PRUDENTIAL SMALL CO VALUE FUND INC, 485BPOS, 1997-12-02

PRUDENTIAL SMALL CO VALUE FUND INC
485BPOS, 1997-12-02

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 2, 1997

REGISTRATION NOS. 811-3084
2-68723

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 / /

PRE-EFFECTIVE AMENDMENT NO. / /

POST-EFFECTIVE AMENDMENT NO. 25 /X/

AND/OR

REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940

AMENDMENT NO. 26 /X/

(Check appropriate box or boxes)
------------------------

PRUDENTIAL SMALL COMPANY VALUE FUND, INC.

(FORMERLY, PRUDENTIAL SMALL COMPANIES FUND, INC.)

(Exact name of registrant as specified in charter)

GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102-4077

(Address of Principal Executive Offices)(Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7530

S. JANE ROSE, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Name and Address of Agent for Service of Process)
Approximate date of proposed public offering:
As soon as practicable after the effective
date of the Registration Statement.
It is proposed that this filing will become effective
(check appropriate box):

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

/ / on pursuant to paragraph (b)

/ / 60 days after filing pursuant to paragraph (a)(1)

/ / on (date) pursuant to paragraph (a)(1)

/ / 75 days after filing pursuant to paragraph (a)(2)

/ / on (date) pursuant to paragraph (a)(2) of rule 485.

If appropriate, check the following box:

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

Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant
has registered an indefinite number of shares of its Common Stock, par value
$.01 per share. The Registrant filed a notice under such Rule for its fiscal
year ended September 30, 1997 on November 25, 1997.

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<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)

<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ----------------------------------------------- ----------------------------------
<S> <C> <C> <C>
PART A
Item 1. Cover Page........................ Cover Page
Item 2. Synopsis.......................... Fund Expenses
Item 3. Condensed Financial Information... Fund Expenses; Financial
Highlights; How the Fund
Calculates Performance
Item 4. General Description of Cover Page; Fund Highlights; How
Registrant........................ the Fund Invests; General
Information
Item 5. Management of the Fund............ Financial Highlights; How the Fund
is Managed; General Information;
Shareholder Guide
Item 5A. Management's Discussion of Fund
Performance....................... Financial Highlights
Item 6. Capital Stock and Other Taxes, Dividends and
Securities........................ Distributions; General
Information; Shareholder Guide
Item 7. Purchase of Securities Being Shareholder Guide; How the Fund
Offered........................... Values its Shares; How the Fund is
Managed
Item 8. Redemption or Repurchase.......... Shareholder Guide; How the Fund
Values its Shares; General
Information
Item 9. Pending Legal Proceedings......... Not Applicable

PART B
Item 10. Cover Page........................ Cover Page
Item 11. Table of Contents................. Table of Contents
Item 12. General Information and History... General Information
Item 13. Investment Objectives and Investment Objective and Policies;
Policies.......................... Investment Restrictions
Item 14. Management of the Fund............ Directors and Officers; Manager;
Distributor
Item 15. Control Persons and Principal
Holders of Securities............. Directors and Officers
Item 16. Investment Advisory and Other Manager; Distributor; Custodian,
Services.......................... Transfer and Dividend Disbursing
Agent and Independent Accountants
Item 17. Brokerage Allocation and Other Portfolio Transactions and
Practices......................... Brokerage
Item 18. Capital Stock and Other
Securities........................ Not Applicable
Item 19. Purchase, Redemption and Pricing Purchase and Redemption of Fund
of Securities Being Offered....... Shares; Shareholder Investment
Account; Net Asset Value
Item 20. Tax Status........................ Taxes, Dividends and Distributions
Item 21. Underwriters...................... Distributor
Item 22. Calculation of Performance Data... Performance Information
Item 23. Financial Statements.............. Financial Statements

PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Post-Effective Amendment
to the Registration Statement.
</TABLE>

<PAGE>

PRUDENTIAL SMALL COMPANY VALUE FUND, INC.

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PROSPECTUS DATED DECEMBER 2, 1997

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Prudential Small Company Value Fund, Inc. (the Fund) is an open-end, diversified
management investment company whose investment objective is capital growth. The
Fund invests primarily in a carefully selected portfolio of common
stocks--generally stocks of smaller, less well known companies that typically
have valuations which, in the investment adviser's view, are temporarily low
relative to the companies' earnings, assets, cash flow and dividends. The Fund's
purchase and sale of put and call options and related short-term trading 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 December 2, 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 COMPANY VALUE FUND, INC.?

Prudential Small Company Value 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 stocks of smaller, less well known companies (with
market capitalizations less than $1.5 billion or a corresponding market
capitalization in foreign markets) that typically have valuations which, in
the investment adviser's view, are temporarily low relative to the
companies' earnings, assets, cash flow and dividends. 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.

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

In seeking to achieve its investment objective, the Fund generally invests
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 using 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 "Investment
Objective and Policies--Foreign Securities" at page 10.

WHO MANAGES THE FUND?

Prudential Investments Fund Management LLC (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, 1997, the Manager
served as manager or administrator to 63 investment companies, including 41
mutual funds, with aggregate assets of approximately $59.4 billion. The
Prudential Investment Corporation, which does business under the name of
Prudential Investments (the Subadviser), furnishes investment advisory
services in connection with the management of the Fund under a Subadvisory
Agreement with the Manager. See "How the Fund is Managed--Manager" at page
16.

WHO DISTRIBUTES THE FUND'S SHARES?

Prudential Securities Incorporated (Prudential Securities), 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 and
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. Prudential Securities
incurs the expenses 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 21 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 LLC (PMFS or the Transfer
Agent) at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities 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 NAV without any sales
charge. See "How the Fund Values its Shares" at page 18 and "Shareholder
Guide--How to Buy Shares of the Fund" at page 21.

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 sales charge or CDSC to a
limited group of investors. Class Z shares are not
subject to any ongoing service or distribution expenses.

See "Shareholder Guide--Alternative Purchase Plan" at page 22.

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
26.

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 19.

3
<PAGE>
FUND EXPENSES

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

<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees..................... .70% .70% .70% .70%
12b-1 Fees (After Reduction)........ .25%++ 1.00% 1.00% None
Other Expenses...................... .26% .26% .26% .26%
--
--- --- ---
Total Fund Operating Expenses (After
Reduction)......................... 1.21% 1.96% 1.96% .96%
--
--
--- --- ---
--- --- ---
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE
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 $ 86 $ 113 $ 189
Class B............................ $ 70 $ 92 $ 116 $ 200
Class C............................ $ 30 $ 62 $ 106 $ 229
Class Z............................ $ 10 $ 31 $ 53 $ 118
You would pay the following expenses on
the same investment, assuming no
redemption:
Class A............................ $ 62 $ 86 $ 113 $ 189
Class B............................ $ 20 $ 62 $ 106 $ 200
Class C............................ $ 20 $ 62 $ 106 $ 229
Class Z............................ $ 10 $ 31 $ 53 $ 118
</TABLE>

The above example is based on data for the Fund's fiscal year ended
September 30, 1997. 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, but excludes foreign
withholding taxes.

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

* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."

+ 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 each class of 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 of the Fund, Prudential Securities
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, 1998. Total
operating expenses without such limitation would be 1.26%. See "How the
Fund is Managed--Distributor."

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

The following financial highlights with respect to the five years ended
September 30, 1997 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 A 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
Guide--Shareholder Services--Reports to Shareholders."

<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------
1997 (d) 1996 (d) 1995 (d) 1994 (d) 1993 (d) 1992 (d) 1991
-------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>

PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 15.30 $ 14.18 $ 12.40 $ 13.06 $ 11.25 $10.16 $ 7.36
-------- -------- -------- -------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .02 .04 .05 -- .03 .02 .05
Net realized and unrealized gain (loss) on
investment transactions......................... 6.06 1.75 2.57 .13 3.14 1.47 2.82
-------- -------- -------- -------- -------- ------- -------
Total from investment operations.................. 6.08 1.79 2.62 .13 3.17 1.49 2.87
-------- -------- -------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income.............. -- -- -- -- -- -- (.07)
Distributions from net realized capital gains on
investment transactions......................... (2.43) (.67) (.84) (.79) (1.36) (.40) --
-------- -------- -------- -------- -------- ------- -------
Total distributions............................... (2.43) (.67) (.84) (.79) (1.36) (.40) (.07)
-------- -------- -------- -------- -------- ------- -------
Net asset value, end of period.................... $ 18.95 $ 15.30 $ 14.18 $ 12.40 $ 13.06 $11.25 $ 10.16
-------- -------- -------- -------- -------- ------- -------
-------- -------- -------- -------- -------- ------- -------

TOTAL RETURN (C):................................. 45.92% 13.38% 23.29% 1.13% 30.42% 15.39% 39.39%

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $412,980 $237,306 $242,231 $103,078 $94,842 $44,845 $25,165
Ratios to average net assets:
Expenses, including distribution fees........... 1.21% 1.24% 1.33% 1.33% 1.17% 1.33% 1.50%
Expenses, excluding distribution fees........... .96% .99% 1.08% 1.09% .97% 1.13% 1.30%
Net investment income (loss).................... .15% .33% .30% .00% .26% .19% .59%
Portfolio turnover................................ 58% 53% 64% 82% 68% 99% 111%
Average commission rate paid per share............ $ .0470 $ .0515 N/A N/A N/A N/A N/A

JANUARY 22,
1990 (a)
THROUGH
SEPTEMBER 30,
1990
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 8.55
-------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .09
Net realized and unrealized gain (loss) on
investment transactions......................... (1.20)
-------------
Total from investment operations.................. (1.11)
-------------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.08)
Distributions from net realized capital gains on
investment transactions......................... --
-------------
Total distributions............................... (.08)
-------------
Net asset value, end of period.................... $ 7.36
-------------
-------------
TOTAL RETURN (C):................................. (13.19)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $17,222
Ratios to average net assets:
Expenses, including distribution fees........... 1.61%(b)
Expenses, excluding distribution fees........... 1.42%(b)
Net investment income (loss).................... 1.54%(b)
Portfolio turnover................................ 79%
Average commission rate paid per share............ N/A
</TABLE>

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(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. Total returns for
periods of less than a full year are not annualized.

(d) Calculated based upon weighted average shares outstanding during the
period.

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, 1997 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>
CLASS B
-----------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
1997 (b) 1996 (b) 1995 (b) 1994 (b) 1993 (b) 1992 (b) 1991
-------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year................ $ 14.49 $ 13.56 $ 11.99 $ 12.74 $ 11.08 $10.11 $ 7.34
-------- -------- -------- -------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)...................... (.09) (.06) (.06) (.09) (.06) (.07 ) (.02)
Net realized and unrealized gain (loss) on
investment transactions......................... 5.67 1.66 2.47 .13 3.08 1.44 2.82
-------- -------- -------- -------- -------- ------- -------
Total from investment operations.................. 5.58 1.60 2.41 .04 3.02 1.37 2.80
-------- -------- -------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income.............. -- -- -- -- -- -- (.03)
Distributions from net realized capital gains on
investment transactions......................... (2.43) (.67) (.84) (.79) (1.36) (.40 ) --
-------- -------- -------- -------- -------- ------- -------
Total distributions............................... (2.43) (.67) (.84) (.79) (1.36) (.40 ) (.03)
-------- -------- -------- -------- -------- ------- -------
Net asset value, end of year...................... $ 17.64 $ 14.49 $ 13.56 $ 11.99 $ 12.74 $11.08 $ 10.11
-------- -------- -------- -------- -------- ------- -------
-------- -------- -------- -------- -------- ------- -------

TOTAL RETURN (C):................................. 44.91% 12.56% 22.37% .34% 29.40% 14.27% 38.33%

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)..................... $645,579 $378,861 $361,873 $425,502 $376,068 $172,018 $118,660
Ratios to average net assets:
Expenses, including distribution fees........... 1.96% 1.99% 2.08% 2.09% 1.97% 2.13% 2.30%
Expenses, excluding distribution fees........... .96% .99% 1.08% 1.09% .97% 1.13% 1.30%
Net investment income (loss).................... (.60)% (.42)% (.51)% (.76)% (.54)% (.61 )% (.21)%
Portfolio turnover................................ 58% 53% 64% 82% 68% 99% 111%
Average commission rate paid per share............ $ .0470 $ .0515 N/A N/A N/A N/A N/A

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

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

(a) On January 31, 1989, Prudential Mutual Fund Management, Inc.
succeeded The Prudential Insurance Company of America as Manager of
the Fund.

(b) Calculated based upon weighted average shares outstanding during the
year.

(d) Net of expense reimbursement.

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 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>
CLASS C
----------------------------------------------
AUGUST 1,
1994 (a)
YEAR ENDED SEPTEMBER 30, THROUGH
------------------------------ SEPTEMBER 30,
1997 (d) 1996 (d) 1995 (d) 1994 (d)
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $ 14.49 $13.56 $11.99 $11.61
-------- -------- -------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss....................... (.09) (.06) (.06) (.01)
Net realized and unrealized gain on
investment transactions................. 5.67 1.66 2.47 .39
-------- -------- -------- ------
Total from investment operations.......... 5.58 1.60 2.41 .38
-------- -------- -------- ------
LESS DISTRIBUTIONS
Distributions from net realized capital
gains on investment transactions........ (2.43) (.67) (.84) --
-------- -------- -------- ------
Total distributions..................... (2.43) (.67) (.84) --
-------- -------- -------- ------
Net asset value, end of period............ $ 17.64 $14.49 $13.56 $11.99
-------- -------- -------- ------
-------- -------- -------- ------
TOTAL RETURN (C):......................... 44.91% 12.56% 22.37% 3.19%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........... $22,049 $4,323 $1,545 $ 269
Ratios to average net assets:
Expenses, including distribution fees... 1.96% 1.99% 2.08% 2.22%(b)
Expenses, excluding distribution fees... .96% .99% 1.08% 1.22%(b)
Net investment loss..................... (.60)% (.42)% (.46)% (.31)%(b)
Portfolio turnover........................ 58% 53% 64% 82%
Average commission rate paid per share.... $ .0470 $.0515 N/A N/A
</TABLE>

- ------------
(a) Commencement of offering of Class C shares.

(b) Annualized.

(d) Calculated based upon weighted average shares outstanding during the
period.

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 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>
CLASS Z
-------------------------------
MARCH 1,
1996 (a)
YEAR ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30,
1997 (d) 1996 (d)
-------------- --------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $15.32 $13.69
-------------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................................... .06 .05
Net realized and unrealized gain on investment
transactions........................................... 6.09 1.58
-------------- -------
Total from investment operations......................... 6.15 1.63
-------------- -------
LESS DISTRIBUTIONS
Distributions from net realized capital gains on
investment transactions................................ (2.43) --
-------------- -------
Total distributions...................................... (2.43) --
-------------- -------
Net asset value, end of period........................... $19.04 $15.32
-------------- -------
-------------- -------
TOTAL RETURN (C):........................................ 46.38% 11.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................... 1$51,215 $68,516
Ratios to average net assets:
Expenses............................................... .96% .99%(b)
Net investment income (loss)........................... .40% .58%(b)
Portfolio turnover....................................... 58% 53%
Average commission rate per share........................ $.0470 $.0515
</TABLE>

- ------------
(a) Commencement of offering of Class Z shares.

(b) Annualized.

(d) Calculated based upon weighted average shares outstanding during the
period.

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 PRIMARILY 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 SUBADVISER, 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. As with an investment in
any mutual fund, an investment in this Fund can decrease in value and
shareholders can lose money.

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 Subadviser generally expects to select for the
Fund's portfolio are those stocks of smaller, less well known companies which,
in the Subadviser's judgment, have valuations that are temporarily low relative
to the companies' earnings, assets, cash flow and 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 invest in equity related securities. Equity related securities
include common stocks, preferred stocks, securities convertible or exchangeable
for common stocks or preferred stocks, equity investments in partnerships, joint
ventures and other forms of non-corporate investments, American Depositary
Receipts (ADRs), and warrants and rights exercisable for equity securities. ADRs
are U.S. dollar-denominated certificates issued by a United States bank or trust
company and represent the right to receive securities of a foreign issuer
deposited in a domestic bank or foreign branch of a United States bank and are
traded on a United States exchange or over-the-counter market.

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 (S&P 500). As a
result, the Fund's portfolio will generally be made up of common stocks issued
by smaller, less well known companies (market capitalizations typically less
than $1.5 billion or a corresponding market capitalization in foreign markets)
selected by the Subadviser on the basis of fundamental investment analysis.
Market capitalization is measured at the time of purchase. 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

9
<PAGE>
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.

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.

REAL ESTATE INVESTMENT TRUSTS

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

FOREIGN SECURITIES

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 and obligations of foreign branches of
domestic banks. For purposes of this limitation, ADRs are not deemed to be
foreign securities.

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

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 United States.

HEDGING AND RETURN ENHANCEMENT STRATEGIES

THE FUND MAY ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING USING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN, BUT NOT FOR SPECULATION. The Fund, and thus investors, may lose
money through any unsuccessful use of these strategies. These strategies include
the use of derivatives, such as options, futures

10
<PAGE>

contracts and options thereon. The Subadviser 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" and "Taxes, Dividends and Distributions" in the Statement of
Additional Information. 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. A written option is covered if, as
long as the Fund is obligated under the option (i) it owns an offsetting
position in the underlying security or (ii) maintains in a segregated account,
cash or other liquid assets in an amount equal to or greater than its obligation
under the option. There is no limitation on the amount of call options the Fund
may write. See "Investment Objective and Policies--Limitations on Purchase and
Sale of Stock Options, Options on Stock Indices and Stock Index Futures" in the
Statement of Additional Information.

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 or make delivery of a specified amount of foreign
currency, rather than stock.

11
<PAGE>
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 Subadviser 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 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 Subadviser 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, Dividends and
Distributions" in the Statement of Additional Information.

12
<PAGE>
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 INVESTORS, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL 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 Securities and Exchange Commission
(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 other liquid assets in an amount at least equal to the Fund's
obligations with respect to such futures contracts. The Fund may place and
maintain cash, securities and similar investments with a futures 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 SUBADVISER'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 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 OR CLOSE OUT FUTURES CONTRACTS AND OPTIONS
THEREON IS LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE FOR
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. See "Taxes, Dividends and
Distributions" 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 INVESTORS, MAY LOSE MONEY IF THE FUND IS
UNSUCCESSFUL IN ITS USE OF THESE STRATEGIES. If the Subadviser'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 Subadviser'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;
(5) the possible need to defer

13
<PAGE>

closing out certain hedged positions to avoid adverse tax consequences; and (6)
the possible inability of the Fund to purchase or sell a portfolio security at a
time that otherwise would be favorable for it to do so, or the possible need for
the Fund to sell a portfolio security at a disadvantageous time, due to the need
for the Fund to maintain "cover" or to segregate securities in connection with
hedging transactions. See "Investment Objective and Policies" and "Taxes,
Dividends and Distributions" 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 Subadviser'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 Subadviser 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 the Subadviser believes that
the other party to the options will continue to make a market for such options.

OTHER INVESTMENTS AND POLICIES

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 the
instruments declines, the Fund will require additional collateral. If the seller
defaults and the value of the collateral securing the repurchase agreement
declines, the Fund may incur a loss. The Fund participates in a joint repurchase
account with other investment companies managed by the Manager, pursuant to an
order of the 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 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 other
liquid assets 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

14
<PAGE>

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 NAV.

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 for,
without payment of any further consideration, 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.

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 Subadviser 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.

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, 1997, 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 1.21%, 1.96%, 1.96%, and .96%, respectively. See "Financial
Highlights."

15
<PAGE>
MANAGER

THE MANAGER OF THE FUND, PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC, GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .70 OF 1% OF THE FUND'S AVERAGE DAILY NET
ASSETS. The Manager is organized in New York as a limited liability company. For
the fiscal year ended September 30, 1997, the Fund incurred management fees
payable to the Manager of .70% of the Fund's average net assets. See "Manager"
in the Statement of Additional Information.

As of October 31, 1997, the Manager served as the manager to 41 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 $59.4 billion.

UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, THE MANAGER 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, PRUDENTIAL INVESTMENTS, AS THE FUND'S
SUBADVISER, FURNISHES INVESTMENT ADVISORY SERVICES IN CONNECTION WITH THE
MANAGEMENT OF THE FUND AND IS REIMBURSED BY THE MANAGER FOR ITS REASONABLE COSTS
AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the Management
Agreement, the Manager continues to have responsibility for all investment
advisory services and supervises Prudential Investments' performance of such
services.

The Fund is managed by Roger E. Ford and Jay S. Kaplan, both of the
Subadviser. As a team, they have responsibility for the day-to-day management of
the Fund's portfolio. The Fund's portfolio managers share a value investment
style, focusing on strong companies selling at a discount from their perceived
true worth. Messrs. Ford and Kaplan select stocks for the Fund's portfolio at
prices which in their view are temporarily low relative to the company's
earnings, assets, cash flow and dividends. Mr. Ford has managed the Fund's
portfolio since July 1995 and manages a number of other portfolios advised by
the Subadviser. Mr. Ford has been employed by the Subadviser as a portfolio
manager since 1972. Mr. Kaplan, who became the co-manager of the Fund in January
1996, has been involved in the management of a number of value-oriented equity
investment portfolios since joining Prudential Mutual Funds in 1993. Prior to
joining Prudential Mutual Funds, Mr. Kaplan was employed by the Prudential
Capital Management Group as a high yield credit analyst.

The Manager and the Subadviser are wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company.

DISTRIBUTOR

PRUDENTIAL SECURITIES, 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, 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 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 Prudential
Securities, 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.

16
<PAGE>

Under the Plans, the Fund is obligated to pay distribution and/or service fees
to Prudential Securities as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If Prudential
Securities' expenses exceed its distribution and service fees, the Fund will not
be obligated to pay any additional expenses. If Prudential Securities' 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 PRUDENTIAL SECURITIES 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 OF THE
FUND. 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. Prudential Securities
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, 1998.

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
CDSCs from certain redeeming shareholders. See "Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges."

For the fiscal year ended September 30, 1997, the Fund incurred 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 and Class C
shares of the Fund will be allocated to each such class based upon the ratio of
sales of each such class to the sales of Class A, Class B or Class C shares of
the Fund other than expenses allocable to a particular class. The distribution
fee and sales charge of one class will not be used to subsidize the sale of
another class.

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 Prudential Securities)
and other persons who distribute shares of the Fund (including Class Z shares).
Such payments may be calculated by reference to the NAV of shares sold by such
persons or otherwise.

The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.

FEE WAIVERS

Prudential Securities has agreed to limit its distribution fees for Class A
shares as described under "Distributor" above. Fee waivers will increase total
return. See "Performance Information" in the Statement of Additional Information
and "Fund Expenses."

17
<PAGE>
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.

The Fund's Transfer Agent, Prudential Mutual Fund Services LLC, 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. The Transfer Agent is a wholly-owned subsidiary of the Manager. Its
mailing address is P.O. Box 15005, New Brunswick, New Jersey 08906-5005.

HOW THE FUND VALUES ITS SHARES

THE FUND'S 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. For valuation purposes, quotations
of foreign securities in a foreign currency are converted to U.S. dollar
equivalents. 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.

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 and/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 and/or service fee expense accrual differential among
the classes.

HOW THE FUND CALCULATES PERFORMANCE

FROM TIME TO TIME THE FUND MAY ADVERTISE ITS AVERAGE ANNUAL TOTAL RETURN,
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

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<PAGE>

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."

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 NET
CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. See "Taxes,
Dividends and Distributions" in the Statement of Additional Information.

TAXATION OF SHAREHOLDERS

Any dividends out of net investment income, together with distributions of net
short-term gains (I.E., the excess of net short-term capital gains over net
long-term capital losses), distributed to shareholders, will be taxable as
ordinary income to the shareholder whether or not reinvested. Any net 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 long-term capital
gains 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 for securities held between 12 and 18 months
currently is 28%, and for securities held more than 18 months is 20%. The
maximum long-term capital gains rate for corporate shareholders is currently the
same as the maximum tax rate for ordinary income.

Both regular and capital gains dividends are taxable to shareholders in the
year in which received, whether they are received in cash or in additional
shares. In addition, certain dividends declared by the Fund will be treated as
received by shareholders on December 31 of the year the dividends are declared.
This rule applies to dividends declared by the Fund in October, November or
December of a calendar year, payable to shareholders of record on a date in any
such month if such dividends are paid during January of the following calendar
year. 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.

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. Gain or loss on shares held more than
18 months will be considered in determining a holder's adjusted net capital gain
subject to a maximum tax rate of 20%.

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<PAGE>
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.

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 certain shareholders who fail to furnish their 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).

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

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 (other
than Class Z) 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 per share 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 the Fund's Transfer
Agent, 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.

If an investor buys shares on or before the record date (the date on which it
is determined who will receive the dividend), the investor will receive a
portion of the money he or she invested as a taxable dividend. Therefore,
investors should consider the timing of dividends when buying shares of the
Fund.

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 shares,
which are not subject to any sales charges and

20
<PAGE>

distribution and/or service fees), is subject to different sales charges and
distribution and/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 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 and/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 shares generally bear higher distribution
expenses than Class A shares, the liquidation proceeds to shareholders of those
classes are likely to be lower than to Class A and Class Z shareholders, whose
shares are not subject to any distribution and/or service fees. 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, ATTENTION: INVESTMENT SERVICES, P.O. BOX 15020, NEW BRUNSWICK, NEW
JERSEY 08906-5020. Participants in programs sponsored by Prudential Retirement
Services should contact their client representative for more information about
Class Z shares. The purchase price is the NAV next determined following receipt
of an order in proper form 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 NAV
without any sales charge. Payment may be made by wire, check or through your
brokerage account. See "Alternative Purchase Plan" and "How the Fund Values its
Shares."

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<PAGE>

The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares except that the minimum for Class C shares may be
waived from time to time. There is no minimum investment requirement for Class Z
shares. The minimum subsequent investment is $100 for all classes, except for
Class Z shares for which there is no such minimum. 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.

Application forms can be obtained from the Transfer Agent, 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.

PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must first telephone the Transfer Agent 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 (State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Prudential Small Company Value Fund, Inc., specifying on
the wire the account number assigned by the Transfer Agent and your name and
identifying the class in which you are eligible to invest (Class A, Class B,
Class C or Class Z shares).

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

In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Small Company
Value 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 the Transfer Agent 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 of 5% .30 of 1% (currently being charged Initial sales charge waived or
of the public offering price at a rate of .25 of 1%) reduced for certain purchases

CLASS B Maximum CDSC of 5% of the lesser of 1% Shares convert to Class A shares
the amount invested or the approximately seven years after
redemption proceeds; declines to purchase
zero after six years
</TABLE>

22
<PAGE>
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
----------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C> <C>
CLASS C Maximum CDSC of 1% of the lesser of 1% Shares do not convert to another
the amount invested or the class
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
(with the exception of Class Z shares, which are not subject to any distribution
and/or service fees) bears the separate expenses of its Rule 12b-1 distribution
and service plan, (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, and (iii)
only Class B shares have a conversion feature. The income attributable to each
class and the dividends payable on the shares of each class will be reduced by
the amount of the distribution fee, if any, 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

23
<PAGE>

Class A shares. This does not take into account the time value of money, which
further reduces the impact of the higher Class B or Class C distribution-related
fee on the investment, fluctuations in NAV, the effect of the return on the
investment over this period of time or redemptions when the CDSC is applicable.

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.

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 payment of an
initial sales charge), the Manager, Prudential Securities or one of their
affiliates will pay dealers, financial advisers and other persons which
distribute shares a finder's fee from its own resources based on a percentage of
the NAV 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 recordkeeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by Prudential Securities or its subsidiaries (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.

PRUDENTIAL RETIREMENT PROGRAMS. 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, for which Prudential serves as
the plan administrator or recordkeeper, provided that (i) the plan has at least
$1 million in existing assets or 250 eligible employees and

24
<PAGE>

(ii) the Fund is an available investment option. These plans include pension,
profit-sharing, stock-bonus or other employee benefit plans under Section 401 of
the Internal Revenue Code, deferred compensation and annuity plans under
Sections 457 or 403(b)(7) of the Internal Revenue Code and plans that
participate in the Transfer Agent's PruArray and SmartPath Programs (benefit
plan recordkeeping services) (hereafter referred to as a PruArray or SmartPath
Plan). All plans of a company for which Prudential serves as plan administrator
or recordkeeper are aggregated in meeting the $1 million threshold. The term
"existing assets" as used herein includes stock issued by a plan sponsor, shares
of Prudential Mutual Funds and shares of certain unaffiliated mutual funds that
participate in the PruArray or SmartPath Program (Participating Funds).
"Existing assets" also include monies invested in The Guaranteed Interest
Account (GIA), a group annuity insurance product issued by Prudential, and units
of The Stable Value Fund (SVF), an unaffiliated bank collective fund. Class A
shares may also be purchased at NAV by plans that have monies invested in GIA
and SVF, provided (i) the purchase is made with the proceeds of a redemption
from either GIA or SVF and (ii) Class A shares are an investment option of the
plan.

PRUARRAY ASSOCIATION BENEFIT PLANS. Class A shares are also offered at NAV to
Benefit Plans or non-qualified plans sponsored by employers which are members of
a common trade, professional or membership association (Association) that
participate in the PruArray Program provided that the Association enters into a
written agreement with Prudential. Such Benefit Plans or non-qualified plans may
purchase Class A shares at NAV without regard to the assets or number of
participants in the individual employer's qualified plan(s) or non-qualified
plans so long as the employers in the Association (i) have retirement plan
assets in the aggregate of at least $1 million or 250 participants in the
aggregate and (ii) maintain their accounts with the Transfer Agent.

PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at NAV to employees
of companies that enter into a written agreement with Prudential Retirement
Services to participate in the PruArray Savings Program. Under this Program, a
limited number of Prudential Mutual Funds are available for purchase at NAV by
Individual Retirement Accounts and Savings Accumulation Plans of the company's
employees. The Program is available only to (i) employees who open an IRA or
Savings Accumulation Plan account with the Transfer Agent and (ii) spouses of
employees who open an IRA account with the Transfer Agent. The program is
offered to companies that have at least 250 employees.

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

OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers of the Prudential Mutual Funds (including the Fund); (b) employees of
Prudential Securities and the Manager 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 of subadvisers of the
Prudential Mutual Funds provided that purchases at NAV are permitted by such
person's employer; (d) Prudential, employees and special agents of Prudential
and its subsidiaries and all persons who have retired directly from active
service with Prudential or one of its subsidiaries; (e) 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; (f) 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 Benefit Plans, (ii) the purchase
is made with proceeds of a redemption of shares of any open-end non-money market
fund sponsored by the financial adviser's previous employer (other than a fund
which imposes a distribution or service fee of .25 of 1% or less) and (iii) the
financial adviser served as the client's broker on the previous purchase; and
(g) investors in Individual Retirement Accounts, provided the purchase is made
with the proceeds of a tax-free rollover of assets from a Benefit Plan for which
PI serves as the recordkeeper or administrator.

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

25
<PAGE>
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, from its own resources, sales commissions of
up to 4% of the purchase price of Class B shares, to dealers, financial advisers
and other persons who sell Class B shares at the time of sale. This facilitates
the ability of the Fund to sell the Class B 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 "How the Fund is Managed--Distributor"
above. In connection with the sale of Class C shares, Prudential Securities will
pay, from its own resources, dealers, financial advisers and other persons which
distribute Class C shares a sales commission of up to 1% of the purchase price
at the time of the sale.

CLASS Z SHARES

Class Z shares of the Fund are currently available for purchase by the
following categories of investors: (i) pension, profit-sharing or other employee
benefit plans qualified under Section 401 of the Internal Revenue Code, deferred
compensation plans 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 that 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 or trust program sponsored by
Prudential Securities or the Prudential Savings Bank, F.S.B. or any affiliate
which 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; (iv) Benefit
Plans for which Prudential Retirement Services serves as recordkeeper and as of
September 20, 1996, (a) were Class Z shareholders of Prudential Mutual Funds or
(b) executed a letter of intent to purchase Class Z shares of the Prudential
Mutual Funds; (v) current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund); and (vi) employees of Prudential and/or Prudential
Securities who participate in a Prudential-sponsored employee savings plan.
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 from its own resources based on a
percentage of the NAV of shares sold by such persons.

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
CDSC, as described below. See "Contingent Deferred Sales Charges" below.

26
<PAGE>

IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
YOUR SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER.

IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, 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. In the case of
redemptions from a PruArray or SmartPath Plan, if the proceeds of the redemption
are invested in another investment option of the plan, in the name of the record
holder and at the same address as reflected in the Transfer Agent's records, a
signature guarantee is not required.

PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT 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 CASHIER'S 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 NAV of the Fund
during any 90-day period for any one shareholder.

INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board of
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 NAV 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.

27
<PAGE>

90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Fund at the 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, may not be allowed for
federal income tax purposes. See "Taxes, Dividends and Distributions" in the
Statement of Additional Information.

CONTINGENT DEFERRED SALES CHARGES

Redemptions of Class B shares will be subject to a 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 CDSC
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" below.

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

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

In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made: first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments for
the purchase of Fund shares made during the preceding six years (five years for
Class B shares purchased prior to January 22,

28
<PAGE>
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 NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.

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

WAIVER OF 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 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.

SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemption from a Systematic Withdrawal Plan. On a annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased prior
to March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% amount is reached.

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.

29
<PAGE>

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.

WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES

PRUARRAY OR SMARTPATH PLANS. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the Transfer Agent's PruArray and SmartPath Programs.

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 NAV without the imposition of any additional sales charge.

Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (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 NAVs, 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 NAV of the Class A shares may be higher than that of the
Class B shares at the time of conversion. Thus, although the aggregate dollar
value will be the same, you may receive fewer Class A shares than Class B shares
converted. 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

30
<PAGE>
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 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, Inc. 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 the Transfer Agent,
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 THE TRANSFER AGENT, AT THE ADDRESS NOTED ABOVE.

SPECIAL EXCHANGE PRIVILEGES. 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,

31
<PAGE>

(2) amounts representing the increase in the NAV above the total amount of
payments for the purchase of Class B or Class C shares and (3) amounts
representing Class B or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through Prudential Securities 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 NAV.

The exchange privilege is not a right and may be modified, suspended or
terminated upon 60 days' notice to shareholders.

FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, the Fund reserves the right to refuse purchase orders and exchanges
by any person, group or commonly controlled accounts, if, in the Manager's sole
judgment, such person, group or accounts were following a market timing strategy
or were otherwise engaging in excessive trading (Market Timers).

To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.

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.

32
<PAGE>
- 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.

33
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY

Prudential 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
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 International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.

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

Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Bond Market Index Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value 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
What are the Fund's 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......................... 15
Manager....................................... 16
Distributor................................... 16
Fee Waivers................................... 17
Portfolio Transactions........................ 18
Custodian and Transfer and Dividend Disbursing
Agent........................................ 18
HOW THE FUND VALUES ITS SHARES.................. 18
HOW THE FUND CALCULATES PERFORMANCE............. 18
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 19
GENERAL INFORMATION............................. 20
Description of Common Stock................... 20
Additional Information........................ 21
SHAREHOLDER GUIDE............................... 21
How to Buy Shares of the Fund................. 21
Alternative Purchase Plan..................... 22
How to Sell Your Shares....................... 26
Conversion Feature--Class B Shares............ 30
How to Exchange Your Shares................... 31
Shareholder Services.......................... 32
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>

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

MF109A

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

Prudential Small Company Value Fund, Inc.
Prospectus
December 2, 1997
www.prudential.com
[LOGO]
Prudential Investments

<PAGE>

PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 2, 1997

Prudential Small Company Value Fund, Inc. (the Fund), is an open-end,
diversified, management investment company whose objective is capital growth.
The Fund intends to invest primarily in a carefully selected portfolio of common
stocks, generally stocks of smaller, less well known companies that typically
have valuations which, in the investment adviser's view, are temporarily low
relative to the companies' earnings, assets, cash flow and dividends. The Fund's
purchase and sale of put and call options and related short-term trading 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 the
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, 100 Mulberry Street, Newark, New
Jersey 07102-4077, and its telephone number is (800) 225-1852.

This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus, dated December 2, 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 20
Investment Objective and Policies..................... B-2 9
Investment Restrictions............................... B-9 15
Directors and Officers................................ B-10 15
Manager............................................... B-14 16
Distributor........................................... B-15 16
Portfolio Transactions and Brokerage.................. B-17 18
Purchase and Redemption of Fund Shares................ B-19 21
Shareholder Investment Account........................ B-22 21
Net Asset Value....................................... B-25 18
Performance Information............................... B-26 18
Taxes, Dividends and Distributions.................... B-28 19
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants.............................. B-30 18
Financial Statements.................................. B-31 --
Report of Independent Accountants..................... B-44 --
Appendix I -- General Investment Information.......... I-1 --
Appendix II -- Historical Performance Data............ II-1 --
Appendix III -- Information Relating to The
Prudential........................................... III-1 --
</TABLE>

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

MF109B

<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. By an amendment to the Fund's Articles of Incorporation filed with
the Maryland Secretary of State on June 10, 1996, the Fund's name was changed
from Prudential Growth Opportunity Fund, Inc., to Prudential Small Companies
Fund, Inc. At a meeting of the Fund's Board of Directors held on May 21, 1997,
an amendment to the Fund's Articles of Incorporation was approved to change the
Fund's name from Prudential Small Companies Fund, Inc. to Prudential Small
Company Value Fund, Inc.

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is capital growth. It attempts to achieve
such objective by investing primarily in a carefully selected portfolio of
common stocks generally of smaller, less well known companies that typically
have valuations which, in the Subadviser's view, are temporarily low relative to
the companies' earnings, assets, cash flow and dividends. 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 Subadviser believes that, in seeking to attain capital appreciation, it
is important to attempt to minimize losses. Accordingly, the Subadviser will
attempt to anticipate periods when stock prices generally decline. When, in the
Subadviser'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
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.

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 Subadviser 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 (NAV) occasioned by such declines in market value.
Except as part of the "sell discipline" described below, the Subadviser will
generally not write listed covered call options when it anticipates that the
market values of the Fund's portfolio securities will increase.

B-2
<PAGE>

One reason for the Fund to write call options is as part of a "sell
discipline." If the Subadviser 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 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
Subadviser, 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 Subadviser 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 Subadviser 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, State Street Bank and Trust Company (the Custodian),
consisting of cash or other liquid assets, marked-to-market daily, 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 other liquid assets,
marked-to-market daily, 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 the 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 or other liquid assets, equal in value to the
difference. In addition, when the Fund writes a call on an index which

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is in-the-money at the time the call is written, the Fund will segregate with
the Custodian or pledge to the broker as collateral cash or other liquid assets,
marked-to-market daily, equal in value to the amount by which the call is
in-the-money times the multiplier times the number of contracts. Any amount
segregated pursuant to the foregoing sentence may be applied to the Fund's
obligation to segregate additional amounts in the event that the market value of
the qualified securities falls below 100% of the current index value times the
multiplier times the number of contracts. A "qualified security" is an equity
security which is listed on a national securities exchange or listed on 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 other liquid assets, marked-to-market daily, in a segregated
account with the 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 or for return enhancement. 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
other liquid assets, marked-to-market daily, having a value equal to the market
value of the futures contracts, will be deposited in a segregated account with
the Fund's Custodian, a futures commissions merchant, 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 regulations
of the Commodity Futures Trading Commission (CFTC). 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 investors,
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 Subadviser'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
securities 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

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<PAGE>

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.

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 Subadviser's
opinion, the market for such options has developed sufficiently that the risk in
connection with such transactions is no greater than the 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 securities 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 Objective 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

B-5
<PAGE>
counterparty. Although it does not eliminate counterparty risk, the Fund may be
able to eliminate the market risk of an option it 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 staff of the Securities and
Exchange Commission (the SEC) 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 Subadviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, the
Fund may enter into a forward contract for a fixed amount of dollars, to sell
the amount of foreign currency approximating the value of some or all of the
Fund's portfolio securities denominated in such foreign currency. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. If the Fund enters into a position hedging
transaction, the transaction will be "covered" by the position being hedged, or
the Fund's Custodian will place cash or other liquid assets into a segregated
account of the Fund (less the value of the covering positions, if any) in an
amount equal to the value of the Fund's total assets committed to the
consummation of such forward contracts. The assets placed in the segregated
account will be marked-to-market daily, and if the value of the securities
placed in the segregated account declines, additional cash or other liquid
assets 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 commitment with respect to such
contract. The Fund's ability to enter into forward foreign currency exchange
contracts may be limited by certain requirements for qualification as a
regulated investment company under the Internal Revenue Code. See "Taxes,
Dividends and Distributions."

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<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. The Fund's
ability to enter into forward foreign currency exchange contracts may be limited
by certain requirements for qualification as a regulated investment company
under the Internal Revenue Code. See "Taxes, Dividends and Distributions."

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 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 on 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. However, in the event a futures contract has been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, there is no guarantee that the price movements of the
securities will, in fact, correlate with the price movements in the futures
contracts and thus provide an offset to losses on a futures contract. Currently,
futures contracts are available on the Australian Dollar, British Pound,
Canadian Dollar, French Franc, Japanese Yen, Swiss Franc, German Mark and
Eurodollars.

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
exemption 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 CFTC's regulations. The Fund will use stock index futures and
currency futures and options on futures

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<PAGE>

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 liquidation 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 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 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.

SEGREGATED ACCOUNTS

When the Fund is required to segregate assets in connection with certain
hedging transactions, it will maintain cash or liquid assets in a segregated
account with the Fund's Custodian. "Liquid assets" mean cash, U.S. Government
securities, equity securities (including foreign securities), debt obligations
or other liquid assets, marked-to-market daily.

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 securities 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 Subadviser 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 Subadviser will monitor the
liquidity of such restricted securities subject to the supervision of the Board
of Directors. In reaching liquidity decisions, the Subadviser 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

B-8
<PAGE>

(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 Subadviser; 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.

The staff of the SEC has taken the position that purchased over-the-counter
options and the assets used as "cover" for written over-the-counter options are
illiquid securities unless the Fund and the counterparty have provided for the
Fund, at the Fund's election, to unwind the over-the-counter option. The
exercise of such an option ordinarily would involve the payment by the Fund of
an amount designed to reflect the counterparty's economic loss from an early
termination, but does allow the Fund to treat the assets used as "cover" as
"liquid."

SECURITIES OF OTHER INVESTMENT COMPANIES

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

PORTFOLIO TURNOVER

The Fund anticipates that its annual portfolio turnover rate will not exceed
100% in normal circumstances. For the years ended September 30, 1996 and 1997,
the Fund's portfolio turnover rate was 53% and 58%, respectively.

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

B-9
<PAGE>
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, 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.

DIRECTORS AND OFFICERS

B-10
<PAGE>

<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE (1) WITH FUND DURING PAST FIVE YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
Douglas H. McCorkindale (58) Director President (since September 1997) and Vice Chairman (since March
1984), Gannett Co. Inc. (publishing and media) (since March
1984); Director of Gannett Co. Inc., Frontier Corporation and
Continental Airlines, Inc.
*Mendel A. Melzer, CFA (36) Director Chief Investment Officer (since October 1996) of Prudential
751 Broad St. Mutual Funds; formerly Chief Financial Officer (November
Newark, NJ 07102 1995-September 1996) of Prudential Investments; Senior Vice
President and Chief Financial Officer (April 1993-November 1995)
of Prudential Preferred Financial Services, Managing Director
(April 1991-April 1993) of Prudential Investment Advisors and
Senior Vice President (July 1989-April 1991) of Prudential
Capital Corporation; Chairman and Director of Prudential Series
Fund, Inc.; Director of The High Yield Income Fund, Inc.
Thomas T. Mooney (56) Director 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.,
The High Yield Income Fund, Inc. and The High Yield Plus Fund,
Inc.
Stephen P. Munn (55) Director Chairman (since January 1994), Director and President (since
1988) and Chief Executive Officer (1988-December 1993) of
Carlisle Companies Incorporated (manufacturer of industrial
products).
*Richard A. Redeker (54) President and Director Employee of Prudential Investments; formerly President, Chief
751 Broad St. Executive Officer and Director (October 1993-September 1996),
Newark, NJ 07102 Prudential Mutual Fund Management, Inc.; Executive Vice
President, Director and Member of Operating Committee (October
1993-September 1996), Prudential Securities. Director (October
1993-September 1996) of Prudential Securities Group, Inc.,
Executive Vice President, The Prudential Investment Corporation
(January 1994-September 1996); Director (January 1994-September
1996) of Prudential Mutual Fund Distributors, Inc. and
Prudential Mutual Fund Services, Inc. and Senior Executive Vice
President and Director of Kemper Financial Services, Inc.
(September 1978-September 1993); President and Director of The
High Yield Income Fund, Inc.
Robin B. Smith (58) Director Chairman and Chief Executive Officer (since August 1996) of
Publisher's Clearing House; formerly President and Chief
Executive Officer (January 1989-August 1996) and President and
Chief Operating Officer (September 1981-December 1988) of
Publishers Clearing House; Director of BellSouth Corporation,
Texaco Inc., Springs Industries Inc. and Kmart Corporation.
</TABLE>

B-11
<PAGE>

<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE (1) WITH FUND DURING PAST FIVE YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
Louis A. Weil, III (56) Director Publisher and Chief Executive Officer (since January 1996) and
Director (since September 1991) of Central Newspapers, Inc.;
Chairman of the Board (since January 1996), Publisher and Chief
Executive Officer (August 1991-December 1995) of Phoenix
Newspapers, Inc.; formerly Publisher of Time Magazine (May
1989-March 1991); President, Publisher and Chief Executive
Officer of The Detroit News (February 1986-August 1989); and
Member of the Advisory Board, Chase Manhattan Bank-Westchester;
Director of The High Yield Income Fund, Inc.
Clay T. Whitehead (58) Director President of National Exchange Inc. (new business development
firm) (since May 1983).
Thomas A. Early (42) Vice President Vice President and General Counsel (since March 1997), Prudential
Mutual Funds & Annuities; Executive Vice President, Secretary
and General Counsel (since December 1996) of PIFM; formerly,
Vice President and General Counsel (March 1994-March 1997) of
Prudential Retirement Services; Associate General Counsel and
Chief Financial Services Officer (1988-1994), Frank Russell
Company.
S. Jane Rose (51) Secretary Senior Vice President (since December 1996) of PIFM; Senior Vice
President and Senior Counsel of Prudential Securities (since
July 1992); formerly Senior Vice President (January
1991-September 1996) and Senior Counsel (June 1987-September
1996) of Prudential Mutual Fund Management, Inc.; and Vice
President and Associate General Counsel of Prudential
Securities.
Grace C. Torres (38) Treasurer and Principal First Vice President (since December 1996) of PIFM; First Vice
Financial and President (since March 1994) of Prudential Securities; formerly
Accounting Officer First Vice President (March 1994-September 1996) of Prudential
Mutual Fund Management, Inc. and Vice President (July 1989-March
1994) of Bankers Trust Corporation.
Stephen M. Ungerman (44) Assistant Treasurer Tax Director (since March 1996) of Prudential Investments and the
Private Asset Group of The Prudential Insurance Company of
America (Prudential); formerly First Vice President of
Prudential Mutual Fund Management, Inc. (February 1993-September
1996); prior thereto, Senior Tax Manager of Price Waterhouse LLP
(1981-January 1993).
Marguerite E. H. Morrison (41) Assistant Secretary Vice President (since December 1996) of PIFM; Vice President and
Associate General Counsel (since September 1987) of Prudential
Securities; formerly Vice President and Associate General
Counsel (June 1991-September 1996) of Prudential Mutual Fund
Management, Inc.
</TABLE>

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

(1) Unless otherwise stated, the address is c/o Prudential Investments Fund
Management LLC, Gateway Center Three, 100 Mulberry Street Newark, New Jersey
07102-4077.

* "Interested" director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities, The Prudential Insurance Company
of America (Prudential) or PIFM.

B-12
<PAGE>
Directors and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities.

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

The Board of Directors has adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors who were age 68
or older as of December 31, 1993. Under this phase-in provision, Messrs. Lennox
and Beach are scheduled to retire on December 31, 1997 and 1999, respectively.

Pursuant to the Management Agreement with the Fund, the Manager pays all
compensation of officers and employees of the Fund as well as the fees and
expenses of all Directors of the Fund who are affiliated persons of the Manager.
The Fund pays each of its Directors who is not an affiliated person of the
Manager annual compensation of $2,500, in addition to certain out-of-pocket
expenses. The amount of annual compensation paid to each Director may change as
a result of the introduction of additional funds on the boards of which the
Director will be asked to serve.

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 Directors' fees,
together with interest thereon, is a general obligation of the Fund.

The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended September 30, 1997 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
the Manager (Fund Complex) for the calendar year ended December 31, 1996. In
October 1996, shareholders elected a new Board of Directors. Below are listed
all Directors who have served the Fund during its most recent fiscal year, as
well as new Directors who took office after the shareholders' meeting in
October.

COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL 1996
PENSION OR COMPENSATION
RETIREMENT FROM FUND
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID
NAME OF DIRECTOR FROM FUND EXPENSES RETIREMENT TO DIRECTORS
- ------------------------------------------------- ------------- --------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Edward D. Beach $ 1,875 None N/A $ 166,000(21/39)*
Delayne Dedrick Gold 3,425 None N/A 175,308(21/42)*
Robert F. Gunia+ None None N/A --
Arthur Hauspburg -- Former Director 1,500 None N/A 38,250(5/7)
Harry A. Jacobs, Jr. -- Former Director+ None None N/A --
Donald D. Lennox 1,875 None N/A 90,000(10/22)*
Douglas H. McCorkindale** 1,875 None N/A 71,208(10/13)*
Mendel A. Melzer+ None None N/A --
Thomas T. Mooney** 1,875 None N/A 135,375(18/36)*
Stephen P. Munn 3,375 None N/A 49,125(6/8)*
Richard A. Redeker+ None None N/A --
Robin B. Smith** 1,875 None N/A 89,957(11/20)*
Louis A. Weil, III 3,375 None N/A 91,250(13/18)*
Clay T. Whitehead 1,875 None N/A 38,292(5/7)*
</TABLE>

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

** Total compensation from all of the funds in the Fund Complex for the calendar
year ended December 31, 1996, includes amounts deferred at the election of
Directors under the funds' deferred compensation plans. Including accrued
interest, total compensation amounted to $71,034, $139,869 and $109,294 for
Douglas H. McCorkindale, Thomas T. Mooney and Robin B. Smith, respectively.

+ Robert F. Gunia, Mendel A. Melzer and Richard A. Redeker, who are interested
Directors, and Harry A. Jacobs, Jr., who is a former interested Director, did
not receive compensation from the Fund or any other fund in the Fund Complex.

B-13
<PAGE>

As of November 7, 1997, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding common stock of the Fund.

As of November 7, 1997, the only beneficial owner, directly or indirectly,
of more than 5% of the outstanding shares of any class of beneficial interest
was: Prudential Trust Company, FBO PRU-DC Trust Accounts, Attn: John Surdy, 30
Scranton Office Park, Moosic, Pennsylvania who held 448,828 Class Z shares
(5.3%).

As of November 7, 1997, Prudential Securities was the record holder for
other beneficial owners of 11,841,992 Class A shares (or 54.1% of the
outstanding Class A shares), 26,774,811 Class B shares (or 70.5% of the
outstanding Class B shares), 1,096,028 Class C shares (or 77.3% of the
outstanding Class C shares), and 928,118 Class Z shares (or 11.0% of the
outstanding Class Z 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.

MANAGER

The Manager of the Fund is Prudential Investments Fund Management LLC
(formerly, Prudential Mutual Fund Management LLC), Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077. The Manager 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, 1997, the Manager managed
and/or administered open-end and closed-end management investment companies with
assets of approximately $60 billion. According to the Investment Company
Institute, as of September 30, 1997, the Prudential Mutual Funds were the 15th
largest family of mutual funds in the United States.

The Manager is a subsidiary of Prudential Securities and Prudential.
Prudential Mutual Fund Services LLC (the Transfer Agent), a wholly-owned
subsidiary of the Manager 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), the Manager, 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, the Manager is obligated to keep certain
books and records of the Fund. The Manager 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 the Fund's Custodian and the Transfer Agent. The services of
the Manager for the Fund are not exclusive under the terms of the Management
Agreement and the Manager is free to, and does, render management services to
others.

For its services, the Manager 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
the Manager, 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 the Manager will be reduced by the amount of such excess. Reductions in
excess of the total compensation payable to the Manager will be paid by the
Manager to the Fund. No such reductions were required during the fiscal year
ended September 30, 1997. No jurisdiction currently limits the Fund's expenses.

In connection with its management of the corporate affairs of the Fund, the
Manager 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 the
Manager;

(b) all expenses incurred by the Manager 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,
doing business as Prudential Investments, pursuant to the subadvisory agreement
between the Manager and the Subadviser (the Subadvisory Agreement).

B-14
<PAGE>

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 Subadviser, (c) the fees and certain expenses of the Custodian and Transfer
Agent, including the cost of providing records to the Manager in connection with
its obligation of maintaining required records of the Fund and of pricing the
Fund's shares, (d) the charges and expenses of legal counsel and independent
accountants for the Fund, (e) brokerage commissions and any issue or transfer
taxes chargeable to the Fund in connection with its securities transactions, (f)
all taxes and corporate fees payable by the Fund to governmental agencies, (g)
the fees of any trade associations of which the Fund may be a member, (h) the
cost of 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
SEC and the states, including the preparation and printing of the Fund's
registration statements and prospectuses for such purposes, (k) allocable
communications expenses with respect to investor services and all expenses of
shareholders' and Directors' meetings and of preparing, printing and mailing
reports, proxy statements and prospectuses to shareholders 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 the Manager 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 21,
1997, and by shareholders of the Fund on April 28, 1988.

For the fiscal years ended September 30, 1997, 1996 and 1995, the Fund
incurred management fees of $5,864,087, $4,336,587, and $3,676,126,
respectively.

The Manager has entered into the Subadvisory Agreement with the Subadviser.
The Subadvisory Agreement provides that the Subadviser will furnish investment
advisory services in connection with the management of the Fund. In connection
therewith, the Subadviser is obligated to keep certain books and records of the
Fund. The Manager continues to have responsibility for all investment advisory
services pursuant to the Management Agreement and supervises the Subadviser's
performance of such services. The Subadviser is reimbursed by the Manager for
the reasonable costs and expenses incurred by the Subadviser in furnishing those
services.

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 21, 1997, 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, the Manager or the Subadviser upon not more than 60
days', nor less than 30 days', written notice. The Subadvisory Agreement
provides that it will continue in effect for a period of more than two years
from its execution only so long as such continuance is specifically approved at
least annually in accordance with the requirements of the Investment Company
Act.

DISTRIBUTOR

Prudential Securities Incorporated (Prudential Securities), One Seaport
Plaza, New York, New York 10292, 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 incurs the expense of
distributing the Fund's Class A, Class B and Class C shares. Prudential
Securities also incurs the expenses of distributing the Fund's Class Z shares
under the Distribution Agreement, none of which are paid for or reimbursed by
the Fund. See "How the Fund is Managed--Distributor" in the Prospectus.

B-15
<PAGE>

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 had 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 Class C Plan provides
that (i) up to .25 of 1% of the average daily net assets of the Class C shares
may be paid for providing personal service and/or maintaining shareholder
accounts and (ii) up to .75 of 1% of the average daily net assets of the Class C
shares may be paid for distribution-related expenses with respect to Class C
shares. The Plans were last approved by the Board of Directors, including a
majority of the Rule 12b-1 Directors, on May 21, 1997. The Class A Plan, as
amended, was approved by Class A and Class B shareholders of the Fund, and the
Class B Plan, as amended, was approved by Class B shareholders of the Fund, on
July 19, 1994. The Class C Plan was approved by the sole shareholder of Class C
shares of the Fund on August 1, 1994.

CLASS A PLAN. For the fiscal year ended September 30, 1997, Prudential
Securities received payments of $719,734 on behalf of the Fund 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, 1997, Prudential Securities also received approximately
$1,019,000 on behalf of the Fund in initial sales charges.

CLASS B PLAN. For the fiscal year ended September 30, 1997, Prudential
Securities received $4,437,608 from the Fund under the Class B Plan and spent
approximately $5,371,300 in distributing the Fund's Class B shares. It is
estimated that of the latter amount, approximately $28,900 (0.5%) was spent on
printing and mailing of prospectuses to other than current shareholders;
$804,300 (15.0%) 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 $4,538,100 (84.5%) on the aggregate of (i) payments of commissions and
account servicing fees to financial advisers $1,780,300 or (33.2%) and (ii) an
allocation on account of overhead and other branch office distribution-related
expenses $2,757,800 or (51.3%). The term "overhead and other branch office
distribution-related expenses" represents (a) the expenses of operating branch
offices of Prudential Securities and Prusec 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, 1997, Prudential
Securities received approximately $697,300 in contingent deferred sales charge
attributable to Class B shares.

CLASS C PLAN. For the fiscal year ended September 30, 1997, Prudential
Securities received $87,617 from the Fund under the Class C Plan and spent
approximately $161,500 in distributing Class C shares. It is estimated that of
the latter amount, approximately $2,100 (1.3%) was spent on printing and mailing
of prospectuses to other than current shareholders; $8,600 (5.4%) on
compensation to Prusec, 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 $150,800 (93.4%) on aggregate of (i)
$80,900 or (50.1%) as payments of commissions and

B-16
<PAGE>

account servicing fees to financial advisers and (ii) $69,900 or (43.3%) as
allocation on account of overhead and other branch office distribution-related
expenses. 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, 1997,
Prudential Securities received approximately $3,300 in contingent deferred sales
charges attributable to Class C shares.

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 Prudential Securities. 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 federal securities laws. The amended Distribution Agreement
was last approved by the Board of Directors, including a majority of the Rule
12b-1 Directors, on May 21, 1997.

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

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 (or any affiliate)
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

B-17
<PAGE>
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 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 securities broker or futures commission merchant for the Fund.
In order for Prudential Securities (or any affiliate) to effect any portfolio
transactions for the Fund, the commissions, fees or other remuneration received
by Prudential Securities (or any affiliate) must be reasonable and fair compared
to the commissions, fees or other remuneration paid to other brokers or futures
commission merchants in connection with comparable transactions involving
similar securities or futures being purchased or sold on an exchange or board of
trade 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 non-interested 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, 1997.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Total brokerage commissions paid by the
Fund................................... $1,594,915 $954,560 $1,055,207
Total brokerage commissions paid to
Prudential Securities.................. $ 1,380 $ 0 $ 0
Percentage of total brokerage
commissions paid to Prudential
Securities............................. .09% 0% 0%
</TABLE>

B-18
<PAGE>

Of the total brokerage commissions paid by the Fund for the fiscal year
ended September 30, 1997, $1,039,708 (65.04% of gross brokerage transactions)
was paid to firms which provided research, statistical or other services
provided to the Manager on behalf of the Fund. The Manager has not separately
identified a portion of such brokerage commissions as applicable to the
provision of such research, statistical or other services.

PURCHASE AND REDEMPTION OF FUND SHARES

Shares of the Fund may be purchased at a price equal to the next determined
NAV 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 NAV without any sales charges. See
"Shareholder Guide--How to Buy Shares of the Fund" in the Prospectus.

Each class of shares represents an interest in the same assets of the Fund
and is identical in all respects, except that (i) each class is subject to
different sales charges and distribution and/or service expenses (with the
exception of Class Z shares, which are not subject to any sales charges and
distribution and/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 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. See "Distributor" and
"Shareholder Investment Account--Exchange Privilege."

SPECIMEN PRICE MAKE-UP

Under the current distribution arrangements between the Fund and Prudential
Securities, Class A shares are sold at a maximum sales charge of 5% and Class
B*, Class C* and Class Z shares are sold at NAV. Using the Fund's NAV at
September 30, 1997, 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................... $ 18.95
Maximum sales charge (5% of offering price).............................. 1.00
---------
Maximum offering price to public......................................... $ 19.95
---------
---------
CLASS B
Net asset value, offering price and redemption price to public per Class
B share*................................................................ $ 17.64
---------
---------
CLASS C
Net asset value, offering price and redemption price to public per Class
C share*................................................................ $ 17.64
---------
---------
CLASS Z
Net asset value, offering price and redemption price to public per Class
Z share................................................................. $ 19.04
---------
---------
<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.
</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;

B-19
<PAGE>
(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

(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).

Prudential Securities 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 (NAV plus maximum sales charge) as of the
previous business day. See "How the Fund Values its Shares" in the Prospectus.
Prudential Securities must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. 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 NAV 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, all shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
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 permits a purchaser, in the case of an Investment Letter
of Intent, 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. Similarly, the Participant Letter of
Intent does not obligate the retirement or group plan to enroll the indicated
number of eligible employees or participants. 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

B-20
<PAGE>

charge otherwise applicable to the purchases made during this period and sales
charge actually paid. Such payment may be made directly to Prudential Securities
or, if not paid, Prudential Securities 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.

Prudential Securities 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.

WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES

The contingent deferred sales charge (CDSC) 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 an investor in a
single account exceeded $500,000. For example, if an investor 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 his/her
Class B shares of the Fund

B-21
<PAGE>
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>

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

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 five 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 NAV 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 NAV per share
next determined after receipt of the check or proceeds by the Transfer Agent.
Such shareholder will receive credit for any CDSC 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 the relative NAV next determined after receipt of an order
in proper form. An exchange will be treated as a redemption and purchase for tax
purposes. 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 Prudential Securities.

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.

B-22
<PAGE>

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. (Class A shares)
Prudential Tax-Free Money Fund, Inc.

CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B
shares and Class C shares of the Fund for Class B and Class C shares of certain
other Prudential Mutual Funds and shares of Prudential Special Money Market
Fund, Inc. No CDSC will be payable upon such exchange, but a CDSC may be payable
upon the redemption of the Class B and Class C shares acquired as a result of 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
an eligible money market fund without imposition of any CDSC at the time of
exchange. Upon subsequent redemption from such money market fund or after re-
exchange into the Fund, such shares will be subject to the CDSC calculated
without regard to the time such shares were held in the money market fund. In
order to minimize the period of time in which shares are subject to a CDSC,
shares exchanged out of the money market fund will be exchanged on the basis of
their remaining holding periods, with the longest remaining holding periods
being transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month. Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.

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

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

Additional details about the exchange privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The exchange privilege may be modified,
terminated or suspended on 60 days' notice, and any fund, including the Fund, or
Prudential Securities, 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

B-23
<PAGE>
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 for the 1993-1994 academic year.

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

AUTOMATIC 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 NAV 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 Prudential Securities 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.

B-24
<PAGE>
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 Prudential
Securities. 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 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 part of
a 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 or principal market maker. 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

B-25
<PAGE>

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 sale prices as of the
close of trading on the applicable commodities exchange. Quotations of foreign
securities in a foreign currency are converted to U.S. dollar equivalents at the
current rate obtained from a recognized bank or dealer, and forward currency
exchange contracts are valued at the current cost of covering or offsetting such
contracts. Should an extraordinary event, which is likely to affect the value of
the security, occur after the close of an exchange on which a portfolio security
is traded, such security will be valued at fair value considering factors
determined in good faith by 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 reliable market quotations are not
readily available, or for which the pricing agent or principal market maker does
not provide a valuation or methodology or provides a valuation or methodology
that, in the judgment of the Manager or Subadviser (or Valuation Committee or
Board of Directors), does not represent fair value, are valued by the Valuation
Committee or Board in consultation with the Manager or Subadviser. 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 available, are valued at their current market
quotations as supplied by an independent pricing agent or principal market
maker. The Fund will compute its NAV at 4:15 P.M., New York time, on each day
the New York Stock Exchange is open for trading except on days on which no
orders to purchase, sell or redeem Fund shares have been received or days on
which changes in the value of the Fund's portfolio securities do not affect NAV.
In the event the New York Stock Exchange closes early on any business day, the
NAV of the Fund's shares shall be determined at a time between such closing and
4:15 P.M., New York time. The New York Stock Exchange is closed on the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.

NAV is calculated separately for each class. The NAV of Class B and Class C
shares will generally be lower than the NAV 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. The NAV of Class Z shares will generally be higher than the
NAV of Class A, Class B or Class C shares as a result of the fact that Class Z
shares are not subject to any distribution and/or service fee. It is expected
however that the NAV per share 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 and/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.

B-26
<PAGE>

The average annual total returns for Class A shares for the one year, five
year and since inception (January 22, 1990) periods ended September 30, 1997
were 38.63%, 20.65% and 18.01%, respectively. The average annual total returns
for Class B shares for the one, five and ten year periods ended September 30,
1997 were 39.91%, 20.89% and 13.88% respectively. The average annual total
returns for Class C shares for the one year and since inception, (August 1,
1994) periods ended September 30, 1997 were 43.91% and 25.65%, respectively. The
average total annual returns for Class Z shares for the one year and since
inception (March 1, 1996) periods ended September 30, 1997 were 46.38% and
36.60%, respectively.

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 returns for Class A shares for the one year, five year
and since inception (January 22, 1990) periods ended September 30, 1997 were
45.92%, 169.04% and 275.91%, respectively. The aggregate total returns for Class
B shares for the one, five and ten year periods ended on September 30, 1997 were
44.91%, 159.15% and 266.66%, respectively. The aggregate total returns for Class
C shares for the one year and since inception (August 1, 1994) periods ended
September 30, 1997 were 44.91% and 105.97%, respectively. The aggregate total
returns for Class Z shares for the one year and since inception (March 1, 1996)
periods ended September 30, 1997 were 46.38% and 63.81%, respectively.

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.

B-27
<PAGE>
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
(1/192603/1997)
Long-Term Govt.
Common Stocks Bonds Inflation
10.7% 5.0% 3.1%
</TABLE>

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

(1)Source: Ibbotson Associates. "STOCKS, BONDS, BILLS AND INFLATION--1997
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 & 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.

TAXES, DIVIDENDS AND DISTRIBUTIONS

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 capital gains of the Fund (I.E., the excess
of net long-term capital gains over 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 of the Fund as a regulated investment company under the Internal
Revenue Code requires, among other things, that (a) at least 90% of the Fund's
annual gross income (without offset for losses from the sale or other
disposition of securities or foreign currencies) be derived from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of securities or options thereon or foreign currencies, or
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
securities or currencies; (b) the Fund diversify its holdings so that, at the
end of each quarter of the taxable year, (i) at least 50% of the value of the
Fund's assets is represented by cash, U.S. government securities and other
securities limited in respect of any one issuer to an amount not greater than 5%
of the value of the Fund's assets and 10% of the outstanding voting securities
of such issuer, and (ii) not more than 25% of the value of its assets is
invested in the securities of any one issuer (other than U.S. government
securities); and (c) the Fund distributes to its shareholders at least 90% of
its net investment income and net short-term gains (I.E., the excess of net
short-term capital gains over net long-term capital losses) 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

B-28
<PAGE>

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. Certain transactions
of the Fund may be subject to wash sale, short sale, constructive sale, straddle
and anti-conversion provisions of the Internal Revenue Code which may, among
other things, require the Fund to defer recognition of losses. In addition, debt
securities acquired by the Fund may be subject to original issue discount and
market discount rules which, respectively, may cause the Fund to accrue income
in advance of the receipt of cash with respect to interest or cause gains to be
treated as ordinary income.

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. 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.

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
and lower on Class A shares in relation to Class Z 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).

Under the Internal Revenue Code, gains or losses attributable to
fluctuations in exchange rates which occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities are treated as ordinary income or ordinary
loss. Similarly, gains or losses on forward foreign currency exchange contracts
or dispositions of debt securities denominated in a foreign currency
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the security and

B-29
<PAGE>

the date of disposition also may be treated as ordinary gain or loss. These
gains, referred to under the Internal Revenue Code as "Section 988" gains or
losses, increase or decrease the amount of the Fund's investment company taxable
income available to be distributed to its shareholders as ordinary income,
rather than increasing or decreasing the amount of the Fund's net capital gain.
If Section 988 losses exceed other investment company taxable income during a
taxable year, the Fund would not be able to make any ordinary dividend
distributions, or distributions made before the losses were realized would be
recharacterized as a return of capital to shareholders, rather than as an
ordinary dividend, reducing each shareholder's basis in his or her Fund shares.

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 LLC, 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 the Manager. The Transfer Agent provides customary
transfer agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions and
related functions. For these services, the Transfer Agent 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.
The Transfer Agent 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, 1997, the Fund
incurred fees of approximately $1,160,000 for the services of the Transfer
Agent.

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-30
<PAGE>
PRUDENTIAL SMALL COMPANY
VALUE FUND, INC.
PORTFOLIO OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ---------------------------------------------------------------
LONG-TERM INVESTMENTS--89.9%
COMMON STOCKS--89.1%
- ---------------------------------------------------------------
AEROSPACE/DEFENSE--1.3%
139,600 Doncasters PLC (ADR) (United
Kingdom) (a) $ 4,188,000
184,200 Precision Castparts Corp. 11,973,000
--------------
16,161,000
- ---------------------------------------------------------------
AUTOMOTIVE--0.9%
43,200 Dura Automotive Systems, Inc. (a) 1,360,800
345,500 Strattec Security Corp. (a) 9,609,219
--------------
10,970,019
- ---------------------------------------------------------------
BUILDING & CONSTRUCTION--0.9%
365,800 Crossmann Communities, Inc. (a) 8,276,225
93,100 NVR, Inc. (a) 2,420,600
--------------
10,696,825
- ---------------------------------------------------------------
BUILDING & PRODUCTS--0.8%
561,700 Cameron Ashley Building Products
(a) 10,251,025
- ---------------------------------------------------------------
BUSINESS SERVICES--0.5%
254,100 World Fuel Services Corp. 6,320,738
- ---------------------------------------------------------------
CELLULAR COMMUNICATIONS--1.7%
784,600 Centennial Cellular Corp. (a) 13,436,275
437,500 Vanguard Cellular System, Inc.
Class A (a) 6,890,625
--------------
20,326,900
- ---------------------------------------------------------------
CHEMICALS--1.0%
983,300 Agrium, Inc. (Canada) 11,799,600
- ---------------------------------------------------------------
COMPUTER SOFTWARE & SERVICES--1.1%
530,400 Banctec, Inc. (a) 14,121,900
- ---------------------------------------------------------------
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ---------------------------------------------------------------
CONSUMER SERVICES--0.6%
86,100 Pittston Brink's Group $ 3,449,381
398,210 Right Management Consultants,
Inc. (a) 4,081,653
--------------
7,531,034
- ---------------------------------------------------------------
CONTAINERS & PACKAGING--2.7%
353,000 ACX Technologies, Inc. (a) 9,398,625
203,400 Ball Corp. 7,080,862
79,800 Ivex Packaging Corp. (a) 1,276,800
208,300 Shorewood Packaging Corp. (a) 4,973,163
624,200 U.S. Can Corp. (a) 10,377,325
--------------
33,106,775
- ---------------------------------------------------------------
DEFENSE--0.0%
8,800 ESCO Electronics Corp. (a) 155,100
- ---------------------------------------------------------------
ELECTRICAL UTILITIES--0.6%
274,900 TNP Enterprises, Inc. 6,906,863
- ---------------------------------------------------------------
ELECTRICAL EQUIPMENT--2.4%
432,400 Belden, Inc. 16,296,075
5,500 Lincoln Electric Co. 231,688
182,900 Lincoln Electric Co., Class A 7,521,762
283,400 Woodhead Industries, Inc. 5,880,550
--------------
29,930,075
- ---------------------------------------------------------------
ELECTRONICS--4.4%
34,500 Berg Electronics Corp. (a) 1,854,375
263,900 Continental Circuits Corp. (a) 4,981,112
453,400 Marshall Industries (a) 17,569,250
449,700 Methode Eletronics, Inc., Class A 11,579,775
1,050,400 Pioneer Standard Electronics,
Inc. 18,053,750
--------------
54,038,262
- ---------------------------------------------------------------
ENVIRONMENTAL SERVICES--0.3%
247,807 BHA Group, Inc. (a) 4,274,671
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-31

<PAGE>
PRUDENTIAL SMALL COMPANY
VALUE FUND, INC.
PORTFOLIO OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------
FINANCIAL SERVICES--0.7%
92,400 Finova Group, Inc. $ 8,743,350
- ---------------------------------------------------------------
FOOD DISTRIBUTION--0.5%
195,400 JP Foodservice, Inc. (a) 6,155,100
- ---------------------------------------------------------------
FOOD RETAIL--0.9%
377,900 Dominicks Supermarkets, Inc. (a) 11,407,856
- ---------------------------------------------------------------
FOODS--0.2%
140,600 Ingles Markets, Inc., Class A 1,845,375
- ---------------------------------------------------------------
FURNITURE--0.6%
414,600 Furniture Brands International,
Inc. (a) 7,825,575
- ---------------------------------------------------------------
HEALTH SERVICES--2.1%
462,400 Maxicare Health Plans, Inc. (a) 8,612,200
463,900 Sierra Health Services, Inc. (a) 16,990,337
--------------
25,602,537
- ---------------------------------------------------------------
HOSPITAL MANAGEMENT--2.3%
650,600 Universal Health Services, Inc.,
Class B (a) 28,138,450
- ---------------------------------------------------------------
HOUSEHOLD PRODUCTS--1.8%
177,200 Libbey, Inc. 6,323,825
479,600 Premark International, Inc. 15,347,200
--------------
21,671,025
- ---------------------------------------------------------------
INSURANCE--12.0%
331,550 Allied Group, Inc. 16,846,884
172,500 Allmerica Financial Corp. 7,579,219
510,600 AmVestors Financial Corp. 11,041,725
281,500 Capital Re Corp. 17,171,500
294,200 Enhance Financial Services Group,
Inc. 16,107,450
204,900 Equitable of Iowa Companies 13,728,300
549,200 Financial Security Assurance
Holdings, Ltd. 25,537,800
- ---------------------------------------------------------------
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ---------------------------------------------------------------
163,300 Harleysville Group, Inc. $ 6,858,600
178,100 Liberty Corp. 8,059,025
414,400 MMI Cos., Inc. 10,929,800
164,100 Philadelphia Consolidated Holding
Corp. (a) 7,107,581
177,000 Poe & Brown, Inc. 7,301,250
--------------
148,269,134
- ---------------------------------------------------------------
LODGING/GAMING--1.2%
801,400 Red Roof Inns, Inc. (a) 15,226,600
- ---------------------------------------------------------------
MACHINERY--2.0%
594,780 Allied Products Corp. 14,720,805
269,700 CTB International Corp. (a) 4,247,775
312,000 Omniquip International, Inc. (a) 5,733,000
--------------
24,701,580
- ---------------------------------------------------------------
MEDIA--3.8%
31,000 Central Newspapers, Inc., Class A 2,301,750
1,657,500 Century Communications Corp.,
Class A (a) 12,638,437
749,290 Granite Broadcasting Corp. (a) 8,897,819
309,700 TCA Cable TV, Inc. 12,078,300
319,500 Young Broadcasting, Inc., Class A
(a) 10,942,875
--------------
46,859,181
- ---------------------------------------------------------------
METALS PROCESSING--2.3%
254,800 Chase Industries, Inc. (a) 7,325,500
434,400 Ryerson Tull, Inc., Class A (a) 7,031,850
434,400 Wolverine Tube, Inc. (a) 13,629,300
--------------
27,986,650
- ---------------------------------------------------------------
MISCELLANEOUS INDUSTRIAL--16.9%
715,488 Applied Industrial Technologies,
Inc. 24,639,601
478,600 Blount International, Inc., Class
A 24,139,387
281,800 Carlisle Companies, Inc. 12,522,487
330,900 Cascade Corp. 6,535,275
347,400 Clarcor, Inc. 9,944,325
277,000 DT Industries, Inc. 9,141,000
307,600 Graco, Inc. 10,996,700
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-32

<PAGE>
PRUDENTIAL SMALL COMPANY
VALUE FUND, INC.
PORTFOLIO OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------
MISCELLANEOUS INDUSTRIAL (CONT'D.)
263,100 Greenfield Industries, Inc. $ 7,564,125
857,000 Jason, Inc. (a) 7,070,250
434,546 Mark IV Industries, Inc. 11,678,424
376,700 Pentair, Inc. 13,890,812
521,600 Regal Beloit Corp. 16,039,200
213,835 Robbins & Myers, Inc. 8,232,648
218,100 Roper Industries 7,360,875
299,900 Standex International Corp. 9,446,850
713,100 United Dominion Industries, Ltd.
(Canada) 20,189,644
214,810 Varlen Corp. 8,484,995
--------------
207,876,598
- ---------------------------------------------------------------
NURSING HOMES--0.4%
456,300 GranCare, Inc. (a) 5,390,044
- ---------------------------------------------------------------
OIL & GAS EXPLORATION/PRODUCTION--5.6%
545,300 Comstock Resources, Inc. (a) 6,305,031
530,200 Louis Dreyfus Natural Gas Corp.
(a) 11,796,950
126,500 Mitchell Energy & Development
Corp., Class A 3,581,531
85,250 Mitchell Energy & Development
Corp., Class B 2,376,344
304,900 Pioneer Natural Resources Co. 12,767,688
672,300 Santa Fe Energy Resources, Inc.
(a) 8,403,750
35,900 Swift Energy Co. (a) 1,011,931
457,200 Vintage Petroleum, Inc. 22,517,100
--------------
68,760,325
- ---------------------------------------------------------------
PAPER & PACKAGING--0.6%
186,800 Schweitzer-Mauduit International,
Inc. 7,939,000
- ---------------------------------------------------------------
PRECIOUS METALS--0.2%
84,300 Handy & Harman 1,928,363
- ---------------------------------------------------------------
PRINTING & PUBLISHING--2.1%
628,800 Big Flower Press Holdings, Inc.
(a) 14,580,300
364,800 World Color Press, Inc. (a) 11,012,400
--------------
25,592,700
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ---------------------------------------------------------------
RAILROADS--0.7%
259,500 Kansas City Southern Industries,
Inc. $ 8,936,531
- ---------------------------------------------------------------
REGIONAL BANKS--1.0%
170,100 Community First Bankshares, Inc. 8,249,850
101,400 Peoples Heritage Financial Group 4,290,488
--------------
12,540,338
- ---------------------------------------------------------------
RESTAURANTS--0.7%
33,300 Ruby Tuesday, Inc. (a) 849,150
657,300 Ryan's Family Steak Houses, Inc.
(a) 6,038,944
125,260 VICORP Restaurants, Inc. (a) 2,004,160
--------------
8,892,254
- ---------------------------------------------------------------
RETAIL--3.1%
526,800 BJ's Wholesale Club, Inc. (a) 15,375,975
339,600 Dress Barn, Inc. (a) 8,150,400
440,800 Homebase, Inc. (a) 3,967,200
242,550 Regis Corp. 6,124,387
249,300 Tractor Supply Co. (a) 4,923,675
--------------
38,541,637
- ---------------------------------------------------------------
SAVINGS & LOAN--1.7%
413,800 Astoria Financial Corp. 20,819,312
- ---------------------------------------------------------------
SPECIALTY CHEMICALS--2.8%
235,000 Cambrex Corp. 10,956,875
468,600 Lilly Industries, Inc., Class A 9,840,600
121,300 Rogers Corp. (a) 5,246,225
535,300 Spartech Corp. 8,029,500
--------------
34,073,200
- ---------------------------------------------------------------
STEEL - PRODUCERS--0.8%
276,400 Quanex Corp. 9,691,275
- ---------------------------------------------------------------
TEXTILES--0.8%
369,300 Guilford Mills, Inc. 9,601,800
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-33

CORPORATE BOND--0.4%
$ 2,679 Robbins & Myers, Inc.,
Convertible
6.50%, 9/1/03
(Misc. Industrial) (cost
$2,679,000) $ 4,073,205
--------------
Total long-term investments
(cost $800,592,616) 1,106,654,795
--------------
SHORT-TERM INVESTMENT--9.7%
- ------------------------------------------------------------
REPURCHASE AGREEMENT
119,958 Joint Repurchase Agreement
Account
6.13%, 10/1/97
(cost $119,958,000; Note 5) 119,958,000
--------------
- ------------------------------------------------------------
TOTAL INVESTMENTS--99.6%
(cost $920,550,616; Note 4) 1,226,612,795
Other assets in excess of
liabilities--0.4% 5,209,732
--------------
Net Assets--100% $1,231,822,527
--------------
--------------
</TABLE>
- ---------------
ADR--American Depository Receipt.
(a) Non-income producing security.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-34

<PAGE>
PRUDENTIAL SMALL COMPANY
STATEMENT OF ASSETS AND LIABILITIES VALUE FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, 1997
------------------
<S> <C>
Investments, at value (cost $920,550,616).............................................................. $1,226,612,795
Cash................................................................................................... 1,333,423
Receivable for Fund shares sold........................................................................ 16,060,922
Receivable for investments sold........................................................................ 7,551,773
Dividends and interest receivable...................................................................... 552,466
Deferred expenses and other assets..................................................................... 18,492
------------------
Total assets........................................................................................ 1,252,129,871
------------------
LIABILITIES
Payable for Fund shares reacquired..................................................................... 10,060,672
Payable for investments purchased...................................................................... 8,712,236
Management fee payable................................................................................. 667,734
Distribution fee payable............................................................................... 593,738
Accrued expenses....................................................................................... 272,964
------------------
Total liabilities................................................................................... 20,307,344
------------------
NET ASSETS............................................................................................. $1,231,822,527
------------------
------------------
Net assets were comprised of:
Common stock, at par................................................................................ $ 675,894
Paid-in capital in excess of par.................................................................... 805,291,351
------------------
805,967,245
Accumulated net realized gain on investments........................................................ 119,793,103
Net unrealized appreciation on investments.......................................................... 306,062,179
------------------
Net assets, September 30, 1997......................................................................... $1,231,822,527
------------------
------------------
Class A:
Net asset value and redemption price per share
($412,979,533 / 21,795,052 shares of common stock issued and outstanding)........................ $18.95
Maximum sales charge (5% of offering price)......................................................... 1.00
------------------
Maximum offering price to public.................................................................... $19.95
------------------
------------------
Class B:
Net asset value, offering price and redemption price per share
($645,579,275 / 36,602,678 shares of common stock issued and outstanding)........................ $17.64
------------------
------------------
Class C:
Net asset value, offering price and redemption price per share
($22,049,204 / 1,250,164 shares of common stock issued and outstanding).......................... $17.64
------------------
------------------
Class Z:
Net asset value, offering price and redemption price per share
($151,214,515 / 7,941,500 shares of common stock issued and outstanding)......................... $19.04
------------------
------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-35

<PAGE>
PRUDENTIAL SMALL COMPANY
VALUE FUND, INC.
STATEMENT OF OPERATIONS
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
NET INVESTMENT INCOME (LOSS) SEPTEMBER 30, 1997
------------------
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $29,384)..................... $ 6,294,365
Interest................................. 5,058,311
------------------
Total income.......................... 11,352,676
------------------
Expenses
Management fee........................... 5,864,087
Distribution fee--Class A................ 719,734
Distribution fee--Class B................ 4,437,608
Distribution fee--Class C................ 87,617
Transfer agent's fees and expenses....... 1,358,000
Reports to shareholders.................. 360,000
Registration fees........................ 190,000
Custodian's fees and expenses............ 177,000
Audit fee................................ 25,000
Legal fees and expenses.................. 22,500
Directors' fees and expenses............. 23,000
Miscellaneous............................ 2,857
------------------
Total expenses........................ 13,267,403
------------------
Net investment income (loss)................ (1,914,727)
------------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Net realized gain on investment
transactions............................. 138,255,423
Net change in unrealized appreciation on
investments.............................. 201,444,620
------------------
Net gain on investments..................... 339,700,043
------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS................... $337,785,316
------------------
------------------
</TABLE>

PRUDENTIAL SMALL COMPANY
VALUE FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE (DECREASE) YEAR ENDED SEPTEMBER 30,
-------------------------------
IN NET ASSETS 1997 1996
-------------------------------
<S> <C> <C>
Operations
Net investment income
(loss)................... $ (1,914,727) $ (579,529)
Net realized gain on
investments.............. 138,255,423 96,387,630
Net change in unrealized
appreciation on
investments.............. 201,444,620 (17,952,802)
------------------ -------------
Net increase in net assets
resulting from
operations............... 337,785,316 77,855,299
------------------ -------------
Distributions from net realized
capital gains (Note 1)
Class A..................... (35,968,641) (11,343,132)
Class B..................... (62,311,718) (17,645,142)
Class C..................... (737,555) (93,369)
Class Z..................... (10,814,701) --
------------------ -------------
(109,832,615) (29,081,643)
------------------ -------------
Fund share transactions (net of
conversions) (Note 6)
Proceeds from shares sold... 1,508,723,401 594,169,971
Net asset value of shares
issued in reinvestment of
distributions............ 105,395,777 27,854,955
Cost of shares reacquired... (1,299,254,732) (587,442,637)
------------------ -------------
Net increase in net assets
from Fund share
transactions............. 314,864,446 34,582,289
------------------ -------------
Total increase................. 542,817,147 83,355,945
NET ASSETS
Beginning of year.............. 689,005,380 605,649,435
------------------ -------------
End of year.................... $1,231,822,527 $ 689,005,380
------------------ -------------
------------------ -------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-36

<PAGE>
PRUDENTIAL SMALL COMPANY
NOTES TO FINANCIAL STATEMENTS VALUE FUND, INC.
- --------------------------------------------------------------------------------
Prudential Small Company Value Fund, Inc., formerly Prudential Small Companies
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, by investing 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.
- ------------------------------------------------------------
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.

RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts and reports for
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 investment by $1,914,727 for net operating
losses during the fiscal year ended September 30, 1997. Net investment income,
net realized gains and net assets were not affected by this change.
- ------------------------------------------------------------
NOTE 2. AGREEMENTS

The Fund has a management agreement with Prudential Investments Fund Management
LLC ("PIFM"). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. Pursuant to a subadvisory agreement between PIFM and The Prudential
Investment Corporation ("PIC"), PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM 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.
- --------------------------------------------------------------------------------

B-37

<PAGE>
PRUDENTIAL SMALL COMPANY
NOTES TO FINANCIAL STATEMENTS VALUE FUND, INC.
- --------------------------------------------------------------------------------
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .70 of 1% of the Fund's average daily net assets.

The Fund has a distribution agreement with Prudential Securities Incorporated
("PSI"), which acts as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund. The Fund compensates 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 PSI. The distribution fees for Class A, B and C shares are accrued
daily and payable monthly. PSI also incurs the expenses of distributing the
Fund's Class Z shares under the distribution agreement, none of which is
reimbursed or paid by the Fund.

Pursuant to the Class A, B and C Plans, the Fund compensates PSI 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 were .25 of 1%, 1% and 1% of the average daily net assets of the
Class A, Class B and Class C shares, respectively, for the year ended September
30, 1997.

PSI has advised the Fund that it has received approximately $1,019,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended September 30, 1997. From these fees, PSI paid such sales charges to Pruco
Securities Corporation, an affiliated broker-dealer, which in turn paid
commissions to salespersons and incurred other distribution costs.

PSI has advised the Fund that for the year ended September 30, 1997, it received
approximately $697,300 and $3,300 in contingent deferred sales charges imposed
upon certain redemptions by Class B and Class C shareholders, respectively.

PSI, PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.

The Fund, along with other affiliated registered investment companies (the
"Funds"), entered into a credit agreement (the "Agreement") on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purposes of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of September 30,
1997. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.

NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES

Prudential Mutual Fund Services LLC ("PMFS"), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended September 30, 1997,
the Fund incurred fees of approximately $1,160,000 for the services of PMFS. As
of September 30, 1997, approximately $116,000 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.

For the year ended September 30, 1997, PSI earned approximately $1,400 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
- ------------------------------------------------------------
NOTE 4. PORTFOLIO SECURITIES

Purchases and sales of investment securities, other than short-term investments,
for the year ended September 30, 1997 were $600,770,033 and $436,067,635,
respectively.

The federal income tax basis of the Fund's investments at September 30, 1997 was
$920,731,478 and, accordingly, net unrealized appreciation for federal income
tax purposes was $305,881,317 (gross unrealized appreciation--$308,757,380 gross
unrealized depreciation--$2,876,063).
- ------------------------------------------------------------
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 September 30, 1997, the
Fund had a 8.90% undivided interest in the joint account. The undivided interest
for the Fund represents $119,958,000 in the principal amount. As of such date,
each repurchase agreement in the joint account and the collateral therefor were
as follows:

Credit Suisse First Boston Corp., 6.15%, in the principal amount of
$341,000,000, repurchase price $341,058,254, due 10/1/97. The value of the
collateral including accrued interest was $352,935,110.

Goldman, Sachs & Co. Inc., 6.15%, in the principal amount of $341,000,000,
repurchase price $341,058,254, due 10/1/97. The value of the collateral
including accrued interest was $347,820,010.
- --------------------------------------------------------------------------------

B-38

<PAGE>
PRUDENTIAL SMALL COMPANY
NOTES TO FINANCIAL STATEMENTS VALUE FUND, INC.
- --------------------------------------------------------------------------------
Morgan Stanley, Dean Witter, Discover & Co., 6.15%, in the principal amount of
$325,256,000, repurchase price $325,311,565, due 10/1/97. The value of the
collateral including accrued interest was $331,761,960.

UBS Securities, LLC, 6.06%, in the principal amount of $341,000,000, repurchase
price $341,057,402, due 10/1/97. The value of the collateral including accrued
interest was $347,821,030.
- ------------------------------------------------------------
NOTE 6. CAPITAL

The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 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 qualify to purchase Class A shares at net asset value. 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 750 million shares of common stock authorized $.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 consist of 200 million
authorized shares. Class C shares consist of 150 million authorized shares.

Transactions in shares of common stock for the years ended September 30, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
Class A SHARES AMOUNT
- ----------------------------------- ----------- -------------
<S> <C> <C>
Year ended September 30, 1997:
Shares sold........................ 58,541,824 $ 901,368,248
Shares issued in reinvestment of
distributions.................... 2,537,905 34,540,892
Shares reacquired.................. (56,528,491) (869,785,004)
----------- -------------
Net increase in shares outstanding
before conversion................ 4,551,238 66,124,136
Shares issued upon conversion from
Class B.......................... 1,732,321 27,796,514
----------- -------------
Net increase in shares
outstanding...................... 6,283,559 $ 93,920,650
----------- -------------
----------- -------------
<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)
----------- -------------
----------- -------------
<CAPTION>
Class B
- -----------------------------------
Year ended September 30, 1997:
Shares sold........................ 20,787,255 $ 309,922,681
Shares issued in reinvestment of
distributions.................... 4,656,202 59,320,016
Shares reacquired.................. (13,133,974) (187,564,507)
----------- -------------
Net increase in shares outstanding
before conversion................ 12,309,483 181,678,190
Shares reacquired upon conversion
into Class A..................... (1,856,230) (27,796,514)
----------- -------------
Net increase in shares
outstanding...................... 10,453,253 $ 153,881,676
----------- -------------
----------- -------------
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)
----------- -------------
----------- -------------
<CAPTION>
Class C
- -----------------------------------
Year ended September 30, 1997:
Shares sold........................ 1,398,968 $ 20,854,398
Shares issued in reinvestment of
distributions.................... 56,529 720,186
Shares reacquired.................. (503,684) (7,062,824)
----------- -------------
Net increase in shares
outstanding...................... 951,813 $ 14,511,760
----------- -------------
----------- -------------
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
----------- -------------
----------- -------------
</TABLE>
- --------------------------------------------------------------------------------

B-39

<PAGE>
PRUDENTIAL SMALL COMPANY
NOTES TO FINANCIAL STATEMENTS VALUE FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class Z SHARES AMOUNT
- ----------------------------------- ----------- -------------
<S> <C> <C>
Year ended September 30, 1997:
Shares sold........................ 17,575,451 $ 276,578,074
Shares issued in reinvestment of
distributions.................... 792,865 10,814,683
Shares reacquired.................. (14,899,669) (234,842,397)
----------- -------------
Net increase in shares
outstanding...................... 3,468,647 $ 52,550,360
----------- -------------
----------- -------------
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
----------- -------------
----------- -------------
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------

B-40

<PAGE>
PRUDENTIAL SMALL COMPANY
FINANCIAL HIGHLIGHTS VALUE FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(a):
Net asset value, beginning of year.................. $ 15.30 $ 14.18 $ 12.40 $ 13.06 $ 11.25
-------- -------- -------- -------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)........................ .02 .04 .05 -- .03
Net realized and unrealized gain on investment
transactions..................................... 6.06 1.75 2.57 .13 3.14
-------- -------- -------- -------- -------
Total from investment operations................. 6.08 1.79 2.62 .13 3.17
-------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Distributions from net realized capital gains....... (2.43) (.67) (.84) (.79) (1.36)
-------- -------- -------- -------- -------
Net asset value, end of year........................ $ 18.95 $ 15.30 $ 14.18 $ 12.40 $ 13.06
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
TOTAL RETURN(b):.................................... 45.92% 13.38% 23.29% 1.13% 30.42%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $412,980 $237,306 $242,231 $103,078 $94,842
Average net assets (000)............................ $287,894 $223,091 $174,449 $ 97,877 $69,801
Ratios to average net assets:
Expenses, including distribution fees............ 1.21% 1.24% 1.33% 1.33% 1.17%
Expenses, excluding distribution fees............ .96% .99% 1.08% 1.09% .97%
Net investment income (loss)..................... .15% .33% .30% .00% .26%
For Class A, B, C and Z shares:
Portfolio turnover............................... 58% 53% 64% 82% 68%
Average commission rate paid per share........... $ .0470 $ .0515 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-41

<PAGE>
PRUDENTIAL SMALL COMPANY
FINANCIAL HIGHLIGHTS VALUE FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(a):
Net asset value, beginning of period................ $ 14.49 $ 13.56 $ 11.99 $ 12.74 $ 11.08
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)........................ (.09) (.06) (.06) (.09) (.06)
Net realized and unrealized gain on investment
transactions..................................... 5.67 1.66 2.47 .13 3.08
-------- -------- -------- -------- --------
Total from investment operations................. 5.58 1.60 2.41 .04 3.02
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net realized capital gains....... (2.43) (.67) (.84) (.79) (1.36)
-------- -------- -------- -------- --------
Net asset value, end of period...................... $ 17.64 $ 14.49 $ 13.56 $ 11.99 $ 12.74
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(b):.................................... 44.91% 12.56% 22.37% .34% 29.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..................... $645,579 $378,861 $361,873 $425,502 $376,068
Average net assets (000)............................ $443,761 $355,636 $349,929 $399,920 $278,659
Ratios to average net assets:
Expenses, including distribution fees............ 1.96% 1.99% 2.08% 2.09% 1.97%
Expenses, excluding distribution fees............ .96% .99% 1.08% 1.09% .97%
Net investment income (loss)..................... (.60)% (.42)% (.51)% (.76)% (.54)%
</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-42

<CAPTION>
CLASS Z
-------------------------------
MARCH 1,
1996(e)
YEAR ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE(a):
Net asset value, beginning of period................ $ 15.32 $ 13.69
------------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)........................ .06 .05
Net realized and unrealized gain on investment
transactions..................................... 6.09 1.58
------------- ------
Total from investment operations................. 6.15 1.63
------------- ------
LESS DISTRIBUTIONS
Distributions from net realized capital gains....... (2.43) --
------------- ------
Net asset value, end of period...................... $ 19.04 $ 15.32
------------- ------
------------- ------
TOTAL RETURN(b):.................................... 46.38% 11.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..................... $ 151,215 $68,516
Average net assets (000)............................ $ 97,310 $66,228
Ratios to average net assets:
Expenses, including distribution fees............ .96% .99%(c)
Expenses, excluding distribution fees............ .96% .99%(c)
Net investment income (loss)..................... .40% .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-43

<PAGE>
PRUDENTIAL SMALL COMPANY
REPORT OF INDEPENDENT ACCOUNTANTS VALUE FUND, INC.
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
Prudential Small Company Value 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 Company Value
Fund, Inc., formerly Prudential Small Companies Fund, Inc. at September 30,
1997, results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended and the
financial highlights for each of the periods presented, 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, 1997 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where securities purchased have not been received, provide
a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
November 19, 1997

B-44

<PAGE>

APPENDIX I--GENERAL INVESTMENT INFORMATION

The following terms are used in mutual fund investing.

ASSET ALLOCATION

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

DIVERSIFICATION

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

DURATION

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

Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, 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.

I-1
<PAGE>

APPENDIX II--HISTORICAL PERFORMANCE DATA

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

This chart shows the long-term performance of various asset classes and the rate
of inflation.
Value of $1.00 invested on 1/1/26 through 12/31/96

Small Stocks $4,495.99
Common Stocks $1,370.95
Long-Term Bonds $33.73
Treasury Bills $13.54
Inflation $8.87

[CHART]

Generally, stock returns are due to capital appreciation and reinvesting any
gains. Bond returns are due mainly to reinvesting interest. Also, stock prices
usually are more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the New
York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
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 measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).

II-1
<PAGE>

Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
through 1996. 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>
'87 '88 '89 '90 '91 '92 '93 '94 '95 '96
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <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)% 18.4% 2.7%
- ---------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT MORTGAGE SECURITIES(2) 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4%
- ---------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE CORPORATE BONDS(3) 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3%
- ---------------------------------------------------------------------------------------------------------------
U.S. HIGH YIELD CORPORATE BONDS(4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4%
- ---------------------------------------------------------------------------------------------------------------
WORLD GOVERNMENT BONDS(5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1%
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURN PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7
</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.

II-2
<PAGE>

This chart illustrates the performance of major
world stock markets for the period from 1986
through September 1997. It does not represent the
performance of any Prudential Mutual Fund.

AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS 12/31/86 - 9/30/97 (IN
U.S. DOLLARS)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Hong Kong 23.7%
Sweden 22.0%
Netherland 21.3%
Spain 21.0%
Belgium 19.7%
Switzerland 17.5%
USA 17.1%
UK 17.0%
France 16.1%
Germany 12.3%
Austria 10.0%
Japan 8.8%
</TABLE>

Source: Morgan Stanley Capital International (MSCI) and
Lipper Analytical Services, Inc. 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.

[LOGO]
[CHART]

Capital Appreciation and Reinvesting Dividends $228,266
Capital Appreciation Only $80,535

$10,000 Investment in 1969 through 1996

Source: Stocks, Bonds, Bills, and Inflation 1997 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.

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

WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL: $12.7 TRILLION

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Canada 2.7%
U.S. 34.6%
Pacific Rim 20.1%
Europe 42.6%
</TABLE>

Source: Morgan Stanley Capital International, September 30, 1997.
Used with permission. This chart represents the capitalization of
major world stock markets as measured by the Morgan Stanley
Capital International (MSCI) World Index. The total market
capitalization is based on the value of approximately 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.

II-3
<PAGE>

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

LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1996)

[CHART]

YEAR-END

SOURCE: STOCKS, BONDS, BILLS, AND INFLATION 1997 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
1926-1996. 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.

II-4
<PAGE>

The following chart, although not
relevant to share ownership in the Fund, may provide useful
information about the effects of a hypothetical investment
diversified over different asset portfolios. The chart shows the
range of annual total returns for major stock and bond indices
for the period from December 31, 1975 through December 31, 1996.
The horizontal "Best Returns Zone" band shows that a hypothetical
blend portfolio constructed of one-third U.S. stocks (S&P 500),
one-third foreign stocks (EAFE Index), and one-third U.S. bonds
(Lehman Index) would have eliminated the "highest highs" and
"lowest lows" of any single asset class.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
THE RANGE OF ANNUAL TOTAL RETURNS FOR MAJOR STOCK
& BOND
<S> <C> <C>
Indices Over the Past 20 Years
(12/31/76-12/31/96)*
S&P 500 37.6% -7.2%
EAFE 69.9% -23.2%
Lehman Aggregate 32.6% -2.9%
"Best Returns Zone"
With a Diversified Blend
1/3 S&P 500 Index
1/3 EAFE Index
1/3 Lehman Aggregate Index
</TABLE>

* SOURCE: PRUDENTIAL INVESTMENT CORPORATION BASED ON DATA FROM
LIPPER ANALYTICAL NEW APPLICATIONS (LANA). PAST PERFORMANCE IS
NOT INDICATIVE OF FUTURE RESULTS. THE S&P 500 INDEX IS A
WEIGHTED, UNMANAGED INDEX COMPRISED OF 500 STOCKS WHICH PROVIDES
A BROAD INDICATION OF STOCK PRICE MOVEMENTS. THE MORGAN STANLEY
EAFE INDEX IS AN UNMANAGED INDEX COMPRISED OF 20 OVERSEAS STOCK
MARKETS IN EUROPE, AUSTRALIA, NEW ZEALAND AND THE FAR EAST. THE
LEHMAN AGGREGATE INDEX INCLUDES ALL PUBLICLY-ISSUED INVESTMENT
GRADE DEBT WITH MATURITIES OVER ONE YEAR, INCLUDING U.S.
GOVERNMENT AND AGENCY ISSUES, 15 AND 30-YEAR FIXED-RATE
GOVERNMENT AGENCY MORTGAGE SECURITIES, DOLLAR DENOMINATED SEC
REGISTERED CORPORATE AND GOVERNMENT SECURITIES, AS WELL AS
ASSET-BACKED SECURITIES. INVESTORS CANNOT INVEST DIRECTLY IN
STOCK OR BOND MARKET INDICES.

II-5
<PAGE>

APPENDIX III--INFORMATION RELATING TO THE PRUDENTIAL

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

INFORMATION ABOUT PRUDENTIAL

The Manager and PIC(1) 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,
1996. Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs almost 81,000 persons
worldwide, and maintains a sales force of approximately 11,500 agents and nearly
6,400 financial advisors. Prudential is a major issuer of annuities, including
variable annuities. Prudential seeks to develop innovative products and services
to meet consumer needs in each of its business areas. Prudential uses the rock
of Gibraltar as its symbol. The Prudential rock is a recognized brand name
throughout the world.

INSURANCE. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to nearly 50 million people worldwide.
Long one of the largest issuers of individual life insurance, Prudential has 22
million life insurance policies in force today with a face value of $1 trillion.
Prudential has the largest capital base ($12.1 billion) of any life insurance
company in the United States. Prudential provides auto insurance for more than
1.6 million cars and insures approximately 1.2 million homes.

MONEY MANAGEMENT. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It manages
$36 billion of individual retirement plan assets, such as 401(k) plans. As of
December 31, 1996, Prudential had more than $322 billion in assets under
management. Prudential Investments, a business group of Prudential (of which
Prudential Mutual Funds is a key part) manages over $190 billion in assets of
institutions and individuals. In PENSIONS & INVESTMENTS, May 12, 1997,
Prudential was ranked third in terms of total assets under management.

REAL ESTATE. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 37,000 brokers and
agents across the United States.(2)

HEALTHCARE. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.6
million Americans receive healthcare from a Prudential managed care membership.

FINANCIAL SERVICES. The Prudential Bank, a wholly-owned subsidiary of
Prudential, has over $1 billion in assets and serves nearly 1.5 million
customers across 50 states.

INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS

As of June 30, 1997, Prudential Investments Fund Management is the fifteenth
largest mutual fund company in the country, with over 2.5 million shareholders
invested in more than 50 mutual fund portfolios and variable annuities with more
than 3.7 million shareholder accounts.

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

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

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

(2) As of December 31, 1994

III-1
<PAGE>
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRON'S and USA TODAY.

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

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

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

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

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

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

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

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

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

- --------------
(3) As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
(4) Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts managed
by Prudential Mutual Fund Investment Management, a division of PIC, for the
year ended December 31, 1995.
(5) Based on 559 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage Funds.
(6) As of December 31, 1994

III-2
<PAGE>
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services LLC, the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.

INFORMATION ABOUT PRUDENTIAL SECURITIES

Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI.(7)

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

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

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

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

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

III-3
<PAGE>
PART C
OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(A) FINANCIAL STATEMENTS:

(1) The Financial Statements in Parts A and B, as applicable, to this
Post-Effective Amendment to the Registration Statement on Form N-1A
(File No. 2-68723).

Financial Highlights for the ten year period ended September 30, 1997
(Part A).

Portfolio of Investments at September 30, 1997 (Part B).

Statement of Assets and Liabilities at September 30, 1997 (Part B).

Statement of Operations for the year ended September 30, 1997 (Part B).

Statement of Changes in Net Assets for the years ended September 30,
1996 and 1997 (Part B).

Notes to Financial Statements (Part B).

Financial Highlights for each of the five years ended September 30, 1997
(Part B).

Report of Independent Accountants (Part B).

(B) EXHIBITS:

1. (a) Amended and Restated Articles of Incorporation. Incorporated by
reference to Exhibit 1(e) to Post-Effective Amendment No. 17 to the
Registration Statement filed on Form N-1A via EDGAR on November 29, 1993
(File No. 2-68723).

(b) Articles of Amendment. Incorporated by reference to Exhibit 1(b) to
Post-Effective Amendment No. 20 to the Registration Statement filed on
Form N-1A via EDGAR on November 29, 1994 (File No. 2-68723).

(c) Articles of Amendment. Incorporated by reference to Exhibit 1(c) to
Post-Effective Amendment No. 24 to the Registration Statement filed on
Form N-1A via EDGAR on December 13, 1996 (File No. 2-68723).

(d) Articles of Amendment.*

2. Amended and Restated By-Laws. Incorporated by reference to Exhibit 2(d)
to Post-Effective Amendment No. 17 to the Registration Statement on Form
N-1A via EDGAR filed on November 29, 1993 (File No. 2-68723).

4. Instruments defining rights of holders of the securities being offered.
Incorporated by reference to Exhibit 4(c) to Post-Effective Amendment No.
17 to the Registration Statement filed on Form N-1A via EDGAR filed on
November 29, 1993 (File No. 2-68723).

5. (a) Management Agreement between the Registrant and Prudential Mutual
Fund Management Inc. Incorporated by reference to Exhibit No. 5(a) to
Post-Effective Amendment No. 13 to the Registration Statement on Form
N-1A (File No. 2-68723).

(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. Incorporated by reference
to Exhibit No. 5(b) to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A (File No. 2-68723).

6. Restated Distribution Agreement. Incorporated by reference to Exhibit 6
to Post-Effective Amendment No. 24 to the Registration Statement on Form
N-1A filed via EDGAR on December 13, 1996 (File No. 2-68723).

C-1
<PAGE>

8. (a) Custodian Agreement between the Registrant and State Street Bank and
Trust Company. Incorporated by reference to Exhibit No. 8 to
Post-Effective Amendment No. 6 to the Registration Statement on Form N-1A
(File No. 2-68723).

(b) Amended Custodian Agreement between the Registrant and State Street
Bank and Trust Company. Incorporated by reference to Exhibit No. 8(b) to
Post-Effective Amendment No. 14 to the Registration Statement on Form
N-1A (File No. 2-68723).

9. Transfer Agency Agreement between the Registrant and Prudential Mutual
Fund Services, Inc., dated January 1, 1988. Incorporated by reference to
Exhibit No. 9 to Post-Effective Amendment No. 10 to the Registration
Statement on Form N-1A (File No. 2-68723).

10. Not Applicable.

11. Consent of Independent Accountants.*

13. Not Applicable.

15. (a) Distribution and Service Plan for Class A shares. Incorporated by
reference to Exhibit 15(a) to Post-Effective Amendment No. 20 to the
Registration Statement filed on Form N-1A via EDGAR on November 29, 1994
(File No. 2-68723).

(b) Distribution and Service Plan for Class B shares. Incorporated by
reference to Exhibit 15(b) to Post-Effective Amendment No. 20 to the
Registration Statement filed on Form N-1A via EDGAR on November 29, 1994
(File No. 2-68723).

(c) Distribution and Service Plan for Class C shares. Incorporated by
reference to Exhibit 15(c) to Post-Effective Amendment No. 20 to the
Registration Statement filed on Form N-1A via EDGAR on November 29, 1994
(File No. 2-68723).

16. (a) Schedule of Computation of Performance Quotations. Incorporated by
reference to Exhibit No. 16 to Post-Effective Amendment No. 13 to
Registration Statement on Form N-1A (File No. 2-68723).

(b) Schedule of Computation of 30-day yield. Incorporated by reference
to Exhibit No. 16(b) to Post-Effective Amendment 17 to the Registration
Statement on Form N-1A via EDGAR filed on November 29, 1993 (File No.
2-68723).

17. Financial Data Schedules.*

18. Rule 18f-3 Plan. Incorporated by reference to Exhibit 18 to
Post-Effective Amendment No. 21 to the Registration Statement filed on
Form N-1A via EDGAR on October 20, 1995 (File No. 2-68723).

- ------------------------
*Filed herewith.

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

None.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

As of November 3, 1997 there were 42,226, 76,826, 3,674 and 9,544 record
holders of Class A, Class B, Class C and Class Z common stock, $.01 par value
per share, of the Registrant, respectively.

C-2
<PAGE>
ITEM 27. INDEMNIFICATION.

As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940, as amended (the 1940 Act) and pursuant to Article VI of the Fund's By-Laws
(Exhibit 2 to the Registration Statement), officers, directors, employees and
agents of the Registrant will not be liable to the Registrant, any stockholder,
officer, director, employee, agent or other person for any action or failure to
act, except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of Maryland General Corporation Law permits indemnification of
directors who acted in good faith and reasonably believed that the conduct was
in the best interests of the Registrant. As permitted by Section 17(i) of the
1940 Act, pursuant to Section 10 of the Distribution Agreement (Exhibit 6 to the
Registration Statement), PSI of the Registrant may be indemnified against
liabilities which it may incur, except liabilities arising from bad faith, gross
negligence, willful misfeasance or reckless disregard of duties.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1940 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
director, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1940 Act and will be governed by the final
adjudication of such issue.

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

Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (PIFM) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from reckless
disregard by them of their respective obligations and duties under the
agreements.

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

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

(a) Prudential Investments Fund Management LLC (PIFM)

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

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

C-3
<PAGE>

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

<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- -------------------- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Brian Storms Officer-in-Charge, President, Prudential Mutual Funds & Annuities (PMF&A); Officer- in-Charge,
President, Chief Executive President, Chief Executive Officer and Chief Operating Officer, PIFM
Officer and Chief Operating
Officer
Thomas A. Early Executive Vice President, Vice President and General Counsel, PMF&A; Executive Vice President, Secretary
Secretary and General and General Counsel, PIFM
Counsel
Robert F. Gunia Executive Vice President and Comptroller, Prudential Investments; Executive Vice President and Treasurer,
Treasurer PIFM; Senior Vice President, Prudential Securities
Neil A. McGuinness Executive Vice President Executive Vice President and Director of Marketing, PMF&A; Executive Vice
President, PIFM
Robert J. Sullivan Executive Vice President Executive Vice President, PMF&A; Executive Vice President, PIFM
</TABLE>

(b) The Prudential Investment Corporation (PIC)

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

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

<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ---------------------- --------------------- ------------------------------------------------------------------
<S> <C> <C>
E. Michael Caulfield Chairman of the Chief Executive Officer of Prudential Investments (PIC) of The
Board, President and Prudential Insurance Company of America (Prudential)
Chief Executive
Officer and Director
Jonathan M. Greene Senior Vice President President--Investment Management of Prudential Investments of
and Director Prudential; Senior Vice President and Director, (PIC)
John R. Strangfeld Vice President and President of Private Asset Management Group of Prudential; Senior
Director Vice President, Prudential; Vice President and Director, (PIC)
</TABLE>

ITEM 29. PRINCIPAL UNDERWRITERS.

(a) Prudential Securities Incorporated

Prudential Securities is distributor for The BlackRock Government Income
Trust, The Global Total Return Fund, Inc., Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc., (Nicholas-Applegate Growth Equity Fund),
Prudential Balanced Fund, Prudential California Municipal Fund, Prudential
Distressed Securities Fund, Inc., Prudential Diversified Bond Fund, Inc.,
Prudential Dryden Fund, Prudential Emerging Growth Fund, Inc., Prudential Equity
Fund, Inc., Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc.,
Prudential Global Genesis Fund, Inc., Prudential Global Limited Maturity Fund,
Inc., Prudential Government Income Fund, Inc., Prudential Government Securities
Trust, Prudential High Yield Fund, Inc., Prudential Institutional Liquidity
Portfolio, Inc., Prudential Intermediate Global Income Fund, Inc., Prudential
International Bond Fund, Inc., Prudential Jennison

C-4
<PAGE>

Series Fund, Inc., Prudential MoneyMart Assets, Inc., Prudential Mortgage Income
Fund, Inc., Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund,
Prudential Municipal Series Fund, Prudential National Municipals Fund, Inc.,
Prudential Natural Resources Fund, Inc., Prudential Pacific Growth Fund, Inc.,
Prudential Small-Cap Quantum Fund, Inc., Prudential Small Company Value Fund,
Inc., Prudential Special Money Market Fund, Inc., Prudential Structured Maturity
Fund, Inc., Prudential Tax-Free Money Fund, Inc., Prudential Utility Fund, Inc.,
Prudential World Fund, Inc. and The Target Portfolio Trust. Prudential
Securities is also a depositor for the following unit investment trusts:

Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust

(b) Information concerning the officers and directors of Prudential
Securities Incorporated is set forth below.

<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ------------------------------ ----------------------------------------------------------------------- --------------
<S> <C> <C>
Alan D. Hogan................. Executive Vice President and Director None
George A. Murray.............. Executive Vice President and Director None
Leland B. Paton .............. Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Martin Pfinsgraff............. Executive Vice President, Chief Financial Officer and Director None
Vincent T. Pica II............ Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Hardwick Simmons.............. Chief Executive Officer, President and Director None
Lee B. Spencer, Jr............ Executive Vice President, General Counsel Secretary, and Director None
Brian Storms.................. Director None
Gateway Center Three
Newark, NJ 07102
<FN>
- ------------------------
(1) The address of each person named is One Seaport Plaza, New York, New York
10292 unless otherwise indicated.
</TABLE>

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.

All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, The Prudential Investment Corporation, Prudential Plaza,
745 Broad Street, Newark, New Jersey 07102, the Registrant, Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077 and Prudential Mutual
Fund Services, LLC, Raritan Plaza One, Edison, New Jersey 08837. Documents
required by Rules 31a-1(b)(5), (6), (7), (9), (10) and (11) and 31a-1(f) and
Rules 31a-1(b)(4) and (11) and 31a-1(d) will be kept at Gateway Center Three and
the remaining accounts, books and other documents required by such other
pertinent provisions of Section 31(a) and the Rules promulgated thereunder will
be kept by State Street Bank and Trust Company and Prudential Mutual Fund
Services, LLC.

C-5
<PAGE>

ITEM 31. MANAGEMENT SERVICES.

Other than as set forth under the captions "How the Fund is
Managed--Manager" and "How the Fund is Managed-- Distributor" in the Prospectus
and the captions "Manager" and "Distributor" in the Statement of Additional
Information, constituting Parts A and B, respectively, of this Registration
Statement, Registrant is not a party to any management-related service contract.

ITEM 32. UNDERTAKINGS.

The Registrant hereby undertakes to furnish each person to whom a Prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.

C-6
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Newark, and the State
of New Jersey, on the 26th day of November, 1997.

PRUDENTIAL SMALL COMPANY VALUE FUND, INC.

/s/ Richard A. Redeker
------------------------------------------

RICHARD A. REDEKER, PRESIDENT

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------ --------------------------------------------
<S> <C> <C>
/s/ Edward D.
Beach
- ------------------------------------ Director November 26, 1997
EDWARD D. BEACH
/s/ Delayne D.
Gold
- ------------------------------------ Director November 26, 1997
DELAYNE D. GOLD
/s/ Robert F.
Gunia
- ------------------------------------ Director November 26, 1997
ROBERT F. GUNIA
/s/ Donald D.
Lennox
- ------------------------------------ Director November 26, 1997
DONALD D. LENNOX
/s/ Douglas H.
McCorkindale
- ------------------------------------ Director November 26, 1997
DOUGLAS H. MCCORKINDALE
/s/ Mendel A.
Melzer
- ------------------------------------ Director November 26, 1997
MENDEL A. MELZER
/s/ Thomas T. Mooney
- ------------------------------------ Director November 26, 1997
THOMAS T. MOONEY
/s/ Stephen P.
Munn
- ------------------------------------ Director November 26, 1997
STEPHEN P. MUNN
/s/ Richard A.
Redeker
- ------------------------------------ President and Director November 26, 1997
RICHARD A. REDEKER
/s/ Robin B.
Smith
- ------------------------------------ Director November 26, 1997
ROBIN B. SMITH
/s/ Louis A. Weil,
III
- ------------------------------------ Director November 26, 1997
LOUIS A. WEIL, III
- ------------------------------------ Director
CLAY WHITEHEAD
/s/ Grace C.
Torres Treasurer and Principal November 26, 1997
- ------------------------------------ Financial and Accounting
GRACE C. TORRES Officer
</TABLE>

<PAGE>
EXHIBIT INDEX

(B) EXHIBITS:

(d) Articles of Amendment.*

6. Restated Distribution Agreement. Incorporated by reference to Exhibit 6
to Post-Effective Amendment No. 24 to the Registration Statement filed on
Form N1-A via EDGAR on December 13, 1996 (File No. 2-68723).

10. Not Applicable

11. Consent of Independent Accountants.*

13. Not applicable.

16. (a) Schedule of Computation of Performance Quotations. Incorporated by
reference to Exhibit No. 16 to Post-Effective Amendment No. 13 to
Registration Statement on Form N-1A (File No. 2-68723).

<PAGE>
(b) Schedule of Computation of 30-day yield. Incorporated by reference
to Exhibit No. 16(b) to Post-Effective Amendment 17 to the Registration
Statement on Form N-1A via EDGAR filed on November 29, 1993 (File No.
2-68723).

17. Financial Data Schedules.*

18. Rule 18f-3 Plan. Incorporated by reference to Exhibit 18 to
Post-Effective Amendment No. 21 to the Registration Statement filed on
Form N-1A via EDGAR on October 20, 1995 (File No. 2-68723).
- ------------------------
*Filed herewith.

<PAGE>

PRUDENTIAL SMALL COMPANIES FUND, INC.
ARTICLES OF AMENDMENT

Prudential Small Companies Fund, Inc., a Maryland corporation having its
principal office in Baltimore, Maryland (hereinafter called the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:

FIRST: The charter of the Corporation is hereby amended by striking out
Article 1 and inserting in lieu thereof the following:

"The name of the corporation (hereinafter called the "Corporation")
is Prudential Small Company Value Fund, Inc."

SECOND: The amendment to the charter of the Corporation as hereinabove
set forth has been duly advised and approved by the board of directors and is
limited to changes expressly permitted by Section 2-605 of the General
Corporation Law of the State of Maryland to be made without stockholder
action.

THIRD: The Corporation is registered as an open-end company under the
Investment Company Act of 1940.

FOURTH: The foregoing amendment to the charter of the Corporation shall
become effective at 9:00 a.m. on June 1, 1997.

IN WITNESS WHEREOF, Prudential Small Companies Fund, Inc. has caused
these presents to be signed in its name and on its behalf by its President
and Secretary on May 21, 1997.

PRUDENTIAL SMALL COMPANIES FUND, INC.

By: /s/ Richard Redeker
-------------------------------------
Richard A. Redeker
President

ATTEST:

By: /s/ Marguerite Morrison
-----------------------------------
Marguerite E. H. Morrison
Assistant Secretary

<PAGE>

THE UNDERSIGNED, President of Prudential Small Companies Fund, Inc., who
executed on behalf of said Corporation the foregoing Articles of Amendment,
of which this certificate is made a part, hereby acknowledges in the name and
on behalf of said Corporation the foregoing Articles of Amendment to be the
corporate act of said Corporation, and further certifies that, to the best of
his knowledge, information and belief, the matters and facts set forth
therein with respect to the approval thereof are true in all material
respects, under the penalties of perjury.

By: /s/ Richard Redeker
------------------------------------
Richard A. Redeker
President

<PAGE>

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 25 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
November 19, 1997, relating to the financial statements and financial highlights
of Prudential Small Company Value Fund, Inc., which appears in such Statement of
Additional Information, and to the incorporation by reference of our report into
the Prospectus which constitutes part of this Registration Statement. We also
consent to the reference to us under the heading "Custodian, Transfer and
Dividend Disbursing Agent and Independent Accountants" in such Statement of
Additional Information and to the reference to us under the heading "Financial
Highlights" in such Prospectus.

Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
November 25, 1997

<PAGE>
<ARTICLE> 6
<CIK> 0000318531
<NAME> PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
<SERIES>
<NUMBER> 001
<NAME> SMALL COMPANY FUND (CLASS A)

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Sep-30-1997
<PERIOD-END> Sep-30-1997
<INVESTMENTS-AT-COST> 920,550,616
<INVESTMENTS-AT-VALUE> 1,226,612,795
<RECEIVABLES> 24,165,161
<ASSETS-OTHER> 1,351,915
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 18,772,908
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,534,436
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 805,967,245
<SHARES-COMMON-STOCK> 67,589,394
<SHARES-COMMON-PRIOR> 46,432,122
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 119,793,103
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 306,062,179
<NET-ASSETS> (114,021,516)
<DIVIDEND-INCOME> 6,294,365
<INTEREST-INCOME> 5,058,311
<OTHER-INCOME> 0
<EXPENSES-NET> 13,267,403
<NET-INVESTMENT-INCOME> (1,914,727)
<REALIZED-GAINS-CURRENT> 138,255,423
<APPREC-INCREASE-CURRENT> 201,444,620
<NET-CHANGE-FROM-OPS> 337,785,316
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (109,832,615)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,508,723,401
<NUMBER-OF-SHARES-REDEEMED> (1,299,254,732)
<SHARES-REINVESTED> 105,395,777
<NET-CHANGE-IN-ASSETS> 542,817,147
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 93,285,022
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,864,087
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 13,267,403
<AVERAGE-NET-ASSETS> 287,894,000
<PER-SHARE-NAV-BEGIN> 15.30
<PER-SHARE-NII> 6.08
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (2.43)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 18.95
<EXPENSE-RATIO> 1.21
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000318531
<NAME> PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
<SERIES>
<NUMBER> 002
<NAME> SMALL COMPANY FUND (CLASS B)

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Sep-30-1997
<PERIOD-END> Sep-30-1997
<INVESTMENTS-AT-COST> 920,550,616
<INVESTMENTS-AT-VALUE> 1,226,612,795
<RECEIVABLES> 24,165,161
<ASSETS-OTHER> 1,351,915
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 18,772,908
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,534,436
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 805,967,245
<SHARES-COMMON-STOCK> 67,589,394
<SHARES-COMMON-PRIOR> 46,432,122
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 119,793,103
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 306,062,179
<NET-ASSETS> (114,021,516)
<DIVIDEND-INCOME> 6,294,365
<INTEREST-INCOME> 5,058,311
<OTHER-INCOME> 0
<EXPENSES-NET> 13,267,403
<NET-INVESTMENT-INCOME> (1,914,727)
<REALIZED-GAINS-CURRENT> 138,255,423
<APPREC-INCREASE-CURRENT> 201,444,620
<NET-CHANGE-FROM-OPS> 337,785,316
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (109,832,615)
<DISTRIBUTIONS-OTHER> 0
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</TABLE>

<PAGE>
<ARTICLE> 6
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<NAME> PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
<SERIES>
<NUMBER> 003
<NAME> SMALL COMPANY FUND (CLASS C)

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</TABLE>

<PAGE>
<ARTICLE> 6
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<NAME> PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
<SERIES>
<NUMBER> 004
<NAME> SMALL COMPANY FUND (CLASS Z)

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</TABLE>