIDEND," THE NAV OF EACH CLASS IS REDUCED BY THE
AMOUNT OF THE DIVIDEND OR DISTRIBUTION ALLOCABLE TO EACH CLASS. IF YOU BUY
SHARES JUST PRIOR TO THE EX-DIVIDEND DATE, THE PRICE YOU PAY WILL INCLUDE THE
DIVIDEND OR DISTRIBUTION AND A PORTION OF YOUR INVESTMENT WILL BE RETURNED TO
YOU AS A TAXABLE DIVIDEND OR DISTRIBUTION. YOU SHOULD, THEREFORE, CONSIDER THE
TIMING OF DIVIDENDS AND DISTRIBUTIONS WHEN MAKING YOUR PURCHASES.

GENERAL INFORMATION

DESCRIPTION OF COMMON STOCK

THE FUND WAS INCORPORATED IN MARYLAND ON JULY 28, 1980. THE FUND IS
AUTHORIZED TO ISSUE 750 MILLION SHARES OF COMMON STOCK, $.01 PAR VALUE PER
SHARE, DIVIDED INTO FOUR CLASSES, DESIGNATED CLASS A, CLASS B, CLASS C AND CLASS
Z COMMON STOCK. CLASS A, CLASS B AND CLASS Z SHARES EACH CONSISTS OF 200 MILLION
AUTHORIZED SHARES; CLASS C SHARES CONSIST OF 150 MILLION AUTHORIZED SHARES. Each
class of common stock represents an interest in the same assets of the Fund and
is identical in all respects except that (i) each class (except Class Z) is
subject to different sales charges and distribution or service fees, which may
affect performance, (ii) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its distribution arrangement
and has separate voting rights on any matter submitted to shareholders in which
the interests of one class differ from the interests of any other class, (iii)
each class has a different exchange privilege, (iv) only Class B shares have a
conversion feature and (v) Class Z shares are offered exclusively for sale to a
limited group of investors. In accordance with the Fund's Articles of
Incorporation, the Board of Directors may authorize the creation of additional
series of common stock and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Board may
determine.

The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class bears the
expenses related to the distribution of its shares (with the exception of Class
Z shares, which are not subject to any distribution or service fee). Except for
the conversion feature applicable to the Class B shares, there are no
conversion, preemptive or other subscription rights. In the event of
liquidation, each share of common stock of the Fund is entitled to its portion
of all of the Fund's assets after all debt and expenses of the Fund have been
paid. Since Class B and Class C

21
<PAGE>
shares generally bear higher distribution expenses than Class A shares and Class
Z shares, the liquidation proceeds to shareholders of those classes are likely
to be lower than to Class A and Class Z shareholders. The Fund's shares 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 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

YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial investment
is $1,000 for Class A and Class B shares and $5,000 for Class C shares (this
minimum for Class C shares may be waived from time to time). The minimum
subsequent investment is $100 for all classes, except for Class Z shares, which
are not subject to any minimum investment requirement. All minimum investment
requirements are waived for certain retirement and employee savings plans or
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.

THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER
BY THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT
YOUR OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES)
OR (II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). CLASS Z SHARES ARE
OFFERED TO A LIMITED GROUP OF INVESTORS AT NET ASSET VALUE WITHOUT ANY SALES
CHARGE. SEE "ALTERNATIVE PURCHASE PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS
SHARES." PARTICIPANTS IN PROGRAMS SPONSORED BY PRUDENTIAL RETIREMENT SERVICES
SHOULD CONTACT THEIR CLIENT REPRESENTATIVE FOR MORE INFORMATION ABOUT CLASS Z
SHARES.

Application forms can be obtained from PMFS, Prudential Securities 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.

The Fund reserves the right 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.

Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.

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

22
<PAGE>
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, class election, dividend distribution election, amount
being wired, and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company, Boston,
Massachusetts, Custody and Shareholder Services Division, Attention: Prudential
Small Companies Fund, Inc., specifying on the wire the account number assigned
by PMFS and your name and identifying the sales charge alternative (Class A,
Class B, Class C or Class Z shares).

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

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

ALTERNATIVE PURCHASE PLAN

THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS
Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).

<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
------------------------------ ------------------------------ ------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge .30 of 1% (currently being Initial sales charge waived or
of 5% of the public offering charged at a rate of .25 of reduced for certain purchases
price 1%)

CLASS B Maximum contingent deferred 1% Shares convert to Class A
sales charge or CDSC of 5% of shares approximately seven
the lesser of the amount years after purchase
invested or the redemption
proceeds; declines to zero
after six years

CLASS C Maximum CDSC of 1% of the 1% Shares do not convert to
lesser of the amount invested another class
or the redemption proceeds on
redemptions made within one
year of purchase

CLASS Z None None Sold to a limited group of
investors
</TABLE>

The four classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
(except Class Z) is subject to different sales charges and distribution or
service fees, which may affect performance, (ii) each class has exclusive voting
rights on any matter submitted to shareholders that relates solely to its
distribution arrangement and has separate voting rights on any matter submitted
to shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv) only
Class B shares have a conversion feature and (v) Class Z shares are offered
exclusively for sale to a limited group of investors. The income attributable to

23
<PAGE>
each class and the dividends payable on the shares of each class will be reduced
by the amount of the distribution fee of each class. Class B and Class C shares
bear the expenses of a higher distribution fee which will generally cause them
to have higher expense ratios and to pay lower dividends than the Class A and
Class Z shares.

Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B, Class C and Class Z
shares and will generally receive more compensation initially for selling Class
A and Class B shares than for selling Class C and Class Z shares.

IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares automatically
convert to Class A shares approximately seven years after purchase (see
"Conversion Feature--Class B Shares" below).

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

If you intend to hold your investment in the Fund for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 5% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.

If you intend to hold your investment for 7 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.

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

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

ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A
SHARES, UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. SEE
"REDUCTION AND WAIVER OF INITIAL SALES CHARGES" AND "CLASS Z SHARES" BELOW.

24
<PAGE>
CLASS A SHARES

The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:

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

Prudential Securities may reallow the entire sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.

In connection with the sale of Class A shares at NAV (without an initial
sales charge), the Manager, PSI or one of their affiliates may pay dealers,
financial advisors and other persons who distribute shares a finder's fee based
on a percentage of the net asset value of shares sold by such persons.

REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.

BENEFIT PLANS. Class A shares may be purchased at NAV, without payment of
an initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (collectively, Benefit Plans), provided that the Benefit Plan has
existing assets of at least $1 million invested in shares of Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) or 250 eligible employees or participants. In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential Securities
does individual account record keeping (Direct Account Benefit Plans) and
Benefit Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary Prototype
Benefit Plans), Class A shares may be purchased at NAV by participants who are
repaying loans made from such plans to the participant.

PRUARRAY AND SMARTPATH PLANS. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or
non-qualified under the Internal Revenue Code, including pension,
profit-sharing, stock-bonus or other employee benefit plans under Section 401 of
the Internal Revenue Code and deferred compensation and annuity plans under
Sections 457 and 403(b)(7) of the Internal Revenue Code that participate in the
Prudential's PruArray or SmartPath Programs (a benefit plan record keeping
service) (hereafter referred to as a PruArray or SmartPath Plan), provided (i)
that the plan has at least $1 million in existing assets or 250 eligible
employees or participants. The term "existing assets" for this purpose includes
stock issued by a PruArray or SmartPath Plan sponsor and shares of non-money
market Prudential Mutual Funds and shares of certain unaffiliated non-money
market mutual funds that participate in the PruArray or SmartPath Programs
(Participating Funds). "Existing assets" also include shares of money market
funds acquired by exchange from a Participating Fund.

SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a Benefit Plan,
PruArray Plan or SmartPath Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.

25
<PAGE>
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
current and former directors/trustees and current officers of the Prudential
Mutual Funds (including the Fund), (b) employees of Prudential Securities and
PMF and their subsidiaries and members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the Transfer
Agent, (c) employees and special agents of Prudential and its subsidiaries and
all persons who have retired directly from active service with Prudential or one
of its subsidiaries, (d) registered representatives and employees of dealers who
have entered into a selected dealer agreement with Prudential Securities
provided that purchases at NAV are permitted by such person's employer and (e)
investors who have a business relationship with a financial adviser who joined
Prudential Securities from another investment firm, provided that (i) the
purchase is made within 180 days of the commencement of the financial adviser's
employment at Prudential Securities, or within one year in the case of a Benefit
Plan, (ii) the purchase is made with proceeds of a redemption of shares of any
open-end fund sponsored by the financial adviser's previous employer (other than
a money market fund or other no-load fund which imposes a distribution or
service fee of .25 of 1% or less) and (iii) the financial adviser served as the
client's broker on the previous purchases.

You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.

CLASS B AND CLASS C SHARES

The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."

Prudential Securities will pay sales commissions of up to 4% and 1% of the
purchase price of Class B shares and Class C shares, respectively, to dealers,
financial advisers and other persons who sell Class B and Class C shares at the
time of sale from its own resources. This facilitates the ability of the Fund to
sell the Class B and Class C shares without an initial sales charge being
deducted at the time of purchase. Prudential Securities anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC and
the distribution fee. See "Distributor" above.

CLASS Z SHARES

Class Z shares of the Fund are available for purchase by (i) pension,
profit-sharing or other employee benefit plans qualified under Section 401 of
the Internal Revenue Code, deferred compensation and annuity plans under Section
457 and 403(b)(7) of the Internal Revenue Code and non-qualified plans for which
the Fund is an available option (collectively, Benefit Plans), provided such
Benefit Plans (in combination with other plans sponsored by the same employer or
group of related employers) have at least $50 million in defined contribution
assets; (ii) participants in any fee-based program sponsored by Prudential
Securities (or one of its affiliates) that includes mutual funds as investment
options and for which the Fund is an available option; (iii) certain
participants in the MEDLEY Program (group variable annuity contracts) sponsored
by Prudential for whom Class Z shares of the Prudential Mutual Funds are an
available investment option; and (iv) Benefit Plans for which Prudential
Retirement Services serves as record keeper and as of September 20, 1996, (a)
were Class Z shareholders or (b) executed a letter of intent to purchase Class Z
shares of the Prudential Mutual Funds. After a Benefit Plan qualifies to
purchase Class Z shares, all subsequent purchases will be for Class Z shares.

In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee based on a percentage of the net asset
value of shares sold by such persons.

26
<PAGE>
Participants in programs sponsored by Prudential Retirement Services should
contact their group representative for more information about Class Z shares.

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." In certain cases,
however, redemption proceeds will be reduced by the amount of any applicable
contingent deferred sales charge, as described below. See "Contingent Deferred
Sales Charges" below.

IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION
REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE
TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P.O. Box 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 or Preferred Services offices.

PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the SEC, by
order, so permits; provided that applicable rules and regulations of the SEC
shall govern as to whether the conditions prescribed in (b), (c) or (d) 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.

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

27
<PAGE>
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.

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

CONTINGENT DEFERRED SALES CHARGES

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

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

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

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

In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of

28
<PAGE>
payments for the purchase of Fund shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
then of amounts representing the cost of shares acquired prior to July 1, 1985;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.

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

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

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

The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code for a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (I.E.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.

In addition, the CDSC will be waived on redemptions of shares held by a
Director of the Fund.

You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.

A quantity discount may apply to redemptions of Class B shares purchased
prior to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.

29
<PAGE>
CONVERSION FEATURE--CLASS B SHARES

Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
The first conversion of Class B shares occurred in February 1995, when the
conversion feature was first implemented.

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

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

Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of conversion. Thus, although
the aggregate dollar value will be the same, you may receive fewer Class A
shares than Class B shares converted. See "How the Fund Values its Shares."

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

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

HOW TO EXCHANGE YOUR SHARES

AS A SHAREHOLDER OF THE FUND YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS
C AND CLASS Z SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS OF THE RELATIVE
NAV. No sales charge will be imposed at the time of the

30
<PAGE>
exchange. Any applicable CDSC payable upon the redemption of shares exchanged
will be calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. Class B and Class C
shares may not be exchanged into money market funds other than Prudential
Special Money Market Fund. For purposes of calculating the holding period
applicable to the Class B conversion feature, the time period during which Class
B shares were held in a money market fund will be excluded. See "Conversion
Feature-- Class B Shares" above. An exchange will be treated as a redemption and
purchase for tax purposes. See "Shareholder Investment Account--Exchange
Privilege" in the Statement of Additional Information.

IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order. The Exchange Privilege is available only in states where the
exchange may legally be made.

IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.

IF YOU HOLD CERTIFICATES, THE CERTIFICATES, 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 MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.

SPECIAL EXCHANGE PRIVILEGE. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (neither of which
are subject to a CDSC) held in such a shareholder's account will be
automatically exchanged for Class A shares for shareholders who qualify to
purchase Class A shares at NAV on a quarterly basis, unless the shareholder
elects otherwise. Similarly, shareholders who qualify to purchase Class Z shares
will have their Class B and Class C shares (which are not subject to a CDSC) and
their Class A shares exchanged for Class Z shares on a quarterly basis.
Eligibility for this exchange privilege will be calculated on the business day
prior to the date of the exchange. Amounts representing Class B or Class C
shares which are not subject to a CDSC include the following: (1) amounts
representing Class B or Class C shares acquired pursuant to the automatic
reinvestment of dividends and distributions, (2) amounts representing the
increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special exchange
privilege.

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

31
<PAGE>
401(k) Plan for which the Fund's Class Z shares is an available option and who
wish to transfer their Class Z shares out of the PSI 401(k) Plan following
separation from service (I.E., voluntary or involuntary termination of
employment or retirement) will have their Class Z shares exchanged for Class A
shares at net asset value.

The Fund reserves the right to reject any exchange order including exchanges
(and market timing transactions) which are of size and/or frequency engaged in
by one or more accounts acting in concert or otherwise, that have or may have an
adverse effect on the ability of the Subadviser to manage the portfolio. The
determination that such exchanges or activity may have an adverse effect and the
determination to reject any exchange order shall be in the discretion of the
Manager and the Subadviser.

The Exchange Privilege is not a right and may be modified, suspended or
terminated upon 60 day's notice to shareholders.

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:

- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. 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.

- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including a
Command Account). For additional information about this service, you may contact
your Prudential Securities financial adviser, Prusec representative or the
Transfer Agent directly.

- TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.

- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges."

- 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 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. In addition, monthly
unaudited financial data are available upon request from the Fund.

- 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.

32
<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 representative or telephone the Funds 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
The Global Government Plus Fund, Inc.
The Global Total Return Fund, Inc.
Global Utility 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 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
----------------------
-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.

-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

-COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund

-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

<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
Risk Factors and Special Characteristics...... 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 9
Investment Objective and Policies............. 9
Hedging and Return Enhancement Strategies..... 10
Other Investments and Policies................ 14
Investment Restrictions....................... 15
HOW THE FUND IS MANAGED......................... 16
Manager....................................... 16
Distributor................................... 16
Portfolio Transactions........................ 18
Custodian and Transfer and Dividend Disbursing
Agent....................................... 18
HOW THE FUND VALUES ITS SHARES.................. 19
HOW THE FUND CALCULATES PERFORMANCE............. 19
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 20
GENERAL INFORMATION............................. 21
Description of Common Stock................... 21
Additional Information........................ 22
SHAREHOLDER GUIDE............................... 22
How to Buy Shares of the Fund................. 22
Alternative Purchase Plan..................... 23
How to Sell Your Shares....................... 27
Conversion Feature--Class B Shares............ 30
How to Exchange Your Shares................... 30
Shareholder Services.......................... 32
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>

- -------------------------------------------
MF109A 44401I

Class A: 743968 10 9
Class B: 743968 20 8
CUSIP Nos.: Class C: 743968 30 7
Class Z: 743968 40 6

<PAGE>
[PRUDENTIAL SMALL COMPANIES FUND, INC.]
<PAGE>

PRUDENTIAL SMALL COMPANIES FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 6, 1997

Prudential Small Companies Fund, Inc. (the Fund), is an open-end diversified
management investment company whose objective is capital growth. The Fund
intends to invest principally in a carefully selected portfolio of common
stocks, generally stocks having prospects of a high return on equity, increasing
earnings, increasing dividends (or an expectation of dividends), and price
earnings ratios which are not excessive. The Fund's purchase and sale of put and
call options and related short-term trading may result in a high portfolio
turnover rate. These activities may be considered speculative and may result in
higher risks and costs to the Fund. The Fund may also buy and sell stock index
futures and may buy and sell options on stock indices pursuant to limits
described herein. 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, Newark, New Jersey 07102, and
its telephone number is (800) 225-1852.

This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus, dated January 6, 1997. A copy of
the Prospectus may be obtained from the Fund upon request.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ---------------
<S> <C> <C>
General Information................................... B-2 18
Investment Objective and Policies..................... B-2 8
Investment Restrictions............................... B-9 12
Directors and Officers................................ B-10 12
Manager............................................... B-13 13
Distributor........................................... B-15 13
Portfolio Transactions and Brokerage.................. B-17 15
Purchase and Redemption of Fund Shares................ B-19 19
Shareholder Investment Account........................ B-22 27
Net Asset Value....................................... B-25 15
Performance Information............................... B-26 16
Taxes................................................. B-28 16
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants.............................. B-29 15
Financial Statements.................................. B-30 --
Report of Independent Accountants..................... B-39 --
Appendix A -- General Investment Information.......... A-1 --
Appendix B -- Historical Performance Data............. B-1 --
</TABLE>

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

MF109B 444081A
<PAGE>
GENERAL INFORMATION

At a special meeting held on July 19, 1994, shareholders approved an
amendment to the Fund's Articles of Incorporation to change the Fund's name from
Prudential-Bache Growth Opportunity Fund, Inc. to Prudential Growth Opportunity
Fund, Inc. At a meeting of the Fund's Board of Directors held on May 9, 1996,
shareholders approved an amendment to the Fund's Articles of Incorporation to
change the Fund's name from Prudential Growth Opportunity Fund, Inc., to
Prudential Small Companies Fund, Inc.

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is capital growth. It attempts to achieve
such objective by investing principally in a carefully selected portfolio of
common stocks. There can be no assurance that the Fund's investment objective
will be achieved. See "How the Fund Invests--Investment Objective and Policies"
in the Prospectus.

The investment adviser believes that, in seeking to attain capital
appreciation, it is important to attempt to minimize losses. Accordingly, the
investment adviser will attempt to anticipate periods when stock prices
generally decline. When, in the investment adviser's judgment, such a period is
imminent, the Fund will take defensive measures, such as investing all or part
of the Fund's assets in money market instruments during this period. The Fund
may also engage in various derivatives transactions, such as the purchase and
sale of options on stocks, stock indices and foreign currencies, forward foreign
currency exchange contracts and futures contracts on stock indices and foreign
currencies and options thereon to hedge its portfolio and to attempt to enhance
return.

The Fund may invest without limit in high quality money market instruments
(a) when conditions dictate a temporary defensive strategy, (b) until the
proceeds from the sale of the Fund's shares have been invested or (c) during
temporary periods of portfolio restructuring. Such instruments may include
commercial paper of domestic corporations, certificates of deposit, repurchase
agreements, bankers' acceptances and other obligations of domestic banks, and
obligations issued or guaranteed by the United States Government, its
instrumentalities or its agencies.

LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS, OPTIONS ON STOCK INDICES AND
STOCK INDEX FUTURES

CALL OPTIONS ON STOCK. The Fund may, from time to time, write call options
on its portfolio securities. The Fund may only write call options which are
"covered," meaning that the Fund either owns the underlying security or has an
absolute and immediate right to acquire that security, without additional cash
consideration, upon conversion or exchange of other securities currently held in
its portfolio. In addition, the Fund will not permit the call to become
uncovered prior to the expiration of the option or termination through a closing
purchase transaction as described below. If the Fund writes a call option, the
purchaser of the option has the right to buy (and the Fund has the obligation to
sell) the underlying security at the exercise price throughout the term of the
option. The amount paid to the Fund by the purchaser of the option is the
"premium." The Fund's obligation to deliver the underlying security against
payment of the exercise price would terminate either upon expiration of the
option or earlier if the Fund were to effect a "closing purchase transaction"
through the purchase of an equivalent option on an exchange. There can be no
assurance that a closing purchase transaction can be effected.

The Fund would not be able to effect a closing purchase transaction after it
had received notice of exercise. In order to write a call option on an exchange,
the Fund is required to comply with the rules of The Options Clearing
Corporation and the various exchanges with respect to collateral requirements.
The Fund may not purchase call options except in connection with a closing
purchase transaction. It is possible that the cost of effecting a closing
purchase transaction may be greater than the premium received by the Fund for
writing the option.

Generally, the investment adviser intends to write listed covered call
options during periods when it anticipates declines in the market values of
portfolio securities because the premiums received may offset to some extent the
decline in the Fund's net asset value occasioned by such declines in market
value. Except as part of the "sell discipline" described below, the investment
adviser will generally not write listed covered call options when it anticipates
that the market values of the Fund's portfolio securities will increase.

One reason for the Fund to write call options is as part of a "sell
discipline." If the investment adviser decides that a portfolio security would
be overvalued and should be sold at a certain price higher than the current
price, the Fund could write an

B-2
<PAGE>
option on the stock at the higher price. Should the stock subsequently reach
that price and the option be exercised, the Fund would, in effect, have
increased the selling price of that stock, which it would have sold at that
price in any event, by the amount of the premium. In the event the market price
of the stock declined and the option were not exercised, the premium would
offset all or some portion of the decline. It is possible that the price of the
stock could increase beyond the exercise price; in that event, the Fund would
forego the opportunity to sell the stock at that higher price.

In addition, call options may be used as part of a different strategy in
connection with sales of portfolio securities. If, in the judgment of the
investment adviser, the market price of a stock is overvalued and it should be
sold, the Fund may elect to write a call option with an exercise price
substantially below the current market price. As long as the value of the
underlying security remains above the exercise price during the term of the
option, the option will, in all probability, be exercised, in which case the
Fund will be required to sell the stock at the exercise price. If the sum of the
premium and the exercise price exceeds the market price of the stock at the time
the call option is written, the Fund would, in effect, have increased the
selling price of the stock. The Fund would not write a call option in these
circumstances if the sum of the premium and the exercise price were less than
the current market price of the stock.

PUT OPTIONS ON STOCK. The Fund may also write listed put options. If the
Fund writes a put option, it is obligated to purchase a given security at a
specified price at any time during the term of the option.

Writing listed put options is a useful portfolio investment strategy when
the Fund has cash or other reserves available for investment as a result of
sales of Fund shares or, more importantly, because the investment adviser
believes a more defensive and less fully invested position is desirable in light
of market conditions. If the Fund wishes to invest its cash or reserves in a
particular security at a price lower than current market value, it may write a
put option on that security at an exercise price which reflects the lower price
it is willing to pay. The buyer of the put option generally will not exercise
the option unless the market price of the underlying security declines to a
price near or below the exercise price. If the Fund writes a listed put, the
price of the underlying stock declines and the option is exercised, the premium,
net of transaction charges, will reduce the purchase price paid by the Fund for
the stock. The price of the stock may decline by an amount in excess of the
premium, in which event the Fund would have foregone an opportunity to purchase
the stock at a lower price.

If, prior to the exercise of a put option, the investment adviser determines
that it no longer wishes to invest in the stock on which the put option had been
written, the Fund may be able to effect a closing purchase transaction on an
exchange by purchasing a put option of the same series as the one which it has
previously written. The cost of effecting a closing purchase transaction may be
greater than the premium received on writing the put option and there is no
guarantee that a closing purchase transaction can be effected.

At the time a put option is written, the Fund will be required to establish,
and will maintain until the put is exercised or has expired, a segregated
account with its custodian consisting of cash or liquid securities equal in
value to the amount the Fund will be obligated to pay upon exercise of the put
option.

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

If the Fund has written an option on an industry or market segment index, it
will segregate or put into escrow with its Custodian, or pledge to a broker as
collateral for the option, at least ten "qualified securities," which are
securities of an issuer in such industry or market segment, with a market value
at the time the option is written of not less than 100% of the current index
value times the multiplier times the number of contracts. Such securities will
include stocks which represent at least 50% of the weighting of the industry or
market segment index and will represent at least 50% of the Fund's holdings in
that industry or market segment. No individual security will represent more than
25% of the amount so segregated, pledged or escrowed. If at the close of
business on any day the market value of such qualified securities so segregated,
escrowed or pledged falls below 100% of the current index value times the
multiplier times the number of contracts, the Fund will so segregate, escrow or
pledge an amount in cash, Treasury bills or other high-grade short-term
obligations equal in value to the difference. In addition, when the Fund writes
a call on an index which is in-the-money at the time the call is written, the
Fund will segregate with its Custodian or pledge to the broker as collateral
cash or liquid securities equal in value to the amount by which the call is
in-the-money times the

B-3
<PAGE>

multiplier times the number of contracts. Any amount segregated pursuant to the
foregoing sentence may be applied to the Fund's obligation to segregate
additional amounts in the event that the market value of the qualified
securities falls below 100% of the current index value times the multiplier
times the number of contracts. A "qualified security" is an equity security
which is listed on a national securities exchange or listed on the National
Association of Securities Dealers Automated Quotation System against which the
Fund has not written a stock call option and which has not been hedged by the
Fund by the sale of stock index futures. However, if the Fund holds a call on
the same index as the call written where the exercise price of the call held is
equal to or less than the exercise price of the call written or greater than the
exercise price of the call written if the difference is maintained by the Fund
in cash or liquid securities in a segregated account with its Custodian, it will
not be subject to the requirements described in this paragraph.

STOCK INDEX FUTURES. The Fund will engage in transactions in stock index
futures contracts as a hedge against changes resulting from market conditions in
the values of securities which are held in the Fund's portfolio or which it
intends to purchase. The Fund will engage in such transactions when they are
economically appropriate for the reduction of risks inherent in the ongoing
management of the Fund. The Fund may not purchase or sell stock index futures
if, immediately thereafter, more than one-third of its net assets would be
hedged and, in addition, except as described above in the case of a call written
and held on the same index, will write call options on indices or sell stock
index futures only if the amount resulting from the multiplication of the then
current level of the index (or indices) upon which the option or future
contract(s) is based, the applicable multiplier(s), and the number of futures or
options contracts which would be outstanding, would not exceed one-third of the
value of the Fund's net assets. In instances involving the purchase of stock
index futures contracts by the Fund, an amount of cash or liquid securities
equal to the market value of the futures contracts, will be deposited in a
segregated account with the Fund's Custodian and/or in a margin account with a
broker to collateralize the position and thereby insure that the use of such
futures is unleveraged.

Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act of 1940, as amended (the Investment
Company Act), are exempt from the definition of "commodity pool operator,"
provided all of the Fund's commodity futures or commodity options transactions
constitute BONA FIDE hedging transactions within the meaning of the CFTC's
regulations. The Fund will use stock index futures and options on futures as
described herein in a manner consistent with this requirement.

RISKS OF TRANSACTIONS IN STOCK OPTIONS. Writing options involves the risk
that there will be no market in which to effect a closing transaction. An option
position may be closed out only on an exchange which provides a secondary market
for an option of the same series. Although the Fund will generally write only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange will exist for any
particular option, or at any particular time, and for some options no secondary
market on an exchange may exist. If the Fund as a covered call option writer is
unable to effect a closing purchase transaction in a secondary market, it will
not be able to sell the underlying security until the option expires or it
delivers the underlying security upon exercise. The Fund, and thus the investor,
may lose money if the Fund is unsuccessful in its use of these strategies.

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

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

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

B-4
<PAGE>
Trading in index options commenced in April 1983 with the S&P 100 option
(formerly called the CBOE 100). Since that time a number of additional index
option contracts have been introduced including options on industry indices.
Although the markets for certain index option contracts have developed rapidly,
the markets for other index options are still relatively illiquid. The ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain that
this market will develop in all index option contracts. The Fund will not
purchase or sell any index option contract unless and until, in the investment
adviser's opinion, the market for such options has developed sufficiently that
such risk in connection with such transactions is no greater than such risk in
connection with options on stocks.

SPECIAL RISKS OF WRITING CALLS ON INDICES. Because exercises of index
options are settled in cash, a call writer such as the Fund cannot determine the
amount of its settlement obligations in advance and, unlike call writing on
specific stocks, cannot provide in advance for, or cover, its potential
settlement obligations by acquiring and holding the underlying securities.
However, the Fund will write call options on indices only under the
circumstances described above under "Limitations on Purchase and Sale of Stock
Options, Options on Stock Indices and Stock Index Futures."

Price movements in the Fund's portfolio probably will not correlate
precisely with movements in the level of the index and, therefore, the Fund
bears the risk that the price of the securities held by the Fund may not
increase as much as the index. In such event, the Fund would bear a loss on the
call which is not completely offset by movements in the price of the Fund's
portfolio. It is also possible that the index may rise when the Fund's portfolio
of stocks does not rise. If this occurred, the Fund would experience a loss on
the call which is not offset by an increase in the value of its portfolio and
might also experience a loss in its portfolio. However, because the value of a
diversified portfolio will, over time, tend to move in the same direction as the
market, movements in the value of the Fund in the opposite direction as the
market would be likely to occur for only a short period or to a small degree.

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

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

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

ADDITIONAL RISKS OF PURCHASING OTC OPTIONS. In addition to those risks
described in the Prospectus under "Investment Objectives and Policies -- Hedging
and Return Enhancement Strategies -- Options Transactions," OTC Options are
subject to certain additional risks. It is not possible to effect a closing
transaction in OTC options in the same manner as listed options because a
clearing corporation is not interposed between the buyer and seller of the
option. In order to terminate the obligation represented by an OTC option, the
holder must agree to the termination of the OTC option and may be unable or
unwilling to do so on terms acceptable to the writer. In any event, a
cancellation, if agreed to, may require the writer to pay a premium to the
counterparty. Although it does not eliminate counterparty risk, the Fund may be
able to eliminate the market risk of an option it

B-5
<PAGE>

has written by writing or purchasing an offsetting position with the same or
another counterparty. However, the Fund would remain exposed to each
counterparty's credit risk on the call or put option until such option is
exercised or expires. There is no guarantee that the Fund will be able to write
put or call options, as the case may be, that will effectively offset an
existing position.

OTC options are issued in privately negotiated transactions exempt from
registration under the Securities Act of 1933 and, as a result, are generally
subject to substantial legal and contractual limitations on sale. As a result,
there is no secondary market for OTC options and the SEC staff has taken the
position that OTC options held by an investment company, as well as securities
used to cover OTC options written by one, are illiquid securities, unless the
Fund and its counterparty have provided for the Fund at its option to unwind the
option. Such provisions ordinarily involve the payment by the Fund to the
counterparty to compensate it for the economic loss caused by an early
termination. In the absence of a negotiated unwind provision, the Fund may be
unable to terminate its obligation under a written option or to enter into an
offsetting transaction eliminating its market risk.

There are currently legal and regulatory limitations on the Fund's purchase
or sale of OTC options. These limitations are not fundamental policies of the
Fund and the Fund's obligation to comply with them could be changed without
approval of the Fund's shareholders in the event of modification or elimination
of such laws or regulations in the future.

There can be no assurance that the Fund's use of OTC options will be
successful and the Fund may incur losses in connection with the purchase and
sale of OTC options.

RISKS RELATED TO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

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

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

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

B-6
<PAGE>

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

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

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

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

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

RISKS OF TRANSACTIONS IN FUTURES CONTRACTS

There are several risks in connection with the use of futures contracts as a
hedging device. Due to the imperfect correlation between the price of futures
contracts and movements in the prices of equity securities or a currency or
group of currencies, the price of a futures contract may move more or less than
the price of the equity securities or currencies being hedged. Therefore, a
contract forecast of equity prices, currency rates, market trends or
international political trends by the Manager or Subadviser may still not result
in a successful hedging transaction.

Although the Fund will purchase or sell futures contracts only on exchanges
where there appears to be an adequate secondary market, there is no assurance
that a liquid secondary market or an exchange will exist for any particular
contract or at any particular time. Accordingly, there can be no assurance that
it will be possible, at any particular time, to close a futures position. In the
event the Fund could not close a futures position and the value of such position
declined, the Fund would be required to continue to make daily cash payments of
variation margin. There is no guarantee that equity prices or the price
movements of the portfolio securities denominated in foreign currencies will, in
fact, correlate with the price movements in the futures contracts and thus
provide an offset to losses on a futures contract.

Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act are exempt from the definition of
"commodity pool operator," subject to compliance with certain conditions. The
exception is conditioned upon a requirement that all of the Fund's futures or
options transactions constitute bona fide hedging transactions within the
meaning of the Commodity Futures Trading Commission's (CFTC's) regulations. The
Fund will use stock index futures and currency futures and options on futures in
a manner consistent with this requirement. The Fund may also enter into futures
or related options contracts for income enhancement and risk management purposes
if the aggregate initial margin and option premiums do not exceed 5% of the
liquidiation value of the Fund's total assets.

Successful use of futures contracts by the Fund is also subject to the
ability of the Fund's Manager or Subadviser to predict correctly movements in
the direction of markets and other factors affecting equity securities and
currencies generally. For example, if the Fund has hedged against the
possibility of an increase in the price of securities in its portfolio and the
price of

B-7
<PAGE>

such securities increases instead, the Fund will lose part or all of the benefit
of the increased value of its securities because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash to meet daily variation margin requirements, it may need to
sell securities to meet such requirements. Such sales of securities may be, but
will not necessarily be, at increased prices which reflect the rising market.
The Fund may have to sell securities at a time when it is disadvantageous to do
so.

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

ILLIQUID SECURITIES

The Fund may not hold more than 15% 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 (either within or outside of the United States) or
legal or contractual restrictions on resale. The Subadviser will monitor the
liquidity of such restricted securities under the supervision of the Board of
Directors.

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 on an issuer's ability to honor a demand for repayment.
The fact that there are contractual or legal restrictions on resale to the
general public or to certain institutions may not be indicative of the liquidity
of such investments.

Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.

Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper 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). In addition, in order for commercial paper that is issued in
reliance on Section 4(2) of the Securities Act to be considered liquid, (i) it
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations (NRSRO), or if only one
NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable
quality in the view of the investment adviser; and (ii) it must not be "traded
flat" (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.

PORTFOLIO TURNOVER

The Fund anticipates that its annual portfolio turnover rate will not exceed
100% in normal circumstances. For the years ended September 30, 1995 and 1996,
the Fund's portfolio turnover rate was 64% and 53%, respectively.

B-8
<PAGE>
INVESTMENT RESTRICTIONS

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

The Fund may not:

(1) With respect to 75% of the Fund's total assets, invest more than 5% of
the value of its total assets in the securities of any one issuer (other than
obligations issued or guaranteed by the United States Government, its agencies
or instrumentalities). It is the current policy (but not a fundamental policy)
of the Fund not to invest more than 5% of the value of its total assets in
securities of any one issuer.

(2) Purchase more than 10% of the outstanding voting securities of any one
issuer.

(3) Invest more than 25% of the value of its total assets in securities of
issuers in any one industry. This restriction does not apply to obligations
issued or guaranteed by the United States Government or its agencies or
instrumentalities.

(4) Purchase or sell real estate or interests therein, although the Fund may
purchase securities of issuers which engage in real estate operations and
securities which are secured by real estate or interests therein.

(5) Purchase or sell commodities or commodity futures contracts, except that
transactions in foreign currency financial futures contracts and forward
contracts and related options are not considered to be transactions in
commodities or commodity contracts.

(6) Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Fund may invest in the
securities of companies which operate, invest in or sponsor such programs.

(7) Purchase securities of other investment companies, except by purchases
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.

(8) Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow up to 20% of the value of the total assets (calculated when
the loan is made) for temporary, extraordinary or emergency purposes or for the
clearance of transactions. The Fund may pledge up to 20% of the value of its
total assets to secure such borrowings. Secured 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. For purposes of
this restriction, obligations of the Fund to Directors pursuant to deferred
compensation arrangements, the purchase and sale of securities on a when-issued
or delayed delivery basis, the purchase and sale of forward foreign currency
exchange contracts and financial futures contracts and related options and
collateral arrangements with respect to margins for financial futures contracts
and with respect to options are not deemed to be the issuance of a senior
security or a pledge of assets.

(9) Make loans of money or securities, except by the purchase of debt
obligations in which the Fund may invest consistently with its investment
objective and policies or by investment in repurchase agreements.

(10) Make short sales of securities except short sales against-the-box.

(11) Purchase securities on margin, except for such short-term loans as are
necessary for the clearance of purchases of portfolio securities. (For the
purpose of this restriction, the deposit or payment by the Fund of initial or
maintenance margin in connection with financial futures contracts is not
considered the purchase of a security on margin.)

(12) Engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933, as amended (the
"Securities Act"), in disposing of a portfolio security.

(13) Invest for the purpose of exercising control or management of any other
issuer.

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.

B-9
<PAGE>
DIRECTORS AND OFFICERS

<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS+ AND AGE WITH FUND DURING PAST FIVE YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
Edward D. Beach (71) 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.; Member of the
Board of Trustees of Mars Hill College; President and Director
of First Financial Fund, Inc. and The High Yield Plus Fund, Inc.
Delayne Dedrick Gold (58) Director Marketing and Management Consultant.
*Robert F. Gunia (49) Vice President and Director Acting CFO, Prudential Investments (since September 1996), Chief
Administrative Officer (since July 1990), Director (since
January 1989), Executive Vice President, Treasurer and Chief
Financial Officer of PMF; Senior Vice President (since March
1987) of Prudential Securities; Director (since June 1987) of
PMFS; Vice President and Director of The Asia Pacific Fund, Inc.
(since May 1989).
Donald D. Lennox (77) Director Chairman (since February 1990) and Director (since April 1989) of
International Imaging Materials, Inc. (thermal transfer ribbon
manufacturer); Retired Chairman, Chief Executive Officer and
Director of Schlegel Corporation (industrial manufacturing)
(March 1987-February 1989); Director of Gleason Corporation,
Personal Sound Technologies, Inc.
Douglas H. McCorkindale (57) Director Vice Chairman, Gannett Co. Inc. (publishing and media) (since
March 1984); Director of Gannett Co. Inc., Frontier Corporation,
Continental Airlines, Inc.
*Mendel A. Melzer (35) Director Chief Investment Officer (since September 1996) of Prudential
Investments; formerly Chief Financial Officer (November 1995 to
September 1996) of Prudential Investments; 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).
Thomas T. Mooney (54) President of the Greater Rochester Metro Chamber of Commerce;
former Rochester City Manager; Trustee of Center for
Governmental Research, Inc.; Director of Blue Cross of
Rochester, Monroe County Water Authority, Rochester Jobs, Inc.,
Executive Service Corps of Rochester, Monroe County Industrial
Development Corporation, Northeast Midwest Institute, The
Business Council of New York State, First Financial Fund, Inc.
and The High Yield Plus Fund, Inc.
Stephen P. Munn (54) Director Chairman (since January 1994), Director and President (since
101 South Salina Street 1988) and Chief Executive Officer (1988-December 1993) of
Syracuse, NY Carlisle Companies Incorporated (manufacturer of industrial
products).
</TABLE>

B-10
<PAGE>

Robin B. Smith (57) Director Chairman (since August 1996), Chief Executive Officer (since
January 1988) and formerly President (1981-1996) of Publishers
Clearing House; Director of BellSouth Corporation, The Omnicom
Group, Inc., Texaco Inc., Spring Industries Inc., First
Financial Fund, Inc. and The High Yield Plus Fund, Inc.

Louis A. Weil, III (55) Director Publisher and Chief Executive Officer, Phoenix Newspapers, Inc.
120 East Van Buren (since August 1991); Director of Central Newspapers, Inc. (since
Phoenix, AZ September 1991); prior thereto, Publisher of Time Magazine (May
1989-March 1991); formerly, President, Publisher and Chief
Executive Officer, The Detroit News (February 1986-August 1989);
formerly member of the Advisory Board, Chase Manhattan Bank-
Westchester; Director of The Global Government Plus Fund,Inc.

Clay T. Whitehead (57) Director President, National Exchange Inc. (new business development firm)
(since May 1983).

Eugene S. Stark (38) Treasurer and Principal First Vice President (since January 1990) of PMF; First Vice
Financial and President of Prudential Securities (since January 1992).
Accounting Officer

Stephen M. Ungerman (42) Assistant Treasurer First Vice President of PMF (since February 1993). Prior thereto,
Senior Tax Manager at Price Waterhouse.

S. Jane Rose (50) Secretary Senior Vice President (since January 1991) and Senior Counsel and
First Vice President (June 1987-December 1990) of PMF; Senior
Vice President, and Senior Counsel of Prudential Securities
(since July 1992); formerly, Vice President and Associate
General Counsel of Prudential Securities.
</TABLE>

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

+ Unless otherwise indicated, the address is 100 Mulberry Street, Newark, New
Jersey.

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.

B-11
<PAGE>
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 Fund pays each of its Directors who is not an affiliated person of PMF
annual compensation of $6,000, in addition to certain out-of-pocket expenses.
The Chairman of the Audit Committee receives an additional $200 per year.

Directors may receive their Director's fees 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 which accrues 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 SEC exemptive order,
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 Director's fees,
together with interest thereon, is a general obligation of the Fund.

The Directors have 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.

Pursuant to the terms of the Management Agreement with the Fund, the Manager
pays all compensation of officers and employees of the Fund as well as the fees
and expenses of all Directors of the Fund who are affiliated persons of the
Manager.

The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended September 30, 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
Prudential Mutual Fund Management, Inc. (Fund Complex) for the calendar year
ended December 31, 1995.

COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM FUND
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF TRUST BENEFITS UPON COMPLEX PAID
NAME AND POSITION FROM FUND EXPENSES RETIREMENT TO TRUSTEES
- ----------------------------------------------------- ------------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Edward D. Beach -- Director None None N/A $ 183,500(22/43)*
Delayne Dedrick Gold -- Director $ 6,200 None N/A $ 183,250(24/45)*
Donald D. Lennox -- Director None None N/A $ 86,250(10/22)*
Douglas H. McCorkindale -- Director None None N/A $ 63,750(7/10)*
Thomas T. Mooney -- Director $ 6,000 None N/A $ 39,375(6/8)*
Stephen P. Munn -- Director $ 6,000 None N/A $ 39,375(6/8)*
Robin B. Smith -- Director None None N/A $ 100,741(10/19)*
Louis A. Weil, Ill -- Director $ 6,000 None N/A $ 93,750(11/16)*
Clay T. Whitehead -- Director None None N/A $ 35,500(4/5)*
</TABLE>

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

As of November 3, 1996, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding common stock of the Fund.

As of November 3, 1996, the only beneficial owner, directly or indirectly,
of more than 5% of the outstanding shares of any class of beneficial interest
was: Robert I. Orestein, P.O. Box 2009, Peck Slip Station, New York, NY, who
held 10,528 Class C shares (8.1%).

As of November 3, 1996, Prudential Securities was the record holder for
other beneficial owners of 7,052,591 Class A shares (or 41% of the outstanding
Class A shares), 18,605,128 Class B shares (or 70% of the outstanding Class B
shares) and 85,773 Class C shares (or 66% of the outstanding Class C shares) 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.

B-12
<PAGE>
MANAGER

The manager of the Fund is Prudential Mutual Fund Management LLC (PMF or the
Manager), Gateway Center Three, Newark, New Jersey 07102. PMF serves as manager
to all of the other open-end management investment companies that, together with
the Fund, comprise the Prudential Mutual Funds. See "How the Fund Is
Managed--Manager" in the Prospectus. As of October 31, 1996, PMF managed and/or
administered open-end and closed-end management investment companies with assets
of approximately $52 billion. According to the Investment Company Institute, as
of September 30, 1996, the Prudential Mutual Funds were the 17th 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). PMF has two wholly-owned
subsidiaries: Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent)
and Prudential Mutual Fund Investment Management, Inc. PMFS serves as the
transfer agent for the Prudential Mutual Funds and, in addition, provides
customer service, record keeping 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 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, and Prudential Mutual Fund Services, Inc.
(PMFS or the Transfer Agent), 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 .70 of 1% of the Fund's average daily net assets. The fee
is computed daily and payable monthly. The Management Agreement also provides
that, in the event the expenses of the Fund (including the fees of 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 the Fund's
shares are 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 September 30, 1996.

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

(a) the salaries and expenses of all 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 The Prudential Investment Corporation
(PIC) pursuant to the subadvisory agreement between PMF and PIC (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 persons of the Manager or
the Fund's investment adviser, (c) the fees and certain expenses of the
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 legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of any
trade associations of which the Fund may be a member, (h) the cost of stock
certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the Securities and
Exchange Commission, 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,

B-13
<PAGE>
printing and mailing reports, proxy statements and prospectuses to shareholders
in the amount necessary for distribution to the shareholders, (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business, and (m) distribution fees.

The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. The Management Agreement
was last approved by the Board of Directors of the Fund, including a majority of
the Directors who are not parties to the contract or interested persons of any
such party as defined in the Investment Company Act on May 9, 1996 and by
shareholders of the Fund on April 28, 1988.

For the fiscal years ended September 30, 1996, 1995 and 1994, the Fund paid
management fees to PMF of $4,336,587, $3,676,126 and $3,484,730 respectively.

PMF has entered into the Subadvisory Agreement with PIC (the Subadviser), a
wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
PIC will furnish investment advisory services in connection with the management
of the Fund. In connection therewith, PIC is obligated to keep certain books and
records of the Fund. PMF continues to have responsibility for all investment
advisory services pursuant to the Management Agreement and supervises PIC's
performance of such services. PIC is reimbursed by PMF for the reasonable costs
and expenses incurred by PIC in furnishing those services. Investment advisory
services are provided to the Fund by a unit of the Subadviser, known as
Prudential Mutual Fund Investment Management.

The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not parties to the contract or
interested persons of any such party as defined in the Investment Company Act,
on May 9, 1996, and by shareholders of the Fund on April 28, 1988.

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 PIC 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.

The Manager and Subadviser are subsidiaries of Prudential, which is one of
the largest diversified financial services institutions in the world and, based
on total assets, the largest insurance company in North America as of December
31, 1994. 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 nearly
100,000 persons worldwide, and maintains a sales force of approximately 19,000
agents, 3,400 insurance brokers and 6,000 financial advisors. It insures or
provides other financial services to more than 50 million people worldwide.
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. For the year ended December 31, 1994,
Prudential through its subsidiaries provided financial services to more than 50
million people worldwide--more than one of every five people in the United
States. As of December 31, 1994, Prudential through its subsidiaries provided
automobile insurance for more than 1.8 million cars and insured more than 1.5
million homes. For the year ended December 31, 1994, The Prudential Bank, a
subsidiary of Prudential, served 940,000 customers in 50 states providing credit
card services and loans totaling more than $1.2 billion. Assets held by
Prudential Securities Incorporated (PSI) for its clients totaled approximately
$150 billion at December 31, 1994. During 1994, over 28,000 new customer
accounts were opened each month at PSI. 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.

Based on data for the year ended December 31, 1994 for the Prudential Mutual
Funds, on an average day, there are approximately $80 million in common stock
transactions, over $100 million in bond transactions and over $4.1 billion in
money market transactions. In 1994, the Prudential Mutual Funds effected more
than 57,000 trades in money market securities and held

B-14
<PAGE>
on average $21 billion of money market securities. Based on complex-wide data
for the year ended December 31, 1994, on an average day, 7,168 shareholders
telephoned Prudential Mutual Fund Services, Inc., 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 and
approximately 1.1 million fund transactions.

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.

DISTRIBUTOR

Prudential Securities Incorporated, One Seaport Plaza, New York, New York
10292 (Prudential Securities or PSI), acts as the distributor of shares of the
Fund.

Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and a distribution agreement
(the Distribution Agreement), Prudential Securities (the Distributor) incurs the
expense of distributing the Fund's Class A, Class B and Class C shares. See "How
the Fund is Managed--Distributor" in the Prospectus. Prudential Securities also
incurs the expense of distributing the Fund's Class Z shares, none of which are
paid for or reimbursed by the Fund.

Prior to January 22, 1990, the Fund offered only one class of shares (the
then existing Class B shares). On October 6, 1989, the Board of Directors,
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
Class A or Class B Plan or in any agreement related to either Plan (the Rule
12b-1 Directors), at a meeting called for the purpose of voting on each Plan,
adopted a new plan of distribution for the Class A shares of the Fund (the Class
A Plan) and approved an amended and restated plan of distribution with respect
to the Class B shares of the Fund (the Class B Plan). On February 8, 1993, the
Board of Directors, including a majority of the Rule 12b-1 Directors, at a
meeting called for the purpose of voting on each Plan, approved modifications to
the Fund's Class A and Class B Plans and Distribution Agreements to conform them
to recent amendments to the National Association of Securities Dealers, Inc.
(NASD) maximum sales charge rule described below. As so modified, the Class A
Plan provides that (i) up to .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1%. As so modified, the
Class B Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class B shares may be paid as a service fee and (ii) up to.75 of 1% (not
including the service fee) of the average daily net assets of the Class B shares
(asset-based sales charge) may be used as reimbursement for distribution-related
expenses with respect to the Class B shares. On May 3, 1993, the Board of
Directors, including a majority of the Rule 12b-1 Directors, at a meeting called
for the purpose of voting on each Plan, adopted a plan of distribution for the
Class C shares of the Fund and approved further amendments to the plans of
distribution for the Fund's Class A and Class B shares changing them from
reimbursement type plans to compensation type plans. The Plans were last
approved by the Board of Directors, including a majority of the Rule 12b-1
Directors, on May 9, 1996. The Class A Plan, as amended, was approved by Class A
and Class B shareholders, and the Class B Plan, as amended, was approved by
Class B shareholders on July 19, 1994. The Class C Plan was approved by the sole
shareholder of Class C shares on August 1, 1994.

CLASS A PLAN. For the fiscal year ended September 30, 1996, PSI received
payments of $557,727 under the Class A Plan. This amount was primarily expended
for payment of account servicing fees to financial advisers and other persons
who sell Class A shares. For the fiscal year ended September 30, 1996, PSI also
received approximately $307,200 in initial sales charges.

CLASS B PLAN. For the fiscal year ended September 30, 1996, Prudential
Securities received $3,556,358 from the Fund under the Class B Plan and spent
approximately $2,425,800 in distributing the Fund's Class B shares. It is
estimated that of the latter amount, approximately $19,600 (0.8%) was spent on
printing and mailing of prospectuses to other than current shareholders;
$584,300 (24.1%) on compensation to Pruco Securities Corporation, an affiliated
broker-dealer, for commissions to its representatives and other expenses,
including an allocation on account of overhead and other branch office
distribution-related expenses, incurred by it for distribution of Fund shares;
and $1,821,900 (75.1%) on the aggregate of (i) payments of commissions and
account servicing fees to financial advisers ($769,400 or 31.7%) and (ii) an
allocation on account of overhead and other branch office distribution-related
expenses ($1,052,500 or 43.4%). The term "overhead and other branch office

B-15
<PAGE>
distribution-related expenses" represents (a) the expenses of operating
Prudential Securities' branch offices in connection with the sale of Fund
shares, including lease costs, the salaries and employee benefits of operations
and sales support personnel, utility costs, communications costs and the costs
of stationery and supplies, (b) the costs of client sales seminars, (c) expenses
of mutual fund sales coordinators to promote the sale of Fund shares; and (d)
other incidental expenses relating to branch promotion of Fund shares.

Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by investors upon certain redemptions of Class B shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus. For the fiscal year ended September 30, 1996, Prudential
Securities received approximately $775,100 in contingent deferred sales charges.

CLASS C PLAN. For the fiscal year ended September 30, 1995, Prudential
Securities received $28,600 under the Class C Plan and spent approximately
$18,200 in distributing Class C shares. Prudential Securities also receives the
proceeds of contingent deferred sales charges paid by investors upon certain
redemptions of Class C shares. See "Shareholder Guide-- How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus. For the fiscal
year ended September 30, 1996, Prudential Securities received approximately
$1,270 in contingent deferred sales charges.

The Class A, Class B and Class C Plans continue 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 Rule 12b-1 Directors,
cast in person at a meeting called for the purpose of voting on such
continuance. The Plans may each be terminated at any time, without penalty, by
the vote of a majority of the Rule 12b-1 Directors or by the vote of the holders
of a majority of the outstanding shares of the applicable class on not more than
30 days' written notice to any other party to the Plans. The Plans may not be
amended to increase materially the amounts to be spent for the services
described therein without approval by the shareholders of the applicable class
(by both Class A and Class B shareholders, voting separately, in the case of
material amendments to the Class A Plan), and all material amendments are
required to be approved by the Board of Directors in the manner described above.
Each Plan will automatically terminate in the event of its assignment. The Fund
will not be contractually obligated to pay expenses incurred under any Plan if
it is terminated or not continued.

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

Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against certain
liabilities under the Securities Act of 1933, as amended. The restated
Distribution Agreement was last approved by the Board of Directors, including a
majority of the Rule 12b-1 Directors, on May 9, 1996. On November 3, 1995, the
Directors approved the transfer of the Distribution Agreement for Class A shares
from PMFD to PSI

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 $5,000,000 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

B-16
<PAGE>
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 will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months for a
three-year period.

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

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Manager is responsible for decisions to buy and sell securities, options
on securities and futures contracts for the Fund, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any. For purposes of this section, the
term "Manager" includes the "Subadviser." Purchases and sales of securities or
futures contracts on a securities exchange or board of trade are effected
through brokers or futures commission merchants who charge a commission for
their services. Orders may be directed to any broker or futures commission
merchant, including, to the extent and in the manner permitted by applicable
law, Prudential Securities and its affiliates. Brokerage commissions on United
States securities, options and futures exchanges or boards of trade are subject
to negotiation between the Manager and the broker or futures commission
merchant.

In the over-the-counter market, 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. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid. The Fund will not deal with Prudential
Securities in any transaction in which Prudential Securities acts as principal.
Thus it will not deal in over-the-counter securities with Prudential Securities
acting as market maker, and it will not execute a negotiated trade with
Prudential Securities if execution involves Prudential Securities acting as
principal with respect to any part of the Fund's order. In placing orders for
portfolio securities or futures contracts of the Fund, the Manager is required
to give primary consideration to obtaining the most favorable price and
efficient execution. Within the framework of this policy, the Manager will
consider the research and investment services provided by brokers, dealers or
futures commission merchants 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 companies 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, dealers
or futures commission merchants furnishing such services may be selected for the
execution of transactions of

B-17
<PAGE>
such other accounts, whose aggregate assets are far larger than the Fund, and
the services furnished by such brokers, dealers or futures commission merchants
may be used by the Manager in providing investment management for the Fund.
Commission rates are established pursuant to negotiations with the broker,
dealer or futures commission merchant based on the quality and quantity of
execution services provided by the broker, dealer or futures commission merchant
in the light of generally prevailing rates. The Manager's policy is to pay
higher commissions to brokers, other than Prudential Securities, for particular
transactions than might be charged if a different broker had been selected, on
occasions when, in the Manager's opinion, this policy furthers the objective of
obtaining best price and execution. In addition, the Manager is authorized to
pay higher commissions on brokerage transactions for the Fund to brokers,
dealers or futures commission merchants other than Prudential Securities in
order to secure research and investment services described above, 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, dealers
and futures commission merchants and the commission rates paid are reviewed
periodically by the Fund's Board of Directors. Portfolio securities may not be
purchased from any underwriting or selling syndicate of which Prudential
Securities (or any affiliate), during the existence of the syndicate, is a
principal underwriter (as defined in the Investment Company Act), except in
accordance with rules of the SEC. This limitation, in the opinion of the Fund,
will not significantly affect the Fund's ability to pursue its present
investment objective. However, in the future in other circumstances, the Fund
may be at a disadvantage because of this limitation in comparison to other funds
with similar objectives but not subject to such limitations.

Subject to the above considerations, the Manager may use Prudential
Securities as a broker or futures commission merchant for the Fund. In order for
Prudential Securities (or any affiliate) to effect any portfolio transactions
for the Fund, the commissions, fees or other remuneration received by Prudential
Securities (or any affiliate) must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers or futures
commission merchants in connection with comparable transactions involving
similar securities or futures being purchased or sold on a securities or
commodities exchange during a comparable period of time. This standard would
allow Prudential Securities (or any affiliate) to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker or
futures commission merchant in a commensurate arm's-length transaction.
Furthermore, the Board of Directors of the Fund, including a majority of the
noninterested Directors, has adopted procedures which are reasonably designed to
provide that any commissions, fees or other remuneration paid to Prudential
Securities (or any affiliate) are consistent with the foregoing standard. In
accordance with Section 11(a) of the Securities Exchange Act of 1934, Prudential
Securities may not retain compensation for effecting transactions on a national
securities exchange for the Fund unless the Fund has expressly authorized the
retention of such compensation. Prudential Securities must furnish to the Fund
at least annually a statement setting forth the total amount of all compensation
retained by Prudential Securities from transactions effected for the Fund during
the applicable period. Brokerage and futures transactions with Prudential
Securities (or any affiliate) are also subject to such fiduciary standards as
may be imposed upon Prudential Securities (or such affiliate) by applicable law.

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

The table presented below shows certain information regarding the payment of
commissions by the Fund, including the amount of such commissions paid to
Prudential Securities for the three-year period ended September 30, 1996.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Total brokerage commissions paid by the
Fund................................... $954,560 $1,055,207 $1,222,849
Total brokerage commissions paid to
Prudential Securities.................. $ 0 $ 0 $ 11,325
Percentage of total brokerage
commissions paid to Prudential
Securities............................. 0% 0% .93%
</TABLE>

The Fund did not effect any transactions through Prudential Securities
during the fiscal year ended September 30, 1996. Of the total brokerage
commissions paid by the Fund for the fiscal year ended September 30, 1996,
$777,243 (74% of gross brokerage transactions) was paid to firms which provided
research, statistical or other services provided to PMF. PMF has not separately
identified a portion of such brokerage commissions as applicable to the
provision of such research, statistical or other service.

B-18
<PAGE>
PURCHASE AND REDEMPTION OF FUND SHARES

Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). Class Z shares of the Fund
are offered to a limited group of investors at net asset value without any sales
charges. See "Shareholder Guide--How to Buy Shares of the Fund" in the
Prospectus.

Each class represents an interest in the same assets of the Fund and is
identical in all respects except that (i) each class (with the exception of
Class Z shares) is subject to different sales charges and distribution and/or
service expenses, which may affect performance, (ii) each class has exclusive
voting rights on any matter submitted to shareholders that relates solely to its
arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege and (iv)
only Class B shares have a conversion feature. See "Distributor" and
"Shareholder Investment Account--Exchange Privilege."

SPECIMEN PRICE MAKE-UP

Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 5% and Class
B*, Class C* and Class Z** shares are sold at net asset value. Using the Fund's
net asset value at September 30, 1996, the maximum offering price of the Fund's
shares is as follows:

<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share................... $ 15.30
Maximum sales charge (5% of offering price).............................. .81
---------
Offering price to public................................................. $ 16.11
---------
---------
CLASS B
Net asset value, offering price and redemption price per Class B
share*.................................................................. $ 14.49
---------
---------
CLASS C
Net asset value, offering price and redemption price per Class C
share*.................................................................. $ 14.49
---------
---------
CLASS Z
Net asset value, offering price and redemption price per Class Z
share**................................................................. $ 15.32
---------
---------
<FN>

--------------------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions. See "Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges" in the Prospectus.
** Class Z shares did not exist prior to March 1, 1996.
</TABLE>

REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES

COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder
Guide--Alternative Purchase Plan" in the Prospectus.

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

(a) an individual;

(b) the individual's spouse, their children and their parents;

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

(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;

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

B-19
<PAGE>
(g) one or more employee benefit plans of a company controlled by an
individual.

In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).

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

RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (net asset value plus maximum sales charge) as
of the previous business day. See "How the Fund Values its Shares" in the
Prospectus. The Distributor must be notified at the time of purchase that the
investor is entitled to a reduced sales charge. The reduced sales charges will
be granted subject to confirmation of the investor's holdings. Rights of
accumulation are not available to individual participants in any retirement or
group plans.

LETTERS OF INTENT. Reduced sales charges are also available to investors (or
an eligible group of related investors), including retirement and group plans,
who enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may also
qualify to purchase Class A shares at net asset value by entering into a Letter
of Intent whereby they agree to enroll, within a thirteen-month period, a
specified number of eligible employees or participants (Participant Letter of
Intent).

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

A Letter of Intent, in the case of an Investment Letter of Intent, permits a
purchaser to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant goal
over a thirteen-month period. Each investment made during the period, in the
case of an Investment Letter of Intent, will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. In the case of a Participant Letter of Intent, each investment made
during the period will be made at net asset value. Escrowed Class A shares
totaling 5% of the dollar amount of the Letter of Intent will be held by the
Transfer Agent in the name of the purchaser, except in the case of retirement
and group plans where the employer or plan sponsor will be responsible for
paying any applicable sales charge. The effective date of an Investment Letter
of Intent (except in the case of retirement and group plans) may be back-dated
up to 90 days, in order that any investments made during this 90-day period,
valued at the purchaser's cost, can be applied to the fulfillment of the Letter
of Intent goal.

The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser (or the
employer or plan sponsor in the case of any retirement or group plan) is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and sales charges actually paid. Such
payment may be made directly to the Distributor or, if not paid, the Distributor
will liquidate sufficient escrowed shares to obtain such difference. Investors
electing to purchase Class A shares of the Fund pursuant to a Letter of Intent
should carefully read such Letter of Intent.

PSI must be notified at the time of purchase that the investor is entitled
to a reduced sales charge. The reduced sales charge will, in the case of an
Investment Letter of Intent, be granted subject to confirmation of the
investor's holdings or, in the case of a Participant Letter of Intent, subject
to confirmation of the number of eligible employees or Participants in the
retirement or group plan. Letters of Intent are not available to individual
participants in any retirement or group plans.

B-20
<PAGE>
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES

The Contingent Deferred Sales Charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--Waiver of
Contingent Deferred Sales Charges--Class B Shares" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit the
supporting documentation set forth below.

<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
Death A copy of the shareholder's death certificate or,
in the case of a trust, a copy of the grantor's
death certificate, plus a copy of the trust
agreement identifying the grantor.
Disability - An individual will be A copy of the Social Security Administration award
considered disabled if he or she is letter or a letter from a physician on the
unable to engage in any substantial physician's letterhead stating that the shareholder
gainful activity by reason of any (or, in the case of a trust, the grantor) is
medically determinable physical or permanently disabled. The letter must also indicate
mental impairment which can be expected the date of disability.
to result in death or to be of
long-continued and indefinite duration.
Distribution from an IRA or 403(b) A copy of the distribution form from the custodial
Custodial Account firm indicating (i) the date of birth of the
shareholder and (ii) that the shareholder is over
age 59 1/2 and is taking a normal
distribution--signed by the shareholder.
Distribution from Retirement Plan A letter signed by the plan administrator/trustee
indicating the reason for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or the
plan administrator/ trustee on company letterhead
indicating the amount of the excess and whether or
not taxes have been paid.
</TABLE>

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

QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994

The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchase an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares of
the Fund following the second purchase was $550,000, the quantity discount would
be available for the second purchase of $450,000 but not for the first purchase
of $100,000. The quantity discount will be imposed at the following rates
depending on whether the aggregate value exceeded $500,000 or $1 million:

<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVESTED
OR REDEMPTION PROCEEDS
YEAR SINCE PURCHASE ------------------------------------------
PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
- ------------------------- ----------------------- ----------------
<S> <C> <C>
First.................... 3.0% 2.0%
Second................... 2.0% 1.0%
Third.................... 1.0% 0%
Fourth and thereafter.... 0% 0%
</TABLE>

You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.

B-21
<PAGE>
SHAREHOLDER INVESTMENT ACCOUNT

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

AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS

For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund. An investor
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. 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 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. Such shareholder will receive credit for any contingent
deferred sales charge paid in connection with the amount of proceeds being
reinvested.

EXCHANGE PRIVILEGE

The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund 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. 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. 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. For
retirement and group plans having a limited menu of Prudential Mutual Funds, the
Exchange Privilege is available for those funds eligible for investment in the
particular program.

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

CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds, shares of Prudential
Government Securities Trust (Short-Intermediate Term Series) and shares of the
money market funds specified below. No fee or sales load will be imposed upon
the exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the Exchange Privilege only to acquire Class
A shares of the Prudential Mutual Funds participating in the Exchange Privilege.

The following money market funds participate in the Class A Exchange
Privilege:

Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(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.

CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund,
Inc., a money market fund. No CDSC will be payable upon such exchange, but a
CDSC may be payable upon the redemption of the

B-22
<PAGE>
Class B and Class C shares acquired as a result of an exchange. The applicable
sales charge will be that imposed by the fund in which shares were initially
purchased and the purchase date will be deemed to be the first day of the month
after the initial purchase, rather than the date of the exchange.

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

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

CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.

Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Transfer Agent, Prudential
Securities or Prusec. The Exchange Privilege is not a right and may be modified,
terminated or suspended at any time, and any fund, including the Fund, or PSI,
has the right to reject any exchange application relating to such fund's shares.

DOLLAR COST AVERAGING

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

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

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

<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- ------------------------------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
25 Years.......................................................... $ 110 $ 165 $ 220 $ 275
20 Years.......................................................... 176 264 352 440
15 Years.......................................................... 296 444 592 740
10 Years.......................................................... 555 833 1,110 1,388
5 Years.......................................................... 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan."
</TABLE>

- ------------------------
(1)Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board.
(2)The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.

B-23
<PAGE>
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)

Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account or
Prudential Securities account (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.

SYSTEMATIC WITHDRAWAL PLAN

A systematic withdrawal plan is available to shareholders 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. Withdrawals of Class B or Class C shares
may be subject to a CDSC. See "Shareholder Guide-- How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.

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/or Distributions."

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 systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.

Withdrawal payments should not be considered as dividends, yield or income.
If 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 generally be recognized for federal income tax
purposes. In addition, withdrawals made concurrently with purchases of
additional shares are inadvisable because of the sales charge applicable to (i)
the purchase of Class A shares and (ii) the withdrawal of Class B and Class C
shares. Each shareholder should consult his or her own tax adviser with regard
to the tax consequences of the systematic withdrawal plan, particularly if used
in connection with a retirement plan.

TAX-DEFERRED RETIREMENT PLANS

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

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

TAX-DEFERRED RETIREMENT ACCOUNTS

INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a

B-24
<PAGE>
personal savings account with those in an IRA, assuming a $2,000 annual
contribution, an 8% rate of return and a 39.6% federal income tax bracket and
shows how much more retirement income can accumulate within an IRA as opposed to
a taxable individual savings account.

<TABLE>
<CAPTION>
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
- ------------------------ ---------- ----------
<S> <C> <C>
10 years................ $ 26,165 $ 31,291
15 years................ 44,675 58,649
20 years................ 68,109 98,846
25 years................ 97,780 157,909
30 years................ 135,346 244,692
- ------------------------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
the IRA account will be subject to tax when withdrawn from the account.
</TABLE>

MUTUAL FUND PROGRAMS

From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, 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 a part
of the program. Since the allocation of portfolios included in the program may
not be appropriate for all investors, investors 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.

NET ASSET VALUE

Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indices) are valued at the
last sales price on the day of valuation or, if there was no sale on such day,
the mean between the last bid and asked prices on such day, as provided by a
pricing service. Corporate bonds (other than convertible debt securities) and
U.S. Government securities that are actively traded in the over-the-counter
market, including listed securities for which the primary market is believed to
be over-the-counter, are valued on the basis of valuations provided by a pricing
service which uses information with respect to transactions in bonds, quotations
from bond dealers, agency ratings, market transactions in comparable securities
and various relationships between securities in determining value. Convertible
debt securities that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed to be
over-the-counter, are valued at the mean between the last reported bid and asked
prices provided by principal market makers or independent pricing agents.
Options on stock and stock indices traded on an exchange are valued at the mean
between the most recently quoted bid and asked prices on the respective exchange
and futures contracts and options thereon are valued at their last sales prices
as of the close of the commodities exchange or board of trade. Should an
extraordinary event, which is likely to affect the value of the security, occur
after the close of an exchange on which a portfolio security is traded, such
security will be valued at fair value considering factors determined in good
faith by the investment adviser under procedures established by and under the
general supervision of the Fund's Board of Directors.

Securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
Board of Directors. Short-term debt securities are valued at cost, with interest
accrued or discount amortized to the date of maturity, if their original
maturity was 60 days or less, unless this is determined by the Board of
Directors not to represent fair value. Short-term securities with remaining
maturities of 60 days or more, for which market quotations are readily

B-25
<PAGE>
available, are valued at their current market quotations as supplied by an
independent pricing agent or principal market maker. The Fund will compute its
net asset value at 4:15 P.M., New York time, on each day the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem Fund shares have been received or days on which changes in the value
of the Fund's portfolio securities do not affect net asset value. In the event
the New York Stock Exchange closes early on any business day, the net asset
value of the Fund's shares shall be determined at a time between such closing
and 4:15 P.M., New York time.

Net asset value is calculated separately for each class. The net asset value
of Class B and Class C shares will generally be lower than the net asset value
of Class A or Class Z shares as a result of the larger distribution-related fee
to which Class B and Class C shares are subject. It is expected, however, that
the net asset value per share of each class will tend to converge immediately
after the recording of dividends (if any) which will differ by approximately the
amount of the distribution or service fee expense accrual differential among the
classes.

PERFORMANCE INFORMATION

AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares. See "How the Fund
Calculates Performance" in the Prospectus.

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

P(1+T)to the power of n = ERV

Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1000 investment
made at the beginning of the 1, 5 or 10 year periods.

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

The average annual total return for Class A shares for the one year, five
year and since inception (January 22, 1990) periods ended September 30, 1996 was
7.71%, 15.08% and 14.32%, respectively. The average annual total return for
Class B shares for the one, five and ten year periods ended on September 30,
1996 was 7.56%, 15.25% and 12.78%, respectively. The average annual total return
for Class C shares for the one year and since inception period (August 1, 1994)
ended September 30, 1996 was 11.56% and 17.63%, respectively. The Class Z
average annual return from March 1, 1996 to September 30, 1996 is 11.91% (not
annualized).

AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. See "How the Fund Calculates Performance" in the
Prospectus.

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

ERV - P
-------

Where: P = a hypothetical initial payment of $1000.
ERV = Ending Redeemable Value at the end of the 1, 5, or 10 year
periods (or fractional portion thereof) of a hypothetical $1000
investment made at the beginning of the 1, 5 or 10 year
periods.

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

The aggregate total return for Class A shares for the one year, five year
and since inception (January 22, 1990) periods ended on September 30, 1996 was
13.38%, 112.54% and 157.61%, respectively. The aggregate total return for Class
B shares for the one, five and ten year periods ended on September 30, 1996 was
12.56%, 104.37% and 233.20%, respectively. The

B-26
<PAGE>

aggregate total return for Class C shares for the one year and since inception
period (August 1, 1994) ended September 30, 1996 was 12.56% and 42.13%,
respectively. The Class Z aggregate total return from March 1, 1996 to September
30, 1996 is 11.91% (not annualized).

YIELD. The Fund may from time to time advertise its yield as calculated over
a 30-day period. Yield is calculated separately for Class A, Class B, Class C
and Class Z shares. This yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of this period. Yield is calculated
according to the following formula:

a - b
YIELD = 2[( ------- +1)to the power of 6 - 1]
cd

Where: a=dividends and interest earned during the period.
b=expenses accrued for the period (net of reimbursements).
c=the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d=the maximum offering price per share on the last day of the period.

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.

From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.(1)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
PERFORMANCE
<S> <C> <C> <C>
Comparison of
Different
Types of Investments
Over the Long Term
(1/1926-12/1994)
Long-Term Govt.
Common Stocks Bonds Inflation
10.2% 4.8% 3.1%
</TABLE>

- ------------
(1)Source: Ibbotson Associates STOCKS, BONDS, BILLS AND INFLATION--1995 YEARBOOK
(annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. Common stock
returns are based on the Standard and Poor's 500 Stock Index, a
market-weighted, unmanaged index of 500 common stocks in a variety of
industry sectors. It is a commonly used indicator of broad stock
price movements. This chart is for illustrative purposes only and is
not intended to represent the performance of any particular
investment or fund. Investors cannot invest directly in an index.
Past performance is not a guarantee of future results.

B-27
<PAGE>
TAXES

The Fund expects to pay dividends of net investment income, if any,
semi-annually. The Board of Directors of the Fund will determine at least once a
year whether to distribute any net long-term capital gains in excess of any net
short-term capital losses. In determining amounts of capital gains to be
distributed, any capital loss carryforwards from prior years will offset capital
gains. Distributions will be paid in additional Fund shares based on the net
asset value at the close of business on the record date, unless the shareholder
elects in writing not less than five full business days prior to the record date
to receive such distributions in cash.

The Fund is qualified and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code.
Qualification as a regulated investment company under the Internal Revenue Code
requires, among other things, that (a) at least 90% of the Fund's annual gross
income (without offset for losses from the sale or other disposition of
securities or foreign currencies) be derived from dividends, interest, proceeds
from loans of securities and gains from the sale or other disposition of
securities or foreign currencies and certain financial futures, options and
forward contracts; (b) the Fund derive less than 30% of its gross income from
gains (without offset for losses) from the sale or other disposition of
securities or options thereon held for less than three months; and (c) the Fund
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, 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
government securities). In addition, in order not to be subject to federal
income tax, the Fund must distribute to its shareholders as ordinary dividends
at least 90% of its net investment income other than net capital gains earned in
each year. A 4% nondeductible excise tax will be imposed on the Fund to the
extent the Fund does not meet certain minimum distribution requirements by the
end of each calendar year. For this purpose, any income or gain retained by the
Fund which is subject to tax will be considered to have been distributed by
year-end. In addition, dividends declared in October, November and December
payable to shareholders of record on a specified date in October, November and
December and paid in the following January will be treated as having been paid
by the Fund and received by each shareholder in such prior year. Under this
rule, therefore, a shareholder may be taxed in one year on dividends or
distributions actually received in January of the following year. (The Fund
intends to make timely distributions of the Fund's income in compliance with
these requirements. As a result, it is expected that the Fund will not be
subjected to the excise tax.)

Gains or losses on sales of securities by the Fund will be long-term capital
gains or losses if the securities have been held by it for more than one year,
except in certain cases where the Fund acquires a put or writes a call thereon
or otherwise holds an offsetting position with respect to the securities. Other
gains or losses on the sale of securities will be short-term capital gains or
losses. If an option written by the Fund lapses or is terminated through a
closing transaction, such as a repurchase by the Fund of the option from its
holder, the Fund will realize a short-term capital gain or loss, depending on
whether the premium income is greater or less than the amount paid by the Fund
in the closing transaction. If securities are sold by the Fund pursuant to the
exercise of a call option written by it, the Fund will add the premium received
to the sale price of the securities delivered in determining the amount of gain
or loss on the sale. If securities are purchased by the Fund pursuant to the
exercise of a put option written by it, the Fund will subtract the premium
received from its cost basis in the securities purchased. The requirement that
the Fund derive less than 30% of its gross income from gains from the sale of
securities held for less than three months may limit the Fund's ability to write
options.

Certain futures contracts and certain listed options held by the Fund will
be required to be "marked to market" for federal income tax purposes, I.E.,
treated as having been sold at their fair market value on the last day of the
Fund's taxable year (referred to as Section 1256 Contracts). 60% of any gain or
loss recognized on actual or deemed sales of such Section 1256 Contracts will be
treated as long-term capital gain or loss, and 40% of such gain or loss will be
treated as short-term capital gain or loss. Under the "straddle" rules, the Fund
may be required to defer the recognition of losses on securities and options and
futures contracts to the extent of any unrecognized gain on offsetting positions
held by the Fund. In addition, the Fund's holding period in any position held as
a part of a straddle may be reduced, and the Fund's ability to acquire or hold
such positions may therefore be limited by the 30% of gross income test
described above. Other special rules may apply to positions held as part of a
straddle; in particular, the deductibility of interest or other charges incurred
to purchase or carry such positions will be subject to limitations.

B-28
<PAGE>
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend or distribution will
constitute a replacement of shares.

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

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

Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. Prior to purchasing shares of the Fund,
therefore, the investor should carefully consider the impact of dividends or
capital gains distributions which are expected to be or have been announced.

Dividends and distributions may also be subject to state and local taxes.

The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations which derive a majority of
their income from passive sources. For tax purposes, the Fund's investments in
PFICs may subject the Fund to federal income taxes on certain income and gains
realized by the Fund. Under proposed Treasury regulations, the Fund would be
able to avoid such taxes and interest by electing to "mark-to-market" its
investments in PFICs (I.E., treat them as sold for fair market value at the end
of the year).

Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject, since the amount of the Fund's
assets to be invested in various countries is not known.

CUSTODIAN, 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 an agreement with the Fund. See "How the Fund Is
Managed--Custodian and Transfer and Dividend Disbursing Agent" in the
Prospectus.

Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, 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 September 30, 1996, the Fund incurred fees of approximately $978,000 for
the services of PMFS.

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

B-29
<PAGE>

PORTFOLIO OF INVESTMENTS AS OF
SEPTEMBER 30, 1996 PRUDENTIAL SMALL COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------------
<S> <C> <C>
LONG-TERM INVESTMENTS--87.4%
COMMON STOCKS--87.0%
- ---------------------------------------------------------------
AEROSPACE/DEFENSE--1.0%
147,800 Precision Castparts Corp. $ 7,168,300
- ---------------------------------------------------------------
AUTOMOTIVE--1.1%
49,800 Dura Automotive Systems, Inc. (a) 927,525
238,200 Strattec Security Corp. (a) 3,453,900
169,800 Walbro Corp. 3,226,200
------------
7,607,625
- ---------------------------------------------------------------
CHEMICALS--1.0%
331,900 Agrium, Inc. (Canada) 4,506,580
225,400 Spartech Corp. 2,169,475
------------
6,676,055
- ---------------------------------------------------------------
COMMUNICATIONS EQUIPMENT--0.7%
146,100 Black Box Corp. (a) 4,821,300
- ---------------------------------------------------------------
COMPUTER HARDWARE--0.5%
83,700 Western Digital Corp. (a) 3,358,463
- ---------------------------------------------------------------
COMPUTER SOFTWARE & SERVICES--0.6%
10,900 Software Spectrum, Inc. (a) 327,000
49,800 Sterling Software, Inc. (a) 3,803,475
------------
4,130,475
- ---------------------------------------------------------------
CONSUMER SERVICES--0.9%
117,700 Pittston Brink's Group 3,692,837
84,750 Regis Corp. 2,203,500
4,100 Right Management Consultants, Inc.
(a) 99,425
------------
5,995,762
- ---------------------------------------------------------------
CONTAINERS & PACKAGING--2.5%
208,400 ACX Technologies, Inc. (a) 3,620,950
360,200 Applied Extrusion Technologies (a) 3,286,825
143,900 Ball Corp. $ 3,525,550
429,800 U.S. Can Corp. (a) 6,930,525
------------
17,363,850
- ---------------------------------------------------------------
COSMETICS & SOAPS--0.5%
71,500 Block Drug Co., Inc. Cl. A 3,208,563
- ---------------------------------------------------------------
DRUGS & MEDICAL SUPPLIES--0.5%
442,681 Healthdyne, Inc. (a) 3,707,453
- ---------------------------------------------------------------
ELECTRICAL UTILITIES--0.4%
113,000 TNP Enterprises, Inc. 2,796,750
- ---------------------------------------------------------------
ELECTRICAL EQUIPMENT--1.4%
230,900 Belden, Inc. 6,696,100
263,200 Woodhead Industries, Inc. 3,322,900
------------
10,019,000
- ---------------------------------------------------------------
ELECTRONICS--10.5%
234,100 Augat, Inc. 4,974,625
209,500 Berg Electronics Corp. (a) 5,708,875
216,600 Burr-Brown Corp. (a) 4,332,000
281,100 Continental Circuits Corp. (a) 3,302,925
233,900 ITI Technologies, Inc. (a) 8,244,975
63,300 Kemet Corp. (a) 1,273,913
472,700 Marshall Industries (a) 14,240,087
817,800 Methode Eletronics, Inc. Cl. A 15,231,525
570,900 Pioneer Standard Electronics, Inc. 6,422,625
266,000 Wyle Electronics 8,545,250
------------
72,276,800
- ---------------------------------------------------------------
ENGINEERING & CONSTRUCTION--0.6%
144,900 Baker (Michael) Corp. (a) 724,500
92,000 Valmont Industries, Inc. 3,139,500
------------
3,864,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-30

<PAGE>

PORTFOLIO OF INVESTMENTS AS OF
SEPTEMBER 30, 1996 PRUDENTIAL SMALL COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------------
<S> <C> <C>
ENVIRONMENTAL SERVICES--0.5%
248,270 BHA Group, Inc. Cl. A $ 3,599,915
- ---------------------------------------------------------------
FINANCIAL SERVICES--5.0%
71,000 Banctec, Inc. (a) 1,482,125
146,500 Capital Re Corp. 5,567,000
157,100 Enhance Financial Services Group,
Inc. 5,184,300
237,900 Financial Security Assurance
Holdings, Ltd. 7,018,050
233,900 Finova Group, Inc. 14,034,000
64,100 McDonald & Co. Investments, Inc. 1,554,425
------------
34,839,900
- ---------------------------------------------------------------
FOOD & BEVERAGE--0.7%
495,600 Michaels Foods, Inc. 5,141,850
- ---------------------------------------------------------------
FOOD DISTRIBUTION--2.5%
400,700 JP Foodservice, Inc. (a) 9,516,625
136,400 Riser Foods, Inc. 3,546,400
295,300 Rykoff-Sexton, Inc. 4,244,937
------------
17,307,962
- ---------------------------------------------------------------
FOOD/DRUG RETAIL--2.3%
325,400 Eckerd Corp. (a) 9,111,200
353,400 Thrifty Payless Holdings, Inc. Cl.
B 6,582,075
------------
15,693,275
- ---------------------------------------------------------------
FOREST PRODUCTS--0.3%
91,950 Wausau Paper Mills Co. 1,770,038
- ---------------------------------------------------------------
FURNITURE--0.8%
367,900 Furniture Brands International,
Inc. (a) 5,380,538
- ---------------------------------------------------------------
GAS DISTRIBUTION--0.8%
152,614 KN Energy, Inc. 5,379,644
- ---------------------------------------------------------------
HOSPITAL MANAGEMENT--2.8%
197,600 Physician Corp. of America (a) $ 2,395,900
235,200 Sierra Health Services, Inc. (a) 8,085,000
335,200 Universal Health Services, Inc.
Cl. B (a) 9,134,200
------------
19,615,100
- ---------------------------------------------------------------
HOUSEHOLD PRODUCTS--2.3%
328,900 Libbey, Inc. 8,674,737
311,900 Premark International, Inc. 5,887,113
48,000 The Rival Co. 1,056,000
------------
15,617,850
- ---------------------------------------------------------------
HOUSING RELATED--0.4%
560,050 Fedders Corp. Cl. A 2,870,256
- ---------------------------------------------------------------
INSURANCE--4.5%
135,700 Allied Group, Inc. 5,224,450
130,800 Allmerica Financial Corp. 4,251,000
299,000 AmVestors Financial Corp. 4,260,750
115,900 Equitable of Iowa Companies (a) 4,809,850
253,400 Philadelphia Consolidated Holding
Corp. (a) 5,384,750
266,500 Poe & Brown, Inc. 6,396,000
17,400 Security-Connecticut Life
Insurance Co. 545,925
------------
30,872,725
- ---------------------------------------------------------------
LEISURE--0.7%
177,600 WMS Industries Inc. 4,795,200
- ---------------------------------------------------------------
LODGING/GAMING--0.8%
388,500 Red Roof Inns, Inc. (a) 5,293,313
- ---------------------------------------------------------------
MACHINERY--4.1%
181,700 Allied Products Corp. 4,542,500
231,200 Blount International, Inc. Cl. A 7,774,100
226,700 Measurex Corp. 5,979,212
285,200 Pfeiffer Vacuum Technology AG (a) 4,384,950
116,100 Roper Industries 5,485,725
------------
28,166,487
</TABLE>
- --------------------------------------------------------------------------------
B-31 See Notes to Financial Statements.

<PAGE>

PORTFOLIO OF INVESTMENTS AS OF
SEPTEMBER 30, 1996 PRUDENTIAL SMALL COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------------
<S> <C> <C>
MEDIA--1.9%
4,000 Central Newspapers, Inc. Cl. A $ 152,500
516,400 Century Communications Corp. Cl. A
(a) 3,873,000
330,000 Granite Broadcasting Corp. (a) 4,702,500
166,300 TCA Cable TV, Inc. 4,282,225
------------
13,010,225
- ---------------------------------------------------------------
METALS-NON FERROUS--1.3%
392,900 Brush Wellman, Inc. 7,563,325
89,500 Chase Brass Industries, Inc. (a) 1,555,062
------------
9,118,387
- ---------------------------------------------------------------
MISCELLANEOUS INDUSTRIAL--9.9%
77,000 Apogee Enterprises Inc. 2,695,000
362,725 Bearings, Inc. 10,246,981
107,400 Carlisle Companies, Inc. 5,960,700
244,100 Figgie International, Inc. Cl. A
(a) 3,280,094
185,800 Graco, Inc. 3,483,750
142,000 Greenfield Industries, Inc. 3,408,000
250,000 Jason, Inc. (a)(b) (cost
$2,200,000; purchase
date-1/21/94) 1,870,313
212,182 Mark IV Industries, Inc. 4,614,958
215,100 Penn Engineering & Manufacturing
Corp. 3,764,250
230,100 Pentair, Inc. 6,097,650
422,100 Regal Beloit Corp. 7,017,412
89,000 Robbins & Myers, Inc. 2,013,625
242,600 Rofin Sinar Technologies, Inc. (a) 2,638,275
116,800 Standex International Corp. 3,504,000
381,400 United Dominion Industries, Ltd.
(Canada) 7,628,000
------------
68,223,008
- ---------------------------------------------------------------
NURSING HOMES--0.9%
314,900 GranCare, Inc. (a) 6,061,825
- ---------------------------------------------------------------
OIL & GAS EXPLORATION/PRODUCTION--3.9%
168,800 Mitchell Energy & Development Corp.
Class A 3,186,100
306,850 Mitchell Energy & Development Corp.
Class B $ 6,021,931
122,100 Newpark Resources, Inc. (a) 4,441,388
179,800 Parker & Parsley Petroleum Co. 4,697,275
181,900 Santa Fe Energy Resources, Inc.(a) 2,592,075
196,700 Vintage Petroleum, Inc. 5,778,062
------------
26,716,831
- ---------------------------------------------------------------
PRINTING--0.5%
279,700 Big Flower Press Holdings, Inc. (a) 3,531,213
- ---------------------------------------------------------------
RAILROADS--2.0%
219,400 Kansas City Southern Industries,
Inc. 9,379,350
48,800 Tranz Rail Holdings Ltd. (a) 707,600
173,800 Varlen Corp. 3,877,912
------------
13,964,862
- ---------------------------------------------------------------
REGIONAL BANKS--0.8%
199,000 Community First Bankshares, Inc. 4,676,500
18,200 Interwest Bancorp, Inc. 536,900
------------
5,213,400
- ---------------------------------------------------------------
RETAIL--0.8%
250,900 Waban, Inc. (a) 5,739,338
- ---------------------------------------------------------------
SAVINGS & LOANS--1.9%
195,600 Astoria Financial Corp. 5,672,400
106,400 Downey Financial Corp. 2,686,600
184,000 RCSB Financial, Inc. 4,922,000
------------
13,281,000
- ---------------------------------------------------------------
SPECIALTY CHEMICALS--3.4%
224,000 Cabot Corp. 6,244,000
149,600 Cambrex Corp. 5,067,700
379,000 Lilly Industries, Inc. Cl. A 6,300,875
247,500 Rogers Corp. (a) 6,094,687
------------
23,707,262
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-32

<PAGE>

PORTFOLIO OF INVESTMENTS AS OF
SEPTEMBER 30, 1996 PRUDENTIAL SMALL COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------------
<S> <C> <C>
STEEL - PRODUCERS--1.8%
182,800 Huntco, Inc. Cl. A $ 3,244,700
349,000 Quanex Corp. 9,379,375
------------
12,624,075
- ---------------------------------------------------------------
TRANSPORTATION--0.8%
162,700 Trinity Industries, Inc. 5,430,113
- ---------------------------------------------------------------
TRANSPORTATION-ROAD & RAIL--1.1%
404,750 Pittston Burlington Group. (a) 7,336,094
- ---------------------------------------------------------------
TRUCKING & SHIPPING--5.3%
239,950 Air Express International Corp. 6,778,587
228,000 Expeditors International of
Washington, Inc. 8,037,000
130,200 GATX Capital Corp. (a) 6,086,850
381,200 Harper Group, Inc. 7,814,600
361,700 Interpool, Inc. 7,595,700
------------
36,312,737
------------
Total common stocks
(cost $495,041,491) 599,608,819
------------
<CAPTION>

PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------------
<S> <C> <C>
CORPORATE BOND--0.4%
$ 2,679 Robbins & Myers, Inc.,
Convertible,
6.50%, 9/1/03
(Misc. Industrial) (cost
$2,679,000) $ 2,729,231
------------
Total long-term investments
(cost $497,720,491) 602,338,050
------------
SHORT-TERM INVESTMENT--13.5%
- ---------------------------------------------------------------
REPURCHASE AGREEMENT
92,840 Joint Repurchase Agreement Account,
5.72%, 10/1/96
(cost $92,840,000; Note 5) 92,840,000
------------
- ---------------------------------------------------------------
TOTAL INVESTMENTS--100.9%
(cost $590,560,491; Note 4) 695,178,050
Liabilities in excess of other
assets--(0.9%) (6,172,670)
------------
Net Assets--100% $689,005,380
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
(b) Private placement restricted as to resale; includes registration rights
under which the Fund may demand registration by the issuer.
- --------------------------------------------------------------------------------
B-33 See Notes to Financial Statements.

<PAGE>

STATEMENT OF ASSETS AND LIABILITIES PRUDENTIAL SMALL COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

ASSETS SEPTEMBER 30, 1996
------------------
<S> <C>
Investments, at value (cost $590,560,491).............................................................. $695,178,050
Cash................................................................................................... 52,276
Receivable for investments sold........................................................................ 4,562,867
Receivable for Fund shares sold........................................................................ 1,045,876
Dividends and interest receivable...................................................................... 464,706
Deferred expenses and other assets..................................................................... 17,675
------------------
Total assets........................................................................................ 701,321,450
------------------
LIABILITIES
Payable for Fund shares reacquired..................................................................... 7,605,082
Payable for investments purchased...................................................................... 3,618,734
Management fee payable................................................................................. 384,683
Distribution fee payable............................................................................... 354,612
Accrued expenses....................................................................................... 352,959
------------------
Total liabilities................................................................................... 12,316,070
------------------
NET ASSETS............................................................................................. $689,005,380
------------------
------------------
Net assets were comprised of:
Common stock, at par................................................................................ $ 464,321
Paid-in capital in excess of par.................................................................... 490,638,478
------------------
491,102,799
Accumulated net realized gain on investments........................................................ 93,285,022
Net unrealized appreciation on investments.......................................................... 104,617,559
------------------
Net assets, September 30, 1996......................................................................... $689,005,380
------------------
------------------
Class A:
Net asset value and redemption price per share
($237,305,703 DIVIDED BY 15,511,493 shares of common stock issued and outstanding)............... $15.30
Maximum sales charge (5.0% of offering price)....................................................... .81
------------------
Maximum offering price to public.................................................................... $16.11
------------------
------------------
Class B:
Net asset value, offering price and redemption price per share
($378,861,340 DIVIDED BY 26,149,425 shares of common stock issued and outstanding)............... $14.49
------------------
------------------
Class C:
Net asset value, offering price and redemption price per share
($4,322,587 DIVIDED BY 298,351 shares of common stock issued and outstanding).................... $14.49
------------------
------------------
Class Z:
Net asset value, offering price and redemption price per share
($68,515,750 DIVIDED BY 4,472,853 shares of common stock issued and outstanding)................. $15.32
------------------
------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-34

<PAGE>

PRUDENTIAL SMALL COMPANIES FUND, INC.
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
NET INVESTMENT INCOME SEPTEMBER 30, 1996
------------------
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $20,133)..................... $ 5,778,821
Interest................................. 3,902,287
------------------
Total income.......................... 9,681,108
------------------
Expenses
Management fee........................... 4,336,587
Distribution fee--Class A................ 557,727
Distribution fee--Class B................ 3,556,358
Distribution fee--Class C................ 27,862
Transfer agent's fees and expenses....... 1,188,000
Reports to shareholders.................. 250,000
Custodian's fees and expenses............ 140,000
Registration fees........................ 101,000
Audit fee................................ 46,000
Legal fees............................... 30,000
Directors' fees.......................... 24,200
Miscellaneous............................ 2,903
------------------
Total expenses........................ 10,260,637
------------------
Net investment loss......................... (579,529)
------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain on investment
transactions............................. 96,387,630
Net change in unrealized appreciation of
investments.............................. (17,952,802)
------------------
Net gain on investments..................... 78,434,828
------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS................... $ 77,855,299
------------------
------------------
</TABLE>

PRUDENTIAL SMALL COMPANIES FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE (DECREASE) YEAR ENDED SEPTEMBER 30,
IN NET ASSETS 1996 1995
------------- ------------
<S> <C> <C>
Operations
Net investment loss............ $ (579,529) $ (1,279,828)
Net realized gain on
investments................. 96,387,630 29,417,664
Net change in unrealized
appreciation of
investments................. (17,952,802) 83,509,332
------------- ------------
Net increase in net assets
resulting from operations... 77,855,299 111,647,168
------------- ------------
Net equalization credits.......... -- 1,510,164
------------- ------------
Distributions from net realized
capital gains (Note 1)
Class A........................ (11,343,132) (6,672,537)
Class B........................ (17,645,142) (28,252,159)
Class C........................ (93,369) (23,735)
------------- ------------
(29,081,643) (34,948,431)
------------- ------------
Fund share transactions (net of
conversion) (Note 6)
Net proceeds from shares
sold........................ 594,169,971 369,521,600
Net asset value of shares
issued in reinvestment of
distributions............... 27,854,955 33,299,692
Cost of shares reacquired...... (587,442,637) (404,229,931)
------------- ------------
Net increase (decrease) in net
assets from Fund share
transactions................ 34,582,289 (1,408,639)
------------- ------------
Total increase.................... 83,355,945 76,800,262
NET ASSETS
Beginning of year................. 605,649,435 528,849,173
------------- ------------
End of year....................... $ 689,005,380 $605,649,435
------------- ------------
------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-35 See Notes to Financial Statements.

<PAGE>

NOTES TO FINANCIAL STATEMENTS PRUDENTIAL SMALL COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
Prudential Small Companies Fund, Inc., formerly Prudential Growth Opportunity
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 achieve capital growth, consistent with reasonable
risk, by investing in a carefully selected portfolio of common stocks having
prospects of a high return on equity, increasing earnings, increasing dividends
and price-earnings ratios which are not excessive.

- ------------------------------------------------------------
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 VALUATIONS : Investments traded on a national securities exchange are
valued at the last reported sales price on the primary exchange on which they
are traded. Securities traded in the over-the-counter market (including
securities listed on exchanges whose primary market is believed to be
over-the-counter) and listed securities for which no sale was reported on that
date are valued at the mean between the last reported bid and asked prices. Any
security for which a reliable market quotation is unavailable is valued at fair
value as determined in good faith by or under the direction of the Fund's Board
of Directors.

Short-term securities which mature in more than 60 days are valued based upon
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost.

In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians, as the case may be under triparty repurchase agreements, take
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction, including accrued interest.
If the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.

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

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

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

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 taxable net income to its shareholders. Therefore, no
federal income tax provision is required.

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

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

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

EQUALIZATION: Effective October 1, 1995, the Fund discontinued the accounting
practice of equalization. Equalization is a practice whereby a portion of the
proceeds from sales and costs of repurchases of capital shares, equivalent on a
per share basis to the amount of distributable net investment income on the date
of the transaction, is credited or charged to undistributed net investment
income. The balance of $1,954,545 of undistributed net investment income at
September 30, 1995, resulting from equalization, was transferred to paid-in
capital in excess of par. Such reclassification has no effect on net assets,
results of operations, or net asset value per share.

RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to increase undistributed net investment income and decrease
accumulated net realized gain on investments by $579,529 for net operating
losses during the fiscal year ended September 30, 1996. Net investment income,
net realized gains and net assets were not affected by this change.
- --------------------------------------------------------------------------------
B-36

<PAGE>

NOTES TO FINANCIAL STATEMENTS PRUDENTIAL SMALL COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
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 The 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 .70 of 1% of the Fund's average daily net assets.

The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. ("PMFD"), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Effective January 2, 1996 Prudential Securities
Incorporated ("PSI") became the distributor of the Class A shares of the Fund
and is serving the Fund under the same terms and conditions as under the
arrangement with PMFD. PSI is also the distributor of the Class B, Class C and
Class Z shares of the Fund. The Fund compensated PMFD and PSI for distributing
and servicing the Fund's Class A, Class B and Class C shares, pursuant to plans
of distribution (the "Class A, B and C Plans"), regardless of expenses
actually incurred by them. The distribution fees are accrued daily and payable
monthly.

Pursuant to the Class A, B and C Plans, the Fund compensates PSI, and PMFD for
the period September 1, 1995 through January 1, 1996 with respect to Class A
shares, for distribution-related activities at an annual rate of up to .30 of
1%, 1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Class A Plan were .25 of 1% of the average
daily net assets of Class A shares and 1% of the average daily net assets under
the Class B and C Plans of both the Class B and Class C shares, respectively,
for the year ended September 30, 1996.

PMFD and PSI have advised the Fund that they have received approximately
$287,200 in front-end sales charges resulting from sales of Class A shares
during the year ended September 30, 1996. From these fees, PMFD and PSI paid
such sales charges to Pruco Securities Corporation, an affiliated broker-dealer,
which in turn paid commissions to sales persons and incurred other distribution
costs.

PSI has advised the Fund that for the year ended September 30, 1996, it received
approximately $775,100 and $1,300, respectively, in contingent deferred sales
charges imposed upon certain redemptions by Class B and C shareholders.

PMFD is a wholly-owned sudsidiary of PMF; 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, Inc. ("PMFS"), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended September 30,
1996, the Fund incurred fees of approximately $978,000 for the services of PMFS.
As of September 30, 1996, approximately $87,000 of such fees were due to PMFS.
Transfer agent fees and expenses in Statement of Operations include certain
out-of-pocket expenses paid to non-affliates.

- ------------------------------------------------------------
NOTE 4. PORTFOLIO SECURITIES

Purchases and sales of investment securities, other than short-term investments,
for the year ended September 30, 1996 were $290,760,085 and $312,681,087,
respectively.

The federal income tax basis of the Fund's investments at September 30, 1996 was
$590,614,165 and, accordingly, net unrealized appreciation for federal income
tax purposes was $104,563,885 (gross unrealized appreciation--$116,642,822 gross
unrealized depreciation--$12,078,937).

- ------------------------------------------------------------
NOTE 5. JOINT REPURCHASE AGREEMENT ACCOUNT

The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. As of Sepember 30, 1996, the
Fund had a 9.29% undivided interest in the joint account. The undivided interest
for the Fund represents $92,840,000 in the principal amount. As of such date,
each repurchase agreement in the joint account and the collateral therefor were
as follows:

Bear, Stearns & Co., Inc., 5.72%, in the principal amount of $333,000,000,
repurchase price $333,052,910, due 10/1/96. The value of the collateral
including accrued interest was $339,757,925.
- --------------------------------------------------------------------------------
B-37

<PAGE>

NOTES TO FINANCIAL STATEMENTS PRUDENTIAL SMALL COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
J.P. Morgan Securities, Inc., 5.70%, in the principal amount of $109,000,000,
repurchase price $109,017,258, due 10/1/96. The value of the collateral
including accrued interest was $111,181,257.

Goldman Sachs & Co.,Inc. 5.70%, in the principal amount of $333,000,000,
repurchase price $333,052,725, due 10/1/96. The value of the collateral
including accrued interest was $339,860,615.

Smith Barney, Inc., 5.75%, in the principal amount of $224,000,000, repurchase
price $224,035,778, due 10/1/96. The value of the collateral including accrued
interest was $228,481,010.

- ------------------------------------------------------------
NOTE 6. CAPITAL

The Fund currently offers Class A, Class B, Class C and Class Z shares. Class A
shares are sold with a front-end sales charge of up to to 5%. Class B shares are
sold with a contingent deferred sales charge which declines from 5% to zero
depending on the period of time the shares are held. Class C shares are sold
with a contingent deferred sales charge of 1% during the first year. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase. A special exchange privilege is also
available for shareholders who qualified to purchase Class A shares at net asset
value. Effective March 1, 1996, the Fund commenced offering Class Z shares.
Class Z shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.

There are 1 billion shares of common stock, $.01 par value per share, divided
into four classes, designated Class A, Class B, Class C and Class Z common
stock, each of which consists of 250 million authorized shares.

Transactions in shares of common stock for the years ended September 30, 1996
and 1995 were as follows:

<TABLE>
<CAPTION>
CLASS A SHARES AMOUNT
- ----------------------------------- ----------- -------------
<S> <C> <C>
Year ended September 30, 1996:
Shares sold........................ 30,393,176 $ 429,242,812
Shares issued in reinvestment of
distributions.................... 835,885 10,983,529
Shares reacquired.................. (29,632,995) (419,271,484)
----------- -------------
Net increase in shares outstanding
before conversion................ 1,596,066 20,954,857
Shares issued upon conversion from
Class B.......................... 1,312,309 18,909,540
Shares reacquired upon conversion
into Class Z..................... (4,480,718) (61,296,301)
----------- -------------
Net decrease in shares
outstanding...................... (1,572,343) $ (21,431,904)
----------- -------------
----------- -------------
</TABLE>

<TABLE>
<CAPTION>
CLASS A SHARES AMOUNT
- ----------------------------------- ----------- -------------
<S> <C> <C>
Year ended September 30, 1995:
Shares sold........................ 16,264,230 $ 199,059,220
Shares issued in reinvestment of
distributions.................... 614,029 6,502,568
Shares reacquired.................. (16,750,855) (207,402,318)
----------- -------------
Net increase in shares outstanding
before conversion................ 127,404 (1,840,530)
Shares issued upon conversion from
Class B.......................... 8,645,131 97,904,973
----------- -------------
Net increase in shares
outstanding...................... 8,772,535 $ 96,064,443
----------- -------------
----------- -------------
</TABLE>

<TABLE>
<CAPTION>
CLASS B
- -----------------------------------
<S> <C> <C>
Year ended September 30, 1996:
Shares sold........................ 10,646,908 $ 141,359,376
Shares issued in reinvestment of
distributions.................... 1,340,218 16,779,529
Shares reacquired.................. (11,138,852) (146,886,969)
----------- -------------
Net increase in shares outstanding
before conversion................ 848,274 11,251,936
Shares reacquired upon conversion
into Class A..................... (1,382,405) (18,909,540)
----------- -------------
Net decrease in shares
outstanding...................... (534,131) $ (7,657,604)
----------- -------------
----------- -------------
Year ended September 30, 1995:
Shares sold........................ 14,302,262 $ 168,922,003
Shares issued in reinvestment of
distributions.................... 2,601,937 26,773,935
Shares reacquired.................. (16,720,969) (196,352,189)
----------- -------------
Net increase in shares outstanding
before conversion................ 183,230 (656,251)
Shares reacquired upon conversion
into Class A..................... (8,999,868) (97,904,973)
----------- -------------
Net decrease in shares
outstanding...................... (8,816,638) $ (98,561,224)
----------- -------------
----------- -------------
</TABLE>

- --------------------------------------------------------------------------------
B-38

<PAGE>

NOTES TO FINANCIAL STATEMENTS PRUDENTIAL SMALL COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C SHARES AMOUNT
- ----------------------------------- ----------- -------------
<S> <C> <C>
Year ended September 30, 1996:
Shares sold........................ 403,369 $ 5,378,137
Shares issued in reinvestment of
distributions.................... 7,340 91,897
Shares reacquired.................. (226,306) (3,018,680)
----------- -------------
Net increase in shares
outstanding...................... 184,403 $ 2,451,354
----------- -------------
----------- -------------
Year ended September 30, 1995:
Shares sold........................ 129,738 $ 1,540,377
Shares issued in reinvestment of
distributions.................... 2,254 23,189
Shares reacquired.................. (40,456) (475,424)
----------- -------------
Net increase in shares
outstanding...................... 91,536 $ 1,088,142
----------- -------------
----------- -------------
</TABLE>

<TABLE>
<CAPTION>
CLASS Z
- -----------------------------------
<S> <C> <C>
March 1, 1996(a) through September
30, 1996:
Shares sold........................ 1,257,435 $ 18,189,646
Shares reacquired.................. (1,265,300) (18,265,504)
----------- -------------
Net decrease in shares outstanding
before conversion................ (7,865) (75,858)
Shares issued upon conversion from
Class A.......................... 4,480,718 61,296,301
----------- -------------
Net increase in shares
outstanding...................... 4,472,853 $ 61,220,443
----------- -------------
----------- -------------
- ---------------
(a) Commencement of offering of Class Z shares.
</TABLE>
- --------------------------------------------------------------------------------
B-39

<PAGE>

FINANCIAL HIGHLIGHTS PRUDENTIAL SMALL COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(a):
Net asset value, beginning of year........ $ 14.18 $ 12.40 $ 13.06 $ 11.25 $ 10.16
-------- -------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................... .04 .05 -- .03 .02
Net realized and unrealized gain on
investment transactions................ 1.75 2.57 .13 3.14 1.47
-------- -------- -------- ------- -------
Total from investment operations....... 1.79 2.62 .13 3.17 1.49
-------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net realized capital
gains.................................. (.67) (.84) (.79) (1.36) (.40)
-------- -------- -------- ------- -------
Net asset value, end of year.............. $ 15.30 $ 14.18 $ 12.40 $ 13.06 $ 11.25
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
TOTAL RETURN(b):.......................... 13.38% 23.29% 1.13% 30.42% 15.39%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............. $237,306 $242,231 $103,078 $94,842 $44,845
Average net assets (000).................. $223,091 $174,449 $ 97,877 $69,801 $36,011
Ratios to average net assets:
Expenses, including distribution
fees................................ 1.24% 1.33% 1.33% 1.17% 1.33%
Expenses, excluding distribution
fees................................ .99% 1.08% 1.09% .97% 1.13%
Net investment income.................. .33% .30% .00% .26% .19%
For Class A, B, C and Z shares:
Portfolio turnover..................... 53% 64% 82% 68% 99%
Average commission rate paid per
share............................... $ .0515 N/A N/A N/A N/A
</TABLE>

- ---------------
(a) Calculated based upon weighted average shares outstanding during the year.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-40

<PAGE>

FINANCIAL HIGHLIGHTS PRUDENTIAL SMALL COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(a):
Net asset value, beginning of year........ $ 13.56 $ 11.99 $ 12.74 $ 11.08 $ 10.11
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss....................... (.06) (.06) (.09) (.06) (.07)
Net realized and unrealized gain on
investment transactions................ 1.66 2.47 .13 3.08 1.44
-------- -------- -------- -------- --------
Total from investment operations....... 1.60 2.41 .04 3.02 1.37
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net realized capital
gains.................................. (.67) (.84) (.79) (1.36) (.40)
-------- -------- -------- -------- --------
Net asset value, end of year.............. $ 14.49 $ 13.56 $ 11.99 $ 12.74 $ 11.08
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(b):.......................... 12.56% 22.37% .34% 29.40% 14.27%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............. $378,861 $361,873 $425,502 $376,068 $172,018
Average net assets (000).................. $355,636 $349,929 $399,920 $278,659 $154,601
Ratios to average net assets:
Expenses, including distribution
fees................................ 1.99% 2.08% 2.09% 1.97% 2.13%
Expenses, excluding distribution
fees................................ .99% 1.08% 1.09% .97% 1.13%
Net investment loss.................... (.42)% (.51)% (.76)% (.54)% (.61)%
</TABLE>

<PAGE>

FINANCIAL HIGHLIGHTS PRUDENTIAL SMALL COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C CLASS Z
--------------------------------------------------------- -----------------
AUGUST 1, MARCH 1,
YEAR YEAR 1994(d) 1996(e)
ENDED ENDED THROUGH THROUGH
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1994 1996
--------------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(a):
Net asset value, beginning of period...... $ 13.56 $ 11.99 $ 11.61 $ 13.69
----- ----- ----- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss).............. (.06) (.06) (.01) .05
Net realized and unrealized gain on
investment transactions................ 1.66 2.47 .39 1.58
----- ----- ----- ------
Total from investment operations....... 1.60 2.41 .38 1.63
----- ----- ----- ------
LESS DISTRIBUTIONS
Distributions from net realized capital
gains.................................. (.67) (.84) -- --
----- ----- ----- ------
Net asset value, end of period............ $ 14.49 $ 13.56 $ 11.99 $ 15.32
----- ----- ----- ------
----- ----- ----- ------
TOTAL RETURN(b):.......................... 12.56% 22.37% 3.19% 11.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........... $ 4,323 $ 1,545 $ 269 $68,516
Average net assets (000).................. $ 2,786 $ 784 $ 179 $66,228
Ratios to average net assets:
Expenses, including distribution
fees................................ 1.99% 2.08% 2.22%(c) .99%(c)
Expenses, excluding distribution
fees................................ .99% 1.08% 1.22%(c) .99%(c)
Net investment income (loss)........... (.42)% (.46)% (.31)%(c) .58%(c)
</TABLE>

- ---------------
(a) Calculated based upon weighted average shares outstanding during the period.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
(e) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-42

<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS PRUDENTIAL SMALL COMPANIES FUND, INC.
- --------------------------------------------------------------------------------

The Shareholders and Board of Directors of
Prudential Small Companies 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 Small Companies Fund,
Inc., formerly Prudential Growth Opportunity Fund, Inc. (the "Fund") at
September 30, 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
September 30, 1996 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP
New York, New York
November 25, 1996

FEDERAL INCOME TAX INFORMATION PRUDENTIAL SMALL COMPANIES FUND, INC.
- --------------------------------------------------------------------------------

We are required by the Internal Revenue Code to advise you within 60 days of the
Fund's fiscal year end (September 30, 1996) as to the federal tax status of
distributions paid by the Fund during such fiscal year. Accordingly, during its
fiscal year ended September 30, 1996, the Fund paid distributions from net
realized short-term capital gains of $.211 per Class A, Class B and Class C
shares, which are fully taxable as ordinary income, and $.457 per Class A, Class
B and Class C shares from net realized long-term capital gains, which are
taxable as such. Further, we wish to advise you that 62% of the ordinary income
dividends paid in the fiscal year ended September 30, 1996 qualified for the
corporate dividends received deduction available to corporate taxpayers.

In January 1997, you will be advised on Internal Revenue Service Form 1099 DIV
or substitute 1099 as to the federal tax status of the dividends received by you
in calendar year 1996. The amounts that will be reported on such Form 1099 DIV
or substitute will be the amounts to use on your 1996 federal income tax return
and probably will differ from the amounts which we must report for the Fund's
fiscal year ended September 30, 1996.
- --------------------------------------------------------------------------------
B-43

<PAGE>
APPENDIX A--GENERAL INVESTMENT INFORMATION

The following terms are used in mutual fund investing.

ASSET ALLOCATION

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

DIVERSIFICATION

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

DURATION

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

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

MARKET TIMING

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

POWER OF COMPOUNDING

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

A-1
<PAGE>
APPENDIX B--HISTORICAL PERFORMANCE DATA

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

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

[CHART]
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is for illustrative
purposes only and is not indicative of the past, present, or future performance
of any asset class of any Prudential Mutual Fund.

Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile than
bond prices over the long-term.

Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.

Long-term government bond returns are represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each year
a new bond with a then-current coupon replaces the old bond. Treasury bill
returns are for a one-month bill. Treasuries are guaranteed by the government as
to the timely payment of principal and interest; equities are not. Inflation is
measured by the consumer price index (CPI).

IMPACT OF INFLATION. The "real" rate of investment return is that which exceeds
the rate of inflation, the percentage change in the value of consumer goods and
the general cost of living. A common goal of long-term investors is to outpace
the erosive impact of inflation on investment returns.

B-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987 to
May 1995. The total returns of the indices include accrued interest, plus the
price changes (gains or losses) of the underlying securities during the period
mentioned. The data is provided to illustrate the varying historical total
returns and investors should not consider this performance data as an indication
of the future performance of the Fund or of any sector in which the Fund
invests.

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

HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS

<TABLE>
<CAPTION>
YTD
'87 '88 '89 '90 '91 '92 '93 '94 9/95
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 13.2%
- ---------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
MORTGAGE
SECURITIES(2) 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 13.1%
- ---------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 16.5%
- ---------------------------------------------------------------------------------------------------------------
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 15.6%
- ---------------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 17.1%
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURN PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 4.0
</TABLE>

(1)LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.
(2)LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3)LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
(4)LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.
(5)SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the U.S.,
but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.

B-2
<PAGE>
This chart illustrates the performance of major
world stock markets for the period from 1985
through 1994. It does not represent the
performance of any Prudential Mutual Fund.

[CHART]

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

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

[CHART]

Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson
and Rex A. Sinquefield). Used with permission. All rights reserved.
This chart is used for illustrative purposes only and is not intended to
represent the past, present or future performance of any Prudential
Mutual Fund. Common stock total return is based on the Standard
& Poor's 500 Stock Index, a market-value-weighted index made up
of 500 of the largest stocks in the U.S. based upon their stock
market value. Investors cannot invest directly in indices.

[CHART]
Source: Morgan Stanley Capital International, December 1994.
Used with permission. This chart represents the capitalization of
major world stock markets as measured by the Morgan Stanley
Capital International (MSCI) World Index. The total market
capitalization is based on the value of 1577 companies in 22
countries (representing approximately 60% of the aggregate
market value of the stock exchanges). This chart is for illustrative purposes
only and does not represent the allocation of any Prudential Mutual Fund.

B-3
<PAGE>

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

[CHART]

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

Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook,
Ibbotson Associates, Chicago (annually updates work by Roger G.
Ibbotson and Rex A. Sinquefield). Used with permission. All
rights reserved. This chart illustrates the historical yield of
the long- term U.S. Treasury Bond from 1926-1994. Yields
represent that of an annually renewed one-bond portfolio with a
remaining maturity of approximately 20 years. This chart is for
illustrative purposes only and should not be construed to
represent the yields of any Prudential Mutual Fund.

B-4