PRUDENTIAL VARIABLE CONTRACT ACCOUNT 2, 485BPOS, 1998-04-29

PRUDENTIAL VARIABLE CONTRACT ACCOUNT 2
485BPOS, 1998-04-29

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<PAGE> 1

Registration No. 2-28316

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

---------

Form N-3

REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933

POST-EFFECTIVE AMENDMENT NO. 52
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940

AMENDMENT NO. 29

---------

THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT-2
(Exact Name of Registrant)

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Name of Insurance Company)

751 Broad Street
Newark, New Jersey 07102-3777
(973) 802-8781
(Address and telephone number of Insurance Company's
principal executive offices)

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

CAREN CUNNINGHAM
Assistant General Counsel
Prudential Mutual Fund Management LLC
Gateway Center Three
100 Mulberry Street, 9th Floor
Newark, N.J. 07102
(Name and address of agent for service)

Copy to:
Christopher E. Palmer, Esq.
Shea & Gardner
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036

-----------

It is proposed that this filing will become effective (Check appropriate space):

___ immediately upon filing pursuant to paragraph (b) of Rule 485

_X_ on April 30, 1998 pursuant to paragraph (b) of Rule 485
--------------
(date)

___ 60 days after filing pursuant to paragraph (a)(i) of Rule 485

on ___________ pursuant to paragraph (a)(i) of the Rule 485
- --- (date)

___ 75 days after filing pursuant (a)(ii) of Rule 485

on pursuant to paragraph (a)(ii) of Rule 485
- --- -----------
(date)

If appropriate, check the following box:

___ this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE> 2

<TABLE>

CROSS REFERENCE SHEET

Pursuant to Rule 495(a) under the Securities Act of 1933 indicating the location
in the Prospectus and Statement of Additional Information called for by the
Items of Parts A and B of Form N-3.

Heading in Prospectus or Statement
Item Number and Caption of Additional Information
----------------------- -------------------------
<S> <C>
1. Cover Page............................................... Cover Page
2. Definitions.............................................. Glossary of Terms Used in this Prospectus
3. Synopsis or Highlights................................... Summary of Prospectus Information
4. Condensed Financial Information.......................... Condensed Financial Information
5. General Description of Registrant
and Insurance Company................................... Description of Prudential and VCA-2
6. Management............................................... Description of Prudential and VCA-2
7. Deductions and Expenses.................................. Fee Tables; Charges; The Group Variable Annuity Contracts
8. General Description of
Variable Annuity Contracts.............................. Summary of Prospectus Information; The Group Variable Annuity
Contracts, The Accumulation Period; Voting Rights
9. Annuity Period........................................... The Group Variable Annuity Contracts, The Annuity Period
10. Death Benefit............................................ The Group Variable Annuity Contracts, Death Benefits before an
Annuity is Effected
11. Purchases and Contract Value............................. Description of Prudential and VCA-2; Investment Practices
of VCA-2, Determination of Asset Value; The Group Variable
Annuity Contracts, The Accumulation Period
12. Redemptions.............................................. The Group Variable Annuity Contracts, Withdrawal (Redemption)
of Purchase Payments Prior to Death, Systematic Withdrawal
Plan, Texas Optional Retirement Program
13. Taxes.................................................... Federal Tax Status
14. Legal Proceedings........................................ Legal Proceedings
15. Table of Contents of the Statement
of Additional Information............................... Table of Contents -- Statement of Additional Information
16. Cover Page............................................... Cover Page
17. Table of Contents........................................ Table of Contents
18. General Information and History.......................... Not Applicable
19. Investment Objectives and Policies....................... Investment Management and Administration of VCA-2
20. Management............................................... The VCA-2 Committee
21. Investment Advisory and Other Services................... Investment Management and Administration of VCA-2
22. Brokerage Allocation..................................... Investment Management and Administration of VCA-2, Portfolio
Brokerage and Related Practices
23. Purchase and Pricing of Securities
Being Offered........................................... Not Applicable
24. Underwriters............................................. Investment Management and Administration of VCA-2; Sale of
Group Variable Annuity Contracts
25. Calculation of Performance Data.......................... Not Applicable
26. Annuity Payments......................................... The Group Variable Annuity Contracts, The Annuity Period
27. Financial Statements..................................... Financial Statements of VCA-2; Consolidated Financial
Statements of The Prudential Insurance Company of America
and Subsidiaries
</TABLE>

<PAGE> 3

LOGO

DATED MAY 1, 1998

GROUP TAX-DEFERRED VARIABLE ANNUITY CONTRACTS

issued through

THE PRUDENTIAL
VARIABLE CONTRACT ACCOUNT-2

For Persons Eligible For Such Annuities
In accordance with Section 403(b) of the Internal Revenue Code
- --------------------------------------------------------------------------------

The Prudential Variable Contract Account-2 will invest primarily in equity
securities of major, established corporations that are selected with the
objective of long-term growth of capital.

This Prospectus provides information a prospective investor should know before
investing. Additional information about the Contracts has been filed with the
Securities and Exchange Commission in a Statement of Additional Information,
dated May 1, 1998, which information is incorporated herein by reference, and is
available without charge upon written or oral request directed to the address or
telephone number shown below. The Table of Contents of the Statement of
Additional Information appears on page 27 of this Prospectus.

PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE.

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

The Prudential Insurance Company of America

c/o Prudential Investments

30 Scranton Office Park
Scranton, PA 18507-1789
Telephone 1-800-458-6333

================================================================================

LOGO
<PAGE> 4

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
GLOSSARY OF TERMS USED IN THIS PROSPECTUS................... 1
FEE TABLE................................................... 2
SUMMARY OF PROSPECTUS INFORMATION........................... 3
CONDENSED FINANCIAL INFORMATION............................. 5
DESCRIPTION OF PRUDENTIAL AND VCA-2......................... 6
INVESTMENT PRACTICES OF VCA-2............................... 7
AGREEMENT FOR INVESTMENT MANAGEMENT SERVICES................ 9
CHARGES..................................................... 10
THE GROUP VARIABLE ANNUITY CONTRACTS........................ 11
A. The Accumulation Period............................. 11
1. Crediting Accumulation Units; Deduction for
Sales and Administrative Expenses.................. 11
2. Valuation of a Participant's Individual
Accumulation Account............................... 12
3. The Accumulation Unit Value................... 12
4. Discontinuance of Purchase Payments........... 12
5. Continuance Under Group Contract After Being
Employed by New Employer........................... 13
6. Withdrawal (Redemption) of Purchase Payments
Prior to Death..................................... 13
7. Systematic Withdrawal Plan.................... 14
8. Texas Optional Retirement Program............. 14
9. Death Benefits Before an Annuity is
Effected........................................... 15
10. Transfer Payments............................. 16
11. Requests by Telephone or Other Electronic
Means.............................................. 17
12. Modified Procedures........................... 17
13. Exchange Offer with the PMF Funds............. 17
14. Exchange into Discovery Select(TM) Group
Retirement Annuity................................. 18
B. The Annuity Period.................................. 18
1. Variable Annuity Payments..................... 18
2. Electing the Annuity Date and the Form of
Annuity............................................ 19
3. Deductions for Taxes on Annuity
Considerations..................................... 19
4. Available Forms of Variable Annuity........... 19
5. The Annuity Unit.............................. 20
6. The Annuity Unit Value........................ 20
7. The Annuity Unit Change Factor for Any
Month.............................................. 20
8. Assumed Investment Result..................... 20
9. Schedule of Variable Annuity Purchase Rates... 21
C. Assignment.......................................... 21
D. Changes in the Group Variable Annuity Contract...... 22
E. Periodic Reports.................................... 22
F. Participation in Divisible Surplus................. 22
FEDERAL TAX STATUS.......................................... 22
VOTING RIGHTS............................................... 23
OTHER CONTRACTS ON A VARIABLE BASIS......................... 24
STATE REGULATION............................................ 24
LEGAL PROCEEDINGS........................................... 24
YEAR 2000................................................... 25
ADDITIONAL INFORMATION...................................... 26
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...... 27
</TABLE>

NOTE: All masculine references in this Prospectus are intended to include the
feminine gender. The singular context also includes the plural and vice
versa where necessary.
<PAGE> 5

GLOSSARY OF TERMS USED IN THIS PROSPECTUS

ACCUMULATION PERIOD: the period from the date a Participant's VCA-2 account is
opened to the date it is applied to provide an annuity or otherwise withdrawn
(see page 11).

ACCUMULATION UNIT: a measure used to determine the value of a Participant's
VCA-2 account (see page 11).

ACCUMULATION UNIT VALUE: the dollar value of one Accumulation Unit (see page
12).

ANNUITY: a series of payments made each month as long as a person, called the
annuitant, is living. In some forms of annuity, payments may continue after the
annuitant's death (see page 15).

ANNUITY-CERTAIN: a series of payments for a definite period, not dependent on
the length of a person's life (see page 19).

ANNUITY UNIT: a measure used to determine the value of a variable annuity
payment (see page 20

ANNUITY UNIT VALUE: the dollar value of one Annuity Unit (see page 20).

ASSUMED INVESTMENT RESULT: the annual rate of investment result assumed for the
purpose of establishing the initial payment under a variable annuity and which
is used in determining Annuity Unit Values (see page 20).

CONTRACT: the Group Variable Annuity Contract described in this Prospectus which
is a written agreement between Prudential and the Contract-holder which sets
forth the rights, duties, and privileges of all parties (see page 3).

CONTRACT-HOLDER: ordinarily the employer of the Participants, but may also be an
association representing them or their employers (see page 3).

MORTALITY AND EXPENSE RISKS: the risks Prudential assumes because the amount of
variable annuity payments will not be affected by losses Prudential may incur if
annuitants live longer than expected, or if actual expenses are higher than
expected (see page 4).

PARTICIPANT: a person for whom purchase payments have been made to credit
Accumulation Units which remain in his account or have been applied to provide a
variable annuity for him (see page 11).

PARTICIPANT'S ACCOUNT, INDIVIDUAL ACCUMULATION ACCOUNT: a record of the number
of Accumulation Units credited to a Participant (see page 12).

"PROGRAM"--PRUDENTIAL'S GROUP TAX-DEFERRED ANNUITY PROGRAM: a Contract-holder's
program providing for purchase payments under the Contract, a companion
fixed-dollar annuity contract or a combination of the two (see page 3).

PRUDENTIAL VARIABLE CONTRACT ACCOUNT-2 ("VCA-2" OR THE "ACCOUNT"): the separate
account in which the Contracts participate (see page 6).

PURCHASE PAYMENT: money paid under a contract on behalf of a Participant (see
pages 10-14).

SECTION 403(B) ANNUITY: see Tax-Deferred annuity.

TAX-DEFERRED ANNUITY: an arrangement under Section 403(b) of the Internal
Revenue Code of 1986, as amended, for deferring Federal income tax on the
portion of a person's income which is applied by his employer to the purchase of
an annuity, until annuity payments commence (see page 3).

VARIABLE ANNUITY: an annuity whose payments vary with the investment results of
VCA-2 (see page 19).

1
<PAGE> 6

FEE TABLE

The purpose of this table is to assist the Participant in understanding the
various charges that a Participant in the Account will bear, whether directly or
indirectly. For a more complete description of the various charges, see
"Charges" on page 10.

PARTICIPANT TRANSACTION EXPENSES

<TABLE>
<S> <C>
Sales Load Imposed on Purchases (as a percentage of purchase
payments):................................................ 2.5%
Maximum Annual Contract Fee*................................ $30
</TABLE>

ANNUAL ACCOUNT OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

<TABLE>
<S> <C>
Investment Management Fee................................... .125%
Mortality and Expense*...................................... .375%
-----
Total Annual Expenses....................................... .500%
</TABLE>

EXAMPLE

<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on
each $1,000 invested assuming a 5% annual
return. You would pay the same expenses
whether you withdraw from VCA-2, remain as
a Participant in the Account, or
annuitize, at the end of each time
period.................................... $30 $41 $53 $89
</TABLE>

The above example is based on data for the Account's fiscal year ended December
31, 1997. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.

The example is intended to illustrate the dollar amount of the aggregate of all
the expenses, fees and charges shown above, on a cumulative basis over the
periods shown, that would be incurred on each $1000 invested. The annual
contract fee reflected in the above example is based upon the assumption that
the fee is deducted from the VCA-2 contract in the same proportion as the
aggregate annual contract fees are deducted from the fixed-dollar or VCA-2
contracts. The actual expenses paid by each Participant will vary depending upon
the total amount credited to that Participant and how that amount is allocated.

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

* During a Participant's annuity period, the annual contract fee is not charged
and the mortality and expense charges are not made. See "The Annuity Period"
on pages 18 through 21 for further information.

2
<PAGE> 7

SUMMARY OF PROSPECTUS INFORMATION

The Group Variable Annuity Contracts (the "Contracts") described in this
Prospectus are offered for use by public school systems and certain tax-exempt
organizations pursuant to Section 403(b) of the Internal Revenue Code of 1986,
as amended (the "Internal Revenue Code"). The Contracts, together with
fixed-dollar annuity contracts offered for the same use, but which are not
described in this Prospectus, comprise Prudential's Group Tax-Deferred Annuity
Program (the "Program"). A person for whom purchase payments have been made
under a Contract which remain credited to his account or which have been applied
to provide a variable annuity for him is referred to as a "Participant." The
following is a summary of information about the Contracts and the rights of
Participants. More detailed information can be found in the referenced portions
of this Prospectus. A glossary of certain terms used in this Prospectus can be
found on page 1.

REGISTRANT

The Prudential Variable Contract Account-2 ("VCA-2" or the "Account") is an
open-end, diversified management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). See "Description of
Prudential and VCA-2," page 6.

The Prudential Insurance Company of America ("Prudential") is the investment
manager of VCA-2, and Prudential Investment Management Services LLC ("PIMS"), a
direct wholly-owned subsidiary of Prudential, is the principal underwriter of
the Contracts pursuant to an agreement between Prudential, VCA-2, and PIMS (the
"Distribution Agreement"). Prudential is a mutual life insurance company
incorporated in 1873 under the laws of the State of New Jersey. See "Description
of Prudential and VCA-2," page 6.

Prudential is currently considering reorganizing itself into a stock company.
This form of reorganization, known as demutualization, is a complex process that
may take two or more years to complete. No plan of demutualization has been
adopted yet by Prudential's Board of Directors. Adoption of a plan of
demutualization would occur only after enactment of appropriate legislation in
New Jersey and would have to be approved by Prudential policyholders and
appropriate state insurance regulators. Throughout the process, there will be a
continuing evaluation by the Board of Directors and management of Prudential as
to the desirability of demutualization. The Board of Directors, in its
discretion, may choose not to demutualize or to delay demutualization for a
time.

INVESTMENT OBJECTIVE

VCA-2's investment objective is long-term growth of capital. VCA-2 will seek to
achieve this objective by investing primarily in equity securities of major,
established corporations. Current income, if any, is incidental to this
objective. There is no assurance that this investment objective will be
attained. There is no guarantee that the amount available to a person for whom
purchase payments have been made will equal or exceed the total purchase
payments made on his behalf. The value of the investments held in the Account
fluctuates daily and is subject to the risks of changing economic conditions and
risks inherent in the selection of investments necessary to meet the Account's
objective. See "Investment Practices of VCA-2," page 7 and see "Investment
Management and Administration of VCA-2" in the Statement of Additional
Information.

CONTRACTS OFFERED

The Contracts are generally offered pursuant to agreements between certain
eligible employers and their employees. Annuities issued pursuant to such
agreements are commonly called "tax-deferred annuities," "tax sheltered
annuities" or "403(b) annuities," because the Participants enjoy certain federal
income tax benefits provided by Section 403(b) of the Internal Revenue Code. A
Participant is afforded an opportunity to have his employer set aside funds for
the purpose of providing retirement income for him, with federal income tax upon
those amounts deferred until the annuity payments commence. The Contracts
provide for variable annuity payments to each Participant commencing on a date
selected by him. The amounts of these annuity payments will vary with the
investment performance of VCA-2. The annuity payments will reflect the
investment performance of the Account not only during the period in which the
Participant is receiving annuity payments, but also from the time he first
becomes a Participant under the Contract until the commencement of those
payments. Certain of the rights provided by the Contracts are granted to
Participants, while other rights are exercisable by the Contract-holder, usually
the employer. See "The Group Variable Annuity Contracts," pages 11 through 22.

3
<PAGE> 8

CHARGES

A deduction of 2.5% (2.56% of the amount invested) for sales and marketing
expenses is made from each Participant's purchase payments. An annual
administration charge is made against each Participant's accumulation account in
an amount which varies with each Contract, but which is not more than $30 for
any accounting year. The sales and administration charges may be reduced in
connection with a particular Contract if Prudential estimates that its sales and
administrative expenses will be lower or that it will perform fewer sales or
administrative services in connection with the Contract. A daily charge is made
against each Participant's accumulation account, computed at an effective annual
rate of 0.5% ( 1/2 of 1%), consisting of 0.125% ( 1/8 of 1%) for investment
management services, 0.125% ( 1/8 of 1%) for assuming mortality risks and 0.250%
( 1/4 of 1%) for assuming expense risks, and corresponding charges are made in
computing monthly annuity payments. See "Charges," page 10.

All these charges, except those for investment management services, may be
changed by Prudential without the prior approval of Participants, except as
described under "Changes in the Group Variable Annuity Contract," page 22.

REDEMPTION AND TRANSFER

Federal tax law imposes restrictions on withdrawals from Section 403(b)
annuities. In addition, an employer may adopt a plan that limits the right of
Participants to obtain cash withdrawals upon request. In cases where such
restrictions or limitations do not apply, a Participant upon written request on
a form approved by Prudential, is entitled to withdraw all or a portion of the
amount then credited to his accumulation account. See "Withdrawal (Redemption)
of Purchase Payments Prior to Death," page 13. Redemptions by telephone or other
electronic means also may be allowed. A Participant may transfer all or a
portion of his individual accumulation account from the Contract to a
fixed-dollar annuity contract. Prudential may limit the frequency of such
transfers. A Participant who changes employers may also transfer all of his
individual accumulation account to a similar group annuity contract issued by
Prudential which covers employees of his new employer. See "Transfer Payments,"
page 16. Prudential may impose a redemption charge on any withdrawal or transfer
payment provided by the Contract. See "Changes in the Group Variable Annuity
Contract," page 22.

CONTACTING PRUDENTIAL

All written requests, notices and transfer requests required by the Contracts
(other than withdrawal requests and death benefit claims), should be sent to
Prudential at the address shown on the cover page of this Prospectus. Any
written inquiries also should be sent to Prudential at that address. A
Participant may effect the telephone transactions that are permitted by his
Program by calling Prudential at 1-800-458-6333. A Participant may effect other
electronic transactions that are permitted by his Program through
www.Prudential.com or as instructed after calling Prudential at 1-800-458-6333.
All written withdrawal requests or death benefit claims relating to a
Participant's interest in VCA-2 must be sent to Prudential by one of the
following three means: (1) by U.S. mail to: Prudential Investments, P.O. Box
5410, Scranton, Pennsylvania 18505-5410; (2) delivery service other than the
U.S. mail (e.g., Federal Express, etc.) sent to our office at the following
address: Prudential Investments, 30 Scranton Office Park, Scranton, Pennsylvania
18507-1789; or (3) fax to Prudential Investments, Attention: Client Payments at
(717) 340-4328. A withdrawal request or death benefit claim will be deemed
received in good order by Prudential as of the end of the valuation period
within which all the properly completed forms and other information required by
Prudential to pay such a request or claim (e.g., due proof of death) are
received as specified above. Receipt of a withdrawal request or death benefit
claim in good order is required by Prudential to process the transaction in the
manner explained below in this Prospectus. Under certain Contracts, the
Contract-holder or a third party acting on their behalf provides record-keeping
services that would otherwise be performed by Prudential. See "Modified
Procedures," page 17.

THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.

4
<PAGE> 9

CONDENSED FINANCIAL INFORMATION

INCOME AND CAPITAL CHANGES PER ACCUMULATION UNIT*
(For an Accumulation Unit outstanding throughout the year)

The following condensed financial information for the two-year period ended
December 31, 1997 has been audited by Price Waterhouse LLP, independent
accountants, whose report thereon was unqualified. The condensed financial
information for each of the years prior to and including the period ended
December 31, 1995 were audited by other independent auditors, whose report
thereon was also unqualified. The information set out below should be read in
conjunction with the financial statements and related notes that also appear in
VCA-2's Annual Report which is included in the Statement of Additional
Information.

<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income................. $.2633 $.2056 $.2000 $.1896 $.2823 $.1635 $.1629 $.2278 $.2061
- --------------------------------------------------------------------------------------------------------------------------------
Expenses
for investment management fee... .0284 .0215 .0170 .0151 .0138 .0111 .0094 .0079 .0078
for assuming mortality and
expense risks................. .0850 .0646 .0511 .0453 .0412 .0335 .0285 .0239 .0234
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income............. .1499 .1195 .1319 .1292 .2273 .1189 .1250 .1960 .1749
- --------------------------------------------------------------------------------------------------------------------------------
Capital changes
Net realized gain on
investments................... 4.7245 2.3368 1.5228 1.0028 1.1147 1.2862 .6231 .1523 .8364
Net unrealized appreciation
(depreciation) of
investments................... 1.3843 1.7641 1.7558 (1.2955) .9803 (.2121) 1.4671 (.5709) .1931
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
Accumulation Unit Value......... 6.2587 4.2204 3.4105 (.1635) 2.3223 1.1930 2.2152 (.2226) 1.2044
Accumulation Unit Value
Beginning of year............... 19.6241 15.4037 11.9932 12.1567 9.8344 8.6414 6.4262 6.6488 5.4444
- --------------------------------------------------------------------------------------------------------------------------------
End of year..................... $25.8828 $19.6241 $15.4037 $11.9932 $12.1567 $9.8344 $8.6414 $6.4262 $6.6488
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net
assets**........................ .5000% .4982% .4959% .4991% .4984% .4975% .4970% .4999% .5009%
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets**............ .7000% .6913% .9602% 1.0664% 2.056% 1.3253% 1.6372% 3.0779% 2.8084%
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate........... 47% 53% 42% 37% 47% 73% 79% 108% 71%
- --------------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units
outstanding for Participants at
end of year (000 omitted)....... 28,643 30,548 31,600 32,624 32,968 33,147 34,228 35,218 37,813
- --------------------------------------------------------------------------------------------------------------------------------
Average commission rate per
share........................... $.0548 $.0543 N/A N/A N/A N/A N/A N/A N/A

<CAPTION>
1988
-------
<S> <C>
Investment income................. $.1574
- ----------------------------------
Expenses
for investment management fee... .0064
for assuming mortality and
expense risks................. .0193
- ----------------------------------
Net investment income............. .1317
- ----------------------------------
Capital changes
Net realized gain on
investments................... .5383
Net unrealized appreciation
(depreciation) of
investments................... .4303
- ----------------------------------
Net increase (decrease) in
Accumulation Unit Value......... 1.1003
Accumulation Unit Value
Beginning of year............... 4.3441
- ----------------------------------
End of year..................... $5.4444
- ----------------------------------
Ratio of expenses to average net
assets**........................ .5016%
- ----------------------------------
Ratio of net investment income to
average net assets**............ 2.5657%
- ----------------------------------
Portfolio turnover rate........... 31%
- ----------------------------------
Number of Accumulation Units
outstanding for Participants at
end of year (000 omitted)....... 41,638
- ----------------------------------
Average commission rate per
share........................... N/A
</TABLE>

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

* Calculated by accumulating the actual per unit amounts daily.
** These calculations exclude Prudential's equity in VCA-2.

The above table does not reflect the annual administration charge, which does
not affect the Accumulation Unit Value. This charge, which is described on page
10, is made by reducing Participants' Accumulation Accounts by a number of
Accumulation Units equal in value to the charge.

5
<PAGE> 10

PRUDENTIAL VARIABLE CONTRACT ACCOUNT-2
GROUP VARIABLE ANNUITY CONTRACTS SOLD BY
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

DESCRIPTION OF

PRUDENTIAL AND VCA-2

Prudential is a mutual life insurance company incorporated in 1873 under the
laws of the State of New Jersey. It is authorized to transact business in all
states of the United States, the District of Columbia, the Territory of Guam,
the Commonwealth of Puerto Rico, the Virgin Islands of the United States, Canada
and United States military installations in foreign countries. Its corporate
office is located at 751 Broad Street, Newark, New Jersey 07102-3777.

Prudential conducts a conventional life insurance business. Assets derived from
such business are invested in the manner permitted by applicable state laws. The
financial statements of Prudential contained in the Statement of Additional
Information should be considered by Participants only to the extent they may
bear upon the ability of Prudential to meet its obligations under the Contracts.

On January 9, 1968, the Board of Directors of Prudential established VCA-2 in
accordance with certain provisions of the insurance statutes of the State of New
Jersey. The Account meets the definition of a "separate account" under the
federal securities laws. VCA-2 is empowered to hold only assets derived from
contributions under variable contracts issued by Prudential, assets that
Prudential may deem prudent to place in the Account for the purpose of
maintaining a surplus to support the obligations under the Contracts, and assets
derived from the dividends, interest and gains produced by the foregoing. The
portion of the assets in the Account equal to the reserve liability required by
law will be held for the sole benefit of Participants and persons entitled to
payment under the Contracts described herein and under other contracts which may
be offered by Prudential in the future and designated as participating in the
Account. The assets in the Accounts are the property of Prudential, but are
legally segregated from all other assets of Prudential and may not be charged
with liabilities arising out of any of Prudential's other business. All income,
gains and losses, whether or not realized, from assets allocated to the Account
are credited to or charged against the Account without regard to other income,
gains, or losses of Prudential. The obligations arising under the Contracts are
general corporate obligations of Prudential.

The Account is registered as an open-end, diversified management investment
company with the Securities and Exchange Commission (the "Commission") under the
1940 Act. This registration does not involve supervision by the Commission of
Prudential or of the management or investment practices or policies of the
Account.

Prudential acts as investment manager for VCA-2. The operation of the Account is
supervised by The Prudential Variable Contract Account-2 Committee (the
"Committee"). Beginning in June 1989, all Committee members elected by persons
having voting rights are elected for indefinite terms. Vacancies may be filled
by a majority vote of all the remaining Committee members, provided that
immediately after filling any such vacancy, at least two-thirds of the members
then holding office shall have been elected by persons having voting rights.
Members elected by the Committee, rather than by persons having voting rights,
hold their positions only until the next meeting of persons having voting rights
in respect to the Account. At that next meeting, persons with voting rights fill
the vacancy by electing a member for an indefinite term. See "Voting Rights,"
page 23. A majority of the members of the Committee are not affiliated with
Prudential (nor are they "interested persons" within the meaning of the 1940
Act). In addition, Prudential acts as investment manager to several other
investment companies registered under the 1940 Act. Prudential also manages
assets for certain pension fund customers on a discretionary basis.

Prudential has entered into a Service Agreement with its wholly-owned
subsidiary, The Prudential Investment Corporation ("PIC"), pursuant to which PIC
provides such services as Prudential may require in connection with its
obligations as the Account's investment manager. See "Agreement for Investment
Management Services," page 9.

PIMS acts as principal underwriter for VCA-2 and is responsible for sales and
administrative functions relative to the Contracts and VCA-2 pursuant to an
Agreement for the Sale of Contracts between PIMS, Prudential, and VCA-2. This
Agreement was approved by the unanimous vote of the Committee on May 19, 1997.
Under this Agreement, PIMS offers the Contracts through its agents and
independent brokers.

Prudential's administrative responsibilities include receiving and allocating
contributions in accordance with the Contracts, making annuity payments as they
become due, preparing and filing all reports required to be filed by VCA-2,
recordkeeping, and expenses associated with these activities. Administrative
expenses include, but are not limited to, salaries, rent, postage,

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telephone, travel, office equipment, stationery, and fees for legal, actuarial
and accountants' services.

For purposes of the Contracts, payments, notices and other communications such
as withdrawal and transfer requests will be deemed to have been received by
Prudential only if delivered to Prudential in the manner described in the
"Contacting Prudential" section of the summary of this Prospectus. Certain
alternative procedures apply if the Contract-holder or a third party provides
record-keeping services. See "Modified Procedures," page 17.

INVESTMENT PRACTICES OF VCA-2

A. INVESTMENT OBJECTIVE AND POLICIES

The investment policies of VCA-2 set forth below are adopted in an effort to
achieve the investment objective and are not fundamental. Therefore, these
investment policies may be changed by the Committee without the approval of
VCA-2 Participants.

In attempting to achieve its objective, VCA-2 will invest in common stocks,
preferred stocks, warrants, convertible bonds or other equity-related securities
which, in the opinion of VCA-2's investment manager, are believed to be in sound
financial condition and have prospects for price appreciation greater than
broadly based stock indices. Under normal market conditions, VCA-2 may also
invest up to 20% of its assets in investment grade short-term, intermediate
term, or long-term debt instruments. At times when economic conditions or
general levels of common stock prices are such that the investment manager deems
it prudent to adopt a defensive position by reducing or curtailing investments
in equities, a larger proportion than usual of VCA-2's assets may be invested in
such debt instruments.

VCA-2 may also invest in American Depository Receipts ("ADRs") which are U.S.
dollar-denominated certificates issued by a United States bank or trust company
and represent the right to receive securities of a foreign issuer deposited in a
domestic bank or foreign branch of a United States bank and traded on a United
States exchange or in an over-the-counter market. Investment in ADRs has certain
advantages over direct investment in the underlying foreign securities because
they are easily transferable, have readily available market quotations, and the
foreign issuers are usually subject to comparable auditing, accounting and
financial reporting standards as domestic issuers. Nevertheless, as foreign
securities, ADRs involve certain risks which should be considered fully by
investors. These risks include political or economic instability in the country
of the issuer, the difficulty of predicting international trade patterns, and
the fact that there may be less publicly available information about a foreign
company than about a domestic company.

B. DESCRIPTION OF INVESTMENT TECHNIQUES

VCA-2 may use some of the following investment techniques designed to meet
VCA-2's objective.

Financial futures contracts. To the extent permitted by applicable regulations,
VCA-2 may purchase and sell financial futures contracts, including stock index
futures contracts, futures contracts on interest-bearing securities (such as
U.S. Treasury bonds and notes) or rate indices, and futures contracts on foreign
currencies or groups of foreign currencies. VCA-2 will use futures contracts
solely for the purpose of hedging the Account's positions with respect to
securities, interest rates, and foreign securities.

A financial futures contract generally provides for the future sale by one party
and purchase by the other party of a specified amount of a particular financial
instrument or currency at a specified price on a designated date. A stock index
futures contract is an agreement in which the seller of the contract agrees to
deliver to the buyer an amount of 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.

Further information about futures contracts, including risks and investment
techniques, is provided in the Statement of Additional Information.

Options. VCA-2 may purchase and sell (i.e., write) put and call options on
equity securities, debt securities, securities indices, foreign currencies, and
financial futures contracts. An option gives the owner the right to buy or sell
securities at a predetermined exercise price for a given period of time.
Currently, the 1940 Act is interpreted to require that any options written by
investment companies, such as VCA-2, be "covered," which can be done in a
variety of ways, such as placing in a segregated account certain securities or
cash designed to "cover" VCA-2's obligation under the written option. Additional
explanation about

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techniques VCA-2 will use in connection with options is provided in the
Statement of Additional Information.

Although options will be primarily used to reduce fluctuations in the value of
VCA-2's investments (i.e., hedge) or to generate additional premium income, they
do involve certain risks. The investment manager may not correctly anticipate
movements in the relevant markets, thus causing losses on VCA-2's options
positions. VCA-2's use of options is subject to other special risks, information
about which is provided in the Statement of Additional Information.

Real estate-related securities. VCA-2 may invest in securities secured by real
estate or shares of real estate investment trusts that are listed on a stock
exchange or reported on the National Association of Securities Dealers, Inc.
automated quotation system ("NASDAQ"). Such securities may be sensitive to
factors such as real estate values and property taxes, interest rates, cash flow
of underlying real estate assets, overbuilding, and the management skill and
creditworthiness of the issuer. They may also be affected by tax and regulatory
requirements, such as those relating to the environment.

Repurchase agreements. When VCA-2 purchases certain money market securities, it
may on occasion enter into a repurchase agreement with the seller wherein the
seller and VCA-2 agree at the time of sale to a repurchase of the security 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 market rate of interest effective for the period of time the
Account's money is invested in the security, and is not related to the coupon
rate of the purchased security. Repurchase agreements may be considered loans of
money to the seller of the underlying security, which are collateralized by the
securities underlying the repurchase agreement. VCA-2 will not enter into
repurchase agreements unless the agreement is "fully collateralized" (i.e., the
value of the securities is, and during the entire term of the agreement remains,
at least equal to the amount of the "loan" including accrued interest). VCA-2
will take possession of the securities underlying the agreement and will value
them daily to assure that this condition is met. The Committee has adopted
standards for the parties with whom it will enter into repurchase agreements
which it believes are reasonably designed to assure that such a party presents
no serious risk of becoming involved in bankruptcy or insolvency proceedings
within the time frame contemplated by the repurchase agreement. In the event
that a seller defaults on a repurchase agreement, VCA-2 may incur a loss in the
market value of the collateral as well as disposition costs; and, if a party
with whom VCA-2 had entered into a repurchase agreement becomes insolvent,
VCA-2's ability to realize on the collateral may be limited or delayed and a
loss may be incurred if the collateral securing the repurchase agreement
declines in value during the insolvency proceedings.

VCA-2 will not enter into repurchase agreements with Prudential or its
affiliates, including Prudential Securities Incorporated, as the seller. This
will not affect VCA-2's ability to maximize its opportunities to engage in
repurchase agreements. Provided that all necessary regulatory approvals are
obtained, VCA-2 may participate in a joint repurchase account with other
investment companies managed by Prudential or its affiliates.

Reverse repurchase agreements and dollar roll transactions. VCA-2 may enter
into reverse repurchase agreements and dollar roll transactions. Reverse
repurchase agreements involve the sale of securities held by VCA-2 with an
agreement by the Account to repurchase the same securities at an agreed upon
price and date. During the reverse repurchase period, VCA-2 often continues to
receive principal and interest payments on the sold securities. The terms of
each agreement reflect a rate of interest for use of the funds for the period,
and thus these agreements have some of the characteristics of borrowing by
VCA-2.

Dollar rolls involve sales by VCA-2 of securities for delivery in the current
month with a simultaneous contract to repurchase substantially similar
securities (same type and coupon) from the same party at an agreed upon price
and date. During the roll period, VCA-2 forgoes principal and interest paid on
the securities. VCA-2 is compensated by the difference between the current sales
price and the forward price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale. A "covered roll" is a specific type of dollar roll for which there is an
offsetting cash position or a cash equivalent security position which matures on
or before the forward settlement date of the dollar roll transaction. VCA-2 will
establish a segregated account with its custodian in which it will maintain
cash, U.S. Government securities or other liquid unencumbered assets equal in
value to its obligations in respect of reverse repurchase agreements and dollar
rolls.

Reverse repurchase agreements and dollar rolls involve the risk that the market
value of the securities retained by VCA-2 may decline below the price of the
securities VCA-2 has sold but is obligated to repurchase under the agreement. In
the event the buyer of securities under a reverse repurchase agreement or dollar
roll files for bankruptcy or becomes insolvent, VCA-2's use of the proceeds of
the agreement may be restricted pending a determination by the other party, or
its trustee or receiver, whether to enforce VCA-2's obligation to repurchase the
securities.

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When-issued or delayed delivery securities. VCA-2 may, from time to time and in
the ordinary course of business, purchase or sell securities on a when-issued or
delayed delivery basis, that is, delivery and payment can take place a month or
more after the date of the transaction. VCA-2 will make commitments for such
when-issued or delayed delivery transactions only with the intention of
acquiring the securities. The Account's custodian will maintain in a separate
account portfolio securities having a value equal to or greater than any such
commitments. If VCA-2 were to dispose of the right to acquire a security it
could, as with the disposition of any security, incur a gain or loss due to
market fluctuations.

Short sales against the box. VCA-2 may make short sales of securities or
maintain a short position, provided that at all times when a short position is
open, VCA-2 owns an equal amount of the securities sold short or securities
convertible into or exchangeable, with or without payment of any further
consideration, for securities of the same issue as, and equal in amount to, the
securities sold short (a "short sale against the box"); provided, that if
further consideration is required in connection with the conversion or exchange,
cash, U.S. Government securities or other liquid unencumbered assets in an
amount equal to such consideration must be put in a segregated account.

Other investment techniques. To the extent permitted by applicable regulations,
VCA-2 may also use forward foreign currency exchange contracts and interest rate
swaps. VCA-2 may also lend its portfolio securities from time to time.
Information about these investment techniques, including certain risks
associated with their use, is provided in the Statement of Additional
Information.

C. DETERMINATION OF ASSET VALUE

The Accumulation Unit Value for VCA-2 will be determined once daily as of 4:15
p.m. Eastern time on each day that the New York Stock Exchange ("NYSE") is open
for trading. The NYSE is normally open for trading Monday through Friday except
for the days on which the following holidays are observed: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. NASDAQ
National Market System equity securities and securities for which the primary
market is on an exchange are generally valued at the last sale price on such
system or exchange or, in the absence of recorded sales, at the mean between the
last bid and asked prices on that day or at the bid price on such day in the
absence of an asked price. Other over-the-counter equity securities are valued
by an independent pricing agent or principal market maker.

Fixed income securities will be valued utilizing an independent pricing service
to determine valuations for normal institutional size trading units of
securities. The pricing service considers such factors as security prices,
yields, maturities, call features, ratings and developments relating to specific
securities in arriving at securities valuations. Convertible debt securities
that are actively traded in the over-the-counter market, including listed
securities for which the primary market is believed to be over-the-counter, are
valued at the mean between the last reported bid and asked prices provided by a
principal market maker.

Short-term investments having maturities of sixty days or less are valued at
amortized cost which, with accrued interest, approximates market value.
Amortized cost is computed using the cost on the date of purchase, adjusted for
constant accrual of discount or amortization of premium to maturity.

Options on stock and stock indices traded on national securities exchanges are
valued at the last sale price on such exchange on the day of valuation, or if
there was no sale on that day, at the mean between the most recently quoted bid
and asked prices on such exchange.

Futures contracts and options thereon are valued at the last sale price at the
close of 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.

Portfolio securities for which market quotations are not readily available will
be valued at fair value as determined in good faith under the direction of the
Committee.

AGREEMENT FOR INVESTMENT
MANAGEMENT SERVICES

Prudential acts as investment manager for VCA-2 pursuant to the Agreement for
Investment Management Services between Prudential and VCA-2 which was approved
initially by the Participants at their meeting on May 29, 1969, and most
recently renewed by unanimous vote of the Committee on May 19, 1997.

Subject to Prudential's supervision, substantially all of the services required
to be provided by Prudential under the Agreement for Investment Management
Services are furnished by PIC pursuant to a Service Agreement between them. This
Service Agreement was most recently renewed by unanimous vote of the Committee
at its meeting on May 19, 1997 and by the Participants on July 25, 1985. PIC is
registered as an investment adviser under the Investment Advisers Act of 1940.

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<PAGE> 14

Prudential continues to have responsibility for all investment advisory services
under its investment management agreement with the Account. Pursuant to the
service agreement between Prudential and PIC, Prudential reimburses PIC for its
costs and expenses.

The Agreement for Investment Management Services between Prudential and VCA-2:

A.must be specifically approved, at least annually, by the affirmative vote of
the Committee, cast in person at a meeting called for the purpose of voting
on such approval, which affirmative vote shall include the votes of a
majority of the members of the Committee who are not "interested persons" of
Prudential, its affiliates or VCA-2, within the meaning of the 1940 Act; and

B.may not be amended to increase the compensation paid to Prudential
thereunder without prior approval by a majority vote of persons having
voting rights in respect of VCA-2 (as defined by the 1940 Act), and by the
affirmative vote of the Committee cast and constituted as described in (a).
above; and

C.will continue in effect from year to year unless it is terminated, without
payment of any penalty, on sixty days' written notice to Prudential, either
by the Committee or by a majority vote of persons having voting rights in
respect of VCA-2 (as defined by the 1940 Act), or unless it is terminated by
Prudential on ninety days' written notice to the Committee. It will also
terminate automatically in the event of its assignment. Termination of the
Agreement does not terminate Prudential's obligations to the
Contract-holders or the Participants under the Contracts.

The Service Agreement between Prudential and PIC:

A.will continue in effect as to VCA-2 for a period of more than two years from
its execution, only so long as such continuance is specifically approved at
least annually in the same manner as the Agreement for Investment Management
Services between Prudential and VCA-2.

B.may be terminated by either party upon not less than thirty days' prior
written notice to the other party, will terminate automatically in the event
of its assignment and will terminate automatically as to VCA-2 in the event
of the assignment or termination of the Agreement for Investment Management
Services between Prudential and VCA-2.

C.does not relieve Prudential of its responsibility for all investment
advisory services under the Agreement for Investment Management Services
between Prudential and VCA-2.

D.provides for Prudential to reimburse PIC for its costs and expenses incurred
in furnishing investment advisory services.

CHARGES

The purchase payments payable on behalf of a Participant will generally be set
forth in a salary-annuity agreement with his employer. Since the charges
discussed below may be a significant percentage of the purchase payments, a
person who is not reasonably certain of both his intention and ability to
continue as a Participant would be well-advised to refrain from participation
under the Contract.

Prudential and PIMS will be compensated for sales and administrative services in
the following manner:

First, ninety-seven and one-half percent (97.5%) of each purchase payment under
a Contract made on the Participant's behalf will be credited to his individual
accumulation account in the form of Accumulation Units. The remaining two and
one-half percent (2.5%), will be retained and used primarily for sales and other
marketing expenses. These maximum sales charges may be changed by Prudential on
90 days' notice (see Section D on page 22).

Second, an annual administration charge will be deducted from each Participant's
individual accumulation account for recordkeeping and other administrative
expenses. Any such charge will be made on the last business day of the
accounting year if the Participant's account is still open. If the account is
cancelled before the end of the accounting year, any such charge will be made on
the date of cancellation. After such cancellation, a Participant may participate
again only as a new Participant and will be subject to a new annual
administration charge. The annual administration charge will be pro rated for
new Participants for the first year of their participation, based on the number
of full months in the accounting year remaining after the first contribution is
received. If the Participant's account is cancelled prior to the end of that
accounting year, however, this initial charge will not be pro rated.

The annual administration charge will not be greater than $30 annually, to be
divided between the Contract and a fixed-dollar annuity contract (if the
Participant is enrolled under such a contract) as determined by Pru-

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dential. This maximum charge may be changed by Prudential on 90 days' notice
(see Section D on page 22).

The sales and annual administration charges described above may be reduced or
eliminated in connection with a particular Contract or Program, but only to the
extent that Prudential and PIMS estimate that they will incur lower sales or
administrative expenses or perform fewer sales or administrative services due to
economies arising from (1) the utilization of mass enrollment procedures or (2)
the performance of recordkeeping or sales functions by the Contract-holder or an
employee organization which Prudential and PIMS would otherwise be required to
perform or (3) an accumulated surplus of charges over expenses under the
Contract. The exact amount of the sales and annual administration charges
applicable to any Contract will be stated in the Contract.

Third, a daily deduction will be made from the value of a Participant's account
in an amount equal to a stated percentage of the current value of the account.
This is done in connection with the daily determination of the Accumulation Unit
Value (see page 12). A corresponding charge is made in computing monthly annuity
payments (see pages 18 through 19). This deduction (which will be in addition to
the investment management fee described below) will be equal to a percentage,
computed at an effective annual rate of 0.375% ( 3/8 of 1%), of the current
value of the Participant's account. Of this charge, 0.125% ( 1/8 of 1%) is for
assuming the mortality risks and 0.250% ( 1/4 of 1%) for assuming the expense
risks described below. This deduction may be changed by Prudential on 90 days'
notice except as described in Section D on page 22.

Prudential is compensated for investment management services through deductions
from the value of the units of a Participant's accumulation account and from the
value of the Annuity Units payable monthly to an annuitant. Deductions are
computed daily at an effective annual rate of 0.125% ( 1/8 of 1%) of the current
value of an accumulation account and an equivalent charge is made monthly in
determining the amount of annuity payments.

Although variable annuity payments will vary in accordance with the investment
performance of VCA-2, they will not be affected by adverse mortality experience
or by an increase in Prudential's expenses (to an amount in excess of the
expense deductions provided for in the Contract). Prudential assumes the risk
(i) that annuitants as a class may live longer than had been estimated, so that
payments will continue for longer than had been anticipated, and (ii) that
deductions for sales and administrative expenses may be insufficient to cover
the actual costs of these items. In either case, the loss would fall on
Prudential. On the other hand, the deductions that will be made for sales,
investment management and administrative expenses and for assuming mortality and
expense risks may exceed the cost that Prudential will ultimately incur over the
life of the Contract. As the actual experience under these Contracts is
realized, the amount of any excess will become known, and if it is greater than
the amount which must prudently be retained to fulfill Prudential's contractual
obligations, the balance becomes part of the divisible surplus of Prudential
(see "Participation in Divisible Surplus," page 22).

THE GROUP VARIABLE ANNUITY
CONTRACTS

Prudential will issue a Contract to the Contract-holder, which will ordinarily
be the employer of the Participants but may also be an association or trustee of
a trust representing them or their employers. Prudential will also issue a
certificate to the Contract-holder for delivery to each annuitant under the
Contract on the date his first annuity payment is made. The certificate will
describe the variable annuity benefits to which the annuitant is entitled under
the Contract. If any applicable law so requires, Prudential will issue a similar
certificate to the Contract-holder for delivery to each Participant for whom an
annuity has not yet been effected.

A. THE ACCUMULATION PERIOD

1. Crediting Accumulation Units; Deduction for Sales and Administrative
Expenses

When a person first becomes a Participant under the Contract, he must designate,
if there is a companion fixed-dollar annuity contract, what portion of the
purchase payments on his behalf is to be invested under the Variable Contract
and what portion is to be invested in the companion fixed-dollar annuity
contract. This designation may be changed from time to time.

During the accumulation period--the period before the commencement of annuity
payments--ninety-seven and one-half percent (97.5%) (see "Charges," page 10) of
each purchase payment allocated to the Variable Contract on behalf of the
Participant will be credited to an individual accumulation account maintained
for him in the form of Accumulation Units. The number of Accumulation Units
credited is determined by dividing ninety-seven and one-half percent (97.5%) of
the amount allocated, by the Accumulation Unit Value for the business day on
which the purchase payment is received by Prudential. The term "business day"
means a day on which the NYSE is open for trading.

The initial contribution made for a Participant will be invested in VCA-2 no
later than two business days
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after it is received by Prudential and identified as being for investment in
VCA-2, if it is preceded or accompanied by enrollment information in a form
satisfactory to Prudential (i.e., good order). If the Contract-holder submits an
initial contribution on behalf of one or more new Participants that is not
preceded or accompanied by satisfactory enrollment information, then Prudential
will allocate such contribution upon receipt to a money market option (which is
available contractually to the Contract-holder), and also will send a notice to
the Contract-holder that requests allocation information for each such
Participant. If the Contract-holder purchases only contracts that are issued
through VCA-2, or purchases such contracts together with either a group variable
annuity contract issued through Prudential's MEDLEY Program or unaffiliated
mutual funds, then contributions that are not preceded or accompanied by
satisfactory enrollment information will be invested in The Prudential Variable
Contract Account-11 ("VCA-11") within Prudential's MEDLEY Program. If the
Contract-holder purchases contracts that are issued through VCA-2 as well as
shares of a money market fund, then contributions that are not preceded or
accompanied by satisfactory enrollment information will be invested in the money
market fund. If the necessary enrollment information is not received in response
to its initial notice to the Contract-holder, Prudential will deliver up to
three additional notices to the Contract-holder at monthly intervals that
request such allocation information. After 105 days have passed from the time
that Units of VCA-11 (or, as the case may be, shares of the money market fund)
were purchased on behalf of Participants who failed to provide the necessary
enrollment information, Prudential will redeem the relevant VCA-11 Units (or
shares of the money market fund) and pay the proceeds (including earnings
thereon) to the Contract-holder. Any proceeds paid to the Contract-holder under
this procedure may be considered a prohibited and taxable reversion to the
Contract-holder under current provisions of the Internal Revenue Code.
Similarly, returning proceeds may cause the Contract-holder to violate a
requirement under the Employee Retirement Income Security Act of 1974, as
amended, to hold all plan assets in trust. Both problems may be avoided if the
Contract-holder arranges to have the proceeds paid into a qualified trust or
annuity contract.

The number of Accumulation Units credited to a Participant will not be affected
by any subsequent change in the value of an Accumulation Unit, but the dollar
value of an Accumulation Unit will vary from business day to business day
depending upon the investment experience of VCA-2. The number of Accumulation
Units will be reduced, however, as the result of the annual administration
charge, which will be made by cancelling that number of Accumulation Units which
is equal to the amount of the charge (see "Charges," page 10) divided by the
Accumulation Unit Value for the business day on which the charge is made. The
annual administration charge is usually made on the last business day of each
accounting year. However, in certain circumstances (described below), such
charge will be made without reduction for the unexpired portion of the year, on
the date a Participant's individual accumulation account is cancelled, either
because a variable annuity is effected or otherwise.

2. Valuation of a Participant's Individual
Accumulation Account

The value of a Participant's individual accumulation account on any day prior to
the commencement of annuity payments to him can be determined by multiplying the
total number of Accumulation Units credited to his account by the Accumulation
Unit Value for that day. Each Participant will be advised at least once during
the second and each subsequent accounting year of the number of Accumulation
Units credited to his account as of the end of the preceding accounting year and
of the Accumulation Unit Value at that time (see "Periodic Reports," page 22).

3. The Accumulation Unit Value

The Accumulation Unit Value will be determined each business day by multiplying
the previous day's Accumulation Unit Value by the gross change factor for the
current business day and reducing this amount by the daily equivalent of the
investment management fees and mortality and expense risk charges. The gross
change factor is determined by dividing the current day's net assets, ignoring
changes resulting from new purchase payments and withdrawals, by the previous
day's net assets.

4. Discontinuance of Purchase Payments

Purchase payments on behalf of all Participants under any Contract may be
discontinued upon notice by the Contract-holder to Prudential. In addition, any
Participant may cause purchase payments on his behalf to be discontinued.

On 90 days' advance notice to the Contract-holder, Prudential may elect not to
accept any new Participant, or not to accept further contributions for existing
Participants under certain Contracts.

A Participant on whose behalf purchase payments have been discontinued may
either leave his individual accumulation account in force or exercise any of the
applicable options outlined below under the headings "Withdrawal (Redemption) of
Purchase Payments Prior to Death," below and "Transfer Payments," page 13.

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5. Continuance Under Group Contract After Being Employed by New Employer

A Participant who becomes employed by a new employer which is eligible to
provide for tax-deferred annuities may enter into an agreement with such new
employer under which purchase payments can be continued under the Contract by
the new employer on behalf of the Participant.

6. Withdrawal (Redemption) of Purchase Payments Prior to Death

The Internal Revenue Code imposes restrictions on withdrawals from the Contract.
Pursuant to Section 403(b)(11), amounts in the Participant's accumulation
account attributable to salary reduction contributions (including the earnings
thereon) that are made under the Contract after December 31, 1988 can only be
withdrawn when the Participant attains age 59 1/2, separates from service with
his employer, dies or becomes disabled (within the meaning of Section 72(m)(7)
of the Internal Revenue Code). However, the Internal Revenue Code permits the
withdrawal at any time of amounts attributable to salary reduction contributions
(excluding the earnings thereon) that are made after December 31, 1988, in the
case of a hardship. If the plan adopted by an employer under which a Participant
is covered contains a financial hardship provision, cash withdrawals from the
Contract can be made in the event of hardship.

Subject to any restrictions upon withdrawals contained in the plan adopted by an
employer under which a Participant is covered, a Participant can withdraw at any
time any amount up to the dollar value of his accumulation account as of
December 31, 1988. Post December 31, 1988 earnings on accumulations attributable
to salary reduction contributions are, however, subject to the Section
403(b)(11) withdrawal restrictions discussed above.

Subject to any conditions or limitations regarding transfers contained in the
plan adopted by an employer under which a Participant is covered, a Participant
can continue to make transfers of all or part of his accumulation account among
the available investment options offered by Prudential and can transfer directly
all or part of his interest in his accumulation account to a Section 403(b)
tax-deferred annuity contract of another insurance company or to a mutual fund
custodial account under Section 403(b)(7). (See "Transfer Payments," page 16).

Furthermore, unless a plan adopted by an employer provides otherwise, the
Contract will provide that upon written request by any Participant, a single sum
cash payment will be made to him in any amount requested which is equal to or
less than the dollar value of his individual accumulation account attributable
to employer contributions or after tax Participant Contributions, if any, as of
the day Prudential receives notice of his request.

Withdrawal requests must be made in the form approved by Prudential including by
telephone or other electronic means if the Program permits). If a Participant's
account is cancelled, the amount of this payment will be computed after
deducting the full annual administration charge that would otherwise be deducted
at the end of the accounting year. Such payment will be made within seven days
after written notice of the Participant's request has been received, except as
deferment of such payment may be permitted under the provisions of the 1940 Act
as may be in effect from time to time. Currently, deferment is permissible only
when the NYSE is closed or trading thereon is restricted, when an emergency
exists as a result of which disposal of the securities held in VCA-2 is not
reasonably practicable or it is not reasonably practicable for the value of its
assets to be fairly determined, or when the Commission has provided for such
deferment for the protection of Participants. As of the day Prudential receives
notice of the Participant's request, his account will be reduced by the number
of Accumulation Units obtained by dividing the payment due by the Accumulation
Unit Value for that day. The appropriate address to which a written withdrawal
request should be sent is set out in the Summary of this Prospectus. Under
certain Contracts, an entity other than Prudential keeps certain records, and
Participants under those Contracts must contact the record-keeper with regard to
withdrawals. See "Modified Procedures," page 17.

A Participant would be well-advised to obtain information about the federal
income tax consequences of any withdrawal and to check with a tax adviser
regarding the current state of the law before making a withdrawal. Generally, a
Participant who exercises his withdrawal rights will be taxed at ordinary income
rates on the amount withdrawn. In addition, withdrawals prior to age 59 1/2 will
generally be subject to a 10% premature distribution penalty tax. Certain
exceptions apply, however, and it is suggested that Participants consult a tax
adviser for additional information about this penalty tax before a withdrawal is
made. (See "Federal Tax Status," pages 22 and 23). Prudential may process a
withdrawal from a Participant's individual accumulation account if Prudential
determines that the Participant's contributions exceed the amount permitted by
the Internal Revenue Code.

An employer may adopt a plan that limits the right of Participants to obtain
cash withdrawals upon request. Participants should ascertain whether their
employer has adopted such a plan and, if so, whether it includes withdrawal
limitations and what they are. Contracts issued to employers who have adopted
such plans will provide that requests for cash withdrawals for the ben-
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<PAGE> 18

efit of the Participants may be made by the Contract-holder, with the
concurrence of the Participant, and that payment of the amount requested, less
any applicable annual administration charge, will be made within seven days
after Prudential has received notice of the request.

Under certain types of Section 403(b) annuities, the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") requires that in the case of a
married Participant, a withdrawal request include the consent of the
Participant's spouse. This consent must contain the signatures of the
Participant and spouse and must be notarized or witnessed by an authorized Plan
representative.

7. Systematic Withdrawal Plan

Subject to any restrictions upon withdrawals contained in the plan adopted by an
employer under which a Participant is covered, and subject to the restrictions
and limitations set forth below, a Participant may arrange for systematic
withdrawals to be made from his accumulation account. A Participant may arrange
for systematic withdrawals only if, at the time he elects to have such an
arrangement, the balance in his accumulation account is at least $5,000. A
Participant who has not reached age 59 1/2, however, may not elect a systematic
withdrawal arrangement unless he has first separated from service with his
employer. In addition, the $5,000 minimum balance does not apply to systematic
withdrawals made for the purpose of satisfying minimum distribution rules.

Generally, amounts withdrawn will be taxable at ordinary income tax rates. In
addition, withdrawals by Participants who have not reached age 59 1/2 will
generally be subject to a 10% premature distribution penalty tax. Withdrawals
made after the later of (i) a Participant's attaining age 70 1/2 and (ii) a
Participant's retirement, and certain withdrawals by beneficiaries must satisfy
certain minimum distribution rules. (See "Federal Tax Status," pages 22-23, and
"Death Benefits Before an Annuity is Effected," page 15.)

Systematic withdrawals may be arranged pursuant to an election on a form
approved by Prudential. Under certain types of Section 403(b) annuities, an
election to arrange for systematic withdrawals by a married Participant must be
consented to in writing by the Participant's spouse, with signatures notarized
or witnessed by an authorized Plan representative. The election must specify
that the systematic withdrawals shall be made on a monthly, quarterly,
semi-annual, or annual basis.

All systematic withdrawals will be effected as of the day of the month specified
by the Contract-holder, or, if such day is not a business day, then on the next
succeeding business day. Systematic withdrawals will continue until the
Participant either has withdrawn all of the balance in his accumulation account
or has instructed Prudential in writing to terminate his systematic withdrawal
arrangement. The Participant may elect to make systematic withdrawals in equal
dollar amounts or over a specified period of time (at least three years). Where
the Participant elects to make systematic withdrawals over a specified period of
time, the amount of each withdrawal--which will vary, reflecting investment
experience during the withdrawal period--will be equal to the sum of the balance
then in the Participant's accumulation amount divided by the number of
systematic withdrawals remaining to be made during the withdrawal period.

A Participant may change the frequency, amount or duration of his systematic
withdrawals by submitting a form to Prudential that Prudential will provide to
him upon request. A Participant may make such a change only once during each
calendar year.

A Participant may at any time instruct Prudential to terminate the Participant's
systematic withdrawal arrangement, and no systematic withdrawals will be made
for him after Prudential has received his instruction. A Participant who chooses
to stop making systematic withdrawals may not make them again until the next
calendar year and may be subject to federal tax consequences.

An arrangement to make systematic withdrawals will not affect any of the
Participant's other rights under the Contracts, including the right to make
withdrawals (redemptions) as described on pages 13 and 14 of this Prospectus,
the right to make transfers as described on pages 16 and 17, and the right to
effect an annuity as described on page 19.

Participants who have elected a systematic withdrawal may also continue to make
additional purchase payments. Purchase payments are generally reduced for sales
charges. See "Charges," page 10. Participants should carefully review the
election of this option if they intend to continue making purchase payments and
consider the effect of sales charge expenses while making payments and
withdrawals at the same time. Different procedures may apply for Contracts under
which an entity other than Prudential provides record-keeping services. See
"Modified Procedures," page 17.

8. Texas Optional Retirement Program

Special rules apply with respect to Contracts covering persons participating in
the Texas Optional Retirement Program ("Texas Program") in order to comply with
the provisions of Texas law relating to the Texas Program.

Under the terms of the Texas Program, Texas will contribute an amount somewhat
larger than a Participant's contribution. Texas' contributions, less the sales
14
<PAGE> 19

charge described on page 10, will be credited to the Participant's individual
accumulation account. Until the Participant begins his second year of
participation in the Texas Program, Prudential will have the right to withdraw
the value of the Accumulation Units purchased for his account with Texas'
contributions. If the Participant does not commence his second year of the Texas
Program participation, the value of those Units will be withdrawn and Texas'
contributions returned to the State.

Withdrawal rights of Contracts issued under the Texas Program are available only
in the event of a Participant's death, retirement or termination of employment
in all institutions of higher education. Participants will not, therefore, be
entitled to exercise the right of withdrawal in order to receive in cash the
values credited to them under the Contract unless one of the foregoing
conditions has been satisfied. The value of a Participant's interests under the
Contract may, however, be transferred to another Prudential contract or
contracts of other carriers approved under the Texas Program during the period
of the Participant's Texas Program participation. For certain Contracts, a death
benefit claim should be sent to a designated record-keeper rather than to
Prudential. See "Modified Procedures," page 17.

9. Death Benefits Before an Annuity is Effected

When a Participant dies, subject to receipt by Prudential of due proof of death
and to the submission of a claim for benefits on a form approved by Prudential,
his individual accumulation account balance (after deduction of the full annual
administration charge) will be used to provide a death benefit for his
beneficiary. The appropriate address to which a death benefit claim should be
sent is set out in the Summary section of this Prospectus.

Unless the Participant has directed otherwise, any beneficiary may elect to
apply the Participant's accumulation account balance (after deduction of the
full annual administration charge):

A.to receive a single sum cash payment of the dollar value of the
Participant's account as of the date such election is made and such proof of
death is received by Prudential. If a single sum payment is elected within
one year after the Participant's death, an additional payment will be made,
if necessary, so that the total paid is equal to the purchase payments paid
in, minus any withdrawals or transfers paid out;

B.to have a variable annuity effected for himself on a specified date on the
basis of the Participant's account, using the same annuity purchase rate
basis that would have applied if the account had been used to effect a
variable annuity for the Participant;

C.to receive regular payments in accordance with the systematic withdrawal
plan; or

D.a combination of all or any two of (a), (b) and (c).

The beneficiary must make his election in writing before the first anniversary
of the Participant's death or at any time before the expiration of two months
after Prudential receives due proof of such death, whichever is later. With
respect to benefits accruing after December 31, 1986, IRS Regulations under
Section 401(a)(9) of the Internal Revenue Code provide that a designated
beneficiary must begin to receive payments no later than the earlier of (1)
December 31 of the calendar year which contains the fifth anniversary of the
Participant's date of death or (2) December 31 of the calendar year in which
annuity payments would be required to begin to satisfy the minimum distribution
requirements described below. As of such date the election must be irrevocable
and must apply to all subsequent years.

However, if the election includes systematic withdrawals, the beneficiary will
have the right to terminate them and receive the remaining balance in cash (or
effect an annuity with it), or to change their frequency, size or duration,
subject to the limitations described below.

Under certain types of Section 403(b) annuities, ERISA requires that, in the
case of a married Participant, a death benefit be payable to the Participant's
spouse in the form of a "qualified pre-retirement survivor annuity." A
"qualified pre-retirement survivor annuity" is an annuity for the lifetime of
the Participant's spouse in an amount which can be purchased with no less than
50% of the balance in the Participant's account as of his date of death. Under
ERISA, the spouse of a Participant in a Section 403(b) annuity which is subject
to these rules may consent to waive the pre-retirement survivor annuity benefit.
Such consent must acknowledge the effect of waiving the coverage and contain the
signatures of the Participant and spouse and must be notarized or witnessed by
an authorized Plan representative. Unless the spouse of a Participant in a Plan
which is subject to these requirements properly waives the benefit, 50% of the
Participant's account balance will be paid to such spouse even if the designated
beneficiary is someone other than the spouse. Under these circumstances, the
remaining 50% of the Participant's account balance would be paid to the
designated beneficiary.

With respect to benefits accrued before January 1, 1987, a beneficiary who
elects to have an annuity purchased for himself may choose from among the forms
of annuity described on page 19. The beneficiary may elect to have an annuity
effected immediately or at a future date (but not later than his 70th birthday,

15
<PAGE> 20

or, if later, two months after the date of his election to have an annuity
effected).

Benefits accruing after December 31, 1986 under a Section 403(b) annuity
contract are subject to required minimum distribution rules which specify the
time when payment of benefits must begin and the minimum amount which must be
paid annually. Generally, when a Participant dies before payment of benefits has
begun, the death benefit must be paid out entirely by December 31 of the
calendar year containing the fifth anniversary of the Participant's date of
death. Alternatively, a designated beneficiary may elect an annuity from among
Options 1, 2, or 4 described on page 19, with payments required to begin by
December 31 of the calendar year immediately following the calendar year in
which the Participant died or, if the Participant's spouse is the designated
beneficiary, December 31 of the calendar year in which the Participant would
have attained age 70 1/2, if later. Options 3 and 5 may not be chosen. In
addition, the duration of any period certain annuities may not exceed the
beneficiary's life expectancy as determined under IRS Tables. If the amount
distributed to a beneficiary for a calendar year is less than the minimum
required amount, a federal excise tax is imposed equal to 50% of the amount of
the underpayment.

The requirements described above concerning the effecting of annuities or
annuity payments apply also to the commencement of a systematic withdrawal plan
and to withdrawals under it.

If the beneficiary elects to receive a single sum cash payment, such payment
will be made within seven days after the date of his election and receipt of due
proof of death, except in certain emergency situations when payment may be
deferred (see "Withdrawal (Redemption) of Purchase Payments Prior to Death,"
page 13). A beneficiary who elects to have a variable annuity effected for
himself will have the right to cancel such election by so notifying Prudential
in writing at least 15 days prior to the date on which such annuity would
otherwise be effected, and, within seven days after receipt of such notice, a
single sum cash payment will be made to the beneficiary in the amount of the
dollar value of the Participant's account (after deducting the full annual
administration charge) as of the date the notice is received.

10. Transfer Payments

A.Unless restricted by the retirement arrangement under which a Participant is
covered, upon the written request or properly authorized telephone or
internet transfer request of a Participant who is also covered by a group
fixed-dollar annuity contract, all or a portion of the Participant's
accumulation account will be transferred from the Variable Contract to the
fixed-dollar contract. As of the date Prudential receives such a request,
the portion of the Participant's accumulation account specified in his
request will be cancelled and, within seven days after such date, a transfer
payment of the dollar value of such amount will be made. There is no minimum
transfer amount. Prudential reserves the right to limit the frequency of
such transfer payments to the fixed-dollar contract. Different procedures
may apply for Contracts under which an entity other than Prudential provides
record-keeping services. See "Modified Procedures," page 17.

B.Transfer payments may be made to a Participant's individual accumulation
account under the Variable Contract from either the group fixed-dollar
annuity contract, if any, or from a similar group annuity contract issued by
Prudential to another employer. All such transfer payments will be treated
as purchase payments made to VCA-2 on the business day on which the transfer
payment is made, except that no transfer payment will count as a purchase
for purposes of calculating sales charges. Prudential reserves the right to
limit the frequency of such transfer payments.

If a Participant who is also covered by a group fixed-dollar annuity
contract transfers an amount to the Participant's accumulation account, the
applicable contracts or the terms of the Participant's retirement
arrangement may provide that amounts transferred may not for 90 days
thereafter be transferred into an investment option deemed to be "competing"
with the fixed-dollar contract with respect to investment characteristics.

C.If a Participant ceases to be employed by a Contract-holder and becomes an
employee of another employer whose employees are covered under a similar
group annuity contract issued by Prudential, the Participant may request on
a form approved by Prudential that Prudential make a transfer payment from
his individual accumulation account to such similar contract, in an amount
equal to the dollar value of the Participant's account as of the date
Prudential receives his request. The transfer payment described in this
paragraph will be made without charge within seven days after Prudential
receives the Participant's transfer request, and the Participant's account
will be cancelled accordingly. If such a transfer is made, the provisions of
the substituted contract will be applicable to him.

D.The Contract provides that upon discontinuance of purchase payments for all
Participants thereunder (see "Discontinuance of Purchase Payments," page 12)
the Contract-holder may on a form approved by Prudential request Prudential

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<PAGE> 21

to make transfer payments from VCA-2 to a designated alternate funding
agency. Each Participant and each beneficiary of a deceased Participant for
whom an individual accumulation account remains in force under the Contract
will be notified promptly that such a request has been received. Each
recipient of such a notice may within thirty days of such receipt elect in
writing on a form approved by Prudential to have his account transferred to
the alternate funding agency. If he does not so elect, his account will
continue in force under the Contract. The accumulation account of any
Participant or beneficiary who does so elect will be cancelled as of a
"transfer date," which is the business day specified in the
Contract-holder's request or 90 days after Prudential receives the request,
whichever is later. A single liquidation account for the Contract will be
established equal to the sum of the individual accumulation accounts so
cancelled (after deducting the full annual administration charge from each
such account). Beginning on the transfer date and each month thereafter
until the liquidation account is exhausted, an allocation will be made from
the liquidation account of not less than the number of Accumulation Units
equal in value to two million dollars or 3% of the number of Accumulation
Units in such account on the transfer date, whichever is greater (or the
total amount of Accumulation Units in the liquidation account, if less).
Upon each such allocation, the number of allocated Accumulation Units will
be cancelled and a transfer payment will be made which is equal to 100% of
the product of (i) the number of Accumulation Units so allocated, and (ii)
the Accumulation Unit Value for the date of allocation. Each transfer
payment will be made to the designated alternate funding agency within
seven days of the date of allocation.

Under certain types of Section 403(b) annuities, the Retirement Equity Act of
1984 provides that, in the case of a married Participant, a request for transfer
payments (other than to the group fixed dollar annuity contract) must include
the consent and signatures of the Participant and spouse and must be notarized
or witnessed by an authorized Plan representative.

11. Requests by Telephone or Other Electronic Means

Certain Programs may allow Participants to effect transfers and other Account
transactions by telephone, telecopy, or other electronic means, such as the
Internet. If the Program offers telephone or other electronic privileges, each
Program Participant will automatically receive such privileges unless he or she
declines those privileges on a form that will be approved and communicated to by
the Contract-holder or Prudential. For the Participant's protection and to
prevent unauthorized exchanges, telephone calls or other communications will be
recorded and the Participant will be asked to provide his or her personal
identification number or other identifying information. A confirmation of a
transfer normally will be sent to the Participant. Neither the Account 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. Electronic privileges are available only if the Contract-holder has
so elected and only in states where these privileges may legally be offered. The
safeguards discussed above that are employed by the Account are designed to
minimize unauthorized exercise of these privileges. During times of
extraordinary economic or market changes, electronic instructions may be
difficult to implement.

12. Modified Procedures

Under certain Contracts, the Contract-holder or a third party acting on their
behalf provides record-keeping services that would otherwise be performed by
Prudential. Such Contracts may require procedures somewhat different than those
set forth in this Prospectus. For example, such Contracts may require that
contribution allocation requests, withdrawal requests, and/or transfer requests
be directed to the Contract's record-keeper rather than Prudential. The record-
keeper is the Contract-holder's agent, not Prudential's agent. Accordingly,
transactions will be processed and priced as of the end of the valuation period
in which Prudential receives appropriate instructions and/or funds from the
record-keeper. Any such different procedures will be set forth in the Contract.

13. Exchange Offer with the PMF Funds

Prudential may offer certain open-end management investment companies--generally
referred to as mutual funds--as an alternative investment vehicle for existing
VCA-2 Contract-holders. These funds are managed by Prudential Investment's Fund
Management, LLC, an indirect wholly-owned subsidiary of Prudential
(collectively, the "PMF Funds"). If the Contract-holder elects to make one or
more of the PMF Funds available to its Participants, Participants will be given
the opportunity to direct new contributions to those PMF Funds.

Prudential may permit Participants to exchange any or all amounts in their
current individual accumulation accounts for shares of the PMF Funds without the
imposition of any sales load or other fee (a "VCA-2-to-PMF Exchange"). In
addition, Prudential may permit Participants to exchange any or all amounts in
their PMF Funds to VCA-2 (a "PMF-to-VCA-2 Exchange") without the imposition of
any sales load or other fee.

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<PAGE> 22

Prudential will determine the time periods for which any exchange offer will be
available and the other terms of the offer. Prudential may, for example,
establish fixed periods of time for exchanges under a particular Contract (an
"open window"). This exchange offer is subject to termination and its terms are
subject to change.

If a Participant exchanges all of the amount in his VCA-2 individual
accumulation account for shares of PMF Funds, the annual administrative charge,
which is assessed at the end of each administration year, may be deducted from
the Participant's PMF Fund account(s).

Before deciding whether to exchange any or all of their existing VCA-2
Accumulation Units for shares of any PMF Fund, Participants should carefully
read the relevant PMF Fund prospectus. Participants should understand that the
PMF Funds are registered management investment companies (i.e., mutual funds)
offered directly to qualified plans, certain institutional investors and others.
They are not funding vehicles for variable annuity contracts. Thus, Participants
investing in the PMF Funds will not have the features of an annuity contract or
certain annuity-related provisions, as they do under the VCA-2 Program.

In Prudential's opinion, there should be no adverse tax consequences if a
Participant in a qualified retirement arrangement elects to exchange amounts in
the Participant's current VCA-2 individual accumulation account(s) for shares of
PMF Funds or vice versa.

VCA-2-to-PMF Exchanges will be effected from a 403(b) annuity contract to a
Section 403(b)(7) custodial account (Tax Deferred Annuity funds under the PMF
Funds) so that such transactions will not constitute taxable distributions.
Conversely, PMF-to-VCA-2 Exchanges will be effected from a 403(b)(7) custodial
account to a 403(b) annuity contract so that such transactions will not
constitute taxable distributions. However, Participants should be aware that the
Internal Revenue Code may impose more restrictive rules on early withdrawals
from Section 403(b)(7) custodial accounts under the PMF Funds than under the
VCA-2 Program.

Prudential also may make available to VCA-2 Contract-holders certain mutual
funds that are not affiliated with Prudential. If such mutual funds are made
available, Prudential may permit Participants to exchange any or all amounts in
their current individual accumulation accounts for shares of such unaffiliated
mutual funds (and also may permit exchanges from those mutual funds into VCA-2).
Any such exchanges would be effected without the imposition of any sales load or
other fee, and may be conducted in accordance with such other terms and
conditions as Prudential may determine. The tax consequences associated with
these exchanges involving unaffiliated mutual funds are comparable to those
discussed above in connection with exchanges involving the PMF Funds. With
respect to unaffiliated funds exchanges, VCA-2-to-PMF Exchanges, and
PMF-to-VCA-2 Exchanges, Contract-holders and Participants are encouraged to
consult a qualified tax adviser for complete tax information and advice.

13. Exchange into Discovery SelectSM Group Retirement Annuity

Certain Participants may be offered an opportunity to exchange their
interests in VCA-2 for interest in Discovery SelectSM Group Retirement
Annuity, which offers twenty-two variable investment options, each of which
is called a subaccount and which is invested in one of twenty-two mutual
funds. The mutual funds available for investment through the Discovery
SelectSM Group Retirement Annuity are described in that annuity's
prospectus and include both Prudential and non-Prudential funds.

No charge will be assessed on an exchange from VCA-2, however, the
Participant will become subject to the charges applicable under the
Discovery SelectSM Group Retirement Annuity. Any years of participation
credited to those Participants under a VCA-2 contract will be counted as
years of Discovery SelectSM Group Retirement Annuity participation for
purposes of calculating the accumulation period.

A copy of the Discovery SelectSM Group Retirement Annuity prospectus and
statement of additional information may be obtained at no cost by calling
1-800-458-6333.

B. THE ANNUITY PERIOD

1. Variable Annuity Payments

Variable annuity payments are determined on the basis of (i) the value of the
Participant's accumulation account on the date it is applied to effect an
annuity, reflecting the investment performance of VCA-2 to that date, (ii) any
taxes on annuity considerations applicable when the annuity is effected, (iii) a
schedule of annuity rates specified in the Contract (see "Schedule of Variable
Annuity Purchase Rates," page 21), and (iv) the investment performance of VCA-2
after the annuity has been effected. The amount of the variable annuity payments
will not be affected by adverse mortality experience or by an increase in
Prudential's expenses in excess of the expense deductions provided for in the
Contract. The annuitant will receive the value of a fixed number of Annuity
Units each month. Changes in the value of such Units, and thus the amounts of
the monthly annuity payments, will reflect investment gains and losses and
investment income

18
<PAGE> 23

occurring after the date on which annuity payments commence.

2. Electing the Annuity Date and the Form of Annuity

Subject to the withdrawal restrictions discussed above (See "Withdrawal
(Redemption) of Purchase Payments Prior to Death," page 13), a Participant may
at any time elect to have a variable annuity effected for him under the
Contract. A beneficiary may make a similar election (see "Death Benefits Before
an Annuity is Effected," page 15). It may also be possible to effect a
fixed-dollar annuity if there is a companion fixed-dollar contract to which a
transfer payment may be made (see "Transfer Payments," page 16).

In electing to have a variable annuity effected, the Participant may select from
the available forms of annuity described below. With respect to benefits
accruing after December 31, 1986, the duration of any period certain payments
may not exceed the life expectancy of the Participant or, if there is a
designated beneficiary, the joint life and last survivor expectancy of the
Participant and his designated beneficiary as determined under IRS Tables. In
addition, IRS Proposed Regulations under Section 401(a)(9) of the Internal
Revenue Code specify the maximum permissible duration of any period certain
payments and the maximum survivor benefit payable under a joint and survivor
annuity (expressed as a percentage of the benefit originally payable). The
annuity is effected on the first day of the second month following receipt by
Prudential of written notice that the Participant or beneficiary has elected to
have an annuity effected or on the first day of any subsequent month designated
by the Participant or beneficiary. Any such notice must be on a form approved by
Prudential and should include all the information Prudential requires to effect
the annuity. The first monthly annuity payment will be made to an annuitant on
the date an annuity is effected for him.

Under certain types of Section 403(b) annuities, ERISA provides that, in the
case of a married Participant, the election of a payout which is not a qualified
joint and survivor annuity must include the consent and signatures of the
Participant and spouse and must be notarized or witnessed by an authorized Plan
representative. A "qualified joint and survivor annuity" is an annuity for the
Participant's lifetime with at least 50% of the amount payable to the
Participant during his lifetime payable to his spouse, if living at the
Participant's death.

If the dollar amount of the first monthly payment of an annuity effected under
the Contract would be less than the minimum amount specified in the Contract,
Prudential at its option may, in lieu of making any annuity payment whatsoever,
consider that the person who would receive the annuity had requested a
withdrawal of the individual accumulation account that would otherwise have been
applied to effect the annuity, as of the date the annuity was to begin.

Once annuity payments have commenced to an annuitant under Options 1, 2, 3 or 5
described below, the annuitant cannot surrender his annuity benefit and receive
a single sum payment in lieu thereof. An annuitant under Option 4 may, by
written request, surrender his annuity benefit and receive the commuted value of
the unpaid payments-certain. Under Options 2, 4 or 5, the annuitant's
beneficiary may, by a written request made after the death of the annuitant,
surrender his annuity benefit and receive the commuted value of the unpaid
payments-certain due him. The annuitant's beneficiary may also receive a lump
sum payment under certain circumstances as described below.

3. Deductions for Taxes on Annuity Considerations

Some states impose a premium tax with respect to annuity contracts. The tax
rates in those jurisdictions that impose a tax generally range from 0.5% to 5%.
When an annuity is effected, any applicable taxes on annuity considerations will
be deducted from the amount applied.

4. Available Forms of Variable Annuity

Option 1--variable life annuity. This is an immediate annuity payable monthly
during the lifetime of the annuitant and terminating with the last monthly
payment preceding his death. This option offers a higher level of monthly
payments than Option 2, Option 3 or Option 5 because no further payments are
payable after the death of the annuitant. It would be possible under this option
for the annuitant to receive only one annuity payment if he died (in an
automobile accident, for example) within the first month after the annuity was
effected. Therefore, a life annuity under this option is generally appropriate
only for someone who has no dependents and wants higher income during his
lifetime.

Option 2--variable life annuity with 120 or 180 payments certain. This is an
immediate annuity payable monthly during the lifetime of the annuitant with the
guarantee that if, at the death of the annuitant, payments have been made for
less than the period-certain (which may be 120 or 180 months, as selected by the
annuitant), they will be continued during the remainder of the selected period
to his beneficiary.

Option 3--variable joint and survivor annuity. This is an immediate annuity
payable monthly during the lifetime of the annuitant with payments continued
after his death to his contingent annuitant, if surviving, for the latter's
lifetime. The payments continued to the contingent annuitant may be based on
100% of the Annuity

19
<PAGE> 24

Units originally payable each month, or a lower percentage such as 50%, if the
annuitant so elects.

Option 4--variable annuity-certain. This is an immediate annuity payable
monthly for a period-certain of 120 months. If the annuitant dies during the
period-certain, payments will be continued to his beneficiary, but no further
payments are payable after the end of the period-certain. Since Prudential
assumes no mortality risks under Option 4, it makes no mortality risk charges in
determining annuity purchase rates for this option.

Option 5--variable joint and survivor annuity with 120 payments certain. This
is an immediate annuity payable monthly during the lifetime of the annuitant
with payments continued after his death to his contingent annuitant, if
surviving, for the latter's lifetime. The payments to the contingent annuitant
prior to the expiration of the period-certain will be based on 100% of the
Annuity Units originally payable each month. Thereafter, they will be based on
the same percentage or a lower percentage such as 50%, if the annuitant so
elects. If both the annuitant and the contingent annuitant die before 120
payments have been made, payments will be continued during the remainder of the
120-month period to the properly designated beneficiary.

If the dollar amount of the first monthly payment to a beneficiary is less than
the minimum amount specified in the Contract or if in Options 2, 4 and 5, the
beneficiary is other than a natural person receiving payments in his own right
or is an estate, Prudential may elect to pay the commuted value of the unpaid
payments-certain in one sum.

5. The Annuity Unit

On the date a variable annuity is effected for any Participant or his
beneficiary, his accumulation account is cancelled and the full annual
administration charge withdrawn. The aggregate value of the remaining
Accumulation Units in the Participant's accumulation account is determined. This
value, less any applicable taxes on annuity considerations, is then applied to
provide an annuity under which each payment will be the value of a specified
number of Annuity Units. The Annuity Unit Value is discussed in the following
section. The determination of each payment is discussed under "Schedule of
Variable Annuity Purchase Rates," page 21.

6. The Annuity Unit Value

The Annuity Unit Value for the month of June, 1968 was approximately $1.0102.
The Annuity Unit Value for any subsequent month is determined as of the end of
the month by multiplying the Annuity Unit Change Factor for the month (see
below) by the Annuity Unit Value for the preceding month. The Annuity Unit Value
applicable to annuity payments due during any month is the Annuity Unit Value
for the second preceding month. The Annuity Unit Value differs from and is
necessarily smaller than the Accumulation Unit Value since the Annuity Unit
Value must be reduced by the Assumed Investment Result as discussed in the
following sections.

7. The Annuity Unit Change Factor for Any Month

The Annuity Unit Change Factor for any month is obtained by (a) adding to 1.00
the rates of investment income earned, if any, after applicable taxes (currently
none--see "Federal Tax Status," pages 22 and 23), and of asset value changes in
VCA-2 during the period from the end of the preceding month to the end of the
current month, (b) deducting from such sum the rate of investment management fee
for the number of days in the current month, computed at an effective annual
rate of 0.125% ( 1/8 of 1%), and (c) dividing such difference by the sum of 1.00
and the rate of interest for one-twelfth of a year, computed at the effective
annual rate specified in the Contract as the Assumed Investment Result (see
below). The result of this division is the Annuity Unit Change Factor for the
month. (Items (a) and (b) for a given month are equivalent to items (a) and (b)
used during such month to derive Accumulation Unit Change Factors. See pages 11
and 12).

8. Assumed Investment Result

In order to convert the value of an accumulation account into an annuity and to
determine the initial payment, it is necessary to use an appropriate annuity
purchase rate (as discussed below) which is based on, among other things, an
interest rate. The greater the assumed interest rate, the greater the initial
annuity payment provided by a given amount applied, since the annuity payments
are supported by the amount applied and the investment result on that amount.

Where the annuity is a variable annuity, the payments remain level only if the
actual investment results each month thereafter are at the assumed rate. If, for
any month, the actual rate is greater, the payments increase. If the actual rate
is less, the payments decrease. For the variable annuities under the Contract,
the selection of the Assumed Investment Result is not made by Prudential but by
the Contract-holder who may choose, for example, 4 1/2% as the annual rate.
Rates of 3 1/2%, 4%, 5% and 5 1/2% may also be selected. Annuity purchase rates
appropriate for the Assumed Investment Result selected by the Contract-holder
will be inserted in the Contract.

The selection should reflect the Contract-holder's conservative estimate of the
average investment result that may be obtained from a diversified portfolio of
common stocks in a relatively stable economy. If a Contract-holder selects a
high Assumed Investment Result, the dollar amount of the first variable annuity

20
<PAGE> 25

payment to each annuitant under that Contract will be greater than if the
Contract-holder has selected a lower Assumed Investment Result. For example, for
a given amount applied, a 4 1/2% assumption produces a first monthly payment (in
dollars) higher by about 8 or 9% than a 3 1/2% assumption. The offset to this
higher initial payment is that, in reflecting the investment results of VCA-2,
the variable annuity payments resulting from the 3 1/2% assumption will increase
at a faster rate or decrease at a slower rate than the variable annuity payments
resulting from the 4% assumption. The lower Assumed Investment Result produces
greater income later in life than does a higher assumption, and it may be that
in later years a retired person will have the greatest need for more dollars of
income.

As may be seen from the description of the Annuity Unit Change Factor in the
preceding section, the change each month in the Annuity Unit Value depends on
the extent to which the actual investment results of VCA-2, including investment
income and market value changes, differ from the Assumed Investment Result
selected by the Contract-holder. If the actual results are at a rate greater
than the monthly equivalent of the assumed result, the Annuity Unit Value
increases, thereby increasing the dollar amount of the monthly variable annuity
payment. If the actual investment results are at a rate lower than the Assumed
Investment Result, the Annuity Unit Value decreases, thereby decreasing the
dollar amount of the monthly payment.

Once the Assumed Investment Result is fixed under a Contract, it applies to all
annuitants covered by that Contract. However, the Contract may be amended with
respect to all annuities effected after the amendment.
9. Schedule of Variable Annuity Purchase Rates

The annuity rates contained in the schedules of the Contract show how much
annuity is provided by the application of a given amount.

On July 6, 1983 the Supreme Court of the United States rendered a decision that
prohibits employers from providing for periodic retirement payments that vary in
amount depending upon the sex of the employee, to the extent that those payments
are derived from contributions made on or after August 1, 1983. While the
decision by its terms applies only to employers subject to the provisions of
Title VII of the Civil Rights Act of 1964, namely those with 15 or more
employees, it may be applicable to employers with fewer than 15 employees. To
facilitate employer compliance with the decision, Prudential has amended its
Group Tax-Deferred Variable Annuity Contracts issued through The Prudential
Variable Contract Account-2. The amendment provides for annuity purchase rates
that do not vary with the sex of the annuitant with respect to purchase payments
made under the Contracts on and after August 1, 1983. Thus, as a result of this
amendment, if a Participant's Annuity Units include Annuity Units derived from
purchase payments made before August 1, 1983, those Annuity Units are applied to
effect a variable annuity using schedules which take into account the date on
which the annuity is effected, the form of annuity selected, and the date of
birth and sex of the annuitant and of the contingent annuitant, if any. Any
remaining Annuity Units are applied using schedules which take into account the
form of annuity selected, the effective date and the relevant dates of birth,
but not the sex of any person. If a Participant's Annuity Units are derived
solely from purchase payments made either before August 1, 1983 or on and after
August 1, 1983, only one schedule of annuity rates is used. The dollar amount of
each monthly payment of the variable annuity will be equal to the number of
Annuity Units in each portion of the variable annuity payment, multiplied by the
Annuity Unit Value applicable to annuity payments due in the month.

Here are a few sample rates for an Assumed Investment Result of 4 1/2% from the
schedules in use for variable annuities effected in 1997 under Contracts entered
into on or after May 1, 1980. (More favorable results would be obtained for
variable annuities effected in 1997 under Contracts entered into prior to May 1,
1980). They show the number of Annuity Units payable each month resulting from
an accumulation, after reduction by the full annual administration charge and
applicable taxes on considerations, equivalent in value to 10,000 Annuity Units,
being applied to purchase the annuity.

<TABLE>
<CAPTION>
POST--7/31/83 PRE--8/1/83
ANNUITY UNITS ANNUITY UNITS
---------------- -------------------
TYPE OF ANNUITY ANNUITANT AGE 65 MALE 65 FEMALE 65
<S> <C> <C> <C>
Life Annuity with 120
Payments Certain 56.40 62.90 54.16
Life Annuity with 180
Payments Certain 54.07 58.64 52.32
</TABLE>

The interest rate used in constructing the schedules of annuity rates equals the
Assumed Investment Result less 0.375% ( 3/8 of 1%), which corresponds to the
daily deductions from accumulation accounts, also at an effective annual rate of
0.375% ( 3/8 of 1%), for assuming mortality and expense risks. The mortality
rates are based on the Prudential 1950 Group Annuity Valuation Table, with
adjustments to allow for improvements in mortality. In the case of the schedules
applicable to the variable annuity-certain option (the fourth option listed
under "Available Forms of Variable Annuity," page 19), the interest rate used is
equal to the Assumed Investment Result less 0.25% ( 1/4% of 1%), to reflect the
absence of any charge for the mortality risk. The annuity purchase rates may be
changed by Prudential, except as described in section D following. While the
Contract, in keeping with the preceding

21
<PAGE> 26

discussion, expresses the schedule of annuity purchase rates in terms of annuity
units, it may be helpful to describe the application of these schedules in terms
of the dollar amount of the monthly annuity payment due one month after the date
on which an annuity is effected. For each $1,000 applied on the effective date,
the dollar amount of this monthly payment is shown in the following table.

<TABLE>
<CAPTION>
POST--7/31/83 PRE--8/1/83
ANNUITY UNITS ANNUITY UNITS
---------------- -------------------
TYPE OF ANNUITY ANNUITANT AGE 65 MALE 65 FEMALE 65
<S> <C> <C> <C>
Life Annuity with 120
Payments Certain 5.640 6.290 5.416
Life Annuity with 180
Payments Certain 5.407 5.864 5.232
</TABLE>

Subsequent payments will be more or less depending upon the investment results
of the Account.

C. ASSIGNMENT

Unless contrary to applicable law, the right to any payment under the Contract
is neither assignable nor subject to the claim of any creditor.

D. CHANGES IN THE GROUP VARIABLE ANNUITY CONTRACT

The Contract provides that Prudential may limit the frequency of transfers to or
from the companion fixed-dollar contract, if any. The Contract also reserves to
Prudential the right to change the annual administration charge, uniformly
applicable to all accumulation accounts, and the percentage deducted from each
future purchase payment for sales expenses.

The Contract also provides that Prudential may change the annuity purchase
rates, may change the 0.375% ( 3/8 of 1%) charge described on page 11, and may
impose a redemption charge on any withdrawal or transfer payment provided by the
Contract. Any such change will apply only to Accumulation Units credited after
such change becomes effective, except that the initial basis will continue to
apply to all Accumulation Units credited before the fifth Contract anniversary
to any person who was a Participant before such change became effective, or
credited before such Participant makes a withdrawal, if sooner.

Changes discussed in this section become effective 90 days after notice thereof
has been given to the Contract-holder. Each person to whom the change is
applicable will also be notified.

It should be realized that the initial schedules of annuity purchase rates
remain in effect indefinitely with respect to all purchase payments made before
a change in rates. Since purchase payments on behalf of a Participant may be
made long before any annuity is effected for him and since his annuity payments
may continue long after that date, this risk assumed by Prudential extends many
years into the future.

Although the Contract may be changed at any time by agreement between Prudential
and the Contract-holder, no such change may adversely affect rights with respect
to Accumulation Units credited or variable annuities effected prior to the
effective date of the change (unless the change is made to comply with a law or
government regulation or the consent of each Participant is obtained).

The Contract provides that if at any time an investment manager other than
Prudential is selected for VCA-2, Prudential may determine that no new
Participants will become covered under the Contract.

E. PERIODIC REPORTS

Participants will be sent semi-annual reports showing the financial condition of
VCA-2 including the investments held in the account. Each Participant will also
be sent, at least annually, a statement of the number of Accumulation Units
credited to his account as of the end of the preceding accounting year.

F. PARTICIPATION IN DIVISIBLE SURPLUS

A mutual life insurance company differs from a stock life insurance company in
that it has no stockholders who are the owners of the enterprise.

A contract-holder of Prudential participates in the divisible surplus of
Prudential, according to the annual determination of the Board of Directors as
to the portion, if any, of the divisible surplus of Prudential which has accrued
on the contract. In the case of Contracts described herein, any surplus
determined to be payable as a dividend is credited to the persons participating
under such Contracts.

No assurance can be given as to the amount of divisible surplus, if any, that
will be available for distribution under these Contracts in the future. The
determination of such surplus is within the sole discretion of Prudential's
Board of Directors. When any payments of divisible surplus are made, they may
take the form of additional payments to annuitants and additions to the accounts
of other Participants and beneficiaries.

Such payments amounted to $78,656 during 1997. The equivalent figure for 1996
was ($235,290) and for 1995 was ($12,650).

FEDERAL TAX STATUS

In the opinion of counsel, under the Internal Revenue Code, the operations of
VCA-2 form a part of and are taxed with the operations of Prudential. A ruling
to this effect has been received from the Internal Revenue Service. The effect
of this basis of taxation is that the

22
<PAGE> 27

Accumulation and Annuity Unit Values are not reduced by federal income taxes
under current law.

In the opinion of counsel, the Contract meets the requirements of Section 403(b)
of the Internal Revenue Code. Contributions on behalf of a Participant under
such a Contract are excludable from the Participant's gross income to the extent
the contributions do not exceed the "exclusion allowance" specified in the Code.
A further limit of $9,500 (adjusted annually by the Internal Revenue
Service -- to $10,000 for 1998) generally applies to salary reduction
contributions. Section 415 of the Code also imposes an overall limit on the
maximum annual contribution which can be made to the Contract by or on behalf of
a Participant. Generally, this limit on annual contributions is the lesser of
$30,000 or 25% of Participant's compensation. Increases in the Accumulation and
Annuity Unit Values are not includable in the Participant's gross income in the
year credited. Amounts distributed to a Participant in the form of an annuity or
otherwise are includable in the Participant's gross income when received and are
taxed at ordinary income rates. However, an exclusion from federal income tax is
provided for distributions attributable to contributions which were includable
in the Participant's gross income when they were originally made.

In general, a death benefit consisting of amounts paid to a Participant's
beneficiary is includable in the Participant's estate for federal estate tax
purposes.

Benefits accruing after December 31, 1986 under Section 403(b) annuity contracts
are subject to required minimum distribution rules which specify the time when
payment of benefits must begin and the minimum amount which must be paid
annually. These rules apply to Participants and to beneficiaries. Generally,
payment of benefits to Participants must begin no later than April 1st of the
calendar year following the later of (i) the year the employee retires, or (ii)
the year in which the Participant attains age 70 1/2. If the Participant dies
before the entire interest in the contract has been distributed, the remaining
interest must be distributed at least as rapidly as under the method of
distribution being used as of the date of death. If the Participant dies before
payment of benefits has begun (or is treated as having begun) the entire
interest must be distributed by December 31 of the calendar year containing the
fifth anniversary of the Participant's death. Alternatively, if there is a
designated beneficiary, the designated beneficiary may elect to receive payments
beginning no later than December 31 of the calendar year immediately following
the year in which the Participant died and continuing for the beneficiary's life
or a period not exceeding the beneficiary's life expectancy. If the
Participant's spouse is the designated beneficiary, payments can be deferred
until December 31 of the year in which the Participant would have attained age
70 1/2. An excise tax applies to Participants or beneficiaries who reach the
date when distributions are required to begin and fail to take the required
minimum distribution in any calendar year.

Payers of pension distributions (including insurance companies) are required to
withhold taxes on pension and annuity payments. This applies to payments made
under a tax-deferred annuity program (including total or partial withdrawals).

Certain distributions from qualified plans under Section 403(b) of the Internal
Revenue Code, which are not directly rolled over or transferred to another
eligible qualified plan, are subject to a mandatory 20% withholding for federal
income tax. The 20% withholding requirement does not apply to: (a) distributions
for the life or life expectancy of the Participant or joint and last survivor
expectancy of the Participant and a designated beneficiary; or (b) distributions
for a specified period of 10 years or more; or (c) distributions which are
required as minimum distributions. A recipient of a distribution which is not
subject to mandatory withholding may elect not to have any taxes withheld from
his distribution. Participants must be notified annually of their right to
change their withholding elections. Payers of taxable pension payments must
report such payments to the Internal Revenue Service.

If a transfer is made from a Participant's accumulation account under this
Contract to another tax-deferred annuity program, no tax will be withheld from
the amount transferred.

A premature distribution penalty tax generally applies to withdrawals made prior
to age 59 1/2. Certain exceptions do, however, apply. In addition, federal tax
law imposes restrictions on withdrawals from Section 403(b) annuities (See
"Withdrawal (Redemption) of Purchase Payments Prior to Death," page 13).
Therefore, persons contemplating participation in a Section 403(b) annuity
should consult a tax adviser concerning the tax consequences of a withdrawal
under the Contract.

The above description of certain federal income and estate tax rules that may
apply to a Participant is not exhaustive or specific to a particular
circumstance. A Participant should consult with appropriate tax advisers
concerning the applicability of the rules to the Participant's personal tax
circumstances.

VOTING RIGHTS

In addition to Prudential, each person who has an individual accumulation
account or a variable annuity as to which values or payments depend upon the
investment results of VCA-2 has the right to vote at meetings of such persons.
They are entitled to vote to:

23
<PAGE> 28

A.approve any amendments of the Agreement for Investment Management Services
and approve any such new agreements negotiated by the Committee;

B.approve any recommendations made by the Committee regarding changes in the
fundamental investment policies of the Account; and

C.any matters requiring a vote of persons having voting rights with respect to
VCA-2.

Meetings of persons having voting rights are not required to be held annually.
The Rules and Regulations of VCA-2 provide that meetings of persons having
voting rights may be called by a majority of the Committee. The Committee is
required to call a meeting of persons having voting rights in the event that at
any time less than a majority of the members of the Committee holding office at
that time were elected by persons having voting rights. Such meeting must be
held within 60 days unless the Commission by order extends such period. In
addition, the Committee is required to call meetings of persons with voting
rights in order to submit for a vote matters on which such persons are entitled
to vote (as listed above).

For the purpose of determining the persons having voting rights in respect of
VCA-2 who are entitled to notice of and to vote at meetings, the Committee may
fix, in advance, a date as the record date which shall not be more than 70 nor
less than 10 days before the date of such meeting.

The number of votes which each person may cast at a meeting of persons having
voting rights in VCA-2 is equal to the number of dollars and fractions thereof
in his accumulation account as of the record date or, if he is an annuitant, the
number of dollars and fractions thereof equal in value to the portion of the
assets in VCA-2 held to meet the annuity obligations to him on such date. This
number decreases as annuity payments are made. Votes may be cast either in
person or by proxy and persons entitled to vote receive all proxy materials.

Prudential is entitled to vote the number of votes and fractions thereof equal
to the number of dollars and fractions thereof of its own funds invested in
VCA-2 as of the record date. Prudential will cast its votes in the same
proportions as all other votes represented at the meeting, in person or by
proxy.

As defined by the 1940 Act and as referred to elsewhere in this Prospectus, a
majority vote of persons having voting rights in respect of VCA-2 means (a) 67%
or more of the votes of such persons present at a meeting if more than 50% of
all votes entitled to be cast are held by persons present in person or
represented by proxy at such meeting, or (b) more than 50% of all votes entitled
to be cast, whichever is less.

OTHER CONTRACTS ON A
VARIABLE BASIS

In addition to the Contracts, Prudential currently issues other forms of
contracts on a variable basis. At present, purchase payments under such other
contracts are not held in VCA-2 but are held in other separate accounts.

STATE REGULATION

Prudential is subject to regulation by the Department of Banking and Insurance
of the State of New Jersey as well as by the insurance departments of all the
other states and jurisdictions in which it does business. Prudential must file
an annual statement in a form promulgated by the National Association of
Insurance Commissioners. This annual statement is reviewed and analyzed by the
New Jersey Department, which makes an independent computation of Prudential's
legal reserve liabilities and statutory apportionments under its outstanding
contracts. New Jersey law requires a quinquennial examination of Prudential to
be made. Examination involves extensive audit including, but not limited to, an
inventory check of assets, sampling techniques to check the performance by
Prudential of its contracts and an examination of the manner in which divisible
surplus has been apportioned and distributed to policy and contract-holders.
This regulation does not involve any supervision or control over the investment
policy of VCA-2 or over the selection of investments therefor except for
verification of the compliance of Prudential's investment portfolio with New
Jersey law. See "Investment restrictions imposed by state law" in the Statement
of Additional Information.

The laws of New Jersey also contain special provisions which relate to the
issuance and regulation of contracts on a variable basis. These laws set forth a
number of mandatory provisions which must be included in contracts on a variable
basis and prohibit such contracts from containing other specified provisions. No
variable contract may be issued for delivery in New Jersey prior to the written
acknowledgement by the Department of Banking and Insurance of its filing. The
Department may initially disapprove or subsequently withdraw approval of any
contract if it contains provisions which are "unjust, unfair, inequitable,
ambiguous, misleading, likely to result in misrepresentation or contrary to
law." Approval can also be withheld or withdrawn if sales are solicited by
communications which involve misleading or inadequate descriptions of the
provisions of the contract.

In addition to the annual statement referred to above, Prudential is required to
file with New Jersey and other states a separate statement with respect to the
opera-

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<PAGE> 29

tions of all its variable contract accounts, in a form promulgated by the
National Association of Insurance Commissioners.

Persons engaged in the negotiation or sale of a variable annuity contract in New
Jersey are not subject to the provisions of the laws of New Jersey governing the
sale of securities.

LEGAL PROCEEDINGS

On October 28, 1996, Prudential entered into a Stipulation of Settlement in a
multidistrict proceeding involving allegations of various claims relating to
Prudential's life insurance sales practices. (In re Prudential Insurance Company
of America Sales Practices Litigation, D.N.J., MDL No. 1061, Master Docket No.
95-4704 (AMW).) On March 7, 1997, the United States District Court for the
District of New Jersey approved the Stipulation of Settlement as fair,
reasonable and adequate, and later issued a Final Order and Judgment in the
consolidated class actions before the Court, 962 F. Supp. 450 (March 17, 1997,
as amended April 14, 1997). The Court's Final Order and Judgment approving the
class Settlement has been appealed to the United States Court of Appeals for the
Third Circuit, which held a hearing on January 26, 1998. The Court has not yet
issued a ruling on the appeal.

Pursuant to the Settlement, Prudential agreed to provide and has begun to
implement an Alternative Dispute Resolution ("ADR") process for class members
who believe they were misled concerning the sale or performance of their life
insurance policies. Management now has information which allows for computation
of a reasonable estimate of losses associated with ADR claims. Based on this
information, management estimated the cost of remedying policyholder claims in
the ADR process before taxes to be approximately $2.05 billion. While management
believes these to be reasonable estimates based on information currently
available, the ultimate amount of the total cost of remedied policyholder claims
is dependent on complex and varying factors, including actual claims by eligible
policyholders, the relief options chosen and the dollar value of those options.
There are also additional elements of the ADR process which cannot be fully
evaluated at this time (e.g., claims which may be successfully appealed) which
could increase this estimate.

In addition, a number of actions have been filed against Prudential by
policyowners who have excluded themselves from the Settlement; Prudential
anticipates that additional suits may be filed by other policyowners.

Also, on July 9, 1996, a Multi-State Life Insurance Task Force comprised of
insurance regulators from 29 states and the District of Columbia, released a
report on Prudential's activities. As of February 24, 1997, Prudential had
entered into consent orders or agreements with all 50 states and the District of
Columbia to implement a remediation plan, whose terms closely parallel the
Settlement approved in the MDL proceeding, and agreed to a series of payments
allocated to all 50 states and the District of Columbia amounting to a total of
approximately $65 million. These agreements are now being implemented through
Prudential's implementation of the class Settlement.

Accordingly, management is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of all pending
litigation and regulatory inquiries. It is possible that the results of
operations or the cash flow of Prudential, in particular quarterly or annual
periods, could be materially affected by an ultimate unfavorable outcome of
certain pending litigation and regulatory matters. Management believes, however,
that the ultimate outcome of all pending litigation and regulatory matters
referred to above should not have a material adverse effect on Prudential's
financial position, after consideration of applicable reserves.

YEAR 2000

The services provided to the Contract owners by Prudential, PIMS and PIC depend
on the smooth functioning of their respective computer systems. The year 2000,
however, holds the potential for a significant disruption in the operation of
these systems. Many computer programs cannot distinguish the year 2000 from the
year 1900 because of the way in which dates are encoded. Left uncorrected, the
year "00" could cause systems to perform date comparisons and calculations
incorrectly that in turn could compromise the integrity of business records and
lead to serious interruption of business processes.

Prudential, PIMS' and PIC's ultimate corporate parent, identified this issue as
a critical priority in 1995 and has established quality assurance procedures
including a certification process to monitor and evaluate enterprise-wide
conversion and upgrading of systems for "Year 2000" compliance. Prudential has
also initiated an analysis of potential exposure that could result from the
failure of major service providers such as suppliers, custodians and brokers, to
achieve Year 2000

25
<PAGE> 30

compliance. Prudential expects to complete its adaptation, testing and
certification of software for Year 2000 compliance by December 31, 1998. During
1999, Prudential plans to conduct additional internal testing, to participate in
securities industry-wide test efforts and to complete major service provider
analysis and contingency planning.

The expenses of Prudential's Year 2000 compliance are allocated across its
various businesses, including those businesses not engaged in providing services
to Contract owners. Accordingly, while the expense is substantial in the
aggregate, it is not expected to have a material impact on the ability of
Prudential, PIMS or PIC to meet their contractual commitments to Contract
owners.

Prudential believes that it is well positioned to achieve the necessary
modifications and mitigate Year 2000 risks. However, if such efforts are not
completed on a timely basis, the Year 2000 issue could have a material adverse
impact on Prudential's operations, those of its subsidiary and affiliate
companies and/or the Account. Moreover, there can be no assurance that the
measures taken by Prudential's external service providers will be sufficient to
avoid any material adverse impact on Prudential's operations or those of its
subsidiary and affiliate companies.

ADDITIONAL INFORMATION

This Prospectus does not contain all the information set forth in the
registration statement, certain portions of which have been omitted pursuant to
the rules and regulations of the Commission. The omitted information may be
obtained from the Commission's principal office in Washington, D.C. upon payment
of the fees prescribed by the Commission.

Participants may also receive further information about the Contracts at the
address and phone number set forth on the cover page of this Prospectus.

26
<PAGE> 31

TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION

<TABLE>
<CAPTION>
PAGE
<S> <C>
INVESTMENT MANAGEMENT AND ADMINISTRATION OF VCA-2........... 2
Fundamental investment restrictions adopted by VCA-2... 2
Non-fundamental investment restrictions adopted by
VCA-2................................................. 3
Investment restrictions imposed by state law........... 3
Additional information about financial futures......... 4
Additional information about options................... 5
Forward foreign currency exchange contracts............ 9
Interest rate swap transactions........................ 9
Loans of portfolio securities.......................... 9
Portfolio turnover rate................................ 9
Portfolio brokerage and related practices.............. 10
Custody of securities.................................. 11
THE VCA-2 COMMITTEE......................................... 12
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA--DIRECTORS...... 13
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA--PRINCIPAL
OFFICERS.................................................. 15
SALE OF GROUP VARIABLE ANNUITY CONTRACTS.................... 16
EXPERTS..................................................... 16
FINANCIAL STATEMENTS OF VCA-2............................... 18
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES............. B-1
</TABLE>

27
<PAGE> 32

YOU MUST DETACH BEFORE MAILING

Please send me the "Statement of Additional Information"
describing Prudential's Group Tax-Deferred Variable Annuity Contracts.

Name --------------------------------------------------------------------------
Address -----------------------------------------------------------------------
City
-----------------------------------------------------------------------------

<TABLE>
<S> <C>
State
------------------------- Zip Code
--------------------------
</TABLE>

PLEASE PRINT--will be used as mailing label!

A "Statement of Additional
Information" about the
Contracts has been filed with
the Securities and Exchange
Commission. A copy of this
Statement is available
without charge.
To receive additional
information about the
Contracts and VCA-2 fill in
your name and address on
this card, tear it off, affix the
proper postage, and mail it
to us.
<PAGE> 33

Please
place
correct
postage
here

The Prudential Insurance Company of America

c/o Prudential Investments Retirement Services

30 Scranton Office Park

Scranton, Pennsylvania 18507-1789

Attention: Retirement Services Marketing
<PAGE> 34

<S> <C>
The Prudential Insurance Company of America BULK RATE
c/o Prudential Investments Retirement Services U.S. POSTAGE
30 Scranton Office Park PAID
Scranton, Pennsylvania 18507-1789 PERMIT No. 941
ADDRESS SERVICE REQUESTED CHICAGO, IL
-------------------------
</TABLE>

MD.PU.002.498 ED. 5/98

<PAGE> 35

STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998

GROUP TAX-DEFERRED VARIABLE ANNUITY CONTRACTS
ISSUED THROUGH

THE PRUDENTIAL
VARIABLE CONTRACT ACCOUNT-2

These Contracts are designed for use in connection with retirement arrangements
that qualify for federal tax benefits under Section 403(b) of the Internal
Revenue Code of 1986, as amended. Contributions made on behalf of Participants
are invested in The Prudential Variable Contract Account-2, a separate account
primarily invested in common stocks.

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

This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus, dated May 1, 1998, which is available
without charge upon written request to The Prudential Insurance Company of
America, c/o Prudential Investments, 30 Scranton Office Park, Scranton,
Pennsylvania 18507-1789, or by telephoning 1-800-458-6333.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
INVESTMENT MANAGEMENT AND ADMINISTRATION OF VCA-2........... 2
Fundamental investment restrictions adopted by VCA-2...... 2
Non-fundamental investment restrictions adopted by
VCA-2.................................................. 3
Investment restrictions imposed by state law.............. 3
Additional information about financial futures............ 4
Additional information about options...................... 5
Forward foreign currency exchange contracts............... 9
Interest rate swap transactions........................... 9
Loans of portfolio securities............................. 9
Portfolio turnover rate................................... 9
Portfolio brokerage and related practices................. 10
Custody of securities..................................... 11
THE VCA-2 COMMITTEE......................................... 12
Remuneration of members of the committee and certain
affiliated persons..................................... 12
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA--DIRECTORS...... 13
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA--PRINCIPAL
OFFICERS.................................................. 15
SALE OF GROUP VARIABLE ANNUITY CONTRACTS.................... 16
EXPERTS..................................................... 16
FINANCIAL STATEMENTS OF VCA-2............................... 18
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES............. B-1
</TABLE>

The Prudential Insurance Company of America
c/o Prudential Investments
30 Scranton Office Park
Scranton, PA 18507-1789
Telephone 1-800-458-6333

================================================================================

LOGO
<PAGE> 36

INVESTMENT MANAGEMENT AND
ADMINISTRATION OF
VCA-2

Prudential acts as investment manager for VCA-2 under an Agreement for
Investment Management Services. The Account's assets are invested and reinvested
in accordance with its investment objective and policies, subject to the general
supervision and authorization of the Account's Committee.

Subject to Prudential's supervision, substantially all of the investment
management services provided by Prudential are furnished by its wholly-owned
subsidiary, The Prudential Investment Corporation ("PIC"), pursuant to the
service agreement between Prudential and PIC (the "Service Agreement") which
provides that Prudential will reimburse PIC for its costs and expenses. PIC is
registered as an investment adviser under the Investment Advisers Act of 1940.

Prudential continues to have responsibility for all investment advisory services
under its advisory or subadvisory agreements with respect to its clients.
Prudential's Agreement for Investment Management Services with VCA-2 was
approved initially by the Participants at their meeting on May 29, 1969 and was
most recently renewed by unanimous vote of the Committee on May 19, 1997. The
Service Agreement was approved by participants in VCA-2 on July 25, 1985 and its
annual continuation was most recently approved by unanimous vote of the VCA-2
Committee on May 19, 1997. The Account's Agreement for Investment Management
Services and the Service Agreement will continue in effect as long as approved
at least once a year by a majority of the non-interested members of the
Account's Committee and either by a majority of the entire Committee or by a
majority vote of persons entitled to vote in respect of the Account. The
Account's Agreement for Investment Management Services will terminate
automatically in the event of assignment, and may be terminated without penalty
on 60 days' notice by the Account's Committee or by the majority vote of persons
having voting rights in respect of the Account, or on 90 days' notice by
Prudential.

The Service Agreement will continue in effect as to the Account for a period of
more than two years from its execution only so long as such continuance is
specifically approved at least annually in the same manner as the Agreement for
Investment Management Services between Prudential and the Account. The Service
Agreement may be terminated by either party upon not less than thirty days'
prior written notice to the other party, will terminate automatically in the
event of its assignment and will terminate automatically as to the Account in
the event of the assignment or termination of the Agreement for Investment
Management Services between Prudential and the Account. Prudential is not
relieved of its responsibility for all investment advisory services under the
Agreement for Investment Management Services between Prudential and the Account.
The Service Agreement provides for Prudential to reimburse PIC for its costs and
expenses incurred in furnishing investment advisory services. For the meaning of
a majority vote of persons having voting rights with respect to the Account, see
"Voting Rights," page 23 of the Prospectus.

Prudential is responsible for the administrative and recordkeeping functions of
VCA-2 and pays the expenses associated with them. These functions include
enrolling Participants, receiving and allocating contributions, maintaining
Participants' Accumulation Accounts, preparing and distributing confirmations,
statements, and reports. The administrative and recordkeeping expenses borne by
Prudential include salaries, rent, postage, telephone, travel, legal, actuarial
and accounting fees, office equipment, stationery and maintenance of computer
and other systems.

A daily charge is made which is equal to an effective annual rate of 0.50% of
the net asset value of VCA-2. One-half (0.25%) of this charge is for assuming
expense risks; 1/4 (0.125%) of this charge is for assuming mortality risks; and
1/4 (0.125%) is for investment management services. During 1997, 1996, and
1995, Prudential received $3,351,395, $2,694,889, and $2,195,986, respectively
from VCA-2 for assuming mortality and expense risks and for providing investment
management services.

There is also an annual administration charge made against each Participant's
accumulation account in an amount which varies with each Contract but which is
not more than $30 for any accounting year. During 1997, 1996, and 1995,
Prudential collected $28,266, $30,477, and $34,067, respectively, from VCA-2 in
those annual account charges.

A sales charge is also imposed on certain purchase payments made under a
Contract on behalf of a Participant. The sales charges imposed on purchase
payments to VCA-2 during 1997, 1996, and 1995 were $9,628, $162,008, and
$180,356, respectively.

FUNDAMENTAL INVESTMENT RESTRICTIONS ADOPTED BY VCA-2

In addition to the investment objective described in the prospectus, the
following investment restrictions are fundamental investment policies of VCA-2
and may not be changed without the approval of a majority vote of persons having
voting rights in respect of the Account.

Concentration in Particular Industries. VCA-2 will not purchase any security
(other than obligations of the U.S. Government, its agencies or
instrumentalities) if

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<PAGE> 37

as a result: (i) with respect to 75% of VCA-2's total assets, more than 5% of
VCA-2's total assets (determined at the time of investment) would then be
invested in securities of a single issuer, or (ii) 25% or more of VCA-2's total
assets (determined at the time of the investment) would be invested in a single
industry.

Investments in Real Estate-Related Securities. No purchase of or investment in
real estate will be made for the account of VCA-2 except that VCA-2 may buy and
sell securities that are secured by real estate or shares of real estate
investment trusts listed on stock exchanges or reported on the National
Association of Securities Dealers, Inc. automated quotation system ("NASDAQ").

Investments in Financial Futures. No commodities or commodity contracts will be
purchased or sold for the account of VCA-2 except that VCA-2 may purchase and
sell financial futures contracts and related options. Loans. VCA-2 will not lend
money, except that loans of up to 10% of the value of VCA-2's total assets may
be made through the purchase of privately placed bonds, debentures, notes, and
other evidences of indebtedness of a character customarily acquired by
institutional investors that may or may not be convertible into stock or
accompanied by warrants or rights to acquire stock. Repurchase agreements and
the purchase of publicly traded debt obligations are not considered to be
"loans" for this purpose and may be entered into or purchased by VCA-2 in
accordance with its investment objectives and policies.

Borrowing. VCA-2 will not issue senior securities, borrow money or pledge its
assets, except that VCA-2 may borrow from banks up to 33 1/3 percent of the
value of its total assets (calculated when the loan is made) for temporary,
extraordinary or emergency purposes, for the clearance of transactions or for
investment purposes. VCA-2 may pledge up to 33 1/3 percent of the value of its
total assets to secure such borrowing. 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 arrangements relating
thereto, and collateral arrangements with respect to interest rate swap
transactions, reverse repurchase agreements, dollar roll transactions, options,
futures contracts, and options thereon are not deemed to be a pledge of assets
or the issuance of a senior security.

Margin. VCA-2 will not purchase securities on margin (but VCA-2 may obtain such
short-term credits as may be necessary for the clearance of transactions);
provided that the deposit or payment by VCA-2 of initial or maintenance margin
in connection with futures or options is not considered the purchase of a
security on margin.

Underwriting of Securities. VCA-2 will not underwrite the securities of other
issuers, except where VCA-2 may be deemed to be an underwriter for purposes of
certain federal securities laws in connection with the disposition of portfolio
securities and with loans that VCA-2 is permitted to make.

Control or Management of Other Companies. No securities of any company will be
acquired for VCA-2 for the purpose of exercising control or management thereof.

NON-FUNDAMENTAL INVESTMENT RESTRICTIONS ADOPTED BY VCA-2

The VCA-2 Committee has also adopted the following additional investment
restrictions as non-fundamental operating policies. The Committee can change
these restrictions without the approval of the persons having voting rights in
respect of VCA-2.

Investments in Other Investment Companies. Except as part of a merger,
consolidation, acquisition or reorganization, VCA-2 will not invest in the
securities of other investment companies in excess of the limits stipulated by
the Investment Company Act of 1940 as amended, and the rules and regulations
thereunder.

Short Sales. VCA-2 will not make short sales of securities or maintain a short
position, except that VCA-2 may make short sales against the box. Collateral
arrangements entered into with respect to options, futures contracts and forward
contracts are not deemed to be short sales. Collateral arrangements entered into
with respect to interest rate swap agreements are not deemed to be short sales.

Restricted Securities. No more than 15% of the value of the net assets held in
VCA-2 will be invested in securities (including repurchase agreements and
non-negotiable time deposits maturing in more than seven days) that are subject
to legal or contractual restrictions on resale or for which no readily available
market exists.

INVESTMENT RESTRICTIONS IMPOSED BY STATE LAW

In addition to the investment objectives, policies and restrictions that VCA-2
has adopted, the Account must limit its investments to those authorized for
variable contract accounts of life insurance companies by the laws of the State
of New Jersey. In the event of future amendments of the applicable New Jersey
statutes, the Account will comply, without the approval of Participants or
others having voting rights in respect of the Account, with the statutory
requirements as so modified. The pertinent provisions of New Jersey law as they
currently read are, in summary form, as follows:

1. An account may not purchase any evidence of indebtedness issued, assumed or
guaranteed by

3
<PAGE> 38

any institution created or existing under the laws of the U.S., any U.S.
state or territory, District of Columbia, Puerto Rico, Canada or any
Canadian province, if such evidence of indebtedness is in default as to
interest. "Institution" includes any corporation, joint stock association,
business trust, business joint venture, business partnership, savings and
loan association, credit union or other mutual savings institution.

2. The stock of a corporation may not be purchased unless (i) the corporation
has paid a cash dividend on the class of stock during each of the past five
years preceding the time of purchase, or (ii) during the five-year period
the corporation had aggregate earnings available for dividends on such
class of stock sufficient to pay average dividends of 4% per annum computed
upon the par value of such stock, or upon stated value if the stock has no
par value. This limitation does not apply to any class of stock which is
preferred as to dividends over a class of stock whose purchase is not
prohibited.

3. Any common stock purchased must be (i) listed or admitted to trading on a
securities exchange in the United States or Canada; or (ii) included in the
National Association of Securities Dealers' national price listings of
"over-the-counter" securities; or (iii) determined by the Commissioner of
Insurance of New Jersey to be publicly held and traded and as to which
market quotations are available.

4. Any security of a corporation may not be purchased if after the purchase
more than 10% of the market value of the assets of an Account would be
invested in the securities of such corporation.

The currently applicable requirements of New Jersey law impose substantial
limitations on the ability of VCA-2 to invest in the stock of companies whose
securities are not publicly traded or who have not recorded a five-year history
of dividend payments or earnings sufficient to support such payments. This means
that the Account will not generally invest in the stock of newly organized
corporations. Nonetheless, an investment not otherwise eligible under paragraph
1 or 2 above may be made if, after giving effect to the investment, the total
cost of all such non-eligible investments does not exceed 5% of the aggregate
market value of the assets of the Account.

Investment limitations may also arise under the insurance laws and regulations
of the other states where the Contracts are sold. Although compliance with the
requirements of New Jersey law set forth above will ordinarily result in
compliance with any applicable laws of other states, under some circumstances
the laws of other states could impose additional restrictions on the portfolios
of the Account.

ADDITIONAL INFORMATION ABOUT FINANCIAL FUTURES CONTRACTS

As described in the Prospectus, VCA-2 may engage in certain transactions
involving financial futures contracts. This additional information on those
instruments should be read in conjunction with the prospectus.

VCA-2 will only enter into futures contracts that are standardized and traded on
a U.S. exchange or board of trade. When a financial futures contract is entered
into, each party deposits with a broker or in a segregated custodial account
approximately 5% of the contract amount, called the "initial margin." Subsequent
payments to and from the broker, called the "variation margin," are made on a
daily basis as the underlying security, index, or rate fluctuates, making the
long and short positions in the futures contracts more or less valuable, a
process known as "marking to the market."

There are several risks associated with the use of futures contracts for hedging
purposes. While VCA-2's hedging transactions may protect it against adverse
movements in the general level of interest rates or other economic conditions,
such transactions could also preclude VCA-2 from the opportunity to benefit from
favorable movements in the level of interest rates or other economic conditions.
There can be no guarantee that there will be correlation between price movements
in the hedging vehicle and in the securities or other assets being hedged. An
incorrect correlation could result in a loss on both the hedged assets and the
hedging vehicle so that VCA-2's return might have been better if hedging had not
been attempted. The degree of imperfection of correlation depends on
circumstances such as variations in speculative market demand for futures and
futures options, including technical influences in futures trading and futures
options, and differences between the financial instruments being hedged and the
instruments underlying the standard contracts available for trading in such
respects as interest rate levels, maturities, and creditworthiness of issuers. A
decision as to whether, when, and how to hedge involves the exercise of skill
and judgment and even a well-conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected market trends.

There can be no assurance that a liquid market will exist at a time when VCA-2
seeks to close out a futures contract or a futures option position. Most futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these

4
<PAGE> 39

instruments are relatively new and without a significant trading history. As a
result, there is no assurance that an active secondary market will develop or
continue to exist. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses. Lack of a liquid market for any reason may prevent VCA-2
from liquidating an unfavorable position and VCA-2 would remain obligated to
meet margin requirements and continue to incur losses until the position is
closed.

ADDITIONAL INFORMATION ABOUT OPTIONS

As described in the Prospectus, VCA-2 may engage in certain transactions
involving options. This additional information on those instruments should be
read in conjunction with the prospectus.

In addition to those described in the Prospectus, options have other risks,
primarily related to liquidity. A position in an exchange-traded option 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 VCA-2
will generally purchase or write only those exchange-traded 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 VCA-2 would have to
exercise its options in order to realize any profit and would incur brokerage
commissions upon the exercise of such 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 VCA-2 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: (i) there may be insufficient trading interest in certain options;
(ii) restrictions imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading volume;
or (vi) 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 purchase and sale of over-the-counter ("OTC") options will also be subject
to certain risks. Unlike exchange-traded options, OTC options generally do not
have a continuous liquid market. Consequently, VCA-2 will generally be able to
realize the value of an OTC option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when VCA-2 writes an OTC
option, it generally will be able to close out the OTC option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to which VCA-2 originally wrote the OTC option. There can be no assurance that
VCA-2 will be able to liquidate an OTC option at a favorable price at any time
prior to expiration. In the event of insolvency of the other party, VCA-2 may be
unable to liquidate an OTC option.

Options on Equity Securities. VCA-2 may purchase and write (i.e., sell) put and
call options on equity securities that are traded on U.S. securities exchanges,
are listed on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), or that result from privately negotiated transactions with
broker-dealers. A call option is a short-term contract pursuant to which the
purchaser or holder, in return for a premium paid, has the right to buy the
security underlying the option at a specified exercise price at any time during
the term of the option. The writer of the call option, who receives the premium,
has the obligation, upon exercise of the option, to deliver the underlying
security against payment of the exercise price. A put option is a similar
contract which gives the purchaser or holder, in return for a premium, the right
to sell the underlying security at a specified price during the term of the
option. The writer of the put, who receives the premium, has the obligation to
buy the underlying security

5
<PAGE> 40

at the exercise price upon exercise by the holder of the put.

VCA-2 will write only "covered" options on stocks. A call option is covered if:
(1) VCA-2 owns the security underlying the option; or (2) VCA-2 has an absolute
and immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities it holds; or
(3) VCA-2 holds on a share-for-share basis a call on the same security 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 VCA-2 in cash U.S. government
securities or other liquid unencumbered assets in a segregated account with its
custodian. A put option is covered if: (1) VCA-2 deposits and maintains with its
custodian in a segregated account cash, U.S. government securities or other
liquid unencumbered assets having a value equal to or greater than the exercise
price of the option; or (2) VCA-2 holds on a share-for-share basis a put on the
same security as the put written where the exercise price of the put held is
equal to or greater than the exercise price of the put written or less than the
exercise price if the difference is maintained by VCA-2 in cash, U.S. government
securities or other liquid unencumbered assets in a segregated account with its
custodian.

VCA-2 may also purchase "protective puts" (i.e., put options acquired for the
purpose of protecting VCA-2 security from a decline in market value). The loss
to VCA-2 is limited to the premium paid for, and transaction costs in connection
with, the put plus the initial excess, if any, of the market price of the
underlying security over the exercise price. However, if the market price of the
security underlying the put rises, the profit VCA-2 realizes on the sale of the
security will be reduced by the premium paid for the put option less any amount
(net of transaction costs) for which the put may be sold.

VCA-2 may also purchase putable and callable equity securities, which are
securities coupled with a put or call option provided by the issuer.

VCA-2 may purchase call options for hedging or investment purposes. VCA-2 does
not intend to invest more than 5% of its net assets at any one time in the
purchase of call options on stocks.

If the writer of an exchange-traded option wishes to terminate the obligation,
he or she may effect a "closing purchase transaction" by buying an option of the
same series as the option previously written. Similarly, the holder of an option
may liquidate his or her position by exercise of the option or by effecting a
"closing sale transaction" by selling an option of the same series as the option
previously purchased. There is no guarantee that closing purchase or closing
sale transactions can be effected.

Options on Debt Securities. VCA-2 may purchase and write exchange-traded and
OTC put and call options on debt securities. Options on debt securities are
similar to options on stock, except that the option holder has the right to take
or make delivery of a debt security, rather than stock.

VCA-2 will write only "covered" options. Options on debt securities are covered
in the same manner as options on stocks, discussed above, except that, in the
case of call options on U.S. Treasury Bills, VCA-2 might own U.S. Treasury Bills
of a different series from those underlying the call option, but with a
principal amount and value corresponding to the option contract amount and a
maturity date no later than that of the securities deliverable under the call
option.

VCA-2 may also write straddles (i.e., a combination of a call and a put written
on the same security at the same strike price where the same issue of the
security is considered as the cover for both the put and the call). In such
cases, VCA-2 will also segregate or deposit for the benefit of VCA-2's broker
cash or other liquid unencumbered assets equivalent to the amount, if any, by
which the put is "in the money." It is contemplated that VCA-2's use of
straddles will be limited to 5% of VCA-2's net assets (meaning that the
securities used for cover or segregated as described above will not exceed 5% of
VCA-2's net assets at the time the straddle is written).

VCA-2 may purchase "protective puts" in an effort to protect the value of a
security that it owns against a substantial decline in market value. Protective
puts on debt securities operate in the same manner as protective puts on equity
securities, described above. VCA-2 may wish to protect certain securities
against a decline in market value at a time when put options on those particular
securities are not available for purchase. VCA-2 may therefore purchase a put
option on securities it does not hold. While changes in the value of the put
should generally offset changes in the value of the securities being hedged, the
correlation between the two values may not be as close in these transactions as
in transactions in which VCA-2 purchases a put option on an underlying security
it owns.

VCA-2 may also purchase call options on debt securities for hedging or
investment purposes. VCA-2 does not intend to invest more than 5% of its net
assets at any one time in the purchase of call options on debt securities.

VCA-2 may also purchase putable and callable debt securities, which are
securities coupled with a put or call option provided by the issuer.

6
<PAGE> 41

VCA-2 may enter into closing purchase or sale transactions in a manner similar
to that discussed above in connection with options on equity securities.

Options on Stock Indices. VCA-2 may purchase and sell put and call options on
stock indices traded on national securities exchanges, listed on NASDAQ or OTC
options. Options on stock indices are similar to options on stock except that,
rather than the right to take or make delivery of stock at a specified price, an
option on a stock index gives the holder the right to receive, upon exercise of
the option, an amount of cash if the closing level of the stock index upon which
the option is based is greater than in the case of a call, or less than, in the
case of a put, the strike price of the option. This amount of cash is equal to
such difference between the closing price of the index and the strike price of
the option times a specified multiple (the "multiplier"). If the option is
exercised, the writer is obligated, in return for the premium received, to make
delivery of this amount. Unlike stock options, all settlements are in cash, and
gain or loss depends on price movements in the stock market generally (or in a
particular industry or segment of the market) rather than price movements in
individual stocks.

VCA-2 will write only "covered" options on stock indices. A call option is
covered if VCA-2 follows the segregation requirements set forth in this
paragraph. When VCA-2 writes a call option on a broadly based stock market
index, it will segregate or put into escrow with its custodian or pledge to a
broker as collateral for the option, cash, U.S. government securities or other
liquid unencumbered assets, or "qualified securities" (defined below) 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. A
"qualified security" is an equity security which is listed on a national
securities exchange or listed on NASDAQ against which VCA-2 has not written a
stock call option and which has not been hedged by VCA-2 by the sale of stock
index futures. When VCA-2 writes a call option on an industry or market segment
index, it will segregate or put into escrow with its custodian or pledge to a
broker as collateral for the option, cash, U.S. government securities or other
liquid unencumbered assets, or at least five qualified securities, all of 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 VCA-2's holdings in that
industry or market segment. No individual security will represent more than 15%
of the amount so segregated, pledged or escrowed in the case of broadly based
stock market stock 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, escrowed, or pledged falls
below 100% of the current index value times the multiplier times the number of
contracts, VCA-2 will so segregate, escrow, or pledge an amount in cash, U.S.
government securities, or other liquid unencumbered assets equal in value to the
difference. In addition, when VCA-2 writes a call on an index which is
in-the-money at the time the call is written, it will segregate with its
custodian or pledge to the broker as collateral, cash or U.S. government or
other liquid unencumbered 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 VCA-2'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 call option is also covered if VCA-2 holds a call on the same index as the
call written where the strike price of the call held is equal to or less than
the strike price of the call written or greater than the strike price of the
call written if the difference is maintained by VCA-2 in cash, U.S. government
securities or other liquid unencumbered assets in a segregated account with its
custodian.

A put option is covered if: (1) VCA-2 holds in a segregated account cash, U.S.
government securities or other liquid unencumbered assets of a value equal to
the strike price times the multiplier times the number of contracts; or (2)
VCA-2 holds a put on the same index as the put written where the strike price of
the put held is equal to or greater than the strike price of the put written or
less than the strike price of the put written if the difference is maintained by
VCA-2 in cash, U.S. government securities or other liquid unencumbered assets in
a segregated account with its custodian.

VCA-2 may purchase put and call options on stock indices for hedging or
investment purposes. VCA-2 does not intend to invest more than 5% of its net
assets at any one time in the purchase of puts and calls on stock indices. VCA-2
may effect closing sale and purchase transactions involving options on stock
indices, as described above in connection with stock options.

The distinctive characteristics of options on stock indices create certain risks
that are not present with stock options. Index prices may be distorted if
trading of certain stocks included in the index is interrupted. Trading in the
index options also may be interrupted in certain circumstances, such as if
trading were halted in a substantial number of stocks included in the index.
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If this occurred, VCA-2 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 VCA-2. Price movements in VCA-2's equity security holdings probably will not
correlate precisely with movements in the level of the index and, therefore, in
writing a call on a stock index VCA-2 bears the risk that the price of the
securities held by VCA-2 may not increase as much as the index. In such event,
VCA-2 would bear a loss on the call which is not completely offset by movement
in the price of VCA-2's equity securities. It is also possible that the index
may rise when VCA-2's securities do not rise in value. If this occurred, VCA-2
would experience a loss on the call which is not offset by an increase in the
value of its securities holdings and might also experience a loss in its
securities holdings. In addition, when VCA-2 has written a call, there is also a
risk that the market may decline between the time VCA-2 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 VCA-2 is able to sell stocks in its
portfolio. As with stock options, VCA-2 will not learn that an index option has
been exercised until the day following the exercise date but, unlike a call on
stock where VCA-2 would be able to deliver the underlying securities in
settlement, VCA-2 may have to sell part of its stock portfolio in order to make
settlement in cash, and the price of such stocks might decline before they can
be sold. This timing risk makes certain strategies involving more than one
option substantially more risky with options in stock indices than with stock
options.

There are also certain special risks involved in purchasing put and call options
on stock indices. If VCA-2 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 exercise option to fall out of-the-money, VCA-2 will be required to pay the
difference between the closing index value and the strike price of the option
(times the applicable multiplier) to the assigned writer. Although VCA-2 may be
able to minimize the 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.

Options on Foreign Currencies. VCA-2 may purchase and write put and call
options on foreign currencies traded on U.S. or foreign securities exchanges or
boards of trade. Options on foreign currencies are similar to options on stock,
except that the option holder has the right to take or make delivery of a
specified amount of foreign currency, rather than stock. VCA-2's successful use
of options on foreign currencies depends upon the investment manager's ability
to predict the direction of the currency exchange markets and political
conditions, which requires different skills and techniques than predicting
changes in the securities markets generally. In addition, the correlation
between movements in the price of options and the price of currencies being
hedged is imperfect.

Options on Futures Contracts. VCA-2 may enter into certain transactions
involving options on futures contracts. VCA-2 will utilize these types of
options for the same purpose that it uses the underlying futures contract. An
option on a futures contract gives the purchaser or holder the right, but not
the obligation, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a specified
price at any time during the option exercise period. The writer of the option is
required upon exercise to assume an offsetting futures position (a short
position if the option is a call and long position if the option is a put). Upon
exercise of the option, the assumption of offsetting futures positions by the
writer and holder of the option will be accomplished by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the futures contract, at exercise, exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. As an alternative to exercise, the holder
or writer of an option may terminate a position by selling or purchasing an
option of the same series. There is no guarantee that such closing transactions
can be effected. VCA-2 intends to utilize options on futures contracts for the
same purposes that it uses the underlying futures contracts.

Options on futures contracts are subject to risks similar to those described
above with respect to options on securities, options on stock indices, and
futures contracts. These risks include the risk that the investment manager may
not correctly predict changes in the market, the risk of imperfect correlation
between the option and the securities being hedged, and the risk that there
might not be a liquid secondary market for the option. There is also the risk of
imperfect correlation between the option and the underlying futures contract. If
there were no liquid secondary market for a particular option on a futures
contract, VCA-2 might have to exercise an option it held in order to realize any
profit and might continue to be obligated under an option it had written until
the option expired or was exercised. If VCA-2 were unable to close out an option
it had written on a futures contract, it would continue to be required to
maintain initial margin and make variation margin payments with respect to the
option posi-

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tion until the option expired or was exercised against VCA-2.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

A forward foreign currency exchange contract is a contract obligating one party
to purchase and the other party to sell one currency for another currency at a
future date and price. When investing in foreign securities, VCA-2 may enter
into such contracts in anticipation of or to protect itself against fluctuations
in currency exchange rates.

VCA-2 generally will not enter into a forward contract with a term of greater
than 1 year. At the maturity of a forward contract, VCA-2 may either sell the
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.

VCA-2's successful use of forward contracts depends upon the investment
manager's ability to predict the direction of currency exchange markets and
political conditions, which requires different skills and techniques than
predicting changes in the securities markets generally.

INTEREST RATE SWAP TRANSACTIONS

VCA-2 may enter into interest rate swap transactions. Interest rate swaps, in
their most basic form, involve the exchange by one party with another party of
their respective commitments to pay or receive interest. For example, VCA-2
might exchange its right to receive certain floating rate payments in exchange
for another party's right to receive fixed rate payments. Interest rate swaps
can take a variety of other forms, such as agreements to pay the net differences
between two different indices or rates, even if the parties do not own the
underlying instruments. Despite their differences in form, the function of
interest rate swaps is generally the same to increase or decrease exposure to
long- or short-term interest rates. For example, VCA-2 may enter into a swap
transaction to preserve a return or spread on a particular investment or a
portion of its portfolio or to protect against any increase in the price of
securities the Account anticipates purchasing at a later date. VCA-2 will
maintain appropriate liquid assets in a segregated custodial account to cover
its obligations under swap agreements.

The use of swap agreements is subject to certain risks. As with options and
futures, if the investment manager's prediction of interest rate movements is
incorrect, VCA-2's total return will be less than if the Account had not used
swaps. In addition, if the counterparty's creditworthiness declines, the value
of the swap would likely decline. Moreover, there is no guarantee that VCA-2
could eliminate its exposure under an outstanding swap agreement by entering
into an offsetting swap agreement with the same or another party.

LOANS OF PORTFOLIO SECURITIES

VCA-2 may from time to time lend its portfolio securities to broker-dealers,
qualified banks and certain institutional investors provided that such loans are
made pursuant to written agreements and are continuously secured by collateral
in the form of cash, U.S. Government securities or irrevocable standby letters
of credit in an amount equal to at least the market value at all times of the
loaned securities. During the time portfolio securities are on loan, VCA-2
continues to receive the interest and dividends, or amounts equivalent thereto,
on the loaned securities while receiving a fee from the borrower or earning
interest on the investment of the cash collateral. The right to terminate the
loan is given to either party subject to appropriate notice. Upon termination of
the loan, the borrower returns to the lender securities identical to the loaned
securities. VCA-2 does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment. The primary risk in lending securities
is that the borrower may become insolvent on a day on which the loaned security
is rapidly advancing in price. In such event, if the borrower fails to return
the loaned securities, the existing collateral might be insufficient to purchase
back the full amount of stock loaned, and the borrower would be unable to
furnish additional collateral. The borrower would be liable for any shortage but
VCA-2 would be an unsecured creditor as to such shortage and might not be able
to recover all or any of it. However, this risk may be minimized by a careful
selection of borrowers and securities to be lent.

VCA-2 will not lend its portfolio securities to entities affiliated with
Prudential, including Prudential Securities Incorporated. This will not affect
VCA-2's ability to maximize its securities lending opportunities.

PORTFOLIO TURNOVER RATE

VCA-2 has no fixed policy with respect to portfolio turnover, which is an index
determined by dividing the lesser of the purchases or sales of portfolio
securities during the year by the monthly average of the aggregate value of the
portfolio securities owned during the year. VCA-2 seeks long term growth of
capital rather than short-term trading profits. However, during any period when
changing economic or market conditions are anticipated, successful management
requires an aggressive response to such changes which may result in portfolio
shifts that may significantly increase

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<PAGE> 44

the rate of portfolio turnover. The rate of portfolio activity will normally
affect the brokerage expenses of VCA-2. The annual portfolio turnover rate was
47% in 1997 and 53% in 1996.

PORTFOLIO BROKERAGE AND RELATED PRACTICES

In connection with decisions to buy and sell securities for VCA-2, brokers and
dealers to effect the transactions must be selected and brokerage commissions,
if any, negotiated. Transactions on a stock exchange in equity securities will
be executed primarily through brokers that will receive a commission paid by
VCA-2. Fixed income securities, on the other hand, as well as equity securities
traded in the over-the-counter market, will not normally incur any brokerage
commissions. These securities are generally traded on a "net" basis with dealers
acting as principals 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 that includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount. Certain of these securities may also be
purchased directly from an issuer, in which case neither commissions nor
discounts are paid.

In placing orders of securities transactions, primary consideration is given to
obtaining the most favorable price and efficient execution. An attempt is made
to effect each transaction at a price and commission, if any, that provides the
most favorable total cost or proceeds reasonably attainable in the
circumstances. However, a higher commission than would otherwise be necessary
for a particular transaction may be paid when to do so would appear to further
the goal of obtaining the best available execution.

In connection with any securities transaction that involves a commission
payment, the commission is negotiated with the broker on the basis of the
quality and quantity of execution services that the broker provides, in light of
generally prevailing commission rates. Periodically, Prudential and PIC review
the allocation among brokers of orders for equity securities and the commissions
that were paid.

When selecting a broker or dealer in connection with a transaction for VCA-2,
consideration is given to whether the broker or dealer has furnished PIC with
certain services, provided this does not jeopardize the objective of obtaining
the best price and execution. These services, which include statistical and
economic data and research reports on particular companies and industries, are
services that brokerage houses customarily provide to institutional investors.
PIC uses these services in connection with all of its investment activities, and
some of the data or services obtained in connection with the execution of
transactions for VCA-2 may be used in connection with the execution of
transactions for other investment accounts. Conversely, brokers and dealers
furnishing such services may be selected for the execution of transactions of
such other accounts, while the data or service may be used in connection with
investment management for VCA-2. Although Prudential's present policy is not to
permit higher commissions to be paid for transactions for VCA-2 in order to
secure research and statistical services from brokers or dealers, Prudential
might in the future authorize the payment of higher commissions, but only with
the prior concurrence of the VCA-2 Committee, if it is determined that the
higher commissions are necessary in order to secure desired research and are
reasonable in relation to all of the services that the broker or dealer
provides.

When investment opportunities arise that may be appropriate for more than one
entity for which Prudential serves as investment manager or adviser, one entity
will not be favored over another and allocations of investments among them will
be made in an impartial manner believed to be equitable to each entity involved.
The allocations will be based on each entity's investment objectives and its
current cash and investment positions. Because the various entities for which
Prudential acts as investment manager or adviser have different investment
objectives and positions, from time to time a particular security may be
purchased for one or more such entities while, at the same time, such security
may be sold for another.

An affiliated broker may be employed to execute brokerage transactions on behalf
of VCA-2 as long as the commissions are reasonable and fair compared to the
commissions received by other brokers in connection with comparable transactions
involving similar securities being purchased or sold on a securities exchange
during a comparable period of time. During 1997, 1996, and 1995, $17,671,
$35,806, and $0, respectively, was paid to Prudential Securities Incorporated,
an affiliated broker. For 1997, the commissions paid to this affiliated broker
constitutes 1.60% of the total commissions paid by VCA-2 for that year, and the
transactions through this affiliated broker accounted for 1.21% of the aggregate
dollar amount of transactions for VCA-2 involving the payment of commissions.
VCA-2 may not engage in any transactions in which Prudential or its affiliates,
including Prudential Securities Incorporated, acts as principal, including
over-the-counter purchases and negotiated trades in which such a party acts as a
principal.

Prudential or PIC may enter into business transactions with brokers or dealers
for purposes other than the execution of portfolio securities transactions for
accounts Prudential manages. These other transactions will not affect the
selection of brokers or dealers in connection with portfolio transactions for
VCA-2.
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<PAGE> 45

During the calendar year 1997, $1,102,637 was paid to various brokers in
connection with securities transactions for VCA-2. Of this amount, approximately
62.1% was allocated to brokers who provided research and statistical services to
Prudential. The equivalent figures for 1996 were $718,231 and 77.6%, and for
1995 were $655,211 and 76.6%.

CUSTODY OF SECURITIES

Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, is custodian of VCA-2's assets and maintains certain books and records in
connection therewith.

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<PAGE> 46

THE VCA-2 COMMITTEE

VCA-2 is managed by The Prudential Variable Contract Account-2 Committee ("VCA-2
Committee"). The members of the Committee are elected by the persons having
voting rights in respect of the VCA-2 Account. The affairs of the Account are
conducted in accordance with the Rules and Regulations of the Account. The
members of the Account's Committee, the Account's Secretary and Assistant
Secretaries and the principal occupation of each during the past five years are
shown below.

VCA-2 COMMITTEE

MENDEL A. MELZER, CFA*, 37, Chairman of the Board--Chief Investment Officer of
Prudential Investments since 1996; 1995 to 1996: Chief Financial Officer of the
Money Management Group of Prudential; 1993 to 1995: Senior Vice President and
Chief Financial Officer of Prudential Preferred Financial Services; Prior to
1993: Managing Director, The Prudential Investment Corporation. Address: 751
Broad Street, Newark, New Jersey 07102.

JONATHAN M. GREENE*, 54, President and Member of the Committee--President of
Investment Management (since 3/96), Prudential Investments. Vice President and
Portfolio Manager, T. Rowe Price Associates, Inc. from 6/74 to 3/96. Address:
751 Broad Street, Newark, New Jersey 07102.

SAUL K. FENSTER, 65, Director--President of New Jersey Institute of Technology.
Address: 323 Martin Luther King Boulevard, Newark, New Jersey 07102.

W. SCOTT McDONALD, JR., 61, Director--Vice President, Kaludis Consulting Group
since 1997; 1995 to 1996: Principal, Scott McDonald & Associates; Prior to 1995:
Executive Vice President of Fairleigh Dickinson University. Address: 9 Zamrok
Way, Morristown, New Jersey 07960.

JOSEPH WEBER, 74, Director--Vice President, Interclass (international corporate
learning). Address: 37 Beachmont Terrace, North Caldwell, New Jersey 07006.

* These Members of the Committee are interested persons of Prudential, its
affiliates or VCA-2, as defined in the Investment Company Act of 1940 (the "1940
Act"). Certain actions of the Committee, including the annual continuance of the
Agreement for Investment Management Services between VCA-2 and Prudential, must
be approved by a majority of the Members of the Committee who are not interested
persons of Prudential, its affiliates or VCA-2. Messrs. Melzer and Greene,
Members of the Committee, are interested persons of Prudential, as that term is
defined in the 1940 Act, because they are officers of Prudential, the investment
adviser of VCA-2. Messrs. Fenster, McDonald, and Weber are not interested
persons of Prudential, its affiliates, or VCA-2. However, Mr. Fenster is
President of the New Jersey Institute of Technology. Prudential has issued a
group annuity contract to the Institute and provides group life and group health
insurance to its employees.

OFFICERS WHO ARE NOT DIRECTORS

CAREN A. CUNNINGHAM, Secretary--Assistant General Counsel of Prudential Mutual
Fund Management, Inc. since 1997; 1994 to 1997: Vice President and Associate
General Counsel of Smith Barney Mutual Fund Management Inc.; 1992 to 1994:
Assistant Vice President and Counsel, The Boston Company. Address: Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102.

GRACE C. TORRES, Treasurer and Principal Financial and Accounting Officer--First
Vice President of PIFM since 1996; 1994 to 1996: First Vice President of
Prudential Securities Inc.; Prior to 1994: Vice President of Bankers Trust
Corporation. Address: Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102.

STEPHEN M. UNGERMAN, Assistant Treasurer--Vice President and Tax Director of
Prudential Investments since 1996; 1993 to 1996: First Vice President of
Prudential Mutual Fund Management, Inc. Address: Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102.

REMUNERATION OF MEMBERS OF THE COMMITTEE AND CERTAIN AFFILIATED PERSONS

No member of the VCA-2 Committee nor any other person (other than Prudential)
receives remuneration from the Account. Prudential pays certain of the expenses
relating to the operation of, including all compensation paid to members of the
Committee, its Chairman, its Secretary and Assistant Secretaries. No member of
the VCA-2 Committee, its Chairman, its Secretary or Assistant Secretaries who is
also an officer, Director or employee of Prudential or an affiliate of
Prudential is entitled to any fee for his services as a member or officer of the
Committee.

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<PAGE> 47

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

DIRECTORS

FRANKLIN E. AGNEW, Director since 1994 (current term expires April, 2000).
Member, Committee on Dividends; Member, Finance Committee; Member Corporate
Governance Committee. Business consultant since 1987. Senior Vice President,
H.J. Heinz from 1971 to 1986. Mr. Agnew is also a director of Bausch & Lomb,
Inc., John Wiley & Sons, Inc. and Erie Plastics Corporation. Age 63. Address:
600 Grant Street, Suite 660, Pittsburgh, PA 15219.

FREDERICK K. BECKER, Director since 1994 (current term expires April, 1999).
Member, Auditing Committee; Member, Committee on Business Ethics; Member,
Corporate Governance Committee. President, Wilentz Goldman and Spitzer, P.A.
(law firm) since 1989, with firm since 1960. Age 62. Address: 90 Woodbridge
Center Drive, Woodbridge, NJ 07095.

JAMES G. CULLEN, Director since 1994 (current term expires April, 2001). Member,
Compensation Committee; Member, Committee on Business Ethics. President & Chief
Executive Officer, Telecom Group, Bell Atlantic Corporation, since 1997. Vice
Chairman, Bell Atlantic Corporation from 1995 to 1997. President, Bell Atlantic
Corporation from 1993 to 1995. Mr. Cullen is also a director of Bell Atlantic
Corporation and Johnson & Johnson. Age 55. Address: 1310 North Court House Road,
11th Floor, Alexandria, VA 22201.

CAROLYNE K. DAVIS, Director since 1989 (current term expires April, 2001).
Member, Finance Committee; Member Committee on Business Ethics; Member,
Compensation Committee. Independent Health Care Advisor. National and
International Health Care Advisor, Ernst & Young, LLP from 1985 to 1997. Dr.
Davis is also a director of Beckman Instruments, Inc., Merck & Co., Inc.,
Science Applications International Corporation, Minimed Incorporated, and
Beverley Enterprises. Age 65. Address: 751 Broad Street, 23rd Floor, Newark, NJ
07102.

ROGER A. ENRICO, Director since 1994 (current term expires April, 2002). Member,
Committees on Nominations and Corporate Governance; Member, Compensation
Committee. Chairman and Chief Executive Officer, PepsiCo, Inc. since 1996.
Originally with PepsiCo, Inc. since 1971. Mr. Enrico is also a director of A.M.
Belo Corporation and Dayton Hudson Corporation. Age 53. Address: 700 Anderson
Hill Road, Purchase, NY 10577.

ALLAN D. GILMOUR, Director since 1995 (current term expires April, 1999).
Member, Finance Committee; Member, Committee on Dividends. Retired since 1995.
Vice Chairman, Ford Motor Company, from 1993 to 1995. Mr. Gilmour originally
joined Ford in 1960. Mr. Gilmour is also a director of Whirlpool Corporation,
USWest, Inc., The Dow Chemical Company and DTE Energy Company. Age 63. Address:
751 Broad Street, 23rd Floor, Newark, NJ 07102.

WILLIAM H. GRAY, III, Director since 1991 (current term expires April, 2000).
Member, Executive Committee; Member, Finance Committee; Chairman, Committees on
Nominations and Corporate Governance. President and Chief Executive Officer, The
College Fund/UNCF since 1991. Mr. Gray served in Congress from 1979 to 1991. Mr.
Gray is also a director of Chase Manhattan Corporation, The Chase Manhattan
Bank, Lotus Development Corporation, Municipal Bond Investors Assurance
Corporation, Rockwell International Corporation, Union-Pacific Corporation,
Warner-Lambert Company, Westinghouse Electric Corporation, and Electronic Data
Systems. Age 56. Address: 8260 Willow Oaks Corp. Drive, Fairfax, VA 22031-4511.

JON F. HANSON, Director since 1991 (current term expires April, 2003). Member,
Finance Committee; Member, Committee on Dividends. Chairman, Hampshire
Management Company since 1976. Mr. Hanson is also a director of United Water
Resources, Orange & Rockland Utilities, Inc., and Consolidated Delivery and
Logistics. Age 61. Address: 235 Moore Street, Suite 200, Hackensack, NJ 07601.

GLEN H. HINER, JR., Director since 1997 (current term expires April, 2001).
Member, Compensation Committee. Chairman and Chief Executive Officer, Owens
Corning since 1991. Senior Vice President and Group Executive, Plastics Group,
General Electric Company from 1983 to 1991. Mr. Hiner is also a director of Dana
Corporation. Age 64. Address: One Owens Corning Parkway, Toledo, OH 43659.

CONSTANCE J. HORNER, Director since 1994 (current term expires April, 2002).
Member, Auditing Committee; Member, Committees on Nominations and Corporate
Governance. Guest Scholar, The Brookings Institution since 1993. Ms. Horner is
also a director of Foster Wheeler Corporation, Ingersoll-Rand Corporation, and
Pfizer, Inc. Age 55. Address: 1775 Massachusetts Ave., N.W. Washington, D.C.
20036-2188.

GAYNOR N. KELLEY, Director since 1997 (current term expires April, 2001).
Member, Auditing Committee. Retired since 1996. Former Chairman and Chief
Executive Officer, The Perkins Elmer Corporation from 1990 to

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<PAGE> 48

1996. Mr. Kelley is also a director of Hercules Incorporated, Arrow Electronics,
Inc., and Alliant Techsystems. Age 66. Address: 751 Broad Street, 23rd Floor,
Newark, NJ 07102-3777.

BURTON G. MALKIEL, Director since 1978 (current term expires April, 2002).
Chairman, Finance Committee; Member, Executive Committee; Member, Committee on
Dividends. Professor of Economics, Princeton University, since 1988. Dr. Malkiel
is also a director of Banco Bilbao Vizcaya, Baker Fentress and Company, The
Jeffrey Company, The Southern New England Telecommunications Company, and
Vanguard Group, Inc. Age 65. Address: Princeton University, 110 Fisher Hall,
Prospect Avenue, Princeton, NJ 08544-1021.

ARTHUR F. RYAN, Chairman of the Board, President and Chief Executive Officer of
Prudential since 1994. President and Chief Operating Officer, Chase Manhattan
Corp. from 1990 to 1994, with Chase since 1972. Age 55. Address: 751 Broad
Street, Newark, NJ 07102.

IDA F.S. SCHMERTZ , Director since 1997 (current term expires April, 2004).
Member, Finance Committee. Principal, Investment Strategies International since
1994. Age 63. Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102.

CHARLES R. SITTER, Director since 1995 (current term expires April, 1999).
Member, Finance Committee; Member, Committee on Dividends. Retired since 1996.
President, Exxon Corporation from 1993 to 1996. Mr. Sitter began his career with
Exxon in 1957. Age 67. Address: 5959 Las Colinas Boulevard, Irving, TX
75039-2298.

DONALD L. STAHELI, Director since 1995 (current term expires April, 1999).
Member, Compensation Committee; Member, Auditing Committee. Retired since 1997.
Chairman and Chief Executive Officer, Continental Grain Company from 1994 to
1997. President and Chief Executive Officer, Continental Grain Company from 1988
to 1994. Mr. Staheli is also director of Bankers Trust Company and Bankers Trust
New York Corporation. Age 66. Address: 39 Locust Street, Suite 204, New Canaan,
CT 06840.

RICHARD M. THOMSON, Director since 1976 (current term expires April, 2000).
Chairman, Executive Committee; Chairman, Compensation Committee; Member,
Committee on Nominations and Corporate Governance. Chairman of the Board, The
Toronto-Dominion Bank since 1997. Chairman and Chief Executive Officer from 1978
to 1997. Mr. Thomson is also a director of CGC, Inc., INCO, Limited, S.C.
Johnson &Son, Inc., The Thomson Corporation, and Canadian Occidental Petroleum,
Ltd. Age 64. Address: P.O. Box 1, Toronto-Dominion Centre, Toronto, Ontario, M5K
1A2, Canada.

JAMES A. UNRUH, Director since 1996 (current term expires April, 2000). Member,
Compensation Committee. Retired since 1997. Chairman and Chief Executive
Officer, Unisys Corporation, from 1990 to 1997. Mr. Unruh is also a director of
Ameritech Corporation. Age 55. Address: Two Bala Plaza, Suite 300, Bala Cynwyd,
PA 19004.

P. ROY VAGELOS, M.D., Director since 1989 (current term expires April, 2001).
Chairman, Auditing Committee; Member, Executive Committee; Member, Committees on
Nominations and Corporate Governance. Chairman, Regeneron Pharmaceuticals since
1995. Chairman and Chief Executive Officer, Merck and Co., Inc. from 1986 to
1994. Dr. Vagelos is also a director of The Estee Lauder Companies, Inc. and
PepsiCo., Inc. Age 68. Address: One Crossroads Drive, Building A, 3rd Floor,
Bedminster, NJ 07921.

STANLEY C. VAN NESS, Director since 1990 (current term expires April, 2002).
Chairman, Committee on Business Ethics; Member, Executive Committee; Member,
Auditing Committee. Counselor at Law, Picco Herbert Kennedy (law firm) from
1990. Mr. Van Ness is also a director of Jersey Central Power and Light Company.
Age 63. Address: 22 Chambers Street, Princeton, NJ 08542.

PAUL A. VOLCKER, Director since 1988 (current term expires April, 2000).
Chairman, Committee on Dividends; Member, Executive Committee; Member, Committee
on Nominations and Corporate Governance. Consultant since 1996. Chairman, James
D. Wolfensohn, Inc. from 1988 to 1996. Chief Executive Officer, James D.
Wolfensohn, Inc. from 1995 to 1996. Mr. Volcker is also a public member of the
Board of Governors of the American Stock Exchange, a member of the Board of
Overseers of TIAA-CREF, and a director of Nestle, S.A., UAL Corporation, and
Bankers Trust New York Corporation. Age 70. Address: 610 Fifth Avenue, Suite
420, New York, NY 10020.

JOSEPH H. WILLIAMS, Director since 1994 (current term expires April, 2002).
Member, Committee on Dividends; Member, Auditing Committee. Director, The
Williams Companies since 1971. Chairman and Chief Executive Officer, The
Williams Companies from 1979 to 1993. Mr. Williams is also a director of Flint
Industries, The Orvis Company, and MTC Investors, LLC. Age 64. Address: One
Williams Center, Tulsa, OK 74172.

14
<PAGE> 49

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

PRINCIPAL OFFICERS

ARTHUR F. RYAN, Chairman, President and Chief Executive Officer since 1994;
prior to 1994, President and Chief Operating Officer, Chase Manhattan
Corporation, New York, NY. Age 55.

E. MICHAEL CAULFIELD, Chief Executive Officer, Prudential Investments since
1996; Chief Executive Officer, Money Management Group from 1995 to 1996; prior
to 1995, President, Prudential Preferred Financial Services. Age 51.

MICHELE S. DARLING, Executive Vice President, Human Resources since 1997; prior
to 1997, Executive Vice President, Canadian Imperial Bank of Commerce, Toronto,
Canada. Age 44.

ROBERT C. GOLDEN, Executive Vice President, Corporate Operations and Systems
since 1997; prior to 1997, Executive Vice President, Prudential Securities, New
York, NY. Age 51.

MARK B. GRIER, Executive Vice President, Financial Management since 1997; Chief
Financial Officer from 1995 to 1997; prior to 1995, Executive Vice President,
Chase Manhattan Corporation, New York, NY. Age 44.

RODGER A. LAWSON, Executive Vice President, Marketing and Planning since 1996;
President and CEO, Van Eck Global, New York, NY, from 1994 to 1996; prior to
1994, President and CEO, Global Private Banking, Bankers Trust Company, New
York, NY. Age 50.

JOHN V. SCICUTELLA, Chief Executive Officer, Individual Insurance Group since
1997; Executive Vice President Operations and Systems from 1995 to 1997; prior
to 1995, Executive Vice President, Chase Manhattan Corporation. Age 48.

JOHN R. STRANGFELD, Executive Vice President, Private Asset Management Group
(PAMG) since 1998; President, PAMG, from 1996 to 1998; prior to 1996, Senior
Managing Director. Age 44.

R. BROCK ARMSTRONG, Senior Vice President, Individual Insurance Development
since 1997; prior to 1997, Executive Vice President, London Life Insurance
Company, London, Canada. Age 50.

JAMES J. AVERY, JR., Senior Vice President and Chief Actuary since 1997;
President Prudential Select from 1995 to 1997; prior to 1995, Chief Financial
Officer, Prudential Select. Age 46.

MARTIN A. BERKOWITZ, Senior Vice President and Comptroller since 1995; prior to
1995, Senior Vice President and CFO, Prudential Investment Corporation. Age 48.

WILLIAM M. BETHKE, Chief Investment Officer since 1997; prior to 1997, Senior
Vice President. Age 50.

RICHARD J. CARBONE, Senior Vice President and Chief Financial Officer since
1997. Controller, Salomon Brothers, New York, NY, from 1995 to 1997; prior to
1995, Controller, Bankers Trust, New York, NY. Age 50.

LEO J. CORBETT, Senior Vice President, Individual Insurance Marketing since
1997; prior to 1997, Managing Director, Lehman Brothers, New York, NY. Age 49.

MARK R. FETTING, President, Prudential Retirement Services since 1996; prior to
1996, President, Prudential Defined Contribution Services. Age 43.

WILLIAM D. FRIEL, Senior Vice President and Chief Information Officer since
1993. Age 59.

JONATHAN M. GREENE, President, Investment Management since 1996; prior to 1996,
Vice President, T. Rowe Price, Baltimore, MD. Age 54.

JEAN D. HAMILTON, President, Diversified Group since 1995; prior to 1995,
President, Prudential Capital Group. Age 51.

RONALD P. JOELSON, Senior Vice President, Guaranteed Products since 1997;
President, Prudential Investments Guaranteed Products from 1996 to 1998; prior
to 1996, Managing Director, Enterprise Planning Unit. Age 40.

IRA J. KLEINMAN, Executive Vice President, International Insurance Group, since
1997; prior to 1997, Senior Vice President. Age 51.

NEIL A. McGUINNESS, Senior Vice President, Marketing, Prudential Investments,
since 1996; prior to 1996, Managing Director, Putnam Investments, Boston, MA.
Age 51.

15
<PAGE> 50

PRISCILLA A. MYERS, Senior Vice President, Audit, Compliance and Investigation
since 1995. Vice President and Auditor from 1989 to 1995. Age 48.

RICHARD O. PAINTER, President, Prudential Insurance & Financial Services since
1995; prior to 1995, Senior Vice President, New York Life, New York, NY. Age 50.

I. EDWARD PRICE, Senior Vice President and Actuary since 1995; prior to 1995,
Chief Executive Officer, Prudential International Insurance. Age 55.

KIYOFUMI SAKAGUCHI, President, International Insurance Group since 1995; prior
to 1995, Chairman and CEO, The Prudential Life Insurance Co., Ltd., Japan. Age
55.

BRIAN M. STORMS, President, Mutual Funds and Annuities, Prudential Investments
since 1996; prior to 1996, Managing Director, Fidelity Investments, Boston. Age
43.

ROBERT J. SULLIVAN, Senior Vice President, Sales, Prudential Investments since
1997; prior to 1997, Managing Director, Fidelity Investments, Boston. Age 59.

SUSAN J. BLOUNT, Vice President and Secretary since 1995; prior to 1995,
Assistant General Counsel. Age 40.

C. EDWARD CHAPLIN, Vice President and Treasurer since 1995; prior to 1995,
Managing Director and Assistant Treasurer. Age 41.

SALE OF GROUP VARIABLE ANNUITY CONTRACTS

Prudential offers the Contracts on a continuous basis through Corporate Office,
regional home office and group sales office employees in those states in which
the Contracts may be lawfully sold. It may also offer the Contracts through
licensed insurance brokers and agents, or through appropriately registered
direct or indirect subsidiary(ies) of Prudential, provided clearances to do so
are secured in any jurisdiction where such clearances may be necessary or
desirable. During 1997, 1996 and 1995, Prudential received $9,628, $162,008 and
$180,356, respectively, as sales charges in connection with the sale of these
contracts. Prudential credited $151,753, $108,192 and $100,063, respectively to
other broker-dealers in connection with such sales.

EXPERTS

The condensed financial information included in the Prospectus and the financial
statements in this Statement of Additional Information for the two year period
ended December 31, 1997 have been audited by Price Waterhouse LLP, independent
accountants, as stated in their report appearing herein. Such financial
statements and condensed financial information have been included in reliance
upon the reports of Price Waterhouse LLP upon their authority as experts in
accounting and auditing. The Committee approves the accountant's employment
annually. Price Waterhouse LLP's business address is 1177 Avenue of the
Americas, New York, NY 10036.

Financial statements for VCA-2 and Prudential, as of December 31, 1997, are
included in this Statement of Additional Information, beginning at page 17.

16
<PAGE> 51

FINANCIAL HIGHLIGHTS FOR VCA-2

INCOME AND CAPITAL CHANGES PER ACCUMULATION UNIT*
(FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIOD)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------

<CAPTION>
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME............................... $ .2633 $ .2056 $ .2000 $ .1896 $ .2823
- ------------------------------------------------------------------------------------------------------
EXPENSES
For investment management fee................. .0284 .0215 .0170 .0151 .0138
For assuming mortality and expense risks...... .0850 .0646 .0511 .0453 .0412
- ------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME........................... .1499 .1195 .1319 .1292 .2273
- ------------------------------------------------------------------------------------------------------
CAPITAL CHANGES
Net realized gain on investments.............. 4.7245 2.3368 1.5228 1.0028 1.1147
Net unrealized appreciation (depreciation) of
investments................................ 1.3843 1.7641 1.7558 (1.2955) .9803
- ------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN ACCUMULATION UNIT
VALUE......................................... 6.2587 4.2204 3.4105 (.1635) 2.3223
- ------------------------------------------------------------------------------------------------------
ACCUMULATION UNIT VALUE
Beginning of year............................. 19.6241 15.4037 11.9932 12.1567 9.8344
- ------------------------------------------------------------------------------------------------------
End of year................................... $25.8828 $19.6241 $15.4037 $11.9932 $12.1567
- ------------------------------------------------------------------------------------------------------
RATIO OF EXPENSES TO AVERAGE NET ASSETS**....... .50% .50% .50% .50% .50%
- ------------------------------------------------------------------------------------------------------
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET
ASSETS**...................................... .70% .69% .96% 1.07% 2.06%
- ------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE......................... 47% 53% 42% 37% 47%
- ------------------------------------------------------------------------------------------------------
AVERAGE COMMISSION RATE PER SHARE............... $ .0548 $ .0543 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------
NUMBER OF ACCUMULATION UNITS OUTSTANDING
for Participants at end of year (000
omitted)...................................... 28,643 30,548 31,600 32,624 32,968
- ------------------------------------------------------------------------------------------------------
</TABLE>

* Calculated by accumulating the actual per unit amounts daily.

** These calculations exclude Prudential's equity in VCA-2.

The above table does not reflect the annual administration charge, which does
not affect the Accumulation Unit Value. This charge is made by reducing
Participants' Accumulation Accounts by a number of Accumulation Units equal in
value to the charge.

SEE NOTES TO FINANCIAL STATEMENTS

17
<PAGE> 52

FINANCIAL STATEMENTS OF VCA-2

STATEMENT OF NET ASSETS AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
COMMON STOCK VALUE
INVESTMENTS SHARES [NOTE 2A]
<S> <C> <C>
- --------------------------------------------------------

<CAPTION>
<S> <C> <C>
AEROSPACE/DEFENSE--2.8%
Doncasters PLC (ADR)
(United Kingdom)+....... 185,700 $ 3,922,912
Gen Corp. ................ 375,000 9,375,000
Litton Industries,
Inc.+................... 116,600 6,704,500
Primex Technologies....... 61,100 2,062,125
------------
22,064,537
- --------------------------------------------------------
AUTOS & TRUCKS--2.3%
Borg-Warner Automotive,
Inc. ................... 192,700 10,020,400
Lear Corp.+............... 90,300 4,289,250
Tower Automotive, Inc.+... 94,400 3,970,700
------------
18,280,350
- --------------------------------------------------------
CHEMICALS--7.5%
Agrium, Inc. ............. 618,300 7,535,531
Boc Group PLC (ADR)
(United Kingdom)........ 127,600 4,202,825
Chemfirst, Inc.+.......... 214,400 6,056,800
Cytec Industries, Inc.+... 118,700 5,571,481
Dow Chemical Co........... 56,900 5,775,350
Imperial Chemical
Industries (ADR) (United
Kingdom)................ 62,900 4,084,569
Mississippi Chemical
Corp. .................. 420,714 7,678,030
Olin Corp. ............... 132,200 6,196,875
Solutia, Inc. ............ 182,700 4,875,806
Spartech Corp. ........... 189,800 2,870,725
Union Carbide............. 97,600 4,190,700
------------
59,038,692
- --------------------------------------------------------
COMPUTER RELATED--0.3%
Digital Equipment
Corp.+.................. 62,600 2,316,200
- --------------------------------------------------------
CONSUMER SERVICES--3.0%
Archer-Daniels-Midland
Co. .................... 112,135 2,431,928
Hilton Hotels Corp.+...... 125,400 3,730,650
Ogden Corp. .............. 163,900 4,619,931
RFS Hotel Investors,
Inc.+................... 204,200 4,071,237
360 Communications Co.+... 192,800 3,892,150
Whitman Corp. ............ 169,000 4,404,562
------------
23,150,458
- --------------------------------------------------------
CONTAINERS AND PACKAGING--2.8%
ACX Technologies, Inc.+... 135,100 3,301,506
Alltrista Corp.+.......... 247,600 7,025,650
AptarGroup, Inc. ......... 91,000 5,050,500
U.S. Can Corp.+........... 380,600 6,422,625
------------
21,800,281
- --------------------------------------------------------
ELECTRICAL EQUIPMENT--0.7%
Belden, Inc. ............. 148,900 5,248,725
- --------------------------------------------------------
ELECTRONICS--3.6%
Anixter International,
Inc.+................... 193,000 3,184,500
Dallas Semiconductor
Corp. .................. 182,400 7,432,800
Marshall Industries+...... 224,300 6,729,000
</TABLE>

<TABLE>
<CAPTION>
- --------------------------------------------------------
COMMON STOCK VALUE
INVESTMENTS SHARES [NOTE 2A]
<S> <C> <C>
ELECTRONICS--CONTINUED
Methode Electronics, Inc.
(Class 'A' Stock)....... 164,100 $ 2,666,625
Pioneer Standard
Electronics, Inc. ...... 528,800 8,064,200
------------
28,077,125
- --------------------------------------------------------
ENGINEERING & CONSTRUCTION--4.2%
American Standard
Companies, Inc.+........ 113,500 4,348,469
Apogee Enterprises,
Inc.+................... 51,500 611,562
Cameron Ashley Building
Products+............... 172,600 2,891,050
Giant Cement Holding,
Inc.+................... 400,000 9,250,000
Gradall Industries,
Inc.+................... 373,500 6,162,750
Texas Industries, Inc. ... 215,500 9,697,500
------------
32,961,331
- --------------------------------------------------------
EXPLORATION & PRODUCTION--4.6%
Cabot Oil & Gas Corp. .... 216,600 4,210,162
Comstock Resources,
Inc.+................... 233,000 2,781,437
Occidental Petroleum
Corp. .................. 231,400 6,782,912
Oryx Energy Co.+.......... 335,600 8,557,800
Pioneer Natural Resources
Co. .................... 271,800 7,865,212
Seagull Energy Corp.+..... 61,200 1,262,250
Vintage Petroleum,
Inc. ................... 249,400 4,738,600
------------
36,198,373
- --------------------------------------------------------
FINANCIAL SERVICES--2.5%
Financial Security
Assurance Holdings
Corp. .................. 195,500 9,432,875
Morgan Stanley Dean Witter
Discover & Co. ......... 12,100 715,412
Travelers Group, Inc. .... 176,599 9,514,271
------------
19,662,558
- --------------------------------------------------------
HEALTHCARE--2.1%
Columbia HCA Healthcare... 146,500 4,340,062
Mallinckrodt, Inc. ....... 106,300 4,039,400
Tenet Healthcare Corp.+... 255,700 8,470,063
------------
16,849,525
- --------------------------------------------------------
HOUSING RELATED--2.1%
Furniture Brands
International, Inc.+.... 331,000 6,785,500
Owens Corning Fiberglass
Corp. .................. 124,300 4,241,738
Triangle Pacific Corp.+... 152,800 5,176,100
------------
16,203,338
- --------------------------------------------------------
INSURANCE--9.2%
Allied Group, Inc. ....... 233,925 6,696,103
Lincoln National Corp. ... 136,200 10,640,625
Loews Corp. .............. 35,400 3,756,825
MMI Companies, Inc. ...... 270,112 6,786,554
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

18
<PAGE> 53

FINANCIAL STATEMENTS OF VCA-2

STATEMENT OF NET ASSETS AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
COMMON STOCK VALUE
INVESTMENTS SHARES [NOTE 2A]
<S> <C> <C>
- --------------------------------------------------------

<CAPTION>
<S> <C> <C>
INSURANCE--CONTINUED
NAC Re Corp. ............. 258,900 $ 12,637,556
Reinsurance Group of
America................. 172,950 7,361,184
Safeco Corp.+............. 86,500 4,216,875
Trenwick Group, Inc. ..... 250,000 9,406,250
W.R. Berkley Corp. ....... 247,500 10,859,063
------------
72,361,035
- --------------------------------------------------------
LEISURE--2.4%
Darden Restaurants,
Inc. ................... 638,200 7,977,500
Servico, Inc.+............ 320,600 5,410,125
Sonic Corp.+.............. 185,000 5,203,125
------------
18,590,750
- --------------------------------------------------------
MACHINERY--5.8%
Allied Products Corp. .... 341,250 8,190,000
Applied Power Inc. (Class
'A' Stock).............. 110,400 7,617,600
Columbus McKinnon Corp. .. 224,900 5,453,825
Denison International,
PLC - (ADR) (United
Kingdom)+............... 136,200 2,349,450
Hardinge, Inc. ........... 198,800 7,405,300
Harnischfeger Industries,
Inc. ................... 270,200 9,541,438
Ingersoll-Rand Co.+....... 113,500 4,596,750
------------
45,154,363
- --------------------------------------------------------
MEDIA--9.2%
Century Communications
Corp. (Class 'A'
Stock)+................. 950,000 9,262,500
Comcast Corp. (Class 'A'
Stock).................. 182,600 5,820,375
Comcast Corp. (Class 'A'
Stock) Special.......... 318,626 10,056,633
Cox Communication, Inc.
(Class 'A' Stock)+...... 145,587 5,832,579
Harcourt General, Inc. ... 116,000 6,351,000
Tele-Communications, Inc.
Liberty Media Group
(Series A)+............. 190,300 6,898,375
Time Warner, Inc. ........ 117,400 7,278,800
U.S. West Media Group+.... 497,300 14,359,538
Viacom, Inc. (Class B
Stock)+................. 150,000 6,215,625
------------
72,075,425
- --------------------------------------------------------
METALS--3.9%
The Carbide/Graphite
Group, Inc.+............ 407,400 13,749,750
Cleveland Cliffs, Inc.+... 102,000 4,672,875
Reliance Steel and
Aluminum................ 210,000 6,247,500
UCAR International,
Inc.+................... 153,600 6,134,400
------------
30,804,525
- --------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- --------------------------------------------------------
COMMON STOCK VALUE
INVESTMENTS SHARES [NOTE 2A]
<S> <C> <C>
MISCELLANEOUS-INDUSTRIAL--11.5%
Clarcor, Inc. ............ 185,300 $ 5,489,513
Coltec Industries,
Inc.+................... 294,200 6,821,763
Crane Co. ................ 149,800 6,497,575
Flowserve Corp. .......... 232,971 6,508,627
Global Industrial
Technologies, Inc.+..... 477,000 8,079,188
Harsco Corp. ............. 101,300 4,368,563
Idex Corp. ............... 102,600 3,578,175
Mark IV Industries,
Inc. ................... 305,087 6,673,778
Pentair, Inc. ............ 125,400 4,506,563
PPG Industries, Inc. ..... 117,800 6,729,325
Regal Beloit Corp. ....... 181,100 5,353,769
United Dominion
Industries, Ltd. ....... 398,100 10,076,906
Varian Associates,
Inc. ................... 83,800 4,237,138
Wolverine Tube, Inc.+..... 373,800 11,587,800
------------
90,508,683
- --------------------------------------------------------
PAPER PRODUCTS--1.3%
Boise Cascade Corp. ...... 106,400 3,218,600
Georgia Pacific Corp.
(Georgia - PAC Group)... 6,700 407,025
Georgia Pacific Corp.
(Timber - Group)+....... 6,700 152,006
International Paper
Co. .................... 90,400 3,898,500
Louisiana Pacific
Corp. .................. 151,900 2,886,100
------------
10,562,231
- --------------------------------------------------------
RAILROADS--4.2%
Burlington Northern Santa
Fe...................... 79,700 7,407,119
CSX Corp. ................ 92,400 4,989,600
Greenbrier Companies,
Inc. ................... 254,100 4,399,106
Illinois Central Corp. ... 193,500 6,591,094
Union Pacific Corp. ...... 67,200 4,195,800
Varlen Corp. ............. 213,683 5,238,555
------------
32,821,274
- --------------------------------------------------------
REGIONAL BANKS--3.7%
Banc One Corp. ........... 72,800 3,953,950
First Chicago NBD
Corp. .................. 99,480 8,306,580
First Commerce
Corporation............. 6,300 423,675
Norwest Corp. ............ 311,800 12,043,275
PNC Bank Corp. ........... 69,000 3,937,313
------------
28,664,793
- --------------------------------------------------------
RETAIL--3.9%
BJ's Wholesale Club,
Inc.+................... 139,000 4,361,125
Food Lion, Inc. (Class 'A'
Stock).................. 410,900 3,466,969
Food Lion, Inc. (Class 'B'
Stock).................. 137,500 1,134,375
Haverty Furniture,
Inc. ................... 600,000 8,100,000
The Limited, Inc. ........ 209,200 5,334,600
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

19
<PAGE> 54

FINANCIAL STATEMENTS OF VCA-2

STATEMENT OF NET ASSETS AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
COMMON STOCK VALUE
INVESTMENTS SHARES [NOTE 2A]
<S> <C> <C>
- --------------------------------------------------------

<CAPTION>
<S> <C> <C>
RETAIL--CONTINUED
Officemax, Inc.+.......... 212,400 $ 3,026,700
Toys R Us+................ 156,700 4,926,256
------------
30,350,025
- --------------------------------------------------------
SPECIALTY CHEMICALS--3.6%
Cambrex Corp. ............ 148,500 6,831,000
Ferro Corp. .............. 271,500 6,600,844
French Fragances, Inc.+... 400,000 3,650,000
Great Lakes Chemical,
Corp. .................. 82,100 3,684,238
Lilly Industries, Inc. ... 102,300 2,109,938
OM Group, Inc. ........... 150,000 5,493,750
------------
28,369,770
- --------------------------------------------------------
TRUCKING/SHIPPING--0.8%
Interpool, Inc. .......... 199,400 2,953,613
Pittston Burlington
Group................... 123,400 3,239,250
------------
6,192,863
- --------------------------------------------------------
TOTAL COMMON STOCKS INVESTMENT--98.0%
(Cost: $554,595,006).... 768,307,230
- --------------------------------------------------------
PRINCIPAL
SHORT-TERM INVESTMENT AMOUNT
REPURCHASE AGREEMENT--1.9%
J.P. Morgan Securities, Inc., 5.74%
Due 1/02/98, Amount
Due - $15,075,805
(collateralized by
$15,414,957, U.S.
Treasury Bonds, 13.75%,
Due 8/15/04) (Cost
$15,071,000)............ $15,071,000 15,071,000
- --------------------------------------------------------
TOTAL INVESTMENTS--99.9%
(Cost $569,666,006)..... 783,378,230
- --------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
VALUE
SHORT-TERM INVESTMENT [NOTE 2A]
<S> <C> <C>
- --------------------------------------------------------

<CAPTION>
<S> <C> <C>
OTHER ASSETS, LESS LIABILITIES
Cash.................................. $ 832
Dividends and Interest Receivable..... 717,099
Receivable for Investments Sold....... 4,230,876
Payable for Pending Capital
Transactions........................ (1,963,601)
Payable for Investments Purchased..... (2,509,980)
- --------------------------------------------------------
TOTAL OTHER ASSETS,
LESS LIABILITIES--0.1%.................. 475,226
- --------------------------------------------------------
NET ASSETS--100%.......... $783,853,456
- --------------------------------------------------------
NET ASSETS, REPRESENTING:
Equity of Participants
(other than Annuitants)
28,643,154 Accumulation
Units at an Accumulation
Unit Value of
$25.8828................ $741,364,935
Equity of Annuitants...... 36,178,643
Equity of Prudential
Insurance Company of
America................. 6,309,878
- --------------------------------------------------------
$783,853,456
- --------------------------------------------------------
</TABLE>

The following abbreviations are used in portfolio descriptions:

<TABLE>
<S> <C> <C>
ADR -- American Depository Receipts
PLC -- Public Limited Company
+ Non-income producing Security
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

20
<PAGE> 55

FINANCIAL STATEMENTS OF VCA-2

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
<S> <C>
YEAR ENDED DECEMBER 31, 1997

<CAPTION>
- -------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME [NOTE 2B]
Dividends................................................. $ 6,840,490
Interest.................................................. 1,395,390
- -------------------------------------------------------------------------------
TOTAL INCOME................................................ 8,235,880
- -------------------------------------------------------------------------------
EXPENSES [NOTE 3]
Fees Charged to Participants and Annuitants for Investment
Management Services.................................... 868,606
Fees Charged to Participants (other than Annuitants) for
Assuming Mortality and Expense Risks................... 2,482,789
- -------------------------------------------------------------------------------
TOTAL EXPENSES.............................................. 3,351,395
- -------------------------------------------------------------------------------
INVESTMENT INCOME--NET...................................... 4,884,485
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS--NET [NOTE 2B]
Realized Gain on Investments--Net......................... 147,369,906
Increase in Unrealized Appreciation on Investments--Net... 43,649,467
- -------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS..................................... 191,019,373
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $195,903,858
- -------------------------------------------------------------------------------
</TABLE>

STATEMENTS OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996

<CAPTION>
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Investment Income--Net.................................... $ 4,884,485 $ 4,143,434
Realized Gain on Investments--Net [Note 2B]............... 147,369,906 77,378,955
Increase In Unrealized Appreciation on Investments--Net
[Note 2B].............................................. 43,649,467 61,960,118
- ---------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ 195,903,858 143,482,507
- ---------------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS [NOTES 3 & 5]
Purchase Payments and Transfers In........................ 37,581,652 34,187,009
Withdrawals and Transfers Out............................. (80,261,096) (54,140,871)
Annual Administration Charges Deducted from Participants'
Accumulation Accounts.................................. (28,266) (30,477)
Mortality and Expense Risk Charges Deducted from
Annuitants' Accounts................................... (123,028) (99,600)
Variable Annuity Payments................................. (4,174,661) (3,459,550)
- ---------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM CAPITAL
TRANSACTIONS.............................................. (47,005,399) (23,543,489)
- ---------------------------------------------------------------------------------------------------
NET INCREASE/DECREASE IN NET ASSETS RESULTING FROM SURPLUS
TRANSFERS [NOTE 6]........................................ 78,656 (235,290)
- ---------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS................................ 148,977,115 119,703,728
NET ASSETS
Beginning of Year...................................... 634,876,341 515,173,613
- ---------------------------------------------------------------------------------------------------
End of Year............................................ $783,853,456 $634,876,341
- ---------------------------------------------------------------------------------------------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

21
<PAGE> 56

NOTES TO FINANCIAL STATEMENTS OF VCA-2

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

NOTE 1: GENERAL
The Prudential Variable Contract Account-2 (VCA-2 or the Account)
was established on January 9, 1968 by The Prudential Insurance
Company of America (Prudential) under the laws of the State of New
Jersey and is registered as an open-end, diversified management
investment company under the Investment Company Act of 1940, as
amended. VCA-2 has been designed for use by public school systems
and certain tax-exempt organizations to provide for the purchase and
payment of tax-deferred variable annuities. Its investments are
composed primarily of common stocks. All contractual and other
obligations arising under contracts participating in VCA-2
(Contracts) are general obligations of Prudential, although
Participants' payments from the Account will depend upon the
investment experience of the Account.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. SECURITIES VALUATION

EQUITY SECURITIES
Any security for which the primary market is on an exchange is
generally valued at the last sale price on such exchange as of the
close of the NYSE (which is currently 4:00 p.m. Eastern time) or, in
the absence of recorded sales, at the mean between the most recently
quoted bid and asked prices. Nasdaq National Market System equity
securities are valued at the last sale price or, if there was no
sale on such day, at the mean between the most recently quoted bid
and asked prices. Other over-the-counter equity securities are
valued at the mean between the most recently quoted bid and asked
prices. Portfolio securities for which market quotations are not
readily available will be valued at fair value as determined in good
faith under the direction of the Account's Pricing Committee.

FIXED INCOME SECURITIES
Fixed income securities will be valued utilizing an independent
pricing service to determine valuations for normal institutional
size trading units of securities. The pricing service considers such
factors as security prices, yields, maturities, call features,
ratings and developments relating to specific securities in arriving
at securities valuations. Convertible debt securities that are
actively traded in the over-the-counter market, including listed
securities for which the primary market is believed to be
over-the-counter, are valued at the mean between the most recently
quoted bid and asked prices provided by an independent pricing
service.

SHORT-TERM INVESTMENTS
Short-term investments having maturities of sixty days or less are
valued at amortized cost, which approximates market value. Amortized
cost is computed using the cost on the date of purchase, adjusted
for constant accrual of discount or amortization of premium to
maturity.

B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded on the trade date. Realized
gains and losses on sales of securities are calculated on the
identified cost basis. Dividend income is recorded on the ex-
dividend date and interest income is recorded on the accrual basis.
Income and realized and unrealized gains and losses are allocated to
the Participants and Prudential on a daily basis in proportion to
their respective ownership in VCA-2. Expenses are recorded on the
accrual basis which may require the use of certain estimates by
management.

C. TAXES
The operations of VCA-2 are part of, and are taxed with, the
operations of Prudential. Under the current provisions of the
Internal Revenue Code, Prudential does not expect to incur federal
income taxes on earnings of VCA-2 to the extent the earnings are
credited under the Contracts. As a result, the Unit Value of VCA-2
has not been reduced by federal income taxes.

D. EQUITY OF ANNUITANTS
Reserves are computed for purchased annuities using the Prudential
1950 Group Annuity Valuation (GAV)Table, as adjusted, and a
valuation interest rate related to the Assumed Investment Result
(AIR). The valuation interest rate is equal to the AIR less .5%
which is a charge defined in Note 3A. The AIRs are selected by each
Contract-holder and are described in the prospectus.

22
<PAGE> 57

NOTES TO FINANCIAL STATEMENTS OF VCA-2

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

NOTE 3: CHARGES
A. Prudential acts as investment manager for VCA-2 under an
agreement for Investment Management Services. The expenses
charged to VCA-2 consist of the following contract charges which
are paid to Prudential:

(i) An investment management fee is calculated daily at an
effective annual rate of 0.125% of the current value
of the accounts of Participants (other than Annuitants
and Prudential). An equivalent charge is made monthly
in determining the amount of Annuitants' payments.

(ii) A daily charge for assuming mortality and expense
risks is calculated at an effective annual rate of
0.375% of the current value of the accounts of
Participants (other than Annuitants and Prudential).
An equivalent charge is made monthly in determining
the amount of Annuitants' payments.

B. An annual administration charge of not more than $30 annually, is
deducted from the accumulation account of certain Participants
either time of withdrawal of the value of the entire
Participant's account or at the end of the accounting year by
canceling Accumulation Units. This deduction may be made from a
fixed-dollar annuity contract if the Participant is enrolled
under such a contract.

C. A charge of 2.5% for sales and other marketing expenses is made
from certain Participant's purchase payments. For the year ended
December 31, 1997, Prudential has advised the account it has
received $9,628 for such charges.

NOTE 4: PURCHASES AND SALES OF PORTFOLIO SECURITIES
For the year ended December 31, 1997, the aggregate cost of
purchases and the proceeds from sales of securities, excluding
short-term investments, were $333,425,286 and $373,986,242
respectively.

NOTE 5: UNIT TRANSACTIONS
The number of Accumulation Units issued and redeemed for the years
ended December 31, 1997 and 1996 is as follows:

<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
- --------------------------------------------------------------

<CAPTION>
<S> <C> <C>
Units issued........................... 4,486,054 4,133,210
- --------------------------------------------------------------
Units redeemed......................... 6,391,015 5,185,531
- --------------------------------------------------------------
</TABLE>

NOTE 6: NET INCREASE/DECREASE IN NET ASSETS RESULTING FROM SURPLUS TRANSFERS
The increase/decrease in net assets resulting from surplus transfers
represents the net additions/ reductions from the equity of
Prudential from VCA-2.

NOTE 7: RELATED PARTY TRANSACTIONS
For the year ended December 31, 1997, Prudential Securities
Incorporated, an indirect, wholly owned subsidiary of Prudential,
earned $17,671 in brokerage commissions from portfolio transactions
executed on behalf of VCA-2.

NOTE 8: PARTICIPANT LOANS
Participant loan initiations are not permitted in VCA-2. However,
participants who initiated loans in other accounts are permitted to
direct loan repayments into VCA-2.

For the years ended December 31, 1997 and 1996, $18,529 and $36,354
of participant loan principal and interest has been paid to VCA-2,
respectively.

This report is for the information of persons participating in The Prudential
Variable Contract Account-2 (VCA-2), (Long Term Growth Account, or the Account).
It is not authorized for distribution to prospective investors unless preceded
or accompanied by a current prospectus for VCA-2. Prudential Investment
Management Services LLC, Distributor, is an affiliate of The Prudential
Insurance Company of America. VCA-2 is a group annuity insurance product issued
by The Prudential Insurance Company of America.

23
<PAGE> 58

REPORT OF INDEPENDENT ACCOUNTANTS

To the Committee and Participants

of The Prudential Variable Contract Account-2

of The Prudential Insurance Company of America

In our opinion, the accompanying statement of net assets, 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
The Prudential Variable Contract Account-2 of The Prudential Insurance Company
of America (the "Account") at December 31, 1997, the results of its operations
for the year then ended and the changes in its net assets and the financial
highlights for each of the two years in the period then ended, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Account's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1997 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above. The financial highlights for
each of the three years in the period ended December 31, 1995 were audited by
other independent accountants whose report thereon dated February 15, 1996
expressed an unqualified opinion on those financial highlights.

Price Waterhouse LLP

New York, New York

February 18, 1998

24
<PAGE> 59

REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------

March 5, 1998

To the Board of Directors and Policyholders of
The Prudential Insurance Company of America

In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of operations, of changes in equity and
of cash flows present fairly, in all material respects, the financial position
of The Prudential Insurance Company of America and its subsidiaries at December
31, 1997 and 1996, and the results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audits of these 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 provide a reasonable basis for the opinion expressed
above.

Price Waterhouse LLP

<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
The Prudential Insurance Company of America
Newark, New Jersey

We have audited the accompanying consolidated statements of operations, changes
in equity, and cash flows of The Prudential Insurance Company of America and
subsidiaries for the year ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated statements of operations, changes in equity,
and cash flows present fairly, in all material respects, the results of
operations and cash flows of The Prudential Insurance Company of America and
subsidiaries for the year ended December 31, 1995 in conformity with generally
accepted accounting principles.

Deloitte & Touche LLP
June 4, 1997

<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1997 AND 1996 (IN MILLIONS)

1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost, 1997: $71,496; 1996: $64,545) .......... $ 75,270 $ 66,553
Held to maturity, at amortized cost (fair value, 1997: $19,894; 1996: $21,362) ............ 18,700 20,403
Trading account assets, at fair value........................................................ 6,044 4,219
Equity securities, available for sale, at fair value (cost, 1997: $2,376; 1996: $2,103) ..... 2,810 2,622
Mortgage loans on real estate ............................................................... 16,004 17,097
Investment real estate ...................................................................... 1,519 2,586
Policy loans ................................................................................ 6,827 6,692
Securities purchased under agreements to resell ............................................. 8,661 5,347
Cash collateral for borrowed securities ..................................................... 5,047 2,416
Short-term investments ...................................................................... 12,106 9,294
Other long-term investments ................................................................. 3,360 2,995
----------- -----------
Total investments ......................................................................... 156,348 140,224

Cash ........................................................................................ 3,636 2,091
Deferred policy acquisition costs ........................................................... 5,994 6,291
Accrued investment income ................................................................... 1,909 1,828
Receivables from broker-dealer clients ...................................................... 6,273 5,281
Other assets ................................................................................ 11,276 9,990
Separate Account assets ..................................................................... 74,046 63,358
----------- -----------
TOTAL ASSETS .................................................................................. $ 259,482 $ 229,063
=========== ===========

LIABILITIES AND EQUITY

LIABILITIES
Future policy benefits ...................................................................... $ 65,581 $ 63,955
Policyholders' account balances ............................................................. 32,941 36,009
Other policyholders' liabilities ............................................................ 6,659 6,043
Policyholders' dividends .................................................................... 1,269 714
Securities sold under agreements to repurchase .............................................. 12,347 7,503
Cash collateral for loaned securities ....................................................... 14,117 8,449
Short-term debt ............................................................................. 6,774 6,562
Long-term debt .............................................................................. 4,273 3,760
Income taxes payable ........................................................................ 500 1,544
Payables to broker-dealer clients ........................................................... 3,338 3,018
Securities sold but not yet purchased ....................................................... 3,533 1,900
Other liabilities ........................................................................... 14,774 8,238
Separate Account liabilities ................................................................ 73,658 62,845
----------- -----------
TOTAL LIABILITIES ......................................................................... 239,764 210,540
=========== ===========

COMMITMENTS AND CONTINGENCIES (SEE NOTES 12, 13 AND 14)

EQUITY
Retained earnings ........................................................................... 18,051 17,443
Net unrealized investment gains ............................................................. 1,752 1,136
Foreign currency translation adjustments .................................................... (85) (56)
----------- -----------
TOTAL EQUITY .............................................................................. 19,718 18,523
----------- -----------
TOTAL LIABILITIES AND EQUITY .................................................................. $ 259,482 $ 229,063
=========== ===========
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)

1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
REVENUES
Premiums .................................................................... $ 18,534 $ 18,962 $ 19,783
Policy charges and fee income ............................................... 1,828 1,912 1,824
Net investment income ....................................................... 9,863 9,742 10,178
Realized investment gains, net .............................................. 2,187 1,138 1,503
Commissions and other income ................................................ 4,661 4,521 3,952
------------ ----------- -----------
Total revenues ............................................................ 37,073 36,275 37,240
------------ ----------- -----------

BENEFITS AND EXPENSES
Policyholders' benefits ..................................................... 18,208 19,306 19,470
Interest credited to policyholders' account balances ........................ 2,043 2,251 2,739
Dividends to policyholders .................................................. 2,429 2,339 2,317
General and administrative expenses ......................................... 11,926 10,875 10,345
Sales practice remediation costs ............................................ 1,640 410 --
------------ ----------- -----------
Total benefits and expenses ............................................... 36,246 35,181 34,871
------------ ----------- -----------

INCOME FROM OPERATIONS BEFORE INCOME TAXES .................................... 827 1,094 2,369
------------ ----------- -----------
Income taxes
Current ................................................................... (46) 406 1,293
Deferred .................................................................. 263 (390) (167)
------------ ----------- -----------
217 16 1,126
------------ ----------- -----------

NET INCOME .................................................................... $ 610 $ 1,078 $ 1,243
============ =========== ===========
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)

FOREIGN NET
CURRENCY UNREALIZED
RETAINED TRANSLATION INVESTMENT TOTAL
EARNINGS ADJUSTMENTS GAINS EQUITY
--------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 ........................ $ 15,126 $ (42) $ 16 $ 15,100
Net income .................................... 1,243 -- -- 1,243
Change in foreign currency translation
adjustments ................................. -- 18 -- 18
Change in net unrealized investment gains ..... -- -- 2,381 2,381
--------- --------- --------- ---------

BALANCE, DECEMBER 31, 1995 ...................... 16,369 (24) 2,397 18,742
Net income .................................... 1,078 -- -- 1,078
Change in foreign currency translation
adjustments ................................. -- (32) -- (32)
Change in net unrealized investment gains ..... -- -- (1,261) (1,261)
Additional pension liability adjustment ....... (4) -- -- (4)
--------- --------- --------- ---------

BALANCE, DECEMBER 31, 1996 ...................... 17,443 (56) 1,136 18,523
Net income .................................... 610 -- -- 610
Change in foreign currency translation
adjustments ................................. -- (29) -- (29)
Change in net unrealized investment gains ..... -- -- 616 616
Additional pension liability adjustment ....... (2) -- -- (2)
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 ...................... $ 18,051 $ (85) $ 1,752 $ 19,718
========= ========= ========= =========
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)

1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................... $ 610 $ 1,078 $ 1,243
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized investment gains, net ............................... (2,187) (1,138) (1,503)
Policy charges and fee income ................................ (258) (208) (201)
Interest credited to policyholders' account balances ......... 2,043 2,128 2,616
Depreciation and amortization ................................ 258 266 398
Other, net ................................................... 4,681 (1,180) (2,628)
Loss (gain) on divestitures .................................. -- (116) 297
Change in:
Deferred policy acquisition costs .......................... 143 (122) (214)
Policy liabilities and insurance reserves .................. 2,477 2,471 2,382
Securities purchased under agreements to resell ............ (3,314) (217) 461
Trading account assets ..................................... (1,825) (433) 2,579
Income taxes receivable/payable ............................ (1,391) (937) 194
Cash collateral for borrowed securities .................... (2,631) (332) 25
Broker-dealer client receivables/payables .................. (672) (607) (420)
Securities sold but not yet purchased ...................... 1,633 251 (225)
Securities sold under agreements to repurchase ............. 4,844 (490) (712)
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES ...................... $ 4,411 $ 414 $ 4,292
--------- --------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities, available for sale .......................... $ 123,550 $ 123,368 $ 97,084
Fixed maturities, held to maturity ............................ 4,042 4,268 3,767
Equity securities, available for sale ......................... 2,572 2,162 2,370
Mortgage loans on real estate ................................. 4,299 5,731 5,553
Investment real estate ........................................ 1,842 615 435
Other long-term investments ................................... 5,081 3,203 3,385
Divestitures .................................................. -- 52 790
Payments for the purchase of:
Fixed maturities, available for sale .......................... (129,854) (125,093) (101,197)
Fixed maturities, held to maturity ............................ (2,317) (2,844) (6,803)
Equity securities, available for sale ......................... (2,461) (2,384) (1,391)
Mortgage loans on real estate ................................. (3,363) (1,906) (3,015)
Investment real estate ........................................ (241) (142) (387)
Other long-term investments ................................... (4,148) (2,060) (1,849)
Cash collateral for securities loaned (net) .................... 5,668 2,891 3,471
Short-term investments (net) ................................... (2,848) (1,915) 2,793
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES ...................... $ 1,822 $ 5,946 $ 5,006
--------- --------- ---------
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)

1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits ................................ $ 5,020 $ 2,799 $ 2,724
Policyholders' account withdrawals ............................. (9,873) (8,099) (9,164)
Net increase(decrease) in short-term debt ...................... 305 583 (3,077)
Proceeds from the issuance of long-term debt ................... 324 93 763
Repayments of long-term debt ................................... (464) (1,306) (30)
--------- --------- ---------

CASH FLOWS USED IN FINANCING ACTIVITIES ................... (4,688) (5,930) (8,784)
--------- --------- ---------

NET INCREASE IN CASH ............................................. 1,545 430 514

CASH, BEGINNING OF YEAR .......................................... 2,091 1,661 1,147
--------- --------- ---------

CASH, END OF YEAR ................................................ $ 3,636 $ 2,091 $ 1,661
========= ========= =========

SUPPLEMENTAL CASH FLOW INFORMATION:

Income taxes paid ................................................ $ 968 $ 793 $ 430
--------- --------- ---------

Interest paid .................................................... $ 1,243 $ 1,404 $ 1,413
--------- --------- ---------
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS

The Prudential Insurance Company of America and its subsidiaries
(collectively, "the Company") provide insurance and financial services
throughout the United States and many locations worldwide. Principal
products and services provided include life and health insurance, annuities,
pension and retirement related investments and administration, managed
healthcare, property and casualty insurance, securities brokerage, asset
management, investment advisory services and real estate brokerage.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the Prudential
Insurance Company of America, a mutual life insurance company, and its
subsidiaries, and those partnerships and joint ventures in which the Company
has a controlling interest. The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP"). All significant intercompany balances and transactions have been
eliminated.

USE OF ESTIMATES

The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the period. Actual results could differ from
those estimates.

INVESTMENTS

FIXED MATURITIES classified as "available for sale" are carried at estimated
fair value. Fixed maturities that the Company has both the positive intent
and ability to hold to maturity are stated at amortized cost and classified
as "held to maturity." The amortized cost of fixed maturities are written
down to estimated fair value when considered impaired and the decline in
value is considered to be other than temporary. Unrealized gains and losses
on fixed maturities "available for sale," net of income tax, the effect on
deferred policy acquisition costs and participating annuity contracts that
would result from the realization of unrealized gains and losses, are
included in a separate component of equity, "Net unrealized investment
gains."

TRADING ACCOUNT ASSETS are carried at estimated fair value.

EQUITY SECURITIES, available for sale, comprised of common and
non-redeemable preferred stock, are carried at estimated fair value. The
associated unrealized gains and losses, net of income tax, the effect on
deferred policy acquisition costs and participating annuity contracts that
would result from the realization of unrealized gains and losses, are
included in a separate component of equity, "Net unrealized investment
gains."

MORTGAGE LOANS ON REAL ESTATE are stated primarily at unpaid principal
balances, net of unamortized discounts and allowance for losses on impaired
loans. Impaired loans are identified by management as loans in which a
probability exists that all amounts due according to the contractual terms
of the loan agreement will not be collected. Impaired loans are measured
based on the present value of expected future cash flows, discounted at the
loan's effective interest rate or the fair value of the collateral, if the
loan is collateral dependent. The Company's periodic evaluation of the
adequacy of the allowance for losses is based on a number of factors,
including past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of the underlying collateral, composition of the
loan portfolio, current economic conditions and other relevant factors.
This evaluation is inherently subjective as it requires estimating the
amounts and timing of future cash flows expected to be received on impaired
loans.

Interest received on impaired loans, including loans that were previously
modified in a troubled debt restructuring, is either applied against the
principal or reported as revenue, according to management's judgment as to
the collectibility of principal. Management discontinues the accrual of
interest on impaired loans after the loans are 90 days delinquent as to
principal or interest or earlier when management has serious doubts about
collectibility. When a loan is recognized as

8
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

impaired, any accrued but unpaid interest previously recorded on such loan
is reversed against interest income of the current period. Generally, a loan
is restored to accrual status only after all delinquent interest and
principal are brought current and, in the case of loans where interest has
been interrupted for a substantial period, a regular payment performance has
been established.

INVESTMENT REAL ESTATE, which the Company has the intent to hold for the
production of income, is carried at depreciated cost less any write-downs to
fair value for impairment losses. Depreciation on real estate is computed
using the straight-line method over the estimated lives of the properties.
Real estate to be disposed of is carried at the lower of depreciated cost or
fair value less selling costs and is not depreciated once classified as
such.

POLICY LOANS are carried at unpaid principal balances.

SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE are carried at the amounts at which the securities
will be subsequently resold or reacquired, including accrued interest, as
specified in the respective agreements. The Company's policy is to take
possession of securities purchased under agreements to resell. The market
value of securities to be repurchased is monitored, and additional
collateral is requested, where appropriate, to protect against credit
exposure.

SECURITIES BORROWED AND SECURITIES LOANED are recorded at the amount of cash
advanced or received. With respect to securities loaned, the Company obtains
collateral in an amount equal to 102% and 105% of the fair value of the
domestic and foreign securities, respectively. The Company monitors the
market value of securities borrowed and loaned on a daily basis with
additional collateral obtained as necessary. Non-cash collateral received is
not reflected in the Consolidated Statements of Financial Position.
Substantially, all the Company's securities borrowed contracts are with
other brokers and dealers, commercial banks and institutional clients.
Substantially, all of the Company's securities loaned are with large
brokerage firms.

These transactions are used to generate net investment income and facilitate
trading activity. These instruments are short-term in nature (usually 30
days or less) and are collateralized principally by U.S. Government and
mortgage-backed securities. The carrying amounts of these instruments
approximate fair value because of the relatively short period of time
between the origination of the instruments and their expected realization.

SHORT-TERM INVESTMENTS, including highly liquid debt instruments purchased
with an original maturity of twelve months or less, are carried at amortized
cost, which approximates fair value.

OTHER LONG-TERM INVESTMENTS primarily represent the Company's investments
in joint ventures and partnerships in which the Company does not have
control and derivatives held for purposes other than trading. Joint venture
and partnership investments are recorded using the equity method of
accounting, reduced for other than temporary declines in value.

REALIZED INVESTMENT GAINS, NET are computed using the specific
identification method. Costs of fixed maturities and equity securities are
adjusted for impairments considered to be other than temporary. Allowances
for losses on mortgage loans on real estate are netted against asset
categories to which they apply and provisions for losses on investments are
included in "Realized investment gains, net." Unrealized gains and losses on
trading account assets are included in "Commissions and other income."

CASH

Cash includes cash on hand, amounts due from banks, and money market
instruments.

DEFERRED POLICY ACQUISITION COSTS

The costs which vary with and that are related primarily to the production
of new insurance business are deferred to the extent such costs are deemed
recoverable from future profits. Such costs include certain commissions,
costs of policy issuance and underwriting, and certain variable field office
expenses. Deferred policy acquisition costs are subject to recoverability
testing at the time of policy issue and loss recognition testing at the end
of each accounting period. Deferred policy acquisition costs are adjusted
for the impact of unrealized gains or losses on investments as if these
gains or losses had been realized, with corresponding credits or charges
included in equity.

9
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

For life insurance, deferred policy acquisition costs are amortized over the
expected life of the contracts (up to 45 years) in proportion to estimated
gross margins based on historical and anticipated future experience, which
is updated periodically. The effect of changes in estimated gross margins is
reflected in earnings in the period they are revised. Policy acquisition
costs related to interest-sensitive products and certain investment-type
products are deferred and amortized over the expected life of the contracts
(periods ranging from 15 to 30 years) in proportion to estimated gross
profits arising principally from investment results, mortality and expense
margins and surrender charges based on historical and anticipated future
experience, updated periodically. The effect of revisions to estimated gross
profits on unamortized deferred acquisition costs is reflected in earnings
in the period such estimated gross profits are revised.

For property and casualty contracts, deferred policy acquisition costs are
amortized over the period in which related premiums are earned. Future
investment income is considered in determining the recoverability of
deferred policy acquisition costs.

For disability insurance, health insurance, group life insurance and most
group annuities, acquisition costs are expensed as incurred.

POLICYHOLDERS' DIVIDENDS

The amount of the dividends to be paid to policyholders is determined
annually by the Company's Board of Directors. The aggregate amount of
policyholders' dividends is related to actual interest, mortality,
morbidity, persistency and expense experience for the year and judgment as
to the appropriate level of statutory surplus to be retained by the Company.

SEPARATE ACCOUNT ASSETS AND LIABILITIES

Separate Account assets and liabilities are reported at estimated fair value
and represent segregated funds which are invested for certain policyholders,
pension fund and other customers. The assets consist of common stocks, fixed
maturities, real estate related securities, real estate mortgage loans and
short-term investments. The assets of each account are legally
segregated and are not subject to claims that arise out of any other
business of the Company. Investment risks associated with market value
changes are generally borne by the customers, except to the extent of
minimum guarantees made by the Company with respect to certain accounts. The
investment income and gains or losses for Separate Accounts generally accrue
to the policyholders and are not included in the Consolidated Statement of
Operations. Mortality, policy administration and surrender charges on the
accounts are included in "Policy charges and fee income."

INSURANCE REVENUE AND EXPENSE RECOGNITION

Premiums from participating insurance policies are generally recognized when
due. Benefits are recorded as an expense when they are incurred. A liability
for future policy benefits is recorded using the net level premium method.

Premiums from non-participating group annuities with life contingencies are
generally recognized when due. For single premium immediate annuities and
structured settlements, premiums are recognized when due with any excess
profit deferred and recognized in a constant relationship to insurance
in-force or, for annuities, the amount of expected future benefit payments.

Amounts received as payment for interest sensitive investment contracts,
deferred annuities and participating group annuities are reported as
deposits to "Policyholders' account balances." Revenues from these contracts
are reflected in "Policy charges and fee income" and consist primarily of
fees assessed during the period against the policyholders' account balances
for mortality charges, policy administration charges, surrender charges and
interest earned from the investment of these account balances. Benefits and
expenses for these products include claims in excess of related account
balances, expenses of contract administration, interest credited and
amortization of deferred policy acquisition costs.

For disability insurance, group life insurance, health insurance and
property and casualty insurance, premiums are recognized over the period to
which the premiums relate in proportion to the amount of insurance
protection provided. Claim and claim adjustment expenses are recognized when
incurred.

10
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FOREIGN CURRENCY TRANSLATION ADJUSTMENTS

Assets and liabilities of foreign operations and subsidiaries reported in
other than U.S. dollars are translated at the exchange rate in effect at the
end of the period. Revenues, benefits and other expenses are translated at
the average rate prevailing during the period. Translation adjustments
arising from the use of differing exchange rates from period to period are
charged or credited directly to equity. The cumulative effect of changes in
foreign exchange rates are included in "Foreign currency translation
adjustments."

COMMISSIONS AND OTHER INCOME

Commissions and other income principally includes securities and
commodities, commission revenues, asset management fees, investment banking
revenue and realized and unrealized gains on trading account assets of the
Company's broker-dealer subsidiary.

DERIVATIVE FINANCIAL INSTRUMENTS

Derivatives include swaps, forwards, futures, options and loan commitments
subject to market risk, all of which are used by the Company in both trading
and other than trading activities. Income and expenses related to
derivatives used to hedge are recorded on the accrual basis as an adjustment
to the carrying amount or to the yield of the related assets or liabilities
over the periods covered by the derivative contracts. Gains and losses
relating to early terminations of interest rate swaps used to hedge are
deferred and amortized over the remaining period originally covered by the
swap. Gains and losses relating to derivatives used to hedge the risks
associated with anticipated transactions are deferred and utilized to adjust
the basis of the transaction once it has closed. If it is determined that
the transaction will not close, such gains and losses are included in
"Realized investment gains, net."

DERIVATIVES HELD FOR TRADING PURPOSES are used in the Company's securities
broker-dealer business and in a limited-purpose swap subsidiary to meet the
risk management needs of its customers by structuring transactions that
allow customers to manage their exposure to interest rates, foreign exchange
rates, indices or prices of securities and commodities and when possible,
matched trading positions are established to minimize risk to the Company.
Derivatives used for trading purposes are recorded at fair value as of the
reporting date. Realized and unrealized changes in fair values are included
in "Commissions and other income" in the period in which the changes occur.

DERIVATIVES HELD FOR PURPOSES OTHER THAN TRADING are primarily used to hedge
or reduce exposure to interest rate and foreign currency risks associated
with assets held or expected to be purchased or sold, and liabilities
incurred or expected to be incurred. Additionally, other than trading
derivatives are used to change the characteristics of the Company's
asset/liability mix consistent with the Company's risk management
activities.

INCOME TAXES

The Company and its domestic subsidiaries file a consolidated federal income
tax return. The Internal Revenue Code (the "Code") limits the amount of
non-life insurance losses that may offset life insurance company taxable
income. The Code also imposes an "equity tax" on mutual life insurance
companies which, in effect, imputes an additional tax to the Company based
on a formula that calculates the difference between stock and mutual
insurance companies' earnings. Income taxes include an estimate for changes
in the total equity tax to be paid for current and prior years. Subsidiaries
operating outside the United States are taxed under applicable foreign
statutes.

Deferred income taxes are generally recognized, based on enacted rates, when
assets and liabilities have different values for financial statement and tax
reporting purposes. A valuation allowance is recorded to reduce a deferred
tax asset to that portion which management believes is more likely than not
to be realized.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1996, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS

11
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

125"). The statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities and provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured
borrowings. SFAS 125 became effective January 1, 1997 and is to be applied
prospectively. Subsequent to June 1996, FASB issued SFAS No. 127 "Deferral
of the Effective Date of Certain Provisions of SFAS 125" ("SFAS 127"). SFAS
127 delays the implementation of SFAS 125 for one year for certain
provisions, including repurchase agreements, dollar rolls, securities
lending and similar transactions. The Company will delay implementation
with respect to those affected provisions. Adoption of SFAS 125 has not and
will not have a material impact on the Company's results of operations,
financial condition and liquidity.

In June of 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for years beginning after December 15, 1997. This
statement defines comprehensive income as "the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources, excluding investments by owners and
distributions to owners" and establishes standards for reporting and
displaying comprehensive income and its components in financial statements.
The statement requires that the Company classify items of other
comprehensive income by their nature and display the accumulated balance of
other comprehensive income separately from retained earnings in the equity
section of the Statement of Financial Position. In addition,
reclassification of financial statements for earlier periods must be
provided for comparative purposes.

RECLASSIFICATIONS

Certain amounts in the prior years have been reclassified to conform to
current year presentation.

12
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. INVESTMENTS

FIXED MATURITIES AND EQUITY SECURITIES

The following tables provide additional information relating to fixed
maturities and equity securities (excluding trading account assets) as of
December 31:

1997
------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------------- -------------- -------------- ------------
FIXED MATURITIES AVAILABLE FOR SALE (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 9,755 $ 783 $ -- $ 10,538

Obligations of U.S. states and
their political subdivisions..................... 1,375 93 -- 1,468

Foreign government bonds............................ 3,177 218 17 3,378

Corporate securities................................ 49,997 2,601 144 52,454

Mortgage-backed securities.......................... 6,828 210 5 7,033

Other fixed maturities.............................. 364 35 -- 399
-------------- -------------- -------------- ------------
Total fixed maturities available for sale........... $ 71,496 $ 3,940 $ 166 $ 75,270
============== ============== ============== ============
EQUITY SECURITIES AVAILABLE FOR SALE................ $ 2,376 $ 680 $ 246 $ 2,810
============== ============== ============== ============

1997
------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------------- -------------- -------------- ------------
FIXED MATURITIES HELD TO MATURITY (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 88 $ - $ - $ 88

Obligations of U.S. states and
their political subdivisions...................... 152 4 1 155

Foreign government bonds............................ 33 5 - 38

Corporate securities................................ 18,282 1,212 34 19,460

Mortgage-backed securities.......................... 1 - - 1

Other fixed maturities.............................. 144 8 - 152
-------------- -------------- -------------- ------------
Total fixed maturities held to maturity............. $ 18,700 $ 1,229 $ 35 $ 19,894
============== ============== ============== ============
</TABLE>

13
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. INVESTMENTS (CONTINUED)

1996
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------------- -------------- -------------- ------------
FIXED MATURITIES AVAILABLE FOR SALE (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 10,618 $ 361 $ 77 $ 10,902

Obligations of U.S. states and
their political subdivisions...................... 1,104 29 2 1,131

Foreign government bonds............................ 2,814 137 12 2,939

Corporate securities................................ 43,593 1,737 284 45,046

Mortgage-backed securities.......................... 6,377 140 21 6,496

Other fixed maturities.............................. 39 1 1 39
--------------- -------------- -------------- ------------

Total fixed maturities available for sale........... $ 64,545 $ 2,405 $ 397 $ 66,553
=============== ============== ============== ============

EQUITY SECURITIES AVAILABLE FOR SALE................ $ 2,103 $ 659 $ 140 $ 2,622
=============== ============== ============== ============

<CAPTION>
1996
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------------- -------------- -------------- ------------
FIXED MATURITIES HELD TO MATURITY (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 309 $ 3 $ 6 $ 306

Obligations of U.S. states and
their political subdivisions...................... 7 -- -- 7

Foreign government bonds............................ 162 11 -- 173

Corporate securities................................ 19,886 1,033 82 20,837

Mortgage-backed securities.......................... 26 -- -- 26

Other fixed maturities.............................. 13 -- -- 13
--------------- -------------- -------------- ------------
Total fixed maturities held to maturity............. $ 20,403 $ 1,047 $ 88 $ 21,362
=============== ============== ============== ============
</TABLE>

14
<PAGE>

INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. INVESTMENTS (CONTINUED)

The amortized cost and estimated fair value of fixed maturities by
contractual maturities at December 31, 1997, is shown below:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
-------------------------------- ------------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------------- -------------- -------------- ------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Due in one year or less....................... $ 1,991 $ 2,011 $ 686 $ 695
Due after one year through five years......... 18,916 19,226 4,496 4,659
Due after five years through ten years........ 16,776 17,494 7,161 7,551
Due after ten years........................... 26,985 29,506 6,356 6,988

Mortgage-backed securities.................... 6,828 7,033 1 1
-------------- -------------- -------------- ------------
Total......................................... $ 71,496 $ 75,270 $ 18,700 $ 19,894
============== ============== ============== ============
</TABLE>

Actual maturities may differ from contractual maturities because issuers have
the right to call or prepay obligations

Proceeds from the repayment of held to maturity fixed maturities during 1997,
1996 and 1995 were $4,042 million, $4,268 million, and $3,767 million,
respectively. Gross gains of $62 million, $78 million, and $27 million, and
gross losses of $1 million, $7 million, and $0.2 million were realized on
prepayment of held to maturity fixed maturities during 1997, 1996 and 1995,
respectively.

Proceeds from the sale of available for sale fixed maturities during 1997,
1996 and 1995 were $120,604 million, $121,910 million and $96,134 million,
respectively. Proceeds from the maturity of available for sale fixed
maturities during 1997, 1996 and 1995 were $2,946 million, $1,458 million,
and $950 million, respectively. Gross gains of $1,310 million, $1,562
million, and $2,052 million and gross losses of $639 million, $1,026 million,
and $941 million were realized on sales and prepayments of available for sale
fixed maturities during 1997, 1996 and 1995, respectively.

Write downs for impairments of fixed maturities which were deemed to be other
than temporary were $13 million, $54 million and $100 million for the years
1997, 1996 and 1995, respectively.

During the year ended December 31, 1997, there were no securities classified
as held to maturity that were sold and two securities so classified were
transferred to the available for sale portfolio. These actions were taken as
a result of a significant deterioration in credit worthiness. The aggregate
amortized cost of the securities transferred was $26 million with gross
unrealized investment gains of $0.5 million charged to "Net unrealized
investment gains."

During the year ended December 31, 1996, one security classified as held to
maturity was sold and two securities so classified were transferred to the
available for sale portfolio. These actions were taken as a result of a
significant deterioration in credit worthiness. The amortized cost of the
security sold was $35 million with a related realized investment loss of $0.7
million; the aggregate amortized cost of the securities transferred was $26
million with gross unrealized investment losses of $6 million charged to "Net
unrealized investment gains."

15
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. INVESTMENTS (CONTINUED)

MORTGAGE LOANS ON REAL ESTATE

The Company's mortgage loans were collateralized by the following property
types at December 31:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- --------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Office buildings............................... $ 4,692 28.5% $ 6,056 34.4%
Retail stores.................................. 3,078 18.7% 3,676 20.9%
Residential properties......................... 891 5.4% 961 5.4%
Apartment complexes............................ 3,551 21.6% 2,954 16.8%
Industrial buildings........................... 1,958 11.9% 1,807 10.3%
Agricultural properties........................ 1,666 10.1% 1,550 8.8%
Other.......................................... 618 3.8% 608 3.4%
--------------- --------- -------------- ------
Subtotal 16,454 100.0% 17,612 100.0%
========= ======
Allowance for losses........................... (450) (515)
--------------- --------------
Net carrying value............................. $ 16,004 $ 17,097
=============== ==============
</TABLE>

The mortgage loans are geographically dispersed throughout the United
States and Canada with the largest concentrations in California (25.3%) and
New York (8.3%) at December 31, 1997. Included in the above balances are
mortgage loans receivable from affiliated joint ventures of $225 million
and $461 million at December 31, 1997 and 1996, respectively.

Activity in the allowance for losses for all mortgage loans, for the years
ended December 31, is summarized as follows:
<TABLE>
<CAPTION>

1997 1996 1995
---------------- ---------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C>
Allowance for losses, beginning of year.............. $ 515 $ 862 $ 1,004
Additions charged to operations...................... 19 9 6
Release of allowance for losses...................... (60) (256) (32)
Charge-offs, net of recoveries....................... (24) (100) (116)
--------------- ---------------- ---------------
Allowance for losses, end of year.................... $ 450 $ 515 $ 862
================ ================ ===============
</TABLE>

The $60 million, $256 million and $32 million reduction of the mortgage
loan allowance for losses in 1997, 1996 and 1995, respectively, is
primarily attributable to the improved economic climate, changes in the
nature and mix of borrowers and underlying collateral and a significant
decrease in impaired loans consistent with a general decrease in the
mortgage loan portfolio due to prepayments, sales and foreclosures.

16
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. INVESTMENTS (CONTINUED)

Impaired mortgage loans and related allowance for losses at December 31,
are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- ------------------
(IN MILLIONS)
<S> <C> <C>
Impaired mortgage loans with allowance for losses ............. $ 330 $ 941
Impaired mortgage loans with no allowance for losses .......... 1,303 1,491
Allowance for losses .......................................... (97) (189)
----------------- ------------------
Net carrying value of impaired mortgage loans ................. $ 1,536 $ 2,243
================= ==================
</TABLE>

Impaired mortgage loans with no provision for losses are loans where the
fair value of the collateral or the net present value of the expected
future cash flows related to the loan equals or exceeds the recorded
investment. The average recorded investment in impaired loans before
allowance for losses was $2,102 million, $2,842 million and $4,146 million
during 1997, 1996 and 1995, respectively. Net investment income recognized
on these loans totaled $140 million, $265 million and $415 million for the
years ended December 31, 1997, 1996 and 1995, respectively.

INVESTMENT REAL ESTATE

The Company's "investment real estate" of $1,519 million and $2,586 million
at December 31, 1997 and 1996, respectively, is held through direct
ownership. Of the Company's real estate, $1,490 million and $406 million
consists of commercial and agricultural assets held for disposal at
December 31, 1997 and 1996, respectively. Impairment losses and the
valuation allowances aggregated $40 million, $38 million and $124 million
for the years ended December 31, 1997, 1996 and 1995, respectively, and are
included in "Realized investment gains, net."

RESTRICTED ASSETS AND SPECIAL DEPOSITS

Assets of $2,783 million and $2,453 million at December 31, 1997 and 1996,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Additionally, assets valued at $2,352
million at December 31, 1997, were held in voluntary trusts. Of this
amount, $1,801 million related to the multi-state policyholder settlement
as described in Note 14. The remainder relates to trusts established to
fund guaranteed dividends to certain policyholders. The terms of these
trusts provide that the assets are to be used for payment of the designated
settlement and dividend benefits, as the case may be. Assets valued at $741
million and $3,414 million at December 31, 1997 and 1996, respectively,
were maintained as compensating balances or pledged as collateral for bank
loans and other financing agreements. Restricted cash and securities of
$1,835 million and $1,614 million at December 31, 1997, and 1996,
respectively, were included in the consolidated financial statements. The
restricted cash represents funds deposited by clients and funds accruing to
clients as a result of trades or contracts.

OTHER LONG-TERM INVESTMENTS

The Company's "Other long-term investments" of $3,360 million and $2,995
million as of December 31, 1997 and 1996, respectively, are composed of
$1,349 million and $832 million in real estate related interests and $2,011
million and $2,163 million of non-real estate related interests, including
a $149 million net investment in a leveraged lease entered into in 1997.
The Company's share of net income from such entities was $411 million, $245
million, and $326 million for 1997, 1996, and 1995, respectively, and is
reported in "Net investment income."

17
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. INVESTMENTS (CONTINUED)

INVESTMENT INCOME AND INVESTMENT GAINS AND LOSSES

NET INVESTMENT INCOME arose from the following sources for the years ended
December 31:

1997 1996 1995
-------------- -------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities-available for sale........................ $ 5,074 $ 4,871 $ 4,774
Fixed maturities-held to maturity.......................... 1,622 1,793 1,717
Trading account assets..................................... 504 444 588
Equity securities-available for sale ...................... 52 81 57
Mortgage loans on real estate.............................. 1,555 1,690 2,075
Real estate ............................................... 565 685 742
Policy loans............................................... 396 384 392
Securities purchased under agreements to resell............ 15 11 19
Receivables from broker-dealer clients..................... 706 579 678
Short-term investments..................................... 697 536 590
Other investment income.................................... 573 725 983
-------------- -------------- -------------
Gross investment income.................................... 11,759 11,799 12,615
Less investment expenses................................... (1,896) (2,057) (2,437)
-------------- -------------- -------------
Net investment income...................................... $ 9,863 $ 9,742 $ 10,178
============== ============== =============
</TABLE>

REALIZED INVESTMENT GAINS, NET, including changes in allowances for losses
and charges for other than temporary reductions in value, for the years
ended December 31, were from the following sources:

1997 1996 1995
-------------- -------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities....................................... $ 684 $ 513 $ 1,180
Mortgage loans on real estate ......................... 68 248 67
Investment real estate ................................ 700 76 (19)
Equity securities-available for sale .................. 363 267 400
Other gains (losses)................................... 372 34 (125)
-------------- -------------- -----------

Realized investment gains, net......................... $ 2,187 $ 1,138 $ 1,503
============== ============== ===========
</TABLE>

NET UNREALIZED INVESTMENT GAINS on securities available for sale are
included in the consolidated statement of financial position as a component
of equity, net of tax. Changes in these amounts for the years ended
December 31, are as follows:

1997 1996
----------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Balance, beginning of year................................. $ 1,136 $ 2,397
Changes in unrealized investment
gains(losses) attributable to:
Fixed maturities ....................................... 1,766 (2,892)
Equity securities....................................... (85) 254
Participating group annuity contracts................... (564) 479
Deferred policy acquisition costs....................... (154) 261
Deferred federal income taxes........................... (347) 637
----------------- -----------------
Sub-total............................................... 616 (1,261)
----------------- -----------------
Balance, end of year....................................... $ 1,752 $ 1,136
================= =================
</TABLE>

18
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. INVESTMENTS (CONTINUED)

Based on the carrying value, assets categorized as "non-income producing"
for the year ended December 31, 1997 included in fixed maturities available
for sale, mortgage loans on real estate and other long term investments
totaled $26 million, $93 million and $7 million, respectively.

4. DEFERRED POLICY ACQUISITION COSTS

The balances of and changes in deferred policy acquisition costs as of and
for the years ended December 31, are as follows:

1997 1996 1995
-------------- -------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Balance, beginning of year ............................ $ 6,291 $ 6,088 $ 6,403
Capitalization of commissions, sales and issue expenses 1,049 931 919
Amortization and other adjustments..................... (1,192) (989) (783)
Change in unrealized investment gains ................. (154) 261 (451)
-------------- -------------- -----------
Balance, end of year .................................. $ 5,994 $ 6,291 $ 6,088
============== ============== ===========
</TABLE>

5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES

FUTURE POLICY BENEFITS at December 31 are as follows:

1997 1996
----------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Life insurance ............................................ $ 46,712 $ 44,118
Annuities ................................................. 15,469 14,828
Other contract liabilities ................................ 3,400 5,009
----------------- -----------------
Future policy benefits .................................... $ 65,581 $ 63,955
================= =================
</TABLE>

Life insurance liabilities include reserves for death and endowment policy
benefits, terminal dividends, premium deficiency reserves and certain health
benefits. Annuity liabilities include reserves for immediate annuities and
non-participating group annuities. Other contract liabilities primarily consist
of unearned premium and benefit reserves for group health products.

The following table highlights the key assumptions generally utilized in
calculating these reserves:

<TABLE>
<CAPTION>
PRODUCT MORTALITY INTEREST RATE ESTIMATION METHOD
- ------------------------- ------------------------ --------------- ------------------------
<S> <C> <C> <C>
Life insurance Generally rates 2.5% to 7.5% Net level premium
guaranteed in calculating based on non-forfeiture
cash surrender values interest rate

Individual immediate 1983 Individual 3.25% to 11.25% Present value of
annuities Annuity Mortality expected future payments
Table with certain based on historical
modifications experience

Group annuities in 1950 Group 3.75% to 17.35% Present value of
payout status Annuity Mortality expected future payments
Table with certain based on historical
modifications experience

Other contract liabilities -- 6.0% to 7.0% Present value of
expected future payments
based on historical
experience
</TABLE>

19
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES (CONTINUED)

For the above categories, premium deficiency reserves are established, if
necessary, when the liability for future policy benefits plus the present
value of expected future gross premiums are insufficient to provide for
expected future policy benefits and expenses. A premium deficiency reserve
has been recorded for the group single premium annuity business, which
consists of limited-payment, long duration, traditional non-participating
annuities. A liability of $1,645 million and $1,320 million is included in
"Future policy benefits" with respect to this deficiency for the years
ended December 31, 1997 and 1996, respectively.

POLICYHOLDERS' ACCOUNT BALANCES at December 31, are as follows:

1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Individual annuities........................................ $ 5,695 $ 6,408
Group annuities & guaranteed investment contracts........... 19,053 21,706
Interest-sensitive life contracts........................... 3,160 2,888
Dividend accumulations...................................... 5,033 5,007
--------- ---------
Policyholders' account balances............................. $ 32,941 $ 36,009
========= =========
</TABLE>

Policyholders' account balances for interest-sensitive life and
investment-type contracts are equal to policy account values. The policy
account values represent an accumulation of gross premium payments plus
credited interest less withdrawals, expenses and mortality charges.

Certain contract provisions that determine the policyholder account
balances are as follows:
<TABLE>
<CAPTION>

WITHDRAWAL/
PRODUCT INTEREST RATE SURRENDER CHARGES
----------------------------------- ------------------------ -------------------------------------
<S> <C> <C>
Individual annuities 3.1% to 6.6% 0% to 8% for up to 8 years

Group annuities 5.0% to 12.7% Contractually limited or subject to
market value adjustments

Guaranteed investment contracts 3.9% to 14.34% Subject to market value withdrawal
provisions for any funds withdrawn
other than for benefit responsive and
contractual payments

Interest sensitive life contracts 4.0% to 6.5% Various up to 10 years

Dividend accumulations 3.0% to 4.0%
</TABLE>

20
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES (CONTINUED)

OTHER POLICYHOLDERS' LIABILITIES. The following table provides a
reconciliation of the activity in the liability for unpaid claims and claim
adjustment expense for property and casualty and accident and health
insurance, which is included in "Other policyholder's liabilities" at
December 31:
<TABLE>
<CAPTION>

1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Balance at January 1......................................... $ 6,043 $ 5,933 $ 7,983
Less reinsurance recoverables.............................. 563 572 865
---------- ---------- ----------

Net balance at January 1..................................... 5,480 5,361 7,118
---------- ---------- ----------

Incurred related to:
Current year............................................... 10,691 10,281 10,534
Prior years................................................ 11 (91) 141
---------- ---------- ----------

Total incurred............................................... 10,702 10,190 10,675
---------- ---------- ----------

Paid related to:
Current year............................................... 7,415 7,497 7,116
Prior years................................................ 2,651 2,574 2,800
---------- ---------- ----------

Total paid................................................... 10,066 10,071 9,916
---------- ---------- ----------
Less Reinsurance
Segment.................................................... -- -- 2,516
---------- ---------- ----------

Net balance at December 31................................... 6,116 5,480 5,361
Plus reinsurance recoverables.............................. 543 563 572
---------- ---------- ----------

Balance at December 31....................................... $ 6,659 $ 6,043 $ 5,933
========== ========== ==========
</TABLE>

The changes in provision for claims and claim adjustment expenses related
to prior years of $11 million, $(91) million and $141 million in 1997, 1996
and 1995, respectively, are due to such factors as changes in claim cost
trends in healthcare, an accelerated decline in indemnity health business,
and lower than anticipated property and casualty unpaid claims and claim
adjustment expenses.

The other policyholders' liabilities presented above consist primarily of
unpaid claim liabilities which include estimates for liabilities associated
with reported claims and for incurred but not reported claims based, in
part, on the Company's experience. Changes in the estimated cost to settle
unpaid claims are charged or credited to the statement of operations
periodically as the estimates are revised. Accident and health unpaid
claims liabilities for 1997 and 1996 included above are discounted using
interest rates ranging from 6.0% to 7.5%.

21
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. SHORT-TERM AND LONG-TERM DEBT

Debt consists of the following at December 31:

SHORT-TERM DEBT

<TABLE>
<CAPTION>
1997 1996
-------------- --------------
(IN MILLIONS)
<S> <C> <C>
Commercial paper.......................................... $ 4,268 $ 4,511
Notes payable............................................. 2,151 1,614
Current portion of long-term debt......................... 355 437
-------------- --------------

Total short-term debt................................ $ 6,774 $ 6,562
============== ==============
</TABLE>

The weighted average interest rate on outstanding short-term debt was
approximately 6.0% and 5.6% at December 31, 1997 and 1996, respectively.

The Company issues commercial paper primarily to manage operating cash
flows and existing commitments, meet working capital needs and take
advantage of current investment opportunities. Commercial paper borrowings
are supported by various lines of credit.

LONG-TERM DEBT
<TABLE>
<CAPTION>

DESCRIPTION MATURITY DATES RATE 1997 1996
------------------------------------ ----------------- -------------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Floating rate notes ("FRN") 1998 6.5% $ 40 $ 128
Long term notes 1998 - 2023 4% - 12% 1,194 1,023
Zero coupon notes 1998 - 1999 8.6% (a) 334 365
Australian dollar notes 1997 9% -- 55
Canadian dollar notes 1997 - 1998 7.0% - 9.125% 117 320
Japanese yen notes 1998 - 2000 0.5% - 4.6% 178 90
Swiss francs notes 1998 3.875% 120 103
Canadian dollar FRN 2003 5.89% 96 96
Surplus notes 2003 - 2025 6.875% - 8.3% 986 985
Commercial paper backed by long-term
credit agreements 1,500 1,000
Other notes payable 1998 - 2017 4% - 7.5% 63 32
---------- ----------
Sub-total............................................................................. 4,628 4,197
Less: current portion of long-term debt............................................ (355) (437)
---------- ----------
Total long-term debt.................................................................. $ 4,273 $ 3,760
========== ==========
</TABLE>

(a) The rate shown for zero coupon notes, which do not bear interest,
represents a level yield to maturity.

Payment of interest and principal on the surplus notes of $686 million
issued after 1993 may be made only with the prior approval of the
Commissioner of Insurance of the State of New Jersey.

In order to modify exposure to interest rate and currency exchange rate
movements, the Company utilizes derivative instruments, primarily interest
rate swaps, in conjunction with some of its debt issues. The effect of
these derivative instruments is included in the calculation of the interest
expense on the associated debt, and as a result, the effective interest
rates on the debt may differ from the rates reflected in the tables above.
Floating rates are determined by formulas and may be subject to certain
minimum or maximum rates.

Scheduled principal repayments of long-term debt as of December 31, 1997,
are as follows: $357 million in 1998, $808 million in 1999, $260 million in
2000, $32 million in 2001, $1,814 million in 2002 and $1,379 million
thereafter.

At December 31, 1997, the Company had $8,257 million in lines of credit
from numerous financial institutions of which $5,160 million were unused.
These lines of credit generally have terms ranging from 1 to 5 years.

22
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. EMPLOYEE BENEFIT PLANS

PENSION PLANS

The Company has one funded non-contributory defined benefit pension plan,
which covers substantially all of its employees. The Company also has
several non-contributory non-funded defined benefit plans covering certain
executives. Benefits are generally based on career average earnings and
credited length of service. The Company's funding policy is to contribute
annually an amount necessary to satisfy the Internal Revenue Service
contribution guidelines.

Prepaid and accrued pension costs are included in "Other assets" and "Other
liabilities," respectively, in the Company's consolidated statements of
financial position. The status of these plans as of September 30, adjusted
for fourth quarter activity related to funding activity and contractual
termination benefits is summarized below:

1997 1996
--------------------------------- --------------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
--------------- -------------- -------------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligation:
Vested benefit obligation.............. $ (4,129) $ (205) $ (3,826) $ (180)
============ ============ =========== =============

Accumulated benefit obligation......... $ (4,434) $ (226) $ (4,121) $ (198)
============ ============ =========== =============

Projected benefit obligation............. $ (5,238) $ (319) $ (4,873) $ (274)

Plan assets at fair value................ 8,489 -- 7,306 --
------------ ------------ ----------- -------------
Plan assets in excess of (less than)
projected benefit obligation........... 3,251 (319) 2,433 (274)
Unrecognized transition amount........... (662) 1 (769) 1
Unrecognized prior service cost.......... 317 10 356 11
Unrecognized net (gain) loss............. (1,689) 45 (916) 16
Additional minimum liability............. -- (11) -- (10)
Effect of fourth quarter activity........ (67) 4 (98) 4
------------ ------------ ----------- -------------
Prepaid (accrued) pension cost
at December 31......................... $ 1,150 $ (270) $ 1,006 $ (252)
============ ============ =========== =============
</TABLE>

Plan assets consist primarily of equity securities, bonds, real estate and
short-term investments, of which $6,022 million and $5,668 million are
included in Separate Account assets and liabilities at December 31, 1997
and 1996, respectively.

Effective December 31, 1996, The Prudential Securities Incorporated Cash
Balance Plan (the "PSI Plan") was merged into The Retirement System for
United States Employees and Special Agents of The Prudential Insurance
Company of America (the "Prudential Plan"). The name of the merged plan is
The Prudential Merged Retirement Plan ("Merged Retirement Plan"). All of
the assets of the Merged Retirement Plan are available to pay benefits to
participants and their beneficiaries who are covered by the Merged
Retirement Plan. The merger of the plans had no effect on the December 31,
1996 consolidated financial position or results of operations.

During 1996, the Prudential Plan was amended to provide cost of living
adjustments for retirees. The effect of this plan amendment increased
benefit obligations and unrecognized prior service cost by $170 million at
September 30, 1996. In addition, the Prudential Plan was amended to provide
contractual termination benefits to certain plan participants who were
notified between September 15, 1996 and December 31, 1997 that their
employment had been terminated. During 1997, the Prudential Retirement Plan
Document, a component of the Merged Retirement Plan was amended to extend
the contractual termination benefits to December 31, 1998. Costs related to
these amendments are reflected below in contractual termination benefits.

23
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. EMPLOYEE BENEFIT PLANS (CONTINUED)

Net periodic pension income included in "General and administrative
expenses" in the Company's consolidated statement of operations for the
years ended December 31, 1997, 1996 and 1995 include the following
components:

1997 1996 1995
-------------- ------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost-benefits earned during the year......... $ 127 $ 140 $ 133
Interest cost on projected benefit obligation........ 376 354 392
Actual return on plan assets......................... (1,693) (748) (1,288)
Net amortization and deferral........................ 1,012 73 629
Contractual termination benefits..................... 30 63 --
-------------- ------------- --------------
Net periodic pension income.......................... $ (148) $ (118) $ (134)
============== ============= ==============
</TABLE>

The assumptions at September 30 used by the Company are to calculate the
projected benefit obligations as of that date and determine the pension
expense for the following fiscal year:

1997 1996 1995
-------------- ------------- --------------

<S> <C> <C> <C>
Discount rate.......................................... 7.25% 7.75% 7.50%

Rate of increase in compensation levels................ 4.50% 4.50% 4.50%

Expected long-term rate of return on plan assets....... 9.50% 9.50% 9.00%
</TABLE>

OTHER POSTRETIREMENT BENEFITS

The Company provides certain life insurance and health care benefits for
its retired employees, their beneficiaries and covered dependents.
Substantially all of the Company's employees may become eligible to receive
benefits if they retire after age 55 with at least 10 years of service, or
under circumstances after age 50 with at least 20 years of continuous
service.

The Company has elected to amortize its transition obligation over 20
years. Post-retirement benefits are funded as considered necessary by
Company management. The Company's funding of its postretirement benefit
obligations totaled $43 million, $38 million and $94 million in 1997, 1996
and 1995, respectively.

In 1995 the Company modified the restrictions on certain post-retirement
plan assets to allow these assets to be used for benefits related to both
active and retired employees. Formerly, these benefits were available only
for retired employees. In connection with this modification, the Company
transferred $120 million from one of these plans in 1995. Of the $120
million transferred, $45 million went to Union Post-Retirement Benefits and
$75 million went to Union Medical Benefits.

24
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. EMPLOYEE BENEFIT PLANS (CONTINUED)

The status of the plan at September 30, adjusted for assets transferred to
the plan in the fourth quarter, is provided below. Accrued post-retirement
benefit costs are included in "Other liabilities" in the Company's
consolidated statement of financial position.
<TABLE>
<CAPTION>

1997 1996
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees.......................................................... $ (1,516) $ (1,423)
Fully eligible active plan participants........................... (36) (35)
Other active plan participants.................................... (576) (544)
--------- ---------
Total APBO..................................................... (2,128) (2,002)
Plan assets at fair value............................................ 1,354 1,313
--------- ---------
Funded status........................................................ (774) (689)
Unrecognized transition amount....................................... 707 787
Unrecognized net gain ............................................... (364) (428)
Effects of fourth quarter activity................................... 33 28
--------- ---------
Accrued postretirement benefit cost at December 31................... $ (398) $ (302)
========= =========
</TABLE>

Plan assets with respect to this coverage consist of group and individual
variable life insurance policies, group life and health contracts, common
stocks, U.S. government securities and short-term investments. Plan assets
include $1,044 million and $1,003 million of Company insurance policies and
contracts at December 31, 1997 and 1996, respectively.

Net periodic postretirement benefit cost included in "General and
administrative expenses" for the years ended December 31, 1997, 1996 and
1995 includes the following components:

1997 1996 1995
---------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost.............................................. $ 38 $ 45 $ 44
Interest cost............................................. 149 157 169
Actual return on plan assets.............................. (120) (105) (144)
Net amortization and deferral............................. 70 53 111
----------- ----------- -----------
Net periodic postretirement benefit cost.................. $ 137 $ 150 $ 180
=========== =========== ===========
</TABLE>

The following assumptions at September 30 are used to calculate the APBO as
of that date and determine postretirement benefit expense for the following
fiscal year:

1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Discount rate............................................. 7.25% 7.75% 7.50%
Rate of increase in compensation levels................... 4.5% 4.5% 4.5%
Expected long-term rate of return on plan assets.......... 9.0% 9.0% 8.0%
Health care cost trend rates.............................. 8.2-11.8% 8.5-12.5% 8.9-13.3%
Ultimate health care cost trend rate after gradual
decrease until 2006....................................... 5.0% 5.0% 5.0%

</TABLE>

25
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. EMPLOYEE BENEFIT PLANS (CONTINUED)

The effect of a 1% increase in health care cost trend rates for each future
year on the following costs at December 31, are as follows:

1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation............ $ (218) $ (207) $ (217)
Service and interest costs............................... 24 25 27
</TABLE>

POSTEMPLOYMENT BENEFITS

The Company accrues postemployment benefits primarily for life and health
benefits provided to former or inactive employees who are not retirees. The
net accumulated liability for these benefits at December 31, 1997 and 1996
was $144 million and $156 million, respectively, and is included in "Other
liabilities."

OTHER EMPLOYEE BENEFITS

The Company sponsors voluntary savings plans for employees (401(k) plans).
The plans provide for salary reduction contributions by employees and
matching contributions by the Company of up to three percent of annual
salary, resulting in $63 million, $57 million, and $61 million of expenses
included in "General and administrative expenses" for 1997, 1996 and 1995,
respectively.

8. INCOME TAXES

The components of income tax expense for the years ended December 31, were
as follows:

1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Current tax expense (benefit):
U.S...................................................... $ (158) $ 255 $ 1,189
State and Iocal.......................................... 48 103 38
Foreign.................................................. 64 48 66
--------- --------- ---------
Total.................................................... $ (46) $ 406 $ 1,293
========= ========= =========

Deferred tax expense (benefit):
U.S...................................................... $ 227 $ (442) $ (166)
State and Iocal.......................................... 3 (2) (10)
Foreign.................................................. 33 54 9
--------- --------- ---------
Total.................................................... $ 263 $ (390) $ (167)
========= ========= =========

Total income tax expense................................. $ 217 $ 16 $ 1,126
========= ========= =========
</TABLE>

26
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. INCOME TAXES (CONTINUED)

The Company's income tax expense for the years ended December 31, differs
from the amount computed by applying the expected federal income tax rate
of 35% to income from operations before income taxes for the following
reasons:

1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Expected federal income tax expense.......................... $ 290 $ 382 $ 829
Equity tax................................................... (91) (365) 163
State and local income taxes................................. 51 100 28
Tax-exempt interest and dividend received deduction.......... (67) (50) (77)
Other........................................................ 34 (51) 183
-------- -------- --------
Total income tax expense..................................... $ 217 $ 16 $ 1,126
======== ======== ========
</TABLE>

Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:

1997 1996
------- --------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets
Insurance reserves.......................................... $ 1,482 $ 1,316
Policyholder dividends...................................... 250 257
Net operating loss carryforwards............................ 80 268
Depreciation................................................ -- 44
Litigation related reserves................................. 178 297
Employee benefits........................................... 42 10
Other....................................................... 360 329
-------- --------
Deferred tax assets before valuation allowance.............. 2,392 2,521
Valuation allowance......................................... (18) (36)
-------- --------
Deferred tax assets after valuation allowance............... 2,374 2,485
-------- --------
Deferred tax liabilities
Investments................................................. 1,867 1,183
Deferred acquisition costs.................................. 1,525 1,707
Depreciation................................................ 36 --
Other....................................................... 73 110
-------- --------
Deferred tax liabilities.................................... 3,501 3,000
-------- --------
Net deferred tax liability.................................... $ 1,127 $ 515
======== ========
</TABLE>

The Company's income taxes payable of $500 million and $1,544 million
includes a $627 million current income tax receivable at December 31, 1997
and a $1,029 million current income taxes payable at December 31, 1996.

27
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. INCOME TAXES (CONTINUED)

Management believes that based on its historical pattern of taxable income,
the Company will produce sufficient income in the future to realize its net
deferred tax asset after valuation allowance. Adjustments to the valuation
allowance will be made if there is a change in management's assessment of
the amount of the deferred tax asset that is realizable. At December 31,
1997, the Company had state non-life operating loss carryforwards for tax
purposes approximating $800 million.

The Internal Revenue Service (the "Service") has completed an examination
of the consolidated federal income tax return through 1989. The Service has
examined the years 1990 through 1992. Discussions are being held with the
Service with respect to proposed adjustments, however, management believes
there are adequate defenses against, or sufficient reserves to provide for,
such adjustments. The Service has begun their examination of the years 1993
through 1995.

9. EQUITY

RECONCILIATION OF STATUTORY SURPLUS AND NET INCOME

Accounting practices used to prepare statutory financial statements for
regulatory purposes differ in certain instances from GAAP. The following
table reconciles the Company's statutory net income and surplus as of and
for the years ended December 31, determined in accordance with accounting
practices prescribed or permitted by the New Jersey Department of Banking
and Insurance with net income and equity determined using GAAP:

1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
STATUTORY NET INCOME........................................... $ 1,471 $ 1,402 $ 478
Adjustments to reconcile to net income on a GAAP basis:
Insurance revenues and expenses.............................. 12 (478) (496)
Income taxes................................................. 601 439 (596)
Valuation of investments..................................... (62) 121 --
Realized investment gains.................................... 702 327 1,562
Litigation and other reserves................................ (1,975) (906) --
Other, net................................................... (139) 173 295
-------- -------- --------
GAAP NET INCOME................................................ $ 610 $ 1,078 $ 1,243
======== ======== ========
</TABLE>

1997 1996
-------- --------
(IN MILLIONS)
<S> <C> <C>
STATUTORY SURPLUS.............................................. $ 9,242 $ 9,375
Adjustments to reconcile to equity on a GAAP basis:
Deferred policy acquisition costs............................ 5,994 6,291
Valuation of investments..................................... 8,067 5,624
Future policy benefits and policyholder account balances..... (2,906) (1,976)
Non-admitted assets.......................................... 1,643 1,285
Income taxes................................................. (1,070) (654)
Surplus notes................................................ (986) (985)
Other, net................................................... (266) (437)
-------- --------
GAAP EQUITY.................................................... $ 19,718 $ 18,523
======== ========

</TABLE>

28
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. EQUITY (CONTINUED)

The New York State Insurance Department ("Department") recognizes only
statutory accounting for determining and reporting the financial condition
of an insurance company, for determining its solvency under the New York
Insurance Law and for determining whether its financial condition warrants
the payment of a dividend to its policyholders. No consideration is given
by the Department to financial statements prepared in accordance with GAAP
in making such determinations.

10. OPERATING LEASES

The Company and its subsidiaries occupy leased office space in many
locations under various long-term leases and have entered into numerous
leases covering the long-term use of computers and other equipment. At
December 31, 1997, future minimum lease payments under non-cancelable
operating leases are estimated as follows:

(IN MILLIONS)

1998........................................ $ 313

1999........................................ 277

2000........................................ 230

2001........................................ 201

2002........................................ 171

Remaining years after 2002.................. 833
-----------

Total....................................... $ 2,025
===========

Rental expense incurred for the years ended December 31, 1997 and 1996 was
approximately $352 million and $343 million, respectively.

11. DIVESTITURES

In October 1995, the Company completed the sale of its reinsurance segment,
Prudential Reinsurance Holdings, Inc., through an initial public offering
of common stock. As a result of the sale, an after-tax loss of $297 million
was recorded in 1995.

On January 26, 1996, the Company entered into a definitive agreement to
sell substantially all the assets of Prudential Home Mortgage Company, Inc.
It has also liquidated certain mortgage-backed securities and extended
warehouse losses, asset write downs, and other costs directly related to
the planned sale. The Company recorded an after-tax loss in 1995 of $98
million which includes operating gains and losses, asset write downs and
other costs directly related with the planned sale. The net assets of the
mortgage banking segment at December 31, 1995 was $78 million, comprised of
$4,293 million in assets and $4,215 million in liabilities.

On July 31, 1996, the Company sold a substantial portion of its Canadian
Branch business to the London Life Insurance Company ("London Life"). This
transaction was structured as a reinsurance transaction whereby London Life
assumed total liabilities of the Canadian Branch equal to $3,291 million as
well as a related amount of assets equal to $3,205 million. This transfer
resulted in a reduction of policy liabilities of $3,257 million and a
corresponding reduction in invested assets. The Company recognized an
after-tax gain in 1996 of $116 million as a result of this transaction,
recorded in "Realized investment gains, net."

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values presented below have been determined using available
information and valuation methodologies. Considerable judgment is applied
in interpreting data to develop the estimates of fair value. Accordingly,
such estimates presented may not be realized in a current market exchange.
The use of different market assumptions and/or estimation methodologies
could have a material effect on the estimated fair values. The following
methods and assumptions were used in calculating the fair values (for all
other financial instruments presented in the table, the carrying value
approximates fair value).

29
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

FIXED MATURITIES AND EQUITY SECURITIES

Fair values for fixed maturities and equity securities, other than private
placement securities, are based on quoted market prices or estimates from
independent pricing services. Fair values for private placement securities
are estimated using a discounted cash flow model which considers the
current market spreads between the U.S. Treasury yield curve and corporate
bond yield curve, adjusted for the type of issue, its current credit
quality and its remaining average life. The estimated fair value of certain
non-performing private placement securities is based on amounts estimated
by management.

MORTGAGE LOANS ON REAL ESTATE

The fair value of the mortgage loan portfolio is primarily based upon the
present value of the scheduled future cash flows discounted at the
appropriate U.S. Treasury rate, adjusted for the current market spread for
a similar quality mortgage. For certain non-performing and other loans, the
fair value is based upon the present value of expected future cash flows
discounted at the appropriate U.S. Treasury rate adjusted for current
market spread for a similar quality mortgage.

POLICY LOANS

The estimated fair value of policy loans is calculated using a discounted
cash flow model based upon current U.S. Treasury rates and historical loan
repayments.

DERIVATIVE FINANCIAL INSTRUMENTS

The fair value of swap agreements is estimated based on the present value
of future cash flows under the agreements discounted at the applicable zero
coupon U.S. Treasury rate and swap spread. The fair value of forwards,
futures and options is estimated based on market quotes for a transaction
with similar terms. The fair value of loan commitments is derived by
comparing the contractual stream of fees with such fee streams adjusted to
reflect current market rates that would be applicable to instruments of
similar type, maturity, and credit standing.

POLICYHOLDERS' ACCOUNT BALANCES

Fair values of policyholders' account balances are estimated using
discounted projected cash flows, based on interest rates being offered for
similar contracts, with maturities consistent with those remaining for the
contracts being valued.

DEBT

The estimated fair value of short-term and long-term debt is derived by
using discount rates based on the borrowing rates currently available to
the Company for debt with similar terms and remaining maturities.

30
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

The following table discloses the carrying amounts and estimated fair
values of the Company's financial instruments at December 31:

<TABLE>
<CAPTION>
1997 1996
-------------------------- ------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ----------- ------------ --------------
FINANCIAL ASSETS: (IN MILLIONS)
<S> <C> <C> <C> <C>
Other than trading:
- -------------------
Fixed maturities:
Available for sale....................... $ 75,270 $ 75,270 $ 66,553 $ 66,553
Held to maturity......................... 18,700 19,894 20,403 21,362
Equity securities........................... 2,810 2,810 2,622 2,622
Mortgage loans on real estate............... 16,004 17,153 17,097 17,963
Policy loans................................ 6,827 6,994 6,692 6,613
Securities purchased under
agreements to resell .................... 8,661 8,661 5,347 5,347
Cash collateral for borrowed securities..... 5,047 5,047 2,416 2,416
Short-term investments...................... 12,106 12,106 9,294 9,294
Cash ....................................... 3,636 3,636 2,091 2,091
Separate Accounts assets.................... 74,046 74,046 63,358 63,358
Derivative financial instruments............ 24 35 16 32

Trading:
- --------
Trading account assets...................... 6,044 6,044 4,219 4,219
Receivables from broker-dealer clients...... 6,273 6,273 5,281 5,281
Derivative financial instruments............ 979 979 904 904

FINANCIAL LIABILITIES:

Other than trading:
- -------------------
Policyholders' account balances............. 32,941 33,896 36,009 37,080
Securities sold under
agreements to repurchase................. 12,347 12,347 7,503 7,503
Cash collateral for loaned securities....... 14,117 14,117 8,449 8,449
Short-term and long-term debt............... 11,047 11,020 10,322 10,350
Securities sold but not yet purchased....... 3,533 3,533 1,900 1,900
Separate Accounts liabilities............... 73,658 73,658 62,845 62,845
Derivative financial instruments............ 32 47 32 45

Trading:
- --------
Payables to broker-dealer clients........... 3,338 3,338 3,018 3,018
Derivative financial instruments ........... 1,088 1,088 1,120 1,120
</TABLE>

31
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

The tables below summarize the Company's outstanding positions by
derivative instrument types as of December 31, 1997 and 1996. The amounts
presented are classified as either trading or other than trading, based on
management's intent at the time of contract inception and throughout the
life of the contract. The table includes the estimated fair values of
outstanding derivative positions only and does not include the changes in
fair values of associated financial and non-financial assets and
liabilities, which generally offset derivative notional amounts. The fair
value amounts presented also do not reflect the netting of amounts pursuant
to right of setoff, qualifying master netting agreements with
counterparties or collateral arrangements.

DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1997
(IN MILLIONS)

<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
------------------------ ----------------------- ------------------------------------
ESTIMATED ESTIMATED CARRYING ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
----------- ----------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Assets.............. $ 7,759 $ 394 $ 61 $ -- $ 7,820 $ 395 $ 394
Liabilities......... 6,754 489 13 3 6,767 493 491

Forwards:
Assets.............. 29,511 429 1,031 23 30,542 452 452
Liabilities......... 29,894 459 647 7 30,541 466 466

Futures:
Assets.............. 4,103 51 46 -- 4,149 51 51
Liabilities......... 3,064 50 3,320 21 6,384 71 71

Options:
Assets.............. 6,893 105 239 -- 7,132 105 105
Liabilities......... 4,165 90 5 -- 4,170 90 90

Loan Commitments:
Assets.............. -- -- 317 12 317 -- 12
Liabilities......... -- -- 524 16 524 -- 16
----------- ----------- ---------- ----------- ----------- ---------- -----------

Total:
Assets.............. $ 48,266 $ 979 $ 1,694 $ 35 $ 49,960 $ 1,003 $ 1,014
=========== =========== ========== =========== =========== ========== ===========

Liabilities......... $ 43,877 $ 1,088 $ 4,509 $ 47 $ 48,386 $ 1,120 $ 1,134
=========== =========== ========== =========== =========== ========== ===========
</TABLE>

32
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)

DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1997
(IN MILLIONS)

<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
------------------------ ----------------------- ------------------------------------
ESTIMATED ESTIMATED CARRYING ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
----------- ----------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Assets.............. $ 8,080 $ 481 $ 398 $ 10 $ 8,478 $ 481 $ 491
Liabilities......... 8,316 756 139 17 8,455 771 773

Forwards:
Assets.............. 24,275 367 489 13 24,764 376 380
Liabilities......... 20,103 308 920 10 21,023 318 318

Futures:
Assets.............. 2,299 24 3 -- 2,302 24 24
Liabilities......... 2,573 30 1,087 6 3,660 36 36

Options:
Assets.............. 2,981 32 2,083 7 5,064 39 39
Liabilities......... 2,653 26 437 12 3,090 27 38

Loan Commitments:
Assets.............. -- -- 163 2 163 -- 2
Liabilities......... -- -- 445 -- 445 -- --
----------- ----------- ---------- ----------- ----------- ---------- -----------

Total:
Assets.............. $ 37,635 $ 904 $ 3,136 $ 32 $ 40,771 $ 920 $ 936
=========== =========== ========== =========== =========== ========== ===========

Liabilities......... $ 33,645 $ 1,120 $ 3,028 $ 45 $ 36,673 $ 1,152 $ 1,165
=========== =========== ========== =========== =========== ========== ===========
</TABLE>

CREDIT RISK

The current credit exposure of the Company's derivative contracts is
limited to the fair value at the reporting date. Credit risk is managed by
entering into transactions with creditworthy counterparties and obtaining
collateral where appropriate and customary. The Company also attempts to
minimize its exposure to credit risk through the use of various credit
monitoring techniques. Approximately 95% of the net credit exposure for the
Company from derivative contracts is with investment-grade counterparties.

Net trading revenues for the years ended December 31, 1997, 1996 and 1995
relating to forwards, futures and swaps were $54 million, $37 million, $(8)
million; $42 million, $32 million, $(11) million; and $110 million, $42
million, $3 million respectively. Net trading revenues for options were not
material. Average fair values for trading derivatives in an asset position
during the years ended December 31, 1997 and 1996 were $1,015 million and
$881 million, respectively, and for derivatives in a liability position
were $1,166 million and $1,038 million, respectively. Of those derivatives
held for trading purposes at December 31, 1997, 52% of the notional amount
consisted of interest rate derivatives, 40% consisted of foreign currency
derivatives, and 8% consisted of equity and commodity derivatives. Of those
derivatives held for purposes other than trading at December 31, 1997, 72%
of notional consisted of interest rate derivatives and 28% consisted of
foreign currency derivatives.

33
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)

OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS

During the normal course of its business, the Company utilizes financial
instruments with off-balance sheet credit risk such as commitments,
financial guarantees, loans sold with recourse and letters of credit.
Commitments include commitments to purchase and sell mortgage loans, the
unfunded portion of commitments to fund investments in private placement
securities, and unused credit card and home equity lines. The Company also
provides financial guarantees incidental to other transactions and letters
of credit that guarantee the performance of customers to third parties.
These credit-related financial instruments have off-balance sheet credit
risk because only their origination fees, if any, and accruals for probable
losses, if any, are recognized until the obligation under the instrument is
fulfilled or expires. These instruments can extend for several years and
expirations are not concentrated in any period. The Company seeks to
control credit risk associated with these instruments by limiting credit,
maintaining collateral where customary and appropriate, and performing
other monitoring procedures.

The fair value of asset positions in these instruments, which represents
the Company's current exposure to credit loss from other parties'
non-performance, was $1,014 million and $936 million at December 31, 1997
and 1996, respectively.

14. CONTINGENCIES AND LITIGATION

FINANCIAL GUARANTEE AGREEMENT

In connection with the sale in 1995 of its wholly-owned subsidiary
Prudential Reinsurance Company ("Pru Re"), the Company's subsidiary,
Gibraltar Casualty Insurance Company ("Gibraltar") entered into a stop-loss
reinsurance agreement with Pru Re whereby Gibraltar has reinsured up to
$375 million of the first $400 million of aggregate adverse loss
development on reserves recorded by Pru Re at June 30, 1995. Gibraltar also
has entered into several quota share reinsurance arrangements with Pru Re
whereby certain medical malpractice, direct insurance and casualty
reinsurance pool risks previously underwritten by Pru Re prior to June 30,
1995 were ceded to Gibraltar. The Company has guaranteed Gibraltar's
obligations arising under each of these contracts subject to a limit of
$375 million for the stop-loss agreement and $400 million for the other
agreements. Through December 31, 1997, Gibraltar has incurred $285 million
in losses under the stop-loss agreement, including $45 million in 1997.
Gibraltar has paid $165 million to Pru Re under the stop-loss agreement.
The Company has not been required to fund losses arising under the other
arrangements.

ENVIRONMENTAL AND ASBESTOS-RELATED CLAIMS

Certain of the Company's subsidiaries received claims under expired
contracts which assert alleged injuries and/or damages relating to or
resulting from toxic torts, toxic waste and other hazardous substances. The
liabilities for such claims cannot be estimated by traditional reserving
techniques. As a result of judicial decisions and legislative actions, the
coverage afforded under these contracts may be expanded beyond their
original terms. Extensive litigation between insurers and insureds over
these issues continues and the outcome is not predictable. In establishing
the liability for unpaid claims for these losses, management considered the
available information. However, given the expansion of coverage and
liability by the courts and legislatures in the past, and potential for
other unfavorable trends in the future, the ultimate cost of these claims
could increase from the levels currently established.

MANAGED CARE REIMBURSEMENT

In 1997, the Company continued to review its obligations under certain
managed care arrangements for possible failure to comply with contractual
and regulatory requirements. The estimated cost to the Company for these
reimbursements increased by $115 million in 1997, bringing the total
provision to $265 million. As of December 31, 1997, $163 million has been
paid or credited to customers. It is the opinion of management that the
remaining reserves of $102 million at December 31, 1997 represent a
reasonable estimate of remaining reimbursements to customers and other
related costs.

LITIGATION

Various lawsuits against the Company have arisen in the course of the
Company's business. In certain of these matters, large and/or indeterminate
amounts are sought.

Three putative class actions and approximately 677 individual actions were
pending against the Company in the United States as of January 31, 1998
brought on behalf of those persons who purchased life insurance policies
allegedly because of deceptive sales practices engaged in by the Company
and its insurance agents in violation of state and federal laws. The
Company anticipates additional suits may be filed by individuals who opted
out of the class action settlement described below. The sales practices
alleged to have occurred are contrary to Company policy. Some of

34
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. CONTINGENCIES AND LITIGATION (CONTINUED)

these cases seek substantial damages while others seek unspecified
compensatory, punitive and treble damages. The Company intends to defend
these cases vigorously.

A Multi-State Life Insurance Task Force (the "Task Force"), comprised of
insurance regulators from 29 states and the District of Columbia, was
formed in April 1995 to conduct a review of sales and marketing practices
throughout the life insurance industry. As the largest life insurance
company in the United States, the Company was the initial focus of the Task
Force examination. On July 9, 1996, the Task Force released its report on
the Company's activities. The Task Force found that some sales of life
insurance policies by the Company had been improper. Based on the findings,
the Task Force recommended, and the Company agreed to, a series of fines
allocated to all 50 states and the District of Columbia. In addition, the
Task Force recommended a remediation program pursuant to which the Company
would offer relief to the policyowners who were misled when they purchased
permanent life insurance policies in the United States from 1982 to 1995.

On October 28, 1996, the Company entered into a Stipulation of Settlement
with attorneys for the plaintiffs in the consolidated class action lawsuit
pending in a Multi-District Litigation proceeding in the federal court in
New Jersey. The class action suit involved alleged improprieties in
connection with the Company's sale, servicing and operation of permanent
life insurance policies from 1982 through 1995. Pursuant to the settlement,
the Company agreed to provide certain enhancements and changes to the
remediation program previously accepted by the Task Force, including some
additional remedies. In addition, the Company agreed that it would incur a
minimum cost of $410 million in providing remedies to policyowners under
the program and, in specified circumstances, agreed to make certain other
payments and guarantees. Under the terms of the settlement, the Company
agreed to a minimum average cost per remedy of $2,364 for up to 330,000
claims remedied and also agreed to provide additional compensation to be
determined by formula that will range in aggregate amount from $50 million
to $300 million depending on the total number of claims remedied. At the
end of the remediation program's claim evaluation process, the Court will
determine how the additional compensation will be distributed.

The terms of the remediation program described above were enhanced again in
February 1997 pursuant to agreements reached with several states that had
not previously accepted the terms of the program. These changes were
incorporated as amendments to the above-described Stipulation of Settlement
and related settlement documents, and the amended Stipulation of Settlement
was approved as fair to class members by the United States District Court
for the District of New Jersey in March 1997. By that point in time, the
Company had entered into agreements with all 50 states and the District of
Columbia pursuant to which each jurisdiction had accepted the remediation
plan and the Company had agreed to pay approximately $65 million in fines,
penalties and related payments.

The decision of the U.S. District Court to certify a class in the
above-described litigation for settlement purposes only and to approve the
class action settlement as described in the amended Stipulation of
Settlement is presently on appeal to the U.S. Court of Appeals for the
Third Circuit. The appellants claim that the District Court erred in
certifying a class and in finding that the terms of the settlement are fair
to the class.

Pursuant to the state agreements and the amended Stipulation of Settlement,
as approved by the U.S. District Court, the Company initiated its
remediation program in 1997. The Company mailed packages and provided broad
class notice to the owners of approximately 10.7 million policies eligible
to participate in the remediation program, informing them of their rights.
Owners of approximately 21,800 policies elected to be excluded from the
class action settlement. Of those eligible to participate in the
settlement, policyowners who believed they were misled were invited to file
a claim through an Alternative Dispute Resolution ("ADR") process. The ADR
process was established to enable the company to discharge its liability to
the affected policyowners. Policyowners who did not wish to file a claim in
the ADR process were permitted to choose from options available under Basic
Claim Relief, such as preferred rate premium loans, or annuities, mutual
fund shares or life insurance policies that the Company will enhance.

The owners of approximately 1.16 million policies responded to these
notices by indicating an intent to file an ADR claim. All policyholders who
responded were provided an ADR claim form for completion and submission.
Approximately 635,000 claim forms were completed and returned as of January
31, 1998. Management does not believe the number of ADR claims that will be
completed and returned will increase significantly. In addition, the owners
of approximately 510,000 policies indicated an interest in a Basic Claim
Relief remedy. The ADR process requires that individual claim files be
reviewed by one or more independent claim evaluators. Management does not
believe costs associated with providing Basic Claim Relief will be material
to the Company's financial position or results of operations.

35
<PAGE>

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. CONTINGENCIES AND LITIGATION (CONTINUED)

In 1996, the Company recorded in its Statement of Operations, the minimum
cost of $410 million as agreed to in the settlement. Management had no
better information available at that time upon which to make a reasonable
estimate of losses. Management now has additional information which allows
for computation of a reasonable estimate of losses associated with ADR
claims. Based on this additional information, in 1997, management had
increased the estimated liability for the cost of remedying policyholder
claims in the ADR process by $1.64 billion before taxes to approximately
$2.05 billion before taxes of which $1.80 billion has been funded in a
settlement trust as described in Note 3. While management believes these
are reasonable estimates based on information currently available, the
ultimate amount of the total cost of remedied policyholder claims is
dependent on complex and varying factors, including actual claims by
eligible policyholders, the relief options chosen and the dollar value of
those options. There are also additional elements of the ADR process which
cannot be fully evaluated at this time (e.g., claims which may be
successfully appealed) which could increase this estimate.

Litigation is subject to many uncertainties, and given the complexity and
scope of these suits, their outcome cannot be predicted. It is also not
possible to predict the likely results of any regulatory inquiries or their
effect on litigation which might be initiated in response to widespread
media coverage of these matters. Accordingly, management is unable to make
a meaningful estimate of the amount or range of loss that could result from
an unfavorable outcome of all pending litigation and the regulatory
inquiries. It is possible that the results of operations or the cash flow
of the Company, in particular quarterly or annual periods, could be
materially affected by an ultimate unfavorable outcome of certain pending
litigation and regulatory matters. Management believes, however, that the
ultimate outcome of all pending litigation and regulatory matters referred
to above should not have a material adverse effect on the Company's
financial position, after consideration of applicable reserves.

The Company and a number of other insurers ("the Consortium") entered into
a Reinsurance and Participation Agreement (the "Agreement") with MBL Life
Assurance Corporation ("MBLLAC") and others, under which the Company and
the other insurers agreed to reinsure certain payments to be made to
contract holders by MBLLAC in connection with the plan of rehabilitation of
Mutual Benefit Life Insurance Company. Under the agreement, the Consortium,
subject to certain terms and conditions, will indemnify MBLLAC for the
ultimate net loss sustained by MBLLAC on each contract subject to the
Agreement. The ultimate net loss represents the amount by which the
aggregate required payments exceed the fair market value of the assets
supporting the covered contracts at the time such payments are due. The
Company's share of any net loss is 30.55%. The Company has determined that
it does not expect to make any payments to MBLLAC under the agreement. The
Company concluded this after testing a wide range of potentially adverse
scenarios during the rehabilitation period for MBLLAC.

15. SUBSEQUENT EVENTS

On February 10, 1998, the Company's Board of Directors authorized
management to take the preliminary steps necessary to allow the Company to
demutualize and become a publicly-traded company. The Company has begun
discussions with the New Jersey Department of Banking and Insurance,
leaders in the New Jersey State Legislature, as well as other key
regulatory agencies around the country. The New Jersey State Legislature
must first pass a law permitting demutualization. The New Jersey Department
of Banking and Insurance, the Company's Board and a majority of
participating policyholders must ultimately approve the Company's plan for
demutualization.

* * * * *

<PAGE> 60

Item 28. FINANCIAL STATEMENTS AND EXHIBITS

(a) Financial Statements

(1) Financial Statements of The Prudential Variable Contract
Account-2 (Registrant) consisting of the Statement of Net
Assets, as of December 31, 1997; the Statement of Operations
for the period ended December 31, 1997; the Statements of
Changes in Net Assets for the periods ended December 31,
1997 and 1996; and the Notes relating thereto appear in the
statement of additional information (Part B of the
Registration Statement).

(2) Financial Statements of The Prudential Insurance Company of
America (Depositor) consisting of the Statements of
Financial Position as of December 31, 1997 and 1996; the
Statements of Operations and Changes in Surplus and Asset
Valuation Reserve (AVR) and the Statements of Cash Flows for
the years ended December 31, 1997 and 1996; and the Notes
relating thereto appear in the statement of additional
information (Part B of the Registration Statement).

<TABLE>

<CAPTION>
(b) Exhibits
<S> <C>
(1) Resolution of the Board of Directors Incorporated by reference to
of The Prudential Insurance Exhibit 1 to this Registrant's Form
Company of America establishing N-8B-1 Registration Statement, File
The Prudential Variable Contract No.811-1612
Account-2

(2) Rules and Regulations of The Incorporated by reference to
Prudential Variable Contract Exhibit (2) to Post-Effective
Account-2 Amendment No. 41 to this
Registration Statement
(To be filed via EDGAR)

(3) Form of Custodian Agreement Filed herewith
with Investors Fiduciary Trust
Company

(4) (i) Agreement for Investment Incorporated by reference to
Management Services between Exhibit 5 to Registrant's
Prudential and The Prudential Form N-8B-1 Registration Statement,
Variable Contract Account-2 File No. 811-1612
(To be filed via EDGAR)

(ii) Amendment No. 1 to Agreement Incorporated by reference to
for Investment Management Services Exhibit 1 (5)(b) to Post-Effective
between Prudential and The Amendment No. 8 to this
Prudential Variable Contract Registration Statement
Account-2 (To be filed via EDGAR)
</TABLE>

C-1
<PAGE> 61

<TABLE>

<CAPTION>
<S> <C>
(5) (i) Agreement Relating to the Sale Incorporated by reference to
of Group Variable Annuity Contracts Exhibit 6 to this Registrant's
between Prudential and The Form N-8B-1 Registration Statement,
Prudential Variable Contract File No.811-1612
Account-2 (To be filed via EDGAR)

(ii) Amendment to Agreement Incorporated by reference to
Relating to the Sale of Group Exhibit 6(ii) to Post-Effective
Variable Annuity Contracts between Amendment No. 25 to this
Prudential and The Prudential Registration Statement
Variable Contract Account-2 (To be filed via EDGAR)

(iii) Dealer Agreement between Incorporated by reference to
Prudential, The Prudential Variable Exhibit 6(iii) to Post-Effective
Contract Account-2 and Prudential- Amendment No. 34 to this
Bache Securities Inc. Registration Statement
(To be filed via EDGAR)

(iv) Agreement for the Sale of VCA-2 Incorporated by reference to
Contracts between Prudential, The Exhibit 5(iv) to Post-Effective
Prudential Variable Contract Amendment No. 46 to this
Account-2 and Prudential Retirement Registration Statement
Services, Inc. (To be filed via EDGAR)

(v) Agreement for the Sale of VCA- Incorporated by reference to
Contracts between Prudential, The Exhibit 5(v) to Post-Effective
Prudential Variable Contract Amendment No. 50 to this
Account-2 and Prudential Investment Registration Statement
Management Services LLC

(6) (i) Specimen copy of group variable Incorporated by reference to
annuity contract Form GVA-120, with Exhibit (4) to Post-Effective
State modifications Amendment No. 32 to this
Registration Statement
(To be filed via EDGAR)

(ii) Specimen copy of Group Annuity Incorporated by reference to
Amendment Form GAA-7764 for Exhibit (6)(ii) to Post-Effective
tax-deferred annuities Amendment No 42 to this
Registration Statement
(To be filed via EDGAR)

(iii) Specimen copy of Group Incorporated by reference to
Annuity Amendment Form GAA-7852 Exhibit (6)(iii) to Post-Effective
for tax-deferred annuities Amendment No. 45 to this
Registration Statement
(To be filed via EDGAR)

(7) Application form Incorporated by reference to
Exhibit (4) of Post-Effective
Amendment No. 32 to this
Registration Statement
(To be filed via EDGAR)

(8) (i) Copy of the Charter of Incorporated by reference to
Prudential as amended to and Post-Effective Amendment No. 9
including November 14, 1995 to Form S-1, Registration
No. 33-20083 filed April 9, 1997
on behalf of the Prudential
Variable Contract Real Property
Account
</TABLE>

C-2
<PAGE> 62

<S> <C>
(ii) Copy of the By-Laws of Incorporated by reference to
Prudential, as amended to and Post-Effective Amendment No. 12
including April 8, 1997 for Form N-4, Registration No.
33-25434 Filed April 30, 1997
on behalf of The Prudential
Individual Variable Contract Account

(11) (i) Service Agreement between Incorporated by reference to
Prudential and The Prudential Exhibit (10)(i) to Post-Effective
Investment Corporation Amendment No. 34 to this
Registration Statement
(To be filed via EDGAR)

(ii) Service Agreement between Incorporated by reference to
Prudential and The Prudential Asset Exhibit (10)(ii) to Post-Effective
Management Company, Inc. Amendment No. 34 to this
Registration Statement
(To be filed via EDGAR)

(13) (i) Consents of independent auditors Filed herewith
(ii) Powers of Attorney
(a) Members of the Registrant's Filed herewith
Committee Messrs. Fenster,
Weber and McDonald

(b) Directors and Officers Incorporated by reference to
of Prudential Post-Effective Amendment No. 10 to
Form S-1, Registration No. 33-20083,
filed April 9, 1998 on behalf of
The Prudential Variable Contract
Real Property Account.

(17) Financial Data Schedule Filed herewith
</TABLE>

C-3
<PAGE> 63

Item 29. DIRECTORS AND OFFICERS OF PRUDENTIAL

Information about Prudential's Directors and Executive Officers appears under
the heading "Directors and Officers of Prudential" in the Statement of
Additional Information (Part B of this Registration Statement).

Item 30. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

Registrant is a separate account of The Prudential Insurance Company of America,
a mutual life insurance company organized under the laws of the State of New
Jersey. The subsidiaries of Prudential, and short descriptions of each are
listed under Item 25 to Post-Effective Amendment No. 34 to the Form N-1A
Registration Statement for The Prudential Series Fund, Inc., Registration No.
2-80896, filed April 24, 1998, the text of which is hereby incorporated.

In addition to the subsidiaries shown on the Organization Chart, Prudential
holds all of the voting securities of Prudential's Gibraltar Fund, Inc., a
Maryland corporation, in three of its separate accounts. Prudential also holds
directly and in three of its other separate accounts, shares of The Prudential
Series Fund, Inc., a Maryland corporation. The balance are held in separate
accounts of Pruco Life Insurance Company and Pruco Life Insurance Company of New
Jersey, wholly-owned subsidiaries of Prudential. All of the separate accounts
referred to above are unit investment trusts registered under the Investment
Company Act of 1940. Prudential's Gibraltar Fund, Inc. and The Prudential Series
Fund, Inc. are registered as open-end, diversified management investment
companies under the Investment Company Act of 1940. The shares of these
investment companies are voted in accordance with the instructions of persons
having interests in the unit investment trusts, and Prudential, Pruco Life
Insurance Company and Pruco Life Insurance Company of New Jersey vote the shares
they hold directly in the same manner that they vote the shares that they hold
in their separate accounts.

Registrant may also be deemed to be under common control with The Prudential
Variable Contract Account-10 and The Prudential Variable Contract Account-11,
separate accounts of Prudential registered as open-end, diversified management
investment companies under the Investment Company Act of 1940, and with The
Prudential Variable Contract Account-24, a separate account of Prudential
registered as a unit investment trust.

The Prudential is a mutual insurance company. Its financial statements have been
prepared in conformity with generally accepted accounting principles, which
include statutory accounting practices prescribed or permitted by state
regulatory authorities for insurance companies.

C-4
<PAGE> 64

Item 31. NUMBER OF CONTRACTOWNERS

As of March 31, 1998, the number of contractowners of qualified contracts
offered by Registrant was 590. and the number of contractowners of non-qualifed
contracts offered by Registrant was 0.

Item 32. INDEMNIFICATION

The Registrant, in conjunction with certain affiliates, maintains insurance on
behalf of any person who is or was a trustee, director, officer, employee, or
agent of the Registrant, or who is or was serving at the request of the
Registrant as a trustee, director, officer, employee or agent of such other
affiliated trust or corporation, against any liability asserted against and
incurred by him or her arising out of his or her position with such trust or
corporation.

New Jersey, being the state of organization of The Prudential Insurance Company
of America ("Prudential"), permits entities organized under its jurisdiction to
indemnify directors and officers with certain limitations. The relevant
provisions of New Jersey law permitting indemnification can be found in Section
14A:3-5 of the New Jersey Statutes Annotated. The text of Prudential's By-law
27, which relates to indemnification of officers and directors, is incorporated
by reference to Exhibit (8)(ii) of Post-Effective Amendment No. 26 to Form N-3,
Registration No. 2-76580, filed May 1, 1995, on behalf of The Prudential
Variable Contract Account-10.

Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the Act) may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities 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 Act and will be governed by the final adjudication of
such issue.

Item 33. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

Prudential does have other business of a substantial nature besides activities
relating to the assets of the registrant. Prudential is involved in insurance,
securities, pension services, real estate and banking.

The Prudential Investment Corporation (PIC) is an investment unit of Prudential
and is actively engaged in the business of giving investment advice. The
officers and directors of Prudential and PIC who are engaged directly or
indirectly in activities relating to the registrant have no other business,
profession, vocation, or employment of a substantial nature, and have not had
such other connections during the past two years.

The business and other connections, including principal business address, of
Prudential's Directors are listed under "Directors and Officers of Prudential"
in the Statement of Additional Information (Part B of this Registration
Statement).

C-5

<PAGE> 65

Item 34. PRINCIPAL UNDERWRITER

(a) PIMS, a direct wholly-owned subsidiary of Prudential, acts as the principal
underwriter for The Prudential Variable Contract Account-10, The Prudential
Variable Contract Account-11 and for the Registrant, all registered as
open-end management investment companies under the Investment Company Act
of 1940.

(b) (1) (2) (3)
Name and Principal Position and Offices Positions and Offices
Business Address with Underwriter with Registrant
--------------------- --------------------- ---------------------

*Unless otherwise noted, Principal Business Address will be:
751 Broad Street, Newark, New Jersey 09102.

Odubekun, Francis Asst. Chief Operating None
Officer

Ascherl, Mary Stewart Asst. Secretary None

Cavanaugh, Mary L. Asst. Secretary None

Williamson, Michael G. Chief Financial Officer & None
30 Scranton Office Park Comptroller
Scranton, PA 18507

Fetting, Mark Raymond Executive Vice President None
100 Mulberry St.
Gateway Three
Newark, NJ 07102

Greene, Jonathan Michael Executive Vice President President

Hamilton, Jean Diana Executive Vice President None

Joelson, Ronald Paul Executive Vice President None
71 Hanover Road
Florham Park
New Jersey 07932

Storms, Brian Marshall Executive Vice President None
100 Mulberry St.
Gateway Three
Newark, NJ 07102

Strangfeld, Jr., John R. Executive Vice President None
8 Campus Drive
Arbor Circle South
Parsippany, New Jersey 07054

Caulfield, Edward Michael President None

Wallner, Scott S. Secretary & Chief Legal None
Officer

Bossi, Anne Elizabeth Senior Vice President None
290 W. Mt. Pleasant Avenue
Livingston, NJ 07039

Hiller, Jeffrey Senior Vice President None

Mosse, Mario Alberto Senior Vice President & None
Chief Operating Officer

Chaplin, Charles Edward Treasurer None

McGuire, Carl L. Vice President None
30 Scranton Office Park
Scranton, PA 18507

Moos, Robert William Vice President None
213 Washington Street
Newark, NJ 07102

(c) Reference is made to the Section entitled "Description of Prudential
and VCA-2" on page 6 of the prospectus and "Charges" on page 10 of the
prospectus (Part A of this Registration Statement) and "Investment
Management and Administration of VCA-2" on page 2 of the Statement of
Additional Information (Part B of this Registration Statement).

C-6
<PAGE> 66

Item 35. LOCATION OF ACCOUNTS AND RECORDS

The names and addresses of the persons who maintain physical possession of the
accounts, books and documents required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and the rules thereunder are:

The Prudential Insurance Company of America
and The Prudential Investment Corporation
751 Broad Street
Newark, New Jersey 07102-3777

The Prudential Insurance Company of America
and The Prudential Investment Corporation
56 North Livingston Avenue
Roseland, New Jersey 07068

The Prudential Insurance Company of America
c/o Prudential Defined Contribution Services
30 Scranton Office Park
Scranton, Pennsylvania 18507-1789

Prudential Mutual Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102

Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105

Item 36. MANAGEMENT SERVICES

Not Applicable

Item 37. UNDERTAKINGS

The Prudential Insurance Company of America ("Prudential") represents that the
fees and charges deducted under the Contract in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and the
risks assumed by Prudential.

Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that section. Registrant also undertakes (1) to file a post-effective
amendment to this registration statement as frequently as is necessary to ensure
that the audited financial statements in the registration statement are never
more than 16 months old as long as payment under the contracts may be accepted;
(2) to affix to the prospectus a postcard that the applicant can remove to send
for a Statement of Additional Information or to include as part of any
application to purchase a contract offered by the prospectus, a space that an
applicant can check to request a Statement of Additional Information; and (3) to
deliver any Statement of Additional Information promptly upon written or oral
request.

C-7
<PAGE> 67

Restrictions on withdrawal under Section 403(b) Contracts are imposed in
reliance upon, and in compliance with, a no-action letter issued by the Chief of
the Office of Insurance Products and Legal Compliance of the Securities and
Exchange Commission to the American Council of Life Insurance on November 28,
1988.

REPRESENTATION PURSUANT TO RULE 6c-7

Registrant represents that it is relying upon Rule 6c-7 under the Investment
Company Act of 1940 in connection with the sale of its group variable contracts
to participants in the Texas Optional Retirement Program. Registrant also
represents that it has complied with the provisions of paragraphs (a) - (d) of
the Rule.

C-8
<PAGE> 68

SIGNATURES

As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant has caused this Amendment to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Newark, and State of New Jersey, on the 28th day of April, 1998, and
certifies this Amendment is filed solely for one or more of the purposes
specified in Rule 485(b)(1) under the Securities Act of 1933 and that no
material event requiring disclosure in the prospectus, other than one listed in
Rule 485(b)(1), has occurred since the effective date of the most recent
Post-Effective Amendment to the Registration Statement which included a
prospectus.

THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT-2

By: /s/ MENDEL A. MELZER
--------------------------------
Mendel A. Melzer
Chairman

C-9
<PAGE> 69

SIGNATURES

As required by the Securities Act of 1933, this Amendment to the
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.

<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
MENDEL A. MELZER Member and Chairman, The )
- ------------------------ Prudential Variable Contract )
Mendel A. Melzer Account-2 Committee )

GRACE TORRES Principal Accounting Officer )
- ------------------------ )
Grace Torres )

*SAUL K. FENSTER Member, The Prudential )
- ------------------------ Variable Contract Account-2 ) April 28, 1998
Saul K. Fenster Committee )
)
)
*W. SCOTT McDONALD, JR. Member, The Prudential )
- ------------------------ Variable Contract Account-2 )
W. Scott McDonald, Jr. Committee )
)
)
JONATHAN M. GREENE Member, The Prudential )
- ------------------------ Variable Contract Account-2 )
Jonathan M. Greene Committee )
)
)
*JOSEPH WEBER Member, The Prudential )
- ------------------------ Variable Contract Account-2 )
Joseph Weber Committee )
</TABLE>

*By: /s/ CAREN CUNNINGHAM
--------------------------------
Caren Cunningham
(Attorney-in-Fact)

C-10
<PAGE> 70

SIGNATURES

As required by the Securities Act of 1933 and the Investment Company Act of
1940, The Prudential Insurance Company of America has caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Newark, and State of New Jersey, on
the 28th day of April, 1998.

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

By: /s/ MENDEL A. MELZER
---------------------------------
Mendel A. Melzer
Vice President

As required by the Securities Act of 1933, this Amendment to the
Registration Statement has been signed below by the following Directors and
Officers of The Prudential Insurance Company of America in the capacities and on
the date indicated.

Signature Title Date
- --------- ----- ----

*ARTHUR F. RYAN Chairman of the Board, )
- ------------------------ Chief Executive Officer ) April 28, 1998
Arthur F. Ryan and President )

*By: /s/ CAREN CUNNINGHAM
--------------------------------
Caren Cunningham
(Attorney-in-Fact)

C-11
<PAGE> 71

Signature Title Date
- --------- ----- ----

*FRANKLIN E. AGNEW )
- ------------------------ Director ) April 28, 1998
Franklin E. Agnew )
)
)
*FREDERIC K. BECKER )
- ------------------------ Director )
Frederic K. Becker )
)
)
*MARTIN A. BERKOWITZ )
- ------------------------ Senior Vice President )
Martin A. Berkowitz and Comptroller )
)
)
*RICHARD J. CARBONE )
- ------------------------ Chief Financial Officer )
Richard J. Carbone )
)
*JAMES G. CULLEN )
- ------------------------ Director )
James G. Cullen )
)
)
*CAROLYNE K. DAVIS )
- ------------------------ Director )
Carolyne K. Davis )
)
)
*ROGER A. ENRICO )
- ------------------------ Director )
Roger A. Enrico )
)
)
*ALLAN D. GILMOUR )
- ------------------------ Director )
Allan D. Gilmour )
)
)
*WILLIAM H. GRAY, III )
- ------------------------ Director )
William H. Gray, III )
)
)
*JON F. HANSON )
- ------------------------ Director )
Jon F. Hanson )

*By: /s/ CAREN CUNNINGHAM
--------------------------------
Caren Cunningham
(Attorney-in-Fact)

C-12
<PAGE> 72

Signature Title Date
- --------- ----- ----

*GLEN H. HINER, JR. )
- ------------------------ Director ) April 28, 1998
Glen H. Hiner, Jr. )
)
)
*CONSTANCE J. HORNER )
- ------------------------ Director )
Constance J. Horner )
)
)
*GAYNOR KELLEY )
- ------------------------ Director )
Gaynor Kelley )
)
)
*BURTON G. MALKIEL )
- ------------------------ Director )
Burton G. Malkiel )
)
)
*IDA F.S. SCHMERTZ )
- ------------------------ Director )
Ida F.S. Schmertz )
)
)
*CHARLES R. SITTER )
- ------------------------ Director )
Charles R. Sitter )
)
)
*DONALD L. STAHELI )
- ------------------------ Director )
Donald L. Staheli )
)
)
*RICHARD M. THOMSON )
- ------------------------ Director )
Richard M. Thomson )
)
)
*JAMES A. UNRUH )
- ------------------------ Director )
James A. Unruh )
)
)
*P. ROY VAGELOS, M.D. )
- ------------------------ Director )
P. Roy Vagelos, M.D. )
)
)
*STANLEY C. VAN NESS )
- ------------------------ Director )
Stanley C. Van Ness )
)
)
*PAUL A. VOLCKER )
- ------------------------ Director )
Paul A. Volcker )
)
)
*JOSEPH H. WILLIAMS )
- ------------------------ Director )
Joseph H. Williams )

*By: /s/ CAREN CUNNINGHAM
--------------------------------
Caren Cunningham
(Attorney-in-Fact)

C-13
<PAGE> 73

EXHIBIT INDEX

<S> <C> <C>
Ex-99.3 Custodian Agreement with Investors C-15
Investors Fiduciary Trust Company

Ex-99.13(i)(a) Consent of Price Waterhouse LLP, C-16
independent accountants

Ex-99.13(i)(b) Consent of Deliotte & Touche LLP, C-17
independent auditors

Ex-99.13(ii)(a) Powers of Attorney for Committee C-18
Members

Ex-99.17 Financial Data Schedule C-21
</TABLE>

C-14

<PAGE> 1
Exhibit 3

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CUSTODY AGREEMENT

THIS CUSTODY AGREEMENT ("Agreement"), dated as of September 16, 1996 is
entered into by and between INVESTORS FIDUCIARY TRUST COMPANY, a Missouri trust
company, having its trust office located at 127 West 10th Street, Kansas City,
Missouri 64105 ("Custodian"), and THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a
New Jersey corporation, having its principal office and place of business at
Prudential Plaza, Newark, New Jersey 07102 ("Client").

WHEREAS, Client desires to arrange for the custody of certain assets
belonging to separate accounts (each a "Separate Account" and collectively, the
"Separate Accounts") established and maintained by Client, which Separate
Accounts are registered as management investment companies with the Securities
and Exchange Commission, with Custodian, and Custodian desires to provide such
custodial services, on the terms and conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the mutual agreements contained
herein, Custodian and Client agree as follows:

1. DEFINITIONS. The following terms, as used herein, shall have the
following meanings:

1.1. "Authorized Instruction" means a written, oral or
electronic communication accepted by Custodian in good faith that has been
transmitted subject to, and in accordance with, the Security Procedures or by
such other method as may be acceptable to, and approved in writing by, each of
Custodian and Client.

1.2. "Authorized Persons" means those persons who have been
designated and duly authorized by Client pursuant to all necessary corporate or
other action (which designation and authorization shall be evidenced by
appropriate documentation delivered to Custodian, upon which Custodian may
conclusively rely) to act on behalf of Client in connection with this Agreement
and the transactions contemplated hereby. A person so designated shall continue
to be an Authorized Person hereunder until such time as Client has delivered to
Custodian written notice of the revocation and termination of the authority of
such person to act for Client hereunder.

1.3. "Cash Account" has the meaning given at Section 5 of this
Agreement.

1.4. "Securities Account" has the meaning given at Section 3
of this Agreement.

1.5. "Security Procedure" means, for any specified method of

C-15

<PAGE> 2
communication, a procedure approved in writing by Custodian and Client for the
purpose of (i) verifying that an Authorized Instruction given pursuant to such
method of communication is that of Client, and/or (ii) detecting error in the
transmission or content of such Authorized Instruction.

1.6. "Securities Depository" means any of the securities
depositories or clearing systems listed at Schedule 1.6 hereto, as amended from
time to time in accordance with Sections 4.3.2 and 15 hereof.

1.7. "Security" means any share, stock, bond, debenture, note,
certificate of indebtedness, warrant, option or other security or other non-cash
investment property (whether represented by a certificate or by a book-entry on
the records of the issuer or other entity responsible for recording such
book-entries) that is from time to time held for the account of Client, directly
or indirectly, through a Securities Depository or by Custodian pursuant to this
Agreement.

2. REPRESENTATIONS, WARRANTIES AND COVENANTS.

2.1. AUTHORITY. Client and Custodian each represent and
warrant to the other, as of the date hereof and continuing through termination
of this Agreement, that the execution, delivery and performance by them of this
Agreement (i) are within their respective corporate, trust and other
constitutive powers; (ii) have been duly authorized by all necessary corporate,
trust and other actions required by their respective constitutive documents;
(iii) require no action by or in respect of, or filing with, any governmental
body, agency or official; and (iv) do not contravene or constitute a default
under (a) any provision of applicable law or regulation, (b) their respective
constitutive documents, or (c) any agreement, judgment, injunction, order,
decree or other instrument by which they or their respective properties or
operations are bound.

2.2. TRANSFERS. As of the date hereof and continuing through
termination of this Agreement, Custodian represents and warrants to Client that
Custodian shall hold, maintain and, as applicable, transfer all Securities in
the possession, custody or control of Custodian hereunder free and clear of any
proprietary or equitable interest of Custodian, except as otherwise agreed in
writing by Custodian and Client.

2.3. MARGIN. As of the date hereof and continuing through
termination of this Agreement, Client represents to Custodian that Client will
not incur any credit, advance or overdraft, with respect to any Cash Account (as
hereinafter defined) to purchase or carry any margin stock, as defined in
Regulation U of the Board of Governors of the Federal Reserve System, 12 C.F.R.
Chapter II, as amended.

2.4. CUSTODIAN FINANCIAL CONDITION. Custodian hereby
represents and warrants to Client that Custodian has, at the date hereof, a net
worth of not less than $20,000,000. During the term hereof, Custodian shall (i)
regularly furnish Client with true,

2
<PAGE> 3
correct and complete copies of Custodian's quarterly and annual financial
statements, when and as rendered, and (ii) provide Client with such other
interim financial statements and information pertaining to Custodian's then
current financial condition as reasonably may be requested by Client from time
to time for the purpose of confirming Custodian's continued solvency, net worth
and qualification to act hereunder.

3. SECURITIES ACCOUNTS.

3.1. ESTABLISHMENT OF THE SECURITIES ACCOUNTS Client hereby
establishes with Custodian a securities account for each Separate Account
identified at Schedule 3.1 hereto ( each a "Securities Account" and
collectively, the "Securities Accounts") in the manner and on the terms
specified herein.

3.2. OWNERSHIP AND IDENTIFICATION. All Securities held
directly or indirectly in the Securities Accounts shall be held by Custodian for
the exclusive account and benefit of Client, and beneficial ownership of the
Securities shall at all. times remain vested in Client. The books and records of
Custodian shall so identify the Securities and the Securities Accounts.
Custodian shall cause Client's interest in the Securities to be evidenced by a
credit to the Securities Accounts on the books of Custodian. Custodian shall
segregate on its books and records any securities which are held by it for
Custodian's own account from those securities (including the Securities) held by
it for the account of others. Notwithstanding anything stated in Section 8 of
this Agreement to the contrary, Custodian shall not be responsible for the tide,
validity or genuineness of any Securities or evidence of the title receive by
it.

3.3. RIGHT TO WITHDRAW. Client shall at all times, and from
time to time, have the continuing, unqualified and unlimited right to withdraw
all or any portion of the Securities from the Securities Accounts immediately
upon demand, provided however, that any Securities designated in writing by
Client as being required to meet the deposit requirements of those insurance
regulatory authorities having jurisdiction (each, a "Regulatory Authority")
shall, to the extent required by law, be deemed held by Custodian under and
subject to the control of such Regulatory Authority, and shall not be withdrawn,
or otherwise disposed of, by or at the direction of Client without the prior
written approval of such Regulatory Authority, in a form reasonably acceptable
to Custodian.

4. TERMS OF CUSTODY.

4.1. AUTHORITY TO HOLD SECURITIES Subject to the terms and
conditions of this Agreement, Client hereby authorizes Custodian to hold
Securities received, from time to time, for the account of Client. Custodian may
hold the Securities directly or indirectly through Securities Depositories and
Sub-Custodians qualifying under Section 1.6 and this Section 4.

4.2. DIRECTLY HELD SECURITIES. Certificated Securities held
hereunder may be

3
<PAGE> 4
registered in the name of Custodian or a Sub-custodian (as defined below) and
shall be maintained and held in vaults of Custodian's sub-custodian, State
Street Bank and Trust Company ("State Street"), located in Boston,
Massachusetts, or State Street's agent, Chemical Bank, located in New York, New
York or, in the case of certificated securities to be held outside the United
States, of the applicable foreign Sub-Custodian listed in Schedule 4.4.1

4.3. SECURITIES DEPOSITORIES. Entities qualified to act as
Securities Depositories hereunder shall be limited to the following: (I) a
depository that provides for long-term immobilization of securities, or a
clearing corporation that is also a depository, in each case approved by, or
registered with, the Securities and Exchange Commission ("SEC") pursuant to
Section 17A of the Securities Exchange Act of 1934, as amended; (ii) with
respect to Treasury bill and securities, a Federal Reserve Bank utilizing a
book-entry system pursuant to Subpart 0 of Treasury Circular No.300 (or the
book-entry regulations of Federal agencies in substantially the same form), 31
C.F.R Part 306 and Subpart B of 31 C.F.R. Part 350; (iii) an "eligible foreign
custodian" that is a securities depository ("Foreign Depository") under Rule
17f-5(c)(2) promulgated under the Investment Company Act of 1940 (generally, an
"SEC Rule"); (iv) as applicable, such other entities (each, an "Other Entity")
which Client determines are approved to act as a qualified depository by the
Regulatory Authorities, provided that any such Other Entity located in the
United States has been registered with, or approved by, the SEC.

4.3.1. SCHEDULE 1.6 DEPOSITORIES. Client and
Custodian herewith stipulate and agree that the entities listed at Schedule 1.6
are qualified to act as Securities Depositories under this Section 4.3.

4.3.2. ADDITIONAL DEPOSITORIES. If Custodian wishes
to engage a Securities Depository hereunder and such Securities Depository is
not listed at Schedule 1.6 (each, an "Additional Depository"), the engagement of
such Additional Depository shall be subject to, and shall require, Client's
prior written approval. Upon such approval, the Additional Depository shall be
listed by amendment to Schedule 1.6, in accordance with Section 15 hereof.

4.3.3. FOREIGN DEPOSITORIES. With respect to Foreign
Depositories, Custodian shall continuously monitor the eligibility of the
Foreign Depositories and if, at any time, Custodian determines that any Foreign
Depository no longer satisfies the requirements of SEC Rule 17F-5(c)(2)~
Custodian shall promptly provide written notice to Client and will act upon
Authorized Instructions.

4.3.4. OWNERSHIP AND IDENTIFICATION. Custodian shall
require each Securities Depository to identify Securities held by the Securities
Depository as being held for the account of Custodian for its customers to the
extent permitted by the rules and procedures of such Securities Depository.

<PAGE> 5
4.3.5 NO COMMINGLING. Securities held by Custodian in
accounts with Securities Depositories hereunder shall not be commingled with
securities or other assets held by such Security Depository for the beneficial
account and interest of Custodian.

4.3.6. SECURITIES DEPOSITORY LIENS. Custodian hereby
represents, warrants and covenants that it will permit a Securities Depository
to hold Securities hereunder, only if, and continuing for so long as (i) the
Securities are not subject to any right, charge, security interest, lien or
claim of any kind in favor of the Securities Depository or its creditors,
including a receiver, trustee in bankruptcy or similar authority, other than for
final settlement of Securities Transactions and (ii) beneficial ownership of the
Securities is freely transferable without the payment of money or value, in
either case other than for safe custody or administration.

4.3.7. AGENCY. A Securities Depository engaged under
this Section 4.3 shall at all times be deemed the agent of Custodian.
Custodian's deposit of Securities with a Securities Depository shall not relieve
Custodian of any of Custodian's duties, obligations. responsibilities or
liabilities under this Agreement except as provided in Section 8.1.

4.4. SUB-CUSTODIANS.To the extent permitted by law, Custodian
is authorized to engage State Street as a Sub-custodian hereunder as well as
additional sub-custodians (which may be sub-custodians of State Street) to hold
Securities and cash necessary to effect Securities transactions in any
jurisdiction where a Security is required or otherwise directed by Client to be
held if Custodian does not have facilities for the deposit of Securities in such
jurisdiction (each, a "Sub~Custodian"), and to permit such Sub-Custodians to use
Securities Depositories in accordance with Section 4.3 hereof, as necessary for
such purpose. Sub-Custodians engaged to hold foreign securities, cash and cash
equivalents in accordance with SEC Rule 17f-5(a) shall be limited to "eligible
foreign custodian" under SEC Rule 17f-5(c)(2) (each a "Foreign Sub-Custodian").

4.4.1. APPROVAL REQUIRED. Sub-Custodians engaged by
Custodian under this Section 4.4 shall be subject to, and shall require the
prior written approval of, Client. All Sub-Custodians approved at the time of
this Agreement's execution shall be listed in Schedule 4.4.1.

4.4.2. OWNERSHIP AND IDENTIFICATION. All Securities
held by a Sub-Custodian hereunder shall be identified (I) on Custodian's books,
as belonging to Client and located at the Sub-custodian, and (ii) on the
Sub-Custodian's books, as belonging to Custodian or State Street, as applicable,
for the account and beneficial interest of Custodian's customers or State
Street's customers, as applicable.

4.4.3. COMMINGLED ACCOUNTS. Custodian may permit a
Sub-Custodian to commingle the Securities of Client with Securities of other
sub-custodial accounts held by the Sub-Custodian for the account of Custodian
and other customers of the Sub-Custodian; provided however, that under no
circumstances shall any such sub-custodial account

<PAGE> 6
commingle Securities of Client with securities or other assets beneficially
owned by Custodian or such Sub-custodian.

4.4.4. AGENCY. A Sub-Custodian engaged under this
Section 4.4 shall at all times be deemed the agent of Custodian. Custodian's
engagement of a Sub-Custodian shall not relieve Custodian of any of Custodian~s
duties, obligations, responsibilities or liabilities under this Agreement except
as provided in Section S. 1. Upon request of Client, Custodian shall be willing
to contract with Sub-Custodians designated by Client and reasonable acceptable
to Custodian ("Special Purpose Sub-Custodian") for purposes of (I) effecting
third-party repurchase transactions with banks, brokers, dealers, or other
entities through the use of a common custodian or subcustodian, or (ii)
providing depository and clearing agency services with respect to certain
variable rate demand note Securities, or (iii) for other reasonable purposes
specified by Client.

4.4.5. FOREIGN SUB-CUSTODIANS. With respect to
Foreign Sub-Custodians, Custodian shall continuously monitor the eligibility of
the Foreign Sub-Custodian and if, at any time, Custodian determines that any
Foreign Sub-Custodian no longer satisfies the requirements of SEC Rule
17f-5(c)(2), Custodian shall promptly provide written notice to Client and will
act upon Authorized Instructions.

4.5. USE OF NOMINEES: Custodian, a Securities Depository
and/or a Sub-Custodian acting hereunder may register Securities in the names of
their respective nominees. Client shall have the right to approve use of a
nominee hereunder, which approval shall not be withheld unreasonably. Use of a
nominee shall require that either (i) Custodian provide Client with an affidavit
from an officer of Custodian describing the legal structure of the nominee, and
identifying the nominee's officers, directors or partners, as applicable
("Nominee Affidavit") or (ii) that the parties hereto specify any nominees'
legal structure in Schedule 4.5 to this Agreement. Custodian shall follow the
instructions of Client with respect to any required filing of a Nominee
Affidavit with the Regulatory Authorities. Client agrees to hold Custodian, any
Sub-Custodian, any Securities Depository and their respective approved nominees
harmless from any liability incurred solely by virtue of being shareholder of
record of any Securities.

4.5.1. STREET NAME. Client may direct Custodian to
maintain or cause a Sub-Custodian to maintain Securities in so-called "street
name"; provided, however, that notwithstanding anything herein to the contrary,
Custodian and any such Sub-custodian shall be obligated only to utilize best
efforts to timely collect income due to Client on such Securities and to nod
Client of relevant corporate actions, including, without limitation, pendency of
calls, maturities, and tender and exchange offers.

4.6. FUNGIBILITY. Securities held by Custodian hereunder,
directly or indirectly through a Securities Depository, may be treated as
fungible with other identical securities of the same issue pursuant to the
provisions of the Uniform Commercial Code of the State of New York (or other
applicable laws).

<PAGE> 7
4.7. NO HYPOTHECATION. Except as provided in Section 6.8,
Custodian shall have no power to deliver, assign, pledge, lend, hypothecate or
otherwise dispose of any Security to any person or entity, except pursuant to an
Authorized Instruction

4.8. NO RELEASE OR DISCHARGE. Except as expressly provided
herein~, no~e of the terms or conditions contained in this Section 4 or in
Sections 8 and 9 hereof shall be construed. operate or be effective to limit,
release or discharge in any manner Custodian's duties, obligations,
responsibilities and liabilities to Client in connection with Custodian's direct
or indirect holding of Securities hereunder, whether in definitive or book-entry
form.

5. CASH ACCOUNTS. Client hereby authorized and instructs Custodian, as
an agent of Client, to establish and deposit accounts with State Street to be
used in connection with transactions relating to the Securities (the "Cash
Accounts"). The Cash Accounts shall be custodial accounts under this Agreement,
and shall be subject to all the terms, conditions and other provisions of this
Agreement.

5.1. OWNERSHIP AND IDENTIFICATION. All cash held in the Cash
Accounts shall be held by Custodian for the benefit of Client and the books and
records of Custodian shall so identify the Cash Accounts.

6. INSTRUCTIONS BY CLIENT.

6.1. IN GENERAL. Client shall give Authorized Instructions
with respect to cash and Securities only to Custodian. If Custodian, in the
exercise of the standard of care described in Section 8.1 below, is uncertain as
to the appropriate action to be taken in any circumstances, upon Custodian's
request, Client shall give Custodian Authorized Instructions as to the action to
be taken. Securities held by a Securities Depository shall be subject only to
the instructions of Custodian or the applicable Sub-Custodian.

6.2. BINDING EFFECT. Custodian shall promptly follow and
comply with, and shall instruct all Sub-Custodians and Securities Depositories
holding Securities hereunder to promptly follow and comply with, all lawful
Authorized Instructions given by Client under and in accordance with this
Agreement. Custodian shall not be required to follow or comply with, nor shall
Custodian be required to instruct a Sub-custodian or Securities Depository to
follow or comply with, any Authorized Instruction (i) that would violate any
applicable law, decree, regulation or order of any government, Regulatory
Authority or other governmental body or agency (including any court or
tribunal), or that otherwise would be contrary to any term, condition or
provision of this Agreement; or (ii) that could make Custodian, any
Sub-Custodian or Securities Depository, or the nominee of any of them, liable
for the payment of money on its own account, unless Client, as a prerequisite to
the taking of such action, provides Custodian and any applicable Sub-Custodians
and Securities Depositories an Indemnity in an amount and form satisfactory to
it or them.

6.3. DELIVERY OF SECURITIES. Securities shall be transferred,
exchanged or

7
<PAGE> 8
delivered by Custodian, to the extent sufficient Securities are actually held in
the Securities Accounts and available for delivery, only (i) as specified by an
Authorized Instruction; (ii) in exchange for, or upon conversion into, other
Securities or cash pursuant to a plan of merger, consolidation, reorganization,
recapitalization or readjustment; (iii) upon conversion of Securities pursuant
to their terms into other Securities~s; or (iv) upon termination of this
Agreement.

6.4. CONTRACTUAL SETTLEMENTS. Subject to the provisions of
Section 9' Custodian shall settle all purchases and sales of Securities
hereunder (i) in accordance with Customer's Authorized Instructions, and (ii) on
an "actual settlement" or "good on delivery" basis.

6.5. REPORTING OF CERTAIN MATTERS. Custodian shall promptly
deliver to Client upon receipt all written information (including, without
limitation, pendency of calls and maturities of Securities and expirations of
rights in connection therewith, calls for voting or the exercise of rights or
other specific action intended to be transmitted to holders of the Securities,
proxy statements, proxy forms, prospectuses and other corporate reports)
received from issuers of, or otherwise in respect of, the Securities held under
this Agreement. With respect to tender or exchange offers, Custodian shall
promptly deliver to Client upon receipt all written information received from
issuers of the Securities whose tender or exchange is sought and from the party
(or the party's agents) making the tender or exchange offer. If Client desires
to take action with respect to any tender offer, exchange off~r or other similar
transaction, Client will so instruct Custodian (I) as to Securities held in the
United States, one (1) day prior to the date on which such action is due; and
(ii) as to Securities held outside the United States, two (2) day prior to the
day by which Custodian must provide instructions to a~y Sub-Custodian; provided,
however, that in the event special requirements applicable to any such
transaction require earlier delivery of instructions from Client, Custodian
shall notify Client thereof and Client shall provide instructions to Custodian
in sufficient time to provide Custodian a reasonable time to act thereon.

6.6. SECURITIES MATTERS. Unless and until Custodian receives
an Authorized Instruction to the contrary, Custodian shall hold, administer and
manage the Securities in accordance with this Section 6.6.

6.6.1. DIVIDENDS AND DISTRIBUTIONS. Except as Set
forth in Schedule 6.6.1 hereto, Custodian shall credit to Client's account all
dividends, interest and other payments made under, and all stock dividends,
rights and other similar distributions made, issued or received with respect to,
the Securities on the date that such payments, dividends or distributions are
due, regardless of whether such payments, dividends or distributions have been
received by Custodian on such date. If such dividends, payments or distributions
subsequently are not received, Custodian shall track the non-receipt and make
whatever reasonable claim may be necessary to enforce collection; provided,
however that if any such dividend, payment or distribution is not received
within a reasonable time, upon prior written notice to Client, Custodian may
reverse the credit made to Client's account; and provided

<PAGE> 9
further, however, that nothing herein shall obligate Custodian to initiate or
appear and participate in any legal action or bankruptcy or other insolvency
proceeding necessary to enforce any claim.

6.6.2. PRESENTATION FOR PAYMENT. Custodian shall
present for payment all coupons and other income items held by Custodian which
call for payment upon presentation, all maturing Securities and those called for
redemption, and deposit cash received upon such payments in the applicable Cash
Account; provided, however, that in the case of Securities which are called for
redemption or otherwise become payable prior to their stated maturity, Custodian
shall be considered to have acted timely hereunder if Custodian presents die
same for payment promptly upon obtaining actual knowledge thereof or when
Custodian, in the exercise of the standard of care described by Section 8.1,
should have obtained knowledge thereof.

6.6.3. OWNERSHIP CERTIFICATES. Custodian shall
execute in the name of Client such ownership and other certificates as may be
required to obtain payment or exercise rights in respect of the Securities;
provided, however, that Custodian shall not be authorized to exercise voting
rights held in respect of the Securities other than as directed in writing by
Client.

6.6.4. VOTING OF THE SECURITIES. Custodian shall,
Upon receipt of Authorized Instructions from Client, execute and deliver, or
cause its Sub-custodians, Securities Depositories, or its or their nominees (as
applicable).. to execute and deliver such proxies or other authorizations as may
be required to vote the Securities in accordance with such Authorized
Instructions. Except as permitted by such Authorized Instructions, neither
Custodian nor any of its Sub-Custodians, Securities Depositories, or its or
their nominees (as applicable) shall exercise any power to vote the Securities,
or execute any proxy, power of attorney, or other similar instrument voting any
of such Securities, or give any consent, approval, or waiver with respect
thereto, or take any other similar action.

6.6.5. MAIL TO CLIENT. Custodian shall accept and
open all mail directed to Client in care of Custodian, and shall promptly
forward all such materials to Client.

6.6.6. DISCLOSURES TO ISSUERS. Except as otherwise
required by applicable law, Custodian shall not disclose Client's name, address
and Securities position to the issuers of the Securities when and as such
issuers request.

6.6.7. WITHHOLDING TAXES. As part of the custodial
services rendered hereunder, Custodian shall investigate and advise Client with
respect to available means and methods for the elimination at source, or for the
reclaim, of withholding taxes assessed in connection with the transactions
contemplated hereby. Custodian shall, from time to time, make such filings with
the governmental authorities as may be required to eliminate or secure the
refund of such withholding taxes upon receipt from Client, in completed form, of
all

<PAGE> 10
forms, documents, instruments, proofs and supporting information required to be
filled in connection therewith. In performing its duties under this section.
unless otherwise informed by Client, Custodian shall be entitled to apply
categorical treatment of Client according to the nationality of Client, the
particulars of its organization and other relevant details supplied by Client.
Client shalt inform Custodian in writing of any change in the organization,
domicile or other relevant fact concerning tax treatment of Client and if Client
is or becomes the beneficiary of any special ruling or treatment not applicable
to the general nationality and category of entity of which Client is a part
under general laws and treaty provisions.

6.6.8. ROUTINE MATTERS. Custodian will, or will
instruct its Sub-Custodians, Securities Depositories or its or their nominees,
as applicable, to attend to all routine and mechanical matters in connection
with the sale, exchange, substitution, purchase, transfer of other dealings with
Securities, except as otherwise expressly provided in this Agreement or as
directed by Client from time to time in Authorized Instructions.

6.7. PARTIAL OFFERS. If Custodian, whether by nominee or
otherwise, holds Securities that are commingled and fungible with securities of
the same issue belonging to others (such that the specific Securities held for
the account of Client are not identifiable), and an offer of partial redemption,
partial payment or other action affecting less than all of such securities is
received (collectively, "Partial Offer"), Custodian shall select the securities
eligible to participate in the Partial Offer on any fair, equitable and
non-discriminatory basis that it customarily uses to make such selections. If
such fungible Securities are held by a Securities Depository or Sub-Custodian
and a Partial Offer is received, any method of selection customarily used by the
Securities Depository or Sub-Custodian, as applicable, shall be acceptable to
select the securities eligible to participate in such Partial Offer; provided
however, that Custodian shall use its best efforts to cause such selection to be
made on a fair, equitable and non-discriminatory basis.

6.8 PAYMENTS. Custodian shall make payments only to the extent
that sufficient cash is available in the applicable Cash Account or otherwise,
and only (i) as specified in an Authorized Instruction, or (ii) upon the
termination of this Agreement. Custodian or State Street may make payments, from
time to time, on behalf of Client when sufficient cash is not available in the
applicable Cash Account, but shall have no obligation to make such payments. Any
such credit, advance or overdraft shall be repaid by Client on Custodian's
demand together with the overdraft charge specified in Schedule 10 from the
date advanced until the date ~ As security for any advance made by Custodian or
State Street to pay for Securities purchased by Client pursuant to an Authorized
Instruction, Client hereby grants Custodian and State Street a lien on and
security interest in all Securities at any time held from the account of Client9
including without limitation all Securities acquired with the amount advanced.
Should Client fail to promptly repay the advance and related overdraft charges,
Custodian and State Street, as applicable, shall be entitled to utilize
available cash and to dispose of Securities pursuant to applicable law to the
extent necessary to obtain reimbursement of the amount advanced and related
overdraft charges. Custodian shall promptly notify Client of the amount of any
such overdraft and of the amount of cash and

<PAGE> 11
any Securities of any such overdraft and of the amount of cash and any
Securities debited from the Securities Accounts to repay any such advance and
related overdraft charges.

7. REPORTING.

7.1. STATEMENTS. Custodian shall mail, or cause to be mailed,
or transmit electronically to Client, or with Client's permission, make
available to Client electronically, on not less than a monthly basis, statements
of the Securities Accounts and Cash Accounts. The statements shall list the
Securities and the cash balances of the accounts. Custodian shall promptly
correct any errors or omissions in such statements of which it becomes aware and
shall furnish Client with prompt notice of the correction.

7.2. NEW JERSEY REPORT. Custodian shall periodically file a
report with respect to the Securities held by it under this Agreement as
required, and in the form prescribed, by Section 11:19-2.4 of the New 3ersey
Administrative Code.

7.3. ACCESS TO RECORDS. Upon demand, Custodian shall allow
Client, Client's advisors, accountants, counsel and other authorized
representatives, and the Regulatory Authorities such access to the records of
Custodian relating to the securities Accounts, the Cash Accounts and the
transactions contemplated hereby as may be required under the circumstances.
Custodian shall cooperate with all such requests and records inspections on a
best efforts basis but shall be reimbursed by Client for all reasonable expenses
and employee time invested in any such inspection outside of normal and routine
periodic reviews.

7.4. ACCOUNTING CONTROL SYSTEM REPORTS. Custodian shall
provide Client with any report concerning the inter~l accounting control systems
of a Securities Depository holding Securities hereunder to which Custodian has
access and with annual reports on Custodian's own systems of internal accounting
control.

7.5. OTHER INFORMATION. Custodian shall maintain records
sufficient to verify the related information reported m Client's annual and
quarterly statutory financial statements as filed with the State of New Jersey
and the National Association of Insurance Commissioners. Custodian further
agrees (i) to provide, on request, affidavits in the forms shown at Schedule 7.5
hereto as required by Circular letter 1977-2 of The New York State Insurance
Department (Attachments B, C and D thereto) or in such other substantially
equivalent forms as may be reasonably acceptable to Client and the New York
State Insurance Department in order for such securities to be recognized as
admitted assets for statutory reporting purposes; (ii) to provide similar
affidavits required by the Regulatory Authorities of other jurisdictions; and
(iii) to provide such additional reporting information to Client regarding the
Securities and the transactions contemplated hereby as may be requested from
time to time by Client.

8. CUSTODIAN RESPONSIBILITIES AND INDEMNIFICATION.

<PAGE> 12
8.1. STANDARD OF CARE. Custodian shall exercise the standard
of care that a professional custodian engaged in the banking or trust company
industry and having professional expertise in financial and securities
processing transactions and custody functions would observe with respect to the
subject matter of this Agreement. Custodian shall be liable to Client for losses
of Securities or other property in the Securities Accounts and the Cash Accounts
which result from (i) breach of this Agreement, or (ii) the negligence or
willful misconduct of Custodian and any Securities Depository or Sub-Custodian
acting hereunder or any of their respective officers, employees, agents or
nominees except that Custodian shall be responsible to Client for any loss,
damage or expense suffered or incurred by Client resulting from the actions or
omissions of any Securities Depository or Special Purpose Sub-Custodian only to
the same extent such entity is responsible to Custodian. Client shall be
entitled to review and participate in the negotiation of contracts with
Sub-Custodians. Custodian shall pursue, or cause its Sub-Custodian to pursue,
available rights and remedies against any Securities Depository or Special
Purpose Sub-Custodian responsible for any loss, damage or expense suffered or
incurred by Client with all reasonable business efforts. Client shall be
subrogated to such rights and remedies, to the extent allowable under applicable
law, at Client's option. Notwithstanding the foregoing, Custodian shall be
strictly liable for any loss of Securities resulting from fire, robbery,
burglary, theft or other disappearance.

8.2. REPLACEMENTS. In the event of loss of, or damage to, a
Security held hereunder, for which Custodian is responsible under the terms
hereof, Custodian, on demand by Client, will promptly replace such lost or
damaged Security with securities identical in kind and quality, together with
all rights and privileges pertaining thereto. If Custodian is unable to replace
the Security, Custodian shall pay Client a cash amount equal to the fair market
value of the Security as of the date of the discovery of the loss or damage.

8.3. INSURANCE. Custodian represents, warrants and covenants
that it has in force at the date hereof, and shall maintain in force during the
full term of this Agreement, insurance with respect to the Securities covering
such risks and in such amounts as Custodian maintains with respect to securities
held for its own account and for the account of other customers.

8.4. INDEMNIFICATION OF CLIENT. Custodian shall indemnify,
defend and hold Client harmless of, from and against any loss, damage, claim,
demand or liability, including, without limitation, reasonable costs and
attorneys' fees (collectively, "Losses"), incurred by Client to the extent
resulting from (i) Custodian's breach of this Agreement, (ii) Custodian's
negligence or (iii) Custodian's willful misconduct. Custodian's obligation to
indemnify Client hereunder is conditioned upon Custodian's receipt from Client
of (a) prompt written notice of the claim or matter in respect of which
indemnity is sought; provided, however, that failure or delay in giving such
notice shall not relieve Custodian of its obligations hereunder except to the
extent Custodian is prejudiced thereby; (b) cooperation of Client, on a best
efforts basis, in the defense and settlement of any matter involving a third
party claim; and (c) Client's tender to Custodian of the right to control,
defend and settle, in Custodian's

<PAGE> 13
sole discretion, any matter involving a third party claim. Under no
circumstances shall Custodian be liable to Client for indirect, special or
consequential damages, irrespective of whether or not Custodian was apprised of
the likelihood of such damages

8.5. RELIANCE BY CUSTODIAN. Notwithstanding anything in this
Agreement to the contrary, but provided that Custodian has otherwise exercised
the standard of care described in Section 8.1:

(a) Custodian may conclusively assume that any procedure agreed upon,
approved or directed by Client, its accountants or other advisors does not
conflict with or violate any requirements of its articles of incorporation,
bylaws, any prospectus, any applicable law, rule or regulation of the type
4escribed in Section 8.6~), or any order, decree or agreement by which Client
may be bound;

b) Custodian shall rely upon Client to notify Custodian of any statutes,
rules, regulations, requirements or policies which relate to Client, and of any
changes therein, which may materially impact Custodian's performance of its
responsibilities hereunder or its related operational policies and procedures in
a manner different from United States domiciled insurance companies in general;

(c) Custodian may conclusively rely upon the advice, opinion and statements
of the Authorized Persons, and Client's accountants, auditors and counsel;

(d) Custodian may conclusively rely upon any advice, notice, request,
consent, certificate or other document or instrument reasonable believed by it
to be genuine and to be signed by the proper party or parties; and

(e) Custodian shall not be responsible or liable for the failure or delay
in performance of its obligations hereunder, or any entity for which it is
responsible hereunder, arising out of or caused, directly or indirectly, by
circumstances beyond the affected entity's reasonable control, including,
without limitation, governmental or exchange action, statute, ordinance, ruling,
regulation or direction; war, strike, riot, emergency, civil disturbances,
terrorism, vandalism, explosions, labor disputes, freezes, floods, tornados,
telecommunications system failures, revolutions or insurrections. Custodian
agrees to implement and maintain reasonable back-up and disaster recovery
procedures and plans designed to mimic any loss of data or service interruption
by all reasonable practicable steps.

9. LIMITATIONS TO CUSTODIAN DUTIES.

9.1. PAYMENT AND DELIVERY INSTRUCTIONS. Client stipulates and
acknowledges that in some securities markets, securities deliveries and payments
may not be, or are not customarily, made simultaneously. Accordingly, Client
agrees that, notwithstanding the giving of Authorized Instructions to deliver
Securities against payment or to pay for

<PAGE> 14
Securities against delivery, Custodian may make or accept payment for, or may
deliver, Securities in such form, at such time and in such manner as shall be in
accordance with the customs prevailing in the relevant market or among
professional custodians engaged in the banking or trust company industry and
having professional expertise in financial and securities processing
transactions and custody services.

9.2. REVERSALS. Client stipulates and acknowledges that in
some securities markets, and under certain cash clearing systems, deliveries of
securities and cash may be reversed under certain circumstances. Accordingly,
Client agrees that credits of Securities to the Securities Accounts and cash to
the Cash Accounts will be provisional and subject to reversal if, in accordance
with local practice in the market, the delivery of the Security or cash giving
rise to the credit is reversed.

10. FEES. As compensation for the services rendered hereunder, Client
shall pay Custodian a fee calculated in accordance with Schedule 10 hereto.

11. NO LIENS. Except as provided in Section 6.8, no charge or lien
against any Cash Account or Securities Account shall be permitted for any
reason, including, but not limited to, due and unpaid Custodian fees under
Section 10 or any other expense or loss incurred by Custodian in performing
hereunder, unless Client has first approved such charge or lien by Authorized
Instruction.

12. INDEMNIFICATION OF CUSTODIAN. Client shall indemnify, defend and
hold Custodian harmless of, from and against any Losses incurred by Custodian to
the extent resulting from (i) Client's breach of this Agreement, (ii) the
invalidity of any communication that Custodian believes in good faith and in
accordance with the standard of care required by Section 8.1 hereof to have been
an Authorized Instruction or a properly executed and genuine document, (iii) any
action taken or omitted to be taken, in accordance with standard of care
required by Section 8.1 hereof, by Custodian in reliance on an Authorized
Instruction or other document or information provided to it by Client, (iv)
Client's negligence, or (v) Client's willful misconduct. Client's obligation to
indemnify Custodian hereunder is conditioned upon Client's receipt from
Custodian of (a) prompt written notice of the claim or matter in respect of
which indemnity is sought; provided, however that failure or delay in giving
such notice shall not relieve Client of its obligations hereunder except to the
extent Client is prejudiced thereby; ~) cooperation of Custodian, on a best
efforts basis, in the

14
<PAGE> 15
defense and settlement of any matter involving a third-party claim; (c)
Custodian's tender to Client of the right to control, defend and settle, in
Client's sole discretion, any matter involving a third-party claim. Under no
circumstances shall Client be liable to Custodian for indirect, special or
consequential damages, irrespective of whether or not Client was apprised of the
likelihood of such damages.

13. TERMINATION. This Agreement may be terminated by either party upon
the giving of not less than sixty (60) days prior written notice. This Agreement
may be terminated immediately for cause. Terminations "for cause" shall be
limited to (i) material breach, (ii) fraud, (iii) gross negligence, (iv)
insolvency, and (v) the commencement of bankruptcy proceedings against a patty.
Upon termination of this Agreement, Client shall, by Authorized Instruction,
notify Custodian of the name of the person or entity to whom all Securities and
cash shall be delivered or paid. Custodian shall promptly deliver all Securities
and cash, along with all records not otherwise in the possession of Client
pertaining thereto (including, but not limited to, those records pertaining to
Securities held in book-entry' form, by Federal Reserve banks or retained by the
issuer) to the person or entity so specified. Regardless of whether the
termination is initiated by Client or Custodian, Custodian's responsibilities
under this Agreement shall continue until a successor custodian's appointment
becomes effective and all Securities and cash have been transferred.

14.NOTICES. Except as otherwise specified herein, any notice or other
communication to Custodian is to be addressed to it at 127 West Tenth Street,
Kansas City, Missouri 64105 Attention: Custody Department or to such other
address as may be specified by Custodian from time to time. Any notice or other
communication to Client shall be addressed to it at 2 Gateway Center, Newark,
New Jersey 07102, Attention: 3ames Quinn or to such other address as may be
specified by Client from time to time. Notices given hereunder shall be
effective upon receipt.

15. AMENDMENTS AND WAIVERS. An amendment or waiver of any term of this
Agreement shall be effective only if in writing and signed by the patty to be
bound. The waiver by either party of the breach of any provision of this
Agreement shall not operate or be construed as a waiver of any other or
subsequent breach.

16. SUCCESSORS AND ASSIGNS. This Agreement shall bind the successors
and permitted assigns of the parties. Neither party may assign any of its rights
or obligations under this Agreement without the prior written consent of the
other.

17. GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York, without regard to its
conflicts of law rules.

18. COUNTERPARTS. This Agreement may be signed in any number of
counterparts, each of which shall constitute an original, and all of which taken
together shall comprise one and the same instrument.

15
<PAGE> 16
19. HEADINGS. The section headings used herein are for reference only
and shall not affect the interpretation of any provision of this Agreement.

20. INTEGRATION. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes any
and all prior agreements and understandings, oral or written, relating thereto.

21. CONFIDENTIALITY. The parties shall not disclose to any other party,
but shall keep confidential, the terms and conditions of this Agreement and any
amendment hereof, except to the extent required by an or regulatory authorities.

22. SECURITY PROCEDURES. Client acknowledges that it has been fully
informed of the risks associated with the various methods of communication for
transmitting Authorized Instructions to Custodian. Custodian has recommended
that Client transmit Authorized Instructions to Custodian using one or more
specified methods of communication and has recommended a type of Security
Procedure for each such method. Client hereby agrees that the Security
Procedures selected by it shall be deemed commercially reasonable even if such
Security Procedures offer less protection than those recommended by Custodian.
If Client elects to transmit Authorized Instructions to Custodian by a method of
communication for which no Security Procedure has been agreed, Client agrees to
be bound by any such Authorized Instruction that Custodian believes in good
faith to have been given by an Authorized Person. Client shall (i) not disclose,
or permit any Authorized Person to disclose, except on a "need to know" basis,
any aspects of any Security Procedure, (ii) notify Custodian immediately if the
confidentiality of any Security Procedure is compromised and (iii) act to
prevent the Security Procedures from being further compromised. Client and
Custodian have entered into a separate agreement concerning Authorized
Instructions which constitute "payment orders" under Article 4A of the Uniform
Commercial Code (the Article 4A Agreement"). With respect to such Authorized
Instructions, this Agreement and the Article 4A Agreement shall be construed
cumulatively, but in the event of any conflict or inconsistency between them,
the terms of the Article 4A Agreement shall control. With respect to Authorized
Instructions communicated orally to Custodian, (i) Custodian shall be entitled
to rely thereon if Custodian reasonable believes they are communicated by an
Authorized Person, (ii) Custodian may in its discretion tape record the
communication, (iii) Client shall confirm the same through a written or
electronic Authorized Instruction by no later than the next business day, and
(iv) Custodian shall not be responsible hereunder for actions taken or omitted
reasonably and in good faith based on any oral communication prior to receipt of
and a reasonable time to act on the written or electronic confirming Authorized
Instruction.

23. SEVERABILITY. In the event any of the terms or provisions of this
Agreement shall~ be held to be unenforceable, the remaining terms and provisions
shall be unimpaired

16
<PAGE> 17
and the unenforceable term or provision shall be replaced by such enforceable
term or provision as comes closest to the intention underlying the unenforceable
term or provision.

IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives as of the day and year first
above written.

INVESTORS FIDUCIARY TRUST THE PRUDENTIAL INSURANCE
COMPANY COMPANY OF AMERICA

By:/s/ Allen Strain By: /s/ James J. Quinn
---------------------------- ----------------------------
Title: EVP Title: Vice President & Ass't Treasurer
----------------------------

17
<PAGE> 18

SCHEDULE 1.6

Securities Depositories

Country Central Depository

United States Depository Trust Company

Participants Trust Company

Federal Reserve Bank

<PAGE> 19

SCHEDULE 3.1

Securities Accounts

Variable Contract Account-2 ("VCA-2") - YF1A

Variable Contract Account-10 ("VCA-10") - YFlE

Variable Contract Account-11 ("VCA-11") - YC1A

<PAGE> 20

SCHEDULE 4.4.1

Sub-Custodians

Country Subcustodian

United States State Street Bank and Trust

Chase Manhattan Bank (F/K/A Chemical Bank)
(Physical)

<PAGE> 21

SCHEDULE 4.5

LIST OF NOMINEES

Except where otherwise noted, each Nominee is a domestic corporation wholly
owned by the local Subcustodian.

Australia Westpac Custodian Nominees Ltd.
Austria None
Belgium None
Denmark None
Finland None
France None
Germany None
Hong Kong Horsford Nominees Ltd. (physical)/HKSCC Nominees Ltd. for
CCASS (depository)(1)
Ireland Bank of Ireland Nominees Ltd.
Italy None
Japan None
Malaysia Cartaban (M) Nominees Sdn Berhad.
Netherlands None
New Zealand ANZ Nominees Ltd.
Norway None
Singapore DBS Nominees Pty Ltd.
Spain None
Sweden Skandinaviska Enskilda Banken, as nominee(2)
Switzerland None
United Kingdom State Street London Nominees Ltd.
United States CEDE & Co.(Depository Trust Co. securities), a New York
limited purpose trust company MBSCC & Co. (Participants
Trust Co. securities), a New York limited purpose trust
company
IFTCO (domestic certificated Securities), a Missouri general
partnership composed of officers of the Custodian

Note: In countries where "None" is listed, securities are held through a central
securities depository that does not employ nominees. In such countries,
securities are registered in the name of the beneficial owner (Switzerland only)
or securities are held in bearer form.

(1)H.K. Corporation is owned by the central depository in Hong Kong.

(2)Subcustodian bank (Swedish Banking Corporation) with designation as
nominee

<PAGE> 22

FOREIGN INCOME AVAILABILITY SCHEDULE 6.6.1
STATE STREET BANK SUB-CUSTODIAN

Income will be credited contractually on pay day in the markets noted with
Contractual Income Policy. The markets noted with Actual income policy will be
credited income when it is received.

<TABLE>
<CAPTION>
MARKET INCOME POLICY MARKET INCOME POLICY MARKET INCOME POLICY
<S> <C> <C> <C> <C> <C>
Argentina Actual India Actual South Africa Actual

Australia Contractual Indonesia Actual South Korea Actual

Austria Contractual Ireland Actual Spain Contractual

Bangladesh Actual Israel Actual Sri Lanka Actual

Belgium Contractual Italy Contractual Swaziland Actual

* Bolivia Actual Ivory Coast Actual Sweden Contractual

Botswana Actual Japan Contractual Switzerland Contractual

Brazil Actual * Jamaica Actual Taiwan Actual

Canada Contractual Jordan Actual Thailand Actual

Chile Actual Kenya Actual * Trinidad & Actual
Tobago

China Actual Malaysia Actual * Tunisia Actual

Colombia Actual Mauritius Actual Turkey Actual

Cyprus Actual Mexico Actual United Kingdom Contractual

Czech Republic Actual Morocco Actual United States See Attached

Denmark Contractual Namibia Actual Uruguay Actual

Ecuador Actual Netherlands Contractual Venezuela Actual

Egypt Actual New Zealand Contractual Zambia Actual

** Euroclear Contractual/Actual Norway Contractual Zimbabwe Actual

Euro Cds Actual Pakistan Actual

Finland Contractual Peru Actual

France Contractual Philippines Actual

Germany Contractual Poland Actual

Ghana Actual Portugal Contractual

Greece Actual * Russia Actual

Hong Kong Contractual Singapore Contractual

Hungary Actual Slovak Republic Actual
</TABLE>

* Market is not 17F-5 eligible
** For Euroclear, contractual income paid only in markets listed with
Income Policy of Contractual.

<PAGE> 23

United States
Income Availability Schedule 6.6.1

<TABLE>
<CAPTION>
INCOME TYPE DTC FED PTC PHYSICAL
<S> <C> <C> <C> <C>
Dividends Contractual N/A N/A Actual

Fixed Rate Interest Contractual Contractual N/A Actual

Variable Rate Interest Contractual Contractual N/A Actual

GNMA I N/A N/A Contractual PD+l N/A

GNMA II N/A N/A Contractual PD *** N/A

Mortgags Actual Contractual Contractual Actual

Maturities Actual Contractual N/A Actual
</TABLE>

Exceptions to the above Contractual Income Policy include securities that are:

- Involved in a trade whose settlement either failed, or is pending
over the record date, (excluding the United States),

- On loan under a self directed securities lending program other than
IFTC's own vendor tending program,

- Known to be in a condition of default, or suspected to present a risk of
default or payment delay;

- In the asset categories, without limitation, of Private Placements,
Derivatives, Options, Futures, CMOs, and Zero Coupon Bonds

- Securities whose amount of income and redemption cannot be calculated
in advance of payable date, or determined in advance of actual collection,
examples include ADRs;

- Payments received as the result of a corporate action, not limited
to, bond calls, mandatory or optional puts, and tender offers.

*** For GNMA II securities, if the 19th day of the month is a business day,
Payable/Distribution Date is the next business day. If the 19th is not a
business day, but the 20th is a business day, Payable/Distribution date is
the first business day after the 20th if both the 19th and 20th are not
business days, Payable/Distribution will be the next business day
thereafter.

<PAGE> 24

SCREDULE 7.5

AFFIDAVIT FORMS

ATTACHMENT B

CUSTODIAN AFFIDAVIT

(For use by a custodian bank where securities entrusted to its care and have not
been re-deposited elsewhere.)

STATE OF

S.S.:

COUNTY OF

___________________, being duly sworn deposes and says that he is of
___________, a banking Corporation organized under and pursuant to the laws of
the _____________ with the principal place of business at _____________
(hereinafter called the "bank");

That his duties involve supervision of activities of the bank as custodian and
records relating thereto;

That the bank is custodian for certain securities of _____________ having a
place of business at _______________ (hereinafter called the "insurance
company") pursuant to an agreement between the bank and the insurance company;

That the schedule attached hereto is a true and complete statement of securities
(other than those caused to be deposited with The Depository Trust Company or
the Federal Reserve Bank of New York under the Federal Reserve book entry
procedure) which were in the custody of the bank for the account of the
insurance company as of the close of business on __________; that, unless
otherwise indicated on the schedule, the next maturing and all subsequent
coupons were then either attached to coupon bonds or in the process of
collection; and that, unless otherwise shown on the schedule, all such
securities were in bearer form or in registered form in the name of the
insurance company or its nominee or a nominee of the bank, or were in the
process of being registered in such form;

That the bank as custodian has the responsibility for the safekeeping of such
securities as that responsibility is specifically set forth in the agreement
between the bank as custodian and the insurance company; and

That, to the best of his knowledge and belief; unless otherwise shown on the
schedule, said securities were the property of said insurance company and were
free of all liens, claims or encumbrances whatsoever.

Subscribed and Sworn to
before me this _______ day of ___________ (L.S.)

<PAGE> 25

SCHEDULE 7.5
AFFIDAVIT FORMS

ATTACHMENT C

CUSTODIAN AFFIDAVIT

(For use in instances where a custodian bank maintains securities on deposit
with the Depository Trust Company.)

STATE OF

S.S.:

COUNTY OF

being duly sworn deposes and says that he is __________
of the __________ a banking corporation organized under and pursuant to the laws
of the _____________ with its principal p1ace of business at _____________
(hereinafter called the "bank");

That his duties involve supervision of activities of the bank as custodian and
records re1ating thereto;

That the bank is custodian for certain securities of ______________ with a place
of business at _________ (hereinafter called the "insurance company") pursuant
to an agreement between the bank and the insurance company.

That the bank has caused certain of such securities to be deposited with The
Depository Trust Company, 55 Water Street, New York (hereinafter called
"DTC"); and that the schedule attached hereto is a true and complete statement
of the securities of the insurance company of which the bank was custodian as of
the close of business on and which were so deposited with DTC at
such date;

That the bank as custodian has the responsibility for the safekeeping of such
Securities whether IN the possession of the BANK OR deposited with DTC as that
responsibility is specifically set forth in the agreement between the bank as
custodian and the insurance company; and

That, to the best of his knowledge and belief, unless otherwise shown on the
schedule, said securities were the property of said insurance company and were
free of all liens, claims or encumbrances whatsoever.

Subscribed and sworn to
before me this _____ day of ______________ (L.S.)

<PAGE> 26

SCHEDULE 7.5
AFFIDAVIT FORMS

ATTACHMENT D

CUSTODIAN AFFIDAVIT

(For use wbere ownership is evidenced by book entry at Federal Reserve Bank of
New York.)

STATE OF

S.S.:

COUNTY OF

being duly sworn deposes and says that he is __________
of the __________ A banking corporation organized under and pursuant to the laws
of the ____________ with the principal place of business at ____________
hereinafter called the "bank");

That his duties involve the supervision of activities of the bank as custodian
and records relating thereto;

That the bank is custodian for certain Securities of_____________ with a place
of business at (hereinafter called the "insurance company") pursuant to an
agreement between the bank and the insurance company;

That it has caused certain of such securities to be credited to its book-entry
account with the Federal Reserve Bank of New York under the Federal Reserve book
entry procedure; and that the schedule attached hereto is a true and complete
statement of the securities of the insurance company of which the bank was
custodian as of the close of business on ____________ which were in a 'General'1
book-entry account maintained in the name of the bank on the books and records
of the Federal Reserve Bank of New York at such date;

That the bank has the same responsibility for the safekeeping of such securities
whether in the possession of the bank or in said "General" book-entry account as
that responsibility is specifically set forth in the agreement between the bank
as custodian and the insurance company; and

Subscribed and sworn to before me this _______ day of___________________ (L.S.)

<PAGE> 1

Exhibit 13(i)(a)

Consent of Independent Accountants

We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 52 to the registration
statement on Form N-3 of The Prudential Variable Contract Account-2 (the
"Registration Statement") of our report dated February 18, 1998 relating to the
financial statements and financial highlights of The Prudential Variable
Contract Account-2, which appears in such Statement of Additional Information.

We also consent to the use in the Statement of Additional Information
constituting part of this Registration Statement of our report dated March 5,
1998, relating to the consolidated financial statements of The Prudential
Insurance Company of America, which appears in such Statement of Additional
Information.

We also consent to the references to us under the headings "Condensed Financial
Information" in the Prospectus and "Experts" in the Statement of Additional
Information.

/s/ PRICE WATERHOUSE LLP

New York, New York
April 24, 1998

C-16

<PAGE> 1
Exhibit 13(i)(b)

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Post-Effective Amendment No. 52 to Registration
Statement No. 2-28316 on Form N-3 of The Prudential Variable Contract Account-2
of The Prudential Insurance Company of America of our report dated June 4, 1997,
relating to the consolidated financial statements of The Prudential Insurance
Company of America and subsidiaries in the Statement of Additional Information,
which is a part of such Registration Statement, and to the reference to us under
the heading "Experts", also appearing in the Statement of Additional
Information.

/s/ Deloitte & Touche LLP

Parsippany, New Jersey
April 24, 1998

C-17

<PAGE> 1

Exhibit (13)(2)(a)

POWER OF ATTORNEY

Know all men by these presents:

That I, W. Scott McDonald, Jr., Member of the Committee of The
Prudential Variable Contract Account-2, do hereby make, constitute and appoint
as my true and lawful attorneys in fact Caren Cunningham and Grace Torres,
together or separately for me and in my name, place and stead to sign
registration statements on the appropriate forms prescribed by the Securities
and Exchange Commission for the registration under the Investment Company Act of
1940 and the Securities Act of 1933, as applicable, and any and all amendments
thereto that may be filed with the Securities and Exchange Commission.

IN WITNESS WHEREOF, I have hereunto set my hand this 11th day of March,
1998.

/s/ W. Scott McDonald, Jr.
W. Scott McDonald, Jr.

State of New Jersey )
) SS
County of Essex )

On this 11th day of March, 1998, before me personally appeared W. Scott
McDonald, Jr., to me known and known to me to be the person mentioned and
described in and who executed the foregoing instrument and duly acknowledged to
me that he executed same.

/s/ Floyd Hoelscher
Floyd Hoelscher, Notary Public

C-18
<PAGE> 2

POWER OF ATTORNEY

Know all men by these presents:

That I, Saul Fenster, Member of the Committee of The Prudential
Variable Contract Account-2, do hereby make, constitute and appoint as my true
and lawful attorneys in fact Caren Cunningham and Grace Torres, together or
separately for me and in my name, place and stead to sign registration
statements on the appropriate forms prescribed by the Securities and Exchange
Commission for the registration under the Investment Company Act of 1940 and the
Securities Act of 1933, as applicable, and any and all amendments thereto that
may be filed with the Securities and Exchange Commission.

IN WITNESS WHEREOF, I have hereunto set my hand this 11th day of March,
1998.

/s/ Saul Fenster
Saul Fenster

State of New Jersey )
) SS
County of Essex )

On this 11th day of March, 1998, before me personally appeared Saul
Fenster, to me known and known to me to be the person mentioned and described in
and who executed the foregoing instrument and duly acknowledged to me that he
executed same.

/s/ Floyd Hoelscher
Floyd Hoelscher, Notary Public

C-19
<PAGE> 3

POWER OF ATTORNEY

Know all men by these presents:

That I, Joseph Weber, Member of the Committee of The Prudential
Variable Contract Account-2, do hereby make, constitute and appoint as my true
and lawful attorneys in fact Caren Cunningham and Grace Torres, together or
separately for me and in my name, place and stead to sign registration
statements on the appropriate forms prescribed by the Securities and Exchange
Commission for the registration under the Investment Company Act of 1940 and the
Securities Act of 1933, as applicable, and any and all amendments thereto that
may be filed with the Securities and Exchange Commission.

IN WITNESS WHEREOF, I have hereunto set my hand this 11th day of March,
1998.

/s/ Joseph Weber
Joseph Weber

State of New Jersey )
) SS
County of Essex )

On this 11th day of March, 1998, before me personally appeared Joseph
Weber, to me known and known to me to be the person mentioned and described in
and who executed the foregoing instrument and duly acknowledged to me that he
executed same.

/s/ Floyd Hoelscher
Floyd Hoelscher, Notary Public

C-20

<ARTICLE> 6
<CIK> 0000080941
<NAME> THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT 2
<SERIES>
<NUMBER> 001
<NAME> THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT 2

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 569,666,006
<INVESTMENTS-AT-VALUE> 783,378,230
<RECEIVABLES> 4,947,975
<ASSETS-OTHER> 832
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 788,327,037
<PAYABLE-FOR-SECURITIES> 2,509,980
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,963,601
<TOTAL-LIABILITIES> 4,473,581
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 783,853,456
<SHARES-COMMON-STOCK> 28,643,000
<SHARES-COMMON-PRIOR> 30,548,000
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 783,853,456
<DIVIDEND-INCOME> 6,840,290
<INTEREST-INCOME> 1,395,390
<OTHER-INCOME> 0
<EXPENSES-NET> 3,351,395
<NET-INVESTMENT-INCOME> 4,884,485
<REALIZED-GAINS-CURRENT> 147,369,906
<APPREC-INCREASE-CURRENT> 43,649,467
<NET-CHANGE-FROM-OPS> 195,903,858
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (4,174,661)
<NUMBER-OF-SHARES-SOLD> 37,581,652
<NUMBER-OF-SHARES-REDEEMED> (80,261,096)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 148,977,115
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 868,606
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,351,395
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 19.62
<PER-SHARE-NII> 0.15
<PER-SHARE-GAIN-APPREC> 6.11
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 25.88
<EXPENSE-RATIO> 0.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>