PRUDENTIALS ANNUITY PLAN ACCOUNT-2
485BPOS, 1998-04-30
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<PAGE>
 
                                                        Registration No. 2-59232

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                             ----------------------
   
                   Post-Effective Amendment No. 27 to Form S-6
         For Registration Under the Securities Act of 1933 of Securities
               of Unit Investment Trusts Registered on Form N-8B-2
    
                                       FOR

                             ----------------------
    
                       PRUDENTIAL'S ANNUITY PLAN ACCOUNT-2
                              (Exact name of trust)
                   THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
                751 Broad Street, Newark, New Jersey 07102-3777
                     (Name of depositor and complete address
                         of principal executive offices)           

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


                And Also to Form N-1A for Registration Under the
                Securities Act of 1933 and Registration Statement
                    Under the Investment Company Act of 1940

                                      FOR

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


   
                       PRUDENTIAL'S GIBRALTAR FUND, INC.
                               751 Broad Street
                             Newark, N.J. 07102-3777
                          (Exact name of co-registrant
                   and address of principal executive offices)      

                             ----------------------
                               Caren Cunningham
                                   Secretary
                       Prudential's Gibraltar Fund, Inc.
                  The Prudential Insurance Company of America
                               751 Broad Street
                            Newark, N.J. 07102-3777
                (Name and complete address of agent for service)
    
                             ----------------------


                                   Copies to:

   
                             Christopher E. Palmer
                                 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) of Rule 485
     [ ] on ___________ pursuant to paragraph (a) of Rule 485
              (date)
    
<PAGE>
 
                           VARIABLE ANNUITY CONTRACTS
                       CROSS REFERENCE SHEET TO PROSPECTUS

INFORMATION REQUIRED BY
ITEM OF FORM N-8B-2          LOCATION IN PROSPECTUS
- -------------------          ----------------------
 1...........................Prudential's Annuity Plan Account-2

    
 2...........................Eligibility for Purchase
                             Prudential's Administrative Role     

 3...........................Not Applicable

    
 4...........................Eligibility for Purchase
                             Prudential's Administrative Role     

 5-6.........................Prudential's Annuity Plan Account-2

 9...........................Not Applicable

10(a)........................The Variable Annuity Contracts

  (b)........................Prudential's Annuity Plan Account-2

  (c)........................Liquidation (Redemption) of Accumulation Shares
                             Death of Annuitant Before Annuity Date
                             Right to Cancel

  (d)........................Liquidation (Redemption) of Accumulation Shares
                             Texas Supplement
                             Exercising Rights Under the Contracts

  (e)........................Not Applicable

  (f)........................Description of Fund Shares and Voting Rights

  (g)(h)(1)(4)...............Not Applicable

  (g)(h)(2)(3)...............Exercising Rights Under the Contracts

  (i)........................Eligibility for Purchase
                             Supplemental Death Benefit
                             Effecting a Variable Payout
                             Annuity Options Available
                             How Variable Annuity Payments are Determined
                             Income Payments for a Fixed Period
                             Death of Annuitant Before Annuity Date
                             Death of Annuitant After Annuity Date

   
11...........................Prudential's Annuity Plan Account-2
                             Prudential's Gibraltar Fund, Inc.
    

    
12...........................Prudential's Annuity Plan Account-2
                             Custodian, Transfer Agent and Dividend-Paying Agent
                             Prudential's Administrative Role     

   
13...........................Summary
                             Prudential's Gibraltar Fund, Inc.
                             Prudential's Administrative Role
                             Sales and Related Charges
                             Other Charges
    
<PAGE>
 
CROSS REFERENCE SHEET (VARIABLE ANNUITY) -- PAGE 2

INFORMATION REQUIRED BY
ITEM OF FORM N-8B-2          LOCATION IN PROSPECTUS
- -------------------          ----------------------
14...........................Eligibility for Purchase

    
15...........................The Variable Annuity Contracts
                             Prudential's Administrative Role     

16...........................Prudential's Annuity Plan Account-2

17...........................Liquidation (Redemption) of Accumulation Shares
                             Effecting a Variable Payout
                             Income Payments for a Fixed Period
                             Death of Annuitant Before Annuity Date
                             Right to Cancel

18...........................Prudential's Annuity Plan Account-2
                             How Variable Annuity Payments are Determined

    
19...........................Prudential's Administrative Role     

20-22........................Not Applicable

23...........................Directors and Officers

24...........................Not Applicable

25...........................Eligibility for Purchase

26...........................Sales and Related Charges
                             Other Charges
    
27...........................Eligibility for Purchase
                             Prudential as Manager of the Fund's Investments
     

28...........................Directors and Officers

29-34........................Not Applicable

35...........................Eligibility for Purchase

37...........................Not Applicable

38-39........................Eligibility for Purchase

40...........................Sales and Related Charges
                             Other Charges
    
41(a)........................Eligibility for Purchase
                             Prudential as Manager of the Fund's Investments
     

42...........................Directors and Officers

43...........................Not Applicable

44...........................Prudential's Annuity Plan Account-2
                             How Accumulation Shares are Credited
                             How Variable Annuity Payments are Determined
<PAGE>
 
CROSS REFERENCE SHEET (VARIABLE ANNUITY) -- PAGE 3

INFORMATION REQUIRED BY
ITEM OF FORM N-8B-2          LOCATION IN PROSPECTUS
- -------------------          ----------------------
45...........................Not Applicable

46...........................Liquidation (Redemption) of Accumulation Shares
                             Death of Annuitant Before Annuity Date

47...........................Not Applicable

48...........................Eligibility for Purchase
                             State Regulation

49...........................Not Applicable

50...........................Prudential's Annuity Plan Account-2

    
51...........................The Risks Which Prudential Assumes
                             Supplemental Death Benefit     

52...........................Prudential's Annuity Plan Account-2

53...........................Federal Income Taxes

54...........................Not Applicable

55...........................Results Under a Hypothetical Purchase Program

56-58........................Not Applicable

   
59...........................Financial Statements of Prudential's Annuity
                               Plan Account-2
                             Consolidated Financial Statements of The
                               Prudential Insurance Company of America
                               and Subsidiaries
    
<PAGE>
 
   
                        PRUDENTIAL'S GIBRALTAR FUND, INC.
                       CROSS REFERENCE SHEET TO PROSPECTUS
    

INFORMATION REQUIRED BY

ITEM OF FORM N-1A                  LOCATION IN PROSPECTUS
- -----------------                  ----------------------
 1. Cover Page                     Cover Page

 2. Synopsis                       Summary
                                   Fee Table

   
 3. Condensed Financial            Prudential's Gibraltar Fund, Inc.--Financial
    Information                    Highlights

 4. General Description of         Prudential's Gibraltar Fund, Inc.
    Registrant                     Investment Policies
                                   Restrictions on Investment
                                   Description of Fund Shares and Voting Rights

 5. Management of the Fund         Directors and Officers of the Fund
                                   Prudential's Gibraltar Fund, Inc.
                                   Prudential's Administrative Role 
                                   Custodian, Transfer Agent and Dividend-
                                     Paying Agent
                                   Summary of Investment Advisory Contract
                                   Prudential as Manager of the Fund's
                                     Investments
                                   Brokerage
    

 6. Capital Stock and Other        Description of Fund Shares and Voting Rights
    Securities                     Redemption of Fund Shares
                                   Federal Income Taxes

   
 7. Purchase of Securities         Prudential's Gibraltar Fund, Inc.
    Being Offered                  Determination of Net Asset Value
    

 8. Redemption or Repurchase       Redemption of Fund Shares

 9. Pending Legal Proceedings      Not Applicable

10. Cover Page                     Not Applicable

11. Table of Contents              Prospectus Contents

12. General Information            Not Applicable

   
13. Investment Objective and       Prudential's Gibraltar Fund, Inc.
    Policies                       Investment Policies
                                   Restrictions on Investment
                                   New Jersey Investment Laws
                                   Prudential as Manager of the Fund's
                                     Investments
    

14. Management of the Fu           Directors and Officers of the Fund

   
15. Control Persons and            Prudential's Gibraltar Fund, Inc.
    Principal Holders of           Description of Fund Shares and Voting Rights
    Securities                     Directors and Officers of the Fund

16. Investment Advisory and        Prudential's Gibraltar Fund, Inc.
    Other Services                 Summary of Investment Advisory Contract
                                   Prudential as Manager of the Fund's
                                     Investments
    

17. Brokerage Allocation           Brokerage
<PAGE>
 
CROSS REFERENCE SHEET (PGF) -- PAGE 2

INFORMATION REQUIRED BY
ITEM OF FORM N-1A                  LOCATION IN PROSPECTUS
- -----------------                  ----------------------
18. Capital Stock and Other        Description of Fund Shares and Voting Rights
    Securities

   
19. Purchase, Redemption and       Prudential's Gibraltar Fund, Inc.
    Pricing of Securities          Determination of Net Asset Value
    Being Offered                  Redemption of Fund Shares
                                   Description of Fund Shares and Voting Rights
    

20. Tax Status                     Federal Income Taxes

21. Underwriters                   Not Applicable

22. Calculation of Performance     Not Applicable
    Data

   
23. Financial Statements           Financial Statements of Prudential's
                                     Gibraltar Fund, Inc.
    
<PAGE>
 
PROSPECTUS
   
MAY 1, 1998     
 
 
 
VARIABLE ANNUITY CONTRACTS OF PRUDENTIAL'S ANNUITY PLAN ACCOUNT-2        
                                                                      LOGO     
(for use in connection with retirement
plans qualifying for special
Federal income tax treatment)
 
 . Flexible Purchase Payment Contract
 . Single Purchase Payment Contract
 
PRUDENTIAL'S GIBRALTAR FUND, INC.
 
The net proceeds derived from the sale of these Variable Annuity Contracts are
allocated to Prudential's Annuity Plan Account-2, which is a variable contract
account of The Prudential Insurance Company of America. The assets of this
account are invested solely in shares of a mutual fund concerned primarily
with growth of capital to an extent compatible with a concern for its
preservation. Current income is a secondary consideration. The Fund's
investment objectives are pursued primarily through the purchase of common
stocks.
   
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.     
 
                               MAILING ADDRESS:
 
                  THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
                                
                             751 BROAD STREET     
                         NEWARK, NEW JERSEY 07102-3777
                           
                        TELEPHONE: (888) 778-2888     
   
QVA 81636 Ed 5-98     
  YOU ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
                                                              Printed in U.S.A.
<PAGE>
 
                              PROSPECTUS CONTENTS
 
<TABLE>   
<S>                                                                        <C>
                                                                           PAGE
                                                                           ----
GLOSSARY OF TERMS USED IN THIS PROSPECTUS.................................    1
SUMMARY...................................................................    2
FEE TABLE.................................................................    4
PRUDENTIAL'S GIBRALTAR FUND, INC. -- FINANCIAL HIGHLIGHTS.................    5
GENERAL PROGRAM INFORMATION...............................................    6
   ELIGIBILITY FOR PURCHASE...............................................    6
   THE VARIABLE ANNUITY CONTRACT..........................................    6
   PRUDENTIAL'S ANNUITY PLAN ACCOUNT-2....................................    7
   PRUDENTIAL'S GIBRALTAR FUND, INC. .....................................    8
   PRUDENTIAL'S ADMINISTRATIVE ROLE.......................................    8
DESCRIPTION OF THE CONTRACTS..............................................    9
   SALES AND RELATED CHARGES..............................................    9
   OTHER CHARGES..........................................................   10
   RIGHT TO CANCEL........................................................   10
   HOW ACCUMULATION SHARES ARE CREDITED...................................   10
   LIQUIDATION (REDEMPTION) OF ACCUMULATION SHARES........................   11
   ASSIGNMENT.............................................................   12
   EXERCISING RIGHTS UNDER THE CONTRACTS..................................   12
   SUPPLEMENTAL DEATH BENEFIT.............................................   12
   RESULTS UNDER A HYPOTHETICAL PURCHASE PROGRAM..........................   12
   EFFECTING A VARIABLE PAYOUT............................................   13
   CHANGING THE ANNUITY DATE..............................................   14
   ANNUITY OPTIONS AVAILABLE..............................................   14
   HOW VARIABLE ANNUITY PAYMENTS ARE DETERMINED...........................   14
   THE RISKS WHICH PRUDENTIAL ASSUMES.....................................   16
   INCOME PAYMENTS FOR A FIXED PERIOD.....................................   16
   DEATH OF ANNUITANT BEFORE ANNUITY DATE.................................   16
   DEATH OF ANNUITANT AFTER ANNUITY DATE..................................   17
DESCRIPTION OF PRUDENTIAL'S GIBRALTAR FUND, INC. .........................   18
   INVESTMENT POLICIES....................................................   18
   RESTRICTIONS ON INVESTMENT.............................................   18
   NEW JERSEY INVESTMENT LAWS.............................................   19
   SUMMARY OF INVESTMENT ADVISORY CONTRACT................................   20
   PRUDENTIAL AS MANAGER OF THE FUND'S INVESTMENTS........................   21
   BROKERAGE..............................................................   22
   DETERMINATION OF NET ASSET VALUE.......................................   23
   REDEMPTION OF FUND SHARES..............................................   24
   DESCRIPTION OF FUND SHARES AND VOTING RIGHTS...........................   24
   CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT....................   24
SUPPLEMENTARY INFORMATION.................................................   25
   PRUDENTIAL-SPONSORED PENSION PLANS.....................................   25
   STATE REGULATION.......................................................   25
   FEDERAL INCOME TAXES...................................................   25
   WITHHOLDING............................................................   26
   ADDITIONAL INFORMATION.................................................   28
   EXPERTS................................................................   28
   LITIGATION.............................................................   28
   YEAR 2000..............................................................   29
DIRECTORS AND OFFICERS OF THE FUND........................................   29
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA--DIRECTORS....................   30
</TABLE>    
<PAGE>
 
<TABLE>   
 
<S>                                                                       <C>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA--PRINCIPAL OFFICERS..........  32
FINANCIAL STATEMENTS OF PRUDENTIAL'S ANNUITY PLAN ACCOUNT-2..............  A1
FINANCIAL STATEMENTS OF PRUDENTIAL'S GIBRALTAR FUND, INC. ............... AI1
SCHEDULE OF INVESTMENTS.................................................. AI2
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF
 AMERICA AND SUBSIDIARIES................................................  B1
</TABLE>    
 
EFFECTIVE JANUARY 1, 1984, SALES OF THE CONTRACTS DESCRIBED IN THIS PROSPECTUS
TO NEW CUSTOMERS WERE DISCONTINUED. THIS DECISION DOES NOT AFFECT INFORCE
PLANHOLDERS WHO MAY CONTINUE TO MAKE SUBSEQUENT PURCHASES ON EITHER A
SCHEDULED OR NON-SCHEDULED BASIS.
<PAGE>
 
                   GLOSSARY OF TERMS USED IN THIS PROSPECTUS
 
ACCUMULATION PERIOD: Period prior to annuity date.
 
ACCUMULATION SHARE: A measure used to determine the value of an Annuitant's
Contract during the accumulation period.
 
ACCUMULATION SHARE VALUE: The dollar value of one accumulation share.
 
ANNUITANT: Individual for whom purchases are made under a Flexible Purchase
Payment or Single Purchase Payment Variable Annuity Contract. The Annuitant's
name is shown in the Contract.
 
ANNUITY: A series of payments made each month as long as a person, called an
Annuitant, is living. In some forms of annuity, payments may continue after
the Annuitant's death.
 
ANNUITY DATE: Date when retirement payments are to begin or, alternatively,
when a single payment is to be made. This date is selected by the contract
owner and is specified in the Contract.
 
ANNUITY SHARE VALUE: The monthly dollar value of one annuity share.
   
BUSINESS DAY: Day on which the New York Stock Exchange, Inc. (NYSE) is open
for business.     
   
CONTRACTS: The Flexible Purchase Payment and Single Purchase Payment Variable
Annuity Contracts described in this Prospectus which are written agreements
between Prudential and the contract owner which set forth the rights, duties
and privileges of all parties.     
   
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.     
 
PRUDENTIAL'S ANNUITY PLAN ACCOUNT-2 (APA-2 OR ACCOUNT): The separate account
in which the Contracts described in this Prospectus participate.
 
PRUDENTIAL'S GIBRALTAR FUND, INC. (FUND): The mutual fund in whose shares APA-
2 invests.
 
PURCHASE PAYMENT: Money paid under a Contract on behalf of an Annuitant.
 
RETIREMENT PLANS: Corporate, qualified plans for self-employed individuals,
IRA, public school and Section 501(c)(3) plans, and deferred compensation
plans for public employees.
 
SEPARATE ACCOUNT: A separate portfolio of assets held by an insurance company
and whose investment experience is kept separate from that of the other
investment accounts of the company.
 
SUPPLEMENTAL DEATH BENEFIT: Death benefit equal to the excess, if any, of (a)
purchase payments minus liquidations over (b) the value of accumulation shares
held.
 
SYSTEMATIC LIQUIDATION (OPTION D): Monthly liquidations of an equal number of
an Annuitant's accumulation shares. This option, which is an alternative to
annuity options, provides the Annuitant with a variable monthly income for a
fixed period.
 
VARIABLE ANNUITY: An annuity whose payments vary with the investment results
of APA-2.
 
                                       1
<PAGE>
 
                                    SUMMARY
   
THESE PAGES CONTAIN A BRIEF SUMMARY OF SOME OF THE IMPORTANT FEATURES OF THE
VARIABLE ANNUITY CONTRACTS DESCRIBED IN THIS PROSPECTUS, PARTICULARLY THOSE
RELATED TO THE CHARGES MADE BY PRUDENTIAL. THIS SUMMARY DOES NOT PROVIDE A
FULL DESCRIPTION OF THE CONTRACTS. THE ENTIRE PROSPECTUS SHOULD BE READ FOR
THAT PURPOSE. YOU MAY FIND IT HELPFUL TO RE-READ THIS SUMMARY AFTER HAVING
READ THE PROSPECTUS.     
   
This Prospectus describes two individual variable annuity contracts that are
issued by The Prudential Insurance Company of America (Prudential) in
connection with retirement plans entitled to federal income tax benefits. The
two contracts are a Flexible Purchase Payment Variable Annuity Contract
(Flexible Purchase Contract) and a Single Purchase Payment Variable Annuity
Contract (Single Purchase Contract).     
   
The tax-qualified retirement plans for which the Contracts are issued are: (1)
corporate pension and profit-sharing plans qualified under Section 401(a) of
the Internal Revenue Code of 1986, as amended (the Code) (corporate plans);
(2) Individual Retirement Annuities established in accordance with Section 408
of the Code, including those established by employer contributions under a
Simplified Employee Pension Plan (SEPP) arrangement; (3) annuity purchase
plans adopted by public school systems and tax-exempt Section 501(c)(3)
organizations pursuant to Section 403(b) of the Code (Section 403(b)
Annuities); and (4) deferred compensation plans for public employees
established under the provisions of Section 457 of the Code.     
   
The net purchase payments made under the Contracts, after the deductions
described below, are allocated to Prudential's Annuity Plan Account-2
(Account), a variable contract account of Prudential. The assets of the
Account are invested at net asset value in shares of Prudential's Gibraltar
Fund, Inc. (the Fund). The value of the Contracts before annuity payments
begin and the amount of monthly annuity benefits payable under them thereafter
will increase or decrease depending on increases or decreases in the market
value of the portfolio securities owned by the Fund.     
   
Subject to any limitations contained in the applicable retirement plan, the
Contracts may be liquidated at their net asset value at any time during the
period before annuity payments begin, although such a liquidation may have tax
consequences that should be considered carefully. In addition, federal tax
laws impose restrictions on withdrawals from annuity purchase plans subject to
Section 403(b) of the Code. The net asset value of a Contract is the total
value of accumulation shares credited to it minus any transfer taxes.
Currently no transfer taxes are imposed. See LIQUIDATION (REDEMPTION) OF
ACCUMULATION SHARES, page 11. After annuity payments begin the Contracts may
no longer be liquidated, in whole or in part. However, liquidations may still
be effected after the Annuity Date under an Option D settlement, which
provides for a systematic liquidation of interests under a Contract. It
affords no protection against longevity. See ANNUITY OPTIONS AVAILABLE, page
14, and INCOME PAYMENTS FOR A FIXED PERIOD, page 16.     
   
The Fund was organized by Prudential to serve as the investment medium of the
Account and related individual variable contract accounts of Prudential. The
Fund does not sell its shares to the public. It is registered under the
Investment Company Act of 1940, as amended, as a diversified open-end
management investment company whose investment objective is concerned
primarily with growth of capital to an extent compatible with a concern for
its preservation. Current income is a secondary consideration. The portfolio
of the Fund consists primarily of common stock of a diversified group of
companies in a variety of industries. The Contracts are subject to the risks
associated with common stock investment, so there can be no assurance that the
investment objectives will be achieved. Investment policies of the Fund permit
investments in three categories that could entail special risks: the Fund's
assets may be invested in American Depository Receipts; up to 10% of the value
of the Fund's assets may be invested in securities which are not readily
marketable; and up to 3% may be invested in warrants or rights to acquire
stock. See SPECIAL RISKS, page 19.     
   
Prudential, a mutual insurance company, was founded in 1875 under the laws of
the State of New Jersey. Prudential is subject to regulation by the Department
of Insurance of the State of New Jersey and by the insurance departments of
all the other states and jurisdictions in which it does business. Prudential
is the investment advisor of the Fund. See PRUDENTIAL AS MANAGER OF THE FUND'S
INVESTMENTS, page 21. Prudential's financial statements begin on page C1 and
should be considered only as bearing upon Prudential's ability to meet its
obligations under the Contracts.     
   
Pruco Securities Corporation (Prusec), an indirect wholly-owned subsidiary of
Prudential, acts as the principal underwriter of the Fund and the Account.
Prusec's principal business address is 751 Broad Street, Newark, New Jersey
07102-3777. Subject to Board approval, during the second quarter of 1998,
Prusec's responsibilities as principal underwriter will be assigned to
Prudential Investment Management Services LLC (PIMS). PIMS, also an indirect
wholly-owned subsidiary of Prudential, is a limited liability corporation
organized under Delaware law in 1996. PIMS will act as principal
underwriter under substantially the same terms as Prusec does currently. Both
Prusec and PIMS are      
 
 
                                       2
<PAGE>
 
   
registered as broker-dealers under the Securities Exchange Act of 1934, as
amended, and are members of the National Association of Securities Dealers,
Inc. PIMS' principal business address is 751 Broad Street, Newark, New Jersey
07102-3777.     
 
SALES AND RELATED CHARGES. A sales charge is deducted from purchase payments
under these Contracts. The charge ranges from 8.5% on the first $5,000
received under a Contract in any contract year to 3.5% on any excess over
$20,000 received under that Contract in the same contract year. (Contract
years commence on the contract date and on anniversaries of that date.) There
is also a charge for supplemental death benefit coverage equal to 1/4 of 1%
(0.25%) of each purchase payment.
   
After determination of these charges, a transaction charge of $1 for each
purchase payment, and an annual Contract fee of $7, applicable to the first
purchase payment in each contract year, are deducted and the balance of the
purchase payment is credited as accumulation shares. See HOW ACCUMULATION
SHARES ARE CREDITED, page 10. For the single purchase contract there is, of
course, only one purchase payment made. The above charges are applicable to
that purchase payment. For the flexible purchase contract, purchase payments
scheduled in any contract year may not be less than $300 without Prudential's
consent. The sales charge as a percentage of the net amount invested (purchase
payment minus sales charge, transaction charge and supplemental death benefit
charge) is greatest when purchase payments are smallest and being made at the
first $5,000 rate. For a $25 purchase payment, the sales charge would be 9.7%
of the net amount invested. For a description of purchase flexibility, see THE
VARIABLE ANNUITY CONTRACT, page 6.     
   
These charges are not deducted from any purchase payment to the extent that it
is made with the proceeds of another contract issued by Prudential in
connection with a tax-qualified retirement plan, including any dividend
accumulations or paid-up additions resulting from that contract, but excluding
cash dividends.     
 
No sales charge is deducted at the time accumulation shares are used to
provide an annuity. Some states impose a premium tax on the consideration
applied to provide some tax-qualified variable annuity settlements. The tax
ranges from 0.5% to 5% of the amount applied, depending on the jurisdiction
and the type of retirement plan, and is deducted where applicable from the
value of the accumulation shares used to provide the annuity.
   
Sales and related charges are discussed in greater detail under SALES AND
RELATED CHARGES on page 9. State premium taxes are discussed in greater detail
under EFFECTING A VARIABLE PAYOUT on page 13.     
   
OTHER CHARGES. The sales and transaction charges and annual Contract fee are
deducted from purchase payments. In addition, other charges are made daily
against the assets of the Account and of the Fund. Charges are made against
Account assets attributable to the Contracts at an aggregate rate of 1.300%
per year for administrative services and for the assumption by Prudential of
mortality and expense risks. An investment advisory charge is applied against
the Fund assets underlying the Account, at a rate of 0.125% ( 1/8 of 1%) per
year. In addition, the Fund has expenses which may be considered to be an
indirect charge against assets. See SUMMARY OF INVESTMENT ADVISORY CONTRACT,
page 20.     
   
In total, these other charges, exclusive of the charges described under SALES
AND RELATED CHARGES on page 9, represent on a yearly basis approximately
1.425% of net assets attributable to the Contracts. See OTHER CHARGES, page
10.     
   
SUPPLEMENTAL DEATH BENEFIT. This benefit is included in all Contracts issued
before age 65 with a Contract date which is more than one year before the
annuity date. The annuity date is the date elected at issue by the contract
owner for the commencement of annuity or systematic liquidation payments to
the annuitant under the terms of the Contract. The benefit provides, in
effect, that if the Annuitant's death occurs before the earlier of the annuity
date and age 65, the amount payable to the beneficiary will not be less than
the total purchase payments made. See SUPPLEMENTAL DEATH BENEFIT, page 12.
    
ILLUSTRATION. To illustrate how the sales and other charges may operate,
assume that an employee begins an individual retirement annuity purchase
program with a single investment of $1,000. From this are deducted the 8.5%
sales charge ($85), the charge for supplemental death benefit coverage
($2.50), the $1 transaction charge and the $7 annual Contract fee, leaving
$904.50 as the net amount invested. If the accumulation share value for that
business day is $10, this will result in 90.45 shares being credited under the
Contract. If there should be no daily change in the accumulation share value
during the ensuing year the total charges against assets for the year would be
approximately $12.89.
   
If the employee makes a $1,000 purchase payment each year thereafter until
retirement, the net amount invested will be determined as described under
SALES AND RELATED CHARGES on page 9. Whether the employee makes only a single
purchase under the Single Purchase Contract or periodic purchases under the
Flexible Purchase Contract, the total value available at retirement is
dependent upon the investment results of the Fund and cannot be guaranteed or
projected.     
 
                                       3
<PAGE>
 
                                   FEE TABLE
 
PLANHOLDER TRANSACTION EXPENSES
 
Sales Load Imposed on Purchases (as a percentage of purchase payments)
 
<TABLE>
                  <S>                           <C>                                       <C>
                  First                         $ 5,000                                   8.50%
                  Next                          $ 5,000                                   6.50%
                  Next                          $10,000                                   4.50%
                  Excess over                   $20,000                                   3.50%
</TABLE>
 
<TABLE>
<S>                      <C>
Supplemental Death
Benefit Charge
(as a percentage of
purchase payments)...... 0.25%
Transaction Charge...... $1.00 from each purchase payment.
Annual Contract Fee..... $7.00 from the first purchase payment in each Contract
                          year, if applicable.
</TABLE>
 
SEPARATE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE)
<TABLE>
<S>                                                                        <C>
Mortality and Expense Risk Fees........................................... 0.80%
Account Fees and Expenses (Administrative Charge)......................... 0.50%
                                                                           ----
Total Separate Account Annual Expenses.................................... 1.30%
                                                                           ====
</TABLE>
 
PRUDENTIAL'S GIBRALTAR FUND, INC. ANNUAL EXPENSES
(AS A PERCENTAGE OF THE FUND'S AVERAGE NET ASSETS)
<TABLE>   
<S>                                                                       <C>
Investment Management Fees............................................... 0.125%
Other Expenses........................................................... 0.025%
                                                                          -----
Total Prudential's Gibraltar Fund, Inc. Annual Expenses.................. 0.150%
                                                                          =====
</TABLE>    
 
                                   EXAMPLES
 
<TABLE>   
<CAPTION>
                                           1 YEAR 3 YEARS 5 YEARS 10 YEARS
                                           ------ ------- ------- --------
<S>                                        <C>    <C>     <C>     <C>
If you surrender your Contract at the end
 of the applicable time period:
  You would pay the following expenses
   on a $1,000 investment, assuming 5%
   annual return on assets:                 $109   $137    $167     $252
</TABLE>    
 
The purpose of the foregoing table is to assist the Planholder in
understanding the expenses of the Account and the Fund that he/she will bear,
directly or indirectly. See the sections on Prudential's Gibraltar Fund, Inc.,
Sales and Related Charges and Other Charges for more complete descriptions of
the various costs and expenses. The above table does not include any state
premium taxes.
 
THE EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE
EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
 
                                       4
<PAGE>
 
            PRUDENTIAL'S GIBRALTAR FUND, INC.--FINANCIAL HIGHLIGHTS
                 (FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR)
   
The following financial highlights for the two year period ended December 31,
1997 have been audited by Price Waterhouse LLP, independent accountants, whose
report thereon was unqualified and is included in Appendix C to this
Prospectus. The following information for each of the years prior to and
including the period ended December 31, 1995 has been 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 appear in Appendix C to this Prospectus.
    
       
<TABLE>   
<CAPTION>
                      01/01/97  01/01/96  01/01/95  01/01/94   01/01/93  01/01/92  01/01/91  01/01/90   01/01/89  01/01/88
                         TO        TO        TO        TO         TO        TO        TO        TO         TO        TO
                      12/31/97  12/31/96  12/31/95* 12/31/94*  12/31/93* 12/31/92* 12/31/91* 12/31/90*  12/31/89* 12/31/88*
                      --------  --------  --------- ---------  --------- --------- --------- ---------  --------- ---------
<S>                   <C>       <C>       <C>       <C>        <C>       <C>       <C>       <C>        <C>       <C>
Net Asset Value at
 beginning of year..  $ 11.43   $ 10.14    $ 9.40    $11.29     $11.13    $11.39    $ 9.40    $10.59     $10.29    $ 9.19
                      -------   -------    ------    ------     ------    ------    ------    ------     ------    ------
Income From
 Investment
 Operations:
Net investment
 income.............     0.22      0.16      0.18      0.21       0.18      0.18      0.22      0.34       0.36      0.31
Net realized and
 unrealized gains
 (losses) on
 investments........     1.84      2.56      1.65     (0.40)      2.43      1.77      2.90     (0.64)      1.92      2.00
                      -------   -------    ------    ------     ------    ------    ------    ------     ------    ------
 Total from
  investment
  operations........     2.06      2.72      1.83     (0.19)      2.61      1.95      3.12     (0.30)      2.28      2.31
Distributions to
 Shareholders:
Distributions from
 net investment
 income.............    (0.21)    (0.15)    (0.17)    (0.22)     (0.19)    (0.19)    (0.26)    (0.37)     (0.37)    (0.37)
Distributions from
 realized gains.....    (2.33)    (1.28)    (0.92)    (1.48)     (2.26)    (2.02)    (0.87)    (0.52)     (1.61)    (0.84)
                      -------   -------    ------    ------     ------    ------    ------    ------     ------    ------
  Total
   distributions....    (2.54)    (1.43)    (1.09)    (1.70)     (2.45)    (2.21)    (1.13)    (0.89)     (1.98)    (1.21)
                      -------   -------    ------    ------     ------    ------    ------    ------     ------    ------
Net Asset Value
 at end of year.....  $ 10.95   $ 11.43    $10.14    $ 9.40     $11.29    $11.13    $11.39    $ 9.40     $10.59    $10.29
                      =======   =======    ======    ======     ======    ======    ======    ======     ======    ======
Total Investment
 Rate of Return:**..    18.88%    27.13%    19.13%    (1.33%)    23.79%    17.60%    34.40%    (2.80%)    22.30%    25.60%
Ratios/Supplemental
 Data:
Net assets at end of
 year (in
 millions)..........  $ 325.9   $ 301.3    $261.2    $242.5     $264.3    $230.1    $214.2    $174.4     $197.0    $183.3
Ratio of expenses
 net of
 reimbursement to
 average net
 assets.............     0.15%     0.16%     0.14%     0.15%      0.16%     0.19%     0.19%     0.21%      0.16%     0.16%
Ratio of net
 investment income
 to average net
 assets.............     1.56%     1.38%     1.68%     1.98%      1.45%     1.58%     1.98%     3.38%      3.19%     2.95%
Portfolio turnover
 rate...............      101%       97%      105%       93%        92%       73%       76%      108%        67%       32%
Average commission
 rate per share.....  $0.0578   $0.0576       N/A       N/A        N/A       N/A       N/A       N/A        N/A       N/A
</TABLE>    
 
*  Calculations are based on average month-end shares outstanding.
   
** Total return is at the portfolio level and excludes contract specific
   charges which would reduce returns. Total return is calculated assuming a
   purchase of shares on the first day and a sale on the last day of each
   reported period and includes reinvestment of dividends and distributions.
          
  Further information concerning the Fund, its investment policies and
  restrictions upon its investments and Prudential's role as an investment
  advisor to the Fund, may be found beginning on page 18. The Fund's
  Directors and Officers are listed beginning on page 29. Further information
  about the Fund's performance is contained in the Fund's annual report to
  shareholders, which may be obtained without charge.     
     
  The above table does not reflect charges against Account assets. Those
  charges are described under OTHER CHARGES on page 10.     
 
                                       5
<PAGE>
 
                          GENERAL PROGRAM INFORMATION
 
ELIGIBILITY FOR PURCHASE
 
Subject to the conditions stated in the note under PROSPECTUS CONTENTS, the
Flexible Purchase Payment and Single Purchase Payment Variable Annuity
Contracts (Contracts) described in this Prospectus are issued only for the
benefit of persons who are entitled to favorable federal income tax treatment
under the Code in connection with retirement plans established for or by such
persons.
 
Included are:
 
(1) employees of corporations under qualified plans described in Section
    401(a) or 404(a)(2) of the Code (corporate plans);
 
(2) employees under annuity purchase plans adopted by public school systems
    and tax-exempt Section 501(c)(3) organizations, pursuant to Section 403(b)
    of the Code (public school and Section 501(c)(3) plans);
 
(3) employees and self-employed persons (including former employees at the
    time of separation from employment before retirement), and non-employed
    spouses of such participants, under Individual Retirement Annuities (IRA
    plans) established pursuant to Section 408 of the Code, including those
    established under a Simplified Employee Pension Plan (SEPP) arrangement;
    and
 
(4) public employees under a deferred compensation plan described in Section
    457 of the Code.
   
The Contracts are offered by The Prudential Insurance Company of America
(Prudential), a mutual life insurance company organized in 1875 under the laws
of the State of New Jersey. Its corporate office is located at 751 Broad
Street, Newark, New Jersey 07102-3777. The Contracts are sold by registered
representatives of Pruco Securities Corporation (Prusec), an indirect wholly-
owned subsidiary of Prudential with a principal business address at 751 Broad
Street, Newark, New Jersey 07102-3777. It was organized in 1971 under New
Jersey law, is registered as a broker and dealer under the Securities Exchange
Act of 1934, as amended (the 1934 Act), and is a member of the National
Association of Securities Dealers, Inc. (the NASD). Prusec currently acts as
principal underwriter of the Contracts, however, subject to Board approval.
       
Prusec's responsibilities as principal underwriter will be assigned to PIMS
during the second quarter of 1998. PIMS, also an indirect wholly-owned
subsidiary of Prudential, is a limited liability corporation organized under
Delaware law in 1996. PIMS will act as principal underwriter under
substantially the same terms as Prusec does currently. PIMS is registered as a
broker-dealer under the 1934 Act and is a member of the NASD. PIMS' principal
business address is 751 Broad Street, Newark, New Jersey 07102-3777.     
   
The mailing address of the office which services the tax-qualified contracts
described in this Prospectus is: The Prudential Insurance Company of America,
751 Broad Street, Newark, New Jersey 07102-3777.     
   
Under an employer's corporate plan or qualified plan for self-employed
individuals, applications for Contracts for employees are usually made through
the employer or through a trustee or custodian for the employer's plan. The
Contracts are issued in the names of the individual employees. For the
employer who does not have a corporate plan or qualified plan for self-
employed individuals in effect and is interested in the establishment of such
a plan, Prudential has prepared several examples of plans which may meet its
requirements, and which will be supplied upon request. The employer may prefer
to modify one of these forms or arrange for the drafting of its own plan,
subject to Prudential's willingness to issue contracts under it. See
PRUDENTIAL-SPONSORED PENSION PLANS, page 25.     
 
Under public school and Section 501(c)(3) plans and under public employee
deferred compensation plans, applications for contracts are usually made by
the employee through the employer, after an initial indication by the employer
of willingness to adopt such a plan. General authorizing legislation is
usually necessary before such plans may be adopted for public school systems
or other state or municipal agencies. IRA contract applications may be made
directly by the individual desiring such a plan, or, under SEPP arrangements,
by the employee through the employer.
   
Prudential assumes no responsibility for determining whether a particular
retirement plan meets the requirements for favorable federal income tax
treatment. If, however, Prudential determines that a plan, intended to qualify
for such treatment, has not received favorable determination of its
qualifications by the Internal Revenue Service and does not so qualify,
Prudential may, with some exceptions, terminate any Contract issued in
connection with that plan, and return its net asset value as of the
termination date to the purchaser.     
 
THE VARIABLE ANNUITY CONTRACT
 
The Flexible Purchase Payment Variable Annuity Contract (Flexible Purchase
Contract) is a deferred contract providing for purchase payments on an annual,
semi-annual, quarterly or monthly basis until the annuity date (the
 
                                       6
<PAGE>
 
   
date chosen for the commencement of annuity or systematic liquidation payments
under the Contract). The scheduled amount, due dates and frequency of purchase
payments are described in a Schedule of Purchase Payments in the Contract. All
purchase payments are payable at Prudential, Prudential Plaza, Newark, New
Jersey 07102-3777.     
   
The Flexible Purchase Contract provides for flexibility in purchase payments.
Subject to the provisions of the Contract, Prudential will at any time approve
a request for a change in the frequency of purchase payments and will accept
any purchase payment received by Prudential on a date or in an amount other
than a then effective due date or amount. Purchase payments scheduled in any
Contract year may not be less than $300 without Prudential's consent.
(Contract years commence on the Contract date and on anniversaries of that
date.) The total amount of the purchase payments accepted in any Contract year
after the first may exceed 3 times the total amount of the purchase payments
due in the first Contract year according to the Schedule of Purchase Payments
in the Contract only if Prudential consents.     
 
The Single Purchase Payment Variable Annuity Contract (Single Purchase
Contract) is offered as either an immediate or a deferred Contract. That is,
it is purchased to provide for an annuity date within a year of the Contract
date, or for an annuity date in the more distant future. It provides for only
a single purchase payment which is made when the Contract is issued.
 
Each Contract provides that net purchase payments shall be allocated to
Prudential's Annuity Plan Account-2 (Account). Net purchase payments are
credited as accumulation shares and during the accumulation period (the period
prior to the annuity date) the current value of the Contract is measured in
terms of such shares. Each Contract provides for monthly payments to the
annuitant beginning on the annuity date, for life under an annuity settlement
or for a fixed period of not more than 25 years under a systematic liquidation
settlement. During the payout period (the period beginning on the annuity
date) the amount of the monthly retirement benefit is measured in terms of
annuity shares, if an annuity option is in effect, or accumulation shares, if
a systematic liquidation is in effect.
 
The value of the Contract during the accumulation period and the amount of
each annuity or systematic liquidation payment to the annuitant during the
payout period beginning on the annuity date will vary, reflecting the
investment results of a designated portfolio consisting primarily of common
stocks. Investment during the accumulation period does not, of course, assure
that you will realize any profit from your investment or that you will be
protected against loss in a declining market. Similarly, the amount of each
payment is subject to market fluctuations of the portfolio, and in declining
markets is likely to be lower than earlier payments. As an alternative to
variable monthly payments, the value of the Contract at the end of the
accumulation period may be taken in one sum.
   
Determination of the amount of a net purchase payment, the crediting of
accumulation shares, and the determination of share value during the
accumulation period are described in detail beginning on page 10. The
settlements available on the annuity date and the determination of the amount
of monthly payments thereafter are described in detail beginning on page 14.
    
Unless otherwise indicated, all of the information in this Prospectus applies
to both the Flexible Purchase Contract and the Single Purchase Contract.
 
PRUDENTIAL'S ANNUITY PLAN ACCOUNT-2
   
The Account was established on August 13, 1968, by resolutions of Prudential's
Board of Directors as a variable contract account of Prudential under the laws
of the State of New Jersey. It is administered by Prudential under the general
direction of Prudential's officers and managerial staff. The Account is
registered with the Securities and Exchange Commission under the Investment
Company Act of 1940, as amended (the 1940 Act), as a unit investment trust.
Registration does not imply supervision by the Securities and Exchange
Commission of the management or investment policies and practices of the
Account or Prudential.     
   
The Account is used only in connection with individual Variable Annuity
Contracts issued by Prudential in connection with tax-qualified retirement
plans including the Contracts described in this Prospectus. The assets held in
the Account are legally segregated from all other assets of Prudential and
will always be equal to or greater in value than Prudential's liabilities
under the Contracts, calculated in accordance with sound actuarial principles.
       
The assets of the Account are invested in shares of Prudential's Gibraltar
Fund, Inc. (the Fund) at net asset value without sales load. See PRUDENTIAL'S
GIBRALTAR FUND, INC. below. Any dividend or capital gain distributions
received from the Fund are credited in the form of additional Fund shares at
net asset value. Fund shares will be redeemed     
 
                                       7
<PAGE>
 
without redemption fee to the extent necessary to make payments under the
Contracts. The Contracts do not provide for a change in the underlying
investment of the Account. If, with any required approval of the Securities
and Exchange Commission, a change was ever to take place, the substituted
shares would be of comparable quality to Fund shares and would be registered
under the Securities Act of 1933, as amended.
 
PRUDENTIAL'S GIBRALTAR FUND, INC.
   
The Fund was originally incorporated in the State of Delaware on March 14,
1968 and was reincorporated in the State of Maryland effective May 1, 1997. It
is registered under the 1940 Act as a diversified open-end management
investment company. Registration does not imply supervision by the Securities
and Exchange Commission of the management or investment policies and practices
of the Fund or Prudential. The Board of Directors of the Fund is responsible
for the management of the Fund and, in addition to reviewing the actions of
the Fund's investment advisor, decides upon matters of general policy. The
Fund's officers conduct and supervise the daily business operations of the
Fund.     
 
The Fund's portfolio, which is set forth on pages B2 and B3, is composed
primarily of common stocks of a diversified group of companies in a variety of
industries. The investment objective of the Fund is concerned primarily with
growth of capital to an extent compatible with a concern for its preservation.
Current income is a secondary consideration.
 
The investments of the Fund are subject to the risks of changing economic
conditions and the ability of management and the investment advisor of the
Fund to anticipate such changes. There can be no assurance that the Fund's
investment aims will be achieved.
   
Fund shares are sold only to separate accounts of Prudential including
Prudential's Annuity Plan Account-2. The investment performance of the Fund
determines the dollar value of interests in these accounts.     
   
Prudential is the investment advisor to the Fund. Prudential has entered into
a service agreement with its wholly-owned subsidiary, The Prudential
Investment Corporation (PIC), which provides that PIC will furnish to
Prudential such services as Prudential may require in connection with
Prudential's performance of its obligations under advisory agreements with
clients which are registered investment companies. For its investment advisory
services, Prudential is paid 1/8 of 1% (0.125%) per year of the average daily
market value of the Fund's net assets ($1.25 per year for each $1,000 of
assets). The Fund paid Prudential $390,676 for these services in 1997 and
$349,118 in 1996. In addition, the Fund has expenses which may be considered
to be an indirect charge against assets; in 1997 these expenses amounted to
0.025% of average net assets of the Fund and in 1996 these expenses were
0.035%. See SUMMARY OF INVESTMENT ADVISORY CONTRACT on page 20, PRUDENTIAL AS
MANAGER OF THE FUND'S INVESTMENTS on page 21, and FINANCIAL STATEMENTS OF
PRUDENTIAL'S GIBRALTAR FUND, INC. AND NOTES TO FINANCIAL STATEMENTS on pages
B1 through B5. For the years ended December 31, 1997 and 1996, the Fund's
total expenses were 0.15% and 0.16%, respectively, of the Fund's average net
assets.     
   
INVESTMENT RESULTS. The financial highlights table on page 5 shows the net
asset value together with operating expense and net investment income ratios,
and total investment rate of return for the years indicated.     
   
PRUDENTIAL'S ADMINISTRATIVE ROLE     
   
Prudential acts as transfer agent and dividend-paying agent and performs all
administrative services relative to the Contracts and necessary to the
operation of the Account. The Account itself has no officers or employees.
Prudential pays all expenses relating to its operation.     
   
The services performed by Prudential include safekeeping of and accounting for
the assets in the Account, applying the purchase payments after making any
deductions authorized by the Contracts, recording all other transactions with
respect to the Contracts, furnishing confirmation notices, reports of the
value of the Contracts during their accumulation period and records of the
details relating to annuities effected, making the annuity payments, and
maintaining the pertinent records. As part of its services Prudential also
arranges to furnish periodic financial reports of the Account and of the Fund,
prospectuses, tax notices and other notices and voting material. Prudential
has periodic audits made of the books of the Account and prepares and renders
for the Account tax reports and other periodic statements required by law. The
charges discussed under the first two headings in the next section of this
prospectus compensate Prudential for its services.     
 
                                       8
<PAGE>
 
                         DESCRIPTION OF THE CONTRACTS
 
SALES AND RELATED CHARGES
   
A sales charge, expressed as a percentage of the purchase payment, is deducted
from each purchase payment under the Flexible Purchase Contract and from the
single purchase payment under the Single Purchase Contract. In addition, when
the supplemental death benefit (described under that heading on page 12) is
provided under either Contract, a charge for that benefit, amounting to 1/4 of
1% (0.25%) of the purchase payment is deducted from each purchase payment.
    
The applicable sales charges are as follows:
 
<TABLE>
<CAPTION>
      TOTAL PURCHASE PAYMENTS
        RECEIVED DURING THE     PERCENT OF ADJUSTED GROSS PERCENT OF NET AMOUNT
           CONTRACT YEAR            PURCHASE PAYMENT            INVESTED*
      -----------------------   ------------------------- ---------------------
     <S>                        <C>                       <C>
      First$ 5,000                        8.50%                   9.29%
      Next$ 5,000                         6.50                    6.95
      Next$10,000                         4.50                    4.71
      Excess over$20,000                  3.50                    3.63
</TABLE>
 
    * Without taking into account any deductions for Supplemental Death
      Benefit, Transaction Charges, or annual Contract Fee.
 
The supplemental death benefit is provided in most contracts issued. Thus,
considering that benefit, the total percent deducted, for example, from the
first $5,000 of purchase payments in each Contract year is 8.75% (8.50% plus
0.25%).
 
After deduction of the above charges, a $1 transaction charge is deducted from
each purchase payment under the Flexible Purchase Contract and the single
purchase payment under the Single Purchase Contract. In addition, a $7 annual
Contract fee is deducted from the first purchase payment in each Contract year
upon which a sales charge is payable under the Flexible Purchase Contract and
from the single purchase payment under the Single Purchase Contract. The
Contracts do not provide for use of a Letter of Intent by the purchaser.
   
In determining the sales charge for a current purchase payment, the amounts of
the current payment and any previous payments under the Contract in the same
Contract year upon which a sales charge was payable are considered. For
example, an employer submits two $4,000 purchase payments for an annuitant.
The first payment is received at Prudential on May 1, the beginning of the
annuitant's contract year.     
 
The second payment is received on the following November 1. As seen from the
table above, the rate applicable to the $4,000 purchase in May and also to the
first $1,000 of the November purchase is 8.50%. The rate on the remaining
$3,000 of the November purchase is 6.50%. Thus, the sales charges for the
payments are $340 (8.50% of $4,000) and $280 (8.50% of $1,000 plus 6.50% of
$3,000), respectively.
 
For purchase payments of $25 and $300 made at the "first $5,000" rate, the
sales charges are 9.7% and 9.3%, respectively, of the net amount invested in
the Account (purchase payment minus sales charge, charge for supplemental
death benefit and transaction charge). In this example, the net amount
invested has not been reduced by any deduction that may be made for an annual
Contract fee.
   
During 1997, Prudential received $189 in sales charges, $12 in transaction
charges and $14 in annual Contract fees for purchases under these Contracts.
The equivalent figures for 1996 were $198, $19, and $14.     
   
PURCHASE PAYMENTS DERIVED FROM THE PROCEEDS OF OTHER PRUDENTIAL TAX-QUALIFIED
CONTRACTS. No sales charge or other charge described above is deducted from a
purchase payment to the extent that such payment is derived from the proceeds
of any other contract issued by Prudential in connection with a tax-qualified
retirement plan, including any dividend accumulations or paid-up additions
resulting from that contract, but excluding cash dividends. The amount of any
such purchase payment will not be taken into account in determining the
applicable charge factor for any other purchase payment amount received at
Prudential.     
 
There is no transaction charge or any other charge at the time the value of
accumulation shares is used to effect a variable annuity settlement, but such
value is adjusted by deducting any applicable state premium tax not previously
deducted. At present, state premium taxes are deducted only from amounts
applied to provide an
 
                                       9
<PAGE>
 
   
annuity under these Contracts, not from purchase payments during the
accumulation period. See EFFECTING A VARIABLE PAYOUT, page 13.     
 
OTHER CHARGES
   
An administration charge is applied daily on the value of the portion of the
net assets in Prudential's Annuity Plan Account-2 attributable to these
Contracts. This charge is to cover services that are rendered in connection
with the Contracts but that are not identified with individual contracts. On
the first $250 million of assets, the charge is made at an effective annual
rate of 1/2 of 1% (0.5%); on the next $250 million, the rate is 9/20 of 1%
(0.45%); on the next $500 million, the rate is 2/5 of 1% (0.4%); and on the
excess over $1 billion, the rate is 7/20 of 1% (0.35%). The administration
charge is designed to reimburse Prudential for the development, administration
and modification costs allocable to the Contracts.     
 
A mortality risk charge and an expense risk charge, at effective annual rates
of 0.6% and 0.2%, respectively, (for a total of 0.8%, or 8/10 of 1%, per year)
are applied daily against Account assets attributable to these Contracts.
   
These charges are to provide a surplus for use, if necessary, to help
Prudential to fulfill its contractual obligations, discussed under the heading
THE RISKS WHICH PRUDENTIAL ASSUMES on page 16.     
   
During 1997 and 1996, Prudential received $11,666 and $10,619, respectively,
under these Contracts from the charges described in the preceding two
paragraphs.     
   
In addition, an investment advisory fee, determined daily at the rate of
0.125% (1/8 of 1%) per year of the average net assets of the Fund, is paid by
the Fund to Prudential. Thus, at present, a total charge against assets at a
yearly rate of about 1.425% is made in respect to these Contracts. See
PRUDENTIAL'S GIBRALTAR FUND, INC., page 8.     
 
RIGHT TO CANCEL
   
You have the right, within ten days after you receive your Contract, to
surrender the Contract by delivering or mailing it, with written notice that
you wish to surrender it, to an office of Prudential or to the agent through
whom the Contract was purchased. Upon such surrender Prudential will cancel
the Contract and pay the owner an amount equal to the sum of (1) the
difference between any purchase payments paid and the amounts allocated to any
separate accounts under the Contract and (2) the net asset value of the
Contract on the date of surrender attributable to the amounts so allocated.
However, if applicable state law so requires, the amount of the purchase
payment will be returned instead.     
 
HOW ACCUMULATION SHARES ARE CREDITED
   
Each net purchase payment made during the accumulation period increases the
value of the annuitant's current interest under the Contract. (Of course,
under the Single Purchase Payment Contract only one such purchase payment is
made.) That value will vary, up and down, to reflect the investment results of
Prudential's Gibraltar Fund, Inc. To provide a convenient means of measuring
the value of the annuitant's interest, that interest is described and recorded
in terms of full or fractional accumulation shares. Each net purchase payment
made for an annuitant results in the crediting of a number of accumulation
shares, determined by dividing the net amount invested by the accumulation
share value on the purchase date. Unless a different purchase date is
requested or provided for, the crediting of accumulation shares is effected at
the close of the day on which the purchase payment is received at Prudential
if that is a business day (a day on which the New York Stock Exchange, Inc.
(NYSE) is open for business); otherwise, on the first business day thereafter.
(A situation in which the purchase date may be different from the date on
which payment is received at Prudential is described on page 26 under IRA
PLANS. Deferred purchase will occur under corporate plans or qualified plans
for self-employed individuals only at the request of the person submitting the
funds.)     
 
                                      10
<PAGE>
 
   
For these Contracts the accumulation share value for May 31, 1977 was set at
$10. On each subsequent business day the accumulation share value is
determined by multiplying the accumulation share change factor for that day by
the accumulation share value for the last preceding business day. Sales of
these Contracts to the public commenced September 16, 1977. Shown below are
the accumulation share values for these Contracts from the last business day
of December 1988 to the last business day of December 1997.     
 
<TABLE>   
<CAPTION>
LAST BUSINESS DAY OF:   LAST BUSINESS DAY OF: LAST BUSINESS DAY OF: LAST BUSINESS DAY OF:
<S>          <C>        <C>            <C>    <C>            <C>    <C>            <C>
December
 1988        $    42.41 December 1992  $75.27 September 1994 $93.58 June 1996      $114.52
December
 1989             51.10 March 1993      81.67 December 1994   89.39 September 1996  123.40
December
 1990             48.99 June 1993       86.86 March 1995      96.75 December 1996   132.25
December
 1991             64.90 September 1993  93.28 June 1995      102.70 March 1997      124.79
                        December 1993   91.98 September 1995 109.80 June 1997       145.40
                        March 1994      89.10 December 1995  105.13 September 1997  157.94
                        June 1994       89.31 March 1996     111.70 December 1997   154.46
</TABLE>    
   
The accumulation share change factor for any business day is obtained by (1)
adding to 1.00 the rate of net investment income earned and the rate of asset
value changes in the Account, after provision for any taxes, from the end of
the last preceding business day to the end of the current business day, and
(2) deducting therefrom the rates of the administration charge and the
mortality and expense risk charges described under OTHER CHARGES beginning on
page 10. No provision is currently made for federal income taxes in
determining the change factor. See FEDERAL INCOME TAXES, page 25.     
 
LIQUIDATION (REDEMPTION) OF ACCUMULATION SHARES
   
The Contracts provide that accumulation shares credited under them may be
liquidated, either totally or in part, at any time. For the possible tax
consequences of a liquidation before the annuity date, including any effect a
liquidation may have on the qualification of the retirement plan for special
tax treatment, Prudential recommends that the parties involved seek competent
tax advice before requesting liquidation of accumulation shares. See FEDERAL
INCOME TAXES, page 25.     
   
In addition there are certain restrictions on the withdrawal of salary
reduction contributions and earnings invested in annuity contracts subject to
Section 403(b) of the Code. Under such contracts, withdrawals may be made
prior to attaining age 59 1/2 in the event of severance of employment, death,
total and permanent disability and, in limited circumstances, hardship. The
value of your Contract as of December 31, 1988 is exempt from these
restrictions. In addition, the withdrawal restrictions do not apply to the
direct transfer of all or a part of your interest in the Contract 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 SECTION 403(B)
ANNUITIES, page 27.     
   
Under certain types of retirement arrangements, the Retirement Equity Act of
1984, as amended, provides that, in the case of a married participant, a
withdrawal request must include the consent of the participant's spouse. This
consent, which must contain the notarized or properly witnessed signature of
the participant's spouse, is required except for withdrawals in the form of a
joint and 50% spouse survivor annuity. See ANNUITY OPTIONS AVAILABLE, page 14.
These spousal consent requirements are effective beginning January 1, 1985 and
apply to married participants in most qualified pension plans and those
Section 403(b) annuities which are considered employee pension benefit plans
under the Employee Retirement Income Security Act of 1974 (ERISA), as amended.
       
A liquidation of accumulation shares is effected as of the end of the business
day on which the written request for liquidation is received by Prudential.
       
In the case of total liquidation Prudential will pay the total value of the
accumulation shares credited under the Contract, determined as of the end of
the business day on which the liquidation is effected, less any applicable
transfer taxes. In the case of partial liquidation the minimum payment
permitted is $100, and accumulation shares of a value of at least $200 must
remain credited under the Contract after the transaction. Sufficient shares
and fractions of shares will be liquidated to pay the amount requested and any
applicable transfer taxes. Currently no such taxes are being imposed. (The
method of determining the value of an accumulation share is described in the
section just preceding this one.)     
   
Any liquidation payment is made within seven days after the request for
liquidation is received, except as Prudential may be permitted under any valid
and applicable law to suspend the payment. Circumstances under which
suspension may be permissible are described under REDEMPTION OF FUND SHARES on
page 24.     
 
The systematic liquidation of accumulation share credits over a period of time
is a mode of settlement that may be available for the annuitant on the annuity
date, or for the beneficiary upon the death of the annuitant before the
 
                                      11
<PAGE>
 
   
annuity date. These settlements are described under the headings INCOME
PAYMENTS FOR A FIXED PERIOD on page 16 and DEATH OF ANNUITANT BEFORE ANNUITY
DATE on page 16.     
 
ASSIGNMENT
   
Subject to the terms of the retirement plan, the contract owner may assign the
Contract. Prudential assumes no responsibility for the validity or sufficiency
of any assignment and will not be considered to have knowledge of it unless a
copy is filed at Prudential. If an assignment is in effect on the annuity
date, Prudential may pay the value of the contract in one sum rather than
under any annuity or other periodic payment settlement.     
 
EXERCISING RIGHTS UNDER THE CONTRACTS
 
Under many retirement plans an employer or trustee, rather than the Annuitant
in whose name a Contract is issued, may be legally entitled, during the
accumulation period, to many or all of the benefits, rights and privileges
under the Contract. In each case the Contract, which includes any endorsements
attached thereto as to ownership or limitations of rights, will set forth
explicitly which rights and privileges may be exercised by the Annuitant and
which may be exercised by the employer or trustee. The terms of the retirement
plan itself may also affect the respective rights and privileges of the
parties.
 
SUPPLEMENTAL DEATH BENEFIT
 
This benefit is included in all Flexible Purchase and Single Purchase
Contracts which are issued before the Annuitant's 65th birthday with a
Contract date which is more than one year before the annuity date. The benefit
covers all purchases made from issue through the last day preceding the
earlier of the annuity date and the Annuitant's 65th birthday.
   
Under this benefit, if the Annuitant's death occurs before age 65 and before
the annuity date, while there are accumulation share credits outstanding under
the Contract, a supplemental death benefit will be payable equal to the
excess, if any, of (a) the total purchase payments paid less the amount of any
liquidation payments made, over (b) the value of the accumulation shares
credited as of the date proof of the Annuitant's death is received at
Prudential.     
 
Any supplemental death benefit payment will be in the form of additional
accumulation shares equal in net asset value to such excess as of that date.
The additional accumulation shares will be applied in settlement together with
and in the same manner as the other accumulation shares credited under the
Contract.
   
Suppose, for example, that an annuitant dies before the annuity date and
before age 65, after having made $10,000 in purchase payments. The net value
of the accumulation shares on the date proof of death is received at
Prudential is $9,200. There had been no liquidation payments under the
Contract. Therefore, a supplemental death benefit of $800, credited as
accumulation shares, would be payable, and would be applied in settlement
together with and in the same manner as the other accumulation shares credited
under the Contract. See DEATH OF ANNUITANT BEFORE ANNUITY DATE, page 16.     
 
Supplemental death benefit coverage expires on the earliest to occur of the
annuity date, the Annuitant's 65th birthday, and a total liquidation of
accumulation shares. Coverage would begin anew if purchase payments resume
after total liquidation and before either of these other terminal dates, but
in this case the amounts described in item (a) in the second paragraph of this
section will be those made subsequent to the last such total liquidation.
   
The charge for the supplemental death benefit is 1/4 of 1% (0.25%) of the
purchase payment. See SALES AND RELATED CHARGES, page 9.     
 
RESULTS UNDER A HYPOTHETICAL PURCHASE PROGRAM
   
The following table illustrates results under a hypothetical Flexible Purchase
Contract purchase program for an annuitant, calling for a $25 purchase payment
on the first business day of each month prior to retirement. The results shown
are those which would have been achieved had the hypothetical purchase program
commenced on the first business day of 1988. Results are shown for the ten
years ending December, 1997.     
 
The results shown are based upon the present charge structure, and are
representative of those which might have been obtained, assuming a minimum
purchase schedule and assuming no deductions for state premium taxes or tax
upon liquidation. The results are for a hypothetical program established in
the past and are not to be considered
 
                                      12
<PAGE>
 
   
as predictive of future results. The results shown are those which would have
been achieved had the hypothetical purchase program commenced on the first
business day of 1988. Results are shown for the ten years ending December,
1997.     
 
<TABLE>   
<CAPTION>
       GROSS PURCHASE                                              NET AMOUNT
          PAYMENTS                  YEARLY DEDUCTIONS               INVESTED
- ----------------------------- ----------------------------- ------------------------
                               SALES   TRANSACTION CONTRACT              LIQUIDATION
YEAR  CURRENT YEAR CUMULATIVE CHARGES*   CHARGES     FEE    CURRENT YEAR CUMULATIVE   VALUE**
- ----  ------------ ---------- -------- ----------- -------- ------------ ----------- ---------
<S>   <C>          <C>        <C>      <C>         <C>      <C>          <C>         <C>
1988      $300       $  300    $26.28    $12.00     $7.00     $254.72     $  254.72  $  536.60
1989      $300       $  600    $26.28    $12.00     $7.00     $254.72     $  509.44  $  917.71
1990      $300       $  900    $26.28    $12.00     $7.00     $254.72     $  764.16  $1,134.79
1991      $300       $1,200    $26.28    $12.00     $7.00     $254.72     $1,018.88  $1,788.35
1992      $300       $1,500    $26.28    $12.00     $7.00     $254.72     $1,273.60  $2,359.76
1993      $300       $1,800    $26.28    $12.00     $7.00     $254.72     $1,528.32  $3,158.39
1994      $300       $2,100    $26.28    $12.00     $7.00     $254.72     $1,783.04  $3,319.11
1995      $300       $2,400    $26.28    $12.00     $7.00     $254.72     $2,037.76  $4,171.09
1996      $300       $2,700    $26.28    $12.00     $7.00     $254.72     $2,292.48  $5,495.34
1997      $300       $3,000    $26.28    $12.00     $7.00     $254.72     $2,547.20  $6,631.74
</TABLE>    
 
*Including charge for supplemental death benefit.
 
** At end of calendar year. The liquidation value is calculated upon the basis
   of the actual investment results realized by the Account that are net of
   the actual separate account and Prudential's Gibraltar Fund, Inc. annual
   expenses that were incurred.
 
EFFECTING A VARIABLE PAYOUT
 
The annuity date, selected by the contract owner, is specified in the Contract
at issue. It is the date on which a retirement settlement is scheduled to be
made under the Contract. The annuity date may be changed under certain
circumstances. See CHANGING THE ANNUITY DATE, following this section.
   
Prior to the annuity date of the Contract, the annuitant may elect a form of
variable payout subject to the terms of the retirement plan, to commence on
the annuity date. The payout elected may be one of the annuity options (Option
A, B or C) described on the following page, or may be a systematic liquidation
of accumulation shares described under OPTION D -- INCOME FOR FIXED PERIOD BY
SYSTEMATIC LIQUIDATION OF ACCUMULATION SHARES on page 16. As an alternative to
a variable payout, the Annuitant may elect to receive in one sum, as of the
annuity date, the liquidation value of the accumulation shares then credited.
       
For any variable annuity to be effected, Prudential must receive written
instructions in a form satisfactory to Prudential as to the type of annuity
desired and proof satisfactory to Prudential of the date of birth of the
Annuitant and, if a last survivor annuity is provided, of the contingent
Annuitant.     
 
Where a specific settlement has not been elected by the annuity date,
settlement will be made under Option B -- Life Annuity -- 10-Year Minimum
Period, except as may be provided otherwise by Contract endorsement or by the
terms of the retirement plan or any applicable law or regulation. Option B is
described below under the heading ANNUITY OPTIONS AVAILABLE.
 
An annuity is effected by the application of the net value of the Annuitant's
accumulation shares. This net value, adjusted by deducting any applicable
state premium tax on annuity considerations, is converted as of the annuity
date to annuity shares, which measure the value of the monthly retirement
benefit. See HOW VARIABLE ANNUITY PAYMENTS ARE DETERMINED, below.
 
The amount of any applicable premium tax varies depending on the jurisdiction,
and is subject to change by the legislature or other authority. In many
jurisdictions there is no tax at all. The tax rates for those jurisdictions
imposing a tax range from 0.5% to 5%. The timing and incidence of the tax is
at the point of purchase payment, or at the date of purchase of an annuity
payment option depending upon state law.
   
The Contract provides that if the first payment under the variable payout
settlement elected to take effect on the annuity date would be less than $20,
Prudential may void the settlement and instead pay the value of the
accumulation shares in one sum as a total liquidation. The effecting of a
variable payout is subject to any requirements imposed by federal or state
laws or regulations.     
 
                                      13
<PAGE>
 
CHANGING THE ANNUITY DATE
   
Prudential will, upon request, change the annuity date under certain
conditions. The request, together with the Contract for endorsement, must be
received by Prudential at least one month and seven days before the annuity
date then in effect. The new annuity date may be the first day of the month in
any calendar month and year which is not earlier than seven days after the
request is received, and not later than the second to occur of (1) the annuity
date before the change and (2) the Contract anniversary next following the
Annuitant's 72nd birthday. Another change of annuity date thereafter may be
made only with Prudential's consent.     
 
ANNUITY OPTIONS AVAILABLE
 
The following types of variable annuity are described in these Contracts.
 
OPTION A -- LIFE ANNUITY. Annuity payments are payable only during the
lifetime of the Annuitant. This option provides a larger monthly payment than
do Options B and C, described below, because payments cease when the Annuitant
dies. For example, it would be possible under this type for the Annuitant to
receive only one annuity payment if death were to occur within the first month
after the first monthly annuity payment. Accordingly, this option is primarily
appropriate where larger income during the Annuitant's lifetime is of greater
importance than preservation of a remainder for dependents.
 
OPTION B -- LIFE ANNUITY -- 10-YEAR MINIMUM PERIOD. Annuity payments are
payable during the lifetime of the Annuitant. If the Annuitant dies before the
120th monthly payment is due, monthly annuity payments cease, and, unless
otherwise provided, the discounted value of the remaining unpaid payments, to
and including the 120th monthly payment, is payable to the Annuitant's estate
in one sum.
 
OPTION C -- LAST SURVIVOR LIFE ANNUITY. Annuity payments are payable as long
as either the Annuitant or the designated contingent annuitant is living.
Under plans other than corporate plans, only the spouse of the Annuitant can
be named as contingent annuitant. As with the Option A -- Life Annuity above,
it would be possible under this type of annuity for only one monthly annuity
payment to be made, if both the Annuitant and the contingent annuitant died
within the first month after annuity payments begin.
   
Other forms of annuity may be provided, subject to Prudential's consent, or as
may be required by any applicable law or regulation.     
 
HOW VARIABLE ANNUITY PAYMENTS ARE DETERMINED
   
The amount of the monthly variable annuity payment depends on (1) the net
value of accumulation shares applied to effect the annuity, (2) the type of
annuity selected, (3) the date of birth of the annuitant, and of the
contingent annuitant under an Option C Annuity, (4) the annuity rate table
selected by Prudential for these Contracts (see ANNUITY SETTLEMENT TABLES,
below), and (5) the investment results of Prudential's Annuity Plan Account-2,
which, in turn, reflect the investment results of the Fund.     
 
The first four items together provide the basis for determining the dollar
amount of monthly annuity that would be paid if there were no change in the
monthly value of an annuity share. This dollar amount is called the tabular
monthly annuity. It is converted to a monthly number of annuity shares by
dividing that amount by the annuity share value as of the annuity date. The
monthly number of annuity shares thus established remains the same through the
duration of the annuity except for the possibility of temporary additional
annuity shares as described in the third paragraph under ANNUITY SETTLEMENT
TABLES, below.
   
The investment results of the Account, item (5), are reflected in changes in
the monthly value of the annuity share (the annuity share value) to the extent
that the rate of net investment return (after deducting the administrative and
risk charges described under OTHER CHARGES on page 10) is greater or less than
the effective annual interest rate assumed in the applicable table of annuity
rates. The amount payable on the first day of each month beginning with the
annuity date is the product of (a) the monthly number of annuity shares and
(b) the annuity share value calculated as of one month and one business day
prior to the due date of the payment.     
 
ANNUITY SETTLEMENT TABLES. The tables currently contained in the variable
annuity contract are based on the 1971 Individual Annuity Mortality Table with
the age reduced one year, and with assumed effective annual interest rates of
3.5% and 5%. The 5% table is applicable in all but a few states in which it is
currently not available under the state law or regulations. In these few
states (Florida, New Mexico, Texas and West Virginia) the 3.5% table applies.
   
The 5% table, because it is based upon a higher assumed effective annual
interest rate, results in a greater initial monthly annuity payment than is
provided under the 3.5% table. However, in reflecting the investment results
of     
 
                                      14
<PAGE>
 
the Fund, the annuity share value for an annuity using the 5% table will
increase more slowly and decrease more quickly than will the annuity share
value for an annuity using the 3.5% table. As a rough rule of thumb, the 3.5%
table should turn out to be more advantageous for annuitants who live longer
than the average, while the 5% table should be better for annuitants for whom
the larger early payments are especially important.
   
These Contracts are entitled to participate in the divisible surplus of
Prudential, as may be determined annually at the sole discretion of
Prudential's Board of Directors. The Board has determined that Annuitants
receiving annuity payments will so participate in 1998. They will be
temporarily credited with an additional number of monthly annuity shares on
which annuity payments in 1998 are based. There is no assurance that such
participation in the divisible surplus of Prudential or temporary crediting of
annuity shares will occur for any future year.     
   
Prudential is currently considering reorganizing itself into a stock company.
This form of reorganization, known as demutualization, is a complex process
that may take a year or more 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's 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. Prudential's Board of Directors, in
its discretion, may choose not to demutualize or to delay demutualization for
a time.     
 
ANNUITY SHARE VALUE. For these Contracts, the annuity share value for May 31,
1977 was set at $1. The annuity share value for any subsequent business day is
determined by multiplying the annuity share change factor for that day (see
below) by the annuity share value for the immediately preceding business day.
   
Sales of the Variable Annuity Contracts to the public commenced September 16,
1977. The annuity share change factor for any business day is obtained by (1)
adding to 1.00 the rate, after provision for any taxes, of net investment
income earned and of asset value changes in Prudential's Annuity Plan Account-
2, from the end of the last preceding business day to the end of the current
business day, and (2) deducting from such sum the administrative and risk
charges. See the section headed OTHER CHARGES on page 10. The remainder is
then divided by the sum of 1.00 and the rate of interest on a daily basis at
the effective annual rate assumed in the applicable annuity settlement table.
No provision is currently made for federal income taxes in determining the
change factor. See FEDERAL INCOME TAXES, page 25.     
   
Shown on the following page are the annuity share values at specific times
from the last business day of December 1988 to the last business day of
December 1997. Each share value listed was used to determine annuity payments
for the second succeeding month. For example, the share value as of the last
business day in December is used to compute the February annuity payment.     
 
<TABLE>   
<CAPTION>
  LAST BUSINESS               LAST BUSINESS              LAST BUSINESS
     DAY OF:      3.5%*  5%      DAY OF:     3.5%*  5%      DAY OF:     3.5%*  5%
  -------------   ----- ----- -------------- ----- ----- -------------- ----- -----
  <S>             <C>   <C>   <C>            <C>   <C>   <C>            <C>   <C>
  December
  1988            $2.85 $2.41 March 1994     $5.01 $3.93 March 1996     $5.87 $4.47
  December
  1989             3.32  2.77 June 1994       4.98  3.89 June 1996       5.93  4.50
  December
  1990             3.08  2.53 September 1994  5.18  4.03 September 1996  6.37  4.82
  December
  1991             3.94  3.20 December 1994   4.90  3.80 December 1996   5.57  4.26
  December
  1992             4.42  3.53 March 1995      5.26  4.07 March 1997      6.51  4.89
  March 1993       4.76  3.79 June 1995       5.54  4.27 June 1997       7.32  5.48
  June 1993        5.02  3.98 September 1995  5.87  4.51 September 1997  7.88  5.88
  September
  1993             5.34  4.22 December 1995   5.57  4.26 December 1997   7.64  5.68
  December
  1993             5.22  4.11
</TABLE>    
 * 3.5% schedule currently applies only in a few states.
 
                                      15
<PAGE>
 
   
THE RISKS WHICH PRUDENTIAL ASSUMES     
   
Prudential assumes the risk (1) that annuitants as a class may live longer
than estimated, with the result that payments will continue for longer than
expected, and (2) that charges under the contracts may not be enough to cover
the actual expenses incurred. In either event the loss will fall on
Prudential.     
   
Even though the assets of Prudential's Annuity Plan Account-2 are separately
accounted for, the entire general account assets of Prudential are available
to meet the expenses and fulfill Prudential's obligations under these Variable
Annuity Contracts. The charges Prudential makes for assuming these risks are
described in the section headed OTHER CHARGES, page 10.     
   
On the other hand, the charges may exceed the expenses that Prudential
ultimately incurs under these Contracts. As the actual experience is realized,
the amount by which any such excess is greater than the amount which must
prudently be retained to fulfill Prudential's obligations will become a part
of the divisible surplus of Prudential.     
   
In the event the Fund suspends the redemption of its shares because of the
closing of the NYSE or other emergency reason, Prudential will make annuity
payments during the period of suspension out of its general account assets.
The amount of such payments will be determined in a fair and equitable manner
satisfactory to the Department of Insurance of the State of New Jersey.     
 
INCOME PAYMENTS FOR A FIXED PERIOD
   
As an alternative to a variable annuity settlement beginning on the annuity
date (described on page 13), a variable income may be provided for a fixed
period of years under Option D, as described below.     
   
OPTION D -- INCOME FOR FIXED PERIOD BY SYSTEMATIC LIQUIDATION OF ACCUMULATION
SHARES. The Annuitant may elect to receive, from the systematic liquidation of
the accumulation shares credited under the Contract, monthly installments for
a fixed period of not more than 25 years. Installments are computed so that
each installment will represent the value as of the payment date of an equal
number of accumulation shares. If the Annuitant dies before the end of the
fixed period, the value of any unpaid installments, as of the date proof of
death and completed claim forms and such other evidence as may be required to
properly establish the claim are received by Prudential, will, unless
otherwise provided, be paid in one sum to the Annuitant's estate.     
   
At any time while Option D is in effect, the Annuitant may liquidate all or a
portion of the remaining accumulation shares credited under the Contract. If a
partial liquidation is effected, the remaining period during which monthly
installments are payable under Option D will be reduced proportionately.
Liquidation of all or a portion of the remaining accumulation shares while
Option D is in effect is subject to the conditions and provisions described
under LIQUIDATION (REDEMPTION) OF ACCUMULATION SHARES on page 11.     
   
In addition, at any time while Option D is in effect, the Annuitant may,
subject to the conditions described under EFFECTING A VARIABLE PAYOUT on page
13, elect that the value of any remaining accumulation shares be applied, as
of the first day of any specific future calendar month, under any of the
variable annuity options provided under these Contracts.     
 
With respect to contracts used in connection with tax-favored plans, federal
tax law limits the maximum permissible payout period to a period no greater
than the joint life expectancy of the Annuitant and the Annuitant's spouse.
For example, if the Annuitant's life expectancy is 12 years, monthly
installments under Option D cannot exceed 12 years.
 
DEATH OF ANNUITANT BEFORE ANNUITY DATE
   
Subject to Prudential's approval and the terms of the applicable retirement
plan, a beneficiary or beneficiaries may be designated for the accumulation
shares credited to an Annuitant if the Annuitant dies before the annuity date,
including any additional accumulation shares which may be payable under the
supplemental death benefit. See SUPPLEMENTAL DEATH BENEFIT on page 12.     
   
Prudential reserves the right, prior to making payment in accordance with a
beneficiary designation, to require due proof of the Annuitant's death and
such completed claim forms and other evidence as may be required to properly
establish the claim.     
 
Subject to the above, at the death of the Annuitant before the annuity date, a
designated beneficiary will be credited with that number of the Annuitant's
accumulation shares which represent the beneficiary's interest.
 
The accumulation shares credited to the beneficiary will be subject to the
provisions of THE ACCUMULATION SHARES OPTION, described below, until the
shares have been fully liquidated under that option or until they have been
applied, by election of the beneficiary, under THE LIFE INCOME OPTION, also
described below.
 
                                      16
<PAGE>
 
   
THE ACCUMULATION SHARES OPTION. This option is subject to the same provisions
that apply to liquidations, including systematic liquidation under Option D, by
an Annuitant. (See pages 11 and 16.) In addition to merely retaining the
shares, this option permits the beneficiary to:     
   
(1) liquidate all or a portion of the accumulation shares at any time (see
LIQUIDATION (REDEMPTION) OF ACCUMULATION SHARES on page 11); and     
   
(2) receive monthly installments for a fixed period of up to 25 years by the
systematic liquidation of accumulation shares. This arrangement is similar to
Option D, available to the Annuitant, as described on page 16.     
 
THE LIFE INCOME OPTION (LIFE ANNUITY -- 10-YEAR MINIMUM PERIOD). This option is
available only if the value applied to effect an annuity is sufficient to
provide an initial monthly payment of at least $20. Proof of the beneficiary's
date of birth is required.
 
The value of the beneficiary's accumulation shares is converted to annuity
shares as of the first day of a future calendar month specified by the
beneficiary. Annuity payments are payable during the lifetime of the
beneficiary with 120 monthly payments assured. At any time during the first 10
years, the beneficiary may elect to receive in one sum the discounted value of
such of the 120 payments as then remain unpaid. On payment of such a one sum
value, monthly payments to the beneficiary will cease until after the end of
the 10-year minimum period. At the end of the 10-year period, if the
beneficiary is living, monthly payments will begin again and continue until the
beneficiary's death.
 
If the beneficiary dies before the 120th monthly payment is due, the discounted
value of any remaining unpaid payments, to and including the 120th monthly
payment, is payable to the beneficiary's estate in one sum.
   
If the Life Income Option is elected within two years after the Annuitant's
death, annuity payments for the beneficiary are determined as described for the
Annuitant under HOW VARIABLE ANNUITY PAYMENTS ARE DETERMINED on page 14. If the
election is made more than two years after the Annuitant's death, payments will
be determined in the same way except that Prudential may substitute for the
Annuity Settlement Tables discussed on pages 14 and 15 the Option B Annuity
Settlement rates contained in variable annuity contracts regularly issued by
Prudential on the date of the Annuitant's death.     
   
Under certain types of retirement arrangements, the Retirement Equity Act of
1984, as amended, provides that in the case of a married participant, a pre-
retirement survivor annuity be paid to the participant's spouse if the
participant dies prior to his/her retirement under the plan. In general, a
participant may waive this coverage with his/her spouse's consent on or after
attaining age 35 or upon termination of employment, if earlier. This consent
must contain the signatures of the participant and spouse and must be notarized
or witnessed by an authorized plan representative. Unless such consent is
obtained, the law requires that at least 50% of the participant's account
balance as of his/her date of death be used to purchase a life annuity form of
payment for the participant's spouse. These spousal consent requirements are
generally effective beginning January 1, 1985 and apply to married vested
participants in most qualified pension plans and those Section 403(b) annuities
which are considered employee pension benefit plans under ERISA.     
 
If the death benefit is payable as a result of the Annuitant's coverage under a
qualified plan for self-employed individuals, other qualified plan, IRA or
Section 403(b) Annuity, the Annuitant's death benefit must be distributed
within 5 years after the date of death. However, if payments begin within one
year of the Annuitant's death, the death benefits may be distributed over the
Beneficiary's life or over a period not extending beyond the beneficiary's life
expectancy. For example, if the Beneficiary's life expectancy is 12 years,
he/she may only elect to receive monthly installments for a fixed period of up
to 12 years. If the Annuitant's spouse is the beneficiary, payments need only
begin on or before April 1 of the calendar year following the calendar year in
which the Annuitant would have attained age 70 1/2 or, in some instances, the
remaining interest in the Contract may be rolled over to an IRA owned by the
Annuitant's spouse. Special additional rules apply to Contracts used in
conjunction with plans subject to Section 457 of the Code.
   
DEATH OF ANNUITANT AFTER ANNUITY DATE     
   
No amount is payable upon the death of an Annuitant after the annuity date,
except for any amount which may be payable under an Option B annuity or an
Option D systematic liquidation settlement, as described, respectively, under
ANNUITY OPTIONS AVAILABLE on page 14 and under INCOME PAYMENTS FOR A FIXED
PERIOD on page 16. Of course, upon the death of either the Annuitant or the
designated contingent annuitant under an Option C Annuity (described on page
14) monthly payments will continue in accordance with the provisions of the
annuity for the remaining lifetime of the survivor.     
 
                                       17
<PAGE>
 
               DESCRIPTION OF PRUDENTIAL'S GIBRALTAR FUND, INC.
 
INVESTMENT POLICIES
 
The Fund invests primarily in common stocks and other securities convertible
into common stocks. Notwithstanding its growth objective, the Fund may invest
a relatively small percentage of assets, which Fund management interprets to
be not more than 15%, in preferred stocks, bonds, debentures, notes and other
evidences of indebtedness, of a character customarily acquired by
institutional investors, whether or not publicly distributed. These may or may
not be convertible into stock or accompanied by warrants or rights to acquire
stock.
   
At times, when economic conditions or general levels of common stock prices
are such that it may be deemed temporarily advisable to curtail investments in
common stocks, a larger than usual proportion of the Fund's assets may be
invested in such preferred stocks and evidences of indebtedness, or may be
held in cash or its equivalents, as a defensive measure. Nevertheless, not
more than 10% of the assets of the Fund may be invested in loans made through
the purchase of privately placed evidences of indebtedness of a character
customarily acquired by institutional investors. See the subheading SPECIAL
RISKS, page 19.     
 
In addition, the Fund may hold at times a moderate amount of cash and high-
grade, short-term debt securities to facilitate the orderly and flexible
programming of investments. Such debt securities may include securities
acquired through short-term repurchase transactions which will be "fully
collateralized," i.e., the value of the securities held by the Fund will be at
least equal to the repurchase price, including accrued interest.
   
Normally the Fund will hold securities purchased for one year or more,
although it will sell individual securities when their current price seems
clearly excessive in relation to estimated present or future value or when the
situation of the issuer appears to be deteriorating. The Fund's portfolio
turnover is discussed under the heading PRUDENTIAL AS MANAGER OF THE FUND'S
INVESTMENTS on page 21. The Fund does not plan to trade for short-term
profits, but may take advantage of occasional opportunities for such profits
if circumstances make this advisable. To the extent that the Fund makes short-
term investments, it would incur greater brokerage charges than would
otherwise be the case, and any short-term capital gains would constitute
ordinary income.     
 
RESTRICTIONS ON INVESTMENT
   
The Fund operates under a number of investment restrictions. Some arise out of
state laws and are summarized under NEW JERSEY INVESTMENT LAWS on page 19.
Those which follow, as well as the investment policies described above, are
self-imposed, fundamental policies of the Fund. They may not be changed
without the vote of a majority of the Fund's outstanding voting securities.
    
The Fund does not:
   
 (1) underwrite the securities of other issuers, except where it may be deemed
     to be an "underwriter" for purposes of the Securities Act of 1933, as
     amended, as indicated below;     
 
 (2) buy or sell commodities or commodity contracts;
 
 (3) sell short or buy on margin, or buy, sell or write put or call options or
     combinations of such options;
 
 (4) invest for the purpose of exercising control or management;
 
 (5) buy or hold the securities of any issuer if those officers and directors
     of the Fund or officers of its investment advisor who own individually
     more than one-half of 1% of the securities of such issuer or together own
     more than 5% of the securities of such issuer;
 
 (6) with respect to 75% of the value of its assets, buy the securities of an
     issuer if the purchase would cause more than 5% of the value of the
     Fund's total assets to be invested in the securities of any one issuer
     (except for obligations of the United States government and its
     instrumentalities) or result in the Fund owning more than 10% of the
     voting securities of such issuer;
 
 (7) concentrate its investments in any one industry (no more than 25% of the
     value of the Fund's assets will be invested in any one industry);
 
 (8) borrow money;
 
 (9) buy or sell real estate, although the Fund may purchase shares of a real
     estate investment trust;
 
(10) invest in the securities of other investment companies; or
 
(11) issue senior securities.
 
                                      18
<PAGE>
 
   
SECURITIES LENDING. The Fund 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, the lender continues to
receive the interest and dividends, or amounts equivalent thereto, on the
loaned securities while receiving a fee from the borrower or earned 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. Prudential has advised the Fund's Directors that the lender does
not have the right to vote securities on loan, but Prudential would terminate
the loan and cause the loaned securities to be returned to the Fund in order
to exercise the voting rights 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 the
Fund would be an unsecured creditor 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.     
   
The Fund will not lend its portfolio securities to broker-dealers affiliated
with Prudential, including Prudential Securities Incorporated. This will not
affect the Fund's ability to maximize its securities lending opportunities.
    
AMERICAN DEPOSITORY RECEIPTS. The Fund may 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 by a foreign
branch of a United States exchange or in an over-the-counter market.
   
SPECIAL RISKS. In addition to the previously mentioned restrictions, the Fund
may invest no more than 10% of the value of its assets in securities which,
because of legal or contractual restrictions upon resale or for other reasons,
are not readily marketable. Such securities include the privately placed
evidences of indebtedness referred to above. As of December 31, 1997, such
restricted securities comprised approximately 1% of the Fund's net assets.
       
Any investment in such securities may entail special risks because of
difficulties in selling them. If the securities were to be sold publicly, the
Fund may be deemed an "underwriter" for purposes of the Securities Act of
1933, as amended, and may be required to register the securities under that
Act. In that case, the Fund might have to bear the expense of such
registration, and the delays in the sale pending the registration could result
in a lower selling price. If the securities were to be sold privately, the
price obtainable might be lower than would be obtained if the securities could
be publicly marketed.     
 
The value of any such securities will be determined in good faith by or under
the authority of the Fund's Board of Directors. A determination that the value
of particular securities is less than would have been the case had the
securities been freely marketable will make the net asset value of Fund shares
correspondingly lower.
 
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.
 
Investment by the Fund in warrants or rights to acquire stock may also entail
risks. The Fund will not purchase any such warrants or rights if after giving
effect to such purchase the total cost to the Fund of all warrants and rights
then held by it will exceed 3% of the value of its assets. Warrants are
basically options to purchase securities at a specified price within a given
time. They are highly speculative, have no voting rights, pay no dividends,
and have no rights with respect to the assets of the corporation that issues
them. The price of warrants does not necessarily move parallel with the price
of the underlying securities.
 
NEW JERSEY INVESTMENT LAWS
   
As long as Prudential, or a subsidiary or affiliate thereof, continues to be
the investment advisor of the Fund, the Fund's investments must meet
requirements set forth in the Revised Statutes of New Jersey. The Fund has,
accordingly, adopted such requirements as part of its investment policy while
Prudential, or a subsidiary or affiliate, continues as the investment advisor.
    
                                      19
<PAGE>
 
The following is a summary of provisions of New Jersey law which impose
additional limitations on the investment policies of the Fund described in the
preceding two sections.
 
1. Evidences of indebtedness of a corporation, joint stock association,
   business trust, business joint venture or business partnership may not be
   purchased if in default as to interest.
 
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. Additional securities of a corporation may not be purchased if after the
   purchase more than 10% of the market value of the assets of the Fund would
   be invested in the securities of such corporation.
 
These currently applicable requirements of New Jersey law impose substantial
limitations on the ability of the Fund 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 Fund will not generally invest in the stock of newly
organized corporations. Nonetheless, an investment not otherwise eligible
under items 1 and 2 of this section 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 Fund.
   
Investment limitations may also arise under the insurance laws and regulations
of other states where contracts of the Program 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 portfolio of the Fund.     
 
SUMMARY OF INVESTMENT ADVISORY CONTRACT
   
Under an Investment Advisory Contract, Prudential has agreed to furnish
investment management to the Fund. Such investment management entails the
selection of securities for purchase or sale by the Fund and the resulting
placement of orders. Periodic reports of such purchases and sales are
submitted to the Fund for review by the Board of Directors.     
   
Subject to Prudential's supervision, substantially all of the investment
management services provided by Prudential are furnished by its wholly-owned
subsidiary, PIC, pursuant to the Service Agreement between Prudential and PIC
which provides that Prudential will reimburse PIC for its costs and expenses.
PIC is registered as an investment advisor under the Investment Advisers Act
of 1940, as amended.     
   
Prudential bears the expenses for investment advisory services incurred in
connection with the purchase and sale of securities (but not the brokers'
commissions and transfer taxes and other charges and fees attributable to
investment transactions), the salaries and expenses of all officers and
employees reasonably necessary for the Fund's operations (excluding members of
the Fund's Board of Directors who are not officers or employees of
Prudential), and the office facilities of the Fund. The amount paid to
Prudential for its investment advisory services to the Fund is shown under the
heading PRUDENTIAL'S GIBRALTAR FUND, INC. on page 8.     
 
The Investment Advisory Contract and the Service Agreement will continue in
effect from year to year provided renewal is approved at least annually by the
Fund's Board of Directors, including approval by a majority of those directors
who are not interested persons of either party to the Contract or Agreement.
   
The Investment Advisory Contract also grants the Fund a royalty-free, non-
exclusive license to use the words "Prudential's Gibraltar" and the registered
service mark of a rock representing the Rock of Gibraltar which appears on the
cover of this Prospectus. However, Prudential may terminate this license if
Prudential or a company controlled by it ceases to be the Fund's investment
advisor. Prudential may also terminate the license for any other reason upon
60 days written notice; but, in this event, the Contract shall also terminate
120 days following receipt by the Fund of such notice, unless a majority of
the outstanding voting securities of the Fund vote to continue the Contract
notwithstanding termination of the license.     
 
                                      20
<PAGE>
 
   
The Investment Advisory Contract may be terminated by the Board of Directors
or by the vote of a majority of the Fund's outstanding voting securities on 60
days notice to Prudential. Prudential may terminate the Investment Advisory
Contract on 90 days notice to the Fund. The Investment Advisory Contract will
also terminate automatically in the event of its assignment.     
   
Prudential will continue to have responsibility for all investment advisory
services under its advisory or subadvisory agreements with respect to its
clients.     
   
The Investment Advisory Contract with Prudential was approved at the annual
meeting of stockholders held on May 21, 1970. The Board of Directors has
unanimously approved continuance of the Contract in each year since then, most
recently at a meeting held on May 19, 1997.     
   
The Service Agreement between Prudential and PIC will continue in effect as to
the Fund 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 Investment Advisory Contract between Prudential and the Fund.
The Agreement may be terminated by either party upon not less than 30 days
prior written notice to the other party, will terminate automatically in the
event of its assignment and will terminate automatically as to the Fund in the
event of the assignment or termination of the Investment Advisory Contract
between Prudential and the Fund. Prudential is not relieved of its
responsibility for all investment advisory services under the Investment
Advisory Contract between Prudential and the Fund. The Agreement provides for
Prudential to reimburse PIC for its costs and expenses incurred in furnishing
investment advisory services.     
   
The Service Agreement between Prudential and PIC was ratified by stockholders
at their annual meeting held on September 27, 1985. The Board of Directors has
unanimously approved continuance of the Agreement in each year since then,
most recently at a meeting held on May 19, 1997.     
   
A separate contract between Prudential and the Fund provides that, as long as
the Fund sells its shares only to Prudential, its separate accounts or
organizations approved by it, Prudential will pay all expenses of the Fund not
covered by the Investment Advisory Contract (except for the fees and expenses
of members of the Fund's Board of Directors who are not officers or employees
of Prudential, brokers' commissions, transfer taxes and other charges and fees
attributable to investment transactions, and any other local, state or federal
taxes). Prudential has accordingly paid the organizational expenses of the
Fund and such other expenses as those incurred in connection with the
registration of the Fund and Fund shares with the Securities and Exchange
Commission, the cost of preparing and printing Fund prospectuses, and fees for
auditors and lawyers. Under the present contractual arrangements, it will
continue to pay any such expenses incurred in the future.     
   
PRUDENTIAL AS MANAGER OF THE FUND'S INVESTMENTS     
   
Prudential Mutual Fund Investment Management (PMFIM), a part of Prudential
Investments and a division of PIC, supplies the services with respect to
equity securities. PMFIM analyzes industries and companies within these
industries in order to recommend purchases and sales of equity securities.
PMFIM is responsible for the management of approximately $85 billion of
publicly-traded U.S. and global equity and fixed income securities. These
assets represent Prudential's mutual fund and annuity accounts, as well as
institutional clients and Prudential's general account and subsidiaries.     
          
Jeffrey Rose, Vice President, PIC, has been portfolio manager for the Fund
since March 1998. Mr. Rose also co-manages the Prudential Balanced Fund.     
   
PMFIM's investment staff selects companies and diversifies investments over
many firms and industries. It provides continuous supervision and management
over the performance of the investments. This is to reduce the risk of
developments which may adversely affect the market value of the securities of
one company or industry. But the emphasis is on the careful choice of
investments believed to have potential for growth, rather than upon
diversification alone.     
 
In implementing the Fund's investment objectives, each securities analyst is
assigned the responsibility of keeping abreast of developments in specific
industries and companies within those industries. On the basis of periodic
contacts with company managements, consultants and research staffs of
investment banking and brokerage firms, as well as analyses of company
reports, business periodicals and standard statistical services, each analyst
makes
 
                                      21
<PAGE>
 
projections of earnings and dividends, and determines the relative attraction
of the companies he/she follows based on these projections in the light of
current conditions and market price. Securities will be purchased for the
Fund's portfolio and sold from it on the basis of these analyses.
 
These methods of selection and supervision, like diversification, while they
do not guarantee successful investment or eliminate the risks involved
therein, are ones which the average individual may not have the time,
facilities, training or funds to employ on his/her own.
   
PORTFOLIO TURNOVER. The Fund's portfolio turnover rates for the last ten years
are shown in the table on page 5. (This rate is used to measure the activity
of a fund's portfolio securities. It is calculated by dividing purchases or
sales, whichever is less, by the average monthly value of the portfolio
securities, in each case excluding securities with maturities of one year or
less.)     
   
As noted elsewhere in this Prospectus, the Fund 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 increase
the rate of portfolio turnover. The rate of portfolio activity will usually
affect the brokerage costs of the Fund. It is anticipated that under normal
circumstances the portfolio turnover rate would not exceed 100%. During 1997
and 1996 the portfolio turnover rates were 101% and 97%, respectively.     
   
Prudential manages several other securities portfolios, including the
portfolios of The Prudential Series Fund, Inc., The Prudential Variable
Contract Account-2, The Prudential Variable Contract Account-10 and The
Prudential Variable Contract Account-11, registered under the 1940 Act as
open-end management investment companies. Some of these portfolios invest in
common stock. Investment opportunities may become available from time to time
that are suitable both for the Fund and for these other common stock
portfolios. On these occasions, an allocation of the securities available will
be made, taking into account the suitability of the security in the light of
the investment objectives of each portfolio, the size and composition of the
respective portfolios and the availability of cash.     
 
BROKERAGE
   
Prudential is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of brokerage commissions, if any. Transactions on a stock exchange
in equity securities will be executed primarily through brokers that will
receive a commission paid by the Fund. 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 for 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 if to do so appears 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 any
portfolio, consideration is given to whether the broker or dealer has
furnished Prudential or 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. Prudential or PIC use these
services in connection with all investment activities, and some of the data or
services obtained in connection with the execution of transactions for the
Fund may be used in connection with the execution of transactions for other
investment accounts.     
 
                                      22
<PAGE>
 
   
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 providing investment management for the Fund. Although
Prudential's present policy is not to permit higher commissions to be paid on
transactions in order to secure research and statistical services from
brokers, Prudential might in the future authorize the payment of higher
commissions, but only with the prior concurrence of the Board of Directors of
the Fund, 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 provides.     
   
When investment opportunities arise that may be appropriate for more than one
entity for which Prudential serves as investment manager or advisor, one
entity will not be favored over another and allocation 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 advisor 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 securities may be sold for another.     
   
Prudential Securities Incorporated (Prudential Securities) may act as a
securities broker for the Fund. In order for Prudential Securities to effect
any portfolio transactions for the Fund, the commissions, fees or other
remuneration received by Prudential Securities must be reasonable and fair
compared to the commissions, fees or other remuneration paid to other brokers
in connection with comparable transactions involving similar securities being
purchased or sold on an exchange during a comparable period of time. This
standard would allow Prudential Securities to receive no more than the
remuneration that would be expected to be received by an unaffiliated broker
in a commensurate arm's-length transaction. The Fund may not engage in any
transactions in which Prudential or its affiliates, including Prudential
Securities, acts as principal, including over-the-counter purchases and
negotiated trades in which such a party acts as a principal.     
   
Prudential or its affiliates, including 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 the Fund.     
   
During the calendar year 1997, $329,585 was paid to various brokers in
connection with securities transactions for the Fund. Of this amount,
approximately 91.0% was allocated to brokers who provided research and
statistical services to Prudential. The equivalent figures for 1996 were
$662,074 and 64.9%, respectively, and for 1995 were $756,838 and 77.52%,
respectively.     
   
Of the total brokerage fees paid by the Fund during 1997, $24,750 or 7.5% was
paid to Prudential Securities Incorporated (Prudential Securities), an
affiliated broker. For 1997, Prudential Securities effected 5.1% of the
transactions involving the payment of commissions, on an aggregate dollar
basis. The equivalent figures for 1996 were $19,301, 2.9% and 2.2%. For 1995,
no money or percentage was paid.     
 
DETERMINATION OF NET ASSET VALUE
 
Shares of the Fund are sold to Prudential's Investment Plan Account,
Prudential's Annuity Plan Account and Prudential's Annuity Plan Account-2,
which invest the money paid for purchases under the tax-qualified and non-tax-
qualified contracts of the Program. Sales of Fund shares are made at the net
asset value next determined after such purchases are made.
   
Prudential determines the net asset value of Fund shares on each business day
(a day on which the NYSE is open for business). The net asset value is
computed by dividing the net assets by the number of outstanding shares of the
Fund. Net assets are the total of cash and other assets, including investment
securities taken at value, minus liabilities.     
          
NASDAQ National Market System equity securities and securities for which the
primary market is an exchange are generally valued at the last sale price on
such system or exchange on that day or, in the absence of recorded sales, at
the mean between the most recently quoted bid and asked prices on that day or
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. Debt obligations with maturities of less than 60 days
are valued at amortized cost. Portfolio securities or assets for which market
quotations are not readily available will be valued at fair value as
determined in good faith by or under authority of the Fund's Board of
Directors.     
 
                                      23
<PAGE>
 
REDEMPTION OF FUND SHARES
   
Redemptions of Fund shares result from liquidations of interests under the
Contracts of the Program, and are made at the net asset value next determined
after such liquidations are made. Payment for shares redeemed will ordinarily
be made within 7 days after the redemption request is received from
Prudential.     
   
This right of redemption may, however, be suspended for any period during
which the NYSE is closed other than a regular holiday or weekend, or trading
thereon is restricted, or for any period during which an emergency exists as a
result of which it is not reasonably practicable for the Fund either to
dispose of securities owned by it or to determine the value of its assets
fairly. Redemption may also be suspended in the event the Securities and
Exchange Commission has provided for such suspension for the protection of
security holders. See withdrawal restrictions applicable to Section 403(b)
annuities discussed in SECTION 403(b) ANNUITIES, page 27.     
 
DESCRIPTION OF FUND SHARES AND VOTING RIGHTS
 
The Fund's authorized capital is 75,000,000 shares of common stock, $1 par
value. Common stock is purchased with amounts arising from payments made by
participants in the separate accounts of the Prudential Financial Security
Program. All shares of Fund stock are entitled to participate equally in
dividends and distributions of the Fund and in its net assets remaining upon
liquidation after satisfaction of outstanding liabilities. Fund shares are
fully paid and nonassessable when issued and have no preemptive, conversion or
exchange rights. Such shares are redeemable upon request, except under the
circumstances described in the preceding section, REDEMPTION OF FUND SHARES.
   
After a distribution of investment income and realized net capital gains in
December of each year, the balance of the Fund's investment income and
realized net capital gains for the calendar year then ending are normally
distributed during the first calendar quarter after the end of that calendar
year. Any such distributions to the accounts will ordinarily be credited in
the form of additional Fund shares at net asset value. However, partial
distributions may be made in cash to meet expenses of the accounts. See
FEDERAL INCOME TAXES, page 25.     
   
Each share of common stock outstanding is entitled to one vote. Fund shares
are held only by separate accounts of Prudential. At December 31, 1997,
Prudential's Annuity Plan Account-2, the account discussed in this Prospectus,
held approximately 18% of all Fund shares outstanding. Prudential's Investment
Plan Account and Prudential's Annuity Plan Account, separate accounts of
Prudential which are not discussed in this Prospectus, held approximately 81%
and 1%, respectively. Fund shares are voted by Prudential in accordance with
voting instructions received from participants in those accounts. Instruction
forms for this purpose will be furnished by Prudential. If there are Fund
shares held in the Account for which voting instructions are not received,
Prudential will vote those shares on each matter in the same proportion as it
votes the Fund shares held in the account for which it received instructions.
    
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT
   
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64104-1716, is the custodian of the Fund's assets and transfer agent and
dividend paying-agent of the Fund. The Fund's custodian maintains certain
financial and accounting books and records on behalf of the Fund pursuant to
an agreement with the Fund.     
 
                                      24
<PAGE>
 
                           SUPPLEMENTARY INFORMATION
   
PRUDENTIAL-SPONSORED PENSION PLANS     
   
Prudential has prepared several examples of pension plans for proprietorships
and partnerships, and pension and profit-sharing plans for corporations,
designed to qualify under Section 401(a) of the Code. Each of these plans
provides that Prudential will provide the insurance and annuity contracts
called for under the plan.     
   
The forms of Prudential-sponsored master and prototype plans have been
approved by the Internal Revenue Service (IRS). Approval by the IRS of a plan
as a master or prototype plan is limited to the form of a plan, and does not
constitute approval of any particular plan using the master or prototype. IRS
approval of a particular plan may have to be requested by the employer.     
 
STATE REGULATION
   
Prudential is subject to regulation and supervision by the Department of
Insurance of the State of New Jersey, which periodically examines its
operations and financial condition. It is also subject to the insurance laws
and regulations of all jurisdictions in which it is authorized to do business.
       
Prudential is required to submit annual statements of its operations,
including financial statements, to the insurance departments of the various
jurisdictions in which it does business to determine solvency and compliance
with local insurance laws and regulations.     
   
In addition to the annual statements referred to above, Prudential is required
to file with New Jersey and other jurisdictions a separate statement with
respect to the operations of all its variable contract accounts, in a form
promulgated by the National Association of Insurance Commissioners.     
       
FEDERAL INCOME TAXES
   
PRUDENTIAL'S GIBRALTAR FUND, INC. Under the provisions of the Code applicable
to regulated investment companies, the Fund, by distributing substantially all
of its net investment income and realized capital gains, will be relieved of
federal income tax on the income and gains so distributed. The Fund has
qualified for such tax treatment and intends to continue to so qualify.
Qualification of the Fund as a regulated investment company does not involve
government supervision of management or of investment practices or policies.
See DESCRIPTION OF FUND SHARES AND VOTING RIGHTS on page 24. There is a 4%
excise tax on a portion of the undistributed income of a regulated investment
company if that company fails to distribute required percentages of its
ordinary income and capital gain net income. The Fund intends to employ
practices that will eliminate or minimize the imposition of this excise tax.
       
PRUDENTIAL'S ANNUITY PLAN ACCOUNT-2. The operations of Prudential's Annuity
Plan Account-2 form a part of, and are taxed with, the operations of
Prudential. No federal income tax is currently payable on distributions of
income received on the Fund shares held in the Account for the benefit of
Annuitants, on capital gains realized by Prudential on redemptions of Fund
shares, or on capital gains dividends received by the Account from the Fund.
    
RETIREMENT PLANS USING THESE CONTRACTS. The provisions of the Code that apply
to retirement plans are complex, and Annuitants would be well advised to
consult a qualified tax advisor, particularly if liquidation under a Contract
is contemplated. Withdrawals may be subject to income tax consequences,
including tax penalties. In general, assuming that the requirements and
limitations of the applicable provisions of the Code are adhered to by
Annuitants, employers and trustees, contributions made to a qualified
retirement plan (other than after-tax employee contributions) are deductible
by the employer and not currently taxable to Annuitants.
   
The principal tax advantages to Annuitants under these plans derive from the
facts that within certain limits the amounts set aside each year are in pre-
tax rather than after-tax dollars, and that no federal income tax is currently
imposed upon investment income or realized gains earned by the Account in
which the accumulated purchase payments are held. When an annuity becomes
payable under these plans, all or a portion of the monthly payments are
taxable as ordinary income under Section 72 of the Code. Lump sum
distributions are generally treated as ordinary income, but may in certain
circumstances be treated part as long-term capital gains and part as ordinary
income. The amount of the tax on lump sum distributions may also be limited in
some cases by a special income-averaging rule.     
 
Taxable payments under the Contract will generally be subject to withholding
by the payer. In some circumstances, recipients of pensions and annuities may
elect for withholding not to apply. However, taxable payments to participants
under an eligible deferred compensation plan subject to Section 457 of the
Code are treated as the payment of wages for federal income tax purposes and
thus are subject to the general withholding requirements.
 
                                      25
<PAGE>
 
Recipients, including those who have elected out of withholding, must supply
their Taxpayer Identification Number (Social Security Number) to payers of
distributions for tax reporting purposes. Failure to furnish this number when
required may result in the imposition of a tax penalty and subject the
distribution to the back up withholding requirements of the law.
 
WITHHOLDING
   
Certain distributions from qualified retirement plans and 403(b) annuities
will be subject to mandatory 20% withholding unless the distribution is an
eligible rollover distribution that is "directly" rolled over into another
qualified plan, 403(b) annuity or IRA. Unless the Contract owner elects to the
contrary, the portion of any taxable amounts received under the Contract will
be subject to withholding to meet federal income tax obligations. The rate of
withholding on annuity payments where mandatory withholding is not required
will be determined on the basis of the withholding certificate filed by the
Contract owner with Prudential. For payments not subject to mandatory
withholding, if no such certificate is filed, the Contract owner will be
treated, for purposes of determining the withholding rate, as a married person
with three exemptions; the rate of withholding on all other payments made
under the Contract, such as amounts received upon withdrawals, will be 10%.
Thus, if the Contract owner fails to elect that there be no withholding,
Prudential will withhold from every withdrawal or annuity payment the
appropriate percentage of the amount of the payment that is taxable.
Prudential will provide the Contract owner with forms and instructions
concerning the right to elect that no amount be withheld from payments.
Generally, there will be no withholding for taxes until payments are actually
received under the Contract. Distributions to Contract owners under an
eligible deferred compensation plan subject to Section 457 of the Code are
treated as the payment of wages for federal income tax purposes and thus are
subject to the general withholding requirements.     
 
The few additional comments which follow concerning possible tax consequences
under qualified plans for self-employed individuals, other qualified plans,
IRA, Section 403(b) annuities and Eligible State Deferred Compensation Plans
are intended merely to call attention to certain features of those plans. They
do not purport to be a complete discussion, and are not intended as tax
advice. As suggested above, a qualified tax advisor should be consulted for
advice and answers to any questions.
 
QUALIFIED PLANS FOR SELF-EMPLOYED INDIVIDUALS. For self-employed individuals
who establish such plans, contributions are deductible within the limits
prescribed by the Code. Annual deductible contributions cannot exceed the
lesser of $30,000 or 25% of "earned income." "Earned income" is computed after
the deduction for contributions to the plan is considered.
 
Under these plans, payments are subject to certain minimum distribution
requirements, and generally must begin by April 1 of the calendar year
following the later of the calendar year in which the employee: (1) attains
age 70 1/2; or (2) retires.
   
IRA PLANS. For persons who establish such plans, the annual contribution limit
is the lesser of $2,000 or 100% of earned income. An IRA contribution of up to
$2,000 for each spouse is permitted (including a non-working spouse) if the
combined compensation of both spouses is at least equal to the contributed
amount, provided that the non-working spouse earns less than the working
spouse and they file a joint return. Payments to the Annuitant must begin by
April 1 of the year following the calendar year in which age 70 1/2 is
attained and are subject to certain minimum distribution requirements. Any
distributions before age 59 1/2 generally may result in certain tax penalties.
Certain penalties may result if the contribution or age limitations are
exceeded.     
 
Deductions for IRA contributions in those cases where an individual or an
individual's spouse is an active participant in an employer sponsored pension
plan, Simplified Employee Pension (SEP), savings incentive match plans for
employees (SIMPLE), Section 403(a) or Section 403(b) annuity are limited to
individuals whose adjusted gross income is less than certain specified
amounts.
   
For a married individual who is an active participant and who files a joint
tax return, the adjusted gross income limit is $50,000. For a single
individual, the limit is $30,000. Partial deductions for IRA contributions
will be available for married, joint filers who have adjusted gross income of
more than $50,000 and less than $60,000 and single individuals whose adjusted
gross income is less than $40,000. These limits will increase by $1,000 per
year in 1999-2002. For a married individual who is not an active participant,
but whose spouse is, and who files a joint return, the adjusted gross income
limit is $150,000. For married individuals filing separately the limit is
zero.     
 
The Code permits persons who receive certain qualifying distributions from a
qualified pension or profit sharing plan, Section 403(b) annuity, IRA, SEP or
SIMPLE to make, within 60 days, a tax-free "rollover" transfer of all or any
part of the amount of such distribution to an IRA which they established.
Additionally, the spouse of a deceased employee may roll over to an IRA all or
any portion of a lump sum distribution received by the spouse from a qualified
pension or profit-sharing plan on account of the employee's death.
 
                                      26
<PAGE>
 
   
SEP PLANS. For employees covered by such plans, under this arrangement annual
employer contributions to an IRA plan established by an employee are
excludible from gross income up to the lesser of $30,000 or 15% of the
employee's earned income (excluding the employer's contribution to the SEP).
As with the regular IRA, payments to the Annuitant must begin by April 1 of
the year following the calendar year in which age 70 1/2 is attained and are
subject to certain minimum distribution requirements. Any distributions before
age 59 1/2 generally may result in certain tax penalties. Certain penalties
may result if the contribution or age limitations are exceeded.     
 
Certain SEP arrangements are permitted to allow employees to elect to reduce
their salaries by as much as $9,500 (in 1996, indexed) and have their employer
make contributions on their behalf to the SEP. These arrangements, called
Salary Reduction SEPs, are available only if the employer maintaining the SEP
has 25 or fewer employees and at least 50% of the eligible employees elect to
make salary deferral contributions. Other limitations may reduce the
permissible contribution level for highly compensated employees. New Salary
Reduction SEPs may not be established after 1996.
   
In accordance with regulations released by the IRS, persons applying for one
of these Contracts in connection with an IRA, including one established under
a SEP arrangement, are given disclosure material prepared by Prudential. The
material includes a prospectus, a specimen copy of the Contract being applied
for, and a brochure containing information about eligibility, contribution
limits, tax consequences and other particulars concerning such plans. The
regulations require that such persons be given seven days thereafter in which
to affirm or reverse their decision to establish the plan. Therefore, any
funds accompanying an application for one of these Contracts in connection
with an IRA plan, including one established under a SEPP arrangement, will not
be used to make a purchase until the first business day no earlier than seven
days after the date the application is completed and signed.     
 
SECTION 403(B) ANNUITIES. The amounts contributed under these arrangements and
increments thereon are not taxable as income until distributed as annuity
income or otherwise. In general, the maximum amount that can be contributed by
salary reduction is $9,500. However, under certain special rules, the limit
could be increased as much as $3,000. In addition, the Code permits certain
total distributions from a Section 403(b) Annuity to be "rolled over" to
another Section 403(b) Annuity or IRA. Certain partial distributions from a
Section 403(b) Annuity may be "rolled over" to an IRA.
   
An annuity contract will not qualify as a Section 403(b) Annuity unless under
such contract distributions from salary reduction contributions and earnings
thereon (other than distributions attributable to assets held as of December
31, 1988) may be paid only on account of death, disability, separation from
service, attainment of age 59 1/2 or hardship. (Such hardship withdrawals are
permitted, however, only to the extent of salary reduction contributions and
not earnings thereon.) These Section 403(b) withdrawal restrictions do not
apply to the transfer of all or part of a participant's interest in his/her
Contract among the available investment options offered by Prudential and do
not apply to the direct transfer of all or part of the Participant's interest
in the Contract 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).     
   
In imposing the restrictions on withdrawals as described above, Prudential is
relying upon a no-action letter dated November 28, 1988 from the Chief of the
Office of Insurance Products and Legal Compliance of the Securities and
Exchange Commission to the American Council of Life Insurance.     
 
Employer contributions are subject generally to the same coverage, minimum
participation and nondiscrimination rules applicable to qualified plans.
   
Distributions from a Section 403(b) Annuity generally must commence by April 1
of the calendar year following the later of: (1) the calendar year in which an
employee attains age 70 1/2; or (2) the calendar year in which the employee
retires. However, for governmental and church plans, distributions may be
delayed until April 1 of the calendar year following the calendar year the
employee retires, if that is later. Distributions must satisfy minimum
distribution requirements similar to those that apply to qualified plans
generally.     
   
PENALTY FOR EARLY WITHDRAWALS. A 10% penalty tax will generally apply to the
taxable part of distributions received from an IRA, SEP, SIMPLE (25% penalty
in certain situations), Section 403(b) annuity, qualified plans for self-
employed individuals, and other qualified retirement plans before age 59 1/2.
Limited exceptions are provided, such as where amounts are paid in the form of
a qualified life annuity, upon death of the employee, to pay certain medical
expenses, and in certain instances disability or upon separation from service
on or after attainment of age 55.     
 
                                      27
<PAGE>
 
   
ELIGIBLE DEFERRED COMPENSATION PLANS OF STATE OR LOCAL GOVERNMENTS AND TAX
EXEMPT ORGANIZATIONS. A Contract may be used to fund an eligible deferred
compensation plan of a state or local government or a tax-exempt organization.
The amounts contributed under these plans and increments thereon are not
taxable as income until distributed or otherwise made available to the
employee or other beneficiary. If the requirements of Section 457 of the Code
are not met, however, employees may be required to include in gross income all
or part of the contributions and earnings thereon. Although assets of deferred
compensation plans are generally part of the employer's general assets,
subject to certain transition rules, governmental plans must hold assets in a
trust, annuity contract or custodial account. Contributions generally may not
exceed the lesser of $7,500 (as indexed) or 33 1/3% of the employee's
compensation. Distributions must begin by the later of (1) April 1 of the
calendar year following the calendar year in which the employee attains age 70
1/2 or (2) April 1 of the calendar year following the calendar year in which
an employee retires, and are subject to special minimum distribution rules, in
addition to the minimum distribution requirements for qualified plans.
Rollovers are not permitted (other than between Section 457 plans).     
 
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 Securities and Exchange Commission. The
information so omitted may be obtained from the Commission's principal office
in Washington, D.C., upon payment of the fees prescribed by the Commission.
 
EXPERTS
   
The financial statements and financial highlights included in this Prospectus
for the fiscal years 1997 and 1996, have been audited by Price Waterhouse LLP,
independent accountants, as stated in their reports appearing herein. Such
financial statements and financial highlights have been included herein in
reliance upon the reports of such firms given upon their authority as experts
in accounting and auditing. Price Waterhouse LLP's principal business address
is 1177 Avenue of the Americas, New York, New York 10036.     
 
LITIGATION
          
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, which 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.     
 
                                      28
<PAGE>
 
   
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 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, Prusec and PIMS
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 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 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, Prusec and PIMS 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 its separate accounts such as IPA and APA. 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.
    
                      DIRECTORS AND OFFICERS OF THE FUND
       
          
The directors and executive officers of the Fund are listed below, together
with their addresses and information as to their principal occupations during
the past five years.     
          
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 DIRECTOR--President of Investment
Management, Prudential Investments, since 1996. Vice President and Portfolio
Manager, T. Rowe Price Associates, Inc. from 1974 to 1996. 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.     
 
 
                                      29
<PAGE>
 
   
JOSEPH WEBER, 74, DIRECTOR--Vice President, Interclass (international
corporate learning). Address: 37 Beachmont Terrace, North Caldwell, New Jersey
07006.     
          
CAREN A. CUNNINGHAM, SECRETARY--Assistant General Counsel of Prudential
Investments Fund Management, Inc. (PIFM), 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: 100 Mulberry Street, Gateway Center Three, 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: 100 Mulberry Street, Gateway Center Three, 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: 100 Mulberry Street, Gateway
Center Three, Newark, New Jersey 07102.     
   
* These members of the Board are interested persons of Prudential, its
  affiliates or the Fund as defined in the 1940 Act. Certain actions of the
  Board, including the annual continuance of the Investment Advisory Contract
  between the Fund and Prudential, must be approved by a majority of the
  members of the Board who are not interested persons of Prudential, its
  affiliates or the Fund. Mr. Melzer and Mr. Greene, two of the five members
  of the Board, are interested persons of Prudential and the Fund, as that
  term is defined in the 1940 Act, because they are officers and/or affiliated
  persons of Prudential, the investment advisor to the Fund. Messrs. Fenster,
  McDonald and Weber are not interested persons of Prudential, its affiliates
  or the Fund. However, Mr. Fenster is President of the New Jersey Institute
  of Technology. The Prudential has issued a group annuity contract to the
  Institute and provides group life and group health insurance to its
  employees.     
          
The following table sets forth the aggregate compensation paid by the Fund to
the Directors who are not affiliated with Prudential for the fiscal year ended
December 31, 1997 and the aggregate compensation paid to such Directors for
service on the Fund's Board and the Boards of any other investment companies
managed by Prudential for the calendar year ended December 31, 1997.     
                               
                            COMPENSATION TABLE     
 
<TABLE>   
<CAPTION>
                           AGGREGATE        PENSION OR                         TOTAL
                          COMPENSATION      RETIREMENT        ESTIMATED     COMPENSATION
                              FROM       BENEFITS ACCRUED      ANNUAL     RELATED TO FUNDS
                           GIBRALTAR   AS PART OF GIBRALTAR BENEFITS UPON    MANAGED BY
NAME AND POSITION             FUND        FUND EXPENSES      RETIREMENT      PRUDENTIAL
- -----------------         ------------ -------------------- ------------- ----------------
<S>                       <C>          <C>                  <C>           <C>
Jonathan M. Green(1)            --              --               --               --
Saul K. Fenster              $3,000            None              N/A          $26,200 (5)*
W. Scott McDonald, Jr.       $3,000            None              N/A          $26,200 (5)*
Mendel A. Melzer, CFA(1)        --              --               --               --
Joseph Weber                 $3,000            None              N/A          $26,200 (5)*
</TABLE>    
   
(1) Directors who are "interested" do not receive compensation from Prudential
    (including the Fund).     
   
 * Indicates number of funds (including the Fund) to which aggregate
   compensation relates.     
   
As of April 30, 1998, the Directors and officers of the Fund, as a group,
beneficially owned less than one percent of the outstanding shares of the
Fund's capital stock.     
                  
               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.     
 
                                      30
<PAGE>
 
   
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 & 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 & 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 & 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 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 & 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.     
 
                                      31
<PAGE>
 
   
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 & 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 & Corporate Governance. Chairman, Regeneron Pharmaceuticals
since 1995. Chairman and Chief Executive Officer, Merck & 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 & 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 & 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 Nestl, 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 & 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.     
                  
               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.     
 
                                      32
<PAGE>
 
   
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 & 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.     
   
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.     
 
                                      33
<PAGE>
 
                            FINANCIAL STATEMENTS OF
                      PRUDENTIAL'S ANNUITY PLAN ACCOUNT-2
 
STATEMENT OF NET ASSETS
December 31, 1997
 
<TABLE>
  <S>                                                               <C>
  Investment in 5,375,179 shares of
   Prudential's Gibraltar Fund at net
   asset value of $10.9472 per share
   [Cost: $51,006,076] ............................................ $58,843,374
  Accrued expenses payable to Prudential ..........................     (14,965)
                                                                    -----------
  NET ASSETS....................................................... $58,828,409
                                                                    ===========
  NET ASSETS, representing:
   Equity of planholders [Note 8] ................................. $56,975,703
   Equity of annuitants [Note 8] ..................................     623,313
   Equity of The Prudential
    Insurance Company
    of America [Note 2] ...........................................   1,229,393
                                                                    -----------
                                                                    $58,828,409
                                                                    ===========
</TABLE>
 
STATEMENT OF OPERATIONS
Year Ended December 31, 1997
 
<TABLE>
  <S>                                                             <C>
  INVESTMENT INCOME
   Dividend distributions received .............................. $ 1,016,408
  EXPENSES
   Charges to planholders and annuitants for assuming mortality
    and expense risks and for administration [Note 3] ...........     382,418
                                                                  -----------
  NET INVESTMENT INCOME..........................................     633,990
                                                                  -----------
  NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
   Capital gains distributions received .........................  10,695,864
   Realized gain on shares redeemed
    [identified cost basis] .....................................   1,168,584
   Net change in unrealized gain on investments .................  (2,547,937)
                                                                  -----------
  NET GAIN ON INVESTMENTS........................................   9,316,511
                                                                  -----------
  NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........... $ 9,950,501
                                                                  ===========
</TABLE>
 
STATEMENTS OF CHANGES IN NET ASSETS
 
<TABLE>
<CAPTION>
                                                   YEARS ENDED DECEMBER 31,
                                                   --------------------------
                                                       1997          1996
                                                   ------------  ------------
  <S>                                              <C>           <C>
  OPERATIONS:
   Net investment income ......................... $    633,990  $    340,329
   Capital gains distributions received ..........   10,695,864     5,956,471
   Realized gain on shares redeemed ..............    1,168,584       891,850
   Net change in unrealized gain (loss) on
    investments ..................................   (2,547,937)    5,257,088
                                                   ------------  ------------
  NET INCREASE IN NET ASSETS RESULTING FROM
   OPERATIONS ....................................    9,950,501    12,445,738
                                                   ------------  ------------
  ACCUMULATION AND ANNUITY TRANSACTIONS:
   Purchase payments .............................      680,355       636,829
   Accumulation Shares liquidated ................   (6,961,083)   (5,978,227)
   Annuity benefit payments ......................     (102,923)      (73,649)
                                                   ------------  ------------
  NET DECREASE IN NET ASSETS RESULTING FROM
   ACCUMULATION
   AND ANNUITY TRANSACTIONS.......................   (6,383,651)   (5,415,047)
                                                   ------------  ------------
  NET (DECREASE) INCREASE IN NET ASSETS RESULTING
   FROM EQUITY TRANSFERS..........................   (1,688,445)      579,007
                                                   ------------  ------------
  TOTAL INCREASE IN NET ASSETS ...................    1,878,405     7,609,698
  NET ASSETS:
   Beginning of year .............................   56,950,004    49,340,306
                                                   ------------  ------------
   End of year ................................... $ 58,828,409  $ 56,950,004
                                                   ============  ============
</TABLE>
 
            SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A2 THROUGH A3
 
                                       A1
<PAGE>
 
                         NOTES TO FINANCIAL STATEMENTS
 
                     FOR THE YEAR ENDED DECEMBER 31, 1997
 
PRUDENTIAL'S ANNUITY PLAN ACCOUNT--2
 
NOTE 1:GENERAL
 
     The Annuity Plan Account-2 (the "Account") was established on August
     13, 1968, by resolution of Prudential's Board of Directors as a
     separate variable contract account of The Prudential Insurance Company
     of America ("Prudential") under the laws of the State of New Jersey. It
     is administered by Prudential under the general direction of
     Prudential's officers and managerial staff. The Account is registered
     with the Securities and Exchange Commission under the Investment
     Company Act of 1940, as amended (1940 Act), as a unit investment trust.
     Registration does not imply supervision by the Securities and Exchange
     Commission of the management or investment policies and practices of
     the Account or Prudential. The assets of the Account are invested in
     shares of Prudential's Gibraltar Fund (the "Fund") at the net asset
     value without sales load.
 
     PRUDENTIAL'S GIBRALTAR FUND
 
     The Fund was incorporated in the State of Delaware on March 14, 1968.
     It is registered under the 1940 Act as a diversified open-end
     management investment company. Registration does not imply supervision
     by the Securities and Exchange Commission of the management or
     investment policies and practices of the Fund or Prudential. The Board
     of Directors of the Fund is responsible for the management of the Fund
     and, in addition to reviewing the actions of the Fund's investment
     advisor, decides upon matters of general policy. The Fund's officers
     conduct and supervise the daily business operations of the Fund.
 
NOTE 2:SIGNIFICANT ACCOUNTING POLICIES
 
     The accompanying financial statements are prepared in conformity with
     generally accepted accounting principles (GAAP). The preparation of the
     financial statements in conformity with GAAP requires management to
     make estimates and assumptions that affect the reported amounts and
     disclosures. Actual results could differ from those estimates.
 
     Investment--The investment in shares of the Fund is stated at the net
     asset value.
 
     Security Transactions--Realized gains and losses on security
     transactions are reported on an identified cost basis. Purchase and
     sale transactions are recorded as of the trade date of the security
     being purchased or sold.
 
     Distributions Received--Dividend and capital gain distributions
     received are reinvested in additional shares of the Fund and are
     recorded on the ex-dividend date.
 
     Equity of The Prudential Insurance Company of America--Prudential
     maintains a position in the Account for liquidity purposes including
     unit purchases and redemptions, fund share transactions and expense
     processing. Prudential monitors the balance daily and transfers funds
     based upon anticipated activity.
 
NOTE 3:MORTALITY RISK, EXPENSE RISK AND ADMINISTRATION CHARGES
 
     The following charges, at effective annual rate as indicated, are
     applied daily against the net assets of the Account attributable to the
     respective contracts and are paid to Prudential.
 
     A. Mortality Risk and Expense Risk Charge
 
     For the class of contracts introduced prior to September 16, 1977, the
     mortality risk charge and expense risk charge are 0.10% and 0.20%,
     respectively, during the accumulation period and 0.075% and 0.15%,
     respectively, during the payout period.
 
     For the class of contracts introduced on September 16, 1977, the
     mortality risk charge and expense risk charge are 0.60% and 0.20%,
     respectively, during both the accumulation and the payout period.
 
     Mortality risk is that annuitants may live longer than estimated and
     expense risk is that the cost of issuing and administering the policies
     may exceed the estimated expenses. For the year ended December 31,
     1997, the amount of these charges paid to Prudential was $172,235.
 
                                      A2
<PAGE>
 
     B. Administration Charge
 
     For the class of contracts introduced prior to September 16, 1977, the
     administration charge is 0.375% during the accumulation period and
     0.15% during the payout period.
 
     For the class of contracts introduced on September 16, 1977, the
     administration charge is 0.50% during both the accumulation and the
     payout period.
 
     These charges, which were paid to Prudential, include costs associated
     with issuing the Contract, establishing and maintaining records, and
     providing reports to Contract owners. For the year ended December 31,
     1997, the amount of these charges paid to Prudential was $210,183.
 
NOTE 4:TAXES
 
     Prudential is taxed as a "life insurance company" as defined by the
     Internal Revenue Code and the results of operations of the Account form
     a part of Prudential's consolidated federal tax return. Under current
     federal law, no federal income taxes are payable by the Account. As
     such, no provision for tax liability has been recorded in these
     financial statements.
 
NOTE 5:NET INCREASE IN NET ASSETS RESULTING FROM EQUITY TRANSFERS
 
     The increase in net assets resulting from equity transfers represents
     the net contributions of Prudential to the Account.
 
NOTE 6:PURCHASES AND SALES OF INVESTMENTS
 
     The aggregate costs of purchases and proceeds from sales of investments
     in the Fund for the year ended December 31, 1997 were as follows:
 
<TABLE>
             <S>                                          <C>
             Purchases................................... $        0
             Sales....................................... $8,449,408
</TABLE>
 
NOTE 7:ACCUMULATION SHARE TRANSACTIONS
 
     The number of Accumulation Shares purchased and liquidated for the
     years ended December 31, 1997 and 1996 were as follows:
 
<TABLE>
<CAPTION>
                                                                    1997   1996
                                                                   ------ ------
        <S>                                                        <C>    <C>
        Accumulation Shares Purchased.............................  2,629  4,202
        Accumulation Shares Liquidated............................ 40,530 41,763
</TABLE>
 
NOTE 8:EQUITY OF PLANHOLDERS AND ANNUITANTS
 
     Equity of Planholders at December 31, 1997:
 
<TABLE>
<CAPTION>
                                                         SHARE
                                             SHARES      VALUE      EQUITY
                                           ----------- ---------- -----------
        <S>                                <C>         <C>        <C>
        Class of contracts introduced
         prior to Sept. 16, 1977 ......... 301,932.278 $185.66869 $56,059,370
        Class of contracts introduced on
         Sept. 16, 1977 ..................   5,932.682 $154.45506 $   916,333
                                                                  -----------
                                                                  $56,975,703
                                                                  ===========
 
     Equity of Annuitants at December 31, 1997:
 
        Annuity Contracts assuming 3.5%
         investment result ...............  10,540.972 $  7.65552 $    80,697
        Annuity Contracts assuming 5%
         investment result ............... 106,533.357 $  5.09339 $   542,616
                                                                  -----------
                                                                  $   623,313
                                                                  ===========
</TABLE>
 
                                      A3
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
   
To the Contract Owners of Prudential's Annuity Plan Account - 2 and the Board
of Directors 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 present fairly, in all
material respects, the financial position of Prudential's Annuity Plan Account
- - 2 at December 31, 1997, the results of its operations for the year then
ended and the changes in its net assets for each of the two years in the
period then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of The
Prudential Insurance Company of America'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
shares owned in Prudential's Gibraltar Fund, Inc. at December 31, 1997,
provide a reasonable basis for the opinion expressed above.
 
PRICE WATERHOUSE LLP
New York, New York March 20, 1998
       
                                      A4
<PAGE>
 
                             FINANCIAL STATEMENTS OF
                           PRUDENTIAL'S GIBRALTAR FUND

STATEMENT OF ASSETS AND LIABILITIES STATEMENT OF OPERATIONS
December 31, 1997                         Year Ended December 31, 1997

<TABLE>
<CAPTION>
<S>                                               <C>              <C>                                                 <C> 
ASSETS.........................................................     INVESTMENT INCOME
  Investments, at value (cost: $276,988,335)......$ 322,652,484       Dividends (net of $28,169 foreign withholding.
  Cash....................................................1,502         tax).........................................    $3,968,815
  Receivable for investments sold.....................5,655,023       Interest.......................................     1,369,649
  Interest and dividends receivable.....................427,753                                                           5,338,464
    Total Assets....................................328,736,762 
                                                                
    EXPENSES                                                    
                                                                
LIABILITIES....................................................       Investment advisory fee........................       390,676
  Payable for investments purchased...................2,669,207       State franchise tax expense....................        61,320
  Payable to investment adviser.........................103,022       Directors' fees................................         9,000
  Accrued expenses.......................................45,786       Miscellaneous expenses.........................         8,515
  .............................................................       Custodian expense..............................         6,439
    Total Liabilities.................................2,818,015 
    Total expenses......................................475,950 
                                                                
NET ASSETS........................................$ 325,918,747       Less custodian fee credit......................       (1,439)
  Net assets were comprised of:                                         Net expenses.................................       474,511
    Common stock, at $1 par value...................$29,771,740     NET INVESTMENT INCOME............................     4,863,953
    Paid-in capital, in excess of par...............247,676,370 
    ................................................277,448,110     NET REALIZED AND UNREALIZED GAIN ON
Accumulated net realized gains on investments.........2,806,488     INVESTMENTS
                                                                
Net unrealized appreciation on investments...........45,664,149     Net realized gain on investments.................    50,505,594
                                                                    Net change in unrealized appreciation on
Net assets, December 31, 1997.....................$ 325,918,747       investments....................................       547,282
Net asset value and redemption price per                        
  share, 29,771,740 outstanding shares of......................   NET GAIN ON INVESTMENTS............................    51,052,876
  common stock (authorized 75,000,000..........................   NET INCREASE IN NET ASSETS RESULTING
  shares)...............................................$ 10.95   FROM OPERATIONS....................................   $55,916,829
</TABLE>

STATEMENTS OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
                                                                                                         Years Ended December 31,
                                                                                                         ------------------------
                                                                                                           1997            1996
<S>                                                                                                   <C>          <C> 
   INCREASE (DECREASE) IN NET ASSETS
   OPERATIONS:
     Net investment income.............................................................................$4,863,953   $   3,868,291
     Net realized gain on investments..................................................................50,505,594      35,522,025
   Net change in unrealized appreciation on investments...................................................547,282      28,188,380
   NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................550916,829      67,578,696
DIVIDENDS AND DISTRIBUTIONS:
   Dividends from net investment income...............................................................(5,623,695)      (3,659,501)
   Distributions from net realized capital gains.....................................................(59,469,378)     (31,301,947)
   TOTAL DIVIDENDS AND DISTRIBUTIONS.................................................................(65,093,073)     (34,961,448)
CAPITAL TRANSACTIONS:
   Capital stock sold [232,480 and -0- shares, respectively]............................................3,000,000            --
   Capital stock issued in reinvestment of dividends and distributions [5,819,002 and 2,971,950
     shares, respectively].............................................................................63,060,874      33,969,659
   Capital stock repurchased [(2,645,935) and (2,374,885) shares, respectively].......................(3,262,504)     (26,513,694)
   NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................................33,798,370       7,455,965

TOTAL INCREASE IN NET ASSETS...........................................................................24,622,126      40,073,213
NET ASSETS:
   Beginning of year..................................................................................301,296,621     261,223,408
   End of year.......................................................................................$325,918,747    $301,296,621
</TABLE>

   
                      SEE NOTES TO FINANCIAL STATEMENTS.

                                      AI1
<PAGE>
 
                          PRUDENTIALS GIBRALTAR FUND

December 31, 1997                                                     
                                                                      
LONG-TERM INVESTMENTS - 95.1%                             Value       
COMMON STOCKS - 94.1% Shares                            (Note 1)      
Banks and Savings & Loans - 1.4%                                      
   Chase Manhattan Corp......................30,500     $3,339,750    
   Washington Mutual, Inc.....................21,400     1,365,587    
   .................................................     4,705,337    
   MULi2is-Ferrous - 1.9%                                             
                                                                      
Chemicals - 0.7%....................................                  
   Agrium, Inc...............................177,300     2,160,844    
Computer Services - 3.4%............................                  
   Bay Networks, Inc. (a)....................200,000     5,112,500    
   Larscom, Inc. (Class "A" Stock) (a) ......167,700     1,593,150    
   Microsoft Corp. (a).......................34,000.     4,394,500    
   .................................................    11,100,150    
                                                                      
Computers - 6.6%....................................                  
   3Com Corp. (a)............................234,000     8,175,375    
   Cisco Systems, Inc. (a)...................237,600    13,246,200    
   .................................................    21,421,575    
   .................................................    15,620,993    
Cosmetics & Soaps - 3.1%                                              
                                                                      
   Avon Products, Inc.........................73,200     4,492,650    
   Colgate Palmolive Co.......................77,900     5,725,650    
   .................................................    10,218,300    
   .................................................                  
Diversified Operations - 3.1 %......................                  
   General Electric Co.......................136,500    10,015,687    
   .................................................                  
Drugs and Medical Supplies - 8.9%...................                  
   Bristol-Myers Squibb Co....................58,200     5,507,175    
   Johnson & Johnson..........................82,000     5,401,750    
   Novartis Corp., AG, ADR..........................                  
     (Switzerland)...........................150,600    12,236,250    
   Pfizer, Inc................................78,200     5,830,787    
   .................................................    28,975,962    
Electronics - 0.5%..................................                  
   VLSI Technology, Inc. (a)..................67,400     1,592,325    
Environmental Services - 1.1%.......................                  
   U.S.A. Waste Services, Inc. (a)............90,000     3,532,500    
Financial Services - 4.0%...........................                  
   Federal National Mortgage........................                  
     Association.............................126,000     7,189,875    
   Imperial Credit Industries, Inc. (a).......26,800       549,400    
   The Money Store, Inc......................257,400     5,405,400    
   .................................................    13,144,675    
Food & Beverages - 4.0%.............................                  
   Archer-Daniels-Midland Co.................157,500     3,415,781    
   PepsiCo, Inc..............................260,800     9,502,900    
   .................................................    12,918,681    
Hospitals/ Hospital Management - 2.1%...............                  
   Columbia/HCA Healthcare Corp., . .........156,800     4,645,200    
     Manor Care, Inc..........................66,400     2,324,000    
     ...............................................     6,969,200    
Insurance - 6.0%                                                      
                                                                      
   Aetna, Inc.................................59,200     4,177,300    
American International Group, Inc.............27,255     2,963,981    
CIGNA Corp....................................35,400     6,126,412    
Provident Companies, Inc......................63,000     2,433,375    
Travelers Group, Inc..........................73,999     3,986,696    
 ....................................................    19,687,764    
Leisure - 6.0%......................................                  
   Carnival Corp. (Class "A" Stock)...........89,000     4,928,375    
   Hilton Hotels Corp........................144,200     4,289,950


  December 31, 1997                                                    
                                                                       
  COMMON                                                      Value    
  STOCKS (Continued)                        Shares          (Note 1)   
     La Quinta Inns, Inc.                       222,300     $4,293,169 
  Wall Disney Co.                                 62,000     6,141,875 
                                                            19,653,369 
                                                                       
     UCAR International, Inc. (a)................156,100     6,234,244 
                                                                       
  Metals-Non Ferrous - 0.7%                                            
     Aluminum Company of America..................31,800     2,237,925 
  Miscellaneous - Consumer Growth/Stable..........- 2.4%               
     Unilever N.V., ADR (United Kingdom).........124,000     7,742,250 
  Oil & Gas - 4.8%                                                     
                                                                       
     Exxon Corp..................................108,600     6,644,962 
     Pioneer Natural Resources Co. . . . ........165,500     4,789,156 
     Texaco, lnc..................................77,000     4,186,875 
                                                                       
                                                                       
  Oil & Gas Services - 9.7%                                            
     Bouyges Offshore SA, ADR                                          
       (France) (a)..............................184,200     4,006,350 
     J. Ray McDermott, SA........................126,600     5,443,800 
     ..................................................1               
     McDermott International, Inc................213,500     7,819,438 
     Schlumberger Ltd............................119,800     9,643,900 
     Smith International, Inc. (a)................74,600     4,578,575 
                                                                       
     ...................................................    31,492,063 
  Real Estate Development - 2.5%                                       
     CCA Prison Realty Trust......................80,200     3,578,925 
     Developers Diversified Realty................89,000     3,404,250 
     Patriot American Hospitality, Inc............46,300     1,334,019 
     ...................................................     B,317,194 
                                                                       
  Retail - 7.4%                                                        
     American Stores Co..........................180,600     3,713,588 
     CVS Corp.....................................52,900     3,388,906 
     Nordstrom, Inc..............................139,600     8,428,350 
     Sears, Roebuck & Co..........................62,000     2,805,500 
     Toys `R' Us, Inc. (a).......................181,000     5,690,188 
     ...................................................    24,026,532 
  Telecommunications - 6.0%                                            
     ADC Telecommunications, Inc. (a)............107,500     4,488,125 
     BellSouth Corp...............................60,200     3,390,013 
     Glenayre Technologies, Inc. (a).............200,000     1,975,000 
     Tellabs, Inc. (a)............................45,000     2,379,375 
     Uniphase Corp. (a)..........................178,200     7,373,025 
     ...................................................    19,605,538 
     Tobacco - 1.8%                                                    
       Phillip Morris Co. Inc....................127,400     5,772,813 
                                                                       
                                                                       
  Utility - Electric - 6.0%                                            
       Duke Energy Corp..........................133,000     7,364,875 
       Long Island Lighting Co....................76,800     2,313,600 
       Pinnacle West Capital Corp................137,000     5,805,375 
       Texas Utilities Co.........................98,600     4,098,063 
        .................................................    19,581,913
     TOTAL COMMON STOCKS                                               
        (cost $260,817,908)..............................   306,727,834 


                       SEE NOTES TO FINANCIAL STATEMENTS

                                      AI2
<PAGE>
 
PRUDENTIALS GIBRALTAR FUND (Con
December 31, 1997

                                    Moody's      Principal

CONVERTIBLE                        Rating         Amount        Value

BONDS - 1.0%                     (Unaudited)        (000)       (Note 1)
Retail - 1.0%
   Sunglass Hut International,
     5.25%, 06/15103
     (cost $3,461,427)                B2          $ 4,405         $3,215,650

TOTAL LONG-TERM INVESTMENTS
   (cost $264,279,335)................                 309,943,484


SHORT-TERM
INVESTMENTS - 3.9%
Commercial Paper - 3.9%
   BBL North America,
     6.73%, 01/02198
     (cost $12,709,000)...............NR      12,709    12,709,000
TOTAL INVESTMENTS - 99.0%
   (cost $276,988,335; Note 3)........                 322,652,484
OTHER ASSETS IN EXCESS OF
   LIABILITIES - 1.0%.................                   3,266,263
TOTAL NET ASSETS - 100.0%.............               $ 325,918,747



The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipt
         SA Societe Anonyme (French Corporation)

(a)      Non-income producing security

                       SEE NOTES TO FINANCIAL STATEMENTS.

                                      AI3
<PAGE>
 
                     NOTES TO THE FINANCIAL STATEMENTS OF
                          PRUDENTIAL'S GIBRALTAR FUND

             General

             Prudential's Gibraltar Fund (the "Fund") was originally
             incorporated in the State of Delaware on March 14, 1968 and was
             reincorporated in the State of Maryland effective May 1, 1997. It
             is registered as an open-end, diversified management investment
             company under the Investment Company Act of 1940, as amended. The
             Fund was organized by The Prudential Insurance Company of America
             (The Prudential) to serve as the investment medium for the variable
             contracts accounts of The Prudential Financial Security Program.
             The Fund does not sell its shares to the public. The accounts will
             redeem shares of the Fund to the extent necessary to provide
             benefits under the contracts or for such other purposes as may be
             consistent with the contracts.

Note 1:      Accounting Policies

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

             Securities Valuation: Securities traded on a national securities
             exchange are valued at the last sales price (or the last bid price
             if there were no sales of the security that day) on the New York
             Stock Exchange, or if not traded on such exchange, such last sales
             or bid price at the time of close of the New York Stock Exchange on
             the principal exchange on which such securities are traded. For any
             securities not traded on a national securities exchange but traded
             in the over-the-counter market, the value is the last bid price
             available, except that securities for which quotations are
             furnished through a nationwide automated quotation system approved
             by the National Association of Securities Dealers, Inc. (NASDAQ)
             are valued at the closing best bid price on the date of valuation
             provided by a pricing service which utilizes NASDAQ quotations.

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

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

             Securities Transactions and Net Investment Income: Securities
             transactions are recorded on the trade date. Realized gains and
             losses on sales of investments are calculated on the identified
             cost basis. Dividend income is recorded on the ex-dividend date and
             interest income is recorded on the accrual basis. Expenses are
             recorded on the accrual basis which may require the use of certain
             estimates by management.

             Dividends and Distributions: Dividends from net investment income
             are declared and paid semi-annually. The Fund will distribute at
             least annually net capital gains in excess of capital loss
             carryforwards, if any. Dividends and distributions are recorded on
             the ex-dividend date. Dividends from net investment income and net
             realized capital gains of the Fund will normally be declared and
             reinvested in additional full and fractional shares twice a year.
             Some dividends are paid in cash. ,

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

             Taxes: It is the Fund's policy to continue to meet the requirements
             of the Internal Revenue Code applicable to regulated investment
             companies and to distribute all of its taxable net income to its
             shareholders. Therefore, no federal income tax provision is
             required. State franchise taxes were paid for the period that the
             Fund was incorporated in Delaware. No such commitments exist
             following reincorporation in Maryland. Withholding taxes on foreign
             dividends have been provided for in accordance with the Fund's
             understanding of the applicable country's tax rules and rates.

                                      AI4
<PAGE>
 
             Reclassification of Capital Accounts: The Fund accounts and reports
             for distributions to shareholders in accordance with the American
             Institute of Certified Public Accountants (A.I.C.PA.). Statement of
             Position 93- 2: Determination, Disclosure, and Financial Statement
             Presentation of Income, Capital Gain, and Return of Capital
             Distributions by Investment Companies. The effect of applying this
             statement was to decrease undistributed net investment income by
             $42,059, increased net realized gains by $2,789 and increased
             paid-in capital in excess of par by $39,270. In addition the Fund
             reclassified $199,247 of dividends in excess of net investment
             income to accumulated capital gain. Such reclassifications had no
             effect on net assets, results of operations, or net asset value per
             share.

Note 2:Investment Advisory Fee and Other Transactions with Affiliates

             Investment Advisory Fee:

            
             The investment advisory fee,whichis computed daily at an effective
             annual rate of 0.1 25% of the net assets of the Fund, is payable
             quarterly to The Prudential Insurance Company of America ("The
             Prudential") as required under the investment advisory agreement.
             The Prudential pays all expenses of the Fund except for fees and
             expenses of those members of the Fund's Board of Directors who are
             not officers or employees of The Prudential and its affiliates;
             transfer and any other local, state or federal taxes; and brokers'
             commissions and other fees and charges attributable to investment
             transactions.

             During the year ended December 31, 1997, Prudential Securities
             Incorporated, an affiliate of The Prudential, earned approximately
             $25,000 in brokerage commissions as a result of executing
             transactions in portfolio securities on behalf of the Fund.

Note 3: Portfolio Securities

             Purchases and sales of investment securities, other than short-term
             investments, for the year ended December 31, 1997 aggregated
             $297,205,094 and $303,041,488, respectively.

             The federal income tax basis of the Fund's investments at December
             31, 1997 was substantially the same as for financial reporting
             purposes, $276,988,335 and, accordingly, net unrealized
             appreciation for federal income tax purposes was $45,664,149 (gross
             unrealized appreciation $57,881,924; gross unrealized depreciation
             $12,217,775).


                                      AI5
<PAGE>
 
                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of Prudential's Gibraltar Fund, Inc.

In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential's Gibraltar Fund, Inc.
(the "Fund") 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
the two years in the period then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at 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 statements.

PRICE WATERHOUSE LLP
1177 Avenue of the Americas 
New York, NY 10036 
February 11, 1998

                                      AI6


                       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


                                       1

<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


                                       2

<PAGE>

<TABLE>
<CAPTION>

                                         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


                                        3

<PAGE>
<TABLE>
<CAPTION>



                                         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)


<TABLE>
<CAPTION>

                                                                      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)

<TABLE>
<CAPTION>

                                                                        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)

<TABLE>
<CAPTION>

                                                                        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:

<TABLE>
<CAPTION>

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

<CAPTION>

                                                                                     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>

<TABLE>
<CAPTION>

                                         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:

<TABLE>
<CAPTION>

                                                                   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:

<TABLE>
<CAPTION>

                                                                   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:

<TABLE>
<CAPTION>

                                                                       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:


<TABLE>
<CAPTION>

                                                                   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:

<TABLE>
<CAPTION>

                                                                       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:

<TABLE>
<CAPTION>

                                                                          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:

<TABLE>
<CAPTION>

                                                                 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:

<TABLE>
<CAPTION>

                                                                     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:

<TABLE>
<CAPTION>

                                                                       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:

<TABLE>
<CAPTION>

                                                                       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:

<TABLE>
<CAPTION>

                                                                       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:

<TABLE>
<CAPTION>

                                                                     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:

<TABLE>
<CAPTION>

                                                                     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:

<TABLE>
<CAPTION>

                                                                        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:

<TABLE>
<CAPTION>

                                                                         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:

<TABLE>
<CAPTION>

                                                                          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>


<TABLE>
<CAPTION>

                                                                          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.

                                    * * * * *


                                       36

 
<PAGE>
 
- -------------------------------------------------------------------------------
VARIABLE ANNUITY CONTRACTS
 .Flexible Purchase Payment Contract
 .Single Purchase Payment Contract
 
(for use in connection with retirement plans
qualifying for special federal income tax treatment)
PRUDENTIAL'S GIBRALTAR FUND, INC.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
 
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE TO ANY PERSON TO
WHOM SUCH OFFER WOULD BE UNLAWFUL IN SUCH STATE.
 
NO ONE IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR IN THE SALES MATERIAL
AUTHORIZED BY THE PRUDENTIAL INSURANCE COMPANY OF AMERICA FOR USE IN
CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS.
- -------------------------------------------------------------------------------
                                         --------------------------------------
 
[LOGO] Prudential
- -------------------------------------------------------------------------------
 
The Prudential Insurance Company of America
   
751 Broad Street, Newark, New Jersey 07102-3777                     Bulk Rate
                                                                   U.S. Postage
                                                                       Paid
                                                                    Purdential
<PAGE>
 
                                    PART C

                               OTHER INFORMATION
<PAGE>
 
                      CONTENTS OF REGISTRATION STATEMENT

This registration statement comprises the following papers and documents:

The facing sheet.

   
The prospectus consisting of 79 pages.
    

The signatures for:

   
      (1) Prudential's Annuity Plan Account-2 and The Prudential Insurance
          Company of America; and
      (2) Prudential's Gibraltar Fund, Inc.
    

    
Consent of Price Waterhouse LLP, independent accountants, regarding reports on:

      (1) Prudential's Annuity Plan Account-2 and The Prudential Insurance
          Company of America; and
      (2) Prudential's Gibraltar Fund, Inc.

Responses of Prudential's Gibraltar Fund, Inc. to Items of Part C of Form N-1A:

      Item 24.   Financial Statements and Exhibits;
      Item 25.   Persons Controlled by or under Common Control with Prudential's
                   Gibraltar Fund, Inc.
      Item 26.   Number of Holders of Securities;
      Item 27.   Indemnification;
      Item 28.   Business and other Connections of Investment Advisor;
      Item 29.   Principal Underwriter;
      Item 30.   Location of Accounts and Records;
      Item 31.   Management Services; and
      Item 32.   Undertakings.
    

The Exhibits listed on the following pages pertaining to:

   
      (1) Variable Annuity Contracts; and
      (2) Prudential's Gibraltar Fund, Inc.

      Item 24(a) List of Financial Statements of Prudential's Annuity
                 Plan Account-2 and The Prudential Insurance Company of
                 America Filed as Part of this Registration
                 Statement.
    

Prudential's Annuity Plan Account-2 -- Statements Filed as Part of Part A:

   
      Statement of Net Assets as of December 31, 1997; 
      Statement of Operations -- Year Ended December 31, 1997; and 
      Statements of Changes in Net Assets -- Years Ended December 31, 1997
        and 1996.
    
   
Consolidated Financial Statements of The Prudential Insurance Company of America
and Subsidiaries -- Statements Filed as Part of Part A:


      Statements of Financial Position as of December 31, 1997 
          and 1996;
      Statements of Operations and Changes in Surplus and Asset
          Valuation Reserve (AVR)/ Mandatory Securities Valuation Reserve (MSVR)
          -- Years Ended December 31, 1997, 1996 and 1995; and
      Statements of Cash Flows -- Years Ended December 31, 1997,
          1996 and 1995.
    

List of Financial Statements of Prudential's Gibraltar Fund, Inc. Filed as Part
of this Registration Statement -- Statements Filed as Part of Part A:

   
      Statement of Assets and Liabilities including Schedule of Investments as
        of December 31, 1997;
      Statement of Operations -- Year Ended December 31, 1997;
      Statements of Changes in Net Assets -- Years Ended December 31, 1997 and
        1996; and
      Financial Highlights -- Ten Years Ended December 31, 1997.
    

                                C-1
<PAGE>
 
<TABLE>     


                                    EXHIBITS
                           VARIABLE ANNUITY CONTRACTS

<CAPTION>
1. COPIES OF EXHIBITS REQUIRED BY PARAGRAPH A OF INSTRUCTIONS            INCORPORATED BY REFERENCE TO THE
AS TO EXHIBITS IN FORM N-8B-2 (OTHER PARAGRAPH A EXHIBITS ARE            FOLLOWING:
NOT APPLICABLE):                                                               

<S>       <C>                                                            <C>
(1)       The resolutions of the Board of Directors of                   Exhibit A(1) to N-8B-2, File No.
          Prudential, adopted on August 13, 1968, establishing           811-1849.                       
          Prudential's Annuity Plan Account-2.                           

(2)(a)    Custodian Agreement between                                    Exhibit A(2) to Post-Effective 
          Chemical Bank and Prudential.                                  Amendment No. 17 to Form S-6, 
                                                                         Registration No. 2-52715.          

(3)(a)    Distribution Agreement between Prudential's Investment         Exhibit A(3)(a) to Post-Effective
          Plan Account, Prudential's Annuity Plan Account,               Amendment No. 30 to Form S-6,    
          Prudential's Annuity Plan Account-2 and Pruco                  Registration No. 2-52715.        
          Securities Corporation.                                        

(3)(c)    Schedule of Sales Commissions referred to in Item              Exhibit A(3)(c) to Form S-6,
          38(c).                                                         Registration No. 2-59232.   
                                                                         
(5)(i)    Copy of Variable Annuity Contract with Flexible                Exhibit A(5)(i) to Form S-6,
          Purchase Payments-Pension Series Form QVA-77.                  Registration No. 2-59232.   
                                                                         
(5)(ii)   Copy of Variable Annuity Contract-Pension Series Form          Exhibit A(5)(ii) to Form S-6,
          QVAS-77.                                                       Registration No. 2-59232.    
                                                                         
(5)(iii)  Copy of alternate contract face page QVA-77 (N.Y.),            Exhibit A(5)(iii) to Form S-6,
          for inclusion in Flexible Purchase Payment V.A.                Registration No. 2-59232.     
          contracts sold in the State of New York.                       

(5)(iv)   Copy of alternate contract face page QVAS-77 (N.Y.),           Exhibit A(5)(iv) to Form S-6,
          for inclusion in Single Payment V.A. contracts sold in         Registration No. 2-59232.    
          the State of New York.                                         

(5)(v)    Copy of alternate contract face pages 3 and 4, Page 3          Exhibit A(5)(v) to Form S-6,
          (QVA-77)(N) and Page 4 (QVA-77)(N), for inclusion in           Registration No. 2-59232.   
          Flexible Purchase Payment and Single Purchase Payment          
          V.A. contracts sold in Texas if the Supplemental Death
          Benefit is not provided.

(5)(vi)   Copy of alternate contract pages 3 and 4, Page 3               Exhibit A(5)(vi) to Form S-6,
          (QVAS-77)(N) and Page 4 (QVAS-77)(N), for inclusion in         Registration No. 2-59232.    
          Single Payment V.A. contracts sold in Texas if the             
          Supplemental Death Benefit is not provided.

(5)(vii)  Copy of alternate contract pages 7 and 8, Page 7               Exhibit A(5)(vii) to Form S-6,
          (QVA-77)(3%) and Page 8 (QVA-77)(3%), for inclusion in         Registration No. 2-59232.     
          Flexible Purchase Payment and Single Purchase Payment          
          V.A. contracts sold in Florida, New Mexico, Texas, and
          West Virginia.

(5)(viii) Copy of alternate contract page 9, Page 9 (QVA-                Exhibit A(5)(viii) to Form S-6,
          77)(O), for inclusion in Flexible Purchase Payment and         Registration No. 2-59232.      
          Single Purchase Payment V.A. contracts sold in                 
          Oklahoma.

(5)(ix)   Copy of alternate page 10, Page 10 (QVA-77)(P), for            Exhibit A(5)(ix) to Form S-6,
          inclusion in Flexible Purchase Payment V.A. contracts          Registration No. 2-59232.    
          sold in Pennsylvania.                                          
</TABLE>      


                               C-2
<PAGE>
 
<TABLE> 
<CAPTION>

LISTING OF VARIABLE ANNUITY EXHIBITS - PAGE 2
                                                                               
<S>       <C>                                                            <C>   
(5)(x)    Copy of Texas Variable Annuity Endorsement to the              Exhibit A(5)(x) to Form S-6,
          Variable Annuity Contracts. Form QVA 81545-77.                 Registration No. 2-59232.   
                                                                         
(5)(xi)   Copy of Limitation Provisions Endorsement QVA 81698 to         Exhibit A(5)(xi) to Form S-6,
          the Variable Annuity Contracts, for use with                   Registration no. 2-59232.    
          employee-owned contracts under 403(b) annuity purchase         
          plans.

(5)(xii)  Copy of Limitation Provisions Endorsement QVA 81699 to         Exhibit A(5)(xii) to Form S-6,
          the Variable Annuity Contracts, for use with                   Registration No. 2-59232.     
          Individual Retirement Annuities.                               






(5)(xiii) Copy of Limitation Provisions Endorsement QVA-81700 to         Exhibit A(5)(xiii) to Form S-6,
          the Variable Annuity Contracts, for use with                   Registration No. 2-59232.      
          employee-owned contracts under Corporate pension and           
          profit sharing plans and H.R. 10 pension plans.

(5)(xiv)  Copy of Alteration-of-Text Endorsement, Form QVA               Exhibit A(5)(xiv) to Post-Effective
          81769-77, for inclusion in Flexible Purchase Payment           Amendment No. 3 to Form S-6,       
          and Single Purchase Payment V.A. contracts sold in             Registration No. 2-59232.          
          California.                                                    

(5)(xv)   Copy of Limitation Provisions Endorsement, Form QVA            Exhibit A(5)(xv) to Post-Effective
          82138, for inclusion in Flexible Purchase Payment and          Amendment No. 3 to Form S-6,      
          Single Purchase Payment V.A. contracts sold under the          Registration No. 2-59232.         
          Texas Optional Retirement Program.                             

(5)(xvi)  Copy of Rights Endorsement QVA 81546 to the Variable           Exhibit A(5)(xvi) to Post-Effective
          Annuity Contracts, for use with trustee-owned                  Amendment No. 7 to Form S-6,       
          Corporate pension and profit sharing plans and                 Registration No. 2-59232.          
          trustee-owned H.R. 10 pension plans.                          

   
(6)(i)    Copy of Charter of Prudential, as amended                      Incorporated by reference to    
          to and including November 14, 1995.                            Post-Effective Amendment No. 9  
                                                                         to Form S-1, Registration No.   
                                                                         33-20083, filed April 9, 1997   
                                                                         on behalf of The Prudential Variable
                                                                         Contract Real Property Account. 
                                                                         
(6)(ii)   Copy of the By-Laws of Prudential, as amended                  Incorporated by reference to Post-  
          to and including April 8, 1997.                                Effective Amendment No. 12          
                                                                         to Form N-4, Registration No.       
                                                                         33-25434, filed April 30, 1997      
                                                                         on behalf of The Prudential         
                                                                         Individual Variable Contract Account.
    
                                                                         
(10)      Form of Application for Annuity. Form QVA 81541-78.            Exhibit A(21) to Post-Effective
                                                                         Amendment No. 3 to Form S-6,   
                                                                         Registration No. 2-59232.      
                                                                         
   
2. For specimen of securities, see Exhibits A(5)(i) through
   A(5)(xvi).
    
    
6. Powers of Attorney for Directors and Officers of Prudential           Incorporated by reference to 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.                
    
</TABLE>

                               C-3
<PAGE>
 
<TABLE>
<CAPTION>

   
    


       


<S>                                                                      <C>   
   
    
                                                                         

27.1 Financial Data Schedule                                             Filed herewith
</TABLE>


                               C-4
<PAGE>
 
ITEM 24(B)

<TABLE>
                                                             EXHIBITS
                                                    PRUDENTIAL'S GIBRALTAR FUND
<CAPTION>

                                                          INCORPORATED BY
                                                        REFERENCE TO EXHIBITS                        INCORPORATED BY
             EXHIBITS REQUIRED BY                          TO FORM N-8B-1                      REFERENCE TO THE FOLLOWING
              ITEM OF FORM N-1A                           FILE NO. 811-1660                   (EXCEPT AS OTHERWISE NOTED): 

<S>          <C>                                                 <C>                    <C> 
  (i)        Certificate of Incorporation.                       1(a)

             Amendment to Certificate                            1(b)
             of Incorporation dated April 11, 1968.

             Amendment to Certificate                                                   Exhibit 1(c) to Post-
             of Incorporation dated May 27, 1975.                                       Effective Amendment No. 19
                                                                                        to Form S-6, Registration
                                                                                        No. 2-52715.

             Amendment to Certificate                                                   Exhibit 24(b)(i) to Post-Effective
             of Incorporation dated April 23, 1992.                                     Amendment No. 32 to Form S-6,
                                                                                        Registration No. 2-52715.

   
             Articles of Incorporation                                                  Exhibit 24(b)(i) to Post-Effective  
             filed with the Secretary of State                                          Amendment No. 26 to Form S-6,       
             of the State of Maryland, dated                                            Registration No. 2-59232.            
             May 1, 1997.

 (ii)        By-laws.                                                                   Exhibit 24(b)(ii) to Post-Effective  
                                                                                        Amendment No. 26 to Form S-6,       
                                                                                        Registration No. 2-59232.            

    
                                                                                        
(iii)        None.

 (iv)        Stock Certificate.                                                         Exhibit 4(a) to Post-
                                                                                        Effective Amendment No. 17
                                                                                        to Form S-6, Registration
                                                                                        No. 2-52715.
    
  (v)        Investment Advisory Contract                        5
             between Registrant and 
             Prudential.

             Amendment No. 1 to Investment                                              Exhibit 5(b) to Post-
             Advisory Contract between                                                  Effective Amendment No. 9
             Registrant and Prudential.                                                 to Form S-5, Registration
                                                                                        No. 2-32685.

             Amendment No. 2 to Investment                                              Exhibit 24(b)(v) to Post-Effective
             Advisory Contract between                                                  Amendment No. 32 to Form S-6,
             Registrant and Prudential.                                                 Registration No. 2-52715.

             Service Agreement between                                                  Exhibit 24(b)(v)(3) to
             Prudential and The Prudential                                              Post-Effective Amendment
             Investment Corporation.                                                    No. 23 to Form S-6,
                                                                                        Registration No. 2-52715.
     
 (vi)        Distribution Agreement between                                             Exhibit 24(b)(vi) to Post-
             Prudential's Gibraltar Fund and                                            Effective Amendment No. 30
             Pruco Securities Corporation.                                              to Form S-6, Registration
                                                                                        No. 2-52715.

(vii)        None.
</TABLE>

                                       C-5
<PAGE>
 
<TABLE>

PRUDENTIAL'S GIBRALTAR FUND EXHIBITS -- PAGE 2

<CAPTION>

<S>          <C>                                                 <C>                    <C>
(viii)       Custody Agreement between                                                  Exhibit 8(a) to Post-
             Registrant and Chemical Bank                                               Effective Amendment No. 17
                                                                                        to Form S-6, Registration
                                                                                        No. 2-52715.
    
(viii)(a)    Form of Custodian Agreement                                                Exhibit (viii) to Post-Effective       
             between Investors Fiduciary                                                Amendment No. 40 to Form S-6,         
             Trust Company and the                                                      Registration No. 2-52715.              
             Registrant.                                                                                           
    
 (ix)        Administrative Services                             9(a)
             Agreement between Registrant
             and Prudential.
     
             Contract of Custodianship                                                  Exhibit A(2) to Post-
             with respect to Prudential's                                               Effective Amendment No. 17
             Investment Plan Account                                                    to Form S-6, Registration
             (endorsed by Registrant).                                                  No. 2-52715.

(x)-(xiv)    None.

     (xv)    None.

   
    (xvi)    Powers of Attorney for                                                     Filed herewith 
             Non-Interested Directors of
             Prudential's Gibraltar Fund, Inc.

    (xvii)   Consents of independent auditors                                           Filed herewith 

    
    
27.2         Financial Data Schedule                                                    Filed herewith
     
</TABLE>

                                       C-6
<PAGE>
 
                                   SIGNATURES

                      PRUDENTIAL'S ANNUITY PLAN ACCOUNT - 2

   
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that 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, and has caused this Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized, and its seal hereunto
affixed and attested, all in the city of Newark and the State of New Jersey, on
this 29th day of April, 1998.
    

                   THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
    
Attest:  /s/ CAREN CUNNINGHAM                     By: /s/ ESTHER H. MILNES 
         --------------------------                   --------------------------
         Caren Cunningham                             Esther H. Milnes
         Secretary                                       
                                                      Vice President 
                                                          

   
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 27 to the Registration Statement has been signed below by the
following directors and officers of The Prudential Insurance Company of America
in their capacities and on the date appearing below.
    

         SIGNATURE AND TITLE                                      DATE
                                                            
/s/* ARTHUR C. RYAN                      )                  April 29, 1998
- ----------------------------------       )                      
Arthur C. Ryan                           )
Chairman of the Board, President         )
and Chief Executive Officer              )
                                         )                              
                                         ) *By: /s/ CAREN CUNNINGHAM    
                                         )      ---------------------   
/s/* FRANKLIN E. AGNEW                   )      Caren Cunningham       
- ----------------------------------       )      (Attorney-in-Fact)      
                                         )
Franklin E. Agnew                        )
Director                                 )
                                         )      
                                         )
/s/* FREDERIC K. BECKER                  )
- ----------------------------------       )
                                         )
Frederic K. Becker                       )
Director                                 )
                                         )
                                         )
/s/* MARTIN A. BERKOWITZ                 )
- ----------------------------------       )
                                         )
Martin A. Berkowitz                      )
Senior Vice President and Comptroller    )
                                         )  
                                         )
/s/* RICHARD J. CARBONE                  )
- ----------------------------------       )
                                         )
Richard J. Carbone                       )
Chief Financial Officer                  )


                                       C-7
<PAGE>
 
         SIGNATURE AND TITLE                                      DATE

   
                                                            April 29, 1998


/s/* JAMES G. CULLEN                     )
- ------------------------------------     )
James G. Cullen                          )
Director                                 )
                                         )
                                         )
/s/* CAROLYNE K. DAVIS                   )
- ----------------------------------       )
Carolyne K. Davis                        )
Director                                 )
                                         )
                                         )
/s/* ROGER A. ENRICO                     )
- ----------------------------------       )
Roger A. Enrico                          )
Director                                 )
                                         )
                                         )
/s/* ALLAN D. GILMOUR                    )
- ----------------------------------       )
Allan D. Gilmour                         )
Director                                 )
                                         )
                                         )
/s/* WILLIAM H. GRAY, III                )
- ----------------------------------       )
William H. Gray, III                     )
Director                                 ) *By: /s/ CAREN CUNNINGHAM
                                         )      ----------------------
                                         )      Caren Cunningham
/s/* JON F. HANSON                       )      (Attorney-in-Fact)
- ----------------------------------       ) 
Jon F. Hanson                            ) 
Director                                 ) 
                                         ) 
                                         ) 
/s/* GLEN H. HINER, JR.                  ) 
- ----------------------------------       ) 
Glen H. Hiner, Jr.                       ) 
Director                                 ) 
                                         ) 
                                         ) 
/s/* CONSTANCE J. HORNER                 ) 
- ----------------------------------       ) 
Constance J. Horner                      ) 
Director                                 ) 
                                         ) 
                                         ) 
/s/* GAYNOR KELLEY                       ) 
- ----------------------------------       ) 
Gaynor Kelley                            ) 
Director                                 )                              
                                         ) 
                                         ) 
/s/* BURTON G. MALKIEL                   ) 
- ----------------------------------       ) 
Burton G. Malkiel                        ) 
Director                                 ) 
                                         ) 
                                           
    


                                      C-8
<PAGE>
 
         SIGNATURE AND TITLE                                      DATE

                                                               
                                                            April 29, 1998
/s/* IDA F.S. SCHMERTZ                   )                 
- ----------------------------------       )
Ida F.S. Schmertz                        )
Director                                 )
                                         )
                                         )
/s/* CHARLES R. SITTER                   )
- ----------------------------------       )
Charles R. Sitter                        )
Director                                 )
                                         )
                                         )
/s/* DONALD L. STAHELI                   )
- ----------------------------------       )
Donald L. Staheli                        )
Director                                 )
                                         )
                                         )
/s/* RICHARD M. THOMSON                  )
- ----------------------------------       )
Richard M. Thomson                       )
Director                                 )
                                         )
                                         )
/s/* JAMES A. UNRUH                      )
- ----------------------------------       )
James A. Unruh                           )
Director                                 )
                                         )
                                         )
/s/* P. ROY VAGELOS, M.D.                )
- ----------------------------------       )
P. Roy Vagelos, M.D.                     ) *By: /s/ CAREN CUNNINGHAM
Director                                 )      --------------------
                                         )      Caren Cunningham
                                         )      (Attorney-in-Fact)
/s/* STANLEY C. VAN NESS                 )
- ----------------------------------       )
Stanley C. Van Ness                      )
Director                                 )
                                         )
                                         )
/s/* PAUL A. VOLCKER                     )
- ----------------------------------       )
Paul A. Volcker                          )
Director                                 )
                                         )
                                         )
/s/* JOSEPH H. WILLIAMS                  )
- ----------------------------------       )
Joseph H. Williams                       )
Director                                 )


                                       C-9
<PAGE>
 
                                   SIGNATURES
   
                           PRUDENTIAL'S GIBRALTAR FUND, INC.

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that 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, and has caused this Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized, and its seal hereunto
affixed and attested, all in the city of Newark and the State of New Jersey, on
this 29th day of April, 1998.
    
   
                                       PRUDENTIAL'S GIBRALTAR FUND, INC.


                                          
                                          By: /s/ MENDEL A. MELZER
                                              ----------------------------------
                                              Mendel A. Melzer
                                              Chairman of the Board of Directors
     

   
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 27 to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
    

         SIGNATURE AND TITLE                                      DATE

                                                               
                                                            April 29, 1998
                                                                


/s/ MENDEL A. MELZER                     )
- --------------------------------         )
                                         )
Mendel A. Melzer                         )
                                         )
Chairman of the Board of Directors,      )
Principal Executive Officer and          )
Principal Financial Officer              )
                                         )
                                         )
                                         )
/s/ JONATHAN M. GREENE                   )
- --------------------------------         )
Jonathan M. Greene                       ) *By: /s/ CAREN CUNNINGHAM 
President and Director                   )      ----------------------
                                         )      Caren Cunningham  
                                         )      (Attorney-in-Fact)
                                         )
/s/ GRACE TORRES                         )
- --------------------------------         ) 
Grace Torres                             ) 
Treasurer and Principal                  ) 
Financial and Accounting Officer         ) 
                                         ) 
                                         )
/s/* SAUL K. FENSTER                     )
- --------------------------------         )
Saul K. Fenster                          )
Director                                 )
                                         )
                                         )
/s/* W. SCOTT MCDONALD, JR.              )
- --------------------------------         )
W. Scott McDonald, Jr.                   )
Director                                 )
                                         )
                                         )
/s/* JOSEPH WEBER                        )
- --------------------------------         )
Joseph Weber                             )
Director                                 )




                                      C-10
<PAGE>
 
ITEM 25.     PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
    
             Prudential is a mutual life insurance company incorporated
             under the laws of the State of New Jersey.      
    
             All of the shares of Prudential's Gibraltar Fund, Inc. are held by
             three separate accounts of The Prudential Insurance Company of
             America: Prudential's Investment Plan Account, Prudential's Annuity
             Plan Account and Prudential's Annuity Plan Account-2. Prudential
             also holds directly and in certain other separate accounts shares
             of The Prudential Series Fund, Inc., a Maryland corporation. The
             balance of the shares of Prudential Series Fund, Inc. are held in
             separate accounts of Pruco Life Insurance Company, a direct wholly-
             owned subsidiary of Prudential, and Pruco Life Insurance Company of
             New Jersey, an indirect wholly-owned subsidiary 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
             the investment companies are voted in accordance with the
             instructions of persons having an interest in the unit investment
             trusts, and Prudential, Pruco Life Insurance Company and Pruco Life
             Insurance Company of New Jersey will 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-2, 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.      

    
             Prudential is a mutual insurance company. Its financial
             statements are prepared in accordance with statutory requirements.
     

   
             The subsidiaries of Prudential and short descriptions of each are
             listed under Item 25 in Post-Effective Amendment No. 34 to the
             Registration Statement of The Prudential Series Fund, Inc.,
             Registration No. 2-80896, the text of which is hereby incorporated
             by reference.
    

ITEM 26.     NUMBER OF HOLDERS OF SECURITIES

   
             The registrant was organized to serve as the investment medium for
             separate accounts of Prudential which issue certain variable
             annuity contracts to the public. The public offering commenced on
             January 2, 1970. As of December 31, 1997, there were 29,771,740
             shares of Common Stock outstanding, distributed as follows:
    

             TITLE OF CLASS                  HOLDER                     SHARES
   
              Common Stock    Prudential's Investment Plan Account    24,171,408
                              Prudential's Annuity Plan Account          225,153
                              Prudential's Annuity Plan Account-2      5,375,179
                                                                      ----------
                                                                      29,771,740
    

ITEM 27.   INDEMNIFICATION OF DIRECTORS AND OFFICERS

   
             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.
    

                                      C-11
<PAGE>
 
         

   
           New Jersey, being the state of organization of 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 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 28.   BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
    
           Prudential is involved in insurance, reinsurance, securities, pension
           services, real estate and banking.
     
    
           The Prudential Investment Corporation (PIC) is the investment unit of
           Prudential and actively engages 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 of Prudential's Directors are
           listed in the Prospectus in this Post-Effective Amendment to the
           Registration Statement, which is hereby incorporated by reference.
    

ITEM 29.   PRINCIPAL UNDERWRITERS
    
           (a) Incorporated by reference to Item 29(a) of Post-Effective
               Amendment No. 34 to Form N-1A, Registration No. 2-80896, filed
               April 24, 1998 on behalf of The Prudential Series Fund, Inc.     
   
           (b) Incorporated by reference to Item 29(b) of Post-Effective
               Amendment No. 34 to Form N-1A, Registration No. 2-80896, filed
               April 24, 1998 on behalf of The Prudential Series Fund, Inc.
    

           (c) Not applicable.

                                      C-12
<PAGE>
 
     
ITEM 30.   LOCATION OF ACCOUNTS AND RECORDS

           All accounts, books and other documents required to be maintained by
           Section 31(a) of the Investment Company Act of 1940 and the rules
           promulgated thereunder are maintained by the Registrant, Prudential
           Plaza, Newark, New Jersey 07102-3777; the Registrant's Investment
           Advisor, The Prudential Insurance Company of America, Prudential
           Plaza, Newark, New Jersey, 07102-3777; or the Registrant's Custodian,
           Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
           Missouri 64104-1716.      

ITEM 31.   MANAGEMENT SERVICES

           Not applicable.

ITEM 32.   UNDERTAKINGS

           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.


                                      C-13
<PAGE>
 
   
                                  EXHIBIT INDEX

<TABLE> 
<S>             <C>                                                             <C> 
(x)-(xvi)       Powers of Attorney for Non-Interested Directors of              Page C-15
                Prudential's Gibraltar Fund, Inc.                                    
                                                                                 
(x)-(xvii)(a)   Consent of Price Waterhouse LLP, independent accountants        Page C-18
                                                                                 
(x)-(xvii)(b)   Consent of Deloitte & Touche LLP, independent auditors          Page C-19
                                                                                 
                                                                                 
27.1            Financial Data Schedule - Prudential's Annuity Plan                
                Account-2                                                       Page C-20
                                                                                 
27.2            Financial Data Schedule - Prudential's Gibraltar Fund           Page C-21
</TABLE> 
    

                                     C-14

<PAGE>
 
                                                               EXHIBIT (x)-(xvi)

                               POWER OF ATTORNEY
                               -----------------
                                        



Know all men by these presents:

     That I, Joseph Weber, Member of the Board of Prudential's Gibraltar Fund,
Inc., 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 11/th/ day of March,
1998.

                                    /s/ Joseph Weber
                                    ----------------
                                    Joseph Weber



State of New Jersey     )
                        ) SS
County of Essex         )

          On this 11/th/ 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-15
<PAGE>
 
                                                               EXHIBIT (x)-(xvi)

                               POWER OF ATTORNEY
                               -----------------
                                        



Know all men by these presents:

     That I, Saul Fenster, Member of the Board of Prudential's Gibraltar Fund,
Inc., 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 11/th/ day of March,
1998.

                                    /s/ Saul Fenster
                                    ----------------
                                    Saul Fenster



State of New Jersey     )
                        ) SS
County of Essex         )

          On this 11/th/ 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-16
<PAGE>
 
                                                               EXHIBIT (x)-(xvi)

                               POWER OF ATTORNEY
                               -----------------



Know all men by these presents:

          That I, W. Scott McDonald, Jr., Member of the Board of Prudential's
Gibraltar Fund, Inc., 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 11/th/ day of
March, 1998.

                                         /s/ W. Scott McDonald, Jr.
                                         ------------------------- 
                                         W. Scott McDonald, Jr.



State of New Jersey     )
                        ) SS
County of Essex         )

     On this 11/th/ 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-17

<PAGE>
 
                                                           EXHIBIT (x)-(xvii)(a)

                                    CONSENT



CONSENT OF INDEPENDENT ACCOUNTANTS

    
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 27 to the registration statement on Form S-6 (the
"Registration Statement") of our report dated March 20, 1998, relating to the
financial statements of Prudential's Annuity Plan Account-2, which appears in
such Prospectus.     

    
We also consent to the use in the Prospectus constituting part of this
Registration Statement of our report dated February 11, 1998, relating to the
financial statements and financial highlights of the Prudential's Gibraltar
Fund, Inc., which appears in such Prospectus.     

    
We also consent to the use in the Prospectus constituting part of this
Registration Statement of our report dated March 5, 1998, relating to the
consolidated financial statements of Prudential Insurance Company of America,
which appears in such Prospectus.    

We also consent to the references to us under the headings "Financial
Highlights" and "Experts" in the Prospectus.



    
/s/ PRICE WATERHOUSE LLP      

    
New York, New York
April 24, 1998     

                                     C-18

<PAGE>
 
                                                           EXHIBIT (x)-(xvii)(b)


    
INDEPENDENT AUDITORS' CONSENT      

    
We consent to the use in this Post-Effective Amendment No. 27 to Registration
Statement No. 2-59232 on Form S-6 of Prudential's Annuity Plan 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 appearing in the Prospectus, which is a part
of such Registration Statement, and to the reference to us under the heading
"Experts" in such Prospectus.      


/s/ Deloitte & Touche LLP

Parsippany, New Jersey
April 24, 1998

                                     C-19

<TABLE> <S> <C>

<PAGE>
 
<ARTICLE> 6
<SERIES>
   <NUMBER> 001
<NAME> PRUDENTIAL ANNUITY PLAN ACCOUNT - 2
       
<S>                             <C>
<PERIOD-TYPE>                              YEAR
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-END>                               DEC-31-1997
<INVESTMENTS-AT-COST>                      $51,006,076
<INVESTMENTS-AT-VALUE>                     $58,843,374
<RECEIVABLES>                                       $0
<ASSETS-OTHER>                               $(14,965)
<OTHER-ITEMS-ASSETS>                                $0
<TOTAL-ASSETS>                             $58,828,409
<PAYABLE-FOR-SECURITIES>                             0
<SENIOR-LONG-TERM-DEBT>                              0
<OTHER-ITEMS-LIABILITIES>                            0
<TOTAL-LIABILITIES>                                  0
<SENIOR-EQUITY>                                      0
<PAID-IN-CAPITAL-COMMON>                             0
<SHARES-COMMON-STOCK>                        5,375,179
<SHARES-COMMON-PRIOR>                                0
<ACCUMULATED-NII-CURRENT>                            0
<OVERDISTRIBUTION-NII>                               0
<ACCUMULATED-NET-GAINS>                              0
<OVERDISTRIBUTION-GAINS>                             0
<ACCUM-APPREC-OR-DEPREC>                             0
<NET-ASSETS>                               $58,828,409 
<DIVIDEND-INCOME>                           $1,016,408
<INTEREST-INCOME>                                    0
<OTHER-INCOME>                             $10,695,864
<EXPENSES-NET>                                $382,418
<NET-INVESTMENT-INCOME>                       $633,990
<REALIZED-GAINS-CURRENT>                    $1,168,584
<APPREC-INCREASE-CURRENT>                 $(2,547,937)  
<NET-CHANGE-FROM-OPS>                       $9,950,501 
<EQUALIZATION>                                       0
<DISTRIBUTIONS-OF-INCOME>                            0 
<DISTRIBUTIONS-OF-GAINS>                             0 
<DISTRIBUTIONS-OTHER>                                0
<NUMBER-OF-SHARES-SOLD>                              0
<NUMBER-OF-SHARES-REDEEMED>                          0 
<SHARES-REINVESTED>                                  0 
<NET-CHANGE-IN-ASSETS>                      $1,878,405
<ACCUMULATED-NII-PRIOR>                              0
<ACCUMULATED-GAINS-PRIOR>                            0
<OVERDISTRIB-NII-PRIOR>                              0
<OVERDIST-NET-GAINS-PRIOR>                           0
<GROSS-ADVISORY-FEES>                                0
<INTEREST-EXPENSE>                                   0
<GROSS-EXPENSE>                                      0
<AVERAGE-NET-ASSETS>                                 0
<PER-SHARE-NAV-BEGIN>                                0
<PER-SHARE-NII>                                      0
<PER-SHARE-GAIN-APPREC>                              0
<PER-SHARE-DIVIDEND>                                 0 
<PER-SHARE-DISTRIBUTIONS>                            0  
<RETURNS-OF-CAPITAL>                                 0
<PER-SHARE-NAV-END>                                  0
<EXPENSE-RATIO>                                      0
<AVG-DEBT-OUTSTANDING>                               0
<AVG-DEBT-PER-SHARE>                                 0
        


</TABLE>

<TABLE> <S> <C>

<PAGE>
 
<ARTICLE> 6
<SERIES>
   <NUMBER> 002
   <NAME> PRUDENTIAL GIBRALTAR FUND
       
<S>                             <C>
<PERIOD-TYPE>                              YEAR
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-START>                             JAN-01-1997
<PERIOD-END>                               DEC-31-1997
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