PRUDENTIAL EQUITY INCOME FUND, 485BPOS, 2000-01-20

PRUDENTIAL EQUITY INCOME FUND
485BPOS, 2000-01-20

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<PAGE>

As filed with the Securities and Exchange Commission on January 20, 2000

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. 21

and/or

REGISTRATION STATEMENT UNDER THE

INVESTMENT COMPANY ACT OF 1940 [_]

[X]
Amendment No. 22

(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 20, 2000 pursuant to paragraph (b)

[_] 60 days after filing pursuant to paragraph (a)(1)

[_] on (date) pursuant to paragraph (a)(1)

[_] 75 days after filing pursuant to paragraph (a)(2)

[_] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:

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

Title of Securities Being Registered . . . . Shares of beneficial interest,
par value $.01 per share.

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<PAGE>

FUND TYPE:
_________________________________
Stock

INVESTMENT OBJECTIVES:
_________________________________
Capital appreciation and
current income

Prudential Equity
Income Fund
[LOGO]

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PROSPECTUS: JANUARY 20, 2000

As with all mutual funds, the
Securities and Exchange
Commission has not approved or
disapproved the Fund's shares,
nor has the SEC determined
that this prospectus is
complete or accurate. It is a
criminal offense to state
otherwise.
[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 Objectives and Principal Strategies
1 Principal Risks
2 Evaluating Performance
3 Fees and Expenses

5 How the Fund Invests
5 Investment Objectives and Policies
6 Other Investments and Strategies
9 Investment Risks

12 How the Fund is Managed

12 Board of Trustees
12 Manager
12 Investment Adviser
12 Portfolio Manager
13 Distributor
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 OBJECTIVES AND PRINCIPAL STRATEGIES

Our investment objectives are 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 and convertible securities of companies that
we believe will provide investment income returns above those of the Standard &
Poor's 500 Composite Stock Price Index or the New York Stock Exchange (NYSE)
Composite Index. We also may use derivatives for hedging or to improve the
Fund's returns.

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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
undervalued.

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While we make every effort to achieve our objectives, we can't guarantee
success.

PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Since we invest
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. Stock markets
are volatile.

In addition to an individual stock losing value, the value of the equity
markets or a sector of them could go down. The Fund's holdings can vary
significantly from broad market indexes, and performance of the Fund can
deviate from the performance of such indexes.

Some of our investment strategies--such as using derivatives--involve above-
average risks. The Fund may use risk management techniques to try to preserve
assets or enhance return. Derivatives may not fully offset the underlying
positions and this could result in losses to the Fund that would not otherwise
have occurred.

Like any mutual fund, an investment in the Fund could lose value, and you
could lose money. For more detailed information about the risks associated with
the Fund, see "How the Fund Invests--Investment Risks."
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
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1
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Risk/Return Summary
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EVALUATING PERFORMANCE

A number of factors--including risk--can affect how the Fund performs. The
following bar chart shows the Fund's performance for each full calendar year of
operation for the last 10 years. The bar chart and table below demonstrate the
risk of investing in the Fund by showing how returns can change from year to
year and by showing how the Fund's average annual total returns compare with a
stock index and a group of similar mutual funds. Past performance does not mean
that the Fund will achieve similar results in the future.

[BAR GRAPH]
Annual Returns* (Class B shares)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------

- -5.73% 25.62% 8.42% 20.43% -0.80% 20.72% 20.98% 35.35% -3.57% 10.74%

- ---------
BEST QUARTER: 16.24% (2nd quarter of 1997) WORST QUARTER: -18.25% (3rd quarter
of 1998)

* 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/1/ (as of 12-31-99)
<TABLE>
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<CAPTION>
1 YR 5 YRS 10 YRS SINCE INCEPTION
<S> <C> <C> <C> <C>
Class A shares 6.05% 15.78% N/A 13.42% (since 1-22-90)
Class B shares 5.74% 16.01% 12.47% 11.71% (since 1-22-87)
Class C shares 8.63% 15.88% N/A 13.89% (since 8-1-94)
Class Z shares 11.91% N/A N/A 15.38% (since 3-1-96)
S&P 500/2/ 21.03% 25.54% 19.36% N/A/2/
Lipper Average/3/ 4.56% 17.83% 13.46% N/A/3/
</TABLE>

1 The Fund's returns are after deduction of sales charges and expenses. Without
the distribution and service (12b-1) fee waiver for Class A shares, the
returns would have been lower.

2 The Standard & Poor's 500 Composite Stock Price Index (S&P 500)--an unmanaged
index of 500 stocks of large U.S. companies--gives a broad look at how stock
prices have performed. These returns do not include the effect of any sales
charges or operating expenses of a mutual fund. These returns would be lower
if they included the effect of sales charges and operating expenses. S&P 500
returns since the inception of each class are 19.18% for Class A, 16.96% for
Class B, 25.97% for Class C and 26.60% 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
13.30% for Class A, 11.88% for Class B, 15.61% for Class C and 14.62% 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 that you may pay if you
buy and hold shares of each 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
purchases (as a percentage of offering price) 5% None 1% None

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

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

Redemption fees None None None None

Exchange fee None None None None

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 .27% .27% .27% .27%
= Total annual Fund operating expenses 1.07% 1.77% 1.77% .77%
- Fee waiver or expense reimbursement .05% None None None
= Net annual Fund operating expenses 1.02%/4/ 1.77% 1.77% .77%
</TABLE>

1 Your broker may charge you a separate or additional fee for purchases and
sales of shares.
2 The Contingent Deferred Sales Charge (CDSC) for Class B shares decreases by
1% annually to 1% in the fifth and sixth years and 0% in the seventh year.
Class B shares convert to Class A shares approximately seven years after
purchase.
3 The CDSC for Class C shares is 1% for shares redeemed within 18 months of
purchase.

4 For the fiscal year ending 10-31-00, the Distributor of the Fund has
contractually agreed to reduce its distribution and service (12b-1) fees for
Class A shares to .25 of 1% of the average daily net assets of the Class A
shares.

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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
different share classes and compare the cost of investing in the Fund with the
cost of investing in other mutual funds.

The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that
the Fund's operating expenses remain the same, except for the Distributor's
reduction of distribution and service (12b-1) fees for Class A shares during
the first year. Although your actual costs may be higher or lower, based on
these assumptions, your costs would be:

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<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $599 $819 $1,056 $1,736
Class B shares $680 $857 $1,059 $1,813
Class C shares $378 $652 $1,050 $2,163
Class Z shares $ 79 $246 $ 428 $ 954
</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 $599 $819 $1,056 $1,736
Class B shares $180 $557 $ 959 $1,813
Class C shares $278 $652 $1,050 $2,163
Class Z shares $ 79 $246 $ 428 $ 954
</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 OBJECTIVES AND POLICIES

The Fund's investment objectives are 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
objectives, we can't guarantee success.

In pursuing our objectives, 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
percentage 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.

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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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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 stocks--that we can
convert into the company's common stock or some other equity security. The Fund
also invests in other equity-related securities, including American Depositary
Receipts (ADRs); nonconvertible preferred stock; warrants and rights that can
be exercised to obtain stock; real estate investment trusts (REITs);
investments in various types of business ventures, including partnerships and
joint ventures; and similar securities. 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" below and the Statement of
Additional Information, "Description of the Fund, Its Investments and Risks."
The Statement of Additional Information--which we refer to as the

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5
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How the Fund Invests
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SAI--contains additional information about the Fund. To obtain a copy, see the
back cover page of this prospectus.

The Fund's investment objectives are fundamental policies that cannot be
changed without shareholder approval. The Board of the Fund can change
investment policies that are not fundamental.

OTHER INVESTMENTS AND STRATEGIES

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

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
obligations 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 by Moody's
Investors Service, Inc. (Moody's) or Standard & Poor's Ratings Group (S&P) or
comparably rated by another major rating service). We may invest in lower-rated
obligations which are speculative, including high-yield or "junk" bonds
(obligations rated below Baa/BBB by Moody's or S&P or comparably rated),
although we will not invest in obligations rated lower than Ca/CC by Moody's or
S&P or comparably rated. 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,

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Prudential Equity Income Fund (800) 225-1852

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How the Fund Invests
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stock and other equity-related securities. For purposes of the 30% limit, 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 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
shareholders.

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

Repurchase Agreements

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

Derivative Strategies

We may use various derivative strategies to try to improve the Fund's returns
or protect its assets. We cannot guarantee that these strategies will work,
that the instruments necessary to implement these strategies will be available
or that the Fund will not lose money. Derivatives--such as futures, options,
foreign currency forward contracts and options on futures--involve costs and
can be volatile. With derivatives, the investment adviser tries to predict
whether the underlying investment--a security, market index, currency, interest
rate or some other benchmark--will go up or down at some future date. We may
use derivatives to try to reduce risk or to increase return consistent with the
Fund's overall investment objectives.

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7
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How the Fund Invests
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The investment adviser will consider other factors (such as cost) in deciding
whether to employ any particular strategy or use any particular instrument. Any
derivatives we use may not match the Fund's underlying holdings.

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

Futures Contracts and Related Options

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

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

Additional Strategies

The Fund also follows certain policies when it borrows money (the Fund can
borrow up to 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 on resale, those without a
readily available market and repurchase agreements with maturities longer than
seven days). The Fund is subject to certain investment restrictions that are
fundamental policies, which means they cannot be changed without shareholder
approval. For more information about these restrictions, see the SAI.

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8 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
exception. Since the Fund's holdings can vary significantly from broad market
indexes, performance of the Fund can deviate from performance of the indexes.
This chart outlines the key risks and potential rewards of the Fund's principal
investments and certain other non-principal investments the Fund may make. 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 outperformed
other
investments over
the long term

. The equity
At least 65% markets could go
down, resulting . Generally,
in a decline in economic growth
value of the means higher
Fund's corporate
investments profits, which
leads to an
. Companies that increase in
pay dividends may stock prices,
not do so if they known as capital
don't have appreciation
profits or
adequate cash . May be a source
flow of dividend
income
. Changes in
economic or
political
conditions, both
domestic and
international,
may result in a
decline in value
of the Fund's
investments

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Fixed-income . The Fund's
obligations holdings, share . Bonds have
price, yield and generally
total return may outperformed
fluctuate in money market
response to bond instruments over
market movements the long term,
with less risk
than stocks

Up to 35%
. Most bonds will
rise in value
when interest
. Credit risk--the rates fall
risk that the
default of an
issuer would
leave the Fund . Regular interest
with unpaid income
interest or
principal. The . Investment-grade
lower a bond's bonds have a
quality, the lower risk of
higher its default than
potential junk bonds
volatility

. Market risk--the . Principal and
risk that the interest on
market value of government
an investment may securities may
move up or down, be guaranteed by
sometimes the issuing
government

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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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Fixed-income rapidly or
obligations (cont'd) unpredictably. . High-quality
Market risk may debt obligations
affect an are generally
industry, a more secure than
sector or the stocks since
market as a whole companies must
pay their debts
before they pay
dividends

Up to 35%

. Interest rate
risk--the risk
that the value of
most bonds 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

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Foreign . Foreign markets, . Investors can
securities economies and participate in
political systems the growth of
may not be as foreign markets
stable as in the and companies
U.S. operating in
those markets

Up to 30%
. Changing value
. Currency risk-- of foreign
changing values currencies
of foreign . Opportunities
currencies can for
cause losses diversification
. May be less
liquid than U.S.
stocks and bonds

. Differences in
foreign laws,
accounting
standards, public
information,
custody and
settlement
practices provide
less reliable
information on
foreign
investments and
involve more risk

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. Performance . Real estate
Real estate depends on the holdings can
investment trusts strength of real generate good
(REITs) estate markets, returns from
REIT management rents, rising
and property market values,
management which etc.
can be affected
by many factors,
including
national and
regional economic
conditions

Up to 25%
. Greater
diversification
than direct
ownership

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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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Derivatives . Derivatives such . The Fund could
as futures, make money and
options and protect against
foreign currency losses if the
forward contracts investment
that are used for analysis proves
hedging purposes correct
may not fully
offset the . Derivatives that
underlying involve leverage
positions and could generate
this could result substantial
in losses to the gains at low
Fund that would cost
not have
otherwise . One way to
occurred manage the
Fund's risk/return
balance is by
Percentage varies . Derivatives used locking in the
for risk value of an
management may investment ahead
not have the of time
intended effects
and may result in
losses or missed
opportunities
. The other party
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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Illiquid . May be difficult . May offer a more
securities to value attractive yield
precisely or potential for
growth than more
widely traded
securities

Up to 15% of net . May be difficult
assets to sell at the
time or price
desired

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Money market . Limits potential . May preserve the
instruments for capital Fund's assets
appreciation

. See credit risk
Up to 35% on a and market risk
normal basis and
up to 100% on a
temporary basis

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11
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How the Fund is Managed
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BOARD OF TRUSTEES

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

MANAGER
Prudential Investments Fund Management LLC (PIFM)
Gateway Center Three, 100 Mulberry Street
Newark, NJ 07102-4077

Under a management agreement with the Fund, PIFM manages the Fund's
investment operations and administers its business affairs. PIFM also is
responsible for supervising the Fund's investment adviser. For the fiscal year
ended October 31, 1999, the Fund paid PIFM management fees of .51% of the
Fund's average net assets.

PIFM and its predecessors have served as manager or administrator to
investment companies since 1987. As of December 31, 1999, PIFM served as the
manager to all 43 of the Prudential mutual funds, and as manager or
administrator to 22 closed-end investment companies, with aggregate assets of
approximately $75.6 billion.

INVESTMENT ADVISER

The Prudential Investment Corporation, called Prudential Investments, is the
Fund's investment adviser and has served as an investment adviser to investment
companies since 1984. Its address is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and pays Prudential Investments for its
services.

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, Mr. Spitz 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.

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How the Fund is Managed
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DISTRIBUTOR

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

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13
<PAGE>

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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. Dividends
and distributions from the Fund also may be subject to state and local income
tax in the state where you live.
Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless you hold your
shares in a qualified 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--
typically once a year. Capital gains are generated when the Fund sells its
assets for a profit. For example, if the Fund bought 100 shares of ACME Corp.
stock for a total of $1,000 and more than one year later sold the shares for a
total of $1,500, the Fund has net long-term capital gains of $500, which it
will pass on to shareholders (assuming the Fund's total gains are greater than
any losses it may have). Capital gains are taxed differently depending on how
long the Fund holds the security--if a security is held more than one year
before it is sold, long-term capital gains are taxed at the rate of 20%, but if
the security is held one year or less, short-term capital gains are taxed at
ordinary income rates of up to 39.6%. Different rates apply to corporate
shareholders.
For your convenience, Fund distributions of dividends and capital gains are
automatically reinvested in the Fund without any sales charge. If you ask us to
pay the distributions in cash, we will send you a check if your account is with
the Transfer Agent. Otherwise, if your account is with a

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

Withholding Taxes

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

If You Purchase Just Before Record Date
If you buy shares of the Fund just before the record date (the date that
determines who receives the distribution), that distribution will be paid to
you. As explained above, the distribution may be subject to income or capital
gains taxes. You may think you've done well, since you bought shares one day
and soon thereafter received a distribution. That is not so

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15
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Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------

because when dividends are paid out, the value of each share of the Fund
decreases by the amount of the dividend to reflect the payout, although this
may not be apparent because the value of each share of the Fund also will be
affected by the market changes, if any. The distribution you receive makes up
for the decrease in share value. However, the timing of your purchase does mean
that part of your investment came back to you as taxable income.

Qualified or Tax-Deferred Retirement Plans

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

IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Fund for a profit, you have realized a capital
gain, which is subject to tax unless you hold shares in a qualified tax-
deferred plan or account. The amount of tax you pay depends on how long you
owned your shares. If you sell shares of the Fund for a loss, you may have a
capital loss, which you may use to offset certain capital gains you have.
- ---------------------------------------------

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

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

If you sell shares and realize a loss, you will not be permitted to use the
loss to the extent you replace the shares (including pursuant to the
reinvestment of a dividend) within a 61-day period (beginning 30 days before
the sale of the shares). If you acquire shares of the Fund and sell your shares
within 90 days, you may not be allowed to include certain charges incurred in
acquiring the shares for purposes of calculating gain or loss realized upon the
sale of the shares.

Exchanging your shares of the Fund for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other

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16 Prudential Equity Income Fund (800) 225-1852

<PAGE>

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Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------

words, it's a "taxable event." Therefore, if the shares you exchanged have
increased in value since you purchased them, you have capital gains, which are
subject to the taxes described above.

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

Automatic Conversion of Class B Shares

We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately seven years after
purchase--is not a "taxable event" because it does not involve an actual sale
of your Class B shares. This opinion, however, is not binding on the Internal
Revenue Service. 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 Class A share expenses. With Class C shares, you pay a 1% front-end
sales charge and a 1% CDSC if you sell within 18 months of purchase, but the
operating expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
. The amount of your investment
. The length of time you expect to hold the shares and the impact of the
varying distribution fees

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18
<PAGE>

. 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 of currently)
average net assets/3/
</TABLE>
1 The minimum investment requirements do not apply to certain retirement and
employee savings plans and custodial accounts for minors. The minimum initial
and subsequent investment for purchases made through the Automatic Investment
Plan is $50. For more information, see "Additional Shareholder Services-
Automatic Investment Plan."

2 For more information about the CDSC and how it is calculated, see "How to
Sell Your Shares--Contingent Deferred Sales Charge (CDSC)." 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. For the fiscal year ending
10-31-00, the Distributor of the Fund has contractually agreed to reduce its
distribution and service (12b-1) fees for Class A shares to .25 of 1% of the
average daily net assets of the Class A shares.

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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 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 Class A shares of two or more Prudential mutual funds at the same
time

. Use your Rights of Accumulation, which allow you to combine the current
value of Prudential mutual fund shares you already own with the value of
the shares you are purchasing for purposes of determining the applicable
sales charge (note: you must notify the Transfer Agent if you qualify for
Rights of Accumulation)

. Sign a Letter of Intent, stating in writing that you or an eligible group
of related investors will purchase a certain amount of shares in the Fund
and other Prudential mutual funds within 13 months.

The Distributor may reallow Class A's sales charge to dealers.

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

Mutual Fund Programs. The initial sales charge will be waived for investors in
certain programs sponsored by broker-dealers, investment advisers and financial
planners who have agreements with Prudential Investments Advisory Group
relating to:

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

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

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

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

Waiving Class C's Initial Sales Charge

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

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21
<PAGE>

Investment of Redemption Proceeds from Other Investment Companies. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated (Prudential Securities) or one of its affiliates. These
purchases must be made within 60 days of the redemption. To qualify for this
waiver, you must do one of the following:
. purchase your shares through an account at Prudential Securities,
. purchase your shares through an ADVANTAGE Account or an Investor Account
with Pruco Securities Corporation, or
. purchase your shares through another broker.

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

Qualifying for Class Z Shares

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

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

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

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

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Other Types of Investors. Class Z shares also can be purchased by any of the
following:

. Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available option,

. Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund), and

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

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

Class B Shares Convert to Class A Shares After Approximately Seven Years
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you received with reinvested
dividends and other distributions. Since the 12b-1 fees for Class A shares are
lower than for Class B shares, converting to Class A shares lowers your Fund
expenses.
When we do the conversion, you will get fewer Class A shares than the number
of Class B shares converted if the price of the Class A shares is higher than
the price of Class B shares. The total dollar value will be the same, so you
will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--
Conversion Feature--Class B Shares."

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23
<PAGE>

Step 3: Understanding the Price You'll Pay

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

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

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.

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

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

What Price Will You Pay for Shares of the Fund?

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

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24 Prudential Equity Income Fund (800) 225-1852
<PAGE>

Step 4: Additional Shareholder Services
As a Fund shareholder, you can take advantage of the following services and
privileges:

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

Prudential Mutual Fund Services LLC
Attn: Account Maintenance
P.O. Box 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 business,
please contact your financial adviser. If you are interested in opening a
401(k) or other company-sponsored retirement plan (SIMPLES, SEP plans, Keoghs,
403(b) plans, pension and profit-sharing plans), your financial adviser will
help you determine which retirement plan best meets your needs. Complete
instructions about how to establish and maintain your plan and how to open
accounts for you and your employees will be included in the retirement plan kit
you receive in the mail.

The PruTector Program. Optional group term life insurance--which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. Eligible investors who apply for PruTector coverage after the
initial 6-month enrollment period will need to

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

25
<PAGE>

provide satisfactory evidence of insurability. This insurance is subject to
other restrictions and is not available in all states.

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

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

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

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

Prudential Mutual Fund Services LLC
Attn: Redemption Services
P.O. Box 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.

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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."

If you are selling more than $100,000 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 you hold your shares directly with the Transfer Agent, you will need
to have the signature on your sell order signature guaranteed by an "eligible
guarantor institution." An "eligible guarantor institution" includes any bank,
broker-dealer or credit union. For more information, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Sale of Shares--Signature Guarantee."

Contingent Deferred Sales Charge (CDSC)
If you sell Class B shares within six years of purchase or Class C shares
within 18 months of purchase (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
possible, we will sell amounts representing shares in the following order:
. Amounts representing shares you purchased with reinvested dividends and
distributions
. Amounts representing the increase in NAV above the total amount of
payments for shares made during the past six years for Class B shares
(five years for Class B shares purchased before January 22, 1990) and 18
months for Class C shares (one year for Class C shares purchased before
November 2, 1998)

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

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

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27
<PAGE>

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

As we noted before in the "Share Class Comparison" chart, the CDSC for Class
B shares is 5% in the first year, 4% in the second, 3% in the third, 2% in the
fourth and 1% in the fifth and sixth years. The rate decreases on the first day
of the month following the anniversary date of your purchase, not on the
anniversary date itself. The CDSC is 1% for Class C shares-- which is applied
to shares sold within 18 months of purchase (one year for Class C shares
purchased before November 2, 1998). For both Class B and Class C shares, the
CDSC is calculated based on the lesser of the original purchase price or the
redemption proceeds. For purposes of determining how long you've held your
shares, all purchases during the month are grouped together and considered to
have been made on the last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding
any time shares were held in a money market fund.

Waiver of the CDSC--Class B Shares
The CDSC will be waived if the Class B shares are sold:

. After a shareholder is deceased or disabled (or, in the case of a trust
account, the death or disability of the grantor). This waiver applies to
individual shareholders, as well as shares owned in joint tenancy,
provided the shares were purchased before the death or disability
. To provide for certain distributions--made without IRS penalty-- from a
tax-deferred retirement plan, IRA or Section 403(b) custodial account

. On certain sales 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
Charge--Class B Shares."

Waiver of the CDSC--Class C Shares

Benefit Plans. The CDSC will be waived for purchases by certain group
retirement plans for which Prudential or brokers not affiliated with

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

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Prudential Equity Income Fund (800) 225-1852

28
<PAGE>

Prudential provide administrative or recordkeeping services. The CDSC also will
be waived for certain redemptions by benefit plans sponsored by Prudential and
its affiliates. For more information, call Prudential at (800) 353-2847.

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

Small Accounts

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

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

29
<PAGE>

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

HOW TO EXCHANGE YOUR SHARES

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

Prudential Mutual Fund Services LLC
Attn: Exchange Processing
P.O. Box 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
purchase or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Class B or Class C shares
into a money market fund, the time you hold the shares in the money market
account will not be counted in calculating the required holding periods for
CDSC liability.
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange 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 Class A shares
without paying an initial sales charge, we will automatically exchange your
Class B or Class C shares which are not subject to a CDSC for Class A shares.
We make such exchanges on a quarterly basis if you qualify for this exchange
privilege. We have obtained a legal opinion that this exchange is not a
"taxable event" for federal income tax purposes. This opinion is not binding on
the IRS.

Frequent Trading

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

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31
<PAGE>

- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------

The financial highlights will help you evaluate the Fund's financial
performance. The total return in each chart represents the rate that a
shareholder earned on an investment in that share class of the Fund, assuming
reinvestment of all dividends and other distributions. The information is for
each share class for the periods indicated.
Review each chart with the financial statements and report of independent
accountants, which appear in the annual report and the SAI and are available
upon request. Additional performance information for each share class is
contained in the annual report, which you can receive at no charge.

CLASS A SHARES

The financial highlights for the three years ended October 31, 1999 were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the two years ended October 31, 1996 were audited by
other independent auditors, whose reports were unqualified.

<TABLE>
<CAPTION>
Class A Shares (fiscal years ended 10-31)
- --------------------------------------------------------------------------------
Per Share Operating Performance 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $18.63 $21.00 $15.43 $14.40 $14.03
Income from investment operations:
Net investment income .33 .45 .45 .47 .48
Net realized and unrealized
gain (loss) on investment
transactions .58 (.49) 6.29 1.75 .95
Total from investment
operations .91 (.04) 6.74 2.22 1.43
- ----------------------------------------------------------------------------------
Less distributions:
Dividends from net investment
income (.33) (.44) (.43) (.49) (.54)
Dividends in excess of net
investment income (.03) -- -- -- --
Distributions from net realized
gains (1.06) (1.89) (.74) (.70) (.52)
Total distributions (1.42) (2.33) (1.17) (1.19) (1.06)
Net asset value, end of year $18.12 $18.63 $21.00 $15.43 $14.40
Total return/1/ 5.03% (.65)% 45.68% 15.97% 11.15%
- ----------------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net assets, end of year (000) $619,469 $638,547 $570,146 $341,717 $276,990
Average net assets (000) $653,798 $655,776 $454,892 $310,335 $236,688
Ratios to average net assets:
Expenses, including
distribution fees/2/ 1.02% .91% .94% .98% 1.03%
Expenses, excluding
distribution fees .77% .66% .69% .73% .78%
Net investment income 1.71% 2.19% 2.32% 3.26% 3.36%
Portfolio turnover 17% 22% 36% 36% 74%
</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.

2 The Distributor of the Fund agreed to limit its distribution fees to .25 of
1% of the average daily net assets of the Class A shares.

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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)
- -------------------------------------------------------------------------------
Per Share Operating
Performance 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $18.57 $20.93 $15.39 $14.36 $14.00
Income from investment
operations:
Net investment income .19 .29 .29 .39 .37
Net realized and
unrealized gain (loss) on
investment transactions .58 (.48) 6.29 1.71 .95
Total from investment
operations .77 (.19) 6.58 2.10 1.32
- -------------------------------------------------------------------------------
Less distributions:
Dividends from net
investment income (.19) (.28) (.30) (.37) (.44)
Dividends in excess of
net investment income (.03) -- -- -- --
Distributions from net
realized gains (1.06) (1.89) (.74) (.70) (.52)
Total distributions (1.28) (2.17) (1.04) (1.07) (.96)
Net asset value, end of
year $18.06 $18.57 $20.93 $15.39 $14.36
Total return/1/ 4.25% (1.35)% 44.60% 15.12% 10.29%
- -------------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net assets, end of year
(000) $1,006,346 $1,299,962 $1,250,216 $929,948 $906,793
Average net assets (000) $1,200,663 $1,391,826 $1,072,118 $951,220 $911,856
Ratios to average net
assets:
Expenses, including
distribution fees 1.77% 1.66% 1.69% 1.73% 1.78%
Expenses, excluding
distribution fees .77% .66% .69% .73% .78%
Net investment income .98% 1.44% 1.60% 2.51% 2.66%
Portfolio turnover 17% 22% 36% 36% 74%
</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

<TABLE>
<CAPTION>
Class C Shares (fiscal years ended 10-31)
- ------------------------------------------------------------------------------
Per Share Operating Performance 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $18.57 $20.93 $15.39 $14.36 $14.00
Income from investment operations:
Net investment income .19 .30 .37 .38 .40
Net realized and unrealized gain
(loss) on investment transactions .58 (.49) 6.21 1.72 .92
Total from investment operations .77 (.19) 6.58 2.10 1.32
- ------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (.19) (.28) (.30) (.37) (.44)
Dividends in excess of net investment
income (.03) -- -- -- --
Distributions from net realized gains (1.06) (1.89) (.74) (.70) (.52)
Total distributions (1.28) (2.17) (1.04) (1.07) (.96)
Net asset value, end of year $18.06 $18.57 $20.93 $15.39 $14.36
Total return/1/ 4.25% (1.35)% 44.60% 15.12% 10.29%
- ------------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net assets, end of year (000) $33,685 $37,988 $17,911 $8,511 $4,586
Average net assets (000) $36,981 $31,345 $11,432 $6,730 $3,132
Ratios to average net assets:
Expenses, including distribution fees 1.77% 1.66% 1.69% 1.73% 1.78%
Expenses, excluding distribution fees .77% .66% .69% .73% .78%
Net investment income .98% 1.47% 1.53% 2.51% 2.57%
Portfolio turnover 17% 22% 36% 36% 74%
</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

34
<PAGE>

- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------

CLASS Z SHARES

The financial highlights for the three years ended October 31, 1999 were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights 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 periods ended 10-31)
- -----------------------------------------------------------------------------
Per Share Operating Performance 1999 1998 1997 1996/1/
<S> <C> <C> <C> <C>
Net asset value, beginning of period $18.64 $21.00 $15.42 $15.13
Income from investment operations:
Net investment income .38 .52 .36 .38
Net realized and unrealized gain (loss)
on investment transactions .58 (.51) 6.43 .30
Total from investment operations .96 .01 6.79 .68
- -----------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (.38) (.48) (.47) (.39)
Dividends in excess of net investment
income (.03) -- -- --
Distributions from net realized gains (1.06) (1.89) (.74) --
Total distributions (1.47) (2.37) (1.21) (.39)
Net asset value, end of period $18.13 $18.64 $21.00 $15.42
Total return/2/ 5.28% (.40)% 46.12% 4.55%
- -----------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data 1999 1998 1997 1996/1/
<S> <C> <C> <C> <C>
Net assets, end of period (000) $136,529 $142,918 $74,956 $44,509
Average net assets (000) $144,747 $103,474 $57,369 $24,641
Ratios to average net assets:
Expenses, including distribution fees .77% .66% .69% .73%/3/
Expenses, excluding distribution fees .77% .66% .69% .73%/3/
Net investment income 1.97% 2.49% 2.58% 3.51%/3/
Portfolio turnover 17% 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 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 Sector Funds, Inc.

Prudential Financial Services Fund

Prudential Health Sciences Fund

Prudential Technology Fund

Prudential Utility Fund
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.

Prudential Tax-Managed Funds

Prudential Tax-Managed Equity Fund
Prudential 20/20 Focus Fund

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

Target Funds

Large Capitalization Growth Fund

Large Capitalization Value Fund

Small Capitalization Growth Fund

Small Capitalization Value Fund

Asset Allocation/Balanced Funds
Prudential 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.

Prudential Global Growth Fund

Prudential International Value Fund

Prudential Jennison International Growth Fund
Global Utility Fund, Inc.

Target Funds

International Equity Fund

Global Bond Funds

Prudential Global Total Return Fund, Inc.
Prudential International Bond Fund, Inc.

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

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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

Target Funds

Total Return Bond Fund

Tax-Exempt Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Prudential Municipal Series Fund
Florida Series
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 fu-
ture 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 20549-0102

By Electronic Request:

[email protected]
(The SEC charges a fee to copy documents.)

In Person:
Public Reference Room in Washington, DC

(For hours of operation, call

1-202-942-8090.)

Via the Internet: on the EDGAR Database at
http://www.sec.gov

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

CUSIP Nos.: Quotron Symbols:

Class A: 743916207 PBEAX

Class B: 743916108 PBQIX

Class C: 743916306 PEICX

Class Z: 743916405 PEIZX

Investment Company Act File No.:
811-4864

MF131A [RECYCLE LOGO] Printed on Recycled Paper
<PAGE>

PRUDENTIAL EQUITY INCOME FUND

Statement of Additional Information

dated January 20, 2000

Prudential Equity Income Fund (the Fund) is an open-end, diversified,
management investment company. Its investment objectives are both current
income and capital appreciation. It seeks to achieve these objectives by
investing primarily in common stocks and convertible securities that provide
investment income returns above those of the Standard & Poor's 500 Composite
Stock Price 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 indexes. Common stocks may
include securities of foreign issuers. There can be no assurance that the
Fund's investment objectives 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 20, 2000, 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-23
Purchase, Redemption and Pricing of Fund Shares.......................... B-24
Shareholder Investment Account........................................... B-33
Net Asset Value.......................................................... B-37
Taxes, Dividends and Distributions....................................... B-38
Performance Information.................................................. B-40
Financial Statements..................................................... B-43
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
objectives are both capital appreciation and current income. While the
principal investment policies and strategies for seeking to achieve these
objectives are described in the Fund's Prospectus, the Fund may from time to
time also use the securities, instruments, policies and principal and non-
principal strategies described below in seeking to achieve its objectives. The
Fund may not be successful in achieving its objectives and you could lose
money.

Equity and Equity-Related Securities

The Fund will invest in equity-related securities including common stocks;
non-convertible preferred stocks; securities convertible or exchangeable for
common stocks or preferred stocks; real estate investment trusts; equity
investments in partnerships; joint ventures and other forms of non-corporate
investments; American Depositary Receipts (ADRs); American Depositary Shares
(ADSs); 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" (that is, its value as a fixed-income
security) or its "conversion value" (that is, 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.

B-2
<PAGE>

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 (that is, 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 foreign currency forward contracts for the purchase or sale of
foreign currency for hedging purposes. See "Risk Management and Return
Enhancement Strategies--Special Risks Related to Foreign Currency Forward
Contracts" below.

Risk Factors and Special Considerations of Investing in Euro-Denominated
Securities

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

The conversion may adversely affect the Fund if the euro does not take
effect as planned; if a participating state withdraws from the European
Monetary Union; or if the computing, accounting and trading systems used by
the Fund's service providers, or

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by entities with which the Fund or its service providers do business, are not
capable of recognizing the euro as a distinct currency at the time of, and
following, euro conversion. In addition, the conversion could cause markets to
become more volatile.

The overall effect of the transition of member states' currencies to the
euro is not known at this time. It is likely that more general short- and
long-term ramifications can be expected, such as changes in the economic
environment and change in the behavior of investors, which would affect the
Fund's investments and its net asset value. In addition, although U.S.
Treasury regulations generally provide that the euro conversion will not, in
itself, cause a U.S. taxpayer to realize gain or loss, other changes that may
occur at the time of the conversion, such as accrual periods, holiday
conventions, indices, and other features may require the realization of a gain
or loss by the Fund as determined under existing tax law.

The Fund's Manager has taken steps: (1) that it believes will reasonably
address euro-related changes to enable the Fund and its service providers to
process transactions accurately and completely with minimal disruption to
business activities and (2) to obtain reasonable assurances that appropriate
steps have been taken by the Fund's other service providers to address the
conversion. The Fund has not borne any expense relating to these actions.

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 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. 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 indexes (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 also may 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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The Fund will write only "covered" options. An option is covered if, as long
as the Fund is obligated under the option, it (1) owns an offsetting position
in the underlying security or (2) segregates cash or other liquid assets in an
amount equal to or greater than its obligation under the option. Under the
first circumstance, the Fund's losses are limited because it owns the
underlying 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 (that is,
cash) basis at the rate then prevailing in the currency exchange market or on
a forward basis, by entering into a forward contract to purchase or sell
currency. A forward contract on foreign currency is an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days agreed upon by the parties from the date of the contract at a price set
on the date of the contract.

The Fund's dealings in forward contracts will be limited to hedging
involving either 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 indexes. 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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worse position than if such strategies were not used. Risks inherent in the
use of these strategies 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 assets in connection with hedging
transactions.

Limitations on Purchase and Sale of Stock Options, Options on Stock
Indexes, Stock Index Futures and Options Thereon

Except as described below, the Fund will write call options on indexes 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 indexes or sell stock index futures only if the amount resulting from the
multiplication of the then current level of the index (or indexes) 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 Indexes

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

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

The ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop in all index option contracts. The
Fund will not purchase or sell any index option contract unless and until, in
the 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 Indexes. Because exercises of index
options are settled in cash, a call writer such as the Fund cannot determine
the amount of its settlement obligations in advance and, unlike call writing
on specific stocks, cannot provide in advance for, or cover, its potential
settlement obligations by acquiring and holding the underlying securities.
However, the Fund will write call options on indexes only under the
circumstances described above under "Limitations on Purchase and Sale of Stock
Options, Options on Stock Indexes, 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 Indexes. 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 investment adviser. 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 borrows to invest in securities, any investment
gains made on the securities in excess of interest paid on the borrowing will
cause the net asset value of the shares to rise faster than would otherwise be
the case. On the other hand, if the investment performance of the additional
securities purchased fails to cover their cost (including any interest paid on
the money borrowed) to the Fund, the net asset value of the Fund's shares will
decrease faster than would otherwise be the case. This is the speculative
factor known as "leverage." If the Fund's asset coverage for borrowings falls
below 300%, the Fund will take prompt action (within 3 days) to reduce its
borrowings. If the 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Fund may be required to sell portfolio
securities to reduce the debt and restore the 300% asset coverage, even though
it may be disadvantageous from an investment standpoint to sell securities at
that time.

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.

B-10
<PAGE>

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.

Illiquid Securities

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

Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (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.

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,
1999 and 1998 were 17% and 22%, 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, foreign currency forward 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>
Delayne Dedrick Gold Trustee Marketing and Management Consultant.
(61)
*Robert F. Gunia (53) Vice President Chief Administrative Officer (since June 1999) of
and Trustee Prudential Investments; Vice President (since
September 1997) of The Prudential Insurance Company of
America (Prudential); Executive Vice President and
Treasurer (since December 1996) of Prudential
Investments Fund Management LLC (PIFM); formerly
Senior Vice President (March 1987-May 1999) of
Prudential Securities Incorporated (Prudential
Securities); and 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.
Douglas H. McCorkindale Trustee Vice Chairman (since March 1984) and President (since
(60) September 1997) of Gannett Co. Inc. (publishing and
media), Director of Continental Airlines, Inc.,
Gannett Co., Inc. and Frontier Corporation.
Thomas T. Mooney (58) 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, Executive Service Corps of
Rochester, Monroe County Water Authority, Rochester
Jobs, Inc., Monroe County Industrial Development
Corporation and Northeast Midwest Institute.
</TABLE>

B-13
<PAGE>

<TABLE>
<CAPTION>
Name and Address** (Age) Position Principal Occupations
- ------------------------ with Fund During Past Five Years
--------- ----------------------
<S> <C> <C>
Stephen P. Munn (57) 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).
*David R. Odenath, Jr. Trustee Officer in Charge, President, Chief Executive Officer
(42) and Chief Operating Officer (since June 1999), PIFM;
Senior Vice President (since June 1999), Prudential;
formerly Senior Vice President (August 1993-May 1999),
PaineWebber Group, Inc.
Richard A. Redeker (56) Trustee Formerly President, Chief Executive Officer and
Director (October 1993-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).
Robin B. Smith (60) 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.
*John R. Strangfeld, Jr. President and Chief Executive Officer, Chairman, President and
(45) Trustee Director (since January 1990) of The Prudential
Investment Corporation, Executive Vice President
(since February 1998), Prudential Global Asset
Management Group of Prudential, and Chairman (since
August 1989), Pricoa Capital Group; formerly various
positions to Chief Executive Officer (November 1994-
December 1998), Private Asset Management Group of
Prudential and Senior Vice President (January 1986-
August 1989), Prudential Capital Group, a unit of
Prudential.
Louis A. Weil, III (58) Trustee Chairman (since January 1999), President 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.
Clay T. Whitehead (61) Trustee President, National Exchange Inc. (new business
development firm) (since May 1983).
Grace C. Torres (40) 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.

Stephen M. Ungerman (46) Assistant Tax Director (since March 1996) of Prudential
Treasurer Investments; formerly First Vice President (February
1993-September 1996) of Prudential Mutual Fund
Management, Inc.
</TABLE>

B-14
<PAGE>

<TABLE>
<CAPTION>
Position Principal Occupations
Name and Address** (Age) with Fund During Past Five Years
- ------------------------ --------- ----------------------
<S> <C> <C>
Marguerite E. H. Morri- Secretary Vice President and Associate General Counsel (since
son (43) 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.

** 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.

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

Pursuant to the 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 or the investment adviser annual compensation of $4,000 in addition to
certain out-of-pocket expenses. The amount of annual compensation paid to each
Trustee may change as a result of the introduction of additional funds on the
boards of which the Trustee will be asked to serve.

Trustees may receive their 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.

B-15
<PAGE>

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, 1999 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, 1999.

Compensation Table

<TABLE>
<CAPTION>
Total 1999 Compensation
Aggregate From Fund and Fund
Compensation Complex Paid to
Name and Position From Fund Trustees
- ----------------- ------------ -----------------------
<S> <C> <C>
Edward D. Beach--Former Trustee++ $4,000 $142,500(43/70)*
Delayne D. Gold--Trustee $4,000 $144,500(43/70)*
Robert F. Gunia--Trustee+ -- None
Douglas H. McCorkindale--Trustee** $4,000 $ 80,000(24/49)*
Thomas T. Mooney--Trustee** $4,000 $129,500(35/75)*
Stephen P. Munn--Trustee $4,000 $ 62,250(29/53)*
David R. Odenath, Jr.--Trustee+ -- None
Richard A. Redeker--Trustee $3,000 $ 95,000(29/53)*
Robin B. Smith--Trustee** $4,000 $ 96,000(32/44)*
John R. Strangfeld, Jr.--President and
Trustee+ -- None
Louis A. Weil, III--Trustee $4,000 $ 96,000(29/53)*
Clay T. Whitehead--Trustee $4,000 $ 77,000(38/66)*
</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, 1999, includes amounts deferred at the
election of Trustees under the funds' deferred compensation plans.
Including accrued interest, total compensation amounted to $97,916,
$135,102 and $156,478 for Messrs. McCorkindale and Mooney and Ms. Smith,
respectively.

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

++ Mr. Beach retired on December 31, 1999.

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 contingent deferred
sales charge to a limited group of investors. As of December 31, 1999, 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 31, 1999, beneficial owners, directly or indirectly, of more
than 5% of any class of shares of the Fund were:

<TABLE>
<CAPTION>
Number of Shares/
Name Address Class % of Class
---- ------- ----- -----------------
<S> <C> <C> <C>
Boston Safe Deposit & Trust 1 Cabot Rd. Z 4,774,097(54.9%)
as trustee for K-Mart 401(k) AIM # 028-0035
Medford, MA 02157

Prudential Defined Contribution 30 Scranton Office Park Z 549,306(6.3%)
Services, FBO PruNon-Trust Moosic, PA 18507
Accts, ATTN John Surdy

Prudential Trust Company 30 Scranton Office Park Z 1,532,427(17.6%)
FBO Pru DC Trust Accts Moosic, PA 18507
Attn John Surdy
</TABLE>

As of December 31, 1999, Prudential Securities was record holder of
18,164,588 Class A shares (or 48% of the outstanding Class A shares),
31,479,229 Class B shares (or 55% of the outstanding Class B shares),
1,065,515 Class C shares (or 55.6% of the outstanding Class C shares) and
409,462 Class Z shares (or 0.05% 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 December 31, 1999, PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $75.6 billion. According to the
Investment Company Institute, as of September 30, 1999, the Prudential Mutual
Funds were the 20th 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 and dividend distribution agent for the Prudential Mutual Funds and, in
addition, provides customer service, recordkeeping and management and
administration services to qualified plans.

Pursuant to the Management Agreement with the 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 has hired The Prudential Investment Corporation, doing business as
Prudential Investments (PI, the investment adviser or the Subadviser), to
provide subadvisory services to the Fund. PIFM also administers the Fund's
business affairs and, in connection therewith, furnishes the Fund with office
facilities, together with those ordinary clerical and bookkeeping services
which are not being furnished by State Street Bank and Trust Company (the
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 investment adviser pursuant to the
subadvisory agreement between PIFM and PI (the Subadvisory Agreement).

Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Trustees who are not affiliated persons of the
Manager or the Fund's investment adviser, (c) the fees and certain expenses of
the Custodian and Transfer Agent, including the cost of providing records to
the Manager in connection with its obligation of maintaining required records
of the Fund and of pricing the Fund's shares, (d) the charges and expenses of
legal counsel and independent accountants for the Fund, (e) brokerage
commissions and any issue or transfer taxes chargeable to the Fund in
connection with its securities transactions, (f) all taxes and corporate fees
payable by the Fund to governmental agencies, (g) the fees of any trade
associations of which the Fund may be a member, (h) the cost of share
certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) 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

B-17
<PAGE>

paying the fees and expenses of notice filings made in accordance with state
securities laws, (k) allocable communications expenses with respect to
investor services and all expenses of shareholders' and Trustees' meetings and
of preparing, printing and mailing reports, proxy statements and prospectuses
to shareholders in the amount necessary for distribution to the shareholders,
(l) litigation and indemnification expenses and other extraordinary expenses
not incurred in the ordinary course of the Fund's business and (m)
distribution fees.

The Management Agreement provides that PIFM will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting
from willful misfeasance, 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, 1999, 1998 and 1997, PIFM received
management fees of $10,287,851, $10,945,895 and $8,306,148, 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 was reimbursed by PIFM for
the reasonable costs and expenses incurred by PI in furnishing those services.
Effective January 1, 2000, PI is paid by PIFM at an annual rate of .30 of 1%
of the Fund's average daily net assets up to $500 million, .238 of 1% of
average daily net assets between $500 million and $1 billion, .214 of 1% of
average daily net assets between $1 billion and $1.5 billion and .191 of 1% of
average daily net assets in excess of $1.5 billion (representing approximately
half of the compensation received from the Fund by PIFM).

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. The Distributor is a subsidiary
of Prudential.

Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the
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 the
Distribution Agreement, none of which are reimbursed by or paid for by the
Fund.

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

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

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

B-18
<PAGE>

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 maintenance of shareholder accounts (service fee) and (2) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30
of 1%. The Distributor has contractually agreed to limit its distribution-
related fees payable under the Class A Plan to .25 of 1% of the average daily
net assets of the Class A shares for the fiscal year ending October 31, 2000
and voluntarily limited its distribution-related fees for the fiscal year
ended October 31, 1999 to .25 of 1% of the average daily net assets of the
Class A shares.

For the fiscal year ended October 31, 1999, the Distributor received
payments of $1,634,495 under the Class A Plan and spent approximately
$1,584,339 in distributing the Class A shares. 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,
1999, the Distributor also received approximately $376,500 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 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 and, with respect to Class C shares, initial sales
charges.

Class B Plan. For the fiscal year ended October 31, 1999, the Distributor
received $12,006,633 from the Fund under the Class B Plan and spent
approximately $5,443,700 in distributing the Fund's Class B shares. It is
estimated that of the latter amount, approximately 0.1% ($7,400) was spent on
printing and mailing of prospectuses to other than current shareholders; 24.6%
($1,334,000) 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 75.3% ($4,102,300) on the aggregate of (1)
payments of commissions and account servicing fees to financial advisers
(57.5% or $3,129,800) and (2) an allocation of overhead and other branch
office distribution-related expenses for payments of related expenses (17.8%
or $972,500). 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 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, 1999, the Distributor received approximately
$2,448,000 in contingent deferred sales charges attributable to Class B
shares.

Class C Plan. For the fiscal year ended October 31, 1999, the Distributor
received $369,808 under the Class C Plan and spent approximately $314,300 in
distributing Class C shares. It is estimated that of the latter amount,
approximately 4.4% ($13,700) was spent on compensation to broker-dealers for
commissions to representatives and other expenses, including an allocation of
overhead and other branch office distribution-related expenses, incurred for
distribution of Fund shares; and 95.6% ($300,600) on the aggregate of (1)
payments of commissions and account servicing fees to financial advisers
(85.0% or $267,200) and (2) an allocation of overhead and other branch office
distribution-related expenses for payments of related expenses (10.6% or
$33,400).

The Distributor also receives initial sales charges and the proceeds of
contingent deferred sales charges paid by investors upon certain redemptions
of Class C shares. For the fiscal year ended October 31, 1999, the Distributor
received approximately $30,100 in contingent deferred sales charges
attributable to Class C shares. For the fiscal year ended October 31, 1999,
the Distributor also received approximately $54,600 in initial 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.

Fee Waivers/Subsidies

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

NASD Maximum Sales Charge Rule

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

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, a new account set-up fee of $2.00 for each manually
established shareholder account and a monthly inactive zero balance account
fee of $.20 per shareholder account. PMFS is also reimbursed for its out-of-
pocket expenses, including but not limited to postage, stationery, printing,
allocable communication expenses and other costs.

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

B-20
<PAGE>

Year 2000 Readiness Disclosure

The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Although the Fund has not experienced any material problems with the services
provided by the Manager, Distributor, Transfer Agent or Custodian as a result
of the change from 1999 to 2000, there is a possibility that computer software
systems in use might be impaired or unavailable because of the way dates are
encoded and calculated. Such an event could have a negative impact on handling
securities trades, payments of interest and dividends, pricing and account
services. Although, at this time, there can be no assurance that there will be
no adverse impact on the Fund, the Manager, the Distributor, the Transfer
Agent and the Custodian have advised the Fund that they have been actively
working on necessary changes to their computer systems to prepare for the year
2000. The Fund and its Board receive, and have received since early 1998,
satisfactory quarterly reports from the principal service providers as to
their preparations for year 2000 readiness, although there can be no assurance
that the service providers (or other securities market participants) will
successfully complete the necessary changes in a timely manner. Moreover, the
Fund at this time has not considered retaining alternative service providers
or directly undertaken efforts to achieve year 2000 readiness, the latter of
which would involve substantial expenses without an assurance of success.

Additionally, issuers of securities generally, as well as those purchased by
the Fund, may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/or a specific
issuer's performance and could result in a decline in the value of the
securities held by the Fund.

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

When the Manager selects a firm that executes orders or is a party to
portfolio transactions, relevant factors taken into consideration are whether
that firm has furnished research and research related products and/or
services, such as research reports, research compilations, statistical and
economic data, computer data bases, quotation equipment and services, research
oriented computer-software, hardware and services, reports concerning the
performance of accounts, valuations of securities, investment related
periodicals, investment seminars and other economic services and consultants.
Such services are used in connection with

B-21
<PAGE>

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.

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, 1999.

<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
Year Ended Year Ended Year Ended
October 31, 1999 October 31, 1998 October 31, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Total brokerage commissions
paid by the Fund........... $2,446,512 $2,042,389 $1,978,946
Total brokerage commissions
paid to Prudential
Securities................. $ 81,343 $ 166,500 $ 197,700
Percentage of total
brokerage commissions paid
to Prudential Securities... 4.6% 8.2% 10.0%
</TABLE>

The Fund effected approximately 4.6% of the total dollar amount of its
transactions involving the payment of commissions to Prudential Securities
during the year ended October 31, 1999. Of the total brokerage commissions
paid during that period, $82,014 (or 3.35%) 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, 1999. As of October 31, 1999, the Fund
held equity securities of the following: Lehman Brothers Holdings, Inc.,
$113,913,506; PaineWebber Group, Inc., $53,435,475; Bear, Stearns & Co., Inc.,
$42,516,520 and Edwards (A.G.), Inc., $9,695,156. The Fund also held debt
securities of the following: Bear, Stearns & Co. Inc., $3,839,000; Goldman,
Sachs & Co., $2,992,000; Morgan (J.P.) Securities, Inc., $3,839,000 and
Salomon Smith Barney Inc., $3,839,000.

B-22
<PAGE>

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.

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

B-23
<PAGE>

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.

Purchase by Wire. For an initial purchase of shares of the Fund by wire, you
must complete an application and telephone PMFS at (800) 225-1852 (toll-free)
to receive an account number. The following information will be requested:
your name, address, tax identification number, fund and class election,
dividend distribution election, amount being wired and wiring bank.
Instructions should then be given by you to your bank to transfer funds by
wire to State Street Bank and Trust Company (State Street), Boston,
Massachusetts, Custody and Shareholder Services Division, Attention:
Prudential Equity Income Fund, specifying on the wire the 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 (1) reorganizations, (2) statutory mergers, or
(3) other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange
or market, and (d) are approved by the Fund's investment adviser.

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, 1999, 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.................. $18.12
Maximum sales charge (5% of offering price)............................. .95
------
Maximum offering price to public........................................ $19.07
======
Class B
Net asset value, redemption price and offering price per Class B share*. $18.06
======
Class C
Net asset value and redemption price per Class C share*................. $18.06
Sales charge (1% of offering price)..................................... .18
------
Offering price to public................................................ $18.24
======
Class Z
Net asset value, redemption price and offering price per Class Z share.. $18.13
======
</TABLE>
- ---------

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

B-24
<PAGE>

Selecting a Purchase Alternative

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

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

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

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

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

If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and 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 Charge--Class A Shares

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

Other Waivers. In addition, Class A shares may be purchased at NAV, 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,

. members of the Board of Directors of Prudential,

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

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

B-25
<PAGE>

. 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").

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

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)

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

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

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

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

The Transfer Agent, the Distributor or your broker must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales 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.

B-26
<PAGE>

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

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

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

The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser 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 be
granted subject to confirmation of the investor's holdings. Letters of Intent
are not available to individual participants in any retirement or group plans.

Class B Shares

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

The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to brokers, financial advisers and
other persons 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. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at
(800) 353-2847.

Investment of Redemption Proceeds from Other Investment Companies. Investors
may purchase Class C shares at NAV, without the initial sales charge, with the
proceeds from the redemption of shares of any unaffiliated registered
investment company which were not held through an account with any Prudential
affiliate. Such purchases must be made within 60 days of the redemption.
Investors eligible for this waiver include: (1) investors purchasing shares
through an account at Prudential Securities; (2) investors purchasing shares
through an ADVANTAGE Account or an Investor Account with Prusec; and (3)
investors purchasing

B-27
<PAGE>

shares through other brokers. This waiver is not available to investors who
purchase shares directly from the Transfer Agent. You must notify the Transfer
Agent directly or through your broker if you are entitled to this waiver and
provide the Transfer Agent with such supporting documents as it may deem
appropriate.

Class Z Shares

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

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

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

Other Types of Investors. Class Z shares also are available for purchase by
the following categories of investors:

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

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

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

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

Rights of Accumulation

Reduced sales charges are also available through rights of accumulation,
under which an investor or an eligible group of related investors, as
described above under "Combined Purchase and Cumulative Purchase Privilege,"
may aggregate the value of their existing holdings of shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other
than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. 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. Rights of accumulation may be applied across the classes
of the Prudential Mutual Funds. However, 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 charge will be granted subject to confirmation of the investor's
holdings. Rights of accumulation are not available to individual participants
in any retirement or group plans.

Sale of Shares

You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charges"
below. If you are redeeming your shares

B-28
<PAGE>

through a broker, your broker must receive your sell order before the Fund
computes its NAV for that day (that is, 4:15 P.M., New York time) in order to
receive that day's NAV. Your broker will be responsible for furnishing all
necessary documentation to the Distributor and may charge you for its services
in connection with redeeming shares of the Fund.

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

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

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

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

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

B-29
<PAGE>

Contingent Deferred Sales Charge

Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within 18 months of purchase (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.

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) and 18 months
for Class C shares (one year for Class C shares bought before November 2,
1998); 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 Charge--Class B Shares. The CDSC will be
waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy at the time of death or initial determination of disability, provided
that the shares were purchased prior to death or disability.

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

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

B-30
<PAGE>

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 (a copy of the
impairment which can be expected trust agreement identifying the
to result in death or to be of grantor will be required as well)) is
long-continued and indefinite permanently disabled. The letter must
duration. also indicate the date of disability.

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-31
<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 Charge--Class C Shares

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

Conversion Feature--Class B Shares

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

Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following
formula: (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 (that is, $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to
shareholders.

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

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

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

B-32
<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 at net
asset value per share. An investor may direct the Transfer Agent in writing
not less than five full business days prior to the record date to have
subsequent dividends 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 dividends or distributions in cash
may subsequently reinvest any such dividend or distribution at NAV by
returning the check or the proceeds to the Transfer Agent within 30 days after
the payment date. Such reinvestment will be made at the NAV per share next
determined after receipt of the check or proceeds by the Transfer Agent.
Shares purchased with reinvested dividends and/or distributions will not be
subject to any CDSC upon redemption.

Exchange Privilege

The Fund makes available to its shareholders the privilege of exchanging
their shares 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 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-33
<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.

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-34
<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 (that is, 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-35
<PAGE>

Systematic Withdrawal Plan

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

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

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

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

Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must 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-36
<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
adviser concerning the appropriate blend of portfolios for them. If investors
elect to purchase the individual mutual funds that constitute the program in
an investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.

NET ASSET VALUE

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

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 indexes) 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
indexes 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 Trustees 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.

B-37
<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 is qualified as, intends to remain qualified as and has elected to
be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code. This relieves the Fund (but not its shareholders) from
paying federal income tax on income and capital gains which are distributed to
shareholders, and permits net capital gains of the Fund (that is, the excess
of net long-term capital gains over net short-term capital losses) to be
treated as long-term capital gains of the shareholders, regardless of how long
shareholders have held their shares in the Fund. Net capital gains of the Fund
which are available for distribution to shareholders will be computed by
taking into account any capital loss carryforward of the Fund.

Qualification of the Fund as a regulated investment company under the
Internal Revenue Code requires, among other things, that (a) 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 capital gains (that
is, the excess of net short-term capital gains over net long-term capital
losses) in each year.

In addition, the Fund is required to distribute 98% of its ordinary income
in the same calendar year in which it is earned. The Fund is also required to
distribute during the calendar year 98% of the capital gain net income it
earned during the 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.

Gains or losses on sales of securities by the Fund generally will be treated
as long-term capital gains or losses if the securities have been held by it
for more than one year, except in certain cases where the Fund acquires a put
or writes a call thereon or otherwise holds an offsetting position with
respect to the securities. Other gains or losses on the sale of securities
will be short-term capital gains or losses. Gains and losses on the sale,
lapse or other termination of options on securities will be treated as gains
and losses from the sale of securities. If an option written by the Fund on
securities lapses or is terminated through a closing transaction, such as a
repurchase by the Fund of the option from its holder, the Fund will generally
realize short-term capital gain or loss. If securities are sold by the Fund
pursuant to the exercise of a call option written by it, the Fund will include
the premium received in the sale proceeds of the securities delivered in
determining the amount of gain or loss on the sale. Certain of the Fund's
transactions may be subject to wash sale, short sale, constructive sale, anti-
conversion and straddle provisions of the Internal Revenue Code which may,
among other things, require the Fund to defer recognition of losses. 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 indexes, 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. Except with respect to certain foreign
currency forward contracts, 60% of any gain or loss recognized on these deemed
sales and on actual dispositions will be treated as long-term capital gain or
loss.

B-38
<PAGE>

Gain or loss on the sale, lapse or other termination of options on stock and
on narrowly-based stock indexes will be capital gain or loss and will be long-
term or short-term depending 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
foreign currency forward 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 or
losses, referred to under the Internal Revenue Code as "Section 988" gains or
losses, increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to its shareholders as ordinary
income, rather than increasing or decreasing the amount of the Fund's net
capital gain. If Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
dividend distributions, or distributions made before the losses were realized
would be recharacterized as a return of capital to shareholders, rather than
as an ordinary dividend, 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. Dividends and distributions may
be subject to state and local income taxes. Therefore, prior to purchasing
shares of the Fund, the investor should carefully consider the impact of
dividends 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. Net 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
gain, 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 in the same amount
for Class A, Class B, Class C and Class Z shares. See "Net Asset Value."

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-39
<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. The Fund does not
expect to meet the requirements of the Internal Revenue Code for "passing
through" to its shareholders any foreign income taxes paid.

Shareholders are advised to consult their own tax advisers with respect to
the 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, 1999.

<TABLE>
<CAPTION>
1 5 10 Since
Year Years Years Inception
---- ----- ----- ---------
<S> <C> <C> <C> <C> <C>
Class A.......................... (.22)% 13.23% N/A 12.78% (1-22-90)
Class B.......................... (.75) 13.43 11.98% 11.22 (1-22-87)
Class C.......................... 2.20 13.32 N/A 12.75 (8-1-94)
Class Z.......................... 5.28 N/A N/A 13.72 (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 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>

B-40
<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, 1999.

<TABLE>
<CAPTION>
1 5 10 Since
Year Years Years Inception
---- ----- ------ ---------
<S> <C> <C> <C> <C> <C>
Class A.......................... 5.03% 95.94% N/A 240.09% (1-22-90)
Class B.......................... 4.25 88.79 209.95% 288.92 (1-22-87)
Class C.......................... 4.25 88.79 N/A 89.64 (8-1-94)
Class Z.......................... 5.28 N/A N/A 60.19 (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:

YIELD = 2[(a - b +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, 1999 were 1.82%,
1.18%, 1.18% and 2.16% for the Class A, Class B, Class C and Class Z shares,
respectively.

B-41
<PAGE>

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

[BAR CHART]

Performance Comparison of Different Types of Investments
Over the Long Term (12/31/25 - 12/31/99)

Common Stocks 11.4%
Long-Term Gov't. Bonds 5.1%
Inflation 3.1%

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

B-42
<PAGE>

Portfolio of Investments as of October 31, 1999 PRUDENTIAL EQUITY INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- -----------------------------------------------------------------
LONG-TERM INVESTMENTS--99.6%
COMMON STOCKS--94.4%
- -----------------------------------------------------------------
Airlines--3.7%
956,300 AMR Corp.(a)(b) $ 60,725,050
224,100 US Airways Group, Inc.(a) 6,274,800
--------------
66,999,850
- -----------------------------------------------------------------
Aluminum--10.1%
1,895,900 Alcoa Inc.(b) 115,175,925
1,076,384 Reynolds Metals Co. 65,053,958
--------------
180,229,883
- -----------------------------------------------------------------
Apparel--0.7%
688,200 Kellwood Co. 12,172,538
- -----------------------------------------------------------------
Automobiles & Trucks--3.9%
445,218 Delphi Automotive Systems Corp. 7,318,271
335,800 Ford Motor Co.(b) 18,427,025
637,000 General Motors Corp. 44,749,250
--------------
70,494,546
- -----------------------------------------------------------------
Building & Construction--1.6%
680,600 Kaufman & Broad Home Corp. 13,654,538
725,100 Ryland Group, Inc. 14,955,187
--------------
28,609,725
- -----------------------------------------------------------------
Chemicals--6.1%
735,700 Dow Chemical Co.(b) 86,996,525
487,200 Lyondell Chemical Co. 5,907,300
848,028 Millennium Chemicals, Inc. 15,688,518
--------------
108,592,343
- -----------------------------------------------------------------
Diversfied Consumer Products--0.8%
217,000 Eastman Kodak Co. 14,959,437
- -----------------------------------------------------------------
Diversified Operations--0.6%
819,700 Tomkins PLC, ADR (United
Kingdom)(b) 11,475,800
</TABLE>

<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- -----------------------------------------------------------------
Electrical Equipment--0.9%
596,000 Esterline Technologies Corp.(a) $ 8,195,000
360,800 Newport Corp.(b) 7,035,600
--------------
15,230,600
- -----------------------------------------------------------------
Energy Systems--2.8%
2,819,500 McDermott International, Inc. 51,103,437
- -----------------------------------------------------------------
Financial Services--12.8%
997,455 Bear Stearns Cos., Inc. 42,516,520
322,500 Edwards (A.G.), Inc. 9,695,156
1,434,300 Hanvit Bank, GDR (South Korea)(a) 10,757,250
1,545,900 Lehman Brothers Holdings, Inc. 113,913,506
1,311,300 PaineWebber Group, Inc. 53,435,475
--------------
230,317,907
- -----------------------------------------------------------------
Forest & Paper--3.8%
778,800 Georgia-Pacific Corp.(b) 30,908,625
1,283,400 Louisiana-Pacific Corp. 16,283,138
204,700 Potlatch Corp. 8,635,781
198,000 Weyerhaeuser Co.(b) 11,818,125
--------------
67,645,669
- -----------------------------------------------------------------
Gas Pipelines--0.6%
942,360 TransCanada Pipelines Ltd.(b) 11,367,218
- -----------------------------------------------------------------
Health Care Services--3.4%
1,017,300 Columbia/HCA Healthcare Corp. 24,542,362
1,148,100 Humana Inc.(a) 7,893,188
53,542 LifePoint Hospitals, Inc.(a) 632,465
1,980,000 PhyCor, Inc.(a) 4,950,000
1,125,300 Tenet Healthcare Corp.(a) 21,873,019
53,542 Triad Hospitals, Inc.(a) 522,034
--------------
60,413,068
- -----------------------------------------------------------------
Insurance--2.0%
200,700 Marsh & McLennan Cos., Inc. 15,867,844
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-43
<PAGE>

Portfolio of Investments as of October 31, 1999 PRUDENTIAL EQUITY INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- -----------------------------------------------------------------
Insurance (cont'd.)
779,000 Ohio Casualty Corp.(b) $ 12,999,562
353,200 Selective Insurance Group, Inc. 6,600,425
--------------
35,467,831
- -----------------------------------------------------------------
Machinery--2.4%
14,600 Cascade Corp. 133,225
167,600 Commercial Intertech Corp. 2,126,425
1,100,100 Flowserve Corp. 18,564,187
200,000 Graco, Inc. 6,700,000
150,000 Regal-Beloit Corp. 3,262,500
600,000 United Dominion Industries, Ltd.
(Canada) 12,712,500
--------------
43,498,837
- -----------------------------------------------------------------
Mining
67,658 Ashanti Goldfields Co. Ltd., GDR
(Africa) 321,376
- -----------------------------------------------------------------
Miscellaneous Industrial--4.2%
1,967,200 Hanson PLC, ADR (United Kingdom) 76,106,050
- -----------------------------------------------------------------
Oil & Gas Exploration/Production--6.2%
703,200 Noble Affiliates, Inc. 17,799,750
990,000 Occidental Petroleum Corp. 22,584,375
1,157,400 Pennzoil-Quaker State Co. 13,671,787
2,468,327 Pioneer Natural Resources Co.(b) 23,140,566
481,200 Stillwater Mining Co.(a) 9,684,150
371,377 Total Fina SA, ADR (France) 24,766,199
--------------
111,646,827
- -----------------------------------------------------------------
Paper & Packaging--1.1%
752,300 Gibson Greetings, Inc. 3,667,463
1,332,100 Longview Fibre Co. 15,152,637
--------------
18,820,100
- -----------------------------------------------------------------
Real Estate Investment Trust--12.1%
584,100 Capital Automotive REIT 7,447,275
2,607,800 Crescent Real Estate Equities,
Inc. 43,517,662
1,142,900 Crown American Realty Trust 7,000,263
553,826 Equity Office Properties Trust 12,253,400
</TABLE>

<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- -----------------------------------------------------------------
1,589,000 Equity Residential Properties
Trust $ 66,440,062
538,500 Gables Residential Trust 13,024,969
525,000 Glimcher Realty Trust 7,776,563
406,200 Manufactured Home Communities, Inc. 9,469,537
164,900 TriNet Corporate Realty Trust, Inc. 3,803,006
1,243,300 Vornado Realty Trust 39,397,069
351,400 Walden Residential Properties, Inc. 7,533,138
--------------
217,662,944
- -----------------------------------------------------------------
Retail--4.8%
801,093 Limited, Inc. (The) 32,944,950
145,900 Dillard's, Inc. 2,753,863
1,726,500 Heilig-Meyers Co. 7,553,437
2,462,520 Nabisco Group Holdings Corp. 31,551,037
481,400 Penney (J.C.) Co., Inc.(b) 12,215,525
--------------
87,018,812
- -----------------------------------------------------------------
Steel--3.5%
938,900 AK Steel Holding Corp. 16,254,706
1,188,000 Bethlehem Steel Corp. 8,241,750
1,497,400 USX Corp.-U.S. Steel Group 38,277,288
--------------
62,773,744
- -----------------------------------------------------------------
Telecommunication Services--1.6%
354,700 Telecomunicacoes Brasileras SA,
ADR (Brazil) 11,084
327,200 Telefonos de Mexico, SA,
ADR (Mexico)(b) 27,975,600
--------------
27,986,684
- -----------------------------------------------------------------
Tobacco--2.3%
925,600 Philip Morris Companies, Inc. 23,313,550
820,840 R.J. Reynolds Tobacco Holdings,
Inc. 17,801,967
--------------
41,115,517
- -----------------------------------------------------------------
Tools--0.6%
354,800 Snap-on Inc. 10,777,050
- -----------------------------------------------------------------
Trucking & Shipping--0.6%
584,600 Yellow Corp.(a) 9,938,200
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-44
<PAGE>

Portfolio of Investments as of October 31, 1999 PRUDENTIAL EQUITY INCOME FUND
- ------------------------------------------------------------

<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- -----------------------------------------------------------------
Waste Management--0.3%
311,317 Waste Management, Inc. $ 5,720,450
- -----------------------------------------------------------------
Wood Processing--0.9%
392,700 Rayonier Inc. 16,100,700
Total common stocks
(cost $1,529,759,689) 1,694,567,143
--------------
- -----------------------------------------------------------------
PREFERRED STOCKS--4.6%

- -----------------------------------------------------------------
Manufacturing--0.1%
262,500 Worthington Industries Inc.
Conv. 7.25% 1,640,625
- -----------------------------------------------------------------
Mining--0.1%
34,500 Hecla Mining Co.,
Conv. 7.00%, Ser. B 1,138,500
- -----------------------------------------------------------------
Retail--1.5%
608,500 K-Mart Financing I,
Conv. 7.75% 27,344,469
- -----------------------------------------------------------------
Steel--0.7%
248,300 Bethlehem Steel Corp.,
Conv. $3.50 7,449,000
118,900 USX-Capital Trust I
Conv., 6.75% 4,778,294
--------------
12,227,294
- -----------------------------------------------------------------
Telecommunication Services--1.5%
354,700 Telebras SA, ADR (Brazil)(b) 27,622,262
- -----------------------------------------------------------------
Transportation-Road & Rail--0.7%
241,500 Union Pacific Capital Trust 11,773,125
--------------
Total preferred stocks
(cost $105,418,275) 81,746,275
--------------
</TABLE>

<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
- --------------------------------------------------------------------
CONVERTIBLE BONDS--0.6%
- --------------------------------------------------------------------
Real Estate Investment Trust--0.2%
B3 $ 3,761 Malan Realty Investors,
Inc.,
Conv. 9.50%, 7/15/04,
Sub. Deb. $ 3,403,705
- --------------------------------------------------------------------
Retail--0.4%
B2 7,921 Charming Shoppes Inc.
Conv. 7.50%, 7/15/06 7,287,320
--------------
Total convertible bonds
(cost $11,819,331) 10,691,025
--------------
Total long-term investments
(cost $1,646,997,295) 1,787,004,443
--------------
- --------------------------------------------------------------------
SHORT-TERM INVESTMENTS--7.0%
- --------------------------------------------------------------------
Commercial Paper--4.1%
Bombardier Capital Inc.
7,000 5.55%, 11/15/99(c) 6,982,733
11,000 5.60%, 11/12/99(c) 10,977,756
11,000 Burlington Resources, Inc.
5.50%, 11/01/99(c) 10,994,958
10,000 Coastal Corp.
5.58%, 11/17/99(c) 9,972,100
17,000 Raytheon Corp.
5.50%, 11/12/99(c) 16,965,219
18,000 Rohm & Hass Co.
5.50%, 11/01/99(c) 17,991,750
--------------
Total commercial paper
(cost $73,884,516) 73,884,516
--------------
- --------------------------------------------------------------------
Loan Participation--0.6%
11,000 Tyson Foods, Inc.
5.47%, 11/01/99(c)
(cost $11,000,000) 11,000,000
- --------------------------------------------------------------------
Time Deposit--1.5%
27,660 First Union National Bank
5.28%, 11/01/99(c)
(cost $27,660,000) 27,660,000
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-45
<PAGE>

PRUDENTIAL EQUITY INCOME FUND
Portfolio of Investments as of October 31, 1999
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- -----------------------------------------------------------------
Repurchase Agreement--0.8%
$14,509 Joint Repurchase Agreement
Account,
5.21%, 11/1/99
(cost $14,509,000; Note 5) $ 14,509,000
--------------
Total short-term investments
(cost $127,053,516) 127,053,516
--------------
- -----------------------------------------------------------------
Total Investments--106.6%
(cost $1,774,050,811; Note 4) 1,914,057,959
Liabilities in excess of other
assets--(6.6%) (118,029,657)
--------------
Net Assets--100% $1,796,028,302
==============

</TABLE>
- ---------------
(a) Non-income producing security.
(b) Portion of securities on loan, see Note 4.
(c) Represents security, or portion thereof, purchased with cash collateral
received for securities on loan.
ADR--American Depository Receipt.
GDR--Global Depository Receipt.
PLC--Public Limited Company.
SA--Sociedad Anomia (Spanish Corporation) or Societe Anonyme (French
Corporation).
The Fund's current Statement of Additional Information contains a description of
Moody's ratings.

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-46
<PAGE>

Statement of Assets and Liabilities PRUDENTIAL EQUITY INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
Assets October 31, 1999
<S> <C>
Investments, at value (cost $1,774,050,811)............................................................... $1,914,057,959
Cash...................................................................................................... 26,811
Dividends and interest receivable......................................................................... 2,563,303
Receivable for Fund shares sold........................................................................... 1,081,423
Receivable for investments sold........................................................................... 939,039
Receivable for securities lending......................................................................... 68,473
Prepaid expenses.......................................................................................... 43,800
----------------
Total assets........................................................................................... 1,918,780,808
----------------
Liabilities
Payable to broker for collateral for securities on loan................................................... 112,051,950
Payable for Fund shares reacquired........................................................................ 5,537,601
Payable for investments purchased......................................................................... 2,877,737
Distribution fee payable.................................................................................. 1,008,480
Management fee payable.................................................................................... 775,016
Securities lending rebate payable......................................................................... 438,533
Accrued expenses.......................................................................................... 36,290
Foreign withholding tax payable........................................................................... 26,899
----------------
Total liabilities...................................................................................... 122,752,506
----------------
Net Assets................................................................................................ $1,796,028,302
================

Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 993,191
Paid-in capital in excess of par....................................................................... 1,446,540,382
----------------
1,447,533,573
Accumulated net realized gains......................................................................... 208,488,456
Net unrealized appreciation on investments and foreign currencies...................................... 140,006,273
----------------
Net assets, October 31, 1999.............................................................................. $1,796,028,302
================

Class A:
Net asset value and redemption price per share
($619,468,527 / 34,191,040 shares of beneficial interest issued and outstanding).................... $18.12
Maximum sales charge (5% of offering price)............................................................ .95
----------------
Maximum offering price to public....................................................................... $19.07
================

Class B:
Net asset value, offering price and redemption price per share
($1,006,346,032 / 55,733,634 shares of beneficial interest issued and outstanding).................. $18.06
================
Class C:
Net asset value and redemption price per share
($33,684,824 / 1,865,572 shares of beneficial interest issued and outstanding)...................... $18.06
Sales charge (1% of offering price).................................................................... .18
----------------
Offering price to public............................................................................... $18.24
================

Class Z:
Net asset value, offering price and redemption price per share
($136,528,919 / 7,528,822 shares of beneficial interest issued and outstanding)..................... $18.13
================
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-47
<PAGE>

PRUDENTIAL EQUITY INCOME FUND
Statement of Operations
- --------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income October 31, 1999
<S> <C>
Income
Dividends (net of foreign withholding taxes
of $1,072,938).......................... $ 53,601,878
Interest................................... 1,944,518
Income from securities loaned, net......... 411,204
----------------
Total income............................ 55,957,600
----------------
Expenses
Management fee............................. 10,287,851
Distribution fee--Class A.................. 1,634,495
Distribution fee--Class B.................. 12,006,633
Distribution fee--Class C.................. 369,808
Transfer agent's fees and expenses......... 4,684,000
Reports to shareholders.................... 340,000
Custodian's fees and expenses.............. 181,000
Registration fees.......................... 145,000
Trustees' fees and expenses................ 36,000
Insurance.................................. 35,000
Legal fees and expenses.................... 26,000
Audit fee and expenses..................... 25,000
Miscellaneous.............................. 10,464
----------------
Total expenses.......................... 29,781,251
----------------
Net investment income......................... 26,176,349
----------------
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currencies
Net realized gain (loss) on:
Investment transactions.................... 218,035,153
Foreign currency transactions.............. (1,529,033)
----------------
216,506,120
----------------
Net change in unrealized appreciation
(depreciation) of:
Investments................................ (142,077,401)
Foreign currencies......................... 2,065
----------------
(142,075,336)
----------------
Net gain on investments and foreign
currencies................................. 74,430,784
----------------
Net Increase in Net Assets
Resulting from Operations..................... $ 100,607,133
================
</TABLE>

PRUDENTIAL EQUITY INCOME FUND
Statement of Changes in Net Assets
- --------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended October 31,
-------------------------------
in Net Assets 1999 1998
<S> <C> <C>
Operations
Net investment income........ $ 26,176,349 $ 37,410,326
Net realized gain on
investments and foreign
currency transactions..... 216,506,120 138,053,262
Net change in unrealized
depreciation of
investments and foreign
currencies................ (142,075,336) (224,412,031)
-------------- --------------
Net increase (decrease) in
net assets resulting from
operations................ 100,607,133 (48,948,443)
-------------- --------------
Dividends and distributions (Note 1)
Dividends from net investment income
Class A................... (11,212,454) (14,084,914)
Class B................... (11,757,902) (19,144,502)
Class C................... (360,445) (438,559)
Class Z................... (2,845,548) (2,479,859)
-------------- --------------
(26,176,349) (36,147,834)
-------------- --------------
Dividends in excess of net
investment income
Class A................... (1,032,878) --
Class B................... (1,796,239) --
Class C................... (55,705) --
Class Z................... (189,062) --
-------------- --------------
(3,073,884) --
-------------- --------------
Distributions from net realized gains
Class A................... (36,735,180) (54,361,373)
Class B................... (73,406,073) (114,880,805)
Class C................... (2,177,750) (1,798,135)
Class Z................... (7,944,744) (8,584,415)
-------------- --------------
(120,263,747) (179,624,728)
-------------- --------------
Fund share transactions (net of
share conversions) (Note 6)
Proceeds from shares sold.... 495,723,387 1,012,745,142
Net asset value of shares
issued in reinvestment of
dividends and
distributions............. 138,241,458 198,544,772
Cost of shares reacquired.... (908,444,366) (740,383,287)
-------------- --------------
Net increase (decrease) in
net assets from Fund share
transactions.............. (274,479,521) 470,906,627
-------------- --------------
Total increase (decrease)....... (323,386,368) 206,185,622
Net Assets
Beginning of year............... 2,119,414,670 1,913,229,048
-------------- --------------
End of year(a).................. $1,796,028,302 $2,119,414,670
============== ==============
(a)Includes undistributed net
investment income of......... $ -- $ 500,009
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-48
<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 Composite Stock Price 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 $1,529,033 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-49
<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.

Securities Lending: The Fund may lend securities to broker-dealers. The loans
are secured by collateral at least equal at all times to the market value of the
securities loaned. Loans are subject to termination at the option of the
borrower or the Fund. Upon termination of the loan, the borrower will return to
the lender securities identical to the loaned securities. The Fund may bear the
risk of delay in recovery of, or even loss of rights in, the securities loaned
should the borrower of the securities fail financially. The Fund receives
compensation, net of any rebate, for lending its securities in the form of fees
or it retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan. Prudential Securities
Incorporated ('PSI') is the securities lending agent for the Fund. For the year
ended October 31, 1999, PSI has been compensated approximately $115,300 for
these services.

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 decrease accumulated net realized gains on investments by
$22,418,100, increase undistributed net investment loss by $2,573,875 and
increase paid-in capital by $19,844,225 for realized foreign currency losses and
for redemptions utilized as distibutions for federal income tax purposes. 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 has a distribution agreement with Prudential Investment Management
Services LLC ('PIMS'), which acts as the distributor of the Class A, Class B,
Class C and Class Z shares. The Fund compensates PIMS for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the 'Class A, B and C Plans'), regardless of expenses actually
incurred. The distribution fees are accrued daily and payable monthly. No
distribution or service fees are paid to PIMS as distributor of the Class Z
shares of the Fund.

Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%,
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were .25 of 1%, 1% and 1% of the average daily net
assets of the Class A, B and C shares for the year ended October 31, 1999,
respectively.

PIMS has advised the Fund that it has received approximately $376,500 and
$54,600 in front-end sales charges resulting from sales of Class A shares and
Class C shares, respectively, during the year ended October 31, 1999. From these
fees, PIMS paid such sales charges to affiliated broker-dealers, which in turn
paid commissions to salespersons and incurred other distribution costs.

PIMS has advised the Fund that for the year ended October 31, 1999, it received
approximately $2,448,000 and $30,100 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.

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

- --------------------------------------------------------------------------------
B-50
<PAGE>

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

As of March 11, 1999, the Fund along with other affiliated registered investment
companies (the 'Funds'), entered into a syndicated credit agreement ('SCA') with
an unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any borrowings will be at market rates. The Funds pay a commitment
fee at an annual rate of .065 of 1% on the unused portion of the credit
facility, which is accrued and paid quarterly on a pro rata basis by the Funds.
The SCA expires on March 9, 2000. Prior to March 11, 1999, the Funds had a
credit agreement with a maximum commitment of $200,000,000. The commitment fee
was .055 of 1% on the unused portion of the credit facility. The Fund did not
borrow any amounts pursuant to either agreement during the year ended October
31, 1999. The purpose of the agreements is to serve as an alternative source of
funding for capital share redemptions.

- ------------------------------------------------------------
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, 1999, the
Fund incurred fees of approximately $4,328,000 for the services of PMFS. As of
October 31, 1999, approximately $357,800 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, 1999, PSI, which is an indirect, wholly owned
subsidiary of Prudential, earned approximately $81,300 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, 1999 were $340,763,609 and $710,716,241,
respectively.

The cost basis of investments for federal income tax purposes at October 31,
1999 was $1,662,502,374 and, accordingly, net unrealized appreciation for
federal income tax purposes was $139,011,069 (gross unrealized
appreciation--$421,699,859; gross unrealized depreciation--$282,688,790).

As of October 31, 1999, the Fund had securities on loan with an aggregate market
value of $108,364,179. The Fund received $112,051,950 in cash as collateral for
securities on loan which was used to purchase highly liquid short-term
investments in accordance with the Fund's securities lending procedures.

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, 1999, the Fund
had a 1.5% undivided interest in repurchase agreements in the joint account. The
undivided interest for the Fund represented $14,509,000 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., 5.23%, in the principal amount of $250,000,000,
repurchase price $250,108,958, due 11/1/99. The value of the collateral
including accrued interest was $255,352,721.

Goldman, Sachs & Co., 5.18%, in the principal amount of $194,830,000, repurchase
price $194,914,102, due 11/1/99. The value of the collateral including accrued
interest was $198,727,175.

Morgan (J.P.) Securities, Inc., 5.22%, in the principal amount of $250,000,000,
repurchase price $250,108,750, due 11/1/99. The value of the collateral
including accrued interest was $255,000,115.

Salomon Smith Barney Inc., 5.22%, in the principal amount of $250,000,000,
repurchase price $250,108,750, due 11/1/99. The value of the collateral
including accrued interest was $255,452,608.

- ------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
B-51
<PAGE>

Notes to Financial Statements PRUDENTIAL EQUITY INCOME FUND
- --------------------------------------------------------------------------------
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------- ----------- -------------
<S> <C> <C>
Year ended October 31, 1999:
Shares sold...................... 16,694,821 $ 317,280,599
Shares issued in reinvestment of
dividends and distributions.... 2,467,403 44,364,034
Shares reacquired................ (22,063,847) (415,812,468)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (2,901,623) (54,167,835)
Shares issued upon conversion
from Class B................... 2,822,586 53,289,360
----------- -------------
Net decrease in shares
outstanding.................... (79,037) $ (878,475)
=========== =============
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
=========== =============
<CAPTION>
Class B
- ---------------------------------
Year ended October 31, 1999:
Shares sold...................... 5,716,752 $ 108,733,754
Shares issued in reinvestment of
dividends and distributions.... 4,509,403 80,447,105
Shares reacquired................ (21,658,431) (404,250,026)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (11,432,276) (215,069,167)
Shares reacquired upon conversion
into Class A................... (2,833,175) (53,289,360)
----------- -------------
Net decrease in shares
outstanding.................... (14,265,451) $(268,358,527)
=========== =============
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
into Class A................... (1,995,029) (39,239,381)
----------- -------------
Net increase in shares
outstanding.................... 10,278,417 $ 218,448,889
=========== =============

<CAPTION>
Class C Shares Amount
- --------------------------------- ----------- -------------
<S> <C> <C>
Year ended October 31, 1999:
Shares sold...................... 736,586 $ 14,065,037
Shares issued in reinvestment of
dividends and distributions.... 139,408 2,487,645
Shares reacquired................ (1,055,951) (19,790,850)
----------- -------------
Net decrease in shares
outstanding.................... (179,957) $ (3,238,168)
=========== =============
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
=========== =============
<CAPTION>
Class Z
- ---------------------------------
Year ended October 31, 1999:
Shares sold...................... 2,860,602 $ 55,643,997
Shares issued in reinvestment of
dividends and distributions.... 607,453 10,942,674
Shares reacquired................ (3,605,044) (68,591,022)
----------- -------------
Net decrease in shares
outstanding.................... (136,989) $ (2,004,351)
=========== =============
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
=========== =============
</TABLE>
- ------------------------------------------------------------
Note 7. Dividends

On December 1, 1999 the Board of Trustees of the Fund declared the following
dividends per share, payable on December 3, 1999 to shareholders of record on
December 2, 1999.

<TABLE>
<CAPTION>
Class Class B Class
A and C Z
--------- --------- -------
<S> <C> <C> <C>
Ordinary Income.................. $ 0.09 $ 0.055 $0.1025
Short-Term Capital Gains......... 0.025 0.025 0.025
Long-Term Capital Gains.......... 2.15 2.15 2.15
</TABLE>
- --------------------------------------------------------------------------------
B-52
<PAGE>

Financial Highlights PRUDENTIAL EQUITY INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------
Year Ended October 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................ $ 18.63 $ 21.00 $ 15.43 $ 14.40 $ 14.03
-------- -------- -------- -------- --------
Income from investment operations
Net investment income..................................... .33 .45 .45 .47 .48
Net realized and unrealized gain (loss) on investment
transactions........................................... .58 (.49) 6.29 1.75 .95
-------- -------- -------- -------- --------
Total from investment operations....................... .91 (.04) 6.74 2.22 1.43
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income...................... (.33) (.44) (.43) (.49) (.54)
Dividends in excess of net investment income.............. (.03) -- -- -- --
Distributions from net realized gains..................... (1.06) (1.89) (.74) (.70) (.52)
-------- -------- -------- -------- --------
Total distributions.................................... (1.42) (2.33) (1.17) (1.19) (1.06)
-------- -------- -------- -------- --------
Net asset value, end of year.............................. $ 18.12 $ 18.63 $ 21.00 $ 15.43 $ 14.40
======== ======== ======== ======== ========
TOTAL RETURN(a):.......................................... 5.03% (.65)% 45.68% 15.97% 11.15%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................. $619,469 $638,547 $570,146 $341,717 $276,990
Average net assets (000).................................. $653,798 $655,776 $454,892 $310,335 $236,688
Ratios to average net assets:
Expenses, including distribution fees.................. 1.02% .91% .94% .98% 1.03%
Expenses, excluding distribution fees.................. .77% .66% .69% .73% .78%
Net investment income.................................. 1.71% 2.19% 2.32% 3.26% 3.36%
For Class A, B, C and Z shares:
Portfolio turnover rate................................... 17% 22% 36% 36% 74%
</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 year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-53
<PAGE>

Financial Highlights PRUDENTIAL EQUITY INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------------------
Year Ended October 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................ $ 18.57 $ 20.93 $ 15.39 $ 14.36 $ 14.00
---------- ---------- ---------- ---------- --------
Income from investment operations
Net investment income..................................... .19 .29 .29 .39 .37
Net realized and unrealized gain (loss) on investment
transactions........................................... .58 (.48) 6.29 1.71 .95
---------- ---------- ---------- ---------- --------
Total from investment operations....................... .77 (.19) 6.58 2.10 1.32
---------- ---------- ---------- ---------- --------
Less distributions
Dividends from net investment income...................... (.19) (.28) (.30) (.37) (.44)
Dividends in excess of net investment income.............. (.03) -- -- -- --
Distributions from net realized gains..................... (1.06) (1.89) (.74) (.70) (.52)
---------- ---------- ---------- ---------- --------
Total distributions.................................... (1.28) (2.17) (1.04) (1.07) (.96)
---------- ---------- ---------- ---------- --------
Net asset value, end of year.............................. $ 18.06 $ 18.57 $ 20.93 $ 15.39 $ 14.36
========== ========== ========== ========== ========
TOTAL RETURN(a):.......................................... 4.25% (1.35)% 44.60% 15.12% 10.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................. $1,006,346 $1,299,962 $1,250,216 $ 929,948 $906,793
Average net assets (000).................................. $1,200,663 $1,391,826 $1,072,118 $ 951,220 $911,856
Ratios to average net assets:
Expenses, including distribution fees.................. 1.77% 1.66% 1.69% 1.73% 1.78%
Expenses, excluding distribution fees.................. .77% .66% .69% .73% .78%
Net investment income.................................. .98% 1.44% 1.60% 2.51% 2.66%
</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 year 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 C
-----------------------------------------------------
Year Ended October 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................ $ 18.57 $ 20.93 $ 15.39 $14.36 $14.00
------- ------- ------- ------ ------
Income from investment operations
Net investment income..................................... .19 .30 .37 .38 .40
Net realized and unrealized gain (loss) on investment
transactions........................................... .58 (.49) 6.21 1.72 .92
------- ------- ------- ------ ------
Total from investment operations....................... .77 (.19) 6.58 2.10 1.32
------- ------- ------- ------ ------
Less distributions
Dividends from net investment income...................... (.19) (.28) (.30) (.37) (.44)
Dividends in excess of net investment income.............. (.03) -- -- -- --
Distributions from net realized gains..................... (1.06) (1.89) (.74) (.70) (.52)
------- ------- ------- ------ ------
Total distributions.................................... (1.28) (2.17) (1.04) (1.07) (.96)
------- ------- ------- ------ ------
Net asset value, end of year.............................. $ 18.06 $ 18.57 $ 20.93 $15.39 $14.36
======= ======= ======= ====== ======
TOTAL RETURN(a):.......................................... 4.25% (1.35)% 44.60% 15.12% 10.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................. $33,685 $37,988 $17,911 $8,511 $4,586
Average net assets (000).................................. $36,981 $31,345 $11,432 $6,730 $3,132
Ratios to average net assets:
Expenses, including distribution fees.................. 1.77% 1.66% 1.69% 1.73% 1.78%
Expenses, excluding distribution fees.................. .77% .66% .69% .73% .78%
Net investment income.................................. .98% 1.47% 1.53% 2.51% 2.57%
</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 year 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 Z
-------------------------------------------------
March 1,
1996(c)
Year Ended October 31, Through
--------------------------------- October 31,
1999 1998 1997 1996
-------- -------- ------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...................... $ 18.64 $ 21.00 $ 15.42 $ 15.13
-------- -------- ------- -----------
Income from investment operations
Net investment income..................................... .38 .52 .36 .38
Net realized and unrealized gain (loss) on investment
transactions........................................... .58 (.51) 6.43 .30
-------- -------- ------- -----------
Total from investment operations....................... .96 .01 6.79 .68
-------- -------- ------- -----------
Less distributions
Dividends from net investment income...................... (.38) (.48) (.47) (.39)
Dividends in excess of net investment income.............. (.03) -- -- --
Distributions from net realized gains..................... (1.06) (1.89) (.74) --
-------- -------- ------- -----------
Total distributions.................................... (1.47) (2.37) (1.21) (.39)
-------- -------- ------- -----------
Net asset value, end of period............................ $ 18.13 $ 18.64 $ 21.00 $ 15.42
======== ======== ======= ===========
TOTAL RETURN(a):.......................................... 5.28% (.40)% 46.12% 4.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................... $136,529 $142,918 $74,956 $44,509
Average net assets (000).................................. $144,747 $103,474 $57,369 $24,641
Ratios to average net assets:
Expenses, including distribution fees.................. .77% .66% .69% .73%(b)
Expenses, excluding distribution fees.................. .77% .66% .69% .73%(b)
Net investment income.................................. 1.97% 2.49% 2.58% 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 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, 1999, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the three 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, 1999 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above. The accompanying financial highlights for
each of the two 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 28, 1999
- --------------------------------------------------------------------------------
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.

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

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

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

BB+, BB, 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+, B, 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.

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

D-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.

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

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

A-2
<PAGE>

D-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.

FITCH IBCA, INC.

Long-Term Ratings

AAA Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly unlikely
to be adversely affected by foreseeable events.

AA Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.

A High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to change in circumstances
or in economic conditions than is the case for higher ratings.

BBB Good credit quality. "BBB" ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.

BB Speculative. "BB" ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.

B Highly speculative. "B" ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.

CCC, CC High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A "CC" rating indicates that default of
some kind appears probable.

A-3
<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 1/1/1926 through 12/31/1999

Small Stocks $6,640.79
Common Stocks $2,845.63
Long-Term Bonds $ 40.22
Treasury Bills $ 15.64
Inflation $ 9.40

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

Generally, stock returns are due to capital appreciation and the reinvestment
of 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
500 Composite Stock Price 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 1989 through 1999. 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 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
Treasury
Bonds/1/ 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0% (2.56)%
---------------------------------------------------------------------------------------------
U.S.Government
Mortgage
Securities/2/ 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0% 1.86%
---------------------------------------------------------------------------------------------
U.S. Investment Grade
Corporate Bonds/3/ 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.6% (1.96)%
---------------------------------------------------------------------------------------------
U.S. High Yield
Bonds/4/ 0.8% (9.6)% 46.2%15.8% 17.1% (1.0)% 19.2%11.4% 12.8% 1.6% 2.39%
---------------------------------------------------------------------------------------------
World Government
Bonds/5/ (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)% 5.3% (6.07)%
----------------------------------------------------------------------------------------------
Difference between
highest and lowest 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7 17.1 8.4 7.46
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. Source: Lipper
Inc.

/4/ Lehman Brothers High Yield Bond Index is an unmanaged index comprising
over 750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower
by Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or
Fitch Investors Service). All bonds in the index have maturities of at least
one year.
/5/ Salomon Smith Barney World Government Index (Non U.S.) includes over 800
bonds issued by various foreign governments or agencies, excluding those in
the U.S., but including those in Japan, Germany, France, the U.K., Canada,
Italy, Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and
Austria. All bonds in the index have maturities of at least one year.

II-2
<PAGE>

This chart illustrates the 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, 1985 through December 500 stock index with and without
31, 1999. It does not represent reinvested dividends.
the performance of any Prudential
Mutual Fund. [LINE GRAPH]

Average Annual Total Returns of Major Capital Appreciation and Reinvesting
World Stock Markets Dividends - $474,094
(12/31/1985-12/31/1999) Capital Appreciation only - $159,597
(in U.S. dollars) (1969-1999)

Sweden 22.70%
Hong Kong 20.37%
Spain 20.11% Source: Lipper Inc. Used with
Netherland 18.63% permission. All rights reserved.
Belgium 18.41% This chart is used for illustrative
France 17.69% purposes only and is not intended to
USA 17.39% represent the past, present or
U.K. 16.41% future performance of any Prudential
Europe 16.28% Mutual Fund. Common stock total
Switzerland 15.58% return is based on the Standard &
Sing/Mlysia 15.07% Poor's 500 Stock Index, a market-
Denmark 14.72% value-weighted index made up of 500
Germany 13.29% of the largest stocks in the U.S.
Australia 11.68% based upon their stock market value.
Italy 11.39% cannot invest directly in
Canada 11.10% indices.
Japan 9.59%
Norway 8.91%
Austria 7.09%

Source: Morgan Stanley Capital
International (MSCI) and Lipper
Inc. as of 12/31/99. Used with
permission. Morgan Stanley Country
indices are unmanaged indices
which include those stocks making
up the largest two-thirds of each
country's total stock market
capitalization. Returns reflect
the reinvestment of all
distributions. This chart is for
illustrative purposes only and is
not indicative of the past,
present or future performance of
any specific investment. Investors
cannot invest directly in stock
indices.

World Stock Market Capitalization by Region
World Total: $20.7 Trillion

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

[PIE CHART]

Canada 2.1%
Pacific Basin 16.4%
Europe 32.5%
U.S. 49.0%

Source: Morgan Stanley Capital
International, December 31, 1999.
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 Term U.S. Treasury Bond Yield in Percent (1926-1999)

[LINE GRAPH APPEARS HERE]

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

Source: Ibbotson Associates. Used with permission. All rights reserved. The
chart illustrates the historical yield of the long-term U.S. Treasury Bond from
1926-1999. Yields represent that of an annually renewed one-bond portfolio with
a remaining maturity of approximately 20 years. This chart is for illustrative
purposes and should not be construed to represent the yields of any Prudential
Mutual Fund.

II-4
<PAGE>

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 11,500
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. Prudential provides auto
insurance for more than 1.5 million cars and insures more than 1.2 million
homes.

Money Management. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k)
plans. As of December 31, 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 Institutional Investor,
July 1998, Prudential was ranked eighth in terms of total assets under
management as of December 31, 1997.

Real Estate. The Prudential Real Estate Affiliates is one of the leading
real estate residential and commercial brokerage networks in North America and
has more than 37,000 real estate brokers with over 1,400 offices around the
United States./2/

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 September 30, 1999 Prudential Investments Fund Management was the
twentieth largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.

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

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 LLC as
one of the subadvisers to Prudential Diversified Funds, Prudential 20/20
Focus Fund, Prudential Sector Funds, Inc., The Prudential Series Funds,
Inc. and 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 and Target Funds.
/2/ As of December 31, 1997.

III-1
<PAGE>

Equity Funds. Prudential Equity Fund is managed with a "value" investment
style by PIC. In 1995, Prudential Securities introduced Prudential Jennison
Growth 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. Investment grade bond analysts monitor the financial
viability of 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 trades billions in U.S. and foreign government
securities a year. PIC seeks information from government policy makers.
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.

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, 1998, assets held by Prudential Securities for
its clients approximated $268 billion. During 1998, over 31,000 new customer
accounts were opened each month at Prudential Securities./4/

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 and financial
planning areas.

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.

- ---------

3 As of December 31, 1997. The number of bonds and the size of the Fund are
subject to change.

4 As of December 31, 1998.

III-2
<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) Amended By-laws.*

(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) Amended and Restated Subadvisory Agreement between Prudential
Investments Fund Management LLC and The Prudential Investment
Corporation.*

(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) (1) 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).

(2) Amendment to Custodian Contract.*

(h) (1) 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).

(2) Amendment to Transfer Agency Agreement.*

(i) Opinion and consent of Counsel.*

(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).

C-1
<PAGE>

(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.

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>
David R. Odenath, Jr. Officer in Charge, Officer in Charge, President, Chief Executive Officer
President, Chief and Chief Operating Officer, PIFM; Senior Vice
Executive Officer President, The Prudential Insurance Company of
and Chief Operating America (Prudential)
Officer
Robert F. Gunia Executive Vice Executive Vice President and Chief Administrative
President and Chief Officer, PIFM; Vice President, Prudential; President,
Administrative Prudential Investment Management Services LLC (PIMS)
Officer
William V. Healey Executive Vice Executive Vice President, Chief Legal Officer and
President, Chief Secretary, PIFM; Vice President and Associate General
Legal Officer and Counsel, Prudential; Senior Vice President, Chief
Secretary Legal Officer and Secretary, PIMS
Brian W. Henderson Executive Vice Executive Vice President, PIFM; Senior Vice President
President and Chief Operating Officer, PIMS
Stephen Pelletier Executive Vice Executive Vice President, PIFM
President
Judy A. Rice Executive Vice Executive Vice President, PIFM
President
Lynn M. Waldvogel Executive Vice Executive Vice President, PIFM
President
</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>
Jeffrey Hiller Chief Compliance Chief Compliance Officer, Prudential Global Asset
Officer Management
John R. Strangfeld, Jr. Chairman of the Board, President of Prudential Global Asset Management Group
President, Chief of Prudential; Senior Vice President, Prudential;
Executive Officer and Chairman of the Board, President, Chief Executive
Director Officer and Director, PIC
Bernard Winograd Senior Vice President Chief Executive Officer, Prudential Real Estate
and Investors; Senior Vice 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, Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund),
Prudential Balanced Fund, Prudential California Municipal Fund, Prudential
Diversified Bond Fund, Inc., Prudential Diversified Funds, 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 Total Return Fund, Inc., Prudential Government Income
Fund, Inc., Prudential Government Securities Trust, Prudential High Yield
Fund, Inc., Prudential High Yield Total Return Fund, Inc., Prudential Index
Series Fund, Prudential Institutional Liquidity Portfolio, Inc., Prudential
International Bond Fund, Inc., Prudential Mid-Cap Value Fund, Prudential
MoneyMart Assets, Inc., Prudential Municipal Bond Fund, Prudential Municipal
Series Fund, Prudential National Municipals Fund, Inc., Prudential Natural
Resources Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential Real
Estate Securities Fund, Prudential Sector Funds, Inc., Prudential 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 Tax-Free Money Fund, Inc., Prudential
Tax-Managed Funds, Prudential World Fund, Inc., Target Funds, 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>
Margaret Vice President and Chief Financial Officer None
Deverell..
Robert F. President Vice President and Trustee
Gunia.....
Kevin Senior Vice President and Compliance Officer None
Frawley...
213
Washington
Street
Newark, NJ
07102
William V. Senior Vice President, Secretary and None
Healey.... Chief Legal Officer
Brian W. Senior Vice President and Officer None
Henderson.
John R. Advisory Board Member President and Trustee
Strangfeld,
Jr........
</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," "How the Fund is Managed--Investment Adviser" and "How the Fund is
Managed--Distributor" in the Prospectus and the caption "Investment Advisory
and Other Services" in the Statement of Additional Information, constituting
Parts A and B, respectively, of this Post-Effective Amendment to the
Registration Statement, Registrant is not a party to any management-related
service contract.

Item 30. 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 18th day of January, 2000.

PRUDENTIAL EQUITY INCOME FUND

/s/ John R. Strangfeld, Jr.
----------------------------------

(John R. Strangfeld, Jr., 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 January 18, 2000
- --------------------------------- and Accounting Officer
Grace C. Torres
/s/ Delayne D. Gold Trustee January 18, 2000
- ---------------------------------
Delayne D. Gold
/s/ Robert F. Gunia Trustee January 18, 2000
- ---------------------------------
Robert F. Gunia
/s/ Douglas H. McCorkindale Trustee January 18, 2000
- ---------------------------------
Douglas H. McCorkindale
/s/ Thomas T. Mooney Trustee January 18, 2000
- ---------------------------------
Thomas T. Mooney
/s/ Stephen P. Munn Trustee January 18, 2000
- ---------------------------------
Stephen P. Munn
/s/ David R. Odenath, Jr. Trustee January 18, 2000
- ---------------------------------
David R. Odenath, Jr.
/s/ Richard A. Redeker Trustee January 18, 2000
- ---------------------------------
Richard A. Redeker
/s/ Robin B. Smith Trustee January 18, 2000
- ---------------------------------
Robin B. Smith
/s/ John R. Strangfeld, Jr. President and Trustee January 18, 2000
- ---------------------------------
John R. Strangfeld, Jr.
/s/ Louis A. Weil, III Trustee January 18, 2000
- ---------------------------------
Louis A. Weil, III
/s/ Clay T. Whitehead Trustee January 18, 2000
- ---------------------------------
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) Amended By-laws.*
(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) Amended and Restated Subadvisory Agreement between Prudential
Investments Fund Management LLC and The Prudential Investment
Corporation.*
(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)(1) 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).
(g)(2) Amendment to Custodian Contract.*
(h)(1) 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).
(h)(2) Amendment to Transfer Agency Agreement.*
(i) Opinion and consent of Counsel.*
(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).
(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 B

BY-LAWS

PRUDENTIAL EQUITY INCOME FUND

as amended through

AUGUST 25, 1999
<PAGE>

BY-LAWS

PRUDENTIAL EQUITY INCOME FUND

ARTICLE I.

DEFINITIONS

The terms "Administrator," "Commission," "Custodian," "Declaration,"
------------- ---------- --------- -----------
"Distributor," "Investment Adviser," "1940 Act," "Shareholder," "Shares,"
----------- ------------------ ---- --- ----------- ------
"Transfer," "Transfer Agent," "Trust," "Trust Property," "Trustees," and
-------- -------------- ----- -------------- --------
"Majority Shareholder Vote," have the respective meanings given them in the
-------------------------
Declaration of Trust of Prudential Equity Income Fund (formerly Prudential-Bache
Equity Income Fund) dated September 18, 1986, as amended from time to time.

ARTICLE II.

OFFICES

Section 1. Principal Office. Until changed by the Trustees, the principal
----------------
office of the Trust in The Commonwealth of Massachusetts shall be in the City of
Boston, County of Suffolk.

Section 2. Other Offices. The Trust may have offices in such other places
-------------
without as well as within the Commonwealth as the Trustees may from time to time
determine.

ARTICLE III.

SHAREHOLDERS

Section 1. Meetings. Meetings of the Shareholders shall be held to the
--------
extent provided in the Declaration at such place within or without The
Commonwealth of Massachusetts as the Trustees shall designate. The holders of a
majority of outstanding Shares of the Trust or series of the Trust present in
person or by proxy and entitled to vote shall constitute a quorum with respect
to Shares of the Trust or such series at any meeting of the Shareholders.

<PAGE>

Section 2. Notice of Meetings. Notice of all meetings of the Shareholders,
------------------
stating the time, place and purposes of the meeting, shall be given by the
Trustees by mail to each Shareholder at his or her address as recorded on the
register of the Trust mailed at least (10) days and not more than ninety (90)
days before the meeting. Only the business stated in the notice of the meeting
shall be considered at such meeting. Any adjourned meeting may be held as
adjourned without further notice. No notice need be given to any Shareholder who
shall have failed to inform the Trust of his or her current address or if a
written waiver of notice, executed before or after the meeting by the
Shareholder or his or her attorney thereunto authorized, is filed with the
records of the meeting.

Section 3. Record Date for Meetings and Other Purposes. For the purpose of
-------------------------------------------
determining the Shareholders who are entitled to notice of and to vote at any
meeting, or to participate in any distribution, or for the purpose of any other
action, the Trustees may from time to time close the transfer books for such
period, not exceeding thirty (30) days, as the Trustees may determine or without
closing the transfer books the Trustees may fix a date not more than ninety (90)
days prior to the date of any meeting of Shareholders or distribution or other
action as a record date for the determinations of the persons to be treated as
Shareholders of record for such purposes, except for dividend payments which
shall be governed by the Declaration.

Section 4. Proxies. At any meeting of Shareholders, any holder of Shares
-------
entitled to vote thereat may vote by proxy, provided that no proxy shall be
voted at any meeting unless it shall have been placed on file with the
Secretary, or with such other officer or agent of the Trust as the Secretary may
direct, for verification prior to the time at which such vote shall be taken.
Proxies may be solicited in the name of one or more Trustees or one or more of
the officers of the Trust. Only Shareholders of record shall be entitled to
vote. Each whole Share shall be entitled to one vote as to any matter on which
it is entitled by the Declaration to vote, and each fractional Share shall be
entitled to a proportionate fractional vote. When any Share is held jointly by
several persons, any one of them may vote at any meeting in person or by proxy
in respect of such Share, but if more than one of them shall be present at such
meeting in person or

2
<PAGE>

by proxy, and such joint owners or their proxies so present disagree as to any
vote to be cast, such vote shall not be received in respect of such Share. A
proxy purporting to be executed by or on behalf of a Shareholder shall be deemed
valid unless challenged at or prior to its exercise, and the burden of proving
invalidity shall rest on the challenger. If the holder of any such Share is a
minor or a person of unsound mind, and subject to guardianship or the legal
control of any other person as regards the charge or management of such Share,
he or she may vote by his or her guardian or such other person appointed or
having such control, and such vote may be given in person or by proxy.

Section 5. Inspection of Records. The records of the Trust shall be open to
---------------------
inspection by Shareholders to the same extent as is permitted shareholders of a
Massachusetts business corporation.

Section 6. Action without Meeting. Any action which may be taken by
----------------------
Shareholders may be taken without a meeting if a majority of Shareholders of the
Trust (or such larger proportion thereof as shall be required by law, the
Declaration or these By-Laws for approval of such matter) consent to the action
in writing and the written consents are filed with the records of the meetings
of Shareholders. Such consents shall be treated for all purposes as a vote taken
at a meeting of Shareholders.

ARTICLE IV.

TRUSTEES

Section 1. Meetings of the Trustees. The Trustees may in their discretion
------------------------
provide for regular or stated meetings of the Trustees. Notice of regular or
stated meetings need not be given. Meetings of the Trustees other than regular
or stated meetings shall be held whenever called by the President, or by any one
of the Trustees, at the time being in office. Notice of the time and place of
each meeting other than regular or stated meetings shall be given by the
Secretary or an Assistant Secretary or by the officer or Trustee calling the
meeting and shall be mailed to each Trustee at least two days before the
meeting, or shall be telegraphed, cabled, or wired to each Trustee at his or her
business address, or personally delivered to him or her at least

3
<PAGE>

one day before the meeting. Such notice may, however, be waived by any Trustee.
Notice of a meeting need not be given to any Trustee if a written waiver of
notice, executed by him or her before or after the meeting, is filed with the
records of the meeting, or to any Trustee who attends the meeting without
protesting prior thereto or at its commencement the lack of notice to him or
her. A notice or waiver of notice need not specify the purpose of any meeting.
The Trustees may meet by means of a telephone conference circuit or similar
communications equipment by means of which all persons participating in the
meeting are connected, which meeting shall be deemed to have been held at a
place designated by the Trustees at the meeting. Participation in a telephone
conference meeting shall constitute presence in person at such meeting. Any
action required or permitted to be taken at any meeting of the Trustees may be
taken by the Trustees without a meeting if all the Trustees consent to the
action in writing and the written consents are filed with the records of the
Trustees' meetings. Such consents shall be treated for all purposes as a vote
taken at a meeting of the Trustees.

Section 2. Quorum and Manner of Acting. A majority of the Trustees shall be
---------------------------
present in person at any regular or special meeting of the Trustees in order to
constitute a quorum for the transaction of business at such meetings and (except
as otherwise required by law, the Declaration or these By-Laws) the act of a
majority of the Trustees present at any such meeting, at which a quorum is
present, shall be the act of the Trustees. In the absence of a quorum, a
majority of the Trustees present may adjourn the meeting from time to time until
a quorum shall be present. Notice of an adjourned meeting need not be given.

ARTICLE V.

COMMITTEES

Section 1. Operating and Other Committees. The Trustees by vote of a
------------------------------
majority of all the Trustees may elect from their own number an Operating
Committee to consist of not less than three (3) Trustees to hold office at the
pleasure of the Trustees, which shall have the power to conduct the current and
ordinary business of the Trust while the Trustees are not in session, including
the purchase and sale of securities and the designation of securities to be
delivered

4
<PAGE>

upon redemption of Shares of the Trust, and such other powers of the Trustees as
the Trustees may, from time to time, delegate to them except those powers which
by law, the Declaration or these By-Laws they are prohibited from delegating.
The Trustees may also elect from their own number or otherwise other Committees
from time to time, the number composing such Committees, the powers conferred
upon the same (subject to the same limitations as with respect to the Operating
Committee) and the term of membership on such Committees to be determined by the
Trustees. The Trustees may designate a chairman of any such Committee. In the
absence of such designation the Committee may elect its own Chairman.

Section 2. Meetings. Quorum and Manner of Acting. The Trustees may (1)
-------------------------------------
provide for stated meetings of any Committee, (2) specify the manner of calling
and notice required for special meetings of any Committee, (3) specify the
number of members of a Committee required to constitute a quorum and the number
of members of a Committee required to exercise specified powers delegated to
such Committee, (4) authorize the making of decisions to exercise specified
powers by written assent of the requisite number of members of a Committee
without a meeting, and (5) authorize the members of a Committee to meet by means
of a telephone conference circuit.

The Operating Committee shall keep regular minutes of its meetings and
records of decisions taken without a meeting and cause them to be recorded in a
book designated for that purpose and kept in the office of the Trust.

ARTICLE VI.

OFFICERS

Section 1. General Provisions. The officers of the Trust shall be a
------------------
President, a Treasurer and a Secretary, who shall be elected by the Trustees.
The Trustees may elect or appoint such other officers or agents as the business
of the Trust may require, including one or more Vice Presidents, one or more
Assistant Secretaries, and one or more Assistant Treasurers. The Trustees may
delegate to any officer or committee the power to appoint any subordinate
officers or agents.

5
<PAGE>

Section 2. Term of Office and Qualifications. Except as otherwise provided
---------------------------------
by law, the Declaration or these By-Laws, the President, the Treasurer and the
Secretary shall each hold office until his or her successor shall have been duly
elected and qualified, and all other officers shall hold office at the pleasure
of the Trustees. The Secretary and Treasurer may be the same person. A Vice
President and the Treasurer or a Vice President and the Secretary may be the
same person, but the offices of Vice President, Secretary and Treasurer shall
not be held by the same person. The President shall hold no other office. Except
as above provided, any two offices may be held by the same person. Any officer
may be but none need be a Trustee or Shareholder.

Section 3. Removal. The Trustees, at any regular or special meeting of the
-------
Trustees, may remove any officer without cause, by a vote of a majority of the
Trustees then in office. Any officer or agent appointed by an officer or
committee may be removed with or without cause by such appointing officer or
committee.

Section 4. Powers and Duties of the President. The President shall be the
----------------------------------
principal executive officer of the Trust. He or she may call meetings of the
Trustees and of any Committee thereof when he or she deems it necessary and
shall preside at all meetings of the Shareholders. Subject to the control of the
Trustees and to the control of any Committees of the Trustees, within their
respective spheres, as provided by the Trustees, the President shall at all
times exercise a general supervision and direction over the affairs of the
Trust. The President shall have the power to employ attorneys and counsel for
the Trust and to employ such subordinate officers, agents, clerks and employees
as he or she may find necessary to transact the business of the Trust. He or she
shall also have the power to grant, issue, execute or sign such powers of
attorney, proxies or other documents as may be deemed advisable or necessary in
furtherance of the interests of the Trust. The President shall have such other
powers and duties as from time to time may be conferred upon or assigned to him
or her by the Trustees.

Section 5. Powers and Duties of Vice President. In the absence or
-----------------------------------
disability of the President, the Vice President or, if there be more than one
Vice President, any Vice President

6
<PAGE>

designated by the Trustees shall perform all the duties and may exercise any of
the powers of the President, subject to the control of the Trustees. Each Vice
President shall perform such other duties as may be assigned to him or her from
time to time by the Trustees and the President.

Section 6. Powers and Duties of the Treasurer. The Treasurer shall be the
----------------------------------
principal financial and accounting officer of the Trust. The Treasurer shall
deliver all funds of the Trust which may come into his or her hands to such
Custodian as the Trustees may employ pursuant to Article X of these By-Laws. He
or she shall render a statement of condition of the finances of the Trust to the
Trustees as often as they shall require the same and he or she shall in general
perform all the duties incident to the office of Treasurer and such other duties
as from time to time may be assigned to him or her by the Trustees. The
Treasurer shall give a bond for the faithful discharge of his or her duties, if
required so to do by the Trustees, in such sum and with such surety or sureties
as the Trustees shall require.

Section 7. Powers and Duties of the Secretary. The Secretary shall keep the
----------------------------------
minutes of all meetings of the Trustees and of the Shareholders in proper books
provided for that purpose; he or she shall have custody of the seal of the
Trust; he or she shall have charge of the Share transfer books, lists and
records unless the same are in the charge of the Transfer Agent. The Secretary
shall attend to the giving and serving of all notices by the Trust in accordance
with the provisions of these By-Laws and as required by law; and subject to
these By-Laws, he or she shall in general perform all duties incident to the
office of Secretary and such other duties as from time to time may be assigned
to him or her by the Trustees.

Section 8. Powers and Duties of Assistant Treasurers. In the absence or
-----------------------------------------
disability of the Treasurer, any Assistant Treasurer designated by the Trustees
shall perform all the duties, and may exercise any of the powers, of the
Treasurer. Each Assistant Treasurer shall give a bond for the faithful discharge
of his or her duties, if required so to do by the Trustees, in such sum and with
such surety or sureties as the Trustees shall require.

Section 9. Powers and Duties of Assistant Secretaries. In the absence or
------------------------------------------
disability of the Secretary, any Assistant Secretary designated by the Trustees
shall perform all the duties, and

7
<PAGE>

may exercise any of the powers, of the Secretary. Each Assistant Secretary shall
perform such other duties as from time to time may be assigned to him or her by
the Trustees.

Section 10. Compensation of Officers and Trustees and Members of the
--------------------------------------------------------
Advisory Board. Subject to any applicable provisions of the Declaration, the
- --------------
compensation of the officers and Trustees and members of the Advisory Board
shall be fixed from time to time by the Trustees or, in the case of officers, by
any Committee or officer upon whom such power may be conferred by the Trustees.
No officer shall be prevented from receiving such compensation as such officer
by reason of the fact that he or she is also a Trustee.

ARTICLE VII.

FISCAL YEAR

The fiscal year of the Trust shall begin on the first day of November in
each year and shall end on the last day of October in each year, provided,
however, that the Trustees may from time to time change the fiscal year.

ARTICLE VIII.

SEAL

The Trustees may adopt a seal which shall be in such form and shall have
such inscription thereon as the Trustees may from time to time prescribe.

ARTICLE IX.

WAIVERS OF NOTICE

Whenever any notice whatever is required to be given by law, the
Declaration or these By-Laws, a waiver thereof in writing, signed by the person
or persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto. A notice shall be deemed to have
been telegraphed, cabled or wired for the purposes of these By-Laws when it has
been delivered to a representative of any telegraph, cable or wire company with
instructions that it be telegraphed, cabled or wired.

8
<PAGE>

ARTICLE X.

CUSTODY OF SECURITIES

Section 1. Employment of a Custodian. The Trust shall place and at all
-------------------------
times maintain in the custody of a Custodian (including any sub-custodian for
the Custodian) all funds, securities and similar investments included in the
Trust Property. The Custodian (and any sub-custodian) shall be a bank having not
less than $20,000,000 aggregate capital, surplus and undivided profits and shall
be appointed from time to time by the Trustees, who shall fix its remuneration.

Section 2. Action Upon Termination of Custodian Agreement. Upon termination
----------------------------------------------
of a Custodian Agreement or inability of the Custodian to continue to serve, the
Trustees shall promptly appoint a successor custodian, but in the event that no
successor custodian can be found who has the required qualifications and is
willing to serve, the Trustees shall call as promptly as possible a special
meeting of the Shareholders to determine whether the Trust shall function
without a custodian or shall be liquidated. If so directed by a Majority
Shareholder Vote, the Custodian shall deliver and pay over all Trust Property
held by it as specified in such vote.

Section 3. Provisions of Custodian Contract. The following provisions shall
--------------------------------
apply to the employment of a Custodian and to any contract entered into with the
Custodian so employed: The Trustees shall cause to be delivered to the Custodian
all securities included in the Trust Property or to which the Trust may become
entitled, and shall order the same to be delivered by the Custodian only in
completion of a sale, exchange, transfer, pledge, loan of portfolio securities
to another person, or other disposition thereof, all as the Trustees may
generally or from time to time require or approve or to a successor Custodian;
and the Trustees shall cause all funds included in the Trust Property or to
which it may become entitled to be paid to the Custodian, and shall order the
same disbursed only for investment against delivery of the securities acquired
(including securities acquired under a repurchase agreement), or the return of
cash held as collateral for loans of portfolio securities, or in payment of
expenses, including management compensation, and liabilities of the Trust,
including distributions to Shareholders, or to a

9
<PAGE>

successor Custodian. Notwithstanding anything to the contrary in these By-Laws,
upon receipt of proper instructions, which may be standing instructions, the
Custodian may deliver funds in the following cases. In connection with
repurchase agreements, the Custodian shall transmit prior to receipt on behalf
of the Fund of any securities or other property, funds from the Fund's custodian
account to a special custodian approved by the Trustees of the Fund, which funds
shall be used to pay for securities to be purchased by the Fund subject to the
Fund's obligation to sell and the seller's obligation to repurchase such
securities. In such case, the securities shall be held in the custody of the
special custodian. In connection with the Trust's purchase or sale of financial
futures contracts, the Custodian shall transmit, prior to receipt on behalf of
the Fund of any securities or other property, funds from the Trust's custodian
account in order to furnish to and maintain funds with brokers as margin to
guarantee the performance of the Trust's futures obligations in accordance with
the applicable requirements of commodities exchanges and brokers.

Section 4. Central Certificate System. Subject to applicable rules,
--------------------------
regulations and orders adopted by the Commission, the Trustees may direct the
Custodian to deposit all or any part of the securities owned by the Trust in a
system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, or such other person as
may be permitted by the Commission, or otherwise in accordance with the 1940
Act, pursuant to which system all securities of any particular class or series
of any issuer deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical delivery of such
securities, provided that all such deposits shall be subject to withdrawal only
upon the order of the Trust.

ARTICLE XI.

INDEMNIFICATION

A representative of the Trust shall be indemnified by the Trust with
respect to each proceeding against such representative, except a proceeding
brought by or on behalf of the Trust,

10
<PAGE>

against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such representative in
connection with such proceeding, provided that such representative acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the Trust and, with respect to any criminal proceeding,
had no reasonable cause to believe his or her conduct was unlawful. The
termination of any proceeding by judgment, order, settlement, conviction or upon
a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith in a manner which he or
she reasonably believed to be in or not opposed to the best interests of the
Trust and, with respect to any criminal proceeding, had reasonable cause to
believe that his or her conduct was unlawful.

A representative of the Trust shall be indemnified by the Trust, with
respect to each proceeding brought by or on behalf of the Trust to obtain
judgment or decree in its favor, against expenses (including attorneys' fees)
actually and reasonably incurred by him or her in connection with the defense or
settlement of such proceeding, if he or she acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
the Trust; except that no indemnification shall be made in respect of any claim,
issue, or matter as to which such representative has been adjudged to be liable
for negligence or misconduct in the performance of his or her duty to the Trust,
unless and only to the extent that the court in which the proceeding was
brought, or a court of equity in the county in which the Trust has its principal
office, determines upon application that, despite the adjudication of liability
but in view of all circumstances of the case, such representative is fairly and
reasonably entitled to indemnity for the expenses which the court considers
proper.

To the extent that the representative of the Trust has been successful on
the merits or otherwise in defense of any proceeding referred to in the
preceding two paragraphs, or in defense of any claim, issue or matter therein,
the Trust shall indemnify him or her against all expenses (including attorneys'
fees) actually and reasonably incurred by him or her in connection therewith.

11
<PAGE>

Except as provided in the preceding paragraph any indemnification under the
first two paragraphs of this Article XI (unless ordered by a court) shall be
made by the Trust only as authorized in the specific case upon a determination
that indemnification of the representative of the Trust is proper in the
circumstances because he or she has met the applicable standard of conduct set
forth in such paragraphs. The determination shall be made (1) by the Trustees by
a majority vote of a quorum consisting of Trustees who were not parties to the
proceeding, or (2) if a quorum is not obtainable or if a quorum of disinterested
Trustees so directs, by independent legal counsel in a written opinion, or (3)
by a Majority Shareholder Vote.

Expenses (including attorneys' fees) incurred in defending a proceeding may
be paid by the Trust in advance of the final disposition thereof if (1)
authorized by the Trustees in the specific case, and (2) the Trust receives an
undertaking by or on behalf of the representative of the Trust to repay the
advance if it is not ultimately determined that he or she is entitled to be
indemnified by the Trust as authorized in this Article XI.

The indemnification provided by this Article XI shall not be deemed
exclusive of any other rights to which a representative of the Trust or other
person may be entitled under any agreement, vote of Shareholders or
disinterested Trustees or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding the office, and
shall continue as to a person who has ceased to be a Trustee, officer, employee
or agent and inure to the benefit of his or her heirs and personal
representatives.

The Trust may purchase and maintain insurance on behalf of any person who
is or was a Trustee officer, employee or agent of the Trust, or is or was
serving at the request of the Trust as a trustee, director, officer, employee or
agent of another trust, corporation, partnership, joint venture or other
enterprise, against any liability asserted against him or her and incurred by
him or her in any such capacity or arising out of his or her status as such,
regardless of whether the Trust would have the power to indemnify him or her
against the liability under the provisions of this Article XI.

12
<PAGE>

Nothing contained in this Article XII shall be construed to indemnify any
representative of the Trust against any liability to the Trust or to its
Shareholders to which he or she would otherwise be subject by reason of
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.

As used in this Article XI, "representative of the Trust" means an
individual (1) who is a present or former Trustee, officer, agent or employee of
the Trust or who serves or has served another trust, corporation, partnership,
joint venture or other enterprise in one of such capacities at the request of
the Trust, and (2) who by reason of his or her position is, has been or is
threatened to be made a party to a proceeding; and "proceeding" includes any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administration or investigative.

ARTICLE XII.

AMENDMENTS

These By-Laws, or any of them, may be altered, amended or repealed, or new
By-Laws may be adopted by (a) a Majority Shareholder Vote or (b) by the
Trustees, provided, however, that no By-Law may be amended, adopted or repealed
by the Trustees if such amendment, adoption or repeal requires, pursuant to law,
the Declaration or these By-Laws, a vote of the Shareholders.

End of By-Laws

<PAGE>

EXHIBIT (d)(2)

PRUDENTIAL EQUITY INCOME FUND
SUBADVISORY AGREEMENT

Agreement made as of this 1st day of March, 1988, and amended and restated
as of January 1, 2000, between Prudential Investments Fund Management LLC, a
New York limited liability company and successor to Prudential Mutual Fund
Management Inc., a Delaware Corporation ("PMF" or the "Manager"), and The
Prudential Investment Corporation, a New Jersey Corporation (the
"Subadviser").

WHEREAS, the Manager has entered into a Management Agreement, dated March
1, 1998, and amended and restated as of June 1, 1995 (the "Management
Agreement"), with Prudential Equity Income Fund, formerly known as Prudential-
Bache Equity Income Fund (the "Fund"), a Massachusetts business trust and a
diversified open-end management investment company registered under the
Investment Company Act of 1940 (the "1940 Act"), pursuant to which PMF will act
as Manager of the Fund.

WHEREAS, PMF desires to retain the Subadviser to provide investment
advisory services to the Fund in connection with the management of the Fund and
the Subadviser is willing to render such investment advisory services.

NOW, THEREFORE, the Parties agree as follows;

1. (a) Subject to the supervision of the Manager and of the Trustees of
the Fund, the Subadviser shall manage the investment operations of the Fund
and the composition of the Fund's portfolio, including the purchase,
retention and disposition thereof, in accordance with the Fund's investment
objectives, policies and restrictions as stated in the Prospectus, (such
Prospectus and Statement of Additional Information as currently in effect
and as amended or supplemented from time to time, being herein called the
"Prospectus"), and subject to the following understandings:

(i) The Subadviser shall provide supervision of the Fund's
investments and determine from time to time what investments and
securities will be purchased, retained, sold or loaned by the Fund, and
what portion of the assets will be invested or held uninvested as cash.

(ii) In the performance of its duties and obligations under
this Agreement, the Subadviser shall act in conformity with the
Declaration of Trust, By-Laws and Prospectus of the Fund and with the
instructions and directions of the Manager and of the Trustees of the
Fund and will conform to and comply with the requirements of the 1940
Act, the Internal Revenue Code of 1986 and all other applicable federal
and state laws and regulations.

(iii) The Subadviser shall determine the securities and futures
contracts to be purchased or sold by the Fund and will place orders
with or through such persons, brokers, dealers or

<PAGE>

futures commission merchants (including but not limited to Prudential-Bache
Securities Inc.) to carry out the policy with respect to brokerage as set forth
in the Fund's Registration Statement and Prospectus or as the Trustees may
direct from time to time. In providing the Fund with investment supervision, it
is recognized that the Subadviser will give primary consideration to securing
the most favorable price and efficient execution. Within the framework of this
policy, the Subadviser may consider the financial responsibility, research and
investment information and other services provided by brokers, dealers or
futures commission merchants who may effect or be a party to any such
transaction or other transactions to which the Subadviser's other clients may be
a party. It is understood that Prudential-Bache Securities Inc. may be used as
principal broker for securities transactions but that no formula has been
adopted for allocation of the Fund's investment transaction business. It is also
understood that it is desirable for the Fund that the Subadviser have access to
supplemental investment and market research and security and economic analysis
provided by brokers or futures commission merchants who may execute brokerage
transactions at a higher cost to the Fund than may result when allocating
brokerage to other brokers on the basis of seeking the most favorable price and
efficient execution. Therefore, the Subadviser is authorized to place orders for
the purchase and sale of securities and futures contracts for the Fund with such
brokers or futures commission merchants, subject to review by the Fund's
Trustees from time to time with respect to the extent and continuation of this
practice. It is understood that the services provided by such brokers or futures
commission merchants may be useful to the Subadviser in connection with the
Subadviser's services to other clients.

On occasions when the Subadviser deems the purchase or sale of a
security or futures contract to be in the best interest of the Fund as well as
other clients of the Subadviser, the Subadviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities or futures contracts to be sold or purchased in order
to obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities or futures contracts so
purchased or sold, as well as the expenses incurred in the transaction, will be
made by the subadviser in the manner the Subadviser considers to be the most
equitable and consistent with its fiduciary obligations to the Fund and to such
other clients.

(iv) The Subadviser shall maintain all books and records with respect to
the Fund's portfolio transactions required by subparagraphs (b)(5), (6), (7),
(9), (10) and (11) and

-2-
<PAGE>

paragraph (f) of Rule 31a-1 under the 1940 Act and shall render to the Fund's
Trustees such periodic and special reports as the Trustees may reasonably
request.

(v) The Subadviser shall provide the Fund's Custodian on each business day
with information relating to all transactions concerning the Fund's assets and
shall provide the Manager with such information upon request of the Manager.

(vi) The investment management services provided by the Subadviser
hereunder are not to be deemed exclusive, and the Subadviser shall be free to
render similar services to others.

(b) The Subadviser shall authorize and permit any of its directors, officers
and employees who may be elected as Trustees or officers of the Fund to serve in
the capacities in which they are elected. Services to be furnished by the
Subadviser under this Agreement may be furnished through the medium of any such
directors, officers or employees.

(c) The Subadviser shall keep the Fund's books and records required to be
maintained by the Subadviser pursuant to paragraph 1(a) hereof and shall timely
furnish to the Manager all information relating to the Subadviser's services
hereunder needed by the Manager to keep the other books and records of the Fund
required by Rule 31a-1 under the 1940 Act. The Subadviser agrees that all
records which it maintains for the Fund are the property of the Fund and the
Subadviser will surrender promptly to the Fund any of such records upon the
Fund's request, provided however that the Subadviser may retain a copy of such
records. The Subadviser further agrees to preserve for the periods prescribed by
Rule 31a-2 of the Commission under the 1940 Act any such records as are
required to be maintained by it pursuant to paragraph 1(a) hereof.

2. The Manager shall continue to have responsibility for all services to be
provided to the Fund pursuant to the Management Agreement and shall oversee and
review the Subadviser's performance of its duties under this Agreement.

3. The Manager shall pay the Subadviser at the annual rate of .30 of 1% of the
Fund's average daily net assets up to $500 million, .238 of 1% of average daily
net assets between $500 million and $1 billion, .214 of 1% of average daily net
assets between $1 billion and $1.5 billion and .191 of 1% of average daily net
assets in excess of $1.5 billion for furnishing the services described in
paragraph 1 hereof.

4. The Subadviser shall not be liable for any error of judgement or for any
loss suffered by the Fund or the Manager in connection with the matters to which
this Agreement relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the Subadviser's part in the performance of its
duties or from its reckless disregard of its obligations and duties under this
Agreement.

-3-

<PAGE>

5. This Agreement shall continue in effect for a period of more than two years
from the date hereof only so long as such continuance is specifically approved
at least annually in conformity with the requirements of the 1940 Act; provided,
however, that this Agreement may be terminated by the Fund at any time, without
the payment of any penalty, by the Trustees of the Fund or by vote of a majority
of the outstanding voting securities (as defined in the 1940 Act) of the Fund,
or by the Manager or the Subadviser at any time, without the payment of any
penalty, on not more than 60 days' nor less than 30 days' written notice to the
other party. This Agreement shall terminate automatically in the event of its
assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.

6. Nothing in this Agreement shall limit or restrict the right of any of the
Subadviser's directors, officers, or employees who may also be a Trustee,
officer or employee of the Fund to engage in any other business or to devote his
or her time and attention in part to the management or other aspects of any
business, whether of a similar or a dissimilar nature, nor limit or restrict the
Subadviser's right to engage in any other business or to render services of any
kind to any other corporation, firm, individual or association.

7. During the term of this Agreement, the Manager agrees to furnish the
Subadviser at its principal office all prospectuses, proxy statements, reports
to shareholders, sales literature or other material prepared for distribution to
shareholders of the Fund or the public, which refer to the Subadviser in any
way, prior to use thereof and not to use material if the Subadviser reasonably
objects in writing five business days (or such other time as may be mutually
agreed) after receipt thereof. Sales literature may be furnished to the
Subadviser hereunder by first-class or overnight mail, facsimile transmission
equipment or hand delivery.

8. This Agreement may be amended by mutual consent, but the consent of the
Fund must be obtained in conformity with the requirements of the 1940 Act.

9. This Agreement shall be governed by the laws of the State of New York.

-4-
<PAGE>

IN WITNESS WHEREOF, the Parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.

PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC.

/s/ Robert F. Gunia
By ---------------------------------
Executive Vice President

THE PRUDENTIAL INVESTMENT CORPORATION

/s/ John R. Strangfeld, Jr.
By ---------------------------------
President

-5-

<PAGE>

EXHIBIT (G)(2)

AMENDMENT TO CUSTODIAN CONTRACT/AGREEMENT

This Amendment to the respective Custodian Contract/Agreement is made as of
February 22, 1999 by and between each of the funds listed on Schedule D
(including any series thereof, each, a "Fund") and State Street Bank and Trust
Company (the "Custodian"). Capitalized terms used in this Amendment without
definition shall have the respective meanings given to such terms in the
Custodian Contract/Agreement referred to below.

WHEREAS, each Fund and the Custodian have entered into a Custodian
Contract/Agreement dated as of the dates set forth on Schedule D (each contract,
as amended, a "Contract"); and

WHEREAS, each Fund and the Custodian desire to amend certain provisions of
the Contract to reflect revisions to Rule 17f-5 ("Rule 17f-5") promulgated under
the Investment Company Act of 1940, as amended (the "1940 Act"); and

WHEREAS, each Fund and the Custodian desire to amend and restate certain
other provisions of the Contract relating to the custody of assets of each of
the Funds held outside of the United States.

NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements hereinafter contained, the parties hereby agree to amend the
Contract, to add the following new provisions which supersede the provisions in
the existing contracts relating to the custody of assets of the Funds outside
the United States.

3. The Custodian as Foreign Custody Manager.
----------------------------------------

3.1. Definitions.
-----------

Capitalized terms in this Article 3 shall have the following meanings:

"Country Risk" means all factors reasonably related to the systemic risk of
holding Foreign Assets in a particular country including, but not limited to,
such country's political environment; economic and financial infrastructure;
systemic custody and securities settlement practices; and laws and regulations
applicable to the safekeeping and recovery of Foreign Assets held in custody in
that country.

"Eligible Foreign Custodian" has the meaning set forth in section (a)(1) of Rule
17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as
defined in Rule 17f-5), a bank holding company meeting the requirements of an
Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate
action of the U.S. Securities and Exchange Commission (the "SEC")), or a foreign
branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act) meeting the
requirements of a custodian under Section 17(f) of the 1940 Act, except that the
term does not include Mandatory Securities Depositories.

1
<PAGE>

"Foreign Assets" means any of the Funds' investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Funds'
transactions in such investments.

"Foreign Custody Manager" has the meaning set forth in section (a)(2) of Rule
17f-5.

"Mandatory Securities Depository" means a foreign securities depository or
clearing agency that, either as a legal or practical matter, must be used if the
Fund determines to place Foreign Assets in a country outside the United States
(i) because required by law or regulation; (ii) because securities cannot be
withdrawn from such foreign securities depository or clearing agency; or (iii)
because maintaining or effecting trades in securities outside the foreign
securities depository or clearing agency is not consistent with systemic
custodial or market practices.

3.2. Delegation to the Custodian as Foreign Custody Manager.
------------------------------------------------------

Each Fund, by resolution adopted by its Board of Trustees/Directors (the
"Board"), hereby delegates to the Custodian subject to Section (b) of Rule 17f-
5, the responsibilities set forth in this Article 3 with respect to Foreign
Assets of the Fund held outside the United States, and the Custodian hereby
accepts such delegation, as Foreign Custody Manager with respect to the Funds.

3.3. Countries Covered.
-----------------

The Foreign Custody Manager shall be responsible for performing the delegated
responsibilities defined below only with respect to the countries and custody
arrangements for each such country listed on Schedule A to this Contract, which
list of countries may be amended from time to time by the Fund with the
agreement of the Foreign Custody Manager. The Foreign Custody Manager shall
list on Schedule A the Eligible Foreign Custodians selected by the Foreign
Custody Manager to maintain the assets of the Funds which list of Eligible
Foreign Custodians may be amended from time to time in the sole discretion of
the Foreign Custody Manager. Mandatory Securities Depositories are listed on
Schedule B to this Contract, which Schedule B may be amended from time to time
by the Foreign Custody Manager upon reasonable notice to the Fund. The Foreign
Custody Manager will provide amended versions of Schedules A and B in accordance
with Section 3.7 of this Article 3.

Upon the receipt by the Foreign Custody Manager of Proper Instructions to open
an account or to place or maintain Foreign Assets in a country listed on
Schedule A, and the fulfillment by a Fund of the applicable account opening
requirements for such country, the Foreign Custody Manager shall be deemed to
have been delegated by that Fund's Board responsibility as Foreign Custody
Manager with respect to that country and to have accepted such delegation.
Execution of this Amendment by the Fund shall be deemed to be a Proper
Instruction to open an account, or to place or maintain Foreign Assets, in each
country listed on Schedule A in which the Custodian has previously placed or
currently maintains Foreign Assets pursuant to the terms of the

2
<PAGE>

Contract. Following the receipt of Proper Instructions directing the Foreign
Custody Manager to close the account of a Fund with the Eligible Foreign
Custodian selected by the Foreign Custody Manager in a designated country, the
delegation by that Fund's Board to the Custodian as Foreign Custody Manager for
that country shall be deemed to have been withdrawn and the Custodian shall
immediately cease to be the Foreign Custody Manager of the Fund with respect to
that country.

The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to the
Fund. Thirty days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Fund, the Custodian shall have
no further responsibility as Foreign Custody Manager to the Fund with respect to
the country as to which the Custodian's acceptance of delegation is withdrawn.

3.4. Scope of Delegated Responsibilities.
-----------------------------------

3.4.1. Selection of Eligible Foreign Custodians.
----------------------------------------

Subject to the provisions of this Article 3, the Fund's Foreign Custody Manager
may place and maintain the Foreign Assets in the care of the Eligible Foreign
Custodian selected by the Foreign Custody Manager in each country listed on
Schedule A, as amended from time to time.

In performing its delegated responsibilities as Foreign Custody Manager to place
or maintain Foreign Assets with an Eligible Foreign Custodian, the Foreign
Custody Manager shall determine that the Foreign Assets will be subject to
reasonable care, based on the standards applicable to custodians in the country
in which the Foreign Assets will be held by that Eligible Foreign Custodian,
after considering all factors relevant to the safekeeping of such assets,
including, without limitation the factors specified in Rule 17f-5(c)(1).

3.4.2. Contracts With Eligible Foreign Custodians.
------------------------------------------

The Foreign Custody Manager shall determine that the contract (or the rules or
established practices or procedures in the case of an Eligible Foreign Custodian
that is a foreign securities depository or clearing agency) governing the
foreign custody arrangements with each Eligible Foreign Custodian selected by
the Foreign Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).

3.4.3. Monitoring.
----------

In each case in which the Foreign Custody Manager maintains Foreign Assets with
an Eligible Foreign Custodian selected by the Foreign Custody Manager, the
Foreign Custody Manager shall establish a system to monitor (i) the
appropriateness of maintaining the Foreign Assets with such Eligible Foreign
Custodian and (ii) the contract governing the custody arrangements established
by the Foreign Custody Manager with the Eligible Foreign Custodian (or the rules
or established practices and procedures in the case of an Eligible Foreign
Custodian selected by the Foreign

3
<PAGE>

Custody Manager which is a foreign securities depository or clearing agency that
is not a Mandatory Securities Depository). The Foreign Custody Manager shall
provide the Board at least annually with information as to the factors used in
such monitoring system. If the Foreign Custody Manager determines that the
custody arrangements with an Eligible Foreign Custodian it has selected are no
longer appropriate, the Foreign Custody Manager shall notify the Board in
accordance with Section 3.7 hereunder and withdraw the Foreign Assets from such
Eligible Foreign Custodian as soon as reasonably practicable.

3.5. Guidelines for the Exercise of Delegated Authority.
--------------------------------------------------

For purposes of this Article 3, the Foreign Custody Manager shall have no
responsibility for Country Risk as is incurred by placing and maintaining the
Foreign Assets in each country for which the Custodian is serving as Foreign
Custody Manager of the Portfolios. The Fund and the Custodian each expressly
acknowledge that the Foreign Custody Manager shall not be delegated any
responsibilities under this Article 3 with respect to Mandatory Securities
Depositories.

3.6. Standard of Care as Foreign Custody Manager of a Portfolio.
----------------------------------------------------------

In performing the responsibilities delegated to it, the Foreign Custody Manager
agrees to exercise reasonable care, prudence and diligence such as a person
having responsibility for the safekeeping of assets of management investment
companies registered under the 1940 Act would exercise.

3.7. Reporting Requirements.
----------------------

The Foreign Custody Manager shall report the placement of Foreign Assets with an
Eligible Foreign Custodian, the withdrawal of the Foreign Assets from an
Eligible Foreign Custodian and the placement of such Foreign Assets with another
Eligible Foreign Custodian by providing to the Board amended Schedules A or B at
the end of the calendar quarter in which an amendment to either Schedule has
occurred. The Foreign Custody Manager shall make written reports notifying the
Board of any other material change in the foreign custody arrangements of the
Funds described in this Article 3 promptly after the occurrence of the material
change.

3.8. Representations with Respect to Rule 17f-5.
------------------------------------------

The Foreign Custody Manager represents to the Fund that it is a U.S. Bank as
defined in section (a)(7) of Rule 17f-5.

3.9. Effective Date and Termination of the Custodian as Foreign Custody Manager.
--------------------------------------------------------------------------

The Board's delegation to the Custodian as Foreign Custody Manager of the Funds
shall be effective as of the date hereof and shall remain in effect until
terminated at any time, without penalty, by written notice from the terminating
party to the non-terminating party. Termination will become effective sixty (60)
days after receipt by the non-terminating party of such notice.

4
<PAGE>

The provisions of Section 3.3 hereof shall govern the delegation to and
termination of the Custodian as Foreign Custody Manager of the Funds with
respect to designated countries.

3.10. Most Favored Client.
-------------------

If at any time prior to termination of this Amendment, the Custodian, as a
matter of standard business practice, accepts delegation as Foreign Custody
Manager for its U.S. mutual fund clients on terms of materially greater benefit
to the Funds than set forth in this Amendment, the Custodian hereby agrees to
negotiate with the Funds in good faith with respect thereto.

4. Duties of the Custodian with Respect to Property of the Funds held
------------------------------------------------------------------
Outside the United States.
-------------------------

4.1 Definitions.
-----------

Capitalized terms in this Article 4 shall have the following meanings:

"Foreign Securities System" means either a clearing agency or a securities
depository listed on Schedule A hereto or a Mandatory Securities Depository
listed on Schedule B hereto.

"Foreign Sub-Custodian" means a foreign banking institution (including a foreign
branch of the Custodian or another Bank (as defined in Section 2(a)(5) of the
1940 Act)) serving as an Eligible Foreign Custodian.

4.2. Holding Securities.
------------------

The Custodian shall identify on its books as belonging to the Funds the foreign
securities held by each Foreign Sub-Custodian or Foreign Securities System. The
Custodian may hold foreign securities for all of its customers, including the
Funds, with any Foreign Sub-Custodian in an account that is identified as
belonging to the Custodian for the benefit of its customers, provided however,
-------- -------
that (i) the records of the Custodian with respect to foreign securities of the
Funds which are maintained in such account shall identify those securities as
belonging to the Funds and (ii), to the extent permitted and customary in the
market in which the account is maintained, the Custodian shall require that
securities so held by the Foreign Sub-Custodian be held separately from any
assets of such Foreign Sub-Custodian or of other customers of such Foreign Sub-
Custodian.

4.3. Foreign Securities Systems.
--------------------------

Foreign securities shall be maintained in a Foreign Securities System in a
designated country only through arrangements implemented by the Foreign Sub-
Custodian in such country pursuant to the terms of this Contract.

4.4. Transactions in Foreign Custody Account.
---------------------------------------

5
<PAGE>

4.4.1. Delivery of Foreign Assets.
--------------------------

The Custodian or a Foreign Sub-Custodian shall release and deliver foreign
securities of the Funds held by such Foreign Sub-Custodian, or in a Foreign
Securities System account, only upon receipt of Proper Instructions, which may
be continuing instructions when deemed appropriate by the parties, and only in
the following cases:

(i) upon the sale of such foreign securities for the Fund in accordance
with customary market practice in the country where such foreign
securities are held or traded, including, without limitation: (A)
delivery against expectation of receiving later payment; or (B) in
the case of a sale effected through a Foreign Securities System, in
accordance with the rules governing the operation of the Foreign
Securities System;

(ii) in connection with any repurchase agreement related to foreign
securities;

(iii) to the depository agent in connection with tender or other similar
offers for foreign securities of the Portfolios;

(iv) to the issuer thereof or its agent when such foreign securities are
called, redeemed, retired or otherwise become payable;

(v) to the issuer thereof, or its agent, for transfer into the name of
the Custodian (or the name of the respective Foreign Sub-Custodian
or of any nominee of the Custodian or such Foreign Sub-Custodian)
or for exchange for a different number of bonds, certificates or
other evidence representing the same aggregate face amount or
number of units;

(vi) to brokers, clearing banks or other clearing agents for examination
or trade execution in accordance with reasonable market custom;
provided that in any such case the Foreign Sub-Custodian shall have
--------
no responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for such
securities except as may arise from the Foreign Sub-Custodian's own
negligence or willful misconduct;

(vii) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of
the securities of the issuer of such securities, or pursuant to
provisions for conversion contained in such securities, or pursuant
to any deposit agreement;

(viii) in the case of warrants, rights or similar foreign securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities;

6
<PAGE>

(ix) for delivery as security in connection with any borrowing by the
Funds requiring a pledge of assets by the Funds;

(x) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;

(xi) in connection with the lending of foreign securities; and

(xii) for any other proper purpose, but only upon receipt of Proper
--- ----
Instructions specifying the foreign securities to be delivered,
setting forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper trust\corporate purpose, and
naming the person or persons to whom delivery of such securities
shall be made.

4.4.2. Payment of Fund Monies.
----------------------

Upon receipt of Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay out, or direct the
respective Foreign Sub-Custodian or the respective Foreign Securities System to
pay out, monies of a Fund in the following cases only:

(i) upon the purchase of foreign securities for the Fund, unless
otherwise directed by Proper Instructions, in accordance with
reasonable market settlement practice in the country where such
foreign securities are held or traded, including, without
limitation, (A) delivering money to the seller thereof or to a
dealer therefor (or an agent for such seller or dealer) against
expectation of receiving later delivery of such foreign securities;
or (B) in the case of a purchase effected through a Foreign
Securities System, in accordance with the rules governing the
operation of such Foreign Securities System;

(ii) in connection with the conversion, exchange or surrender of foreign
securities of the Fund;

(iii) for the payment of any expense or liability of the Fund, including
but not limited to the following payments: interest, taxes,
investment advisory fees, transfer agency fees, fees under this
Contract, legal fees, accounting fees, and other operating
expenses;

(iv) for the purchase or sale of foreign exchange or foreign exchange
contracts for the Fund, including transactions executed with or
through the Custodian or its Foreign Sub-Custodians;

(v) in connection with trading in options and futures contracts,
including delivery as

7
<PAGE>

original margin and variation margin;

(vi) for payment of part or all of the dividends received in respect of
securities sold short;

(vii) in connection with the borrowing or lending of foreign securities;
and

(viii) for any other proper purpose, but only upon receipt of Proper
--- ----
Instructions specifying the amount of such payment, setting forth
the purpose for which such payment is to be made, declaring such
purpose to be a proper trust\corporate purpose, and naming the
person or persons to whom such payment is to be made.

4.4.3. Market Conditions; Market Information.
-------------------------------------

Notwithstanding any provision of this Contract to the contrary, settlement and
payment for Foreign Assets received for the account of the Funds and delivery of
Foreign Assets maintained for the account of the Funds may be effected in
accordance with the customary established securities trading or processing
practices and procedures in the country or market in which the transaction
occurs generally accepted by Institutional Clients, including, without
limitation, delivering Foreign Assets to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) with the expectation of
receiving later payment for such Foreign Assets from such purchaser or dealer.

For purposes of this Agreement, the term "Institutional Clients" means U.S.
registered investment companies or major U.S. commercial banks, insurance
companies, pension funds or substantially similar institutions which, as a part
of their ordinary business operations, purchase or sell securities and make use
of global custody services.

The Custodian shall provide to the Board information with respect to material
changes in the custody and settlement practices in countries in which the
Custodian employs a Foreign Sub-Custodian. The Custodian shall provide, without
limitation, information relating to Foreign Securities Systems and other
information described in Schedule C. The Custodian may revise Schedule C from
time to time, provided that no such revision shall result in the Board being
provided with substantively less information than had previously been provided
hereunder and provided further that the Custodian shall in any event provide to
the Board at least annually the following information and opinions with respect
to the Board approved countries listed on Schedule A:

(i) legal opinions relating to whether local law restricts with respect
to U.S. registered mutual funds (a) access of a fund's independent
public accountants to books and records of a Foreign Sub-Custodian
or Foreign Securities System, (b) a fund's ability to recover in
the event of bankruptcy or insolvency of a Foreign Sub-Custodian or
Foreign Securities System, (c) a fund's ability to recover in the
event of a loss by a Foreign Sub-Custodian or Foreign Securities
System, and (d)

8
<PAGE>

the ability of a foreign investor to convert cash and cash
equivalents to U.S. dollars;

(ii) summary of information regarding Foreign Securities Systems; and

(iii) country profile information containing market practice for (a)
delivery versus payment, (b) settlement method, (c) currency
restrictions, (d) buy-in practices, (e) foreign ownership limits,
and (f) unique market arrangements.

4.5. Registration of Foreign Securities.
----------------------------------

The foreign securities maintained in the custody of a Foreign Sub-Custodian
(other than bearer securities) shall be registered in the name of the applicable
series or in the name of the Custodian or in the name of any Foreign Sub-
Custodian or in the name of any nominee of the foregoing, and the Fund agrees to
hold any such nominee harmless from any liability as a holder of record of such
foreign securities, except to the extent that the Fund incurs loss or damage due
to failure of such nominee to meet its standard of care set forth in the
Contract. The Custodian or a Foreign Sub-Custodian shall not be obligated to
accept securities on behalf of a Fund under the terms of this Contract unless
the form of such securities and the manner in which they are delivered are in
accordance with reasonable market practice.

4.6. Bank Accounts.
-------------

The Custodian shall identify on its books as belonging to the Fund cash
(including cash denominated in foreign currencies) deposited with the Custodian.
Where the Custodian is unable to maintain, or market practice does not
facilitate the maintenance of, cash on the books of the Custodian, a bank
account or bank accounts opened and maintained outside the United States on
behalf of a Fund with a Foreign Sub-Custodian shall be subject only to draft or
order by the Custodian or such Foreign Sub-Custodian, acting pursuant to the
terms of this Contract to hold cash received by or from or for the account of
the Portfolio.

4.7. Collection of Income.
--------------------

The Custodian shall use reasonable commercial efforts to collect all income and
other payments with respect to the Foreign Assets held hereunder to which the
Funds shall be entitled and shall credit such income, as collected, to the
applicable Fund. In the event that extraordinary measures are required to
collect such income, the Fund and the Custodian shall consult as to such
measures and as to the compensation and expenses of the Custodian relating to
such measures.

4.8. Shareholder Rights.
------------------

With respect to the foreign securities held pursuant to this Article 4, the
Custodian will use

9
<PAGE>

reasonable commercial efforts to facilitate the exercise of voting and other
shareholder rights, subject always to the laws, regulations and practical
constraints that may exist in the country where such securities are issued. The
Fund acknowledges that local conditions, including lack of regulation, onerous
procedural obligations, lack of notice and other factors may have the effect of
severely limiting the ability of the Fund to exercise shareholder rights.

4.9. Communications Relating to Foreign Securities.
---------------------------------------------

The Custodian shall transmit promptly to the Fund written information
(including, without limitation, pendency of calls and maturities of foreign
securities and expirations of rights in connection therewith) received by the
Custodian via the Foreign Sub-Custodians from issuers of the foreign securities
being held for the account of the Funds. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund written information so
received by the Custodian from issuers of the foreign securities whose tender or
exchange is sought or from the party (or its agents) making the tender or
exchange offer. Subject to the standard of care to which the Custodian is held
under this Agreement, the Custodian shall not be liable for any untimely
exercise of any tender, exchange or other right or power in connection with
foreign securities or other property of the Funds at any time held by it unless
(i) the Custodian or the respective Foreign Sub-Custodian is in actual
possession of such foreign securities or property and (ii) the Custodian
receives Proper Instructions with regard to the exercise of any such right or
power, and both (i) and (ii) occur at least three business days prior to the
date on which the Custodian is to take action to exercise such right or power.

4.10. Liability of Foreign Sub-Custodians and Foreign Securities Systems.
------------------------------------------------------------------

Each agreement pursuant to which the Custodian employs a Foreign Sub-Custodian
shall, to the extent possible, require the Foreign Sub-Custodian to exercise
reasonable care in the performance of its duties and, to the extent possible, to
indemnify, and hold harmless, the Custodian from and against any loss, damage,
cost, expense, liability or claim arising out of or in connection with the
Foreign Sub-Custodian's performance of such obligations. At each Fund's
election, a Fund shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a Foreign Sub-Custodian as a
consequence of any such loss, damage, cost, expense, liability or claim if and
to the extent that a Fund and any applicable series have not been made whole for
any such loss, damage, cost, expense, liability or claim.

4.11. Tax Law.
-------

Except to the extent that imposition of any tax liability arises from the
Custodian's failure to perform in accordance with the terms of this Section 4.11
or from the failure of any Foreign Sub-Custodian to perform in accordance with
the terms of the applicable subcustody agreement, the Custodian shall have no
responsibility or liability for any obligations now or hereafter imposed on a
Fund, a series thereof or the Custodian as custodian of the Fund by the tax law
of the United States or of any state or political subdivision thereof. It shall
be the responsibility of each Fund to notify the Custodian of the obligations
imposed on the Fund or the Custodian as custodian of

10
<PAGE>

the Fund by the tax law of countries other than those mentioned in the above
sentence, including responsibility for withholding and other taxes, assessments
or other governmental charges, certifications and governmental reporting. The
sole responsibility of the Custodian with regard to such tax law shall be to use
reasonable efforts to assist the Fund with respect to any claim for exemption or
refund under the tax law of countries for which the Fund has provided such
information.

4.12. Liability of Custodian.
----------------------

Except as may arise from the Custodian's own negligence or willful misconduct or
the negligence or willful misconduct of a Sub-Custodian, the Custodian shall be
without liability to a Fund for any loss, liability, claim or expense resulting
from or caused by anything which is (A) part of Country Risk or (B) part of the
"prevailing country risk" of the Fund, as such term is used in SEC Release Nos.
IC-22658; IS-1080 (May 12, 1997) or as such term or other similar terms are now
or in the future interpreted by the SEC or by the staff of the Division of
Investment Management of the SEC.

The Custodian shall be liable for the acts or omissions of a Foreign Sub-
Custodian to the same extent as set forth with respect to sub-custodians
generally in the Contract and, regardless of whether assets are maintained in
the custody of a Foreign Sub-Custodian or a Foreign Securities System, the
Custodian shall not be liable for any loss, damage, cost, expense, liability or
claim resulting from nationalization, expropriation, currency restrictions, or
acts of war or terrorism, or any other loss where the Sub-Custodian has
otherwise acted with reasonable care.

III. Except as specifically superseded or modified herein, the terms and
provisions of the Contract shall continue to apply with full force and
effect. In the event of any conflict between the terms of the Contract
prior to this Amendment and this Amendment, the terms of this Amendment
shall prevail. If the Custodian is delegated the responsibilities of
Foreign Custody Manager pursuant to the terms of Article 3 hereof, in the
event of any conflict between the provisions of Articles 3 and 4 hereof,
the provisions of Article 3 shall prevail.

11
<PAGE>

IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed in its name and behalf by its duly authorized representative as of the
date first above written.

WITNESSED BY: STATE STREET BANK AND TRUST
COMPANY

/s/ Marc L. Parsons By: /s/ Ronald E. Logue
- ------------------- -------------------
Marc L. Parsons Ronald E. Logue
Associate Counsel Executive Vice President

Cash Accumulation Trust
Command Government Fund
Command Money Fund
Command Tax-Free Fund
Global Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.

Prudential 2020 Focus Fund
Prudential Balanced Fund
Prudential California Municipal Fund
Prudential Developing Markets Fund
Prudential Distressed Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential Diversified Funds
Prudential Index Series Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund

Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Institutional Liquidity Portfolio, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
The Prudential Investment Portfolios Fund, Inc.
Prudential Mid-Cap Value Fund
Prudential MoneyMart Assets, Inc.

12
<PAGE>

Prudential Mortgage Income Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Municipal Bond Fund
Prudential Municipal Series Fund
Prudential National Municipals Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential 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 Tax-Free Money Fund, Inc.
Prudential Tax-Managed Equity Fund
Prudential Utility Fund, Inc.
Prudential World Fund, Inc.
The Global Total Return Fund, Inc.
The Target Portfolio Trust
The Asia Pacific Fund, Inc.
The High Yield Income Fund, Inc.

Witnessed By:

By: /s/ S. Jane Rose By: /s/ Grace Torres
---------------- ----------------
Grace Torres
Treasurer

First Financial Fund, Inc.
The High Yield Plus Fund, Inc.

Witnessed By:

By: /s/ Stephanie L. Bourque By: /s/ Arthur J. Brown
------------------------ -------------------
Arthur J. Brown
Secretary

13
<PAGE>

STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES

Country Subcustodian Non-Mandatory Depositories

Argentina Citibank, N.A. --

Australia Westpac Banking Corporation --

Austria Erste Bank der Oesterreichischen --
Sparkassen AG

Bahrain British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)

Bangladesh Standard Chartered Bank --

Belgium Generale de Banque --

Bermuda The Bank of Bermuda Limited --

Bolivia Banco Boliviano Americano S.A. --

Botswana Barclays Bank of Botswana Limited --

Brazil Citibank, N.A. --

Bulgaria ING Bank N.V. --

Canada Canada Trustco Mortgage Company --

Chile Citibank, N.A. Deposito Central de
Valores S.A.

People's The Hongkong and Shanghai --
Republic Banking Corporation Limited,
of China Shanghai and Shenzhen branches

Colombia Cititrust Colombia S.A. --
Sociedad Fiduciaria

14
<PAGE>

STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES

Country Subcustodian Non-Mandatory Depositories

Costa Rica Banco BCT S.A. --

Croatia Privredna Banka Zagreb d.d --

Cyprus Barclays Bank Plc. --
Cyprus Offshore Banking Unit

Czech Republic Ceskoslovenska Obchodni --
Banka, A.S.

Denmark Den Danske Bank --

Ecuador Citibank, N.A. --

Egypt National Bank of Egypt --

Estonia Hansabank --

Finland Merita Bank Limited --

France Banque Paribas --

Germany Dresdner Bank AG --

Ghana Barclays Bank of Ghana Limited --

Greece National Bank of Greece S.A. The Bank of Greece,
System for Monitoring
Transactions in
Securities in Book-Entry
Form

Hong Kong Standard Chartered Bank --

Hungary Citibank Budapest Rt. --

Iceland Icebank Ltd.

15
<PAGE>

STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES

Country Subcustodian Non-Mandatory Depositories

India Deutsche Bank AG --

The Hongkong and Shanghai
Banking Corporation Limited

Indonesia Standard Chartered Bank --

Ireland Bank of Ireland --

Israel Bank Hapoalim B.M. --

Italy Banque Paribas --

Ivory Coast Societe Generale de Banques --
en Cote d'Ivoire

Jamaica Scotiabank Jamaica Trust and Merchant --
Bank Ltd.

Japan The Daiwa Bank, Limited Japan Securities
Depository Center

The Fuji Bank, Limited

Jordan British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)

Kenya Barclays Bank of Kenya Limited --

Republic of The Hongkong and Shanghai Banking
Korea Corporation Limited

Latvia JSC Hansabank-Latvija --

Lebanon British Bank of the Middle East
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)

16
<PAGE>

STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES

Country Subcustodian Non-Mandatory Depositories

Lithuania Vilniaus Bankas AB --

Malaysia Standard Chartered Bank --
Malaysia Berhad

Mauritius The Hongkong and Shanghai --
Banking Corporation Limited

Mexico Citibank Mexico, S.A. --

Morocco Banque Commerciale du Maroc --

Namibia (via) Standard Bank of South Africa --

The Netherlands MeesPierson N.V. --

New Zealand ANZ Banking Group --
(New Zealand) Limited

Norway Christiania Bank og --
Kreditkasse

Oman British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)

Pakistan Deutsche Bank AG --

Peru Citibank, N.A. --

Philippines Standard Chartered Bank --

Poland Citibank (Poland) S.A. --
Bank Polska Kasa Opieki S.A.

Portugal Banco Comercial Portugues --

17
<PAGE>

STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES

Country Subcustodian Non-Mandatory Depositories

Romania ING Bank N.V. --

Russia Credit Suisse First Boston AO, Moscow --
(as delegate of Credit Suisse
First Boston, Zurich)

Singapore The Development Bank --
of Singapore Limited

Slovak Republic Ceskoslovenska Obchodni Banka, A.S. --

Slovenia Bank Austria d.d. Ljubljana --

South Africa Standard Bank of South Africa Limited --

Spain Banco Santander, S.A. --

Sri Lanka The Hongkong and Shanghai --
Banking Corporation Limited

Swaziland Standard Bank Swaziland Limited --

Sweden Skandinaviska Enskilda Banken --

Switzerland UBS AG --

Taiwan - R.O.C. Central Trust of China --

Thailand Standard Chartered Bank --

Trinidad
& Tobago Republic Bank Limited --

Tunisia Banque Internationale Arabe de Tunisie --

Turkey Citibank, N.A. --
Ottoman Bank

18
<PAGE>

STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES

Country Subcustodian Non-Mandatory Depositories

Ukraine ING Bank, Ukraine --

United Kingdom State Street Bank and Trust Company, --
London Branch

Uruguay Citibank, N.A. --

Venezuela Citibank, N.A. --

Zambia Barclays Bank of Zambia Limited --

Zimbabwe Barclays Bank of Zimbabwe Limited --

Euroclear (The Euroclear System)/State Street London Limited

Cedel, S.A. (Cedel Bank, societe anonyme)/State Street London Limited

INTERSETTLE (for EASDAQ Securities)

* The global custody network approved by each fund is set forth below on
Schedules A-1 and A-2.

19
<PAGE>

Schedule A-1

Prudential Mutual Funds
State Street Global Custody Network

<TABLE>
<CAPTION>
Country Funds
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Argentina Mexico Global Utility Fund, Inc.
Australia Morocco Prudential 20/20 Focus Fund
Austria Netherlands Prudential Balanced Fund
Bangladesh/+/ New Zealand Prudential Equity Fund, Inc.
Belgium Norway Prudential Equity Income Fund
Brazil Pakistan Prudential Developing Markets Fund
Canada Peru Prudential Diversified Bond Fund, Inc.
Chile Philippines Prudential Distressed Securities Fund, Inc.
China Poland Prudential Diversified Funds
Columbia Portugal Prudential Emerging Growth Fund, Inc.
Cyprus Russia Prudential Global Genesis Fund, Inc.
Czech Republic Singapore Prudential Global Limited Maturity Fund, Inc.
Denmark Slovak Republic Prudential Index Series Fund
Ecuador South Africa Prudential Intermediate Global Income Fund, Inc.
Egypt Spain Prudential International Bond Fund, Inc.,
Finland Sri Lanka Prudential Mid-Cap Value Fund
France Sweden Prudential Natural Resources Fund, Inc.
Germany Switzerland Prudential Pacific Growth Fund, Inc.
Ghana Taiwan Prudential Real Estate Securities Fund
Greece Thailand Prudential Small-Cap Quantum Fund, Inc.
Hong Kong Turkey Prudential Small Company Value Fund, Inc.
Hungary Transnational Prudential Tax-Managed Equity Fund
India United Kingdom Prudential Utility Fund, Inc.
Indonesia Uruguay Prudential World Fund, Inc.
Ireland Venezuela The Prudential Investment Portfolios Fund, Inc.
Israel The Target Portfolio Trust
Italy The Global Total Return Fund, Inc.
Ivory Coast
Japan
Jordan
Kenya
Korea
Lebanon
Malaysia

- -----------------------------------------------------------------------------------------
+ Countries marked by a dagger have been approved only for The Target Portfolio Trust.
</TABLE>
<PAGE>

Schedule A-2

Prudential Mutual Funds
State Street Global Custody Network

Country Funds

- -----------------------------------------------------------------------------------------
<S> <C>
United Kingdom Cash Accumulation Trust
Command Government Fund
Command Money Fund
Prudential Government Income Fund, Inc.
Prudential High Yield Fund, Inc.
Prudential High Yield Income Fund, Inc.
Prudential Institutional Liquidity Portfolio, Inc.
Prudential MoneyMart Assets, Inc.
Prudential Special Money Market Fund, Inc.
Prudential Structured Maturity Fund, Inc.
</TABLE>
<PAGE>

SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES

Country Mandatory Depositories

Argentina Caja de Valores S.A.

Australia Austraclear Limited

Reserve Bank Information and
Transfer System

Austria Oesterreichische Kontrollbank AG
(Wertpapiersammelbank Division)

Belgium Caisse Interprofessionnelle de Depot et
de Virement de Titres S.A.

Banque Nationale de Belgique

Brazil Companhia Brasileira de Liquidacao e
Custodia (CBLC)

Bolsa de Valores de Rio de Janeiro
All SSB clients presently use CBLC

Central de Custodia e de Liquidacao
Financeira de Titulos

Canada The Canadian Depository
for Securities Limited

People's Republic Shanghai Securities Central Clearing
of China and Registration Corporation

Shenzhen Securities Central Clearing
Co., Ltd.

Croatia

Czech Republic Stredisko cennych papiru

Czech National Bank

Denmark Vaerdipapircentralen
(the Danish Securities Center)

* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>

SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES

Country Mandatory Depositories

Egypt Misr Company for Clearing, Settlement,
and Central Depository

Finland The Finnish Central Securities
Depository

France Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres (SICOVAM)

Germany Deutsche Borse Clearing AG

Greece The Central Securities Depository
(Apothetirion Titlon AE)

Hong Kong The Central Clearing and
Settlement System

Central Money Markets Unit

Hungary The Central Depository and Clearing
House (Budapest) Ltd. (KELER)
[Mandatory for Gov't Bonds only;
SSB does not use for other securities]

India The National Securities Depository Limited

Indonesia Bank Indonesia

Ireland Central Bank of Ireland
Securities Settlement Office

Israel The Tel Aviv Stock Exchange Clearing
House Ltd.

Bank of Israel

Italy Monte Titoli S.p.A.

Banca d'Italia

* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>

SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES

Country Mandatory Depositories

Japan Bank of Japan Net System

Kenya Central Bank of Kenya

Republic of Korea Korea Securities Depository Corporation

Lebanon The Custodian and Clearing Center of
Financial Instruments for Lebanon
and the Middle East (MIDCLEAR) S.A.L.

The Central Bank of Lebanon

Malaysia The Malaysian Central Depository Sdn. Bhd.

Bank Negara Malaysia,
Scripless Securities Trading and Safekeeping
System

Mexico S.D. INDEVAL, S.A. de C.V.
(Instituto para el Deposito de
Valores)

Morocco Maroclear

The Netherlands Nederlands Centraal Instituut voor
Giraal Effectenverkeer B.V. (NECIGEF)

De Nederlandsche Bank N.V.

New Zealand New Zealand Central Securities
Depository Limited

Norway Verdipapirsentralen (the Norwegian
Registry of Securities)

Pakistan Central Depository Company of Pakistan
Limited

* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>

SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES

Country Mandatory Depositories

Peru Caja de Valores y Liquidaciones S.A.
(CAVALI)

Philippines The Philippines Central Depository, Inc.

The Registry of Scripless Securities
(ROSS) of the Bureau of the Treasury

Poland The National Depository of Securities
(Krajowy Depozyt Papierow Wartosciowych)

Central Treasury Bills Registrar

Portugal Central de Valores Mobiliarios (Central)

Romania National Securities Clearing, Settlement and
Depository Co.

Bucharest Stock Exchange Registry Division

Singapore The Central Depository (Pte)
Limited

Monetary Authority of Singapore

Slovak Republic Stredisko Cennych Papierov

National Bank of Slovakia

South Africa The Central Depository Limited

Spain Servicio de Compensacion y
Liquidacion de Valores, S.A.

Banco de Espana,
Central de Anotaciones en Cuenta

Sri Lanka Central Depository System
(Pvt) Limited

* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>

SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES

Country Mandatory Depositories

Sweden Vardepapperscentralen AB
(the Swedish Central Securities Depository)

Switzerland Schweizerische Effekten - Giro AG

Taiwan - R.O.C. The Taiwan Securities Central
Depository Co., Ltd.

Thailand Thailand Securities Depository
Company Limited

Turkey Takas ve Saklama Bankasi A.S.
(TAKASBANK)

Central Bank of Turkey

United Kingdom The Bank of England,
The Central Gilts Office and
The Central Moneymarkets Office

Uruguay Central Bank of Uruguay

Venezuela Central Bank of Venezuela

* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>

SCHEDULE C

MARKET INFORMATION

Publication/Type of Information Brief Description
- ------------------------------- -----------------
<S> <C>
(Frequency)

The Guide to Custody in World Markets An overview of safekeeping and
- -------------------------------------
settlement practices and
(annually) procedures in each market in which State
Street Bank and Trust Company offers
custodial services.

Global Custody Network Review Information relating to the operating history
- -----------------------------
and structure of
(annually) depositories and subcustodians located in the markets
in which State Street Bank and Trust Company offers
custodial services, including transnational
depositories.

Global Legal Survey With respect to each market in which State Street Bank
- -------------------
and
(annually) Trust Company offers custodial services, opinions
relating to whether local law restricts (i) access of a
fund's independent public accountants to books and
records of a Foreign Sub-Custodian or Foreign
Securities System, (ii) the Fund's ability to recover
in the event of bankruptcy or insolvency of a Foreign
Sub-Custodian or Foreign Securities System, (iii) the
Fund's ability to recover in the event of a loss by a
Foreign Sub-Custodian or Foreign Securities System, and
(iv) the ability of a foreign investor to convert cash
and cash equivalents to U.S. dollars.

Subcustodian Agreements Copies of the subcustodian contracts State Street Bank
- -----------------------
and
(annually) Trust Company has entered into with each subcustodian
in the markets in which State Street Bank and Trust
Company offers subcustody services to its US mutual
fund clients.

Network Bulletins (weekly): Developments of interest to investors in the
markets in which State Street Bank and Trust Company
offers custodial services.

Foreign Custody Advisories With respect to markets in which State Street Bank
and Trust
(as necessary): Company offers custodial services which exhibit special
custody risks, developments which may impact State
Street's ability to deliver expected levels of service.

</TABLE>
<PAGE>

SCHEDULE D

LIST OF FUNDS,CONTRACTS AND AGREEMENTS

<TABLE>
<CAPTION>
Fund Name Execution Date
- --------- --------------
<S> <C>

Cash Accumulation Trust December 12, 1997

Command Government Fund July 1, 1990

Command Money Fund July 1, 1990

Command Tax-Free Fund July 1, 1990

The Global Total Return Fund, Inc. September 5, 1990
(formerly The Global Yield Fund, Inc.)

Prudential 20/20 Focus Fund April 14, 1998

Prudential California Municipal Fund August 1, 1990

Prudential Developing Markets Fund June 1, 1998

Prudential Distressed Securities Fund, Inc. February 8, 1996

Prudential Diversified Bond Fund, Inc. January 3, 1995

Prudential Diversified Funds September 2, 1998

Prudential Emerging Growth Fund, Inc. October 21, 1996

Prudential Equity Fund, Inc. August 1, 1990

Prudential Global Limited Maturity Fund, Inc. October 25, 1990
(formerly Prudential Short-Term Global
Income Fund, Inc.)

Prudential Government Income Fund, Inc. July 31, 1990
(formerly Prudential Government Plus Fund)

Prudential Government Securities Trust July 26, 1990

Prudential High Yield Fund, Inc. July 26, 1990

Prudential High Yield Total Return Fund, Inc. May 30, 1997

Prudential International Bond Fund, Inc. January 16, 1996
(formerly The Global Government Plus Fund, Inc.)

The Prudential Investment Portfolios Fund, Inc. October 27, 1995
(formerly Prudential Jennison Series Fund, Inc.)

Prudential Mid-Cap Value Fund April 14, 1998

</TABLE>
<PAGE>

<TABLE>
<S> <C>
Prudential MoneyMart Assets, Inc. July 25, 1990

Prudential Mortgage Income Fund, Inc. August 1, 1990
(formerly Prudential GNMA Fund, Inc.)

Prudential Multi-Sector Fund, Inc. June 1, 1990

Prudential Municipal Series Fund August 1, 1990

Prudential National Municipals Fund, Inc. July 26, 1990

Prudential Pacific Growth Fund, Inc. July 16, 1992

Prudential Real Estate Securities Fund February 18, 1998

Prudential Small Cap Quantum Fund, Inc. August 1, 1997

Prudential Small Company Value Fund, Inc. July 26, 1990
(formerly Prudential Growth Opportunity Fund, Inc.)

Prudential Special Money Market Fund, Inc. January 12, 1990

Prudential Structured Maturity Fund, Inc. July 25, 1989

Prudential Tax-Free Money Fund, Inc. July 26, 1990

Prudential Utility Fund, Inc. June 6, 1990

Prudential World Fund, Inc. June 7, 1990
(formerly Prudential Global Fund, Inc.)

The Target Portfolio Trust November 9, 1992

Global Utility Fund, Inc. December 21, 1989

Nicholas-Applegate Fund, Inc. April 10, 1987

Prudential Balanced Fund September 4, 1987

Prudential Equity Income Fund January 6, 1987

Prudential Global Genesis Fund, Inc. October 21, 1987

Prudential Institutional Liquidity Portfolio, Inc. November 20, 1987

Prudential Intermediate Global Income Fund, Inc. May 19, 1988

Prudential Municipal Bond Fund August 25, 1987

Prudential Natural Resources Fund, Inc. September 18, 1987

Prudential Tax-Managed Equity Fund December 8, 1998

The Asia Pacific Fund April 24, 1987
</TABLE>
<PAGE>

<TABLE>

<S> <C>
Duff & Phelps Utilities Tax-Free Income Fund, Inc. November 21, 1991

First Financial Fund, Inc. May 1, 1986

The High Yield Income Fund, Inc. November 6, 1987

The High Yield Plus Fund, Inc. March 15, 1988

</TABLE>

<PAGE>

EXHIBIT (h)(2)

AMENDMENT TO TRANSFER AGENCY AND SERVICE AGREEMENT

THIS AMENDMENT to the Transfer Agency and Service Agreement by and between
Prudential Equity Income Fund (the "Fund") and Prudential Mutual Fund
Services LLC (successor to Prudential Mutual Fund Services, Inc.)("PMFS") is
entered into as of August 24, 1999.

WHEREAS, the Fund and PMFS have entered into a Transfer Agency and
Service Agreement (the "Agreement") pursuant to which PMFS serves as transfer
agent, dividend disbursing agent and shareholder servicing agent for the
Fund; and

WHEREAS, the Fund and PMFS desire to amend the Agreement to confirm
the Fund's agreement to pay transfer agency account fees and expenses for
beneficial owners holding shares through omnibus accounts maintained by The
Prudential Insurance Company of America, its subsidiaries or affiliates.

NOW, THEREFORE, for and in consideration of the continuation of the
Agreement, and other good and valuable consideration, Article 8 of the
Agreement is amended by adding the following section to the Agreement:

8.04 PMFS may enter into agreements with Prudential or
any subsidiary or affiliate of Prudential whereby PMFS will
maintain an omnibus account and the Fund will reimburse PMFS for
amounts paid by PMFS to Prudential, or such subsidiary or
affiliate, in an amount not in excess of the annual maintenance
fee for each beneficial shareholder account and transactional
fees and expenses with respect to such beneficial shareholder
account as if each beneficial shareholder account were maintained
by PMFS on the Fund's records, subject to the fee schedule
attached hereto as Schedule A. Prudential, its subsidiary or
affiliate, as the case may be, shall maintain records relating to
each beneficial shareholder account that underlies the omnibus
account maintained by PMFS.
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed in their names and on their behalf by and through their duly
authorized officers, as of the day and year first above written.

PRUDENTIAL EQUITY INCOME FUND ATTEST:

By: /s/ Robert F. Gunia By: /s/ Marguerite E.H. Morrison
------------------------ ------------------------------
Robert F. Gunia Marguerite E.H. Morrison
Vice President Secretary

PRUDENTIAL MUTUAL FUND SERVICES LLC

ATTEST:

By: /s/ Brian W. Henderson By: /s/ William V. Healey
------------------------ ------------------------------
Brian W. Henderson William V. Healey
President Secretary

<PAGE>

EXHIBIT I

SULLIVAN & WORCESTER LLP
ONE POST OFFICE SQUARE
BOSTON, MASSACHUSETTS 02109
IN WASHINGTON, D.C. (617) 338-2800 IN NEW YORK CITY
1025 CONNECTICUT AVENUE, N.W. FAX NO. 617-338-2880 767 THIRD AVENUE
WASHINGTON, D.C. 20036 NEW YORK, NEW YORK 10017
(202) 775-8190 (212) 486-8200
FAX NO. 202-293-2275 FAX NO. 212-758-2151

Boston
January 19, 2000

Prudential Investments Fund
Management LLC
Three Gateway Center
Newark, New Jersey 07102-4077

Re: Prudential Equity Income Fund
-----------------------------

Ladies and Gentlemen:

You have requested our opinion as to certain matters of Massachusetts law
relating to the organization and shares of Prudential Equity Income Fund, a
trust with transferable shares under Massachusetts law (the "Fund"). We
----
understand that our opinions are requested in connection with the filing by the
Fund with the Securities and Exchange Commission (the "SEC") of Post-Effective
---
Amendment No. 21 to its Registration Statement on Form N-1A, Registration No.
33-9269, pursuant to the Securities Act of 1933, as amended (the "Securities
----------
Act"), and Amendment No. 22 to its Registration Statement pursuant to the
- ---
Investment Company Act of 1940, as amended, Registration No. 811-4864
(collectively, the "Amendment"), relating to the several classes of shares of
---------
beneficial interest, $.01 par value, of the Fund (the "Shares").
------

The Fund was established pursuant to a Declaration of Trust dated September
18, 1986 (the "Original Declaration"), which, as theretofore amended, amended
--------------------
and restated and supplemented, was restated in its entirety by an Amended and
Restated Declaration of Trust dated August 16, 1994 (the Original Declaration,
as so amended, amended and restated and supplemented, the "Restated
--------
Declaration"). The Restated Declaration was thereafter supplemented by Amended
- -----------
Certificates of Designation dated December 14, 1995 and October 29, 1998 (the
Restated Declaration, as supplemented by the Amended Certificates of
Designation, the "Declaration").
-----------

We are Massachusetts counsel to the Fund, and for purposes of this opinion
we have examined and are familiar with the Declaration, and we have reviewed the
text of the Amendment, substantially in the form in which it is to be filed with
the SEC, the form of the
<PAGE>

Prospectus (the "Prospectus") and the Statement of Additional Information (the
----------
"SAI") to be included in the Amendment, records of the actions taken by the
---
Trustees of the Fund to authorize the issuance and sale of its Shares, the
Bylaws of the Fund, certificates of officers of the Fund and of public officials
as to matters of fact relevant to the opinions expressed below, and such other
documents and instruments, certified or otherwise identified to our
satisfaction, and such questions of law and fact, as we have considered
necessary or appropriate for purposes of such opinions. We call to your
attention that, in doing so, we have assumed the genuineness of the signatures
on, and the authenticity of, all documents furnished to us, and the conformity
to the originals of documents submitted to us as copies, which we have not
independently verified.

Based upon and subject to the foregoing, we hereby advise you that, in our
opinion, under the laws of Massachusetts:

1. The Fund is validly existing as a trust with transferable shares of the
type commonly called a Massachusetts business trust.

2. The Fund is authorized to issue an unlimited number of Shares; the
Shares of each class subject to the Registration Statement have been
duly and validly authorized by all requisite action of the Trustees of
the Fund, and no action by the shareholders of the Fund is required in
such connection.

3. The Shares, when duly sold, issued and paid for as contemplated by the
Prospectus and the SAI, will be validly and legally issued, fully paid
and nonassessable by the Fund.

With respect to the opinion expressed in paragraph 3 above, we wish to
point out that the shareholders of a Massachusetts business trust may under some
circumstances be subject to assessment at the instance of creditors to pay the
obligations of such trust in the event that its assets are insufficient for the
purpose.

This letter expresses our opinions as to the provisions of the Declaration
and the laws of Massachusetts applying to business trusts generally, but does
not extend to the Massachusetts Securities Act, or to federal securities or
other laws.

We consent to your filing this letter with the SEC as an exhibit to the
Amendment, but we do not thereby concede that we come within the category of
persons whose consent is required under Section 7 of the Securities Act.

Very truly yours,

/s/ SULLIVAN & WORCESTER LLP

<PAGE>

EXHIBIT J

CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------

We hereby consent to the use in this Registration Statement on Form N-1A of our
report dated December 28, 1999, relating to the financial statements and
financial highlights of Prudential Equity Income Fund, which appears in such
Registration Statement. We also consent to the references to us under the
headings "Investment Advisory and Other Services" and "Financial Highlights" in
such Registration Statement.

/s/ PricewaterhouseCoopers LLP
New York, New York
January 14, 2000