PRUDENTIAL EQUITY INCOME FUND, 485BXT, 1998-12-30

PRUDENTIAL EQUITY INCOME FUND
485BXT, 1998-12-30

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As filed with the Securities and Exchange Commission on December 30, 1998

Securities Act Registration No. 33-9269
Investment Company Act Registration No. 811-4864
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]

PRE-EFFECTIVE AMENDMENT NO. [_]

[X]
POST-EFFECTIVE AMENDMENT NO. 20

AND/OR

REGISTRATION STATEMENT UNDER THE

INVESTMENT COMPANY ACT OF 1940 [_]

[X]
AMENDMENT NO. 21

(Check appropriate box or boxes)

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PRUDENTIAL EQUITY INCOME FUND

(Exact name of registrant as specified in charter)

GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077

(Address of Principal Executive Offices) (Zip Code)

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

MARGUERITE E. H. MORRISON, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE)

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.

IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):

[_] immediately upon filing pursuant to paragraph (b)

[X] on January 14, 1999 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:

[X] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment

TITLE OF SECURITIES BEING REGISTERED . . . . SHARES OF BENEFICIAL INTEREST,
PAR VALUE $.01 PER SHARE.

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FUND TYPE:
_________________________________
Stock

INVESTMENT OBJECTIVE:
_________________________________
Capital appreciation and
current income

PRUDENTIAL EQUITY
INCOME FUND

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PROSPECTUS: JANUARY 14, 1999

As with all mutual funds, the
Securities and Exchange Com-
mission has not approved the
Fund's shares, nor has the SEC
determined that this pro-
spectus is complete or accu-
rate. It is a criminal offense
to state otherwise.
[LOGO OF PRUDENTIAL INVESTMENTS APPEARS HERE]
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TABLE OF CONTENTS
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<TABLE>
<C> <S>
1 Risk/Return Summary
1 Investment Objective and Principal Strategies
1 Principal Risks
2 Evaluating Performance
3 Fees and Expenses
5 How the Fund Invests
5 Investment Objective and Policies
6 Other Investments
7 Derivative Strategies
7 Additional Strategies
9 Investment Risks
12 How the Fund is Managed
12 Manager
12 Investment Adviser
12 Portfolio Manager
12 Distributor
13 Year 2000 Readiness Disclosure
14 Fund Distributions and Tax Issues
14 Distributions
15 Tax Issues
16 If You Sell or Exchange Your Shares
18 How to Buy, Sell and Exchange Shares of the Fund
18 How to Buy Shares
26 How to Sell Your Shares
30 How to Exchange Your Shares
32 Financial Highlights
32 Class A Shares
33 Class B Shares
34 Class C Shares
35 Class Z Shares
36 The Prudential Mutual Fund Family
For More Information (Back Cover)
</TABLE>
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PRUDENTIAL EQUITY INCOME FUND (800) 225-1852
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RISK/RETURN SUMMARY
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This section highlights key information about the PRUDENTIAL EQUITY INCOME
FUND, which we refer to as "the Fund." Additional information follows this
summary.

INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES

Our investment objective is both CAPITAL APPRECIATION and CURRENT INCOME. This
means we seek investments whose price will increase as well as pay the Fund
dividends and other income. We normally invest at least 65% of the Fund's total
assets in the common stock of U.S. companies, as well as securities that can be
converted into common stock (known as convertibles).

To achieve current income, we look for securities that will provide
investment income returns above those of the Standard & Poor's 500 Stock
Index or the NYSE Composite Index. While we make every effort to achieve our
objective, we can't guarantee success.

PRINCIPAL RISKS

Although we try to invest wisely, all investments involve risk. Since the Fund
invests primarily in common stock, there is the risk that the price of a
particular stock we own could go down, or pay lower-than-expected dividends.
Generally, the stock price of large companies is more stable than the stock
price of medium-size and small companies, but this is not always the case.

In addition to an individual stock losing value, the value of the equity
markets as a whole could go down. Some of our investment strategies also
involve risk. Like any mutual fund, an investment in the Fund could lose value,
and you could lose money. For more detailed information about the risks
associated with the Fund, see "Investment Risks."
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.

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WE'RE VALUE INVESTORS

In deciding which stocks to buy, we use what is known as a value investment
style. That is, we invest in stocks that we believe are undervalued, given the
company's sales, book value and cash flow. We consider selling a security if it
has increased in value to the point where we no longer consider it to be under-
valued.

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1
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RISK/RETURN SUMMARY
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EVALUATING PERFORMANCE

A number of factors--including risk--affect how the Fund performs. The fol-
lowing bar chart and table show the Fund's performance for each full calendar
year of operation for the last 10 years. They demonstrate the risk of investing
in the Fund and how returns can change. Past performance does not mean that the
Fund will achieve similar results in the future.

[CHART APPEARS HERE]

Annual Returns (Class B shares/1/)

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

20.35% -5.73% 25.62% 8.42% 20.43% -0.80% 20.72% 20.98% 35.35%

BEST QUARTER: 16.25% (2nd quarter of 1997)
WORST QUARTER: -11.04% (3rd quarter of 1990)

1 These annual returns do not include sales charges. If the sales charges were
included, the annual returns would be lower than those shown.

AVERAGE ANNUAL RETURNS (AS OF 12/31/98/1/)
<TABLE>
- --------------------------------------------------------
<CAPTION>
1 YR 5 YRS 10 YRS SINCE INCEPTION
<S> <C> <C> <C> <C>
Class A shares % % N/A % (since 1-22-90)
Class B shares % % % % (since 1-20-87)
Class C shares % N/A N/A % (since 8-1-94)
Class Z shares % N/A N/A % (since 3-1-96)
S&P 500/2/ - -% - -% - -% N/A
Lipper Average/3/ - -% - -% - -% N/A
</TABLE>

1 The Fund's returns are after deduction of sales charges and expenses.

2 The Standard & Poor's 500 Stock Index (S&P 500)--an unmanaged index of 500
stocks of large U.S. companies--gives a broad look at how stock prices have
performed. These returns do not include the effect of any sales charges.
These returns would be lower if they included the effect of sales charges.
S&P 500 returns since the inception of each class are % for Class A, % for
Class B, % for Class C and % for Class Z shares. Source: Lipper, Inc.

3 The Lipper Average is based on the average return of all mutual funds in the
Lipper Equity Income Fund category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Lipper returns since the inception of each class are
% for Class A, % for Class B, % for Class C and % for Class Z shares.
Source: Lipper, Inc.

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PRUDENTIAL EQUITY INCOME FUND (800) 225-1852

2
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RISK/RETURN SUMMARY
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FEES AND EXPENSES
This table shows the sales charges, fees and expenses for each share class of
the Fund--Class A, B, C and Z. Each share class has different sales charges--
known as loads--and expenses, but represents an investment in the same fund.
Class Z shares are available only to a limited group of investors. For more
information about which share class may be right for you, see "How to Buy, Sell
and Exchange Shares of the Fund."

SHAREHOLDER FEES/1/ (PAID DIRECTLY FROM YOUR INVESTMENT)
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<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on 5% None 1% None
purchases (as a percentage of offering
price)

Maximum deferred sales charge (load) None 5%/2/ 1%/3/ None
(as a percentage of the lower of
original purchase price or sale
proceeds)

Maximum sales charge (load) imposed on None None None None
reinvested dividends and other
distributions

Redemption fees None None None None

Exchange fee None None None None

ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
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<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Management fees .50% .50% .50% .50%
+ Distribution and service (12b-1) fees .30%/4/ 1.00% 1.00% None
+ Other expenses .16% .16% .16% .16%
= TOTAL ANNUAL FUND OPERATING EXPENSES .96%/4/ 1.66% 1.66% .66%
</TABLE>

1 Your broker may charge you a separate or additional fee for purchases and
sales of shares.

2 The Contingent Deferred Sales Charge (CDSC) for Class B shares decreases by
1% annually to 1% in the fifth and sixth years and 0% in the seventh year.
Class B shares convert to Class A shares approximately seven years after
purchase.

3 The CDSC for Class C shares is 1% for shares redeemed within 18 months of
purchase.

4 The Distributor of the Fund has voluntarily reduced its distribution and
service fees for Class A shares to .25 of 1% of the average daily net assets
of the Class A shares. This voluntary reduction may be terminated at any time
without notice. With this reduction, Total annual Fund operating expenses for
Class A shares are .91%.

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3
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RISK/RETURN SUMMARY
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EXAMPLE

This example will help you compare the fees and expenses of the Fund's dif-
ferent share classes and compare the cost of investing in the Fund with the
cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that
the Fund's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:

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<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $593 $791 $1,004 $1,619
Class B shares $669 $823 $1,002 $1,692
Class C shares $367 $618 $ 993 $2,046
Class Z shares $ 67 $211 $ 368 $ 822
</TABLE>

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

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<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $593 $791 $1,004 $1,619
Class B shares $169 $523 $ 902 $1,692
Class C shares $267 $618 $ 993 $2,046
Class Z shares $ 67 $211 $ 368 $ 822
</TABLE>

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PRUDENTIAL EQUITY INCOME FUND (800) 225-1852

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HOW THE FUND INVESTS
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INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is both CAPITAL APPRECIATION and CURRENT
INCOME. This means we seek investments whose price will increase as well as pay
the Fund dividends and other income. While we make every effort to achieve our
objective, we can't guarantee success.
In pursuing our objective, we normally invest at least 65% of the Fund's
total assets in the COMMON STOCK and CONVERTIBLE SECURITIES of companies that
we believe will provide investment income returns above those of the S&P 500 or
the NYSE Composite Index. This means that we focus on companies whose dividend
yield (the annual dividend a company pays to its shareholders, shown as a per-
centage of the current stock price) is higher than the average dividend yield
of the companies that make up the S&P 500 or the NYSE Composite Index.

We buy common stock and convertible securities of companies of every size--
small, medium and large capitalization.

In addition to buying common stock, we may buy CONVERTIBLE SECURITIES. These
are securities--like bonds, corporate notes and preferred stock--that can be
converted into the company's common stock or some other equity security. The
Fund also invests in other EQUITY-RELATED SECURITIES, including non-convertible
preferred stock, warrants and rights that can be exercised to obtain stock,
real estate investment trusts, investments in various types of business
ventures, including partnerships and joint ventures, and securities--like
American Depositary Receipts (ADRs)--which are certificates representing the
right to receive foreign securities that have been deposited with a U.S. bank
(or a foreign branch of a U.S. bank). Generally, we consider selling a security
when it has increased in value to the point where it is no longer undervalued
in the opinion of the investment adviser.
For more information, see "Investment Risks" and the Statement of Additional
Information, "Description of the Fund, Its Investments and Risks." The State-
ment of Additional Information--which we refer to as the SAI--contains addi-
tional information about the Fund. To obtain a copy, see the back cover page of
this prospectus.

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WE USE A CONTRARIAN APPROACH
To achieve our value investment strategy, we generally take a strong contrarian
approach to investing. In other words, we usually buy securities that are out
of favor and that many other investors are selling, and we attempt to invest in
companies and industries before other investors recognize their true value.
Using these guidelines, we focus on long-term performance, not short-term gain.

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5
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HOW THE FUND INVESTS
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The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of the Fund can change invest-
ment policies that are not fundamental.

OTHER INVESTMENTS

We may also make the following investments to increase the Fund's returns or
protect its assets if market conditions warrant.

MONEY MARKET INSTRUMENTS, BONDS AND OTHER FIXED-INCOME OBLIGATIONS

Under normal circumstances, the Fund may invest up to 35% of its total assets
in MONEY MARKET INSTRUMENTS and other fixed-income obligations. Money market
instruments include the commercial paper of U.S. corporations, short-term obli-
gations of U.S. banks, certificates of deposit and short-term obligations
issued or guaranteed by the U.S. government or its agencies. Longer-term fixed-
income obligations include BONDS and similar debt obligations. Generally,
fixed-income obligations provide a fixed rate of return, but provide less
opportunity for capital appreciation than investing in stocks.

The Fund will only purchase money market instruments in one of the two
highest short-term quality ratings of a major rating service. For bonds and
other long-term fixed-income obligations, we invest primarily in obligations in
one of the top three long-term quality ratings (A or better). We may invest in
lower-rated obligations which are more speculative, including high-yield or
"junk" bonds (obligations rated below Baa/BBB), although we will not invest in
obligations rated lower than Ca/CC. We also may invest in obligations that are
not rated, but that we believe are of comparable quality to the obligations
described above.

FOREIGN SECURITIES
We may invest up to 30% of the Fund's total assets in FOREIGN SECURITIES,
including money market instruments and other fixed-income securities, stock and
other equity-related securities. For purposes of this limitation, we do not
consider ADRs and other similar receipts or shares to be foreign securities.

REAL ESTATE INVESTMENT TRUSTS
We may invest in the securities of real estate investment trusts known as
REITS. REITs are like corporations, except that they do not pay income taxes

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PRUDENTIAL EQUITY INCOME FUND (800) 225-1852

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HOW THE FUND INVESTS
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if they meet certain IRS requirements. However, while REITs themselves do not
pay income taxes, the distributions they make to investors are taxable. REITs
invest primarily in real estate and distribute almost all of their income--most
of which comes from rents, mortgages and gains on sales of property--to share-
holders.

TEMPORARY DEFENSIVE INVESTMENTS

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

REPURCHASE AGREEMENTS

The Fund may also use REPURCHASE AGREEMENTS, where a party agrees to sell a
security to the Fund and then repurchase it at an agreed-upon price at a stated
time. This creates a fixed return for the Fund.

DERIVATIVE STRATEGIES

We may use alternative investment strategies--including DERIVATIVES--to try to
improve the Fund's returns or protect its assets, although we cannot guarantee
these strategies will work, that the instruments necessary to implement these
strategies will be available or that the Fund will not lose money. Deriva-
tives--such as futures, options, foreign currency forward contracts and options
on futures--involve costs and can be volatile. With derivatives, the investment
adviser tries to predict whether the underlying investment--a security, market
index, currency, interest rate or some other investment--will go up or down at
some future date. We may use derivatives to try to reduce risk or to increase
return consistent with the Fund's overall investment objective. The invesment
adviser will consider other factors (such as cost) in deciding whether to
employ any particular strategy or use any particular instrument. Any deriva-
tives we may use may not match the Fund's underlying holdings. For more infor-
mation about these strategies, see the SAI, "Description of the Fund, Its
Investments and Risks--Risk Management and Return Enhancement Strategies."

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7
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HOW THE FUND INVESTS
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ADDITIONAL STRATEGIES

The Fund also follows certain policies when it BORROWS MONEY (the Fund can
borrow up to 20% of the value of its total assets); LENDS ITS SECURITIES to
others (the Fund can lend up to 33% of the value of its total assets, including
collateral received in the transaction); and holds ILLIQUID SECURITIES (the
Fund may hold up to 15% of its net assets in illiquid securities, including
securities with legal or contractual restrictions, those without a readily
available market and repurchase agreements with maturities longer than seven
days). The Fund is subject to certain investment restrictions that are funda-
mental policies, which means they cannot be changed without shareholder
approval. For more information about these restrictions, see the SAI.

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PRUDENTIAL EQUITY INCOME FUND (800) 225-1852

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HOW THE FUND INVESTS
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INVESTMENT RISKS

As noted, all investments involve risk, and investing in the Fund is no excep-
tion. This chart outlines the key risks and potential rewards of the Fund's
principal investments. See, too, "Description of the Fund, Its Investments and
Risks" in the SAI.

INVESTMENT TYPE
% OF FUND'S TOTAL RISKS POTENTIAL REWARDS
ASSETS
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COMMON STOCK AND . Individual stocks . Historically,
CONVERTIBLE could lose value stocks have
SECURITIES OF outperformed
U.S. COMPANIES . The equity mar- other investments
kets could go over the long
At least 65% down, resulting term
in a decline in
value of the . Generally, eco-
Fund's invest- nomic growth
ments means higher cor-
porate profits,
. Companies that which leads to an
pay dividends may increase in stock
not do so if they prices, known as
don't have capital apprecia-
profits or ade- tion
quate cash flow
. May be a source
. Changes in eco- of dividend
nomic or polit- income
ical conditions,
both domestic and
international,
resulting in a
decline in value
of the Fund's
investments

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DEBT OBLIGATIONS . The Fund's share . Bonds have gener-
Up to 35% price, yield and ally outperformed
total return will money market
fluctuate in instruments over
response to bond the long term
market movements with less risk
than stocks
. Credit risk--the
default of an . Most bonds will
issuer would rise in value
leave the Fund when interest
with unpaid rates fall
interest or prin-
cipal . Regular interest
income
. Market risk--the
risk that bonds . Investment grade
and other debt bonds have a
instruments may lower risk of
lose value in the default
market because
there is a lack . Generally more
of confidence in secure than stock
the borrower since companies
must pay their
. Interest rate debts before
risk--the value paying stock-
of most bonds holders
will fall when
interest rates
rise; the longer
a bond's maturity
and the lower its
credit quality,
the more its
value typically
falls. It can
lead to price
volatility, par-
ticularly for
junk bonds

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9
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HOW THE FUND INVESTS
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INVESTMENT TYPE (CONT'D)
% OF FUND'S TOTAL RISKS POTENTIAL REWARDS
ASSETS
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FOREIGN . Foreign markets, . Investors can
SECURITIES economies and participate in
Up to 30% political systems the growth of
may not be as foreign markets
stable as in the and companies
U.S. operating in
those markets
. Currency risk--
changing values . Opportunities for
of foreign diversification
currencies

. May be less
liquid than U.S.
stocks and bonds

. Differences in
foreign laws,
accounting stan-
dards and public
information

. Year 2000 conver-
sion may be more
of a problem for
some foreign
issuers
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REAL ESTATE . Performance . Real estate hold-
INVESTMENT TRUSTS depends on the ings can generate
(REITS) strength of real good returns from
Up to 25% estate markets, rents, rising
REIT management market values,
and property man- etc.
agement which can
be affected by . Greater diversi-
many factors, fication than
including direct ownership
national and
regional economic
conditions
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DERIVATIVES . Derivatives such . The Fund could
Percentage varies as futures, make money and
options and for- protect against
eign currency losses if the
forward contracts investment anal-
may not fully ysis proves cor-
offset the under- rect
lying positions
and this could . Derivatives that
result in losses involve leverage
to the Fund that could generate
would not have substantial gains
otherwise at low cost
occurred*
. One way to manage
. Derivatives used the Fund's
for risk manage- risk/return bal-
ment may not have ance is by
the intended locking in the
effects and may value of an
result in losses investment ahead
or missed oppor- of time
tunities

. The counterparty
to a derivatives
contract could
default

. Derivatives that
involve leverage
could magnify
losses

. Certain types of
derivatives
involve costs to
the Fund that can
reduce returns

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HOW THE FUND INVESTS
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INVESTMENT TYPE (CONT'D)
% OF FUND'S TOTAL RISKS POTENTIAL REWARDS
ASSETS
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ILLIQUID . May be difficult . May offer a more
SECURITIES to value pre- attractive yield
Up to 15% of net cisely or potential for
assets growth than more
. May be difficult widely traded
to sell at the securities
time or price
desired

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MONEY MARKET . Limits potential . May preserve the
INSTRUMENTS for capital Fund's assets
Up to 100% on a appreciation
temporary basis
. See Credit risk
and Market risk
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* An option is the right to buy or sell securities in exchange for a premium. A
futures contract is an agreement to buy or sell a set quantity of an
underlying product at a future date, or to make or receive a cash payment
based on the value of a securities index. A foreign currency forward contract
is an obligation to buy or sell a given currency on a future date and at a
set price.

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11
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HOW THE FUND IS MANAGED
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MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET

NEWARK, NJ 07102-4077

Under a management agreement with the Fund, PIFM manages the Fund's invest-
ment operations and administers its business affairs. For the fiscal year ended
October 31, 1998, the Fund paid PIFM management fees of .50% of the Fund's
average net assets.

As of November 30, 1998, PIFM served as the Manager to all 46 of the Pruden-
tial Mutual Funds, and as Manager or administrator to 22 closed-end investment
companies, with aggregate assets of approximately $69 billion.

INVESTMENT ADVISER

The Prudential Investment Corporation, called Prudential Investments, is the
Fund's investment adviser. Its address is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and reimburses Prudential Investments for its
reasonable costs and expenses.

PORTFOLIO MANAGER
WARREN E. SPITZ, a Managing Director of Prudential Investments, has managed the
Fund since 1988. He earned a B.S. from Allegheny College and an M.B.A. from the
University of Pennsylvania's Wharton School of Business.

As a value investor, Warren seeks companies that will produce both above-
average earnings and dividend growth. He also uses sales, book value and cash
flow as guides for stock selection.

DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 of the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing
the Fund's Class A, B, C and Z shares and provides certain share-

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HOW THE FUND IS MANAGED
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holder support services. The Fund pays distribution and other fees to PIMS as
compensation for its services for each class of shares other than Class Z.
These fees--known as 12b-1 fees--are shown in the "Fees and Expenses" table.

YEAR 2000 READINESS DISCLOSURE
Many computer systems used today cannot distinguish the year 2000 from the year
1900 because of the way dates are encoded. This could be a problem when the
year 2000 arrives and could affect securities trades, interest and dividend
payments, pricing and account services. Although we cannot guarantee that this
will not be a problem, the Fund's service providers have been working on
adapting their computer systems. They expect that their systems, and the sys-
tems of their service providers, will be ready for the year 2000.
In addition, issuers of securities may also encounter year 2000 compliance
problems. If these problems are significant and are not corrected, securities
markets could go down or issuers could have poor performance. If the Fund owns
these securities, then it is possible that the Fund could lose money.

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13
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FUND DISTRIBUTIONS AND TAX ISSUES
- --------------------------------------------------------------------------------

Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund distributes DIVIDENDS of ordinary income and any
realized net CAPITAL GAINS to shareholders. These distributions are subject to
taxes, unless you hold your shares in a 401(k) plan, an Individual Retirement
Account (IRA) or some other qualified tax-deferred plan or account.

Also, if you sell shares of the Fund for a profit, you may have to pay cap-
ital gains taxes on the amount of your profit, again unless you hold your
shares in a qualified tax-deferred plan or account.
The following briefly discusses some of the important federal tax issues you
should be aware of, but is not meant to be tax advice. For tax advice, please
speak with your tax adviser.

DISTRIBUTIONS

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

The Fund also distributes realized net CAPITAL GAINS to shareholders--typi-
cally once a year--which are generated when the Fund sells its assets for a
profit. For example, if the Fund bought 100 shares of ACME Corp. stock for a
total of $1,000 and more than one year later sold the shares for a total of
$1,500, the Fund has net long-term capital gains of $500, which it will pass on
to shareholders (assuming the Fund's total gains are greater than any losses it
may have). Capital gains are taxed differently depending on how long the Fund
holds the security--if a security is held more than one year before it is sold,
LONG-TERM capital gains are taxed at the rate of 20%, but if the security is
held one year or less, SHORT-TERM capital gains are taxed at rates up to 39.6%.
Different rates apply to corporate shareholders.

For your convenience, Fund distributions of dividends and capital gains are
AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask us to
pay the distributions in cash, we will send you a check if your account is with
the Transfer Agent. Otherwise, if your account is with a broker you will
receive a credit to your account. Either way, the distributions may be subject
to taxes, unless your shares are held in a qualified tax-deferred plan or

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FUND DISTRIBUTIONS AND TAX ISSUES
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account. For more information about automatic reinvestment and other
shareholder services, see "Step 4: Additional Shareholder Services" in the next
section.

TAX ISSUES
FORM 1099

Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own
shares of the Fund as part of a qualified tax-deferred plan or account, your
taxes are deferred, so you will not receive a Form 1099. However, you will
receive a Form 1099 when you take any distributions from your qualified tax-
deferred plan or account.
Fund distributions are generally taxable to you in the year they are
received, except when we declare certain dividends in the fourth quarter and
actually pay them in January of the following year. In such cases, the divi-
dends are treated as if they were paid on December 31 of the prior year. Corpo-
rate shareholders are eligible for the 70% dividends-received deduction for
certain dividends.

WITHHOLDING TAXES
If federal tax law requires you to provide the Fund with your tax identifica-
tion number and certifications as to your tax status, and you fail to do this,
we will withhold and pay to the U.S. Treasury 31% of your distributions and
sale proceeds. If you are subject to backup withholding, we will withhold and
pay to the U.S. Treasury 31% of your distributions. Dividends of net investment
income and short-term capital gains paid to a nonresident foreign shareholder
generally will be subject to a U.S. withholding tax of 30%. This rate may be
lower, depending on any tax treaty the U.S. may have with the shareholder's
country.

IF YOU PURCHASE JUST BEFORE RECORD DATE

If you buy shares of the Fund just before the record date (the date that deter-
mines who receives the distribution), that distribution will be paid to you. As
explained above, the distribution may be subject to income or capital gains
taxes. You may think you've done well, since you bought shares one day and soon
thereafter received a distribution. That is not so because when dividends are
paid out, the value of each share of the Fund decreases by the

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15
<PAGE>

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FUND DISTRIBUTIONS AND TAX ISSUES
- --------------------------------------------------------------------------------

amount of the dividend and the market changes (if any) to reflect the payout.
The distribution you receive makes up for the decrease in share value. However,
the timing of your purchase does mean that part of your investment came back to
you as taxable income.

QUALIFIED RETIREMENT PLANS

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

IF YOU SELL OR EXCHANGE YOUR SHARES

If you sell any shares of the Fund for a profit, you have realized a capital
gain, which is subject to tax unless you hold shares in a qualified tax-
deferred plan or account. The amount of tax you pay depends on how long you
owned your shares. If you sell shares of the Fund for a loss, you may have a
capital loss, which you may use to offset certain capital gains you have.
Exchanging your shares of the Fund for the shares of another Prudential
Mutual Fund is considered a sale for tax purposes. In other words, it's a "tax-
able event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the
taxes described above.
Any gain or loss you may have from selling or exchanging Fund shares will not
be reported on the Form 1099. Therefore, unless you hold your shares in a qual-
ified tax-deferred plan or account, you or your financial adviser should keep
track of the dates on which you buy and sell--or exchange--Fund shares, as well
as the amount of any gain or loss on each transaction. For tax advice, please
see your tax adviser.

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

CAPITAL GAIN
(taxes owed)
RECEIPTS FROM SALE OR
CAPITAL LOSS
(offset against gain)

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

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17
<PAGE>

HOW TO BUY, SELL AND
- --------------------------------------------------------------------------------
EXCHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------

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

PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEW BRUNSWICK, NJ 08906-5020

To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of the Fund, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Fund) or suspend or modify the Fund's sale of
its shares.

STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.

Multiple share classes let you choose a cost structure that better meets your
needs. With Class A shares, you pay the sales charge at the time of purchase,
but the operating expenses each year are lower than the expenses of Class B and
Class C shares. With Class B shares, you only pay a sales charge if you sell
your shares within six years (that is why it is called a Contingent Deferred
Sales Charge, or CDSC), but the operating expenses each year are higher than
the Class A share expenses. With Class C shares, you pay a 1% front-end sales
charge and a 1% CDSC if you sell within 18 months of purchase, but the oper-
ating expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
. The amount of your investment

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

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. The different sales charges that apply to each share class--Class A's
front-end sales charge vs. Class B's CDSC vs. Class C's low front-end
sales charge and low CDSC
. Whether you qualify for any reduction or waiver of sales charges
. The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
. Whether you qualify to purchase Class Z shares

See "How to Sell Your Shares" for a description of the impact of CDSCs.

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

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<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z

<S> <C> <C> <C> <C>
Minimum purchase $1,000 $1,000 $2,500 None
amount/1/

Minimum amount for $100 $100 $100 None
subsequent purchases/1/

Maximum initial 5% of the public None 1% of the public None
sales charge offering price offering price

Contingent Deferred None If sold during: 1% on sales None
Sales Charge Year 1 5% made within
(CDSC)/2/ Year 2 4% 18 months of
Year 3 3% purchase/2/
Year 4 2%
Years 5/6 1%
Year 7 0%
Annual distribution and .30 of 1%; 1% 1% None
service (12b-1) fees (.25 of 1%
shown as a percentage currently)
of average net
assets/3/
</TABLE>
1 The minimum investment requirements do not apply to certain retirement and
employee savings plans and custodial accounts for minors. The minimum initial
and subsequent investment for purchases made through the Automatic Investment
Plan is $50. For more information, see "Additional Shareholder Services-
Automatic Investment Plan."

2 For more information about the CDSC and how it is calculated, see "Contingent
Deferred Sales Charges (CDSC)." Class C shares bought before November 2, 1998
have a 1% CDSC if sold within one year.

3 These distribution fees are paid from the Fund's assets on a continuous
basis. Over time, the fees will increase the cost of your investment and may
cost you more than paying other types of sales charges. The service fee for
Class A, Class B and Class C shares is .25 of 1%. The distribution fee for
Class A shares is limited to .30 of 1% (including the .25 of 1% service fee)
and is .75 of 1% for Class B and Class C shares.

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19
<PAGE>

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

Increase the Amount of Your Investment. You can reduce Class A's sales charge
by increasing the amount of your investment. This table shows you how the sales
charge decreases as the amount of your investment increases.

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

* If you invest $1 million or more, you can buy only Class A shares, unless you
qualify to buy Class Z shares.

To satisfy the purchase amounts above, you can
. invest with an eligible group of related investors;
. buy the Class A shares of two or more Prudential Mutual Funds at the
same time;

. use your RIGHTS OF ACCUMULATION, which allow you to combine the value of
Prudential Mutual Fund shares you already own with the value of the
shares you are purchasing for purposes of determining the applicable
sales charge (note: you must notify the Transfer Agent if you qualify
for Rights of Accumulation); or
. sign a LETTER OF INTENT, stating in writing that you or an eligible
group of related investors will purchase a certain amount of shares in
the Fund and other Prudential Mutual Funds within 13 months.

Benefit Plans. Benefit Plans can avoid Class A's initial sales charge if 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
under the exchange privilege) or 250 eligible employees or participants. For
these purposes, a Benefit Plan is a pension, profit-sharing or other employee
benefit plan qualified under Section 401 of the Internal Revenue Code, a

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deferred compensation or annuity plan under Sections 403(b) and 457 of the
Internal Revenue Code, a "rabbi" trust or a non-qualified deferred compensation
plan sponsored by an employer that has a tax-qualified benefit plan with Pru-
dential. Class A shares may also be purchased without a sales charge by partic-
ipants who are repaying loans from Benefit Plans where Prudential (or its
affiliates) provides administrative or recordkeeping services, sponsors the
product or provides account services.

Certain Prudential retirement programs--such as PruArray Association Benefit
Plans and PruArray Savings Programs--may also be exempt from Class A's sales
charge. For more information, see the SAI or contact your financial adviser. In
addition, waivers are available to investors in certain programs sponsored by
brokers, investment advisers and financial planners who have agreements with
Prudential Investments Advisory Group relating to:

. Mutual fund "wrap" or asset allocation programs where the sponsor places
Fund trades and charges its clients a management, consulting or other
fee for its services; and

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

Other Types of Investors. Other investors pay no sales charges, including cer-
tain officers, employees or agents of Prudential and its affiliates, Prudential
Mutual Funds, the subadvisers of the Prudential Mutual Funds and clients of
brokers that have entered into a selected dealer agreement with the Distribu-
tor. To qualify for a reduction or waiver of the sales charge, you must notify
the Transfer Agent or your broker at the time of purchase. For more information
about reducing or eliminating Class A's sales charge, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Reduction and Waiver of Initial Sales
Charges--Class A Shares."

WAIVING CLASS C'S INITIAL SALES CHARGE

Benefit Plans. Benefit Plans (as defined above) may purchase Class C shares
without paying an initial sales charge. Class C shares may also be purchased
without an initial sales charge by participants who are repaying loans from
Benefit Plans where Prudential (or its affiliates) provides administrative or
recordkeeping services, sponsors the product or provides account services.

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21
<PAGE>

Prudential Retirement Plans. The initial sales charge will be waived for pur-
chases of Class C shares by both qualified and non-qualified retirement and
deferred compensation plans participating in the PruArray Plan and other plans
if Prudential also provides administrative or recordkeeping services.

Investment of Redemption Proceeds from Other Investment Companies. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential Secu-
rities Incorporated or one of its affiliates. These purchases must be made
within 60 days of the redemption. To qualify for this waiver, you must

. purchase your shares through an account at Prudential Securities,

. purchase your shares through an ADVANTAGE Account or an Investor Account
with Pruco Securities Corporation, or

. purchase your shares through another broker.

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

QUALIFYING FOR CLASS Z SHARES
Class Z shares of the Fund can be purchased by any of the following:

. Any Benefit Plan as defined above, and certain non-qualified plans, pro-
vided the Benefit Plan--in combination with other plans sponsored by the
same employer or group of related employers--has at least $50 million in
defined contribution assets

. Participants in any fee-based program or trust program sponsored by Pru-
dential or an affiliate which includes mutual funds as investment
options and the Fund as an available option
. Certain participants in the MEDLEY Program (group variable annuity con-
tracts) sponsored by Prudential for whom Class Z shares of the Pruden-
tial Mutual Funds are an available option

. Benefit Plans for which an affiliate of the Distributor provides admin-
istrative or recordkeeping services and as of September 20, 1996, were
either Class Z shareholders of the Prudential Mutual Funds or

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executed a letter of intent to purchase Class Z shares of the Prudential
Mutual Funds

. The Prudential Securities Cash Balance Pension Plan, an employee-
defined benefit plan sponsored by Prudential Securities
. Current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund)
. Employees of Prudential and/or Prudential Securities who participate in
a Prudential-sponsored employee savings plan

. Prudential with an investment of $10 million or more

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

CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you purchased with reinvested divi-
dends and other distributions. Since the 12b-1 fees for Class A shares are
lower than for Class B shares, converting to Class A shares lowers your Fund
expenses.
When we do the conversion, you will get fewer Class A shares than the number
of Class B shares converted if the price of the Class A shares is higher than
the price of Class B shares. The total dollar value will be the same, so you
will not have lost any money by getting fewer Class A shares. We do the conver-
sions quarterly, not on the anniversary date of your purchase. For more infor-
mation, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Conver-
sion Feature--Class B Shares."

STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY

The price you pay for each share of the Fund is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE or NAV--is deter-
mined by a simple calculation--it's the total value of the Fund (assets minus
liabilities) divided by the total number of shares outstanding. For

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

23
<PAGE>

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

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

example, if the value of the investments held by Fund XYZ (minus its expenses)
is $1,000 and there are 100 shares of Fund XYZ owned by shareholders, the price
of one share of the fund--or the NAV--is $10 ($1,000 divided by 100). Portfolio
securities are valued based upon market quotations or, if not readily avail-
able, at fair value as determined in good faith under procedures established by
the Fund's Board. Most national newspapers report the NAVs of most mutual
funds, which allows investors to check the price of mutual funds daily.

We determine the NAV of our shares once each business day at 4:15 p.m. New
York Time on days that the New York Stock Exchange is open for trading. We do
not determine NAV on days when we have not received any orders to purchase,
sell or exchange Fund shares, or when changes in the value of the Fund's port-
folio do not materially affect the NAV.

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

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

Automatic Reinvestment. As we explained in the "Fund Distributions and Tax
Issues" section, the Fund pays out--or distributes--its net investment income
and capital gains to all shareholders. For your convenience, we will automat-

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ically reinvest your distributions in the Fund at NAV, without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date
we determine who receives dividends:

PRUDENTIAL MUTUAL FUND SERVICES LLC

ATTN: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015

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

Retirement Plan Services. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs, or SEP-IRAs for a one-person busi-
ness, please contact your financial adviser. If you are interested in opening a
401(k) or other company-sponsored retirement plan (SIMPLES, SEP plans, Keoghs,
403(b)(7) plans, pension and profit-sharing plans), your financial adviser will
help you determine which retirement plan best meets your needs. Complete
instructions about how to establish and maintain your plan and how to open
accounts for you and your employees will be included in the retirement plan kit
you receive in the mail.

The PruTector Program. Optional group term life insurance--which protects the
value of your Prudential Mutual Fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges and
is not available in all states.

Systematic Withdrawal Plan. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks. Remember, the sale of Class B and
Class C shares may be subject to a CDSC.

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25
<PAGE>

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

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

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

PRUDENTIAL MUTUAL FUND SERVICES LLC

ATTN: REDEMPTION SERVICES
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010

Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the proceeds until your check clears, which can take up to 10
days from the purchase date. You can avoid delay if you purchase shares by
wire, certified check or cashier's check. Your broker may charge you a separate
or additional fee for sales of shares.

RESTRICTIONS ON SALES

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

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If you are selling more than $50,000 of shares, you want the check sent to
someone or some place that is not in our records or you are a business or a
trust and if you hold your shares directly with the Transfer Agent, you may
have to have the signature on your sell order guaranteed by a financial insti-
tution. For more information, see the SAI, "Purchase, Redemption and Pricing of
Fund Shares--Sale of Shares--Signature Guarantee."

CONTINGENT DEFERRED SALES CHARGES (CDSC)
If you sell Class B shares within six years of purchase or Class C shares
within 18 months of purchase (one year for Class C shares purchased before
November 2, 1998), you will have to pay a CDSC. To keep the CDSC as low as pos-
sible, we will sell amounts representing shares in the following order:
. Amounts representing shares you purchased with reinvested dividends and
distributions

. Amounts representing the increase in NAV above the total amount of pay-
ments for shares made during the past six years for Class B shares (five
years for Class B shares purchased before January 22, 1990) and 18
months for Class C shares

. Amounts representing the cost of shares held beyond the CDSC period (six
years for Class B shares and 18 months for Class C shares)

Since shares that fall into any of the categories listed above are not sub-
ject to the CDSC, selling them first helps you to avoid--or at least minimize--
the CDSC.

Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the
cost of shares held for the longest period of time within the applicable CDSC
period.

As we noted before in the "Share Class Comparison" chart, the CDSC for Class
B shares is 5% in the first year, 4% in the second, 3% in the third, 2% in the
fourth and 1% in the fifth and sixth years. The rate decreases on the first day
of the month following the anniversary date of your purchase, not on the anni-
versary date itself. The CDSC is 1% for Class C shares-- which is applied to
shares sold within 18 months of purchase (or one year for

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27
<PAGE>

Class C shares purchased before November 2, 1998). For both Class B and Class C
shares, the CDSC is the lesser of the original purchase price or the redemption
proceeds. For purposes of determining how long you've held your shares, all
purchases during the month are grouped together and considered to have been
made on the last day of the month.

The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding
any time shares were held in a money market fund.

WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
. After a shareholder is deceased or disabled (or, in the case of a trust
account, the death or disability of the grantor). This waiver applies to
individual shareholders, as well as shares owned in joint tenancy (with
rights of survivorship), provided the shares were purchased before the
death or disability
. To provide for certain distributions--made without IRS penalty--from a
tax-deferred retirement plan, IRA or Section 403(b) custodial account
. On certain sales from a Systematic Withdrawal Plan

For more information on the above and other waivers, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Waiver of Contingent Deferred Sales
Charges--Class B Shares."

WAIVER OF THE CDSC--CLASS C SHARES

Prudential Retirement Plans. The CDSC will be waived for purchases of Class C
shares by both qualified and non-qualified retirement and deferred compensation
plans participating in the PruArray Plan and other plans if Prudential also
provides administrative or recordkeeping services. The CDSC will also be waived
on redemptions from Benefit Plans sponsored by Prudential and its affiliates to
the extent that the redemption proceeds are invested in The Guaranteed Invest-
ment Account (a group annuity insurance product sponsored by Prudential), The
Guaranteed Insulated Separate Account (a separate account offered by Pruden-
tial), and shares of The Stable Value Fund (an unaffiliated bank collective
fund).

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PRUDENTIAL EQUITY INCOME FUND (800) 225-1852

28
<PAGE>

Other Benefit Plans. The CDSC will be waived on redemptions from Benefit Plans
holding shares through a broker not affiliated with Prudential and for which
the broker provides administrative or recordkeeping services.

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

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

90-DAY REPURCHASE PRIVILEGE

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

RETIREMENT PLANS
To sell shares and receive a distribution from your retirement account, call
your broker or the Transfer Agent for a distribution request form. There are
special distribution and income tax withholding requirements for distributions
from retirement plans and you must submit a withholding form with your request
to avoid delay. If your retirement plan account is held for you by

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

29
<PAGE>

your employer or plan trustee, you must arrange for the distribution request to
be signed and sent by the plan administrator or trustee. For additional infor-
mation, see the SAI.

HOW TO EXCHANGE YOUR SHARES

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

PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010

There is no sales charge for such exchanges. However, if you exchange--and
then sell--Class B shares within approximately six years of your original pur-
chase or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Class B or Class C shares
into a money market fund, the time you hold the shares in the money market
account will not be counted in calculating the required holding periods for
CDSC liability.

Remember, as we explained in the section entitled "Fund Distributions and Tax
Issues--If You Sell or Exchange Your Shares," exchanging shares is considered a
sale for tax purposes. Therefore, if the shares you exchange are worth more
than you paid for them, you may have to pay capital gains tax. For additional
information about exchanging shares, see the SAI, "Shareholder Investment
Account--Exchange Privilege."

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PRUDENTIAL EQUITY INCOME FUND (800) 225-1852

30
<PAGE>

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

FREQUENT TRADING

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

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

31
<PAGE>

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

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

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

CLASS A SHARES

The financial highlights for the two years ended October 31, 1998 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial high-
lights for the three years ended October 31, 1996 were audited by other inde-
pendent auditors whose reports were unqualified.

<TABLE>
<CAPTION>
CLASS A SHARES (FISCAL YEARS ENDED 10-31-98)
- --------------------------------------------------------------------------------
PER SHARE OPERATING
PERFORMANCE 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $21.00 $15.43 $14.40 $14.03 $14.38
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .45 .45 .47 .48 .41
Net realized and unrealized
gain (loss) on investment
transactions (.49) 6.29 1.75 .95 .06
TOTAL FROM INVESTMENT
OPERATIONS (.04) 6.74 2.22 1.43 .47
- -----------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.44) (.43) (.49) (.54) (.29)
Distributions from net
realized gains (1.89) (.74) (.70) (.52) (.53)
TOTAL DISTRIBUTIONS (2.33) (1.17) (1.19) (1.06) (.82)
NET ASSET VALUE, END OF YEAR $18.63 $21.00 $15.43 $14.40 $14.03
TOTAL RETURN/1/ (.65)% 45.68% 15.97% 11.15% 3.48%
- -----------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $638,547 $570,146 $341,717 $276,990 $150,502
Average net assets (000) $655,776 $454,892 $310,335 $236,688 $131,398
RATIOS TO AVERAGE NET ASSETS:
Expenses, including
distribution fees .91% .94% .98% 1.03% 1.09%
Expenses, excluding
distribution fees .66% .69% .73% .78% .85%
Net investment income 2.19% 2.32% 3.26% 3.36% 2.97%
Portfolio turnover 22% 36% 36% 74% 70%
</TABLE>
- --------------------------------------------------------------------------------
1 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported.

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

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PRUDENTIAL EQUITY INCOME FUND (800) 225-1852

32
<PAGE>

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

CLASS B SHARES

<TABLE>
<CAPTION>
CLASS B SHARES (FISCAL YEARS ENDED 10-31-98)
- -------------------------------------------------------------------------------
PER SHARE OPERATING
PERFORMANCE 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF YEAR $20.93 $15.39 $14.36 $14.00 $14.35
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .29 .29 .39 .37 .31
Net realized and
unrealized gain (loss) on
investment transactions (.48) 6.29 1.71 .95 .06
TOTAL FROM INVESTMENT
OPERATIONS (.19) 6.58 2.10 1.32 .37
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.28) (.30) (.37) (.44) (.19)
Distributions from net
realized gains (1.89) (.74) (.70) (.52) (.53)
TOTAL DISTRIBUTIONS (2.17) (1.04) (1.07) (.96) (.72)
NET ASSET VALUE, END OF
YEAR $18.57 $20.93 $15.39 $14.36 $14.00
TOTAL RETURN/1/ (1.35)% 44.60% 15.12% 10.29% 2.73%
- -------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR
(000) $1,299,962 $1,250,216 $929,948 $906,793 $954,951
Average net assets (000) $1,391,826 $1,072,118 $951,220 $911,856 $784,063
RATIOS TO AVERAGE NET
ASSETS:
Expenses, including
distribution fees 1.66% 1.69% 1.73% 1.78% 1.85%
Expenses, excluding
distribution fees .66% .69% .73% .78% .85%
Net investment income 1.44% 1.60% 2.51% 2.66% 2.21%
Portfolio turnover 22% 36% 36% 74% 70%
</TABLE>
- --------------------------------------------------------------------------------
1 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported.

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

33
<PAGE>

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

CLASS C SHARES

The financial highlights for the two years ended October 31, 1998 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial high-
lights for the two years ended October 31, 1996 and the period from August 1,
1994 through October 31, 1994 were audited by other independent auditors whose
reports were unqualified.

<TABLE>
<CAPTION>
CLASS C SHARES (FISCAL YEARS ENDED 10-31-98)
- -------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994/1/
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $20.93 $15.39 $14.36 $14.00 $13.99
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .30 .37 .38 .40 .08
Net realized and unrealized gain
(loss) on investment transactions (.49) 6.21 1.72 .92 (.02)
TOTAL FROM INVESTMENT OPERATIONS (.19) 6.58 2.10 1.32 .06
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.28) (.30) (.37) (.44) (.05)
Distributions from net realized gains (1.89) (.74) (.70) (.52) --
TOTAL DISTRIBUTIONS (2.17) (1.04) (1.07) (.96) (.05)
NET ASSET VALUE, END OF PERIOD $18.57 $20.93 $15.39 $14.36 $14.00
TOTAL RETURN/2/ (1.35)% 44.60% 15.12% 10.29% 0.45%
- -------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF PERIOD (000) $37,988 $17,911 $8,511 $4,586 $1,527
Average net assets (000) $31,345 $11,432 $6,730 $3,132 $762
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 1.66% 1.69% 1.73% 1.78% 2.05%/3/
Expenses, excluding distribution fees .66% .69% .73% .78% 1.05%/3/
Net investment income 1.47% 1.53% 2.51% 2.57% 2.42%/3/
Portfolio turnover 22% 36% 36% 74% 70%
</TABLE>
- --------------------------------------------------------------------------------
1 Information shown is for the period 8-1-94, when Class C shares were first
offered, through 10-31-94.
2 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported. Total return for periods of less than a full year is not
annualized.
3 Annualized.

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PRUDENTIAL EQUITY INCOME FUND (800) 225-1852

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<PAGE>

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

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

CLASS Z SHARES

The financial highlights for the two years ended October 31, 1998 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial high-
lights for the period from March 1, 1996 through October 31, 1996 were audited
by other independent auditors whose reports were unqualified.

<TABLE>
<CAPTION>
CLASS Z SHARES (FISCAL YEARS ENDED 10-31-98)
- -----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998 1997 1996/1/
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $21.00 $15.42 $15.13
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .52 .36 .38
Net realized and unrealized gain (loss) on
investment transactions (.51) 6.43 .30
TOTAL FROM INVESTMENT OPERATIONS .01 6.79 .68
- -----------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.48) (.47) (.39)
Distributions from net realized gains (1.89) (.74) --
TOTAL DISTRIBUTIONS (2.37) (1.21) (.39)
NET ASSET VALUE, END OF PERIOD $18.64 $21.00 $15.42
TOTAL RETURN/2/ (.40)% 46.12% 4.55%
- -----------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996
<S> <C> <C> <C>
NET ASSETS, END OF PERIOD (000) $142,918 $74,956 $44,509
Average net assets (000) $103,474 $57,369 $24,641
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees .66% .69% .73%/3/
Expenses, excluding distribution fees .66% .69% .73%/3/
Net investment income 2.49% 2.58% 3.51%/3/
Portfolio turnover 22% 36% 36%
</TABLE>
- --------------------------------------------------------------------------------
1 Information shown is for the period 3-1-96, when Class Z shares were first
offered, through 10-31-96.
2 Total return assumes reinvestment of dividends and any other distributions.
It is calculated assuming shares are purchased on the first day and sold on
the last day of each period reported. Total return for periods of less than a
full year is not annualized.
3 Annualized.

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

35
<PAGE>

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

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

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

STOCK FUNDS
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
PRUDENTIAL EMERGING GROWTH FUND, INC.
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL EQUITY INCOME FUND
PRUDENTIAL INDEX SERIES FUND
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
PRUDENTIAL MID-CAP VALUE FUND
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
PRUDENTIAL 20/20 FOCUS FUND
PRUDENTIAL UTILITY FUND, INC.
NICHOLAS-APPLEGATE FUND, INC.
Nicholas-Applegate Growth Equity Fund

ASSET ALLOCATION/BALANCED FUNDS
PRUDENTIAL BALANCED FUND
PRUDENTIAL DIVERSIFIED FUNDS
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Prudential Active Balanced Fund

GLOBAL FUNDS
GLOBAL STOCK FUNDS
PRUDENTIAL DEVELOPING MARKETS FUND
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
PRUDENTIAL EUROPE GROWTH FUND, INC.
PRUDENTIAL GLOBAL GENESIS FUND, INC.
PRUDENTIAL INDEX SERIES FUND
Prudential Europe Index Fund
Prudential Pacific Index Fund
PRUDENTIAL NATURAL RESOURCES FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
Global Series
International Stock Series
GLOBAL UTILITY FUND, INC.

GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL LIMITED MATURITY FUND, INC.
Limited Maturity Portfolio
PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
THE GLOBAL TOTAL RETURN FUND, INC.

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

[GRAPHIC]
PRUDENTIAL EQUITY INCOME FUND (800) 225-1852

36
<PAGE>

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

BOND FUNDS
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 HIGH YIELD TOTAL RETURN FUND, INC.
PRUDENTIAL INDEX SERIES FUND
Prudential Bond Market Index Fund
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Income Portfolio

TAX-EXEMPT BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
California Series
California Income Series
PRUDENTIAL MUNICIPAL BOND FUND
High Income Series
Insured Series
PRUDENTIAL MUNICIPAL SERIES FUND
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.

MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
Liquid Assets Fund
National Money Market Fund
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Money Market Series
U.S. Treasury Money Market Series
PRUDENTIAL SPECIAL MONEY MARKET FUND, INC.
Money Market Series
PRUDENTIAL MONEYMART ASSETS, INC.

TAX-FREE MONEY MARKET FUNDS
PRUDENTIAL TAX-FREE MONEY FUND, INC.
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
California Money Market Series
PRUDENTIAL MUNICIPAL SERIES FUND
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

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

37
<PAGE>

FOR MORE INFORMATION
________________________________________________________________

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

PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)
- --------------------------------------------------------------------------------

Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035

(800) 778-8769
- --------------------------------------------------------------------------------

Visit Prudential's Web Site At:
HTTP://WWW.PRUDENTIAL.COM
- --------------------------------------------------------------------------------
Additional information about the Fund can be obtained without charge and can be
found in the following documents:

STATEMENT OF ADDITIONAL INFORMATION (SAI)
(incorporated by reference into this prospectus)

ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies
that significantly affected the Fund's performance)

SEMI-ANNUAL REPORT

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

By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
(The SEC charges a fee to copy documents.)

In Person:
Public Reference Room in Washington, DC

(For hours of operation, call (800) SEC-0330)

Via the Internet:
http://www.sec.gov
- --------------------------------------------------------------------------------
CUSIP NUMBERS:
CLASS A: 743916-20-7
CLASS B: 743916-10-8
CLASS C: 743916-30-6
CLASS Z: 743916-40-5

Investment Company Act File No:
811-4864

Printed on Recycled Paper
[RECYCLE LOGO APPEARS HERE]

MF131A
<PAGE>

PRUDENTIAL EQUITY INCOME FUND

Statement of Additional Information

dated January 14, 1999

Prudential Equity Income Fund (the Fund) is an open-end, diversified,
management investment company. Its investment objective is both current income
and capital appreciation. It seeks to achieve this objective by investing
primarily in common stocks and convertible securities that provide investment
income returns above those of the Standard & Poor's 500 Stock Index or the
NYSE Composite Index. In normal circumstances, the Fund intends to invest at
least 65% of its total assets in such securities. In selecting these
investments, the Fund puts emphasis on earnings, balance sheet and cash flow
analysis and the relationships that those factors have to the price and return
of a given security. The balance of the Fund's assets may be invested in other
equity-related securities, debt securities and certain derivatives, including
options on stocks and stock indices. Common stocks may include securities of
foreign issuers. There can be no assurance that the Fund's investment
objective will be achieved. See "Description of the Fund, Its Investments and
Risks."

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 January 14, 1999, a copy
of which may be obtained from the Fund upon request.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Fund History............................................................. B-2
Description of the Fund, Its Investments and Risks....................... B-2
Investment Restrictions.................................................. B-12
Management of the Fund................................................... B-13
Control Persons and Principal Holders of Securities...................... B-16
Investment Advisory and Other Services................................... B-17
Brokerage Allocation and Other Practices................................. B-21
Capital Shares, Other Securities and Organization........................ B-22
Purchase, Redemption and Pricing of Fund Shares.......................... B-23
Shareholder Investment Account........................................... B-34
Net Asset Value.......................................................... B-38
Taxes, Dividends and Distributions....................................... B-39
Performance Information.................................................. B-41
Financial Statements..................................................... B-44
Report of Independent Accountants........................................ B-57
Description of Security Ratings.......................................... A-1
Appendix I--General Investment Information............................... I-1
Appendix II--Historical Performance Data................................. II-1
Appendix III--Information Relating to Prudential......................... III-1
</TABLE>

- -------------------------------------------------------------------------------
MF131B
<PAGE>

FUND HISTORY

The Fund was organized under the laws of Massachusetts on September 18, 1986
as an unincorporated business trust, a form of organization that is commonly
known as a Massachusetts business trust.

DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS

(A) CLASSIFICATION. The Fund is a diversified, open-end, management investment
company.

(B) AND (C) INVESTMENT STRATEGIES, POLICIES AND RISKS. The Fund's investment
objective is both capital appreciation and current income. While the principal
investment policies and strategies for seeking to achieve this objective are
described in the Fund's Prospectus, the Fund may from time to time also use
the securities, instruments, policies and strategies described below in
seeking to achieve its objective. The Fund may not be successful in achieving
its objective and you could lose money.

EQUITY AND 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 American
Depositary Shares (ADS), and warrants and rights exercisable for equity
securities. Common stocks may include securities of foreign issuers.

A convertible security is typically a bond, debenture, corporate note,
preferred stock or other similar security that may be converted at a stated
price within a specified period of time into a specified number of shares of
common stock or other equity securities of the same or a different issuer. A
warrant or right entitles the holder to purchase equity securities at a
specific price for a specific period of time. Convertible securities are
generally senior to common stocks in a corporation's capital structure, but
are usually subordinated to similar non-convertible securities. While
providing a fixed income stream (generally higher in yield than the income
derivable from a common stock but lower than that afforded by a similar non-
convertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible
security's underlying common stock. Convertible securities also include
preferred stocks which technically are equity securities.

In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security)
or its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security
is also influenced by the market value of the security's underlying common
stock. The price of a convertible security tends to increase as the market
value of the underlying stock rises, whereas it tends to decrease as the
market value of the underlying stock declines. While no securities investment
is without some risk, investments in convertible securities generally entail
less risk than investments in the common stock of the same issuer.

FIXED-INCOME OBLIGATIONS

The Fund may invest up to 35% of its total assets in fixed-income
obligations other than money market instruments. The Fund anticipates that it
will primarily invest in fixed-income securities rated A or better by Moody's
Investors Service, Inc. (Moody's) or Standard & Poor's Ratings Group (S&P) or
BBB+ or better by Duff & Phelps Credit Rating Co. (Duff & Phelps) or
comparably rated by another nationally recognized statistical rating
organization (NRSRO). The Fund may also invest in fixed-income securities
rated Baa or lower by Moody's or BBB or lower by S&P or Duff & Phelps or
another NRSRO (although the Fund will not invest in fixed-income securities
rated lower than Ca, CC or CCC by Moody's, S&P or Duff & Phelps or another
NRSRO, respectively). After its purchase by the Fund, a fixed-income
obligation may be assigned a lower rating or cease to be rated. Such an event
would not require the elimination of the issue from the portfolio, but the
investment adviser will consider this in determining whether the Fund should
continue to hold the security in its portfolio. Securities rated Baa by
Moody's have speculative characteristics and changes in economic conditions or
other circumstances could lead to a weakened capacity to make principal and
interest payments than higher grade securities. Securities rated BB, Ba or BB+
or lower by S&P, Moody's or Duff & Phelps, respectively, are generally
considered to be predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal. A description of corporate bond
ratings is contained in the Appendix. The Fund may also invest in unrated
fixed-income securities which, in the opinion of the investment adviser, are
of a quality comparable to rated securities in which the Fund may invest.

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RISKS OF INVESTING IN HIGH YIELD SECURITIES

Fixed-income securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, the market perception of the creditworthiness of the issuer and
general market liquidity (market risk). Lower rated or unrated (i.e., high
yield) securities are more likely to react to developments affecting market
and credit risk than are more highly rated securities, which react primarily
to movements in the general level of interest rates. The investment adviser
considers both credit risk and market risk in making investment decisions for
the Fund.

Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. In addition, the secondary market for high yield
securities, which is concentrated in relatively few market makers, may not be
as liquid as the secondary market for more highly rated securities. Under
adverse market or economic conditions, the secondary market for high yield
securities could contract further, independent of any specific adverse changes
in the condition of a particular issuer. As a result, the investment adviser
could find it more difficult to sell these securities or may be able to sell
the securities only at prices lower than if such securities were widely
traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Fund's net asset value.

Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting
in a decline in the overall credit quality of the Fund's portfolio and
increasing the exposure of the Fund to the risks of high yield securities.

FOREIGN SECURITIES

The Fund may invest up to 30% of its total assets in foreign money market
instruments and debt and equity securities. ADRs and ADSs are not considered
foreign securities within this limitation. In many instances, foreign
securities may provide higher yields but may be subject to greater
fluctuations in price than securities of domestic issuers which have similar
maturities and quality. Under certain market conditions these investments may
be less liquid than the securities of U.S. corporations and are certainly less
liquid than securities issued or guaranteed by the U.S. Government, its
instrumentalities or agencies.

Foreign securities involve certain risks, which should be considered
carefully by an investor in the Fund. These risks include political or
economic instability in the country of the issuer, the difficulty of
predicting international trade patterns, the possibility of imposition of
exchange controls and the risk of currency fluctuations. Such securities may
be subject to greater fluctuations in price than securities issued by U.S.
corporations or issued or guaranteed by the U.S. Government, its
instrumentalities or agencies. In addition, there may be less publicly
available information about a foreign company than about a domestic company.
Foreign companies generally are not subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to domestic
companies. There is generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States, and,
for certain foreign countries, there is a possibility of expropriation,
confiscatory taxation or diplomatic developments which could affect investment
in those countries. Finally, in the event of a default of any such foreign
debt obligations, it may be more difficult for the Fund to obtain, or to
enforce a judgment against, the issuers of such securities.

If the security is denominated in a foreign currency, it may be affected by
changes in currency rates and in exchange control regulations, and costs may
be incurred in connection with conversions between currencies. The Fund may
enter into forward foreign currency exchange contracts for the purchase or
sale of foreign currency for hedging purposes. See "Risk Management and Return
Enhancement Strategies--Special Risks Related to Forward Foreign Currency
Exchange Contracts" below.

RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN EURO-DENOMINATED
SECURITIES

Effective January 1, 1999, 11 of the 15 member states of the European Union
introduced the "euro" as a common currency. During a three year transitional
period, the euro will coexist with each member state's currency. Beginning
July 1, 2002, the euro is expected to become the sole currency of the member
states. During the transition period, the Fund will treat the euro as a
separate currency from that of any member state.

The conversion may impact the trading in securities of issuers located in,
or denominated in the currencies of, the member states, as well as foreign
exchanges, payments, the settlement process, custody of assets and accounting.
In addition, the transition of member states' currency into the euro will
eliminate the risk among member states and will likely affect the investment
process

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<PAGE>

and considerations of the Fund's investment adviser. To the extent the Fund
holds non-U.S. dollar-denominated securities, including those denominated in
the euro, the Fund will still be subject to currency risk due to fluctuations
in those currencies as compared to the U.S. dollar.

The introduction of the euro is expected to affect derivative and other
financial contracts in which the Fund may invest insofar as price sources
based upon current currencies of the member states will be replaced, and
market conventions, such as day-count fractions or settlement dates,
applicable to underlying instruments may be changed to conform to the
conventions applicable to the euro currency.

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

The Fund's Manager is taking steps: (a) that it believes will reasonably
address euro-related changes to enable the Fund to process transactions
accurately and completely with minimal disruption to business activities and
(b) to obtain reasonable assurances that appropriate steps are being taken by
each of the Fund's other service providers.

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. 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.

RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES

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

OPTIONS TRANSACTIONS

The Fund may purchase and write (that is, sell) put and call options on
securities that are traded on national securities exchanges or in the over-
the-counter market to seek to enhance return or to protect against adverse
price fluctuations in securities in the Fund's portfolio. These options will
be on equity securities and financial indices (for example, S&P 500). The Fund
may write covered put and call options to generate additional income through
the receipt of premiums, purchase put options in an effort to protect the
value of a security that it owns against a decline in market value and
purchase call options in an effort to protect against an increase in the price
of securities it intends to purchase. The Fund may also purchase put and call
options to offset previously written put and call options of the same series.

A call option gives the purchaser, in exchange for a premium paid, the right
for a specified period of time to purchase the securities subject to the
option at a specified price (the exercise price or strike price). The writer
of a call option, in return for the premium, has the obligation, upon exercise
of the option, to deliver, depending upon the terms of the option contract,
the underlying securities or a specified amount of cash to the purchaser upon
receipt of the exercise price. When the Fund writes a call option, the Fund
gives up the potential for gain on the underlying securities in excess of the
exercise price of the option during the period that the option is open. There
is no limitation on the amount of call options the Fund may write.

A put option gives the purchaser, in return for a premium, the right for a
specified period of time to sell the securities subject to the option to the
writer of the put at the specified exercise price. The writer of the put
option, in return for the premium, has the obligation, upon exercise of the
option, to acquire the securities underlying the option at the exercise price.
The Fund, as the writer of a put option might, therefore, be obligated to
purchase the underlying securities for more than their current market price.

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<PAGE>

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

FOREIGN CURRENCY FORWARD CONTRACTS

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

The Fund's dealings in forward contracts will be limited to hedging
involving either specified 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 foreign currency (cross hedge).
Although there are no limits on the number of forward contracts which the Fund
may enter into, the Fund may not position hedge (including cross hedges) with
respect to a particular currency for an amount greater than the aggregate
market value (determined at the time of making any sale of foreign currency)
of the securities being hedged.

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. These
futures contracts and options thereon will be on financial indices. The Fund,
and thus its investors, may lose money through any unsuccessful use of these
strategies.

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.

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 the Fund's purchasing and selling futures
contracts and options thereon for bona fide hedging transactions, except that
the Fund may purchase and sell futures contracts and options thereon for any
other purpose to the extent that the aggregate initial margin and option
premiums do not exceed 5% of the market value of the Fund's total assets.
Although there are no other limits applicable to futures contracts, the value
of all futures contracts sold will not exceed the total market value of the
Fund's portfolio.

The Fund's successful use of futures contracts and options thereon depends
upon the investment adviser's ability to predict the direction of the market
and interest rates and requires skills and techniques different from those
used in selecting portfolio securities. The correlation between movements in
the price of a futures contract and movements in the price of the securities
being hedged is imperfect and the risk from imperfect correlation increases as
the composition of the Fund's portfolio diverges from the composition of the
relevant index. There is also a risk that the value of the securities being
hedged 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 options thereon 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 options thereon on
any particular day.

RISKS OF RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES

Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transaction costs to which the Fund
would not be subject absent the use of these strategies. The Fund, and thus
its investors, may lose money through any unsuccessful use of these
strategies. If the investment adviser's predictions of movements in the
direction of the securities, foreign currency or interest rate markets are
inaccurate, the adverse consequences to the Fund may leave the Fund in a

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<PAGE>

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

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

Except as described below, the Fund will write call options on indices only
if it holds a portfolio of stocks at least equal to the value of the index
times the multiplier times the number of contracts. When the Fund writes a
call option on a broadly-based stock market index, the Fund will segregate
with its Custodian, or pledge to a broker as collateral for the option, cash
or other liquid assets or "qualified securities" with a market value at the
time the option is written of not less than 100% of the current index value
times the multiplier times the number of contracts.

If the Fund has written an option on an industry or market segment index, it
will segregate with its Custodian, or pledge to a broker as collateral for the
option, at least ten "qualified securities," which are stocks of issuers in
such industry or market segment, with a market value at the time the option is
written of not less than 100% of the current index value times the multiplier
times the number of contracts. Such stocks will include stocks which represent
at least 50% of the weighting of the industry or market segment index and will
represent at least 50% of the Fund's holdings in that industry or market
segment. No individual security will represent more than 15% of the amount so
segregated or pledged in the case of broadly-based stock market index options
or 25% of such amount in the case of industry or market segment index options.

If at the close of business on any day the market value of such qualified
securities so segregated or pledged falls below 100% of the current index
value times the multiplier times the number of contracts, the Fund will so
segregate or pledge an amount in cash or other liquid assets, equal in value
to the difference. In addition, when the Fund writes a call on an index which
is in-the-money at the time the call is written, the Fund will segregate with
its Custodian or pledge to the broker as collateral cash or other liquid
assets, equal in value to the amount by which the call is in-the-money times
the multiplier times the number of contracts. Any amount segregated pursuant
to the foregoing sentence may be applied to the Fund's obligation to segregate
additional amounts in the event that the market value of the qualified
securities falls below 100% of the current index value times the multiplier
times the number of contracts. A "qualified security" is an equity security
which is listed on a national securities exchange or listed on 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 segregated with its Custodian, it will
not be subject to the requirements described in this paragraph.

The Fund will engage only in transactions in stock index futures contracts
and options thereon 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 or 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 or
purchase options thereon 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 futures 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. The Fund also may
not purchase or sell stock index futures or options thereon for risk
management purposes or income enhancement if, immediately thereafter, the sum
of the amount of margin deposits on the Fund's existing futures positions and
premiums paid for such options would exceed 5% of the market value of the
Fund's total assets after taking into account unrealized profits and
unrealized losses on any such contracts, provided, however, that in the case
of an option that is in-the-money, the in-the-money amount may be excluded in
computing such 5%. The above restriction does not apply to the purchase and
sale of stock index futures or options thereon for bona fide hedging purposes.
In instances involving the purchase of stock index futures contracts by the
Fund, an amount of cash and other liquid assets, equal to the market value of
the futures contracts, will be

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segregated with the Fund's Custodian and/or in a margin account with a broker
to collateralize the position and thereby ensure that the use of such futures
is unleveraged.

RISKS OF TRANSACTIONS IN STOCK OPTIONS

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

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

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.

Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in the index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number
of stocks included in the index. If this occurred, the Fund would not be able
to close out options which it had purchased or written and, if restrictions on
exercise were imposed, might 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.

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 opinion of the investment adviser, 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, Stock Index Futures and Options Thereon."

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

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<PAGE>

a loss on the call which would not be 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's
portfolio in the opposite direction as the market would be likely to occur for
only a short period or to a small degree.

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

When the Fund has written a call, there is also a risk that the market may
decline between the time the Fund has a call exercised against it, at a price
which is fixed as of the closing level of the index on the date of exercise,
and the time the Fund is able to sell stocks in its portfolio. As with stock
options, the Fund will not learn that an index option has been exercised until
the day following the exercise date but, unlike a call on stock where the Fund
would be able to deliver the underlying securities in settlement, the Fund may
have to sell part of its investment portfolio in order to make settlement in
cash, and the price of such 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 multiplier) to the assigned writer. Although the Fund may be able
to minimize this risk by withholding exercise instructions until just before
the daily cutoff time or by selling rather than exercising an option when the
index level is close to the exercise price, it may not be possible to
eliminate this risk entirely because the cutoff times for index options may be
earlier than those fixed for other types of options and may occur before
definitive closing index values are announced.

SPECIAL RISKS RELATED TO FOREIGN CURRENCY FORWARD CONTRACTS

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

Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract for a fixed amount of
dollars to sell the amount of foreign currency approximating the value of some
or all of the Fund's portfolio securities denominated in such foreign
currency. The precise matching of the forward contract amounts and the value
of the securities involved will not generally be possible since the future
value of securities in foreign currencies will change as a consequence of
market movements in the value of those securities between the date on which
the forward contract is entered into and the date it matures. The projection
of short-term currency market movement is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain. The
Fund does not intend to enter into such forward contracts to protect the value
of its portfolio securities on a regular or continuous basis. The Fund will
also not enter into such forward contracts or maintain a net exposure to such
contracts where the consummation of the contracts would obligate the Fund to
deliver an amount of foreign currency in excess of the value of the Fund's
portfolio securities or other assets denominated in that currency. Under
normal circumstances, consideration of the prospect for currency parities will
be incorporated into the long-term investment decisions made with regard to
overall diversification strategies. However, the Fund believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interest of the Fund will thereby be served. 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 segregate
cash or other liquid assets of the

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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 the
given forward contract.

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 contract. Accordingly,
it may be necessary for the Fund to purchase additional foreign currency on
the spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency that the Fund is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.

If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. Should forward
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 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 dealings in foreign currency forward contracts will 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. Also 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, they also
tend to limit any potential gain which might result should the value of such
currency increase. The Fund's ability to enter into foreign currency forward
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.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

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

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, such securities; provided
that if further consideration is required in connection with the conversion or
exchange, cash or other liquid assets in an amount equal to such consideration
must be segregated for an equal amount of the securities of the same issuer as
the securities sold short (a short sale against-the-box). Not more than 25% of
the Fund's net assets (determined at the time of the short sale) may be
subject to such sales.

B-9
<PAGE>

REPURCHASE AGREEMENTS

The Fund may 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 repurchase agreement. The Fund's repurchase agreements will
at all times be fully collateralized in an amount at least equal to the resale
price. The instruments held as collateral are valued daily, and if the value
of the instruments declines, the Fund will require additional collateral. If
the seller defaults and the value of the collateral securing the repurchase
agreement declines, the Fund may incur a loss.

The Fund will enter into repurchase transactions only with parties meeting
creditworthiness standards approved by the Fund's Trustees. The Fund's
investment adviser will monitor the creditworthiness of such parties under the
general supervision of the Trustees. In the event of a default or bankruptcy
by a seller, the Fund will promptly seek to liquidate the collateral.

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

BORROWING

The Fund may borrow up to 20% of the value of its total assets (calculated
when the loan is made) for temporary, extraordinary or emergency purposes, or
for the clearance of transactions and to take advantage of investment
opportunities. The Fund may pledge up to 20% of its total assets to secure
these borrowings. If the Fund's asset coverage for borrowings falls below
300%, the Fund will take prompt action to reduce its borrowings.

LENDING OF SECURITIES

Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that outstanding loans do not exceed in the aggregate 33% of the value of the
Fund's total assets and that the loans are callable at any time by the Fund.
As a matter of fundamental policy, the Fund will not lend more than 33% of the
value of its total assets. The loans must at all times be secured by cash or
other liquid assets or secured by an irrevocable letter of credit in favor of
the Fund in an amount equal to at least 100%, determined daily, of the market
value of the loaned securities. The collateral is segregated pursuant to
applicable regulations. During the time portfolio securities are on loan, the
borrower will pay the Fund an amount equivalent to any dividend or interest
paid on such securities and the Fund may invest the cash collateral and earn
additional income, or it may receive an agreed-upon amount of interest income
from the borrower. The advantage of such loans is that the Fund continues to
receive payments in lieu of the interest and dividends on the loaned
securities, while at the same time earning interest either directly from the
borrower or on the collateral, which will be invested in short-term
obligations.

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

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

SEGREGATED ASSETS

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

B-10
<PAGE>

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 in securities
markets either within or outside of the United States. Repurchase agreements
subject to demand are deemed to have a maturity equal to the applicable notice
period.

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

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

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

Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and privately placed commercial paper for which there is a
readily available market are treated as liquid only when deemed liquid under
procedures established by the Trustees. The Fund's investment in Rule 144A
securities could have the effect of increasing illiquidity to the extent that
qualified institutional buyers become, for a limited time, uninterested in
purchasing Rule 144A securities. The investment adviser will monitor the
liquidity of such restricted securities subject to the supervision of the
Trustees. In reaching liquidity decisions, the investment adviser will
consider, among others, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (for example, the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer). In addition, in order for commercial paper that is
issued in reliance on Section 4(2) of the Securities Act to be considered
liquid, (a) it must be rated in one of the two highest rating categories by at
least two nationally recognized statistical rating organizations (NRSRO), or
if only one NRSRO rates the securities, by that NRSRO, or, if unrated, be of
comparable quality in the view of the investment adviser, and (b) it must not
be "traded flat" (that is, 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 Commission 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."

B-11
<PAGE>

(D) DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS

When conditions dictate a temporary defensive strategy or pending investment
of proceeds from sales of the Fund's shares, the Fund may invest without limit
in money market instruments, including commercial paper of domestic
corporations, certificates of deposit, bankers' acceptances and other
obligations of domestic and foreign banks, and obligations issued or
guaranteed by the U.S. Government, its instrumentalities or its agencies. Such
obligations (other than U.S. Government securities) will be rated, at the time
of purchase, within the two highest quality grades as determined by an NRSRO
such as Moody's, S&P or Duff & Phelps or, if unrated, will be of equivalent
quality in the judgment of the Fund's investment adviser.

(E) PORTFOLIO TURNOVER

As a result of the investment policies described above, the Fund may engage
in a substantial number of portfolio transactions, and the Fund's portfolio
turnover rate may exceed 100%, but is not expected to exceed 200%. The
portfolio turnover rates for the Fund for the fiscal years ended October 31,
1998 and 1997 were 22% and 36%, respectively. The portfolio turnover rate is
generally the percentage computed by dividing the lesser of portfolio
purchases or sales (excluding all securities, including options, whose
maturities or expiration date at acquisition were one year or less) by the
monthly average value of the long-term portfolio. High portfolio turnover
(100% or more) involves correspondingly greater brokerage commissions and
other transaction costs, which are borne directly by the Fund. In addition,
high portfolio turnover may also mean that a proportionately greater amount of
distributions to shareholders will be taxed as ordinary income rather than
long-term capital gains compared to investment companies with lower portfolio
turnover. See "Brokerage Allocation and Other Practices" and "Taxes, Dividends
and Distributions."

INVESTMENT RESTRICTIONS

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

The Fund may not:

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

(2) Make short sales of securities or maintain a short position, except
short sales against-the-box.

(3) Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow up to 20% of the value of its total assets (calculated
when the loan is made) for temporary, extraordinary or emergency purposes or
for the clearance of transactions and to take advantage of investment
opportunities. The Fund may pledge up to 20% of the value of its total assets
to secure such borrowings. For purposes of this restriction, the purchase or
sale of securities on a when-issued or delayed delivery basis, forward foreign
currency exchange contracts and collateral and collateral arrangements
relating thereto, collateral arrangements with respect to stock index futures
and options thereon and with respect to the writing of options on securities
or on stock indices and obligations of the Fund to Trustees pursuant to
deferred compensation arrangements are not deemed to be a pledge of assets or
the issuance of a senior security.

(4) Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities) if as a result: (i) with respect to 75% of
the Fund's total assets, more than 5% of the Fund's total assets (determined
at the time of investment) would then be invested in securities of a single
issuer, or (ii) more than 25% of the Fund's total assets (determined at the
time of investment) would be invested in a single industry. As to utility
companies, gas, electric and telephone companies will be considered as
separate industries.

(5) Purchase any security if as a result the Fund would then hold more than
10% of the outstanding voting securities of an issuer.

(6) Buy or sell real estate or interests in real estate, except that the
Fund may purchase and sell securities which are secured by real estate,
securities of companies which invest or deal in real estate and publicly
traded securities of real estate investment trusts. The Fund may not purchase
interests in real estate limited partnerships which are not readily
marketable.

B-12
<PAGE>

(7) Buy or sell commodities or commodity contracts, except that the Fund may
purchase and sell stock index futures contracts and options thereon. (For
purposes of this restriction, forward foreign currency exchange contracts are
not deemed to be a commodity or commodity contract.)

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

(9) Make investments for the purpose of exercising control or management.

(10) Invest in securities of other registered 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 as
part of a merger, consolidation or other acquisition.

(11) Invest in interests in oil, gas or other mineral exploration or
development programs, except that the Fund may invest in the securities of
companies which invest in or sponsor such programs.

(12) Make loans, except through repurchase agreements and loans of portfolio
securities (limited to 33% of the Fund's total assets).

(13) Purchase warrants if as a result the Fund would then have more than 5%
of its total assets (taken at current value) invested in warrants or more than
2% of its total assets (taken at current value) invested in warrants not
listed on the New York or American Stock Exchanges.

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.

MANAGEMENT OF THE FUND

<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST FIVE YEARS
------------------------ --------- ----------------------
<C> <C> <S>
Edward D. Beach (73) Trustee President and Director of BMC Fund, Inc., a closed-end
investment company; formerly, Vice Chairman of
Broyhill Furniture Industries, Inc.; Certified Public
Accountant; Secretary and Treasurer of Broyhill Family
Foundation, Inc.; Member of the Board of Trustees of
Mars Hill College; Director of The High Yield Income
Fund, Inc. and Director or Trustee of funds within
the Prudential Mutual Funds.
Delayne Dedrick Gold Trustee Marketing and Management Consultant; Director of The
(59) High Yield Income Fund, Inc. and Director or Trustee
of funds within the Prudential Mutual Funds.
*Robert F. Gunia (51) Vice President Vice President (since September 1997) of The Prudential
and Trustee Insurance Company of America (Prudential); Executive
Vice President and Treasurer (since December 1996) of
Prudential Investments Fund Management LLC (PIFM);
Senior Vice President (since March 1987) of Prudential
Securities Incorporated (Prudential Securities);
formerly Chief Administrative Officer (July 1990-
September 1996), Director (January 1989-September
1996), and Executive Vice President, Treasurer and
Chief Financial Officer (June 1987-September 1996) of
Prudential Mutual Fund Management, Inc.; Vice
President and Director (since May 1989) of The Asia
Pacific Fund, Inc.; Director of The High Yield Income
Fund, Inc. and Director or Trustee of funds within
the Prudential Mutual Funds.
</TABLE>

B-13
<PAGE>

<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST FIVE YEARS
------------------------ --------- ----------------------
<C> <C> <S>
Douglas H. McCorkindale Trustee Vice Chairman (since March 1984) and President (since
(58) September 1997) of Gannett Co. Inc., Director of
Continental Airlines, Inc., Gannett Co., Inc. and
Frontier Corporation and Director or Trustee of
funds within the Prudential Mutual Funds.
*Mendel A. Melzer, CFA Trustee Chief Investment Officer (since October 1996) of
(38) Prudential Mutual Funds; formerly Chief Financial
751 Broad St. Officer of Prudential Investments (November 1995-
Newark, NJ 07102 September 1996), Senior Vice President and Chief
Financial Officer of Prudential Preferred Financial
Services (April 1993-November 1995), Managing Director
of Prudential Investment Advisors (April 1991-April
1993) and Senior Vice President of Prudential Capital
Corporation (July 1989-April 1991); Chairman and
Director of Prudential Series Fund, Inc.; Director of
The High Yield Income Fund, Inc. and Director or
Trustee of funds within the Prudential Mutual Funds.
Thomas T. Mooney (56) Trustee 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, The Business Council of New
York State, Executive Service Corps of Rochester,
Monroe County Water Authority, Rochester Jobs, Inc.,
Monroe County Industrial Development Corporation,
Northeast Midwest Institute and The High Yield Income
Fund, Inc.; President, Director and Treasurer of First
Financial Fund, Inc. and The High Yield Plus Fund,
Inc. and Director or Trustee of funds within the
Prudential Mutual Funds.
Stephen P. Munn (55) Trustee Chairman (since January 1994), Director and President
(since 1988) and Chief Executive Officer (1988-
December 1993) of Carlisle Companies Incorporated
(manufacturer of industrial products) and Director or
Trustee of funds within the Prudential Mutual Funds.
*Richard A. Redeker (54) Trustee Employee of Prudential Investments; formerly President,
751 Broad St. Chief Executive Officer and Director (October 1993-
Newark, NJ 07102 September 1996), 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), 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. and
Director or Trustee of funds within the Prudential
Mutual Funds.
Robin B. Smith (58) Trustee Chairman and Chief Executive Officer (since August
1996), formerly President and Chief Executive Officer
(January 1988-August 1996) and President and Chief
Operating Officer (September 1981-December 1988) of
Publishers Clearing House; Director of BellSouth
Corporation, Texaco Inc., Spring Industries Inc. and
Kmart Corporation and Director or Trustee of funds
within the Prudential Mutual Funds.
*Brian M. Storms (44) President and President (since October 1998) of Prudential
Trustee Investments; formerly President (September 1996-
October 1998) of Prudential Mutual Funds, Annuities
and Investment Management Services, Managing Director
(July 1991-September 1996) of Fidelity Investment
Institutional
</TABLE>

B-14
<PAGE>

<TABLE>
<CAPTION>
NAME AND ADDRESS** (AGE) POSITION PRINCIPAL OCCUPATIONS
- ------------------------ WITH FUND DURING PAST FIVE YEARS
--------- ----------------------
<S> <C> <C>
Services Company, Inc., President (October 1989-
September 1991) of J.K. Schofield and Senior Vice
President (September 1982-October 1989) of INVEST
Financial Corporation; President and Director or
Trustee of funds within the Prudential Mutual Funds.
Louis A. Weil, III (57) Trustee Chairman (since January 1999), 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
(May 1989-March 1991) of Time Magazine, President,
Publisher and Chief Executive Officer (February 1986-
August 1989) of The Detroit News and member of the
Advisory Board, Chase Manhattan Bank-Westchester;
Director of The High Yield Income Fund, Inc. and
Director or Trustee of funds within the Prudential
Mutual Funds.
Clay T. Whitehead (59) Trustee President, National Exchange Inc. (new business
development firm) (since May 1983) and Director or
Trustee of funds within the Prudential Mutual Funds.

Grace C. Torres (39) Treasurer and First Vice President (since December 1996) of PIFM;
Principal First Vice President (since March 1993) of Prudential
Financial Securities; formerly First Vice President (March 1994-
and Accounting September 1996) of Prudential Mutual Fund Management,
Officer Inc. and Vice President (July 1989-March 1994) of
Bankers Trust Corporation.

Stephen M. Ungerman (44) Assistant Tax Director (since March 1996) of Prudential
Treasurer Investments; formerly First Vice President (February
1993-September 1996) of Prudential Mutual Fund
Management, Inc.
Marguerite E. H. Morri- Secretary Vice President and Associate General Counsel (since
son (42) December 1996) of PIFM; Vice President and Associate
General Counsel of Prudential Securities; formerly
Vice President and Associate General Counsel (June
1991-September 1996) of Prudential Mutual Fund
Management, Inc.
</TABLE>
- ---------
* "Interested" Trustee, as defined in the Investment Company Act, by reason
of affiliation with Prudential Securities, Prudential or PIFM.

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

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

Trustees and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Investment Management Services LLC.

The Trustees have adopted a retirement policy which calls for the retirement
of Trustees on December 31 of the year in which they reach the age of 72,
except that retirement is being phased in for Trustees who were age 68 or
older as of December 31, 1993. Under this phase-in provision, Mr. Beach is
scheduled to retire on December 31, 1999.

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 Trustees of the Fund who are affiliated persons of the
Manager.

The Fund pays each of its Trustees who is not an affiliated person of the
Manager annual compensation of [$4,000] in addition to certain out-of-pocket
expenses.

B-15
<PAGE>

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

The following table sets forth the aggregate compensation paid by the Fund
to the Trustees who are not affiliated with the Manager for the fiscal year
ended October 31, 1998 and the aggregate compensation paid to such Trustees
for service on the Fund's Board and the Boards of all other investment
companies managed by PIFM (Fund Complex) for the calendar year ended December
31, 1998.

COMPENSATION TABLE

<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL 1998 COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM FUND AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID TO
NAME AND POSITION FROM FUND EXPENSES RETIREMENT TRUSTEES
- ----------------- ------------ ---------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
Edward D. Beach--Trustee $4,000 None N/A $135,000(38/63)*
Delayne D. Gold--Trustee 4,000 None N/A $135,000(38/63)*
Robert F. Gunia--
Trustee+ -- None N/A None
Donald D. Lennox--Former
Trustee None N/A $ 90,000(26/50)
Douglas H.
McCorkindale--Trustee** 4,000 None N/A $ 70,000(20/35)*
Mendel A. Melzer--
Trustee+ -- None N/A None
Thomas T. Mooney--
Trustee** 4,000 None N/A $115,000(31/64)*
Stephen P. Munn--Trustee 4,000 None N/A $ 45,000(15/21)*
Richard A. Redeker--
Trustee+ -- None N/A None
Robin B. Smith--
Trustee** 4,000 None N/A $ 90,000(27/34)*
Brian M. Storms--
Trustee+ -- None N/A None
Louis A. Weil, III--
Trustee 4,000 None N/A $ 90,000(26/50)*
Clay T. Whitehead--
Trustee 4,000 None N/A $ 45,000(15/21)*
</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, 1998, includes amounts deferred at the
election of Trustees under the funds' deferred compensation plans.
Including accrued interest, total compensation amounted to $ , $ and $
for Messrs. McCorkindale and Mooney and Ms. Smith, respectively.

+ Interested Trustees do not receive compensation from the Fund or any fund in
the Prudential Mutual Fund Family.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

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

As of December 8, 1998, the Trustees and officers of the Fund, as a group,
owned beneficially less than 1% of the outstanding shares of beneficial
interest of the Fund.

As of December 8, 1998, each of the following entities owned more than 5% of
the outstanding voting securities of each of the classes indicated: Boston
Safe Deposit & Trust, as trustee, K-Mart 401(k), PRT 5, 1 Cabot Rd., AIM#028-
0035, Medford, MA 02157 owned 3,928,446 Class Z shares (or approximately 52%
of the outstanding Class Z shares); Pru Defined Contribution Services, FBO
Prudential Bank and Trust, ATTN: John Surdy, 30 Scranton Office Park, Moosic,
PA 18507-1755 owned 858,619 Class Z shares (or approximately 11.4% of the
outstanding Class Z shares).

As of December 8, 1998, Prudential Securities was record holder of
19,138,161 Class A shares (or 55.1% of the outstanding Class A shares),
44,921,492 Class B shares (or 64.7% of the outstanding Class B shares),
1,333,939 Class C shares (or 64.8% of the outstanding Class C shares) and
501,923 Class Z shares (or 6.6% 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 material to the beneficial owners
for which it is the record holder.

B-16
<PAGE>

INVESTMENT ADVISORY AND OTHER SERVICES

(A) MANAGER AND INVESTMENT ADVISER

The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM serves as manager to all of the other investment companies
that, together with the Fund, comprise the Prudential Mutual Funds. See "How
the Fund is Managed--Manager" in the Prospectus. As of November 30, 1998, PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $69 billion. According to the
Investment Company Institute, as of November 30, 1998, the Prudential Mutual
Funds were the th largest family of mutual funds in the United States.

PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent), a wholly-owned subsidiary of PIFM, serves as the transfer
agent for the Prudential Mutual Funds and, in addition, provides customer
service, recordkeeping and management and administration services to qualified
plans.

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

For its services, PIFM receives, pursuant to the Management Agreement, a fee
at an annual rate of .60 of 1% of the Fund's average daily net assets up to
$500 million, .50 of 1% of average daily net assets between $500 million and
$1 billion, .475 of 1% of average daily net assets between $1 billion and $1.5
billion and .45 of 1% of average daily net assets in excess of $1.5 billion.
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
PIFM, 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 PIFM
will be reduced by the amount of such excess. No jurisdiction currently limits
the Fund's expenses.

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

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

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

(c) the costs and expenses payable to The Prudential Investment Corporation,
doing business as Prudential Investments (PI), pursuant to the subadvisory
agreement between PIFM and PI (the Subadvisory Agreement).

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

B-17
<PAGE>

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

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

For the fiscal years ended October 31, 1998, 1997 and 1996, PIFM received
management fees of $10,945,895, $8,306,148 and $6,851,420, respectively.

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

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

(B) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12B-1 PLANS

Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Fund. Prior to June 1, 1998,
Prudential Securities Incorporated (Prudential Securities) was the Fund's
distributor. PIMS and Prudential Securities are subsidiaries of Prudential.

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

The expenses incurred under the Plans include commissions and account
servicing fees paid to, or on account of, brokers or financial institutions
which have entered into agreements with the Distributor, advertising expenses,
the cost of printing and mailing prospectuses to potential investors and
indirect and overhead costs of the Distributor associated with the sale of
Fund shares, including lease, utility, communications and sales promotion
expenses. The distribution and/or service fees may also be used by the
Distributor to compensate on a continuing basis brokers in consideration for
the distribution, marketing, administrative and other services and activities
provided by brokers with respect to the promotion of the sale of the Fund's
shares and the maintenance of related shareholder accounts.

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

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

CLASS A PLAN. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related activities with respect to Class A shares at an
annual rate of up to .30 of 1% of the average daily net assets of the Class A
shares. The Class A Plan provides that (1) 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

B-18
<PAGE>

maintenance of shareholder accounts (service fee) and (2) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1%. The
Distributor has voluntarily limited 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. This voluntary waiver may be terminated at any time without
notice.

For the fiscal year ended October 31, 1998, the Distributor and Prudential
Securities received payments of $1,639,439 under the Class A Plan. This amount
was primarily expended for payments of account servicing fees to financial
advisers and other persons who sell Class A shares. For the fiscal year ended
October 31, 1998, the Distributor and Prudential Securities also received
approximately $2,102,000 in initial sales charges.

CLASS B AND CLASS C PLANS. Under the Class B and Class C Plans, the Fund
pays the Distributor for its distribution-related activities with respect to
Class B and Class C shares at an annual rate of up to 1% of the average daily
net assets of each of the Class B and Class C shares. The Class B Plan
provides that (1) up to .25 of 1% of the average daily net assets of the Class
B shares may be paid as a service fee and (2) 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 paid for distribution-related expenses with respect
to the Class B shares. The Class C Plan provides that (1) up to .25 of 1% of
the average daily net assets of the Class C shares may be paid as a service
fee for providing personal service and/or maintaining shareholder accounts and
(2) 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
service fee (.25 of 1% of average daily net assets) is used to pay for
personal service and/or the maintenance of shareholder accounts. The
Distributor also receives contingent deferred sales charges from certain
redeeming shareholders.

CLASS B PLAN. For the fiscal year ended October 31, 1998, the Distributor
and Prudential Securities received $13,918,264 from the Fund under the Class B
Plan and spent approximately $13,828,600 in distributing the Fund's Class B
shares. It is estimated that of the latter total amount, approximately .1%
($14,900) was spent on printing and mailing of prospectuses to other than
current shareholders; 30.6% ($4,236,200) on compensation to broker-dealers for
commissions to representatives and other expenses, including an allocation of
overhead and other branch office distribution-related expenses, incurred by it
for distribution of Fund shares; and 69.3% ($9,577,500) on the aggregate of
(1) payments of commissions and account servicing fees to financial advisers
(32.9% or $4,548,000) and (2) an allocation of overhead and other branch
office distribution-related expenses for payments of related expenses (36.4%
or $5,029,500). The term "overhead and other branch office distribution-
related expenses" represents (a) the expenses of operating Prudential
Securities' and Pruco Securities Corporation's (Prusec's) branch offices in
connection with the sale of Fund shares, including lease costs, the salaries
and employee benefits of operations and sales support personnel, utility
costs, communications costs and the costs of stationery and supplies, (b) the
costs of client sales seminars, (c) expenses of mutual fund sales coordinators
to promote the sale of Fund shares and (d) other incidental expenses relating
to branch promotion of Fund sales.

The Distributor (and Prudential Securities as its predecessor) also receives
the proceeds of contingent deferred sales charges paid by investors upon
certain redemptions of Class B shares. For the fiscal year ended October 31,
1998, the Distributor and Prudential Securities received approximately
$1,368,000 in contingent deferred sales charges attributable to Class B
shares.

CLASS C PLAN. For the fiscal year ended October 31, 1998, the Distributor
and Prudential Securities received $313,449 under the Class C Plan and spent
approximately $374,000 in distributing Class C shares. It is estimated that of
the latter total amount, approximately .3% ($900) was spent on printing and
mailing of prospectuses to other than current shareholders; 10.9% ($40,900) on
compensation to broker-dealers for commissions to representatives and other
expenses, including an allocation of overhead and other branch office
distribution-related expenses, incurred for distribution of Fund shares; and
88.8% ($332,200) on the aggregate of (i) payments of commissions and account
servicing fees to financial advisers (58.9% or $220,500) and (ii) an
allocation of overhead and other branch office distribution-related expenses
for payments of related expenses (29.9% or $111,700).

The Distributor (and Prudential Securities as its predecessor) also receives
the proceeds of contingent deferred sales charges paid by investors upon
certain redemptions of Class C shares. For the fiscal year ended October 31,
1998, the Distributor and Prudential Securities received approximately $25,000
in contingent deferred sales charges attributable to Class C shares.

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

B-19
<PAGE>

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 Trustees, including a majority vote of the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in
the Class A, Class B or Class C Plan or in any agreement related to the Plans
(Rule 12b-1 Trustees), cast in person at a meeting called for the purpose of
voting on such continuance. A Plan may be terminated at any time, without
penalty, by the vote of a majority of the Rule 12b-1 Trustees or by the vote
of the holders of a majority of the outstanding shares of the applicable class
of the Fund on not more than 30 days' written notice to any other party to the
Plan. The Plans may not be amended to increase materially the amounts to be
spent for the services described therein without approval by the shareholders
of the applicable class (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 Trustees in the manner
described above. Each Plan will automatically terminate in the event of its
assignment. The Fund will not be contractually obligated to pay expenses
incurred under any Plan if it is terminated or not continued.

Pursuant to each Plan, the Trustees will review at least quarterly a written
report of the distribution expenses incurred on behalf of each class of shares
of the Fund by the Distributor. The report includes 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 Trustees shall be committed to the Rule 12b-1 Trustees.

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

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

PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. In addition,
the Distributor has waived a portion of its distribution fees for the Class A
shares as described above. Fee waivers and subsidies will increase the Fund's
total return. These voluntary waivers may be terminated at any time without
notice. See "Performance Information."

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

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. Subcustodians
provide custodial services for the Fund's foreign assets held outside the
United States.

Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the transfer and dividend disbursing agent of the
Fund. PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary
transfer agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee of $10.00
per shareholder account and a new account set-up fee of $2.00 for each
manually established shareholder account. PMFS is also reimbursed for its out-
of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communication expenses and other costs.

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

B-20
<PAGE>

BROKERAGE ALLOCATION AND OTHER PRACTICES

The Manager is responsible for decisions to buy and sell securities, futures
and options on securities and futures for the Fund, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any. For purposes of this section,
the term "Manager" includes the Subadviser. Broker-dealers may receive
brokerage commissions on Fund portfolio transactions, including options and
the purchase and sale of underlying securities upon the exercise of options.
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 and U.S. Government agency securities may be
purchased directly from the issuer, in which case no commissions or discounts
are paid. The Fund will not deal with Prudential Securities or any affiliate
in any transaction in which Prudential Securities or any affiliate acts as
principal, except in accordance with rules of the Commission. Thus, it will
not deal in the over-the-counter market with Prudential Securities acting as
market maker, and it will not execute a negotiated trade with Prudential
Securities if execution involves Prudential Securities' acting as principal
with respect to any part of the Fund's order.

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

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

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

When the Manager deems the purchase or sale of equities to be in the best
interests of the Fund or its other clients, including Prudential, the Manager
may, but is under no obligation to, aggregate the transactions in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the transactions, as well as the
expenses incurred in the transaction, will be made by the Manager in the
manner it considers to be most equitable and consistent with its fiduciary
obligations to its clients. The allocation of orders among firms and the
commission rates paid are reviewed periodically by the Fund's Trustees.
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 Commission.
This limitation, in the opinion of the Fund, will not significantly affect the
Fund's ability to pursue its present investment objective. However, in the
future in other circumstances, the Fund may be at a disadvantage because of
this limitation in comparison to other funds with similar objectives but not
subject to such limitations.

B-21
<PAGE>

Subject to the above considerations, Prudential Securities may act as a
securities broker or futures commission merchant for the Fund. In order for
Prudential Securities (or any affiliate) to effect any portfolio transactions
for the Fund, the commissions, fees or other remuneration received by
Prudential Securities (or any affiliate) must be reasonable and fair compared
to the commissions, fees or other remuneration paid to other firms in
connection with comparable transactions involving similar securities or
futures being purchased or sold on an exchange 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 firm in a commensurate arm's-length
transaction. Furthermore, the Trustees of the Fund, including a majority of
the non-interested Trustees, have adopted procedures which are reasonably
designed to provide that any commissions, fees or other remuneration paid to
Prudential Securities (or any affiliate) are consistent with the foregoing
standard. In accordance with Section 11(a) of the Securities Exchange Act of
1934, as amended, Prudential Securities may not retain compensation for
effecting transactions on a national securities exchange for the Fund unless
the Fund has expressly authorized the retention of such compensation.
Prudential Securities must furnish to the Fund at least annually a statement
setting forth the total amount of all compensation retained by Prudential
Securities from transactions effected for the Fund during the applicable
period. Brokerage and futures transactions with Prudential Securities (or any
affiliate) are also subject to such fiduciary standards as may be imposed upon
Prudential Securities (or such affiliate) by applicable law.

The table below sets forth information concerning the payment of commissions
by the Fund, including the commissions paid to Prudential Securities, for the
three years ended October 31, 1998.

<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997 OCTOBER 31, 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Total brokerage commissions
paid by the Fund........... $2,042,389 $1,978,946 $1,359,109
Total brokerage commissions
paid to Prudential
Securities................. $ 166,500 $ 197,700 $ 55,600
Percentage of total
brokerage commissions paid
to Prudential Securities... 8.2% 10.0% 4.1%
</TABLE>

The Fund effected approximately % of the total dollar amount of its
transactions involving the payment of commissions to Prudential Securities
during the year ended October 31, 1998. Of the total brokerage commissions
paid during that period, $ (or %) were paid to firms which provide
research, statistical or other services to PI. PIFM has not separately
identified a portion of such brokerage commissions as applicable to the
provision of such research, statistical or other services.

The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company
Act) and their parents at October 31, 1998. As of October 31, 1998, the Fund
held securities of Bear, Stearns & Co., Inc., Lehman Brothers, Inc.,
Painewebber, Inc., Salomon Smith Barney, Deutsche Morgan Grenfell, Inc., and
SBC Warburg Dillon Read, Inc. in the amount of $162,085,123.

CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION

The Fund is authorized to issue an unlimited number of shares of beneficial
interest, $.01 par value per share divided into four classes, designated Class
A, Class B, Class C and Class Z shares, initially all of one series. Each
class of par value shares represents an interest in the same assets of the
Fund and is identical in all respects except that (1) each class is subject to
different sales charges and distribution and/or service fees (except for Class
Z shares, which are not subject to any sales charges and distribution and/or
service fees), which may affect performance, (2) each class has exclusive
voting rights on any matter submitted to shareholders that relates solely to
its arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, (3) each class has a different exchange privilege, (4) only
Class B shares have a conversion feature and (5) Class Z shares are offered
exclusively for sale to a limited group of investors. In accordance with the
Fund's Declaration of Trust, the Trustees may authorize the creation of
additional series and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Trustees may
determine. The voting rights of the shareholders of a series or class can be
modified only by the majority vote of shareholders of that series or class.

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

B-22
<PAGE>

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 Trustees is required to be
acted on by shareholders under the Investment Company Act. Shareholders have
certain rights, including the right to call a meeting upon the vote of 10% of
the Fund's outstanding shares for the purpose of voting on the removal of one
or more Trustees or to transact any other business.

The Declaration of Trust and the By-Laws of the Fund are designed to make
the Fund similar in certain respects to a Massachusetts business corporation.
The principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of
the Fund beyond the amount of their investment in the Fund. The Declaration of
Trust of the Fund provides that shareholders will not be subject to any
personal liability for acts or obligations of the Fund and that every written
obligation, contract, instrument or undertaking made by the Fund will contain
a provision to the effect that shareholders are not individually bound
thereunder.

Massachusetts counsel for the Fund have advised the Fund that no personal
liability with respect to contract obligations will attach to the shareholders
under any undertaking containing such provisions when adequate notice of such
provision is given, except possibly in a few jurisdictions. With respect to
all types of claims in the latter jurisdictions and with respect to tort
claims, contract claims when the provision referred to is omitted from the
undertaking, claims for taxes and certain statutory liabilities, a shareholder
may be held personally liable to the extent that claims are not satisfied by
the Fund. However, upon payment of any such liability, the shareholder will be
entitled to reimbursement from the general assets of the Fund. The Trustees
intend to conduct the operations of the Fund in such a way as to avoid, to the
extent possible, ultimate liability of the shareholders for liabilities of the
Fund.

Under the Declaration of Trust, the Trustees may authorize the creation of
additional series of shares (the proceeds of which would be invested in
separate, independently managed portfolios with distinct investment objectives
and policies and share purchase, redemption and net asset value procedures)
with such preferences, privileges, limitations and voting and dividend rights
as the Trustees may determine. All consideration received by the Fund for
shares of any additional series, and all assets in which such consideration is
invested, would belong to that series (subject only to the rights of creditors
of that series) and would be subject to the liabilities related thereto. Under
the Investment Company Act, shareholders of any additional series of shares
would normally have to approve the adoption of any advisory contract relating
to such series and of any changes in the investment policies related thereto.
The Trustees do not intend to authorize additional series at the present time.

The Trustees have the power to alter the number and the terms of office of
the Trustees and they may at any time lengthen their own terms or make their
terms of unlimited duration and appoint their own successors, provided that
always at least a majority of the Trustees have been elected by the
shareholders of the Fund. The voting rights of shareholders are not
cumulative, so that holders of more than 50 percent of the shares voting can,
if they choose, elect all Trustees being selected, while the holders of the
remaining shares would be unable to elect any Trustees.

PURCHASE, REDEMPTION AND PRICING OF FUND SHARES

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

Each class of shares represents an interest in the same assets of the Fund
and is identical in all respects except that (1) each class is subject to
different sales charges and distribution and/or service fees (except for Class
Z shares, which are not subject to any sales charges and distribution and/or
service fees), which may affect performance, (2) each class has exclusive
voting rights with respect to any matter submitted to shareholders that
relates solely to its arrangement and has separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class, (3) each class has a different exchange
privilege, (4) only Class B shares have a conversion feature and (5) Class Z
shares are offered exclusively for sale to a limited group of investors.

PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must complete an application and telephone PMFS at (800) 225-1852 (toll-free)
to receive an account number. The following information will be requested:
your name, address, tax identification number, 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 Equity Income Fund,
specifying on the wire the

B-23
<PAGE>

account number assigned by PMFS 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.

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

ISSUANCE OF FUND SHARES FOR SECURITIES

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

SPECIMEN PRICE MAKE-UP

Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of
5%, Class C* shares are sold with a 1% sales charge, and Class B* and Class Z
shares of the Fund are sold at NAV. Using the NAV at October 31, 1998, 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.................. $18.63
Maximum sales charge (5% of offering price)............................. .98
------
Maximum offering price to public........................................ $19.61
======
CLASS B
Net asset value, redemption price and offering price per Class B share*. $18.57
======
CLASS C
Net asset value and redemption price per Class C share*................. $18.57
Sales charge (1% of offering price)..................................... .19
------
Offering price to public................................................ $18.76
======
CLASS Z
Net asset value, redemption price and offering price per Class Z share.. $18.64
======
</TABLE>
- ---------

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

SELECTING A PURCHASE ALTERNATIVE

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

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

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

B-24
<PAGE>

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

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

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

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

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 or annuity plans under Sections 403(b) and 457 of the Internal
Revenue Code, "rabbi" trusts and non-qualified deferred compensation plans
that are sponsored by any employer that has a tax qualified plan with
Prudential (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 (Prudential Securities or Subsidiary Prototype Benefit Plans),
Class A shares may be purchased at NAV by participants who are repaying loans
made from such plans to the participant.

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 provides
administrative or recordkeeping services, provided that (1) the plan has at
least $1 million in existing assets or 250 eligible employees and (2) 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 and 403(b)(7) of the Internal Revenue Code and plans that participate in
the PruArray Program (benefit plan recordkeeping service) (hereafter referred
to as a PruArray Plan). All Benefit Plans of a company (or affiliated
companies under common control) for which Prudential serves as plan
administrator or recordkeeper are aggregated in meeting the $1 million
threshold, provided that Prudential has been notified in advance of the
entitlement to the waiver of the sales charge based on the aggregated assets.
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 Plan (Participating Fund).
"Existing assets" also include monies invested in The Guaranteed Investment
Account (GIA), a group annuity insurance product issued by Prudential, the
Guaranteed Insulated Separate Account, a separate account offered 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 (1) the purchase is made with
the proceeds of a redemption from either GIA or SVF and (2) 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 Plan 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 (1)
have retirement plan assets in the aggregate of at least $1 million or 250
participants in the aggregate and (2) 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 (1)
employees who open an IRA or Savings Accumulation

B-25
<PAGE>

Plan account with the Transfer Agent and (2) spouses of employees who open an
IRA account with the Transfer Agent. The program is offered to companies that
have at least 250 eligible employees.

Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray 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
the Distributor or the Transfer Agent, by:

. officers of the Prudential Mutual Funds (including the Fund),

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

. employees of subadvisers of the Prudential Mutual Funds provided that
purchases at NAV are permitted by such person's employer,

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

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

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

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

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

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

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

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

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

. an individual;

. the individual's spouse, their children and their parents;

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

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

B-26
<PAGE>

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

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

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

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

The Transfer Agent, the Distributor or your broker must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales 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 your broker will not be
aggregated to determine the reduced sales charge. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (NAV plus maximum sales charge) as of the
previous business day. The Distributor or the Transfer Agent must be notified
at the time of purchase that the investor is entitled to a reduced sales
charge. The reduced sales charges will be granted subject to confirmation of
the investor's holdings. Rights of Accumulation are not available to
individual participants in any retirement or group plans.

LETTERS OF INTENT. Reduced sales charges are also available to investors (or
an eligible group of related investors), including retirement and group plans,
who enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may
also qualify to purchase Class A shares at 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,
Prudential or its affiliates, and through your broker will not be aggregated
to determine the reduced sales charge.

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
enrollment 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 charge
otherwise applicable to the purchases made during this period and the sales
charge actually paid. Such payment may be made directly to the Distributor or,
if not paid, the Distributor will liquidate sufficient escrowed shares to
obtain such difference. Investors electing to purchase Class A shares of the
Fund pursuant to a Letter of Intent should carefully read such Letter of
Intent.

The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or in

B-27
<PAGE>

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.

CLASS B SHARES

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

The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to brokers, financial advisers and
other persons 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. The Distributor anticipates
that it will recoup its advancement of sales commissions from the combination
of the CDSC and the distribution fee.

CLASS C SHARES

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

WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES

Benefit Plans. Class C shares may be purchased at NAV, without payment of an
initial sales charge, by Benefit Plans (as defined above). 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, Prudential Securities or its
subsidiaries (Prudential Securities or Subsidiary Prototype Benefit Plans),
Class C shares may be purchased at NAV by participants who are repaying the
loans made from such plans to the participant.

Prudential Retirement Plans. The initial sales charge will be waived with
respect to purchases of Class C shares by qualified and non-qualified
retirement and deferred compensation plans participating in the PruArray Plan
and other plans for which Prudential provides administrative or recordkeeping
services.

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

CLASS Z SHARES

Class Z shares of the Fund currently are available for purchase by the
following categories of investors:

. pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation and
annuity plans under Sections 457 and 403(b)(7) of the Internal Revenue
Code and non-qualified plans for which the Fund is an available option
(collectively, Benefit Plans), provided such Benefit Plans (in
combination with other plans sponsored by the same employer or group of
related employers) have at least $50 million in defined contribution
assets,

. participants in any fee-based program or trust program sponsored by an
affiliate of the Distributor which includes mutual funds as investment
options and for which the Fund is an available option,

. 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,

. Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services and as of September 20, 1996,
(a) were Class Z shareholders of the Prudential Mutual Funds or (b)
executed a letter of intent to purchase Class Z shares of the Prudential
Mutual Funds,

B-28
<PAGE>

. the Prudential Securities Cash Balance Pension Plan, an employee defined
benefit plan sponsored by Prudential Securities,

. current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund),

. employees of Prudential and/or Prudential Securities who participate in
a Prudential-sponsored employee savings plan, and
. Prudential with an investment of $10 million or more.

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 brokers, financial advisers and other
persons which distribute shares a finder's fee, from its own resources, based
on a percentage of the net asset value of shares sold by such persons.

Class Z shares of the Fund may also be purchased by certain savings,
retirement and deferred compensation plans, qualified or non-qualified under
the Internal Revenue Code of 1986, as amended (the Internal Revenue Code),
provided that (1) the plan purchases shares of the Fund pursuant to an
investment management agreement with The Prudential Insurance Company of
America or its affiliates, (2) the Fund is an available investment option
under the agreement and (3) the plan will participate in the PruArray and
SmartPath Programs (benefit plan recordkeeping services) sponsored by PMFS.
These plans include pension, profit-sharing, stock-bonus or other employee
benefit plans under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 or 403(b)(7) of the Internal
Revenue Code.

SALE OF SHARES

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

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

If you hold shares in non-certificate form, a written request for redemption
signed by you exactly as the account is registered is required. If you hold
certificates, the certificates, signed in the name(s) shown on the face of the
certificates, must be received by the Transfer Agent, the Distributor or your
broker in order for the redemption request to be processed. If redemption is
requested by a corporation, partnership, trust or fiduciary, written evidence
of authority acceptable to the Transfer Agent must be submitted before such
request will be accepted. All correspondence and documents concerning
redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010, the Distributor or to your
broker.

SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $50,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or (4)
are to be paid to a corporation, partnership, trust or fiduciary, the
signature(s) on the redemption request and on the certificates, if any, or
stock power must be guaranteed by an "eligible guarantor institution." An
"eligible guarantor institution" includes any bank, broker, dealer or credit
union. The Transfer Agent reserves the right to request additional information
from, and make reasonable inquiries of, any eligible guarantor institution.
For clients of Prusec, a signature guarantee may be obtained from the agency
or office manager of most Prudential Insurance and Financial Services or
Preferred Services offices. In the case of redemptions from a PruArray Plan,
if the proceeds of the redemption are invested in another investment option of
the plan in the name of the record holder and at the same address as reflected
in the Transfer Agent's records, a signature guarantee is not required.

Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the certificate and/or written request, except as indicated below. If you
hold shares through a broker, payment for shares presented for redemption will
be credited to your account at your broker, unless you indicate otherwise.
Such payment may be postponed or the right of redemption suspended at times
(1) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (2) when trading on such Exchange is restricted, (3)
when an emergency exists as a

B-29
<PAGE>

result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or (4) during any other period when
the Commission, by order, so permits; provided that applicable rules and
regulations of the Commission shall govern as to whether the conditions
prescribed in (2), (3) or (4) exist.

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

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

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

CONTINGENT DEFERRED SALES CHARGES

Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within 18 months of purchase (one year in the case of shares
purchased before November 2, 1998) will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you.
The CDSC will be imposed on any redemption by you which reduces the current
value of your Class B or Class C shares to an amount which is lower than the
amount of all payments by you for shares during the preceding six years, in
the case of Class B shares, and 18 months, in the case of Class C shares (one
year for Class C shares purchased before November 2, 1998). 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.

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 "Shareholder Investment Account--Exchange Privilege."

B-30
<PAGE>

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

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

In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments
for the purchase of Fund shares made during the preceding six years (five
years for Class B shares purchased prior to January 22, 1990); then of amounts
representing the cost of shares held beyond the applicable CDSC period; 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 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 from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions are:

(1) in the case of a tax-deferred retirement plan, a lump-sum or other
distribution after retirement;

(2) in the case of an IRA (including a Roth IRA), a lump-sum or other
distribution after attaining age 59 1/2 or a periodic distribution based on
life expectancy;

(3) in the case of a Section 403(b) custodial account, a lump sum or other
distribution after attaining age 59 1/2; and

(4) 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 Prudential Securities or Subsidiary Prototype Benefit Plans, the
CDSC will be waived on redemptions which represent borrowings from such plans.
Shares purchased with amounts used to repay a loan from such plans on which a
CDSC was not previously deducted will thereafter be subject to a CDSC without
regard to the time such amounts were previously invested. In the case of a
401(k) plan, the CDSC will also be waived upon the redemption of shares
purchased with amounts used to repay loans made from the account to the
participant and from which a CDSC was previously deducted.

B-31
<PAGE>

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

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

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

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

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

<TABLE>
<S> <C>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION

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

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

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

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

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

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

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

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

B-32
<PAGE>

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

WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES

Prudential Retirement Plans. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the PruArray Plan and other plans for which Prudential provides
administrative or recordkeeping services. The CDSC will also be waived on
redemptions from Benefit Plans sponsored by Prudential and its affiliates to
the extent that the redemption proceeds are invested in The Guaranteed
Investment Account, the Guaranteed Insulated Separate Account and units of The
Stable Value Fund.

Other Benefit Plans. The CDSC will be waived on redemptions from Benefit
Plans holding shares through a broker not affiliated with Prudential and for
which the broker provides administrative or recordkeeping services.

CONVERSION FEATURE--CLASS B SHARES

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

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

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

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

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

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

B-33
<PAGE>

SHAREHOLDER INVESTMENT ACCOUNT

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

AUTOMATIC REINVESTMENT OF DIVIDENDS AND/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 broker. Any
shareholder who receives a cash payment representing a dividend or
distribution may reinvest such dividend or distribution at NAV by returning
the check or the proceeds to the Transfer Agent within 30 days after the
payment date. Such 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 the Distributor.

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

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

If you hold certificates, the certificates, signed in the name(s) shown on
the face of the certificates, must be returned in order for the shares to be
exchanged.

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

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

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-34
<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 and
Class C shares of the Fund for Class B and Class C shares, respectively, of
certain other Prudential Mutual Funds and shares of Prudential Special Money
Market Fund, Inc., a money market fund. No CDSC will be payable upon such
exchange, but a CDSC may be payable upon the redemption of the Class B and
Class C shares acquired as a result of the exchange. The applicable sales
charge will be that imposed by the fund in which shares were initially
purchased and the purchase date will be deemed to be the first day of the
month after the initial purchase, rather than the date of the exchange.

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

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

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

SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for
shareholders who qualify to purchase Class Z shares. Under this exchange
privilege, amounts representing any Class B and Class C shares which are not
subject to a CDSC held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends
and distributions, (2) amounts representing the increase in the net asset
value above the total amount of payments for the purchase of Class B or Class
C shares and (3) amounts representing Class B or Class C shares held beyond
the applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities, Prusec or
another broker that they are eligible for this special exchange privilege.

Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares
when they elect to have those assets become a part of the fee-based program.
Upon leaving the

B-35
<PAGE>

program (whether voluntarily or not), such Class Z shares (and, to the extent
provided for in the program, Class Z shares acquired through participation in
the program) will be exchanged for Class A shares at net asset value.
Similarly, participants in Prudential Securities' 401(k) Plan for which the
Fund's Class Z shares is an available option and who wish to transfer their
Class Z shares out of the Prudential Securities 401(k) Plan following
separation from service (i.e., voluntary or involuntary termination of
employment or retirement) will have their Class Z shares exchanged for Class A
shares at NAV.

The Prudential Securities Cash Balance Pension Plan may only exchange its
Class Z shares for Class Z shares of those Prudential Mutual Funds which
permit investment by the Prudential Securities Cash Balance Pension Plan.

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

DOLLAR COST AVERAGING

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

Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 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
</TABLE>

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

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

AUTOMATIC INVESTMENT PLAN (AIP)

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

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

B-36
<PAGE>

SYSTEMATIC WITHDRAWAL PLAN

A systematic withdrawal plan is available to shareholders through the
Transfer Agent, the Distributor or your broker. Such withdrawal plan provides
for monthly 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.

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

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

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

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

TAX-DEFERRED RETIREMENT PLANS

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

TAX-DEFERRED COMPOUNDING/1/

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

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

B-37
<PAGE>

MUTUAL FUND PROGRAMS

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

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

NET ASSET VALUE

The Fund's net asset value per share or NAV is determined by subtracting its
liabilities from the value of its assets and dividing the remainder by the
number of outstanding shares. NAV is calculated separately for each class.

Under the Investment Company Act, the Trustees are responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Trustees, 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 sale
price of such exchange system 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, or at
the bid price on such day in the absence of an asked price. 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 by the Manager in
consultation with the Subadviser to be over-the-counter, are valued on the
basis of valuations provided by an independent pricing agent or principal
market maker which uses information with respect to transactions in bonds,
quotations from bond dealers, agency ratings, market transactions in
comparable securities and various relationships between securities in
determining value. Convertible debt securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed by the Manager in consultation with the Subadviser to be
over-the-counter, are valued at the mean between the last reported bid and
asked prices provided by principal market makers. 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 or board of trade or, if there
was no sale on the applicable commodities exchange or board of trade on such
day, at the mean between the most recently quoted bid and asked prices on such
exchange or board of trade. Quotations of foreign securities in a foreign
currency are converted to U.S. dollar equivalents at the current rate obtained
from a recognized bank or dealer, and foreign currency forward contracts are
valued at the current cost of covering or offsetting such contacts. 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 Trustees.

Securities or other assets for which reliable market quotations are not
readily available or for which the pricing agent or principal market maker
does not provide a valuation or methodology or provides a valuation or
methodology that, in the judgment of the Manager or Subadviser (or Valuation
Committee or Board of Trustees) does not represent fair value, are valued by
the Valuation Committee or Board of Trustees in consultation with the Manager
or Subadviser, including its portfolio manager, traders, and its research and
credit analysts, on the basis of the following factors: cost of the security,
transactions in comparable securities, relationships among various securities
and such other factors as may be determined by the Manager, Subadviser, Board
of Directors or Valuation Committee to materially affect the value of the
security. 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 Trustees not to represent
fair value. Short-term securities with remaining maturities of more than 60
days, for which market quotations are readily available, are valued at their
current market quotations as supplied by an independent pricing agent or
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
the 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.

B-38
<PAGE>

Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger distribution-
related fee to which Class B and Class C shares are subject. The NAV of Class
Z shares will generally be higher than the NAV of Class A, Class B or Class C
shares as a result of the fact that the Class Z shares are not subject to any
distribution or service fee. 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.

TAXES, DIVIDENDS AND DISTRIBUTIONS

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

Qualification of the Fund as a regulated investment company requires, among
other things, that (a) the Fund derive at least 90% of its annual gross income
(without reduction for losses from the sale or other disposition of securities
or foreign currencies) 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
distribute 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.

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

Special rules apply to most options on stock indices, futures contracts and
options thereon, and foreign currency forward contracts in which the Fund may
invest. These investments will generally constitute Section 1256 contracts and
will be required to be "marked to market" for federal income tax purposes at
the end of the Fund's taxable year. Sixty percent of any gain or loss
recognized on these deemed sales and on actual dispositions will be treated as
long-term capital gain or loss.

Gain or loss on the sale, lapse or other termination of stock and on options
on narrowly-based stock indices will be capital gain or loss and will be long-
term or short-term depending on the holding period of the option. In addition,
positions which are part of a "straddle" will be subject to certain wash sale,
short sale and constructive sale provisions of the Internal Revenue Code. In
the case of a straddle, the Fund may be required to defer the recognition of
losses on positions it holds to the extent of any unrecognized gain on
offsetting positions held by the Fund.

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

B-39
<PAGE>

currency exchange contracts or dispositions of debt securities denominated in
a foreign currency attributable to fluctuations in the value of the foreign
currency between the date of acquisition of the security and the date of
disposition also are 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.

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

Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share 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. Therefore, prior to purchasing
shares of the Fund, the investor should carefully consider the impact of
dividends or capital gains distributions which are expected to be or have been
announced.

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

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

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

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

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

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

The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (a) at least 75% of its gross income is passive
or (b) an average of at least 50% of its assets produce, or are held for the
production of, passive income. If the Fund acquires and holds stock in a PFIC
beyond the end of the year of its acquisition, the Fund will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock or of any gain from disposition of the stock (collectively, PFIC
income), plus interest thereon, even if the Fund

B-40
<PAGE>

distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders. The Fund may make a "mark-to-
market" election with respect in any marketable stock it holds of a PFIC. If
the election is in effect, at the end of the Fund's taxable year, the Fund
will recognize the amount of gains, if any, as ordinary income with respect to
PFIC stock. No loss will be recognized on PFIC stock, except to the extent of
gains recognized in prior years. Alternatively, the Fund, if it meets certain
requirements, may elect to treat any PFIC in which it invests as a "qualified
electing fund," in which case, in lieu of the foregoing tax and interest
obligation, the Fund will be required to include in income each year its pro
rata share of the qualified electing fund's annual ordinary earnings and net
capital gain, even if they are not distributed to the Fund; those amounts
would be subject to the distribution requirements applicable to the Fund
described above.

Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine in advance the effective
rate of foreign tax to which the Fund will be subject, since the amount of the
Fund's assets to be invested in various countries will vary.

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

Foreign shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Fund.

PERFORMANCE INFORMATION

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

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

P(1 + T) n = ERV

<TABLE>
<S> <C> <C> <C>
Where: P = hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1000 payment made at the
beginning of the 1, 5 or 10 year periods at the end of the 1, 5 or 10 year
periods (or fractional portion thereof).
</TABLE>

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.

Below are the average annual total returns for the Fund's share classes for
the periods ended October 31, 1998.

<TABLE>
<CAPTION>
1 5 10 SINCE
YEAR YEARS YEARS INCEPTION
----- ----- ----- ---------
<S> <C> <C> <C> <C> <C>
Class A......................... (5.62)% 12.90% N/A 13.70% (1-22-90)
Class B......................... (6.35) 13.10 13.25% 11.83 (1-22-87)
Class C......................... (2.35) N/A N/A 15.12 (8-1-94)
Class Z......................... (0.40) N/A N/A 17.05 (3-1-96)
</TABLE>

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.

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

ERV--P
P

<TABLE>
<S> <C> <C> <C>
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 payment made at the beginning of the 1, 5 or 10 year periods.
</TABLE>

B-41
<PAGE>

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

Below are the aggregate total returns for the Fund's share classes for the
periods ended October 31, 1998.

<TABLE>
<CAPTION>
1 5 10 SINCE
YEAR YEARS YEARS INCEPTION
----- ----- ------ ---------
<S> <C> <C> <C> <C> <C>
Class A........................ (0.65)% 93.05% N/A 224.66% (1-22-90)
Class B........................ (1.35) 86.05 246.93% 273.08 (1-22-87)
Class C........................ (1.35) N/A N/A 81.92 (8-1-94)
Class Z........................ (0.40) N/A N/A 52.16 (3-1-96)
</TABLE>

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. The 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)/6/ - 1 ]
cd
<TABLE>
<S> <C> <C> <C>
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
the average daily number of shares outstanding during the period that were entitled to receive
c = dividends.
d = the maximum offering price per share on the last day of the period.
</TABLE>

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.

The Fund's 30-day yields for the 30 days ended October 31, 1998 were %,
%, % and % for the Class A, Class B, Class C and Class Z shares,
respectively.

B-42
<PAGE>

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

Performance Comparison of Different Types of Investments
Over the Long Term(1/1926-12/1997)
Common Stocks Long-Term Gov't. Bonds Inflation
11% 5.2% 3.1%

[PERFORMANCE COMPARISON OF DIFFERENT TYPES OF INVESTMENTS CHART APPEARS HERE]
/1/ Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1998
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.

B-43
<PAGE>

Portfolio of Investments as of October 31, 1998
- --------------------------------------------------------------------------------

Shares Description Value (Note 1)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--98.6%
COMMON STOCKS--93.9%
- --------------------------------------------------------------------------------
Airlines--3.5%
966,000 AMR Corp.(a) $ 64,722,000
1,290,000 Trans World Airlines, Inc.(a) 6,450,000
54,500 US Airways Group, Inc. 3,082,656
---------------
74,254,656
- --------------------------------------------------------------------------------
Aluminum--7.8%
1,231,700 Aluminum Co. of America 97,612,225
309,820 Kaiser Aluminum Corp.(a) 1,955,739
1,087,284 Reynolds Metals Co. 65,169,084
---------------
164,737,048
- --------------------------------------------------------------------------------
Apparel--0.8%
572,700 Kellwood Co. 15,606,075
40,800 Oxford Industries, Inc. 1,155,150
---------------
16,761,225
- --------------------------------------------------------------------------------
Automobiles & Trucks--7.0%
1,281,658 Chrysler Corp. 61,679,791
750,000 Ford Motor Co. 40,687,500
715,000 General Motors Corp. 45,089,688
---------------
147,456,979
- --------------------------------------------------------------------------------
Building & Construction--1.8%
687,500 Kaufman & Broad Home Corp. 19,636,719
732,400 Ryland Group, Inc. 18,218,450
---------------
37,855,169
- --------------------------------------------------------------------------------
Business Services
161,780 Crescent Operating, Inc.(a) 798,789
- --------------------------------------------------------------------------------
Chemicals--5.5%
1,015,800 Dow Chemical Co. 95,104,275
856,628 Millennium Chemicals, Inc. 20,880,307
---------------
115,984,582

- --------------------------------------------------------------------------------
Computer Hardware--0.2%
632,300 Intergraph Corp.(a) $ 4,109,950

- --------------------------------------------------------------------------------
Diversified Consumer Products--0.8%
219,200 Eastman Kodak Co. 16,988,000
- --------------------------------------------------------------------------------
Diversified Industries--1.1%
851,555 CBS Corp. 23,790,318
- --------------------------------------------------------------------------------
Electrical Equipment--1.8%
602,000 Esterline Technologies Corp.(a) 12,040,000
154,800 Instron Corp. 2,399,400
700,000 Kuhlman Corp. 18,550,000
364,400 Newport Corp. 5,192,700
---------------
38,182,100
- --------------------------------------------------------------------------------
Energy Systems--3.9%
2,795,800 McDermott International, Inc. 81,951,887
- --------------------------------------------------------------------------------
Financial Services--7.1%
959,577 Bear Stearns Cos., Inc. 34,244,904
325,800 Edwards (A.G.), Inc. 11,260,462
1,612,000 Lehman Brothers Holdings, Inc. 61,155,250
1,324,500 PaineWebber Group, Inc. 44,287,969
---------------
150,948,585
- --------------------------------------------------------------------------------
Forest & Paper--2.9%
72,600 Fletcher Challenge Forest Ltd.,
ADR (New Zealand) 254,100
392,400 Georgia-Pacific Corp. 20,306,700
1,296,400 Louisiana-Pacific Corp. 23,011,100
206,800 Potlatch Corp. 7,548,200
200,000 Weyerhaeuser Co. 9,362,500
---------------
60,482,600
- --------------------------------------------------------------------------------
Gas Distribution--1.5%
914,467 BG PLC, ADR (United Kingdom) 30,748,953
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-44
<PAGE>

Portfolio of Investments as of October 31, 1998
================================================================================

Shares Description Value (Note 1)
- --------------------------------------------------------------------------------

Gas Pipelines--1.1%
280,100 Sonat, Inc. $ 8,490,531
951,860 TransCanada Pipelines Ltd. 14,575,357
---------------
23,065,888
- --------------------------------------------------------------------------------
Health Care Services--1.5%
800,000 Columbia/HCA Healthcare Corp. 16,800,000
2,000,000 PhyCor, Inc.(a) 14,500,000
---------------
31,300,000
- --------------------------------------------------------------------------------
Hotels--0.6%
428,900 Hilton Hotels Corp. 8,604,806
353,700 Prime Hospitality Corp. 3,227,513
---------------
11,832,319
- --------------------------------------------------------------------------------
Insurance--3.6%
298,949 Allied Zurich PLC(a) 7,106,252
879,300 Marsh & McLennan Cos., Inc. 48,801,150
393,400 Ohio Casualty Corp. 14,850,850
356,800 Selective Insurance Group, Inc. 6,533,900
---------------
77,292,152
- --------------------------------------------------------------------------------
Integrated Producers--1.8%
676,000 Elf Aquitaine, S.A. ADR (France) 39,208,000
- --------------------------------------------------------------------------------
Mining--0.4%
705,058 Ashanti Goldfields Co. Ltd., GDR
(Africa) 6,037,059
194,678 Coeur D'Alene Mines Corp.(a) 1,095,064
298,499 Echo Bay Mines, Ltd.(a) 671,623
---------------
7,803,746
- --------------------------------------------------------------------------------
Miscellaneous Industrial--3.5%
2,085,600 Hanson PLC, S.A. ADR (United
Kingdom) 73,647,750
- --------------------------------------------------------------------------------
Oil & Gas Exploration/Production--2.3%
1,000,000 Occidental Petroleum Corp. 19,875,000
1,896,527 Pioneer Natural Resources Co. 28,566,438
---------------
48,441,438
- --------------------------------------------------------------------------------
PRUDENTIAL EQUITY INCOME FUND
================================================================================
Shares Description Value (Note 1)
- --------------------------------------------------------------------------------

Oil Refining & Marketing--1.0%
1,500,000 Quaker State Corp. $ 21,187,500
- --------------------------------------------------------------------------------
Paper & Packaging--1.1%
759,900 Gibson Greetings Inc.(a) 7,931,456
1,345,600 Longview Fibre Co. 16,147,200
---------------
24,078,656
- --------------------------------------------------------------------------------
Printing
44,000 R.H. Donnelley Corp. 616,000
- --------------------------------------------------------------------------------

Real Estate-Development
40,000 Vornado Operating Company(a) 250,000
- --------------------------------------------------------------------------------
Real Estate Investment Trusts--13.7%
271,000 AMLI Residential Properties Trust 6,097,500
134,300 Bradley Real Estate, Inc. 2,820,300
590,000 Capital Automotive REIT 8,333,750
642,600 CCA Prison Realty Trust 15,101,100
500,000 Center Trust Retail Properties, Inc. 5,437,500
2,293,300 Crescent Real Estate Equities, Inc. 57,475,831
1,242,900 Crown American Realty Trust 9,943,200
21,800 Equity Inns Inc. 228,900
559,426 Equity Office Properties Trust 13,426,224
1,605,100 Equity Residential Properties Trust 67,414,200
543,900 Gables Residential Trust 14,311,369
530,300 Glimcher Realty Trust 8,584,231
388,100 Irvine Apartment Communities, Inc. 10,187,625
52,350 JDN Realty Corp. 1,115,709
96,000 JP Realty, Inc. 2,010,000
62,550 Kimco Realty Corp. 2,490,272
223,800 Malan Realty Investors, Inc. 3,370,988
410,300 Manufactured Home Communities, Inc. 10,231,856
62,600 Pennsylvania Real Estate Investment
Trust 1,275,475
327,400 Starwood Hotels and Resorts 9,269,512
198,700 Sunstone Hotel Investors, Inc. 1,800,719
166,600 TriNet Corporate Realty Trust, Inc. 4,789,750
808,800 Vornado Realty Trust 27,246,450
355,000 Walden Residential Properties, Inc. 8,187,188
---------------
291,149,649
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-45
<PAGE>

Portfolio of Investments as of October 31, 1998
- --------------------------------------------------------------------------------

Shares Description Value (Note 1)
- --------------------------------------------------------------------------------
Retail--3.6%
1,396,200 Heilig-Meyers Co. $ 10,733,288
1,509,300 Limited, Inc. (The) 38,675,812
587,300 Penney (J.C.) Co., Inc. 27,896,750
---------------
77,305,850
- --------------------------------------------------------------------------------
Steel--3.3%
1,377,000 AK Steel Holding Corp. 23,839,312
1,200,000 Bethlehem Steel Corp. 10,800,000
672,500 LTV Corp. 4,119,063
1,375,100 USX-U.S. Steel Group, Inc. 31,971,075
---------------
70,729,450
- --------------------------------------------------------------------------------
Telecommunication Services--2.5%
358,300 Telebras ADR (Brazil) 27,208,406
470,200 Telefonos de Mexico, S.A. ADR
(Mexico) 24,832,438
---------------
52,040,844
- --------------------------------------------------------------------------------
Tobacco--6.2%
298,974 B.A.T. Industries PLC, ADR
(United Kingdom) 5,437,589
548,200 Imperial Tobacco Group PLC,
ADR(a) (United Kingdom) 10,826,950
850,000 Philip Morris Co., Inc. 43,456,250
2,487,420 RJR Nabisco Holdings Corp. 71,046,934
---------------
130,767,723
- --------------------------------------------------------------------------------
Trucking & Shipping--0.6%
209,250 Alexander & Baldwin Inc. 4,250,391
590,500 Yellow Corp.(a) 9,484,906
---------------
13,735,297
- --------------------------------------------------------------------------------
Waste Management--0.7%
314,417 Waste Management, Inc. 14,188,067
- --------------------------------------------------------------------------------

PRUDENTIAL EQUITY INCOME FUND
================================================================================
Shares Description Value (Note 1)
- --------------------------------------------------------------------------------
Wood Processing--0.7%
396,700 Rayonier Inc. $ 15,545,681
---------------
Total common stocks
(cost $1,696,110,859) 1,989,236,851
---------------
- --------------------------------------------------------------------------------
PREFERRED STOCKS--3.5%
- --------------------------------------------------------------------------------
Integrated Producers--0.1%
48,099 Unocal Capital Trust,
Conv. 6.25% 2,477,098
- --------------------------------------------------------------------------------
Manufacturing--0.1%
262,500 Worthington Industries Inc.,
Conv. 7.25% 2,460,938
- --------------------------------------------------------------------------------
Real Estate Investment Trusts--0.1%
86,027 Archstone Community Trust 2,093,018
- --------------------------------------------------------------------------------
Retail--2.0%
741,600 K-Mart Financing I,
Conv. 7.75% 41,112,450
- --------------------------------------------------------------------------------
Steel--0.7%
250,800 Bethlehem Steel Corp.,
Conv. $3.50 9,781,200
118,900 USX Capital Trust I
Conv., 6.75% 5,112,700
---------------
14,893,900
- --------------------------------------------------------------------------------
Transportation-Road & Rail--0.5%
243,900 Union Pacific Capital Trust 11,341,350
---------------
Total preferred stocks
(cost $82,714,365) 74,378,754
---------------
- --------------------------------------------------------------------------------
Units
- -------------
WARRANTS(a)
- --------------------------------------------------------------------------------
Engineering & Construction
12,044 Morrison Knudsen Corp.
expiring 03/11/2003 @$12.00
(cost $0) 42,154
---------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-46
<PAGE>

Portfolio of Investments as of October 31, 1998
- --------------------------------------------------------------------------------
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
- --------------------------------------------------------------------------------
CONVERTIBLE BONDS--0.8%
- --------------------------------------------------------------------------------
Integrated Oil--0.1%
Oryx Energy Co.,
Sub. Deb.,
Ba3 $1,871 7.50%, 5/15/14 $ 1,871,000
- --------------------------------------------------------------------------------
Mining--0.1%
Hecla Mining Co.,
60,000 Conv. 7.00%, Ser. B 2,520,000
- --------------------------------------------------------------------------------
Real Estate Investment Trusts--0.3%
Centertrust Retail
Properties Inc., Sub.
Deb., Ser. A,
B2 700 7.50%, 1/15/01 650,125
B2 1,200 7.50%, 1/15/01, Sub.
Deb. 1,114,500
Malan Realty Investors,
Inc.,
Sub. Deb.,
B3 3,800 9.50%, 7/15/04 3,738,250
--------------
5,502,875
- --------------------------------------------------------------------------------
Retail--0.3%
Charming Shoppes Inc.
B2 8,000 7.50%, 7/15/06 7,409,440
--------------
Total convertible bonds
(cost $18,524,382) 17,303,315
--------------
- --------------------------------------------------------------------------------

PRUDENTIAL EQUITY INCOME FUND
================================================================================

Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
- --------------------------------------------------------------------------------
FOREIGN GOVERNMENT OBLIGATIONS--0.4%
New Zealand Gov't.
Bonds,
NR NZ$15,580 8.00%, 4/15/04
(cost $10,819,084) $ 9,292,165
--------------
Total long-term
investments
(cost $1,808,168,690) 2,090,253,239
--------------
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--1.1%
REPURCHASE AGREEMENT
US$22,397 Joint Repurchase
Agreement Account
5.40%, 11/2/98
(cost $22,397,000;
Note 5) 22,397,000
--------------
- --------------------------------------------------------------------------------
Total Investments--99.7%
(cost $1,830,565,690;
Note 4) 2,112,650,239
Other assets in excess
of
liabilities--0.3% 6,764,431
--------------
Net Assets--100% $2,119,414,670
==============
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
GDR--Global Depository Receipt.
NR--Not rated by Moody's or Standard & Poor's.
PLC--Public Limited Company.
The Fund's current Statement of Additional Information contains a description of
Moody's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-47
<PAGE>

Statement of Assets and Liabilities PRUDENTIAL EQUITY INCOME FUND
================================================================================
<TABLE>
<CAPTION>

Assets October 31, 1998
----------------
<S> <C>
Investments, at value (cost $1,830,565,690)............................................................... $ 2,112,650,239
Cash...................................................................................................... 174,317
Receivable for investments sold........................................................................... 14,215,546
Receivable for Fund shares sold........................................................................... 2,688,644
Dividends and interest receivable......................................................................... 5,149,110
Other assets.............................................................................................. 50,123
----------------
Total assets........................................................................................... 2,134,927,979
----------------
Liabilities
Payable for investments purchased......................................................................... 9,145,690
Payable for Fund shares reacquired........................................................................ 3,545,651
Distribution fee payable.................................................................................. 1,190,876
Management fee payable.................................................................................... 852,972
Accrued expenses.......................................................................................... 579,801
Foreign withholding tax payable........................................................................... 198,319
----------------
Total liabilities...................................................................................... 15,513,309
----------------
Net Assets................................................................................................ $ 2,119,414,670
================

Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 1,139,805
Paid-in capital in excess of par....................................................................... 1,701,029,064
----------------
1,702,168,869
Undistributed net investment income.................................................................... 500,009
Accumulated net realized gains......................................................................... 134,664,183
Net unrealized appreciation on investments and foreign currencies...................................... 282,081,609
----------------
Net assets, October 31, 1998.............................................................................. $ 2,119,414,670
================
Class A:
Net asset value and redemption price per share
($638,547,014 / 34,270,077 shares of beneficial interest issued and outstanding).................... $18.63
Maximum sales charge (5% of offering price)............................................................ 0.98
----------------
Maximum offering price to public....................................................................... $19.61
================

Class B:
Net asset value, offering price and redemption price per share
($1,299,961,590 / 69,999,085 shares of beneficial interest issued and outstanding).................. $18.57
================

Class C:
Net asset value, offering price and redemption price per share
($37,988,269 / 2,045,529 shares of beneficial interest issued and outstanding)...................... $18.57
================

Class Z:
Net asset value, offering price and redemption price per share
($142,917,797 / 7,665,811 shares of beneficial interest issued and outstanding)..................... $18.64
================

- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-48
<PAGE>

PRUDENTIAL EQUITY INCOME FUND
Statement of Operations
- --------------------------------------------------------------------------------

Year Ended
Net Investment Income October 31, 1998
-----------------
Income
Dividends (net of foreign withholding taxes
of $579,418)............................ $ 62,315,024
Interest................................... 5,461,868
----------------
Total income............................ 67,776,892
----------------
Expenses
Management fee............................. 10,945,895
Distribution fee--Class A.................. 1,639,439
Distribution fee--Class B.................. 13,918,264
Distribution fee--Class C.................. 313,449
Transfer agent's fees and expenses......... 2,770,000
Reports to shareholders.................... 240,000
Registration fees.......................... 240,000
Custodian's fees and expenses.............. 173,000
Insurance.................................. 34,000
Trustees' fees and expenses................ 32,000
Audit fee and expenses..................... 25,000
Legal fees and expenses.................... 25,000
Miscellaneous.............................. 10,519
----------------
Total expenses.......................... 30,366,566
----------------
Net investment income......................... 37,410,326
----------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................... 138,250,848
Foreign currency transactions.............. (197,586)
----------------
138,053,262
----------------
Net change in unrealized appreciation
(depreciation) on:
Investments................................ (224,424,733)
Foreign currency transactions.............. 12,702
----------------
(224,412,031)
----------------
Net loss on investments and foreign currency
transactions............................... (86,358,769)
----------------
Net decrease in Net Assets
Resulting from Operations..................... $(48,948,443)
================

PRUDENTIAL EQUITY INCOME FUND
Statement of Changes in Net Assets
- --------------------------------------

Increase (Decrease) Year Ended October 31,
--------------------------------
in Net Assets 1998 1997

Operations
Net investment income....... $ 37,410,326 $ 29,370,366
Net realized gain on
investments and foreign
currency transactions.... 138,053,262 184,439,985
Net change in unrealized
appreciation
(depreciation) of
investments and foreign
currencies............... (224,412,031) 363,934,627
-------------- --------------
Net increase (decrease) in
net assets resulting from
operations............... (48,948,443) 577,744,978
-------------- --------------
Dividends and distributions (Note 1)
Dividends from net
investment income
Class A.................. (14,084,914) (10,388,275)
Class B.................. (19,144,502) (17,820,066)
Class C.................. (438,559) (186,974)
Class Z.................. (2,479,859) (1,432,974)
-------------- --------------
(36,147,834) (29,828,289)
-------------- --------------
Distributions from net
realized gains
Class A.................. (54,361,373) (16,446,394)
Class B.................. (114,880,805) (44,123,354)
Class C.................. (1,798,135) (407,245)
Class Z.................. (8,584,415) (2,197,282)
-------------- --------------
(179,624,728) (63,174,275)
-------------- --------------
Fund share transactions (net of
share conversions) (Note 6)
Proceeds from shares sold... 1,012,745,142 699,979,865
Net asset value of shares
issued in reinvestment of
dividends and
distributions............ 198,544,772 84,965,746
Cost of shares reacquired... (740,383,287) (681,144,020)
-------------- --------------
Net increase in net assets
from Fund share
transactions............. 470,906,627 103,801,591
-------------- --------------
Total increase................. 206,185,622 588,544,005
Net Assets
Beginning of year.............. 1,913,229,048 1,324,685,043
-------------- --------------
End of year(a)................. $2,119,414,670 $1,913,229,048
============== ==============
- ---------------
(a) Includes undistributed
net investment income
of...................... $ 500,009 --
-------------- --------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-49
<PAGE>

Notes to Financial Statements PRUDENTIAL EQUITY INCOME FUND
- --------------------------------------------------------------------------------
Prudential Equity Income Fund (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 both current income and capital
appreciation. It seeks to achieve this objective by investing primarily in
common stocks and convertible securities that provide investment income returns
above those of the Standard & Poor's 500 Stock Index or the NYSE Composite
Index. The ability of the issuers of the debt securities held by the Fund to
meet their obligations may be affected by economic developments in a specific
industry or country.
- --------------------------------------------------------------------------------
Note 1. Accounting Policies

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

Securities Valuation: Investments in securities traded on a national securities
exchange (or reported on the Nasdaq national market) are valued at the last sale
price on such exchange on the day of valuation or, if there was no sale on such
day, the mean between the last bid and asked prices quoted on such day or at the
bid price in the absence of an asked price. Securities that are actively traded
in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued by an independent
pricing agent or principal market maker. Securities for which reliable market
quotations are not 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 does not represent fair value, are valued in accordance with
procedures adopted by the Fund's Board of Trustees.

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

In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians under triparty repurchase
agreements, as the case may be, take possession of the underlying 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.

Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:

(i) market value of investment securities, other assets and liabilities--at the
current rates of exchange;

(ii) purchases and sales of investment securities, income and expenses--at the
rates of exchange prevailing on the respective dates of such transactions.

Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of long-term debt securities sold
during the period. Accordingly, such realized foreign currency gains and losses
are included in the reported net realized gains/losses on investment
transactions.

Net realized losses on foreign currency transactions of $197,586 represents net
foreign exchange gains and losses from sales and maturities of short-term
securities and forward currency contracts, holding of foreign currencies,
currency gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amounts of interest and
foreign taxes recorded on the Fund's books and the U.S. dollar equivalent
amounts actually received or paid. Net currency gains and losses from valuing
foreign currency denominated assets (excluding investments) and liabilities at
period end exchange rates are reflected as a component of net unrealized
appreciation/depreciation on investments and foreign currencies.

Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. companies as a result of,
among other factors, the possibility of political or economic instability and
the level of governmental supervision and regulation of foreign securities
markets.

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 (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.
- --------------------------------------------------------------------------------
B-50
<PAGE>

Notes to Financial Statements PRUDENTIAL EQUITY INCOME FUND
================================================================================
Federal Income Taxes: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its 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 rates.

Dividends and Distributions: The Fund expects to pay dividends out of net
investment income quarterly 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. These differences are primarily due to differing treatment of
distributions from Real Estate Investment Trusts.

Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with American Institute of Certified
Public Accountants (AICPA) 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 accumulated net realized gains on investments by
$5,366, increase net unrealized appreciation on investments by $192,220 and
decrease undistributed net investment income by $197,586. Net investment income,
net realized gains and net assets were not affected by these changes.
- --------------------------------------------------------------------------------
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.

The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .60 of 1% of the Fund's average daily net assets up to $500 million, .50
of 1% of the next $500 million, .475 of 1% of the next $500 million and .45 of
1% of the average daily net assets in excess of $1.5 billion.

The Fund had a distribution agreement with Prudential Securities Incorporated
('PSI'), which acted as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund through May 31, 1998. Prudential Investment
Management Services LLC ('PIMS') became the distributor of the Fund effective
June 1, 1998 and is serving the Fund under the same terms and conditions as
under the agreement with PSI. The Fund compensated PSI and PIMS for distributing
and servicing the Fund's Class A, Class B and Class C shares, pursuant to plans
of distribution (the 'Class A, B and C Plans'), regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
No distribution or service fees are paid to PIMS as distributor for Class Z
shares of the Fund.

Pursuant to the Class A, B and C Plans, the Fund compensates PSI and PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%,
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were .25 of 1% of the average daily net assets of
Class A shares and 1% of the average daily net assets of both the Class B and C
shares for the year ended October 31, 1998.

PSI and PIMS have advised the Fund that they have received approximately
$2,101,600 in front-end sales charges resulting from sales of Class A shares
during the year ended October 31, 1998. From these fees, PSI and PIMS paid such
sales charges to affiliated broker-dealers, which in turn paid commissions to
salespersons and incurred other distribution costs.

PSI and PIMS have advised the Fund that for the year ended October 31, 1998,
they received approximately $1,368,400 and $25,100 in contingent deferred sales
charges imposed upon certain redemptions by Class B and Class C shareholders,
respectively.

PSI, PIFM, PIC and PIMS 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') with an unaffiliated
lender. The maximum commitment under the Agreement is $200,000,000. Interest on
any such borrowings outstanding will be at market rates. The purpose of the
Agreement is to serve as an alternative source of funding for capital share
redemptions. The Fund did not borrow any amounts pursuant to the Agreement
during the year ended October 31, 1998. 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.
The Agreement expired on December 30, 1997 and has been extended through
December 29, 1998 under the same terms.
- --------------------------------------------------------------------------------
B-51
<PAGE>

Notes to Financial Statements PRUDENTIAL EQUITY INCOME FUND
================================================================================
Note 3. Other Transactions with Affiliates

Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended October 31, 1998, the
Fund incurred fees of approximately $2,339,700 for the services of PMFS. As of
October 31, 1998, approximately $210,400 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.

For the year ended October 31, 1998, PSI earned approximately $166,500 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 October 31, 1998 were $810,275,699 and $466,261,341,
respectively.

The cost basis of investments for federal income tax purposes at October 31,
1998 was $1,834,449,111 and, accordingly, net unrealized appreciation for
federal income tax purposes was $278,201,128 (gross unrealized
appreciation--$425,372,275; gross unrealized depreciation--$147,171,147).
- --------------------------------------------------------------------------------
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 October 31, 1998, the Fund
had a 2.38% undivided interest in repurchase agreements in the joint account.
The undivided interest for the Fund represented $22,397,000 in principal amount.
As of such date, each repurchase agreement in the joint account and the value of
the collateral therefor were as follows:

Bear, Stearns & Co. Inc., 5.40%, in the principal amount of $260,000,000,
repurchase price $260,117,000, due 11/2/98. The value of the collateral
including accrued interest was $265,935,719.

Salomon Smith Barney Inc., 5.40%, in the principal amount of $260,000,000,
repurchase price $260,117,000, due 11/2/98. The value of the collateral
including accrued interest was $265,365,298.

Deutsche Morgan Grenfell Inc., 5.41%, in the principal amount of $260,000,000,
repurchase price $260,117,217, due 11/2/98. The value of the collateral
including accrued interest was $265,200,735.

SBC Warburg Dillon Read, Inc., 5.38%, in the principal amount of $160,825,000,
repurchase price $160,897,103, due 11/2/98. The value of the collateral
including accrued interest was $164,045,205.
- --------------------------------------------------------------------------------
Note 6. Capital

The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Prior to November 2, 1998 Class C shares
were sold with a contingent deferred sales charge of 1% during the first year.
Effective November 2, 1998, Class C shares are sold with a front-end sales
charge of 1% and a contingent deferred sales charge of 1% during the first 18
months. 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 or Class Z shares. Class Z shares are not subject to
any sales or redemption charge and are offered exclusively for sale to a limited
group of investors.

The Fund has authorized an unlimited number of shares of beneficial interest at
$.01 par value divided into four classes, designated Class A, Class B, Class C
and Class Z.

Transactions in shares of beneficial interest for the fiscal years ended October
31, 1998 and October 31, 1997 were as follows:

Class A Shares Amount
- --------------------------------- ----------- -------------
Year ended October 31, 1998:
Shares sold...................... 18,187,422 $ 372,808,932
Shares issued in reinvestment of
dividends and distributions.... 3,225,575 63,494,283
Shares reacquired................ (16,281,521) (328,591,719)
----------- -------------
Net increase in shares
outstanding before
conversion..................... 5,131,476 107,711,496
Shares issued upon conversion
and/or exchanged from Class B.. 1,987,257 39,239,381
----------- -------------
Net increase in shares
outstanding.................... 7,118,733 $ 146,950,877
=========== =============
Year ended October 31, 1997:
Shares sold...................... 24,088,902 $ 429,955,821
Shares issued in reinvestment of
dividends and distributions.... 1,457,169 24,726,140
Shares reacquired................ (23,710,223) (422,399,190)
----------- -------------
Net increase in shares
outstanding before
conversion..................... 1,835,848 32,282,771
Shares issued upon conversion
and/or exchanged from Class
B.............................. 3,168,790 57,758,918
----------- -------------
Net increase in shares
outstanding.................... 5,004,638 $ 90,041,689
=========== =============
- --------------------------------------------------------------------------------
B-52
<PAGE>

Notes to Financial Statements PRUDENTIAL EQUITY INCOME FUND
- --------------------------------------------------------------------------------

Class B Shares Amount
- ------- ------ -----------
Year ended October 31, 1998:
Shares sold...................... 21,354,121 $ 438,253,055
Shares issued in reinvestment of
dividends and distributions.... 6,214,814 121,857,308
Shares reacquired................ (15,295,489) (302,422,093)
----------- -------------
Net increase in shares
outstanding before
conversion..................... 12,273,446 257,688,270
Shares reacquired upon conversion
and/or exchanged into Class B.. (1,995,029) (39,239,381)
----------- -------------
Net increase in shares
outstanding.................... 10,278,417 $ 218,448,889
=========== =============

Year ended October 31, 1997:
Shares sold...................... 11,692,362 $ 220,160,621
Shares issued in reinvestment of
dividends and distributions.... 3,363,615 56,041,561
Shares reacquired................ (12,575,129) (224,049,253)
----------- -------------
Net increase in shares
outstanding before
conversion..................... 2,480,848 52,152,929
Shares reacquired upon conversion
and/or exchanged into Class A.. (3,179,464) (57,758,918)
----------- -------------
Net decrease in shares
outstanding.................... (698,616) $ (5,605,989)
============= ==============

Year ended October 31, 1998:
Shares sold...................... 1,490,743 $ 30,682,873
Shares issued in reinvestment of
dividends and distributions.... 109,439 2,144,607
Shares reacquired................ (410,298) (8,131,504)
----------- -------------
Net increase in shares
outstanding.................... 1,189,884 $ 24,695,976
=========== =============

Class C Shares Amount
- ------- ----------- -------------
Year ended October 31, 1997:
Shares sold...................... 479,888 $ 9,368,720
Shares issued in reinvestment of
dividends and distributions.... 33,855 567,873
Shares reacquired................ (211,033) (3,840,172)
----------- -------------
Net increase in shares
outstanding.................... 302,710 $ 6,096,421
=========== =============
Class Z
- -------
Year ended October 31, 1998:
Shares sold...................... 8,469,492 $ 171,000,282
Shares issued in reinvestment of
dividends and distributions.... 563,480 11,048,574
Shares reacquired................ (4,936,214) (101,237,971)
----------- -------------
Net increase in shares
outstanding.................... 4,096,758 $ 80,810,885
============ =============
Year ended October 31, 1997:
Shares sold...................... 2,149,748 $ 40,494,703
Shares issued in reinvestment of
dividends and distributions.... 213,923 3,630,172
Shares reacquired................ (1,680,122) (30,855,405)
----------- -------------
Net increase in shares
outstanding.................... 683,549 $ 13,269,470
============ =============

- --------------------------------------------------------------------------------
Note 7. Dividends

On December 7, 1998 the Board of Trustees of the Fund declared the following
dividends per share, payable on December 9, 1998 to shareholders of record on
December 8, 1998.

Class Class B Class
A and C Z
--------- --------- ------
Ordinary Income................... $.115 $ .08 $ .125
Short-Term Capital Gains.......... $ .37 $ .37 $ .37
Long-Term Capital Gains........... $ .69 $ .69 $ .69
- --------------------------------------------------------------------------------
B-53

<PAGE>

Financial Highlights PRUDENTIAL EQUITY INCOME FUND
================================================================================
<TABLE>
<CAPTION>

Class A
------------------------------------------------------------
Year Ended October 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year...... $ 21.00 $ 15.43 $ 14.40 $ 14.03 $ 14.38
-------- -------- -------- -------- --------
Income from investment operations
Net investment income................... .45 .45 .47 .48 .41
Net realized and unrealized gain (loss)
on investment transactions........... (.49) 6.29 1.75 .95 .06
-------- -------- -------- -------- --------
Total from investment operations..... (.04) 6.74 2.22 1.43 .47
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income.... (.44) (.43) (.49) (.54) (.29)
Distributions from net realized gains... (1.89) (.74) (.70) (.52) (.53)
-------- -------- -------- -------- --------
Total distributions.................. (2.33) (1.17) (1.19) (1.06) (.82)
-------- -------- -------- -------- --------
Net asset value, end of year............ $ 18.63 $ 21.00 $ 15.43 $ 14.40 $ 14.03
======== ======== ======== ======== ========
TOTAL RETURN(a):........................ (.65)% 45.68% 15.97% 11.15% 3.48%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........... $638,547 $570,146 $341,717 $276,990 $150,502
Average net assets (000)................ $655,776 $454,892 $310,335 $236,688 $131,398
Ratios to average net assets:
Expenses, including distribution
fees.............................. .91% .94% .98% 1.03% 1.09%
Expenses, excluding distribution
fees.............................. .66% .69% .73% .78% .85%
Net investment income................ 2.19% 2.32% 3.26% 3.36% 2.97%
For Class A, B, C and Z shares:
Portfolio turnover rate................. 22% 36% 36% 74% 70%
</TABLE>
- ---------------
(a) 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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-54
<PAGE>

Financial Highlights PRUDENTIAL EQUITY INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------------
Year Ended October 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year...... $ 20.93 $ 15.39 $ 14.36 $ 14.00 $ 14.35
---------- ---------- ---------- -------- --------
Income from investment operations
Net investment income................... .29 .29 .39 .37 .31
Net realized and unrealized gain (loss)
on investment transactions........... (.48) 6.29 1.71 .95 .06
---------- ---------- ---------- -------- --------
Total from investment operations..... (.19) 6.58 2.10 1.32 .37
---------- ---------- ---------- -------- --------
Less distributions
Dividends from net investment income.... (.28) (.30) (.37) (.44) (.19)
Distributions from net realized gains... (1.89) (.74) (.70) (.52) (.53)
---------- ---------- ---------- -------- --------
Total distributions.................. (2.17) (1.04) (1.07) (.96) (.72)
---------- ---------- ---------- -------- --------
Net asset value, end of year............ $ 18.57 $ 20.93 $ 15.39 $ 14.36 $ 14.00
========== ========== ========== ======== ========

TOTAL RETURN(a):........................ (1.35)% 44.60% 15.12% 10.29% 2.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........... $1,299,962 $1,250,216 $ 929,948 $906,793 $954,951
Average net assets (000)................ $1,391,826 $1,072,118 $ 951,220 $911,856 $784,063
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.66% 1.69% 1.73% 1.78% 1.85%
Expenses, excluding distribution
fees.............................. .66% .69% .73% .78% .85%
Net investment income................ 1.44% 1.60% 2.51% 2.66% 2.21%
</TABLE>
- ---------------
(a) 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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-55
<PAGE>

Financial Highlights PRUDENTIAL EQUITY INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
--------------------------------------------------------- ------------------------
August 1,
1994(c)
Year Ended October 31, Through Year Ended October 31,
----------------------------------------- October 31, ------------------------
1998 1997 1996 1995 1994 1998 1997
------- ------- ------ ------ ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 20.93 $ 15.39 $14.36 $14.00 $ 13.99 $ 21.00 $ 15.42
------- ------- ------ ------ ----- -------- -----------
Income from investment operations
Net investment income................... .30 .37 .38 .40 .08 .52 .36
Net realized and unrealized gain (loss)
on investment transactions........... (.49) 6.21 1.72 .92 (.02) (.51) 6.43
------- ------- ------ ------ ----- -------- -----------
Total from investment operations..... (.19) 6.58 2.10 1.32 .06 .01 6.79
------- ------- ------ ------ ----- -------- -----------
Less distributions
Dividends from net investment income.... (.28) (.30) (.37) (.44) (.05) (.48) (.47)
Distributions from net realized gains... (1.89) (.74) (.70) (.52) -- (1.89) (.74)
------- ------- ------ ------ ----- -------- -----------
Total distributions.................. (2.17) (1.04) (1.07) (.96) (.05) (2.37) (1.21)
------- ------- ------ ------ ----- -------- -----------
Net asset value, end of period.......... $ 18.57 $ 20.93 $15.39 $14.36 $ 14.00 $ 18.64 $ 21.00
======= ======= ====== ====== ====== ======== ==========

TOTAL RETURN(a):........................ (1.35)% 44.60% 15.12% 10.29% 0.45% (.40)% 46.12%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $37,988 $17,911 $8,511 $4,586 $ 1,527 $142,918 $74,956
Average net assets (000)................ $31,345 $11,432 $6,730 $3,132 $ 762 $103,474 $57,369
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.66% 1.69% 1.73% 1.78% 2.05%(b) .66% .69%
Expenses, excluding distribution
fees.............................. .66% .69% .73% .78% 1.05%(b) .66% .69%
Net investment income................ 1.47% 1.53% 2.51% 2.57% 2.42%(b) 2.49% 2.58%
<CAPTION>

March 1,
1996(d)
Through
October 31,
1996
-----------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 15.13
-----------
Income from investment operations
Net investment income................... .38
Net realized and unrealized gain (loss)
on investment transactions........... .30
-----------
Total from investment operations..... .68
-----------
Less distributions
Dividends from net investment income.... (.39)
Distributions from net realized gains... --
-----------
Total distributions.................. (.39)
-----------
Net asset value, end of period.......... $ 15.42
===========

TOTAL RETURN(a):........................ 4.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $44,509
Average net assets (000)................ $24,641
Ratios to average net assets:
Expenses, including distribution
fees.............................. .73%(b)
Expenses, excluding distribution
fees.............................. .73%(b)
Net investment income................ 3.51%(b)
</TABLE>
- ---------------
(a) 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.
(b) Annualized.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-56
<PAGE>

Report of Independent Accountants PRUDENTIAL EQUITY INCOME FUND
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Equity Income Fund

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Equity Income Fund (the
'Fund') at October 31, 1998, the results of its operations for the year then
ended, and the changes in its net assets and the financial highlights for each
of the two years in the period then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as 'financial statements') are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above. The accompanying financial highlights for each of the three periods in
the period ended October 31, 1996 were audited by other independent accountants,
whose opinion dated December 5, 1996 was unqualified.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 21, 1998
- --------------------------------------------------------------------------------
B-57
<PAGE>

DESCRIPTION OF SECURITY RATINGS

MOODY'S INVESTORS SERVICE

BOND RATINGS

Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.

Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than the Aaa
securities.

A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.

Baa: Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.

Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.

Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.

SHORT-TERM DEBT RATINGS

Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.

PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obliqations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:

. Leading market positions in well-established industries.

. High rates of return on funds employed.

. Conservative capitalization structure with moderate reliance on debt and
ample asset protection.

. Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.

. Well-established access to a range of financial markets and assured
sources of alternate liquidity.

PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This normally
will be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.

A-1
<PAGE>

STANDARD & POOR'S RATINGS GROUP

DEBT RATINGS

AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.

AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.

A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.

BBB: An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.

BB, B, CCC AND CC: Obligations rated BB, B, CCC and CC are regarded as
having significant speculative characteristics. BB indicates the least degree
of speculation and CC the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.

COMMERCIAL PAPER RATINGS

An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.

A-1: This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.

A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.

DUFF & PHELPS CREDIT RATING CO.

LONG-TERM DEBT AND PREFERRED STOCK RATINGS

AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.

AA: High credit quality. Protection factors are strong. Risk is modest but
may vary sightly from time to time because of economic conditions.

A: Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.

BBB: Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.

BB: Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.

B: Below investment grade and possessing risk that obligations will not be
met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.

Duff & Phelps refines each generic rating classification from AA through B
with a "+" or a "-".

CCC: WELL BELOW INVESTMENT GRADE SECURITIES. CONSIDERABLE UNCERTAINTY EXISTS
AS TO TIMELY PAYMENT OF PRINCIPAL, INTEREST OR PREFERRED DIVIDENDS. PROTECTION
FACTORS ARE NARROW AND RISK CAN BE SUBSTANTIAL WITH UNFAVORABLE
ECONOMIC/INDUSTRY CONDITIONS, AND/OR WITH UNFAVORABLE COMPANY DEVELOPMENTS.

SHORT-TERM DEBT RATINGS

DUFF 1 +: Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury short-
term obligations.

DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.

DUFF 1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.

DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.

A-2
<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.

STANDARD DEVIATION

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

I-1
<PAGE>

APPENDIX II--HISTORICAL PERFORMANCE DATA

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

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

HISTORICAL PERFORMANCE DATA

[LINE GRAPH APPEARS HERE]

Value of $1.00 invested on 1/1/26 through 12/31/97.

Small Stocks -- $5,519.97 Long-Term Bonds -- 39.07
Common Stocks -- 1,828.33 Treasury Bills -- 14.25
Inflation -- 9.02

Source: Stocks, Bonds, Bills, and Inflation 1998 Yearbook, Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. This chart is for
illustrative purposes only and is not indicative of the past, present, or
future performance of any asset class or any Prudential Mutual Fund.

Generally, stock returns are due to capital appreciation and the reinvestment
of any gains. Bond returns are due 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 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 1997. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.

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

Historical Total Returns of Different Bond Market Sectors

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
YEAR 1987 1988 1989 1990 1991 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
Treasury
Bonds/1/ 2.0% 7.0% 14.4% 8.5% 15.3% 7.2%
- -------------------------------------------------------------------------------
U.S. Government
Mortgage
Securities/2/ 4.3% 8.7% 15.4% 10.7% 15.7% 7.0%
- -------------------------------------------------------------------------------
U.S. Investment Grade
Corporate Bonds/3/ 2.6% 9.2% 14.1% 7.1% 18.5% 8.7%
- -------------------------------------------------------------------------------
U.S. High Yield
Corporate Bonds/4/ 5.0% 12.5% 0.8% 9.6% 46.2% 15.8%
- -------------------------------------------------------------------------------
World Government
Bonds/5/ 35.2% 2.3% 3.4% 15.3% 16.2% 4.8%
- -------------------------------------------------------------------------------
Difference between
highest and lowest 33.2% 10.2% 18.8% 24.9% 30.9% 11.0%
returns percent
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
YEAR 1993 1994 1995 1996 1997
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Government
Treasury
Bonds/1/ 10.7% -3.4% 18.4% 2.7% 9.6%
- ------------------------------------------------------------------------
U.S. Government
Mortgage
Securities/2/ 6.8% -1.6% 16.8% 5.4% 9.5%
- ------------------------------------------------------------------------
U.S. Investment Grade
Corporate Bonds/3/ 12.2% -3.9% 22.3% 3.3% 10.2%
- ------------------------------------------------------------------------
U.S. High Yield
Corporate Bonds/4/ 17.1% -1.0% 19.2% 11.4% 12.8%
- ------------------------------------------------------------------------
World Government
Bonds/5/ 15.1% 6.0% 19.6% 4.1% (4.3%)
- ------------------------------------------------------------------------
Difference between
highest and lowest 10.3% 9.9% 5.5% 8.7% 17.1
returns percent
- ------------------------------------------------------------------------
</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.
Table

II-2
<PAGE>

This chart illustrates the This chart shows the growth of a
performance of major world stock hypothetical $10,000 investment made
markets for the period from in the stocks representing the S&P
December 31, 1986 through December 500 stock index with and without
31, 1997. It does not represent reinvested dividends.
the performance of any Prudential
Mutual Fund.
[LINE GRAPH APPEARS HERE]
Average Annual Total Returns of 1969-1997
Major World Stock Markets Capital Appreciation and
12/31/86-12/31/97 (in U.S. Reinvesting Dividends $304,596
Dollars) Capital Appreciation Only 105,413

[BAR GRAPH APPEARS HERE]

Netherlands 20.5%
Spain 20.4%
Sweden 20.4%
Hong Kong 19.7%
Belgium 19.5%
Switzerland 17.9%
USA 17.1%
UK 16.6%
France 15.6%
Germany 12.1%
Austria 9.6%
Japan 6.6%

Source: Morgan Stanley Capital Source: Stocks, Bonds, Bills, and
International (MSCI) and Lipper Inflation 1998 Yearbook, Ibbotson
Analytical Services, Inc. as of Associates, Chicago (annually
12/31/97. Used with permission. updates work by Roger G. Ibbotson
Morgan Stanley Country indices are and Rex A. Sinquefield). Used with
unmanaged indices which include permission. All rights reserved.
those stocks making up the largest This chart is used for illustrative
two-thirds of each country's total purposes only and is not intended to
stock market capitalization. represent the past, present or
Returns reflect the reinvestment future performance of any Prudential
of all distributions. This chart Mutual Fund. Common stock total
is for illustrative purposes only return is based on the Standard &
and is not indicative of the past, Poor's 500 Stock Index, a market-
present or future performance of value-weighted index made up of 500
any specific investment. Investors of the largest stocks in the U.S.
cannot invest directly in stock based upon their stock market value.
indices. Investors cannot invest directly in
indices.

WORLD STOCK MARKET CAPITALIZATION BY
REGION
World Total: $12.5 Trillion

[PIE CHART APPEARS HERE]
U.S 49.8%
Europe 32.1%
Pacific Basin 15.6%
Canada 2.5%

Source: Morgan Stanley Capital
International, December 31, 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 (1926-1997)

[LINE GRAPH APPEARS HERE]

- ---------------------------------------
Source: Stocks, Bonds, Bills, and Inflation 1998 Yearbook, Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. The chart illustrates
the historical yield of the long-term U.S. Treasury Bond from 1926-1997.
Yields represent that of an annually renewed one-bond portfolio with a
remaining maturity of approximately 20 years. This chart is for illustrative
purposes and should not be construed to represent the yields of any Prudential
Mutual Fund.

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, 1976 through December 31, 1997. The horizontal "Best Returns
Zone" band shows that a hypothetical blended portfolio constructed of one-
third U.S. stock (S&P 500), one-third foreign stock (EAFE Index), and one-
third U.S. bonds (Lehman Index) would have eliminated the "highest highs" and
"lowest lows" of any single asset class.

THE RANGE OF ANNUAL TOTAL RETURNES FOR MAJOR STOCK & BOND
Indices Over the Past 20 Years
(12/31/77-12/31/97)*
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 EAPE Index
1/3 Lehman Aggregate Index
- ---------
* Source: Prudential Investment Corporation based on data from Lipper
Analytical New Application (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-4
<PAGE>

APPENDIX III--INFORMATION RELATING TO PRUDENTIAL

Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating
to the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. The data will be used in sales materials relating to the
Prudential Mutual Funds. Unless otherwise indicated, the information is as of
December 31, 1997 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, 1997. 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 more than
79,000 persons worldwide, and maintains a sales force of approximately 10,100
agents and 6,500 domestic and international 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 40 million people
worldwide. Long one of the largest issuers of life insurance, Prudential has
25 million life insurance policies in force today with a face value of almost
$1 trillion. Prudential has the largest capital base ($12.1 billion) of any
life insurance company in the United States. The Prudential provides auto
insurance for more than 1.5 million cars and insures more than 1.2 million
homes.

Money Management. The Prudential is one of the largest pension fund managers
in the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k)
plans. As of December 31, 1997, Prudential had more than $370 billion in
assets under management. Prudential Investments, a business group of
Prudential (of which Prudential Mutual Funds is a key part) manages over $211
billion in assets of institutions and individuals. In Pensions & Investments,
May 12, 1996, 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 and more than 1,100 offices throughout the United States./2/

Healthcare. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.9
million Americans receive healthcare from a Prudential managed care
membership.

Financial Services. The Prudential Savings Bank FSB, a wholly-owned
subsidiary of the Prudential, has nearly $1 billion in assets and serves
nearly 1.5 million customers across 50 states.

INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS

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

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

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.
- ---------
/1/ 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 one of the subadvisers to The Prudential Investment Portfolios,
Inc. and Mercator Asset Management LP as the subadviser to International
Stock Series, a portfolio of Prudential World Fund, Inc. There are
multiple subadvisers for The Target Portfolio Trust.
/2/ As of December 31, 1996.

III-1
<PAGE>

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 LLC, 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
approximately 200 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/

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.
- ---------

/3/ As of December 31, 1996. 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 Investments, a business group of PIC, for the year
ended December 31, 1995.
/5/ Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment
Grade Debt, General U.S. Treasury, General U.S. Government and Mortgage
Funds.
/6/ As of December 31, 1994.

III-2
<PAGE>

INFORMATION ABOUT PRUDENTIAL SECURITIES

Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
Annuities. As of December 31, 1997, assets held by Prudential Securities for
its clients approximated $235 billion. During 1997, over 29,000 new customer
accounts were opened each month at Prudential Securities./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.

In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey.
Three 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, 1997.
/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 23. EXHIBITS.

(a) (1) Amended and Restated Declaration of Trust. Incorporated by
reference to Exhibit 1(a) to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A filed via EDGAR on December 21,
1994 (File No. 33-9269).

(2) Amended Certificate of Designation. Incorporated by reference to
Exhibit (a)(2) to Post-Effective Amendment No. 19 to the Registration
Statement on Form N-1A filed via EDGAR on October 22, 1998 (File No.
33-9269).

(b) By-laws. Incorporated by reference to Exhibit 2(b) to Post-Effective
Amendment No. 11 to the Registration Statement on Form N-1A filed
via EDGAR on May 6, 1994 (File No. 33-9269).

(c) (1) Specimen receipt for shares of beneficial interest, $.01 par
value. Incorporated by reference to Exhibit 4(a) to Post-Effective
Amendment No. 18 to the Registration Statement on Form N-1A filed
via EDGAR on December 30, 1997 (File No. 33-9269).

(2) Instruments Defining Rights of Shareholders. Incorporated by
reference to Exhibit 4(c) to Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A filed via EDGAR on December 30,
1993 (File No. 33-9269).

(d) (1) Amended and Restated Management Agreement between the Registrant
and Prudential Mutual Fund Management, Inc. Incorporated by
reference to Exhibit 5(a) to Post-Effective Amendment No. 15 to the
Registration Statement on Form N-1A filed via EDGAR on October 30,
1995 (File No. 33-9269).

(2) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. Incorporated by
reference to Exhibit 5(b) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A filed via EDGAR on December 30,
1997 (File No. 33-9269).

(e) (1) Distribution Agreement with Prudential Investment Management
Services LLC. Incorporated by reference to Exhibit (e)(1) to Post-
Effective Amendment No. 19 to the Registration Statement on Form N-
1A filed via EDGAR on October 22, 1998 (File No. 33-9269).

(2) Selected Dealer Agreement. Incorporated by reference to Exhibit
(e)(2) to Post-Effective Amendment No. 19 to the Registration
Statement on Form N-1A filed via EDGAR on October 22, 1998 (File No.
33-9269).

(g) Custodian Contract between the Registrant and State Street Bank and
Trust Company. Incorporated by reference to Exhibit 8 to Post-
Effective Amendment No. 18 to the Registration Statement on Form N-
1A filed via EDGAR on December 30, 1997 (File No. 33-9269).

(h) Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorporated by reference to
Exhibit 9 to Post-Effective Amendment No. 18 to the Registration
Statement on Form N-1A filed via EDGAR on December 30, 1997 (File
No. 33-9269).

(i) Opinion of Counsel. Incorporated by reference to Exhibit 10 to Post-
Effective Amendment No. 18 to the Registration Statement on Form N-
1A filed via EDGAR on December 30, 1997 (File No. 33-9269).

(j) Consent of independent accountants.*

(m) (1) Amended and Restated Distribution and Service Plan for Class A
shares. Incorporated by reference to Exhibit (m)(1) to Post-
Effective Amendment No. 19 to the Registration Statement on Form N-
1A filed via EDGAR on October 22, 1998 (File No. 33-9269).

(2) Amended and Restated Distribution and Service Plan for Class B
shares. Incorporated by reference to Exhibit (m)(2) to Post-Effective
Amendment No. 19 to the Registration Statement on Form N-1A filed via
EDGAR on October 22, 1998 (File No. 33-9269).

(3) Amended and Restated Distribution and Service Plan for Class C
shares. Incorporated by reference to Exhibit (m)(3) to Post-Effective
Amendment No. 19 to the Registration Statement on Form N-1A filed via
EDGAR on October 22, 1998 (File No. 33-9269).

(n) Financial Data Schedules.*

(o) Amended Rule 18f-3 Plan. Incorporated by reference to Exhibit (o) to
Post-Effective Amendment No. 19 to the Registration Statement on
Form N-1A filed via EDGAR on October 22, 1998 (File No. 33-9269).
- ---------
*Filed herewith.

C-1
<PAGE>

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

None.

ITEM 25. INDEMNIFICATION.

As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940
(the 1940 Act) and pursuant to Article V, Sections 5.2 and 5.3 of the
Declaration of Trust (Exhibit a(1) to the Registration Statement) and to
Article X of the Fund's By-Laws (Exhibit b to the Registration Statement),
officers, Trustees, employees and agents of the Registrant will not be liable
to the Registrant, any shareholder, officer, Trustee, 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. As permitted by Section 17(i) of
the 1940 Act, pursuant to Section 10 of the Distribution Agreement (Exhibit e
to the Registration Statement), the Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.

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

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

Section 9 of the Management Agreement (Exhibit d(1) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit d(2) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (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 Section 17(h) and 17(i) of
such Act remain in effect and are consistently applied.

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

(a) Prudential Investments Fund Management LLC

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

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

C-2
<PAGE>

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

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

(b) The Prudential Investment Corporation (PIC)

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

The business and other connections of PIC's directors and executive officers
are as set forth below. 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
---------------- ----------------- ---------------------
<C> <S> <C>
E. Michael Caulfield Chairman Chief Executive Officer of Prudential Investments
of the (PIC) of The Prudential Insurance Company of America
Board, (Prudential)
President
and Chief
Executive
Officer
and
Director
John R. Strangfeld Vice President of Private Asset Management Group of
President Prudential; Senior Vice President, Prudential; Vice
and President and Director, PIC
Director
</TABLE>

ITEM 27. PRINCIPAL UNDERWRITERS.

(a) Prudential Investment Management Services LLC (PIMS)

PIMS is distributor for Cash Accumulation Trust, Command Government Fund,
Command Money Fund, Command Tax-Free Fund, 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 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 High Yield
Total Return Fund, Inc., Prudential Index Series Fund, Prudential
Institutional Liquidity Portfolio, Inc., Prudential Intermediate Global Income
Fund, Inc., Prudential International Bond Fund, Inc., Prudential Mid-Cap Value
Fund, Prudential MoneyMart Assets, Inc., Prudential Mortgage Income 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 Real Estate Securities
Fund, Prudential Small-Cap Quantum Fund, Inc., Prudential Small Company Value
Fund, Inc., Prudential Special Money Market Fund, Inc., Prudential Structured
Maturity Fund, Inc., Prudential 20/20 Focus Fund, Prudential Utility Fund,
Inc., Prudential World Fund, Inc., The Prudential Investment Portfolios, Inc.
and The Target Portfolio Trust.

C-3
<PAGE>

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

<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ------- ------------- -------------
<S> <C> <C>
E. Michael Caulfield.... President None
Mark R. Fetting......... Executive Vice President None
Gateway Center Three
100 Mulberry Street
Newark, New Jersey
07102
Jean D. Hamilton........ Executive Vice President None
Ronald P. Joelson....... Executive Vice President None
Brian M. Storms......... Executive Vice President President and Trustee
Gateway Center Three
100 Mulberry Street
Newark, New Jersey
07102
John R. Strangfeld...... Executive Vice President None
Mario A. Mosse ......... Senior Vice President and Chief Operating Officer None
Scott S. Wallner........ Vice President, Secretary and Chief Legal Officer None
Michael G. Williamson... Vice President, Comptroller and Chief Financial Officer None
C. Edward Chaplin....... Treasurer None
</TABLE>
- ---------

(/1/)The address of each person named is Prudential Plaza, 751 Broad Street,
Newark, New Jersey 07102 unless otherwise indicated.

ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.

All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices
of State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171; The Prudential Investment Corporation, Prudential Plaza,
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, 100 Mulberry Street, Newark, New Jersey 07102-4077, and the
remaining accounts, books and other documents required by such other pertinent
provisions of Section 31(a) and the Rules promulgated thereunder will be kept
by State Street Bank and Trust Company and Prudential Mutual Fund Services
LLC.

ITEM 29. MANAGEMENT SERVICES.

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

ITEM 30. UNDERTAKINGS.

Not applicable.

C-4
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act and the Investment Company
Act, 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 and has duly caused this Post-
Effective Amendment to the Registration Statement to be signed on its behalf by
the undersigned, duly authorized, in the City of Newark, and State of New
Jersey, on the 29th day of December, 1998.

PRUDENTIAL EQUITY INCOME FUND

/s/ Brian M. Storms
----------------------------------

(BRIAN M. STORMS, 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/ Grace C. Torres Treasurer and Principal Financial December 29, 1998
- --------------------------------- and Accounting Officer
GRACE C. TORRES
/s/ Edward D. Beach Trustee December 29, 1998
- ---------------------------------
EDWARD D. BEACH
/s/ Delayne D. Gold Trustee December 29, 1998
- ---------------------------------
DELAYNE D. GOLD
/s/ Robert F. Gunia Trustee December 29, 1998
- ---------------------------------
ROBERT F. GUNIA
/s/ Douglas H. McCorkindale Trustee December 29, 1998
- ---------------------------------
DOUGLAS H. MCCORKINDALE
/s/ Mendel A. Melzer Trustee December 29, 1998
- ---------------------------------
MENDEL A. MELZER
/s/ Thomas T. Mooney Trustee December 29, 1998
- ---------------------------------
THOMAS T. MOONEY
/s/ Stephen P. Munn Trustee December 29, 1998
- ---------------------------------
STEPHEN P. MUNN
/s/ Richard A. Redeker Trustee December 29, 1998
- ---------------------------------
RICHARD A. REDEKER
/s/ Robin B. Smith Trustee December 29, 1998
- ---------------------------------
ROBIN B. SMITH
/s/ Brian M. Storms President and Trustee December 29, 1998
- ---------------------------------
BRIAN M. STORMS
/s/ Louis A. Weil, III Trustee December 29, 1998
- ---------------------------------
LOUIS A. WEIL, III
/s/ Clay T. Whitehead Trustee December 29, 1998
- ---------------------------------
CLAY T. WHITEHEAD
</TABLE>

C-5
<PAGE>

PRUDENTIAL EQUITY INCOME FUND

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
(a)(1) Amended and Restated Declaration of Trust. Incorporated by
reference to Exhibit 1(a) to Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A filed via EDGAR on
December 21, 1994 (File No. 33-9269).
(a)(2) Amended Certificate of Designation. Incorporated by reference
to Exhibit (a)(2) to Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A filed via EDGAR on October
22, 1998 (File No. 33-9269).
(b) By-laws. Incorporated by reference to Exhibit 2(b) to Post-
Effective Amendment No. 11 to the Registration Statement on
Form N-1A filed via EDGAR on May 6, 1994 (File No. 33-9269).
(c)(1) Specimen receipt for shares of beneficial interest, $.01 par
value. Incorporated by reference to Exhibit 4(a) to Post-
Effective Amendment No. 18 to the Registration Statement on
Form N-1A filed via EDGAR on December 30, 1997 (File No. 33-
9269).
(c)(2) Instruments Defining Rights of Shareholders. Incorporated by
reference to Exhibit 4(c) to Post-Effective Amendment No. 10 to
the Registration Statement on Form N-1A filed via EDGAR on
December 30, 1993 (File No. 33-9269).
(d)(1) Amended and Restated Management Agreement between the
Registrant and Prudential Mutual Fund Management, Inc.
Incorporated by reference to Exhibit 5(a) to Post-Effective
Amendment No. 15 to the Registration Statement on Form N-1A
filed via EDGAR on October 30, 1995 (File No. 33-9269).
(d)(2) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and The Prudential Investment Corporation.
Incorporated by reference to Exhibit 5(b) to Post-Effective
Amendment No. 18 to the Registration Statement on Form N-1A
filed via EDGAR on December 30, 1997 (File No. 33-9269).
(e)(1) Distribution Agreement with Prudential Investment Management
Services LLC. Incorporated by reference to Exhibit (e)(1) to
Post-Effective Amendment No. 19 to the Registration Statement
on Form N-1A filed via EDGAR on October 22, 1998 (File No. 33-
9269).
(e)(2) Selected Dealer Agreement. Incorporated by reference to Exhibit
(e)(2) to Post-Effective Amendment No. 19 to the Registration
Statement on Form N-1A filed via EDGAR on October 22, 1998
(File No. 33-9269).
(g) Custodian Contract between the Registrant and State Street Bank
and Trust Company. Incorporated by reference to Exhibit 8 to
Post-Effective Amendment No. 18 to the Registration Statement
on Form N-1A filed via EDGAR on December 30, 1997 (File No. 33-
9269).
(h) Transfer Agency and Service Agreement between the Registrant
and Prudential Mutual Fund Services, Inc. Incorporated by
reference to Exhibit 9 to Post-Effective Amendment No. 18 to
the Registration Statement on Form N-1A filed via EDGAR on
December 30, 1997 (File No. 33-9269).
(i) Opinion of Counsel. Incorporated by reference to Exhibit 10 to
Post-Effective Amendment No. 18 to the Registration Statement
on Form N-1A filed via EDGAR on December 30, 1997 (File No. 33-
9269).
(j) Consent of independent accountants.*
(m)(1) Amended and Restated Distribution and Service Plan for Class A
shares. Incorporated by reference to Exhibit (m)(1) to Post-
Effective Amendment No. 19 to the Registration Statement on
Form N-1A filed via EDGAR on October 22, 1998 (File No. 33-
9269).
(m)(2) Amended and Restated Distribution and Service Plan for Class B
shares. Incorporated by reference to Exhibit (m)(2) to Post-
Effective Amendment No. 19 to the Registration Statement on
Form N-1A filed via EDGAR on October 22, 1998 (File No. 33-
9269).
(m)(3) Amended and Restated Distribution and Service Plan for Class C
shares. Incorporated by reference to Exhibit (m)(3) to Post-
Effective Amendment No. 19 to the Registration Statement on
Form N-1A filed via EDGAR on October 22, 1998 (File No. 33-
9269).
(n) Financial Data Schedules.*
(o) Amended Rule 18f-3 Plan. Incorporated by reference to Exhibit
(o) to Post-Effective Amendment No. 19 to the Registration
Statement on Form N-1A filed via EDGAR on October 22, 1998
(File No. 33-9269).
</TABLE>

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

<PAGE>

EXHIBIT 99.J

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Statement of Additional Information
constituting part of this post-effective Amendment No. 20 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
December 21, 1998, relating to the financial statements and financial highlights
of Prudential Equity Income Fund, 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 "Investment Advisory and Other
Services - Other Service Providers" in such Statement of Additional
Information and to the reference to us under the heading "Financial Highlights"
in such Prospectus.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
December 29, 1998

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> EQUITY INCOME FUND (CLASS A)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 1,830,565,690
<INVESTMENTS-AT-VALUE> 2,112,650,239
<RECEIVABLES> 22,053,300
<ASSETS-OTHER> 224,440
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 9,145,690
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,367,619
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,702,168,869
<SHARES-COMMON-STOCK> 113,980,502
<SHARES-COMMON-PRIOR> 91,296,710
<ACCUMULATED-NII-CURRENT> 500,009
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 134,664,183
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 282,081,609
<NET-ASSETS> (205,277,212)
<DIVIDEND-INCOME> 62,315,024
<INTEREST-INCOME> 5,461,868
<OTHER-INCOME> 0
<EXPENSES-NET> 30,366,566
<NET-INVESTMENT-INCOME> 37,410,326
<REALIZED-GAINS-CURRENT> 138,053,262
<APPREC-INCREASE-CURRENT> (224,412,031)
<NET-CHANGE-FROM-OPS> (48,948,443)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (36,147,834)
<DISTRIBUTIONS-OF-GAINS> (179,624,728)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,012,745,142
<NUMBER-OF-SHARES-REDEEMED> (740,383,287)
<SHARES-REINVESTED> 198,544,772
<NET-CHANGE-IN-ASSETS> 206,185,622
<ACCUMULATED-NII-PRIOR> (564,897)
<ACCUMULATED-GAINS-PRIOR> 176,230,283
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 10,945,895
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 30,366,566
<AVERAGE-NET-ASSETS> 655,776,000
<PER-SHARE-NAV-BEGIN> 21.00
<PER-SHARE-NII> 0.45
<PER-SHARE-GAIN-APPREC> (0.49)
<PER-SHARE-DIVIDEND> (0.44)
<PER-SHARE-DISTRIBUTIONS> (1.89)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 18.63
<EXPENSE-RATIO> 0.91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> EQUITY INCOME FUND (CLASS B)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 1,830,565,690
<INVESTMENTS-AT-VALUE> 2,112,650,239
<RECEIVABLES> 22,053,300
<ASSETS-OTHER> 224,440
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 9,145,690
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,367,619
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,702,168,869
<SHARES-COMMON-STOCK> 113,980,502
<SHARES-COMMON-PRIOR> 91,296,710
<ACCUMULATED-NII-CURRENT> 500,009
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 134,664,183
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 282,081,609
<NET-ASSETS> (205,277,212)
<DIVIDEND-INCOME> 62,315,024
<INTEREST-INCOME> 5,461,868
<OTHER-INCOME> 0
<EXPENSES-NET> 30,366,566
<NET-INVESTMENT-INCOME> 37,410,326
<REALIZED-GAINS-CURRENT> 138,053,262
<APPREC-INCREASE-CURRENT> (224,412,031)
<NET-CHANGE-FROM-OPS> (48,948,443)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (36,147,834)
<DISTRIBUTIONS-OF-GAINS> (179,624,728)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,012,745,142
<NUMBER-OF-SHARES-REDEEMED> (740,383,287)
<SHARES-REINVESTED> 198,544,772
<NET-CHANGE-IN-ASSETS> 206,185,622
<ACCUMULATED-NII-PRIOR> (564,897)
<ACCUMULATED-GAINS-PRIOR> 176,230,283
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 10,945,895
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 30,366,566
<AVERAGE-NET-ASSETS> 1,391,826,000
<PER-SHARE-NAV-BEGIN> 20.93
<PER-SHARE-NII> 0.29
<PER-SHARE-GAIN-APPREC> (0.48)
<PER-SHARE-DIVIDEND> (0.28)
<PER-SHARE-DISTRIBUTIONS> (1.89)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 18.57
<EXPENSE-RATIO> 1.66
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> EQUITY INCOME FUND (CLASS C)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 1,830,565,690
<INVESTMENTS-AT-VALUE> 2,112,650,239
<RECEIVABLES> 22,053,300
<ASSETS-OTHER> 224,440
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 9,145,690
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,367,619
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,702,168,869
<SHARES-COMMON-STOCK> 113,980,502
<SHARES-COMMON-PRIOR> 91,296,710
<ACCUMULATED-NII-CURRENT> 500,009
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 134,664,183
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 282,081,609
<NET-ASSETS> (205,277,212)
<DIVIDEND-INCOME> 62,315,024
<INTEREST-INCOME> 5,461,868
<OTHER-INCOME> 0
<EXPENSES-NET> 30,366,566
<NET-INVESTMENT-INCOME> 37,410,326
<REALIZED-GAINS-CURRENT> 138,053,262
<APPREC-INCREASE-CURRENT> (224,412,031)
<NET-CHANGE-FROM-OPS> (48,948,443)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (36,147,834)
<DISTRIBUTIONS-OF-GAINS> (179,624,728)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,012,745,142
<NUMBER-OF-SHARES-REDEEMED> (740,383,287)
<SHARES-REINVESTED> 198,544,772
<NET-CHANGE-IN-ASSETS> 206,185,622
<ACCUMULATED-NII-PRIOR> (564,897)
<ACCUMULATED-GAINS-PRIOR> 176,230,283
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 10,945,895
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 30,366,566
<AVERAGE-NET-ASSETS> 31,345,000
<PER-SHARE-NAV-BEGIN> 20.93
<PER-SHARE-NII> 0.30
<PER-SHARE-GAIN-APPREC> (0.49)
<PER-SHARE-DIVIDEND> (0.28)
<PER-SHARE-DISTRIBUTIONS> (1.89)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 18.57
<EXPENSE-RATIO> 1.66
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> EQUITY INCOME FUND (CLASS Z)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 1,830,565,690
<INVESTMENTS-AT-VALUE> 2,112,650,239
<RECEIVABLES> 22,053,300
<ASSETS-OTHER> 224,440
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 9,145,690
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,367,619
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,702,168,869
<SHARES-COMMON-STOCK> 113,980,502
<SHARES-COMMON-PRIOR> 91,296,710
<ACCUMULATED-NII-CURRENT> 500,009
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 134,664,183
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 282,081,609
<NET-ASSETS> (205,277,212)
<DIVIDEND-INCOME> 62,315,024
<INTEREST-INCOME> 5,461,868
<OTHER-INCOME> 0
<EXPENSES-NET> 30,366,566
<NET-INVESTMENT-INCOME> 37,410,326
<REALIZED-GAINS-CURRENT> 138,053,262
<APPREC-INCREASE-CURRENT> (224,412,031)
<NET-CHANGE-FROM-OPS> (48,948,443)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (36,147,834)
<DISTRIBUTIONS-OF-GAINS> (179,624,728)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,012,745,142
<NUMBER-OF-SHARES-REDEEMED> (740,383,287)
<SHARES-REINVESTED> 198,544,772
<NET-CHANGE-IN-ASSETS> 206,185,622
<ACCUMULATED-NII-PRIOR> (564,897)
<ACCUMULATED-GAINS-PRIOR> 176,230,283
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 10,945,895
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 30,366,566
<AVERAGE-NET-ASSETS> 103,474,000
<PER-SHARE-NAV-BEGIN> 21.00
<PER-SHARE-NII> 0.52
<PER-SHARE-GAIN-APPREC> (0.51)
<PER-SHARE-DIVIDEND> (0.48)
<PER-SHARE-DISTRIBUTIONS> (1.89)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 18.64
<EXPENSE-RATIO> 0.66
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>