PRUDENTIAL ALLOCATION FUND, 485BPOS, 1996-09-27

PRUDENTIAL ALLOCATION FUND
485BPOS, 1996-09-27

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<PAGE>

As filed with the Securities and Exchange Commission on September 27, 1996

Securities Act Registration No. 33-12531
Investment Company Act Registration No. 811-5055
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/

PRE-EFFECTIVE AMENDMENT NO. / /

POST-EFFECTIVE AMENDMENT NO. 18 /X/

AND/OR

REGISTRATION STATEMENT UNDER THE

INVESTMENT COMPANY ACT OF 1940 /X/

AMENDMENT NO. 20 /X/

(CHECK APPROPRIATE BOX OR BOXES)
--------------

PRUDENTIAL ALLOCATION FUND

(Exact name of registrant as specified in charter)

ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292

(Address of Principal Executive Offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 214-1250

S. JANE ROSE, ESQ.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(NAME AND ADDRESS OF AGENT FOR SERVICE)

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

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

/ / immediately upon filing pursuant to paragraph (b)

/X/ on September 27, 1996 pursuant to paragraph (b)

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

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

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

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

If appropriate, check the following box:

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

Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant has
previously registered an indefinite number of shares of beneficial interest, par
value $.01 per share. The Registrant filed a notice for its fiscal year ended
July 31, 1996 on or about September 26, 1996.

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

<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------------------------------------------------------------------ -------------------------------------------
<S> <C> <C> <C>
PART A
Item 1. Cover Page.................................................. Cover Page
Item 2. Synopsis.................................................... Fund Expenses
Item 3. Condensed Financial Information............................. Fund Expenses; Financial Highlights;
General Information
Item 4. General Description of Registrant........................... Cover Page; How the Fund Invests; General
Information
Item 5. Management of the Fund...................................... Financial Highlights; How the Fund is
Managed; General Information
Item 5A. Management's Discussion of Fund Performance................. Financial Highlights
Item 6. Capital Stock and Other Securities.......................... Taxes, Dividends and Distributions; General
Information
Item 7. Purchase of Securities Being Offered........................ Shareholder Guide; How the Fund Values its
Shares
Item 8. Redemption or Repurchase.................................... Shareholder Guide; General Information
Item 9. Pending Legal Proceedings................................... Not Applicable
PART B
Item 10. Cover Page.................................................. Cover Page
Item 11. Table of Contents........................................... Table of Contents
Item 12. General Information and History............................. General Information; Organization and
Capitalization
Item 13. Investment Objectives and Policies.......................... Investment Objectives and Policies;
Investment Restrictions
Item 14. Management of the Fund...................................... Trustees and Officers; Manager; Distributor
Item 15. Control Persons and Principal Holders of Securities......... Not Applicable
Item 16. Investment Advisory and Other Services...................... Manager; Distributor; Custodian, Transfer
and Dividend Disbursing Agent and
Independent Accountants
Item 17. Brokerage Allocation and Other Practices.................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities.......................... Not Applicable
Item 19. Purchase, Redemption and Pricing of Securities Being Purchase and Redemption of Fund Shares;
Offered..................................................... Shareholder Investment Account; Net Asset
Value
Item 20. Tax Status.................................................. Taxes
Item 21. Underwriters................................................ Distributor
Item 22. Calculation of Performance Data............................. Performance Information
Item 23. Financial Statements........................................ Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C of
this Registration Statement.
</TABLE>

<PAGE>
PRUDENTIAL ALLOCATION FUND

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

PROSPECTUS DATED SEPTEMBER 27, 1996

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

Prudential Allocation Fund (the Fund) is an open-end, diversified, management
investment company comprised of two separate portfolios -- the Balanced
Portfolio and the Strategy Portfolio (the Portfolios). The investment objective
of the Balanced Portfolio is to achieve a high total investment return
consistent with moderate risk. The investment objective of the Strategy
Portfolio is to achieve a high total investment return consistent with
relatively higher risk than the Balanced Portfolio. While each Portfolio will
seek to achieve its objective by investing in a diversified portfolio of money
market instruments, debt obligations and equity securities (including securities
convertible into equity securities), the Portfolios will differ with respect to
the proportions of investments in debt and equity securities, the quality and
maturity of debt securities purchased and the price volatility of equity
securities purchased. It is expected that the Strategy Portfolio will offer
investors a higher potential return with a correspondingly higher risk of loss
than the Balanced Portfolio. There can be no assurance that the Portfolios'
investment objectives will be achieved. See "How the Fund Invests -- Investment
Objectives and Policies." The Fund's address is One Seaport Plaza, New York, New
York 10292, and its telephone number is (800) 225-1852.

This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated September 27, 1996, which information
is incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.

- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.

WHAT IS PRUDENTIAL ALLOCATION FUND?
Prudential Allocation Fund is a mutual fund. A mutual fund pools the resources
of investors by selling its shares to the public and investing the proceeds of
such sale in a portfolio of securities designed to achieve its investment
objective. Technically, the Fund is an open-end, diversified, management
investment company.

WHAT ARE THE FUND'S INVESTMENT OBJECTIVES AND RISKS?

The Fund is comprised of two separate portfolios -- the Balanced Portfolio and
the Strategy Portfolio. The investment objective of the Balanced Portfolio is to
achieve a high total investment return consistent with moderate risk. The
investment objective of the Strategy Portfolio is to achieve a high total
investment return consistent with relatively higher risk than the Balanced
Portfolio. Each Portfolio will seek to achieve its objective by investing in a
diversified portfolio of equity securities, debt obligations and money market
instruments. There can be no assurance that the Portfolios' objectives will be
achieved. See "How the Fund Invests -- Investment Objectives and Policies" at
page 12.

RISK FACTORS AND SPECIAL CHARACTERISTICS

The Balanced Portfolio may invest up to 10% of its total assets in securities
rated Ba or lower by Moody's Investors Service (Moody's) or BB or lower by
Standard & Poor's Ratings Group (S&P). The Strategy Portfolio, under normal
conditions, will purchase debt securities of a lesser quality that will, in the
aggregate, have a weighted average maturity greater than that of the Balanced
Portfolio. The Strategy Portfolio may invest up to 25% of its total assets in
securities rated Ba or lower by Moody's or BB or lower by S&P. Each Portfolio
will also purchase equity securities of smaller, faster growing companies which
are subject to greater price volatility than equity securities of major,
established companies. See "How the Fund Invests -- Investment Objectives and
Policies" at page 12. In addition, each Portfolio may engage in various hedging
strategies, including utilizing derivatives. These activities may be considered
speculative and may result in higher risks and costs to the Portfolios. See "How
the Fund Invests -- Hedging and Return Enhancement Strategies -- Risks of
Hedging and Return Enhancement Strategies" at page 19.

WHO MANAGES THE FUND?

Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager of
the Fund and is compensated for its services at an annual rate of .65 of 1% of
the average net assets of each Portfolio. As of August 31, 1996, PMF served as
manager or administrator to 60 investment companies, including 38 mutual funds,
with aggregate assets of approximately $52 billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Fund under a Subadvisory Agreement with
PMF. See "How the Fund is Managed -- Manager" at page 22.

WHO DISTRIBUTES THE FUND'S SHARES?

Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class A, Class B, Class C and Class Z shares and is
paid a distribution and service fee with respect to Class A shares which is
currently being charged at the annual rate of .25 of 1% of the average daily net
assets of the Class A shares and is paid a distribution and service fee with
respect to Class B and Class C shares at an annual rate of 1% of the average
daily net assets of each of the Class B and Class C shares. Prudential
Securities incurs the expense of distributing the Fund's Class Z shares under a
Distribution Agreement with the Fund, none of which is reimbursed or paid for by
the Fund.

See "How the Fund is Managed -- Distributor" at page 23.

2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?

The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for Class A, Class B and Class C shares. Class Z shares are not subject to any
minimum investment requirements. There is no minimum investment requirement for
certain retirement and employee savings plans or custodial accounts for the
benefit of minors. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Guide -- How to Buy Shares of the Fund" at page 29 and "Shareholder Guide --
Shareholder Services" at page 38.

HOW DO I PURCHASE SHARES?

You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at
the net asset value per share (NAV) next determined after receipt of your
purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). Class Z shares are
offered to a limited group of investors at net asset value without any sales
charge. See "How the Fund Values its Shares" at page 25 and "Shareholder Guide
- -- How to Buy Shares of the Fund" at page 29.

WHAT ARE MY PURCHASE ALTERNATIVES?

The Fund offers four classes of shares:

- Class A Shares: Sold with an initial sales charge of up to 5% of the
offering price.

- Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from
5% to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class
B shares will automatically convert to Class A shares
(which are subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.

- Class C Shares: Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to higher
ongoing distribution-related expenses than Class A shares
but do not convert to another class.

- Class Z Shares: Sold without either an initial or contingent deferred
sales charge to a limited group of investors. Class Z
shares are not subject to any ongoing service or
distribution-related expenses.

See "Shareholder Guide -- Alternative Purchase Plan" at page 30.

HOW DO I SELL MY SHARES?

You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide -- How to Sell Your Shares" at page 33.

HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?

Each Portfolio expects to pay dividends of net investment income, if any,
quarterly and make distributions of any net capital gains at least annually.
Dividends and distributions will be automatically reinvested in additional
shares of the Portfolio at NAV without a sales charge unless you request that
they be paid to you in cash. See "Taxes, Dividends and Distributions" at page
26.

3
<PAGE>
FUND EXPENSES
(FOR EACH PORTFOLIO)

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

<TABLE>
<CAPTION>
STRATEGY
BALANCED PORTFOLIO PORTFOLIO
---------------------------------------------------- -----------
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B CLASS C CLASS Z CLASS A
(as a percentage of average net assets) SHARES SHARES SHARES SHARES SHARES
------------ ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Management Fees......................................... .65% .65% .65% .65% .65%
12b-1 Fees.............................................. .25++ 1.00 1.00 None .25++
Other Expenses.......................................... .30 .30 .30 .30 .37
--- --- --- ----- -----
Total Fund Operating Expenses........................... 1.20% 1.95% 1.95% .95% 1.27%
--- --- --- ----- -----
--- --- --- ----- -----

ANNUAL FUND OPERATING EXPENSES CLASS B CLASS C CLASS Z
(as a percentage of average net assets) SHARES SHARES SHARES
------------ ------------ ----------
<S> <C> <C> <C>
Management Fees......................................... .65% .65% .65%
12b-1 Fees.............................................. 1.00 1.00 None
Other Expenses.......................................... .37 .37 .37
--- --- -----
Total Fund Operating Expenses........................... 2.02% 2.02% 1.02%
--- --- -----
--- --- -----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE (BALANCED PORTFOLIO) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of
each time period:
Class A........................................................ $ 62 $ 86 $113 $188
Class B........................................................ $ 70 $ 91 $115 $199
Class C........................................................ $ 30 $ 61 $105 $227
Class Z**...................................................... $ 10 $ 30 $ 53 $117
You would pay the following expenses on the same investment,
assuming no redemption:
Class A........................................................ $ 62 $ 86 $113 $188
Class B........................................................ $ 20 $ 61 $105 $199
Class C........................................................ $ 20 $ 61 $105 $227
Class Z**...................................................... $ 10 $ 30 $ 53 $117
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE (STRATEGY PORTFOLIO) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Class A.................................................................. $ 62 $ 88 $116 $196
Class B.................................................................. $ 71 $ 93 $119 $206
Class C.................................................................. $ 31 $ 63 $109 $235
Class Z**................................................................ $ 10 $ 32 $ 56 $125
You would pay the following expenses on the same investment, assuming no
redemption:
Class A.................................................................. $ 62 $ 88 $116 $196
Class B.................................................................. $ 21 $ 63 $109 $206
Class C.................................................................. $ 21 $ 63 $109 $235
Class Z**................................................................ $ 10 $ 32 $ 56 $125
The above example is based on data for the Fund's fiscal year ended July 31, 1996. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various costs and expenses that an investor in each
Portfolio of the Fund will bear, whether directly or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Fund is Managed." "Other Expenses" includes operating expenses of the Fund, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer agency and custodian fees.
<FN>
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide -- Conversion Feature
-- Class B Shares."
** Estimated based on expenses expected to have been incurred if Class Z
shares had been in existence throughout the fiscal year ended July 31,
1996.
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Fund may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation is
imposed on each class of a Portfolio of the Fund rather than on a per
shareholder basis. Therefore, long-term shareholders of the Fund may pay
more in total sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares. See "How the Fund is Managed --
Distributor."
++ Although the Class A Distribution and Service Plan provides that the Fund
may pay a distribution fee of up to .30 of 1% per annum of the average
daily net assets of the Class A shares of each Portfolio, the Distributor
has agreed to limit its distribution fees with respect to the Class A
shares of each Portfolio to no more than .25 of 1% of the average daily
net assets of the Class A shares for the fiscal year ending July 31, 1997.
Total Fund Operating Expenses without such limitation would be 1.25% and
1.32% of the Balanced Portfolio and Strategy Portfolio, respectively. See
"How the Fund is Managed -- Distributor."
</TABLE>

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

The following financial highlights, with respect to the five year period
ended July 31, 1996, have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The financial highlights
contain selected data for a Class A share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide -- Shareholder
Services -- Reports to Shareholders."

BALANCED PORTFOLIO

<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------
YEAR ENDED JULY 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................................ $ 12.04 $ 11.12 $ 11.75 $ 11.00 $ 10.73
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................................... .31 .34 .33 .43 .44
Net realized and unrealized gain (loss) on investment
transactions....................................................... .28 1.11 (.05) 1.16 .81
--------- --------- --------- --------- ---------
Total from investment operations.................................. .59 1.45 .28 1.59 1.25
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net investment income................................ (.29) (.33) (.37) (.37) (.44)
Distributions from net realized gains on investment and foreign
currency transactions.............................................. (.49) (.20) (.54) (.47) (.54)
--------- --------- --------- --------- ---------
Total distributions............................................... (.78) (.53) (.91) (.84) (.98)
--------- --------- --------- --------- ---------
Net asset value, end of period...................................... $ 11.85 $ 12.04 $ 11.12 $ 11.75 $ 11.00
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL RETURN (C):................................................... 4.89% 13.67% 2.39% 15.15% 12.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..................................... $ 262,096 $ 119,829 $ 37,512 $ 22,605 $ 10,944
Average net assets (000)............................................ $ 246,609 $ 69,754 $ 29,875 $ 15,392 $ 7,103
Ratios to average net assets:
Expenses, including distribution fees............................. 1.20% 1.22% 1.23% 1.17% 1.29%
Expenses, excluding distribution fees............................. .95% .97% 1.00% .97% 1.09%
Net investment income............................................. 2.53% 2.90% 2.84% 3.88% 3.97%
Portfolio turnover rate............................................. 97% 201% 108% 83% 105%
Average commission rate per share................................... $ .0569 N/A N/A N/A N/A

JANUARY 22,
1990 (A)
THROUGH
JULY 31,
1991 1990
--------- --------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................................ $ 10.23 $ 9.83
--------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................................... .44 .26
Net realized and unrealized gain (loss) on investment
transactions....................................................... .73 .38
--------- ------
Total from investment operations.................................. 1.17 .64
--------- ------
LESS DISTRIBUTIONS
Dividends from net investment income................................ (.44) (.24)
Distributions from net realized gains on investment and foreign
currency transactions.............................................. (.23) --
--------- ------
Total distributions............................................... (.67) (.24)
--------- ------
Net asset value, end of period...................................... $ 10.73 $ 10.23
--------- ------
--------- ------
TOTAL RETURN (C):................................................... 11.99% 6.59%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..................................... $ 4,408 $ 1,944
Average net assets (000)............................................ $ 2,747 $ 1,047
Ratios to average net assets:
Expenses, including distribution fees............................. 1.38% 1.29%(b)
Expenses, excluding distribution fees............................. 1.18% 1.09%(b)
Net investment income............................................. 4.44% 5.04%(b)
Portfolio turnover rate............................................. 137% 106%
Average commission rate per share................................... N/A N/A
<FN>
- ----------------------------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>

5
<PAGE>

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B SHARES)

The following financial highlights, with respect to the five year period
ended July 31, 1996, have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The financial highlights
contain selected data for a Class B share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide -- Shareholder
Services -- Reports to Shareholders."

BALANCED PORTFOLIO

<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------------------------------
YEAR ENDED JULY 31,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............ $ 12.00 $ 11.09 $ 11.72 $ 10.98 $ 10.71 $ 10.22 $ 10.21
--------- --------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................... .21 .26 .24 .34 .35 .36 .45
Net realized and unrealized gain (loss) on
investment transactions........................ .28 1.10 (.05) 1.16 .82 .73 .18
--------- --------- --------- --------- --------- --------- ---------
Total from investment operations.............. .49 1.36 .19 1.50 1.17 1.09 .63
--------- --------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net investment income............ (.20) (.25) (.28) (.29) (.36) (.37) (.52)
Distributions from net realized gains on
investment and foreign currency transactions... (.49) (.20) (.54) (.47) (.54) (.23) (.10)
--------- --------- --------- --------- --------- --------- ---------
Total distributions........................... (.69) (.45) (.82) (.76) (.90) (.60) (.62)
--------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period.................. $ 11.80 $ 12.00 $ 11.09 $ 11.72 $ 10.98 $ 10.71 $ 10.22
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN (D):............................... 4.05% 12.79% 1.61% 14.27% 11.48% 11.13% 6.44%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................. $ 420,465 $ 392,291 $ 445,609 $ 321,831 $ 225,995 $ 162,281 $ 154,917
Average net assets (000)........................ $ 437,792 $ 409,419 $ 392,133 $ 267,340 $ 189,358 $ 149,907 $ 143,241
Ratios to average net assets:
Expenses, including distribution fees......... 1.95% 1.97% 2.00% 1.97% 2.09% 2.16% 2.07%
Expenses, excluding distribution fees......... .95% .97% 1.00% .97% 1.09% 1.16% 1.08%
Net investment income......................... 1.78% 2.34% 2.08% 3.04% 3.25% 3.55% 4.42%
Portfolio turnover rate......................... 97% 201% 108% 83% 105% 137% 106%
Average commission rate per share............... $ .0569 N/A N/A N/A N/A N/A N/A

SEPTEMBER 15,
1987(A)
THROUGH
JULY 31,
1989 1988(B)
--------- --------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............ $ 9.43 $ 10.00
--------- --------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................... .52 .32
Net realized and unrealized gain (loss) on
investment transactions........................ .73 (.62)
--------- --------------
Total from investment operations.............. 1.25 (.30)
--------- --------------
LESS DISTRIBUTIONS
Dividends from net investment income............ (.47) (.25)
Distributions from net realized gains on
investment and foreign currency transactions... -- (.02)
--------- --------------
Total distributions........................... (.47) (.27)
--------- --------------
Net asset value, end of period.................. $ 10.21 $ 9.43
--------- --------------
--------- --------------
TOTAL RETURN (D):............................... 13.73% (2.95)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................. $ 132,631 $ 149,472
Average net assets (000)........................ $ 139,009 $ 113,774
Ratios to average net assets:
Expenses, including distribution fees......... 2.09% 2.08%(c)
Expenses, excluding distribution fees......... 1.08% 1.11%(c)
Net investment income......................... 5.47% 4.22%(c)
Portfolio turnover rate......................... 137% 112%
Average commission rate per share............... N/A N/A
<FN>
- ----------------------------------
(a) Commencement of offering of Class B shares.

(b) On March 1, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.

(d) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>

6
<PAGE>

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS C SHARES)

The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class C share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide -- Shareholder Services -- Reports to Shareholders."

BALANCED PORTFOLIO

<TABLE>
<CAPTION>
CLASS C
----------
YEAR
ENDED
JULY 31,
1996
----------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................................................................... $ 12.00
----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.......................................................................................... .21
Net realized and unrealized gain on investment transactions.................................................... .28
----------
Total from investment operations............................................................................. .49
----------
LESS DISTRIBUTIONS
Dividends from net investment income........................................................................... (.20)
Distributions from net realized gains on investment and foreign currency transactions.......................... (.49)
----------
Total distributions.......................................................................................... (.69)
----------
Net asset value, end of period................................................................................. $ 11.80
----------
----------
TOTAL RETURN (C):.............................................................................................. 4.05%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................................................................................ $ 3,525
Average net assets (000)....................................................................................... $ 2,444
Ratios to average net assets:
Expenses, including distribution fees........................................................................ 1.95%
Expenses, excluding distribution fees........................................................................ .95%
Net investment income........................................................................................ 1.78%
Portfolio turnover rate........................................................................................ 97%
Average commission rate per share.............................................................................. $ .0569

AUGUST
1,
1994(A)
THROUGH
JULY
31,
1995
-------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................................................................... $11.12
-------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.......................................................................................... .21
Net realized and unrealized gain on investment transactions.................................................... 1.12
-------
Total from investment operations............................................................................. 1.33
-------
LESS DISTRIBUTIONS
Dividends from net investment income........................................................................... (.25)
Distributions from net realized gains on investment and foreign currency transactions.......................... (.20)
-------
Total distributions.......................................................................................... (.45)
-------
Net asset value, end of period................................................................................. $12.00
-------
-------
TOTAL RETURN (C):.............................................................................................. 12.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................................................................................ $3,046
Average net assets (000)....................................................................................... $ 920
Ratios to average net assets:
Expenses, including distribution fees........................................................................ 2.04%(b)
Expenses, excluding distribution fees........................................................................ 1.04%(b)
Net investment income........................................................................................ 2.20%(b)
Portfolio turnover rate........................................................................................ 201%
Average commission rate per share.............................................................................. N/A
<FN>
- ------------------------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>

7
<PAGE>

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
(CLASS Z SHARES)

The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class Z share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the period indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide -- Shareholder Services -- Reports to Shareholders."

BALANCED PORTFOLIO

<TABLE>
<CAPTION>
CLASS Z
------------
MARCH 1,
1996(A)
THROUGH
JULY 31,
1996
------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................................................................................ $ 12.16
------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................................................................................... .13
Net realized and unrealized gain on investment transactions......................................................... (.28)
------------
Total from investment operations.................................................................................. (.15)
------------
LESS DISTRIBUTIONS
Dividends from net investment income................................................................................ (.16)
Distributions from net realized gains on investment and foreign currency transactions............................... --
------------
Total distributions............................................................................................... (.16)
------------
Net asset value, end of period...................................................................................... $ 11.85
------------
------------
TOTAL RETURN (B):................................................................................................... (1.24)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..................................................................................... $ 4,015
Average net assets (000)............................................................................................ $ 4,217
Ratios to average net assets: (c)
Expenses, including distribution fees............................................................................. .95%(d)
Expenses, excluding distribution fees............................................................................. .95%(d)
Net investment income............................................................................................. 2.72%(d)
Portfolio turnover rate............................................................................................. 97%
Average commission rate per share................................................................................... $ .0569
<FN>
- ------------------------------
(a) Commencement of offering of Class Z shares.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of the period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Because of the recent commencement of its offering, the ratios for Class Z
shares are not necessarily comparable to that of Class A, B and C shares
and are not necessarily indicative of future ratios.
(d) Annualized.
</TABLE>

8
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)

STRATEGY PORTFOLIO

<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------
YEAR ENDED JULY 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $ 12.48 $ 11.60 $ 11.82 $ 12.03 $ 11.45 $ 10.50
--------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................................... .27 .38 .30 .42 .35 .38
Net realized and unrealized gain on investment and
foreign currency transactions........................... .35 1.14 .05 .70 1.02 .98
--------- --------- --------- --------- --------- ---------
Total from investment operations....................... .62 1.52 .35 1.12 1.37 1.36
--------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net investment income..................... (.25) (.30) (.22) (.37) (.37) (.35)
Dividends in excess of net investment income............. -- -- (.01) -- -- --
Distributions from net realized gains on investment and
foreign currency transactions........................... (.81) (.34) (.34) (.96) (.42) (.06)
--------- --------- --------- --------- --------- ---------
Total distributions.................................... (1.06) (.64) (.57) (1.33) (.79) (.41)
--------- --------- --------- --------- --------- ---------
Net asset value, end of period........................... $ 12.04 $ 12.48 $ 11.60 $ 11.82 $ 12.03 $ 11.45
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
TOTAL RETURN(C):......................................... 4.84% 13.95% 2.88% 10.02% 12.36% 13.42%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................... $ 100,211 $ 87,081 $ 32,485 $ 28,641 $ 20,378 $ 10,765
Average net assets (000)................................. $ 97,601 $ 57,020 $ 30,634 $ 24,216 $ 15,705 $ 6,694
Ratios to average net assets:
Expenses, including distribution fees.................. 1.27% 1.33% 1.26% 1.21% 1.26% 1.33%
Expenses, excluding distribution fees.................. 1.02% 1.08% 1.03% 1.01% 1.06% 1.13%
Net investment income.................................. 2.06% 3.34% 2.52% 3.61% 3.05% 3.89%
Portfolio turnover rate.................................. 147% 180% 96% 145% 241% 189%
Average commission rate per share........................ $ .0552 N/A N/A N/A N/A N/A

JANUARY 22,
1990(A)
THROUGH
JULY 31,
1990
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $ 10.16
------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................................... .25
Net realized and unrealized gain on investment and
foreign currency transactions........................... .33
------
Total from investment operations....................... .58
------
LESS DISTRIBUTIONS
Dividends from net investment income..................... (.24)
Dividends in excess of net investment income............. --
Distributions from net realized gains on investment and
foreign currency transactions........................... --
------
Total distributions.................................... (.24)
------
Net asset value, end of period........................... $ 10.50
------
------
TOTAL RETURN(C):......................................... 5.83%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................... $ 5,073
Average net assets (000)................................. $ 2,928
Ratios to average net assets:
Expenses, including distribution fees.................. 1.51%(b)
Expenses, excluding distribution fees.................. 1.26%(b)
Net investment income.................................. 4.58%(b)
Portfolio turnover rate.................................. 159%
Average commission rate per share........................ N/A
<FN>
- ------------------------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>

9
<PAGE>

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B SHARES)

The following financial highlights, with respect to the five year period
ended July 31, 1996, have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The financial highlights
contain selected data for a Class B share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide -- Shareholder
Services -- Reports to Shareholders."

STRATEGY PORTFOLIO

<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------------------------------
YEAR ENDED JULY 31,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $ 12.41 $ 11.54 $ 11.79 $ 12.01 $ 11.43 $ 10.49 $ 10.85
--------- --------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................ .17 .20 .21 .34 .26 .30 .37
Net realized and unrealized gain on investment
and foreign currency transactions............... .35 1.22 .05 .70 1.02 .97 .03
--------- --------- --------- --------- --------- --------- ---------
Total from investment operations............... .52 1.42 .26 1.04 1.28 1.27 .40
--------- --------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net investment income............. (.16) (.21) (.16) (.30) (.28) (.27) (.40)
Dividends in excess of net investment income..... -- -- (.01) -- -- -- --
Distributions paid to shareholders from net
realized gains on investment and foreign
currency transactions........................... (.81) (.34) (.34) (.96) (.42) (.06) (.36)
--------- --------- --------- --------- --------- --------- ---------
Total distributions............................ (.97) (.55) (.51) (1.26) (.70) (.33) (.76)
--------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period................... $ 11.96 $ 12.41 $ 11.54 $ 11.79 $ 12.01 $ 11.43 $ 10.49
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN (D):................................ 4.03% 13.05% 2.11% 9.21% 11.53% 12.49% 3.59%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................. $ 233,040 $ 278,714 $ 351,140 $ 357,287 $ 314,771 $ 219,983 $ 176,078
Average net assets (000)......................... $ 265,387 $ 307,439 $ 362,579 $ 339,225 $ 267,525 $ 190,913 $ 127,360
Ratios to average net assets:
Expenses, including distribution fees.......... 2.02% 2.08% 2.03% 2.01% 2.06% 2.11% 2.10%
Expenses, excluding distribution fees.......... 1.02% 1.08% 1.03% 1.01% 1.06% 1.11% 1.14%
Net investment income.......................... 1.31% 1.77% 1.77% 2.79% 2.27% 2.95% 3.61%
Portfolio turnover rate.......................... 147% 180% 96% 145% 241% 189% 159%
Average commission rate per share................ $ .0552 N/A N/A N/A N/A N/A N/A

SEPTEMBER 15,
1987 (A)
THROUGH
JULY 31,
1989 1988 (B)
------------ ---------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $ 9.52 $ 10.00
------------ -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................ .42(e) .23(e)
Net realized and unrealized gain on investment
and foreign currency transactions............... 1.30 (.53)
------------ -------
Total from investment operations............... 1.72 (.30)
------------ -------
LESS DISTRIBUTIONS
Dividends from net investment income............. (.39) (.18)
Dividends in excess of net investment income..... -- --
Distributions paid to shareholders from net
realized gains on investment and foreign
currency transactions........................... -- --
------------ -------
Total distributions............................ (.39) (.18)
------------ -------
Net asset value, end of period................... $ 10.85 $ 9.52
------------ -------
------------ -------
TOTAL RETURN (D):................................ 18.53% (2.92)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................. $ 62,651 $ 55,671
Average net assets (000)......................... $ 57,326 $ 44,717
Ratios to average net assets:
Expenses, including distribution fees.......... 2.33%(e) 2.40%(c)/(e)
Expenses, excluding distribution fees.......... 1.34%(e) 1.43%(c)/(e)
Net investment income.......................... 4.26%(e) 3.13%(c)/(e)
Portfolio turnover rate.......................... 132% 93%
Average commission rate per share................ N/A N/A
<FN>
- ----------------------------------
(a) Commencement of offering of Class B shares.

(b) On March 1, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.

(e) Net of expense subsidy or reimbursement.
</TABLE>

10
<PAGE>

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS C SHARES)

STRATEGY PORTFOLIO

<TABLE>
<CAPTION>
CLASS C
-----------------------
AUGUST 1,
YEAR 1994 (A)
ENDED THROUGH
JULY 31, JULY 31,
1996 1995
--------- ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................................................................ $ 12.41 $ 11.57
--------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................................................................... .17 .25
Net realized and unrealized gain on investment and foreign currency transactions.................... .35 1.14
--------- ------
Total from investment operations.................................................................. .52 1.39
--------- ------
LESS DISTRIBUTIONS
Dividends from net investment income................................................................ (.16) (.21)
Dividends in excess of net investment income........................................................ -- --
Distributions paid to shareholders from net realized gains on investment and foreign currency
transactions....................................................................................... (.81) (.34)
--------- ------
Total distributions............................................................................... (.97) (.55)
--------- ------
Net asset value, end of period...................................................................... $ 11.96 $ 12.41
--------- ------
--------- ------
TOTAL RETURN (C):................................................................................... 4.03% 12.75%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..................................................................... $ 729 $ 289
Average net assets (000)............................................................................ $ 467 $ 170
Ratios to average net assets:
Expenses, including distribution fees............................................................. 2.02% 2.10%(b)
Expenses, excluding distribution fees............................................................. 1.02% 1.10%(b)
Net investment income............................................................................. 1.31% 2.27%(b)
Portfolio turnover rate............................................................................. 147% 180%
Average commission rate per share................................................................... $ .0552 N/A
<FN>
- ----------------------------------
(a) Commencement of offering of Class C shares.

(b) Annualized.

(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>

11
<PAGE>
HOW THE FUND INVESTS

INVESTMENT OBJECTIVES AND POLICIES

THE FUND IS COMPRISED OF TWO SEPARATE DIVERSIFIED PORTFOLIOS -- THE BALANCED
PORTFOLIO AND THE STRATEGY PORTFOLIO -- EACH OF WHICH IS, IN EFFECT, A SEPARATE
FUND ISSUING ITS OWN SHARES. THE INVESTMENT OBJECTIVE OF THE BALANCED PORTFOLIO
IS TO ACHIEVE A HIGH TOTAL INVESTMENT RETURN CONSISTENT WITH MODERATE RISK. THE
INVESTMENT OBJECTIVE OF THE STRATEGY PORTFOLIO IS TO ACHIEVE A HIGH TOTAL
INVESTMENT RETURN CONSISTENT WITH RELATIVELY HIGHER RISK THAN THE BALANCED
PORTFOLIO. THERE CAN BE NO ASSURANCE THAT SUCH OBJECTIVES WILL BE ACHIEVED. See
"Investment Objectives and Policies" in the Statement of Additional Information.

EACH PORTFOLIO'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE,
MAY NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE
PORTFOLIO'S OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY
ACT OF 1940, AS AMENDED (THE INVESTMENT COMPANY ACT). POLICIES OF A PORTFOLIO
THAT ARE NOT FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.

EACH PORTFOLIO PURSUES ITS OBJECTIVE THROUGH THE INVESTMENT POLICIES DESCRIBED
BELOW. WHILE EACH PORTFOLIO WILL SEEK TO ACHIEVE ITS OBJECTIVE BY INVESTING IN A
DIVERSIFIED PORTFOLIO OF EQUITY SECURITIES (INCLUDING SECURITIES CONVERTIBLE
INTO EQUITY SECURITIES), DEBT OBLIGATIONS AND MONEY MARKET INSTRUMENTS, THE
PORTFOLIOS WILL DIFFER WITH RESPECT TO THE DEGREE OF RISK INVOLVED. THE BALANCED
PORTFOLIO WILL BE SUBJECT TO MODERATE RISK, IN THE OPINION OF THE FUND'S
INVESTMENT ADVISER, AND THE STRATEGY PORTFOLIO WILL BE SUBJECT TO RELATIVELY
HIGHER RISK. These differences in risks will be evidenced in the proportions of
investments in debt and equity securities, the quality and maturity of debt
securities purchased and the price volatility and the type of issuer of equity
securities. The following table summarizes the differences in the types of
investments in which each Portfolio may invest under normal circumstances in
seeking to achieve its objective:

<TABLE>
<CAPTION>
BALANCED STRATEGY
DEBT SECURITIES PORTFOLIO PORTFOLIO
- ------------------ ----------------------------- -----------------------------
<S> <C> <C>
Quality Investment grade debt Investment grade debt
securities AND up to 10% of securities AND up to 25% of
its assets in debt securities its assets in debt securities
rated below investment grade rated below investment grade
Percent of At least 25% of its assets in No specific limitation
Portfolio's fixed-income senior
assets securities
Average duration Less than 10 years; weighted More than 10 years; weighted
average maturity will exceed average maturity will exceed
the average duration the average duration

EQUITY SECURITIES
- ------------------
Type of issuer Common stock and common stock Common stock and common stock
equivalents of major, equivalents of major,
established companies AND established companies AND a
smaller, faster growing greater proportion of its
companies assets in smaller, faster
growing companies
</TABLE>

Lower-rated debt securities, as well as debt securities with longer maturities
or with a longer duration, typically provide a higher return and are subject to
a greater degree of risk of loss and price volatility than higher-rated
securities and securities with shorter maturities or a shorter duration. Equity
securities of smaller companies are generally subject to a greater degree of
risk and price

12
<PAGE>
volatility than those of major companies. Finally, it is anticipated that the
money market instruments held by the Balanced Portfolio will be substantially of
the same quality and have generally the same maturities as those held by the
Strategy Portfolio. A more complete description of the Portfolios' investment
policies is set forth below.

The Fund's investment adviser determines the allocation of assets among the
different investment vehicles available (asset mix) to each Portfolio on a
regular basis (at least monthly). The determination of asset mix will result in
decisions with respect to: (1) the proportion of investments among the various
financial instruments available (money market instruments, bonds and other
indebtedness and equity securities, including convertible securities); (2) the
distribution of debt securities among short, intermediate and long-term
maturities; and (3) the distribution of equity and convertible securities
between those of major, established companies and those of smaller, faster
growing companies, the prices of which are typically more volatile. The
determination of asset mix for each Portfolio is based on technical, qualitative
and fundamental analyses and forecasts made by the investment adviser,
prevailing interest rates and general economic factors. In addition, the
investment adviser considers the relative risk objectives of the Portfolios in
making asset mix determinations.

BALANCED PORTFOLIO

THE BALANCED PORTFOLIO WILL INVEST IN A DIVERSIFIED PORTFOLIO COMPRISED
GENERALLY OF EQUITY SECURITIES, DEBT OBLIGATIONS AND MONEY MARKET INSTRUMENTS.
The specific asset mix of the Portfolio will be determined by the Fund's
investment adviser. Under normal circumstances, the Portfolio will maintain at
least 25% of the value of its assets in fixed-income securities. Although there
is no other limitation on the percentage of assets invested in the various
investment categories (money market instruments, debt obligations and equity
securities), it is anticipated that the Balanced Portfolio will generally have a
smaller percentage of its assets invested in equity securities and a larger
percentage invested in money market instruments than the Strategy Portfolio. In
addition, the average duration of the debt securities purchased by the Balanced
Portfolio will generally be shorter than that of the debt securities purchased
by the Strategy Portfolio. (Duration is a measure of the price sensitivity of a
debt instrument to interest rate changes; it incorporates a bond's yield, coupon
interest payments, final maturity, call and put features and prepayment exposure
into one measure.) The weighted average maturity of the debt securities
purchased by the Balanced Portfolio will generally be shorter than that of the
Strategy Portfolio and a greater proportion of the equity securities held by the
Balanced Portfolio will be those of larger, more mature companies, which are
subject to less price volatility, than those held by the Strategy Portfolio.
Based upon its asset mix, the Balanced Portfolio is expected to be subject to a
relatively lower risk of loss (and offer a correspondingly lower potential
return) than the Strategy Portfolio.

MONEY MARKET INSTRUMENTS. The Balanced Portfolio may invest in the following
money market instruments generally maturing in one year or less:

1. U.S. Treasury bills and other obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities.

2. Obligations (including certificates of deposit, bankers' acceptances and
time deposits) of commercial banks, savings banks and savings and loan
associations having, at the time of acquisition by the Portfolio of such
obligations, total assets of not less than $1 billion or its equivalent. The
Portfolio may invest in obligations of domestic banks, foreign banks, and
branches and offices thereof. The term "certificates of deposit" includes both
Eurodollar certificates of deposit, for which there is generally a market, and
Eurodollar time deposits, for which there is generally not a market.
"Eurodollars" are dollars deposited in banks outside the United States.

3. Commercial paper, variable amount demand master notes, bills, notes and
other obligations issued by a U.S. company, a foreign company or a foreign
government, its agencies, instrumentalities or political subdivisions,
maturing in one year or less, denominated in U.S. dollars, and, at the date of
investment, rated at least A or A-2 by Standard & Poor's Ratings Group (S&P)
or A or Prime-2 by Moody's Investors Service (Moody's), or, if not rated,
issued by an entity having an outstanding unsecured debt issue rated at least
A or A-2 by S&P, or A or Prime-2 by Moody's. If such obligations are
guaranteed or supported by a letter of credit issued by a bank, the bank
(including a foreign bank) must meet the requirements set forth in

13
<PAGE>
paragraph (2) above. If such obligations are guaranteed or insured by an
insurance company or other non-bank entity, the insurance company or other
non-bank entity must represent a credit of high quality, as determined by the
Fund's investment adviser under the supervision of the Fund's Trustees.

DEBT OBLIGATIONS. IN ADDITION TO MONEY MARKET INSTRUMENTS DESCRIBED ABOVE,
THE BALANCED PORTFOLIO MAY INVEST IN LONGER-TERM DEBT SECURITIES. It is
anticipated that the average duration of the debt securities held by the
Portfolio will not exceed 10 years. Duration is a measure of the expected life
of a fixed-income security on a present value basis. Duration takes the length
of time intervals between the present time and the time that the interest and
principal payments are scheduled or, in the case of a mortgage-backed,
asset-backed or callable bond, EXPECTED to be received, and weights them by the
present values of the cash to be received at each future point in time. For any
fixed-income security with interest payments occurring prior to the payment of
principal, duration is ordinarily less than maturity. In general, all other
things being equal, the lower the stated or coupon rate of interest of a
fixed-income security, the longer the duration of the security; conversely, the
higher the stated or coupon rate of interest of a fixed-income security, the
shorter the duration of the security. There are some situations where even the
standard duration calculation does not properly reflect the interest rate
exposure of a security. In these and other similar situations, the investment
adviser will use more sophisticated analytical techniques that incorporate the
economic life of a security into the determination of its interest rate
exposure. The computation of duration is based on estimated rather than known
factors. Thus, there can be no assurance that the average duration will at all
times be achieved by the Portfolio.

Debt securities acquired by the Portfolio will generally be rated at the time
of purchase within the four highest categories determined by S&P, Moody's or a
similar nationally recognized rating service, or, if not rated, be of comparable
quality in the opinion of the investment adviser. However, the Portfolio may
invest up to 10% of its total assets in securities rated at the time of purchase
BB or Ba or lower by S&P or Moody's, respectively (or a similar nationally
recognized rating service), or, if not rated, of comparable quality in the
opinion of the investment adviser, all of which are commonly known as "junk
bonds." The Portfolio will not invest more than 35% of its net assets in "junk
bonds." See "Investment Policies Applicable to All Portfolios -- Risks of
Investing in High Yield Securities" below.

THE PORTFOLIO MAY ALSO INVEST IN OBLIGATIONS OF THE U.S. GOVERNMENT AND ITS
AGENCIES AND INSTRUMENTALITIES. These securities include U.S. Treasury
obligations (including bills, notes and bonds) and securities issued or
guaranteed by U.S. Government agencies (such as the Export-Import Bank of the
United States, Federal Housing Administration and Government National Mortgage
Association) or by U.S. Government instrumentalities (such as the Federal Home
Loan Bank, Federal Intermediate Credit Banks and Federal Land Bank). Except for
U.S. Treasury securities, these obligations, even those that are guaranteed by
federal agencies or instrumentalities, may or may not be backed by the "full
faith and credit" of the United States. In the case of securities not backed by
the full faith and credit of the United States, the Portfolio must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment, and may not be able to assert a claim against the United States
itself in the event the agency or instrumentality does not meet its commitments.

THE PORTFOLIO MAY INVEST IN MORTGAGE-BACKED SECURITIES INCLUDING THOSE
REPRESENTING AN UNDIVIDED OWNERSHIP INTEREST IN A POOL OF MORTGAGES, E.G., GNMA,
FNMA AND FHLMC CERTIFICATES. The mortgages backing these securities include
conventional thirty-year fixed rate mortgages, fifteen-year fixed rate
mortgages, graduated payment mortgages and adjustable rate mortgages. The U.S.
Government or the issuing agency guarantees the payment of interest and
principal of these securities; however, the guarantees do not extend to the
securities' yield or value, which are likely to vary inversely with fluctuations
in interest rates, nor do the guarantees extend to the yield or value of the
Portfolio's shares. These certificates are in most cases "pass-through"
instruments, through which the holder receives a share of all interest and
principal payments from the mortgages underlying the certificate, net of certain
fees. Because the prepayment characteristics of the underlying mortgages vary,
it is not possible to predict accurately the average life or realized yield of a
particular issue of pass-through certificates. Mortgage-backed securities are
often subject to more rapid repayment than their stated maturity date would
indicate as a result of the pass-through of prepayments of principal on the
underlying mortgage obligations. While the timing of prepayments of graduated
payment mortgages differs somewhat from that of conventional mortgages, the
prepayment experience of graduated payment mortgages is basically the same as
that of the conventional mortgages of the same maturity dates over the life of
the

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pool. During periods of declining interest rates, prepayment of mortgages
underlying mortgage-backed securities can be expected to accelerate. When the
mortgage obligations are prepaid, the Portfolio reinvests the prepaid amounts in
securities the yields of which reflect interest rates prevailing at the time.
Therefore, the Portfolio's ability to maintain a portfolio containing high-
yielding mortgage-backed securities will be adversely affected to the extent
that prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid mortgages. Moreover, prepayments of mortgages which
underlie securities purchased at a premium could result in capital losses.

THE PORTFOLIO MAY ALSO INVEST IN ASSET-BACKED SECURITIES. Through the use of
trusts and special purpose corporations, various types of assets, primarily
automobile and credit card receivables and home equity loans, have been
securitized in pass-through structures similar to the mortgage pass-through
structures or in a pay-through structure similar to the collateralized mortgage
structure. The Portfolio may invest in these and other types of asset-backed
securities that may be developed in the future. Asset-backed securities present
certain risks that are not presented by mortgage-backed securities. Primarily,
these securities do not have the benefit of the same security interest in the
related collateral. Credit card receivables are generally unsecured and debtors
are entitled to the protection of a number of state and federal consumer credit
laws, some of which may reduce the ability to obtain full payment. In the case
of automobile receivables, the security interests in the underlying automobiles
are often not transferred when the pool is created, with the resulting
possibility that the collateral could be resold. In general, these types of
loans are of shorter average life than mortgage loans and are less likely to
have substantial prepayments.

EQUITY SECURITIES. THE EQUITY SECURITIES IN WHICH THE BALANCED PORTFOLIO WILL
PRIMARILY INVEST ARE COMMON STOCKS OF MAJOR, ESTABLISHED CORPORATIONS WHICH, IN
THE OPINION OF THE INVESTMENT ADVISER, HAVE PROSPECTS OF PRICE APPRECIATION
GREATER THAN THAT OF THE S&P 500 STOCK INDEX. The Portfolio may also invest in
preferred stocks or debt securities that either have warrants attached or are
otherwise convertible into such common stocks. See "Investment Policies
Applicable to All Portfolios -- Convertible Securities." In addition, the
Portfolio may invest in common stocks and common stock equivalents of smaller,
faster growing companies, although to a lesser extent than the Strategy
Portfolio.

OTHER. The Balanced Portfolio may also make other kinds of investments as
described under "Investment Policies Applicable to All Portfolios" below.

STRATEGY PORTFOLIO

THE STRATEGY PORTFOLIO WILL INVEST IN A DIVERSIFIED PORTFOLIO OF EQUITY
SECURITIES, DEBT OBLIGATIONS AND MONEY MARKET INSTRUMENTS. The specific asset
mix of the Portfolio will be determined by the Fund's investment adviser.
Although there is no limitation on the percentage of assets invested in the
various investment categories (money market instruments, debt obligations and
equity securities), it is anticipated that the Strategy Portfolio will generally
have a greater percentage of its assets invested in long-term bonds and equity
securities than the Balanced Portfolio. In addition, under normal conditions the
debt securities purchased by the Strategy Portfolio will be of lesser quality
and will, in the aggregate, have an average duration that is higher than that of
the Balanced Portfolio and a greater proportion of the equity securities will be
of smaller, faster growing companies and subject to greater price volatility
than those of the Balanced Portfolio. The Strategy Portfolio is expected to be
subject to a relatively higher risk of loss (and offer a correspondingly higher
potential return) than the Balanced Portfolio.

MONEY MARKET INSTRUMENTS. The Strategy Portfolio may invest in the same money
market instruments permitted for the Balanced Portfolio.

DEBT OBLIGATIONS. IN ADDITION TO MONEY MARKET INSTRUMENTS DESCRIBED ABOVE,
THE STRATEGY PORTFOLIO MAY INVEST IN LONG-TERM DEBT SECURITIES. It is
anticipated that the average duration of the debt securities held by the
Portfolio in the aggregate will normally be greater than 10 years. See "Balanced
Portfolio -- Debt Obligations" above. Such securities will generally be rated at
the time of purchase within the four highest categories determined by S&P,
Moody's or a similar nationally recognized rating service, or, if not rated,
will be of comparable quality in the opinion of the investment adviser. However,
the Portfolio may invest up to 25% of its total assets in securities rated at
the time of purchase BB or Ba or lower by S&P or Moody's, respectively

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<PAGE>
(or a similar nationally recognized rating service), or, if not rated, of
comparable quality in the opinion of the investment adviser, all of which are
commonly known as "junk bonds." The Portfolio will not invest more than 35% of
its net assets in "junk bonds." See "Investment Policies Applicable to All
Portfolios -- Risks of Investing in High Yield Securities" below.

THE PORTFOLIO MAY INVEST IN OBLIGATIONS OF THE U.S. GOVERNMENT AND ITS
AGENCIES AND INSTRUMENTALITIES AND IN ASSET-BACKED SECURITIES. See "Balanced
Portfolio -- Debt Obligations" above.

EQUITY SECURITIES. LIKE THE BALANCED PORTFOLIO, THE STRATEGY PORTFOLIO MAY
INVEST IN COMMON STOCKS OF MAJOR, ESTABLISHED CORPORATIONS WHICH, IN THE OPINION
OF THE INVESTMENT ADVISER, HAVE PROSPECTS OF PRICE APPRECIATION GREATER THAN
THAT OF THE S&P 500 STOCK INDEX. THE STRATEGY PORTFOLIO MAY ALSO INVEST A
GREATER PROPORTION OF ITS ASSETS IN COMMON STOCKS OF SMALLER, FASTER GROWING
COMPANIES. These equity securities will typically have more volatile market
values and thus may be subject to a greater risk of decline in market value than
the equity securities of major, established corporations.

The Portfolio may invest in preferred stocks or debt securities that either
have warrants attached or are otherwise convertible into such common stocks.

OTHER. The Strategy Portfolio may also make other kinds of investments as
described under "Investment Policies Applicable to All Portfolios" below.

INVESTMENT POLICIES APPLICABLE TO ALL PORTFOLIOS

GENERAL. IN PURSUIT OF ITS INVESTMENT OBJECTIVE, EACH PORTFOLIO MAY (I)
INVEST IN CONVERTIBLE SECURITIES, (II) PURCHASE AND WRITE (I.E., SELL) OPTIONS
ON EQUITY SECURITIES AND STOCK INDICES FOR HEDGING PURPOSES AND TO REALIZE
INCOME, (III) PURCHASE AND SELL FINANCIAL AND STOCK INDEX FUTURES CONTRACTS AND
PURCHASE AND WRITE (I.E., SELL) OPTIONS THEREON FOR HEDGING PURPOSES OR, WITH
RESPECT TO WRITING OPTIONS ON FUTURES CONTRACTS, TO REALIZE A GREATER RETURN,
(IV) PURCHASE SECURITIES ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS, (V) MAKE
SHORT SALES AGAINST-THE-BOX, (VI) INVEST IN FOREIGN SECURITIES AND (VII) ENTER
INTO REPURCHASE AGREEMENTS.

CONVERTIBLE SECURITIES. EACH PORTFOLIO MAY INVEST IN PREFERRED STOCKS OR DEBT
SECURITIES THAT EITHER HAVE WARRANTS ATTACHED OR ARE OTHERWISE CONVERTIBLE INTO
COMMON STOCKS. A convertible security is typically a corporate bond (or
preferred stock) that may be converted at a stated price within a specified
period of time into a specified number of shares of common stock of the same or
a different issuer. Convertible securities are generally senior to common stocks
in a corporation's capital structure but are usually subordinated to similar
non-convertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from a common stock but lower than
that afforded by a similar non-convertible security), a convertible security
also affords an investor the opportunity, through its conversion feature, to
participate in capital appreciation dependent upon a market price advance in the
convertible security's underlying common stock. Convertible securities also
include preferred stock which is technically an equity security.

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

FOREIGN SECURITIES. EACH PORTFOLIO MAY INVEST UP TO 30% OF ITS TOTAL ASSETS
IN FOREIGN MONEY MARKET INSTRUMENTS AND DEBT AND EQUITY SECURITIES. For purposes
of this limitation, American Depositary Receipts, Yankee bonds (I.E., U.S.

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<PAGE>
dollar denominated bonds issued by foreign companies in the United States) and
global bonds which are U.S. dollar denominated are not deemed to be foreign
securities. In many instances, foreign securities may provide higher yields but
may be subject to greater fluctuations in price than securities of domestic
issuers which have similar maturities or quality.

INVESTING IN SECURITIES OF FOREIGN COMPANIES AND COUNTRIES INVOLVES CERTAIN
CONSIDERATIONS AND RISKS WHICH ARE NOT TYPICALLY ASSOCIATED WITH INVESTING IN
U.S. GOVERNMENT SECURITIES AND SECURITIES OF DOMESTIC COMPANIES. There may be
less publicly available information about a foreign issuer than a domestic one,
and foreign companies are not generally subject to uniform accounting, auditing
and financial standards and requirements comparable to those applicable to U.S.
companies. There may also be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than exists in the
United States. Interest and dividends paid by foreign issuers may be subject to
withholding and other foreign taxes, which may decrease the net return on such
investments as compared to dividends and interest paid to the Portfolio by
domestic companies or the U.S. Government. There may be the possibility of
expropriations, seizure or nationalization of foreign deposits, confiscatory
taxation, political, economic or social instability or diplomatic developments
which could affect assets of the Portfolio held in foreign countries. Finally,
the establishment of exchange controls or other foreign governmental laws or
restrictions could adversely affect the payment of obligations.

To the extent a Portfolio's currency exchange transactions do not fully
protect the Portfolio against adverse changes in currency exchange rates,
decreases in the value of currencies of the foreign countries in which the
Portfolio will invest relative to the U.S. dollar will result in a corresponding
decrease in the U.S. dollar value of the Portfolio's assets denominated in those
currencies (and possibly a corresponding increase in the amount of securities
required to be liquidated to meet distribution requirements). Conversely,
increases in the value of currencies of the foreign countries in which a
Portfolio invests relative to the U.S. dollar will result in a corresponding
increase in the U.S. dollar value of the Portfolio's assets (and possibly a
corresponding decrease in the amount of securities to be liquidated).

There may be less publicly available information about foreign companies and
governments compared to reports and ratings published about U.S. companies.
Foreign securities markets have substantially less volume than the New York
Stock Exchange and securities of some foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Brokerage commissions and
other transaction costs on foreign securities exchanges are generally higher
than in the United States.

RISKS OF INVESTING IN HIGH YIELD SECURITIES
Securities rated Baa by Moody's, although considered to be investment grade,
lack outstanding investment characteristics and in fact have speculative
characteristics as well. Securities rated BB or Ba or lower by S&P or Moody's,
respectively, are generally considered to be predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal. The prices
of debt securities vary inversely with interest rates. In addition, lower-rated
debt obligations typically provide a higher yield than higher-rated obligations
of similar maturity. However, lower-rated obligations are also subject to a
greater degree of risk with respect to the ability of the issuer to meet the
principal and interest payments on the obligations and may also be subject to
greater price volatility due to the market's perceptions of the creditworthiness
of the issuer. A description of security ratings is contained in Appendix A.

FIXED-INCOME SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S INABILITY TO
MEET PRINCIPAL AND INTEREST PAYMENTS ON THE OBLIGATIONS (CREDIT RISK) AND MAY
ALSO BE SUBJECT TO PRICE VOLATILITY DUE TO SUCH FACTORS AS INTEREST RATE
SENSITIVITY AND THE MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER
(MARKET RISK). Lower-rated or unrated (I.E., high yield) securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general level
of interest rates. The investment adviser considers both credit risk and market
risk in making investment decisions for the Portfolios. See "Investment
Objectives and Policies -- Risk Factors Relating to High Yield Securities" in
the Statement of Additional Information.

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<PAGE>

HEDGING AND RETURN ENHANCEMENT STRATEGIES

EACH PORTFOLIO MAY ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING UTILIZING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN. THESE STRATEGIES CURRENTLY INCLUDE THE USE OF OPTIONS, FORWARD
CURRENCY EXCHANGE CONTRACTS AND FUTURES CONTRACTS AND OPTIONS THEREON. Each
Portfolio's ability to use these strategies may be limited by market conditions,
regulatory limits and tax considerations and there can be no assurance that any
of these strategies will succeed. See "Investment Objectives and Policies" in
the Statement of Additional Information. New financial products and risk
management techniques continue to be developed, and each Portfolio may use these
new investments and techniques to the extent consistent with its investment
objective and policies.

OPTIONS TRANSACTIONS

EACH PORTFOLIO MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON
SECURITIES AND CURRENCIES THAT ARE TRADED ON SECURITIES EXCHANGES OR IN THE
OVER-THE-COUNTER MARKET TO ENHANCE RETURN OR TO HEDGE THEIR PORTFOLIOS. These
options will be on equity securities, financial indices (E.G., S&P 500) and
foreign currencies. Each Portfolio may write covered put and call options to
generate additional income through the receipt of premiums, purchase put options
in an effort to protect the value of a security that it owns against a decline
in market value and purchase call options in an effort to protect against an
increase in the price of securities it intends to purchase. Each Portfolio may
also purchase put and call options to offset previously written put and call
options of the same series. See "Investment Objectives and Policies -- Risks of
Transactions in Options" in the Statement of Additional Information.

A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE RIGHT,
FOR A SPECIFIED PERIOD OF TIME, TO PURCHASE THE SECURITIES SUBJECT TO THE OPTION
AT A SPECIFIED PRICE (THE EXERCISE PRICE OR STRIKE PRICE). The writer of a call
option, in return for the premium, has the obligation, upon exercise of the
option, to deliver, depending upon the terms of the option contract, the
underlying securities or a specified amount of cash to the purchaser upon
receipt of the exercise price. When a Portfolio writes a call option, the
Portfolio gives up the potential for gain on the underlying securities in excess
of the exercise price of the option during the period that the option is open.

A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES SUBJECT TO THE OPTION TO THE
WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of the put option,
in return for the premium, has the obligation, upon exercise of the option, to
acquire the securities underlying the option at the exercise price. A Portfolio
might, therefore, be obligated to purchase the underlying securities for more
than their current market price.

EACH PORTFOLIO WILL WRITE ONLY "COVERED" OPTIONS. An option is covered if, so
long as the Portfolio is obligated under the option, it owns an offsetting
position in the underlying security or maintains cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, with a value sufficient to cover its obligations. See
"Investment Objectives and Policies -- Options on Stock Indices" in the
Statement of Additional Information.

THERE IS NO LIMITATION ON THE AMOUNT OF CALL OPTIONS THE PORTFOLIOS MAY WRITE.
The Fund has undertaken with certain state securities commissions that, so long
as shares of the Fund are registered in those states, neither Portfolio will
purchase (i) put options on stocks not held by the Portfolio, (ii) put options
on indices or (iii) call options on stock or stock indices if, after any such
purchase, the total premiums paid for such options would exceed 10% of the
Portfolio's total assets; provided, however, that the Portfolio may purchase put
options on stocks held by the Portfolio if after such purchase the aggregate
premiums paid for such options do not exceed 20% of the Portfolio's total net
assets. In addition, the aggregate value of the securities that are the subject
of the put options will not exceed 50% of the Portfolio's net assets.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

EACH PORTFOLIO MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO
PROTECT THE VALUE OF ITS PORTFOLIO AGAINST FUTURE CHANGES IN THE LEVEL OF
CURRENCY EXCHANGE RATES. Each Portfolio may enter into such contracts on a spot,
I.E., cash, basis at the rate then prevailing in the currency exchange market or
on a forward basis, by entering into a forward contract to

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<PAGE>
purchase or sell currency. A forward contract on foreign currency is an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days agreed upon by the parties from the date of the
contract at a price set on the date of the contract.

EACH PORTFOLIO'S DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING
INVOLVING EITHER SPECIFIC TRANSACTIONS OR PORTFOLIO POSITIONS. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Portfolio generally arising in connection with
the purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Portfolio expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a currency bearing a substantial correlation to
the value of that currency (cross hedge). Although there are no limits on the
number of forward contracts which a Portfolio may enter into, a Portfolio may
not position hedge with respect to a particular currency for an amount greater
than the aggregate market value (determined at the time of making any sale of
forward currency) of the securities held in its portfolio denominated or quoted
in, or currently convertible into, such currency.

FUTURES CONTRACTS AND OPTIONS THEREON

EACH PORTFOLIO MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR CERTAIN
HEDGING, RISK MANAGEMENT PURPOSES AND TO ATTEMPT TO ENHANCE RETURN IN ACCORDANCE
WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION. These futures
contracts and options thereon will be on interest-bearing securities, financial
indices and interest rate indices. A financial futures contract is an agreement
to purchase or sell an agreed amount of securities at a set price for delivery
in the future.

A PORTFOLIO MAY NOT PURCHASE OR SELL FUTURES CONTRACTS AND OPTIONS THEREON FOR
RETURN ENHANCEMENT OR RISK MANAGEMENT PURPOSES IF, IMMEDIATELY THEREAFTER, THE
SUM OF THE AMOUNT OF INITIAL MARGIN DEPOSITS ON THE PORTFOLIO'S FUTURES
POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON WOULD EXCEED 5% OF THE
LIQUIDATION VALUE OF THE PORTFOLIO'S TOTAL ASSETS. ALTHOUGH THERE ARE NO OTHER
LIMITS APPLICABLE TO FUTURES CONTRACTS AND OPTIONS THEREON, THE VALUE OF ALL
FUTURES CONTRACTS AND OPTIONS THEREON SOLD WILL NOT EXCEED THE TOTAL MARKET
VALUE OF THE PORTFOLIO.

A PORTFOLIO'S SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET AND
INTEREST RATES AND REQUIRES SKILLS AND TECHNIQUES DIFFERENT FROM THOSE USED IN
SELECTING PORTFOLIO SECURITIES. The correlation between movements in the price
of a futures contract and movements in the price of the securities being hedged
is imperfect, and there is a risk that the value of the securities being hedged
may increase or decrease at a greater rate than the related futures contracts,
resulting in losses to the Portfolio. Certain futures exchanges or boards of
trade have established daily limits on the amount that the price of futures
contracts or options thereon may vary, either up or down, from the previous
day's settlement price. These daily limits may restrict each Portfolio's ability
to purchase or sell certain futures contracts or options thereon on any
particular day.

EACH PORTFOLIO'S ABILITY TO ENTER INTO FUTURES CONTRACTS AND OPTIONS THEREON
IS LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
(THE INTERNAL REVENUE CODE), FOR QUALIFICATION AS A REGULATED INVESTMENT
COMPANY. See "Taxes" in the Statement of Additional Information.

RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES

PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS INVOLVES INVESTMENT RISKS AND TRANSACTION COSTS TO WHICH A
PORTFOLIO WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. If the
investment adviser's prediction of movements in the direction of the securities,
foreign currency and interest rate markets are inaccurate, the adverse
consequences to the Portfolio may leave the Portfolio in a worse position than
if such strategies were not used. Risks inherent in the use of options, foreign
currency and futures contracts and options on futures contracts include (1)
dependence on the investment adviser's ability to predict correctly movements in
the direction of interest rates, securities prices and currency markets; (2)
imperfect correlation between the price of options and futures contracts and
options thereon and movements in the prices of the securities being hedged; (3)
the fact that the skills needed to use these strategies are different from those
needed to

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<PAGE>
select portfolio securities; (4) the possible absence of a liquid secondary
market for any particular instrument at any time; (5) the possible need to defer
closing out certain hedged positions to avoid adverse tax consequences; and (6)
the possible inability of a Portfolio to purchase or sell a portfolio security
at a time that otherwise would be favorable for it to do so, or the possible
need for a Portfolio to sell a portfolio security at a disadvantageous time, due
to the need for a Portfolio to maintain "cover" or to segregate securities in
connection with hedging transactions. See "Taxes" and "Investment Objectives and
Policies" in the Statement of Additional Information.

OTHER INVESTMENTS AND POLICIES

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

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

SHORT SALES AGAINST-THE-BOX

The Portfolios may make short sales of securities or maintain a short
position, provided that at all times when a short position is open, the
Portfolio owns an equal amount of such securities or securities convertible into
or exchangeable for, with or without payment of any further consideration, such
securities; provided that if further consideration is required in connection
with the conversion or exchange, cash, U.S. Government securities, equity
securities or other liquid, unencumbered assets, marked-to-market daily, in an
amount equal to such consideration must be put in a segregated account, for an
equal amount of the securities of the same issuer as the securities sold short
(a short sale against-the-box). Not more than 25% of a Portfolio's net assets
(determined at the time of the short sale) may be subject to such sales. Short
sales will be made primarily to defer realization of gain or loss for federal
income tax purposes.

INTEREST RATE SWAPS

Each Portfolio may enter into interest rate swap transactions with respect to
up to 5% of its total assets. Interest rate swaps are used to hedge the value of
existing portfolio assets or assets a Portfolio intends to acquire. Interest
rate swaps involve the exchange by a Portfolio with another party of their
respective commitments to pay or receive interest (E.G., an exchange of
floating-rate payments for fixed-rate payments). Each Portfolio enters into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any increase in the
price of securities it anticipates purchasing at a later date. The Portfolios
use interest rate swaps for hedging purposes and not as a speculative
investment.

The use of interest rate swaps is a highly speculative activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the investment adviser were incorrect in
its forecast of market values, interest rates and other applicable factors, the
investment performance of a Portfolio would diminish compared to what it would
have been if this investment technique were never used. Interest rate swaps do
not involve the delivery of securities or other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate swaps is limited to
the net amount of interest payments that a Portfolio is contractually obligated
to make. If the other party to an interest rate swap defaults, a Portfolio's
risk of loss consists of the net amount of interest payments that the Portfolio
is contractually entitled to receive. Since interest rate swaps are individually
negotiated, each Portfolio expects to achieve an acceptable degree of
correlation between its rights to receive interest on its portfolio securities
and its rights and obligations to receive and pay interest pursuant to interest
rate swaps.

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REPURCHASE AGREEMENTS

Each Portfolio may on occasion enter into repurchase agreements whereby the
seller of a security agrees to repurchase that security from the Portfolio at a
mutually agreed-upon time and price. The repurchase date is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Portfolio's
money is invested in the repurchase agreement. Each Portfolio's repurchase
agreements will at all times be fully collateralized in an amount at least equal
to the resale price. The instruments held as collateral are valued daily, and if
the value of the instruments declines, the Portfolio will require additional
collateral. If the seller defaults and the value of the collateral securing the
repurchase agreement declines, the Portfolio may incur a loss. The Fund
participates in a joint repurchase account with other investment companies
managed by Prudential Mutual Fund Management, Inc. pursuant to an order of the
Securities and Exchange Commission (SEC).

BORROWING

Each Portfolio may borrow up to 20% of the value of its total assets
(calculated when the loan is made) for temporary, extraordinary or emergency
purposes or for the clearance of transactions. A Portfolio may pledge up to 20%
of its total assets to secure these borrowings. Neither Portfolio will purchase
portfolio securities if its borrowings exceed 5% of its net assets.

ILLIQUID SECURITIES

Each Portfolio may hold up to 10% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended
(the Securities Act), and privately placed commercial paper that have a readily
available market are not considered illiquid for purposes of this limitation.
The investment adviser will monitor the liquidity of such restricted securities
under the supervision of the Trustees. A Portfolio's investment in Rule 144A
securities could have the effect of increasing illiquidity to the extent that
qualified institutional buyers become, for a limited time, uninterested in
purchasing Rule 144A securities. Each Portfolio intends to comply with any
applicable state blue sky laws restricting the Portfolio's investments in
illiquid securities. See "Investment Restrictions" in the Statement of
Additional Information. Repurchase agreements subject to demand are deemed to
have a maturity equal to the applicable notice period.

PORTFOLIO TURNOVER

The portfolio turnover rate for each Portfolio is not expected to exceed 200%.
The portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of each
Portfolio's securities, excluding securities having a maturity at the date of
purchase of one year or less. High portfolio turnover may involve
correspondingly greater brokerage commissions and other transaction costs, which
will be borne directly by the Portfolio. See "Portfolio Transactions and
Brokerage" in the Statement of Additional Information. In addition, high
portfolio turnover may result in increased short-term capital gains which, when
distributed to shareholders, are treated as ordinary income. See "Taxes,
Dividends and Distributions."

INVESTMENT RESTRICTIONS

Each Portfolio is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies may
not be changed without the approval of the holders of a majority of the
Portfolio's outstanding voting securities, as defined in the Investment Company
Act. See "Investment Restrictions" in the Statement of Additional Information.

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HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.

For the fiscal year ended July 31, 1996, total expenses as a percentage of
average net assets were 1.20%, 1.95%, 1.95% and 0.95% (annualized) of the Class
A, Class B, Class C and Class Z shares, respectively, of the Balanced Portfolio
and were 1.27%, 2.02% and 2.02% of the Class A, Class B and Class C shares,
respectively, of the Strategy Portfolio. See "Financial Highlights." No Class Z
shares of the Strategy Portfolio were outstanding during this period.

MANAGER

PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .65 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF EACH PORTFOLIO. It was incorporated in May 1987 under the laws of the State
of Delaware. For the fiscal year ended July 31, 1996, the Fund paid management
fees to PMF of .65% of average net assets of both the Strategy Portfolio and the
Balanced Portfolio. See "Manager" in the Statement of Additional Information.

As of August 31, 1996, PMF served as the manager to 37 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $52 billion.

UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS AFFAIRS. See
"Manager" in the Statement of Additional Information.

UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.

The Balanced Portfolio is managed by Gregory Goldberg, a Managing Director of
Prudential Mutual Fund Investment Management (PMFIM), a unit of PIC. The
Strategy Portfolio is managed by PIC using a team of portfolio managers under
the supervision of Mr. Goldberg. Mr. Goldberg has had responsibility for the
day-to-day management of the Portfolios since January 1995. Mr. Goldberg was
previously employed by Daiwa International Capital Management (January
1988-December 1993) as a portfolio manager for institutional clients. Mr.
Goldberg joined PIC on January 11, 1994 and is also the portfolio manager of
Prudential Multi-Sector Fund, Inc. With respect to the bond portions of the
Portfolios, Mr. Goldberg is assisted by Barbara Kenworthy, a Managing Director
and senior portfolio manager of PMFIM. Ms. Kenworthy also serves as the
portfolio manager of Prudential Diversified Bond Fund, Inc., Prudential
Government Income Fund, Inc. and Prudential Mortgage Income Fund, Inc. and has
20 years of investment management experience in both U.S. and foreign securities
and investment grade and high yield quality bonds.

In making equity investments, Mr. Goldberg generally focuses on stocks with a
potential for capital appreciation. He utilizes a "bottom-up" approach,
selecting stocks that, in his opinion, have strong fundamentals regardless of
industry performance. He evaluates a company's earnings and balance sheet to
find companies that, in his view, are leaders in their fields and have strong
growth potential. With respect to fixed-income securities, Ms. Kenworthy
generally focuses on issues with a potential for total return, selecting
securities that, in her opinion, compare favorably in terms of price and yield
relative to maturity.

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THE FUND'S SUBADVISER HAS ENTERED INTO A CONSULTING ARRANGEMENT WITH GREG A.
SMITH WITH RESPECT TO THE STRATEGY PORTFOLIO, PURSUANT TO WHICH MR. SMITH MAKES
RECOMMENDATIONS TO PIC WITH RESPECT TO THE ALLOCATION OF ASSETS. Mr. Smith is a
consultant to Prudential Securities Incorporated, an affiliate of both the
Subadviser and the Fund, and the President of Greg A. Smith Asset Management
Corporation, a registered investment adviser. Mr. Smith is a consultant to PIC
with respect to the allocation of assets for Prudential Multi-Sector Fund, Inc.
Mr. Smith is recognized in the financial community as a leading asset allocation
strategist. Since 1983, he has been named by INSTITUTIONAL INVESTOR magazine as
a member of its All-America Research Team.

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

DISTRIBUTOR

PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A, CLASS B,
CLASS C AND CLASS Z SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED
SUBSIDIARY OF PRUDENTIAL.

UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (THE DISTRIBUTOR) INCURS THE
EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B AND CLASS C SHARES.
Prudential Securities also incurs the expenses of distributing the Fund's Class
Z shares under the Distribution Agreement, none of which is reimbursed by or
paid for by the Fund. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential Securities and Prusec associated with the sale
of Fund shares, including lease, utility, communications and sales promotion
expenses. The State of Texas requires that shares of the Fund may be sold in
that state only by dealers or other financial institutions which are registered
there as broker-dealers.

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

UNDER THE CLASS A PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF EACH
PORTFOLIO. The Class A Plan provides that (i) up to .25 of 1% of the average
daily net assets of the Class A shares may be used to pay for personal service
and/or the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30 of
1% of the average daily net assets of the Class A shares. Prudential Securities
has agreed to limit its distribution-related fees payable under the Class A Plan
to .25 of 1% of the average daily net assets of the Class A shares for the
fiscal year ending July 31, 1997.

UNDER THE CLASS B AND CLASS C PLANS, EACH PORTFOLIO PAYS PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF
THE CLASS B AND CLASS C SHARES OF THE PORTFOLIO. The Class B and Class C Plans
provide for the payment to Prudential Securities of (i) an asset-based sales
charge of .75 of 1% of the average daily net assets of each of the Class B and
Class C shares and (ii) a service fee of .25 of 1% of the average daily net
assets of each of the Class B and Class C shares. The service fee is used

23
<PAGE>
to pay for personal service and/or the maintenance of shareholder accounts.
Prudential Securities also receives contingent deferred sales charges from
certain redeeming shareholders. See "Shareholder Guide -- How to Sell Your
Shares -- Contingent Deferred Sales Charges."

For the fiscal year ended July 31, 1996, the Fund paid distribution expenses
of .25%, 1.00% and 1.00% of the average daily net assets of the Class A, Class B
and Class C shares of each Portfolio, respectively. The Fund records all
payments made under the Plans as expenses in the calculation of net investment
income. See "Distributor" in the Statement of Additional Information.

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

Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to a Portfolio at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Portfolio. The Portfolios will not be obligated to pay distribution and
service fees incurred under any Plan if it is terminated or not continued.

In addition to distribution and service fees paid by each Portfolio of the
Fund under the Class A, Class B and Class C Plans, the Manager (or one of its
affiliates) may make payments out of its own resources to dealers (including
Prudential Securities) and other persons who distribute shares of the Portfolios
(including Class Z shares). Such payments may be calculated by reference to the
net asset value of shares sold by such persons or otherwise.

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

On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.

Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.

In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three-year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If, on the other hand, during the course of
the three-year period, PSI violates the terms of the agreement, the U.S.
Attorney can elect to pursue these charges. Under the terms of the agreement,
PSI agreed, among other things, to pay an additional $330,000,000 into the fund
established by the SEC to pay restitution to investors who purchased certain PSI
limited partnership interests.

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<PAGE>
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.

The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.

PORTFOLIO TRANSACTIONS

Prudential Securities may also act as a broker or futures commission merchant
for the Fund, provided that the commissions, fees or other remuneration it
receives are fair and reasonable. See "Portfolio Transactions and Brokerage" in
the Statement of Additional Information.

CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT

State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, 02171, serves as Custodian for the Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting books
and records pursuant to an agreement with the Fund. Its mailing address is P.O.
Box 1713, Boston, Massachusetts 02105.

Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.

HOW THE FUND VALUES ITS SHARES
EACH PORTFOLIO'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING
ITS LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF EACH PORTFOLIO TO BE AS OF 4:15 P.M., NEW YORK TIME.

Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Fund's Trustees. See "Net Asset Value" in the Statement of
Additional Information.

Each Portfolio will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Portfolio or days on which changes in
the value of the portfolio securities do not materially affect the NAV. The New
York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.

Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different net asset
values and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. The
NAV of Class Z shares will generallly be higher than the NAV of the other three
classes because Class Z shares are not subject to any distribution and/or
service fees. It is expected, however, that the NAV of the four classes will
tend to converge immediately after the recording of dividends, if any, which
will differ by approximately the amount of the distribution and/or service fee
expense accrual differential among the classes.

HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME EACH PORTFOLIO OF THE FUND MAY ADVERTISE ITS TOTAL RETURN
(INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) AND YIELD
IN ADVERTISEMENTS OR SALES LITERATURE. TOTAL RETURN AND YIELD ARE

25
<PAGE>

CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES. THESE
FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE
PERFORMANCE. The "total return" shows how much an investment in the Portfolio
would have increased (decreased) over a specified period of time (I.E., one,
five or ten years or since inception of the Portfolio) assuming that all
distributions and dividends by the Portfolio were reinvested on the reinvestment
dates during the period and less all recurring fees. The "aggregate" total
return reflects actual performance over a stated period of time. "Average
annual" total return is a hypothetical rate of return that, if achieved
annually, would have produced the same aggregate total return if performance had
been constant over the entire period. "Average annual" total return smooths out
variations in performance and takes into account any applicable initial or
contingent deferred sales charges. Neither "average annual" total return nor
"aggregate" total return takes into account any federal or state income taxes
which may be payable upon redemption. The "yield" refers to the income generated
by an investment in a Portfolio over a one-month or 30-day period. This income
is then "annualized;" that is, the amount of income generated by the investment
during that 30-day period is assumed to be generated each 30-day period for
twelve periods and is shown as a percentage of the investment. The income earned
on the investment is also assumed to be reinvested at the end of the sixth
30-day period. Each Portfolio of the Fund also may include comparative
performance information in advertising or marketing its shares. Such performance
information may include data from Lipper Analytical Services, Inc., Morningstar
Publications, Inc., other industry publications, business periodicals and market
indices. See "Performance Information" in the Statement of Additional
Information. Further performance information is contained in the Fund's annual
and semi-annual reports to shareholders, which may be obtained without charge.
See "Shareholder Guide -- Shareholder Services -- Reports to Shareholders."

TAXES, DIVIDENDS AND DISTRIBUTIONS

TAXATION OF THE FUND

EACH PORTFOLIO HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, EACH
PORTFOLIO WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT
INCOME AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. See
"Taxes" in the Statement of Additional Information.

Under the Internal Revenue Code, special rules apply to the treatment of
certain options and futures contracts (Section 1256 contracts). At the end of
each year, such investments held by a Portfolio will be required to be "marked
to market" for federal income tax purposes; that is, treated as having been sold
at market value. Sixty percent of any gain or loss recognized on these "deemed
sales" and on actual dispositions will be treated as long-term capital gain or
loss, and the remainder will be treated as short-term capital gain or loss. See
"Taxes" in the Statement of Additional Information.

Each Portfolio may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations which derive a majority of
their income from passive sources. For tax purposes, a Portfolio's investments
in PFICs may subject the Portfolio to federal income taxes on certain income and
gains realized by the Portfolio. Certain gains or losses from fluctuations in
foreign currency exchange rates (Section 988 gains or losses) will affect the
amount of ordinary income a Portfolio will be able to pay as dividends. See
"Taxes" in the Statement of Additional Information.

TAXATION OF SHAREHOLDERS

Any dividends out of net investment income, together with distributions of net
short-term gains (I.E., the excess of net short-term capital gains over net
long-term capital losses) distributed to shareholders will be taxable as
ordinary income to the shareholder whether or not reinvested. Any net capital
gains (I.E., the excess of net long-term capital gains over net short-term
capital losses) distributed to shareholders will be taxable as long-term capital
gains to the shareholders, whether or not reinvested and regardless of the
length of time a shareholder has owned his or her shares. The maximum long-term
capital gains rate for corporate shareholders currently is the same as the
maximum tax rate for ordinary income. The maximum long-term capital gains rate
for individual shareholders is 28%.

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

Dividends received by corporate shareholders are eligible for a dividends
received deduction of 70% to the extent a Portfolio's income is derived from
qualified dividends received by the Portfolio from domestic corporations.
Dividends attributable to foreign dividends, interest income, capital gain net
income, gain or loss from Section 1256 contracts and income from some other
sources will not be eligible for the corporate dividends received deduction. See
"Taxes" in the Statement of Additional Information. Corporate shareholders
should consult their tax advisers regarding other requirements applicable to the
dividends received deduction.

Any gain or loss realized upon a sale or redemption of Fund shares by a
shareholder who is not a dealer in securities will generally be treated as
long-term capital gain or loss if the shares have been held more than one year
and otherwise as short-term capital gain or loss. Any such loss with respect to
shares that are held for six months or less, however, will be treated as
long-term capital loss to the extent of any capital gain distributions received
by the shareholder.

The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of any
class of the Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.

Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes.

WITHHOLDING TAXES

Under the Internal Revenue Code, the Fund is required to withhold and remit to
the U.S. Treasury 31% of dividends, capital gain income and redemption proceeds
on the accounts of those shareholders who fail to furnish their tax
identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of certain
foreign shareholders) with the required certifications regarding the
shareholder's status under the federal income tax law. Withholding at this rate
is also required from dividends and capital gains distributions (but not
redemption proceeds) payable to shareholders who are otherwise subject to backup
withholding. Dividends of net investment income and short-term capital gains
paid to a foreign shareholder will generally be subject to U.S. withholding tax
at the rate of 30% (or lower treaty rate).

DIVIDENDS AND DISTRIBUTIONS

THE FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY, QUARTERLY
AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY CAPITAL GAINS IN EXCESS OF
CAPITAL LOSSES. Dividends paid by the Fund with respect to each class of shares,
to the extent any dividends are paid, will be calculated in the same manner, at
the same time, on the same day and will be in the same amount except that each
class will bear its own distribution charges, generally resulting in lower
dividends for Class B and Class C shares in relation to Class A and Class Z
shares and lower dividends for Class A shares in relation to Class Z shares.
Distributions of net capital gains, if any, will be paid in the same amount for
each class of shares. See "How the Fund Values its Shares."

DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES BASED ON
THE NAV OF EACH CLASS ON THE RECORD DATE, OR SUCH OTHER DATE AS THE TRUSTEES MAY
DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS
DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN
CASH. Such election should be submitted to Prudential Mutual Fund Services,
Inc., Attention: Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey
08906-5015. If you hold shares through Prudential Securities, you should contact
your financial adviser to elect to receive dividends and distributions in cash.
The Fund will notify each shareholder after the close of the Fund's taxable year
both of the dollar amount and the taxable status of that year's dividends and
distributions on a per share basis.

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WHEN THE FUND GOES "EX-DIVIDEND," THE NAV OF EACH CLASS IS REDUCED BY THE
AMOUNT OF THE DIVIDEND OR DISTRIBUTION ALLOCABLE TO EACH CLASS. IF YOU BUY
SHARES JUST PRIOR TO THE EX-DIVIDEND DATE (WHICH GENERALLY OCCURS THREE BUSINESS
DAYS PRIOR TO THE RECORD DATE), THE PRICE YOU PAY WILL INCLUDE THE DIVIDEND OR
DISTRIBUTION AND A PORTION OF YOUR INVESTMENT WILL BE RETURNED TO YOU AS A
TAXABLE DIVIDEND OR DISTRIBUTION. YOU SHOULD, THEREFORE, CONSIDER THE TIMING OF
DIVIDENDS AND DISTRIBUTIONS WHEN MAKING YOUR PURCHASES.

GENERAL INFORMATION

DESCRIPTION OF SHARES

THE FUND IS AN OPEN-END, MANAGEMENT INVESTMENT COMPANY WHICH WAS ORGANIZED
UNDER THE LAWS OF MASSACHUSETTS ON FEBRUARY 23, 1987 AS AN UNINCORPORATED
BUSINESS TRUST, A FORM OF ORGANIZATION THAT IS COMMONLY KNOWN AS A MASSACHUSETTS
BUSINESS TRUST. THE FUND WAS FORMERLY KNOWN AS PRUDENTIAL FLEXIFUND, THE
BALANCED PORTFOLIO WAS FORMERLY KNOWN AS THE CONSERVATIVELY MANAGED PORTFOLIO
AND THE STRATEGY PORTFOLIO WAS FORMERLY KNOWN AS THE AGGRESSIVELY MANAGED
PORTFOLIO. THE FUND IS AUTHORIZED TO ISSUE AN UNLIMITED NUMBER OF SHARES OF
SEPARATE SERIES OR PORTFOLIOS, DIVIDED INTO FOUR CLASSES, DESIGNATED CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES. Each class of shares represents an interest
in the same assets of the Portfolio and is identical in all respects except that
(i) each class is subject to different sales charges and distribution and/or
service fees (except for Class Z shares which are not subject to any sales
charges and distribution and/or service fees), which may affect performance,
(ii) each class has exclusive voting rights or any matter submitted to
shareholders that relates solely to its arrangement and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of any other class, (iii) each class has a
different exchange privilege, (iv) only Class B shares have a conversion feature
and (v) Class Z shares are offered exclusively for sale to a limited group of
investors. See "How the Fund is Managed -- Distributor." In accordance with the
Fund's Declaration of Trust, the Trustees may authorize the creation of
additional series of shares and classes of shares within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine. The Balanced Portfolio is currently offering Class A,
Class B, Class C and Class Z shares. The Strategy Portfolio is currently
offering Class A, Class B and Class C shares, and expects to begin offering
Class Z shares on or about October 21, 1996.

Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide -- How to Sell Your Shares." Each share of each class
is equal as to earnings, assets and voting privileges, except as noted above,
and each class of shares (with the exception of Class Z shares, which are not
subject to any distribution or service fees) bears the expenses related to the
distribution of its shares. Except for the conversion feature applicable to the
Class B shares, there are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of each Portfolio of the Fund is
entitled to its portion of all of the Fund's assets after all debt and expenses
of the Fund have been paid. Since Class B and Class C shares generally bear
higher distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders and to Class Z shareholders, whose shares are not subject to any
distribution and/ or service fees. The Fund's shares do not have cumulative
voting rights for the election of Trustees.

THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.

28
<PAGE>
circumstances, be held personally liable as partners for the obligations of the
Fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.

ADDITIONAL INFORMATION

This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.

SHAREHOLDER GUIDE

HOW TO BUY SHARES OF THE FUND

YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. PARTICIPANTS IN PROGRAMS
SPONSORED BY PRUDENTIAL RETIREMENT SERVICES SHOULD CONTACT THEIR CLIENT
REPRESENTATIVE FOR MORE INFORMATION ABOUT CLASS Z SHARES. The purchase price is
the NAV next determined following receipt of an order by the Transfer Agent or
Prudential Securities plus a sales charge which, at your option, may be imposed
either (i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares). Class Z shares are offered to a limited group of
investors at net asset value without any sales charge. See "Alternative Purchase
Plan" below. See also "How the Fund Values its Shares."

The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares, except that the minimum initial investment
for Class C shares may be waived from time to time. The minimum subsequent
investment is $100 for Class A, Class B and Class C shares. Class Z shares are
not subject to any minimum investment requirements. All minimum investment
requirements are waived for certain retirement and employee savings plans or
custodial accounts for the benefit of minors. For purchases made through the
Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Services" below.

Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.

The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.

Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.

Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.

PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Allocation Fund, specifying on the wire the account number
assigned by PMFS and your name and identifying the sales charge alternative
(Class A, Class B, Class C or Class Z shares) and the name of the Portfolio.

29
<PAGE>
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value" in the
Statement of Additional Information.

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

ALTERNATIVE PURCHASE PLAN

THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS Z
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).

<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 5% of .30 of 1% (Currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .25 of 1%)
CLASS B Maximum contingent deferred sales 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% Shares do not convert to another class
the amount invested or the redemption
proceeds on redemptions made within
one year of purchase
CLASS Z None None Sold to a limited group of investors
</TABLE>

The four classes of shares represent an interest in the same portfolio of
investments of a Portfolio and have the same rights, except that (i) each class
(with the exception of Class Z shares, which are not subject to any distribution
or service fees) bears the separate expenses of its Rule 12b-1 distribution and
service plan, (ii) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, and (iii)
only Class B shares have a conversion feature. The four classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee (if any) of
each class. Class B and Class C shares bear the expenses of a higher
distribution fee which will generally cause them to have higher expense ratios
and to pay lower dividends than the Class A and Class Z shares.

Financial advisers and other sales agents who sell shares of the Portfolios
will receive different compensation for selling Class A, Class B, Class C and
Class Z shares and will generally receive more compensation initially for
selling Class A and Class B shares than for selling Class C or Class Z shares.

IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge,

30
<PAGE>
(4) the various exchange privileges among the different classes of shares (see
"How to Exchange Your Shares" below) and (5) the fact that Class B shares
automatically convert to Class A shares approximately seven years after purchase
(see "Conversion Feature -- Class B Shares" below).

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

If you intend to hold your investment in a Portfolio for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 5% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.

If you intend to hold your investment for 7 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.

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

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

ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction and
Waiver of Initial Sales Charges" and "Class Z Shares" below.

CLASS A SHARES

The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:

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

The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.

In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares a
finders' fee based on a percentage of the net asset value of shares sold by such
persons.

31
<PAGE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares -- Reduction and Waiver of Initial Sales Charges -- Class A Shares" in
the Statement of Additional Information.

BENEFIT PLANS. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (collectively, Benefit Plans), provided that the Benefit Plan has
existing assets of at least $1 million invested in shares of Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) or 250 eligible employees or participants. In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential Securities
does individual account recordkeeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary Prototype Benefit
Plans), Class A shares may be purchased at NAV by participants who are repaying
loans made from such plans to the participant.

PRUARRAY AND SMARTPATH PLANS. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or
non-qualified under the Internal Revenue Code, including pension,
profit-sharing, stock-bonus or other employee benefit plans under Section 401 of
the Internal Revenue Code and deferred compensation and annuity plans under
Sections 457 and 403(b)(7) of the Internal Revenue Code that participate in
Prudential's PruArray or SmartPath Programs (benefit plan recordkeeping
services) (hereafter referred to as a PruArray or SmartPath Plan); provided that
the plan has at least $1 million in existing assets or 250 eligible employees or
participants. The term "existing assets" for this purpose includes stock issued
by a PruArray or SmartPath Plan sponsor and shares of non-money market
Prudential Mutual Funds and shares of certain unaffiliated non-money market
mutual funds that participate in the PruArray or SmartPath Programs
(Participating Funds). "Existing assets" also include shares of money market
funds acquired by exchange from a Participating Fund.

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

OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers and current and former Directors/Trustees of the Prudential Mutual Fund
(including the Fund), (b) employees of Prudential Securities and PMF and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees and special agents of Prudential and its subsidiaries and all persons
who have retired directly from active service with Prudential or one of its
subsidiaries, (d) registered representatives and employees of dealers who have
entered into a selected dealer agreement with Prudential Securities provided
that purchases at NAV are permitted by such person's employer and (e) investors
who have a business relationship with a financial adviser who joined Prudential
Securities from another investment firm, provided that (i) the purchase is made
within 180 days of the commencement of the financial adviser's employment at
Prudential Securities, or within one year in the case of Benefit Plans, (ii) the
purchase is made with proceeds of a redemption of shares of any open-end fund
sponsored by the financial adviser's previous employer (other than a money
market fund or other no-load fund which imposes a distribution or service fee of
.25 of 1% or less) and (iii) the financial adviser served as the client's broker
on the previous purchase.

You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares -- Reduction and Waiver of Initial Sales Charges --
Class A Shares" in the Statement of Additional Information.

32
<PAGE>
CLASS B AND CLASS C SHARES

The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your Shares --
Contingent Deferred Sales Charges." The Distributor will pay sales commissions
of up to 4% of the purchase price of Class B shares to dealers, financial
advisers and other persons who sell Class B shares at the time of sale from its
own resources. This facilitates the ability of the Fund to sell the Class B
shares without an initial sales charge being deducted at the time of purchase.
The Distributor anticipates that it will recoup its advancement of sales
commissions from the combination of the CDSC and the distribution fee. See
"Distributor." In connection with the sale of Class C shares, the Distributor
will pay dealers, financial advisers and other persons which distribute Class C
shares a sales commission of up to 1% of the purchase price at the time of the
sale.

CLASS Z SHARES

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

(i) pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation and annuity
plans under Section 457 and 403(b)(7) of the Internal Revenue Code and
non-qualified plans for which the Fund is an available option (collectively,
Benefit Plans), provided such Benefit Plans (in combination with other plans
sponsored by the same employer or group of related employers) have at least $50
million in defined contribution assets; (ii) participants in any fee-based
program sponsored by Prudential Securities or its affiliates which includes
mutual funds as investment options and for which the Fund is an available
option; and (iii) investors who are, or have executed a letter of intent to
become, shareholders of any series of The Prudential Institutional Fund
(Institutional Fund) on or before one or more series of Institutional Fund
reorganize or who on that date have investments in certain products for which
Institutional Fund provides exchangeability. After a Benefit Plan qualifies to
purchase Class Z shares, all subsequent purchases will be for Class Z shares.

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

HOW TO SELL YOUR SHARES

YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT OR
PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES." In certain cases,
however, redemption proceeds will be reduced by the amount of any applicable
contingent deferred sales charge, as described below. See "Contingent Deferred
Sales Charges" below.

IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.

If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer

33
<PAGE>
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office manager
of most Prudential Insurance and Financial Services or Preferred Services
offices.

PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the SEC, by
order, so permits; provided that applicable rules and regulations of the SEC
shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.

PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.

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

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

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

CONTINGENT DEFERRED SALES CHARGES

Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you

34
<PAGE>
for shares during the preceding six years, in the case of Class B shares, and
one year, in the case of Class C shares. A CDSC will be applied on the lesser of
the original purchase price or the current value of the shares being redeemed.
Increases in the value of your shares or shares acquired through reinvestment of
dividends or distributions are not subject to a CDSC. The amount of any
contingent deferred sales charge will be paid to and retained by the
Distributor. See "How the Fund is Managed -- Distributor" and "Waiver of the
Contingent Deferred Sales Charges -- Class B Shares" below.

The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."

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

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

In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Fund shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.

For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.

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

WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES -- CLASS B SHARES. The CDSC
will be waived in the case of a redemption following the death or disability of
a shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability.

The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include (i) in the case of a tax-deferred
retirement plan, a lump-sum or other distribution after retirement; (ii) in the
case of an IRA or Section 403(b) custodial account, a lump-sum or other
distribution after attaining age 59 1/2; and (iii) a tax-free

35
<PAGE>
return of an excess contribution or plan distributions following the death or
disability of the shareholder, provided that the shares were purchased prior to
death or disability. The waiver does not apply in the case of a tax-free
rollover or transfer of assets, other than one following a separation from
service (I.E., following voluntary or involuntary termination of employment or
following retirement). Under no circumstances will the CDSC be waived on
redemptions resulting from the termination of a tax-deferred retirement plan,
unless such redemptions otherwise qualify for a waiver as described above. In
the case of Direct Account and PSI or Subsidiary Prototype Benefit Plans, the
CDSC will be waived on redemptions which represent borrowings from such plans.
Shares purchased with amounts used to repay a loan from such plans on which a
CDSC was not previously deducted will thereafter be subject to a CDSC without
regard to the time such amounts were previously invested. In the case of a
401(k) plan, the CDSC will also be waived upon the redemption of shares
purchased with amounts used to repay loans made from the account to the
participant and from which a CDSC was previously deducted.

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

You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares -- Waiver of the Contingent Deferred Sales Charge -- Class B Shares"
in the Statement of Additional Information.

A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares -- Quantity
Discount -- Class B Shares Purchased Prior to August 1, 1994" in the Statement
of Additional Information.

CONVERSION FEATURE -- CLASS B SHARES

Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
The first conversion of Class B shares occurred in February 1995, when the
conversion feature was first implemented.

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

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

Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."

36
<PAGE>
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares.

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

HOW TO EXCHANGE YOUR SHARES

AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
PORTFOLIO OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS C AND CLASS Z
SHARES, RESPECTIVELY, OF ANOTHER PORTFOLIO OR ANOTHER FUND ON THE BASIS OF THE
RELATIVE NAV. No sales charge will be imposed at the time of the exchange. Any
applicable CDSC payable upon the redemption of shares exchanged will be
calculated from the first day of the month after the initial purchase, excluding
the time shares were held in a money market fund. Class B and Class C shares may
not be exchanged into money market funds other than Prudential Special Money
Market Fund. For purposes of calculating the holding period applicable to the
Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature -- Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account -- Exchange Privilege" in the
Statement of Additional Information.

IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. (THE FUND OR ITS AGENTS COULD BE SUBJECT TO LIABILITY
IF THEY FAIL TO EMPLOY REASONABLE PROCEDURES.) All exchanges will be made on the
basis of the relative NAV of the two funds next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.

IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.

IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.

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

37
<PAGE>
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.

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

Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value. Similarly, participants in PSI's 401(k) Plan for which the Fund's Class Z
shares is an available option and who wish to transfer their Class Z shares out
of the PSI 401(k) Plan following separation from service (I.E., voluntary or
involuntary termination of employment or retirement) will have their Class Z
shares exchanged for Class A shares at net asset value.

The Fund reserves the right to reject any exchange order including exchanges
(and market timing transactions) which are of size and/or frequency engaged in
by one or more accounts acting in concert or otherwise, that have or may have an
adverse effect on the ability of the Subadviser to manage the portfolio. The
determination that such exchanges or activity may have an adverse effect and the
determination to reject any exchange order shall be in the discretion of the
Manager and the Subadviser.

The Exchange Privilege is not right and may be suspended, terminated or
modified at any time.

SHAREHOLDER SERVICES

In addition to the Exchange Privilege, as a shareholder of the Fund, you can
take advantage of the following services and privileges:

- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.

- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including a
Command Account). For additional information about this service, you may contact
your Prudential Securities financial adviser, Prusec representative or the
Transfer Agent directly.

38
<PAGE>
- TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.

- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares -- Contingent Deferred Sales Charges."

- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at One Seaport
Plaza, New York, New York 10292. In addition, monthly unaudited financial data
is available upon request from the Fund.

- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).

For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.

39
<PAGE>
DESCRIPTION OF SECURITY RATINGS

MOODY'S INVESTORS SERVICE
BOND RATINGS

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

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

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

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

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

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

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

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

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

C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

SHORT-TERM DEBT RATINGS

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

P-1: Issuers rated "Prime-1" or "P-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.

A-1
<PAGE>
P-2: Issuers rated "Prime-2" or "P-2" (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations.

STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS

AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.

A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.

BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.

BB, B, CCC, CC and C: Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest degree of speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.

COMMERCIAL PAPER RATINGS

S&P's commercial paper ratings are current assessments of the likelihood of
timely payment of debt considered short-term in the relevant market.

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

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

A-2
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY

Prudential Mutual Fund Management offers a broad range of mutual funds designed
to meet your individual needs. We welcome you to review the investment options
available through our family of funds. For more information on the Prudential
Mutual Funds, including charges and expenses, contact your Prudential Securities
financial adviser or Prusec representative or telephone the Funds at (800)
225-1852 for a free prospectus. Read the prospectus carefully before you invest
or send money.

TAXABLE BOND FUNDS

Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series

Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust

TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series

Prudential Municipal Series Fund
Florida Series

Hawaii Income Series

Maryland Series
Massachusetts Series
Michigan Series

New Jersey Series

New York Series
North Carolina Series
Ohio Series

Pennsylvania Series

Prudential National Municipals Fund, Inc.

GLOBAL FUNDS

Prudential Europe Growth Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Global Genesis Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series

International Stock Series
The Global Government Plus Fund, Inc.
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.

EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio

Prudential Distressed Securities Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small Companies Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund

MONEY MARKET FUNDS
-TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series

Prudential Special Money Market Fund, Inc.
Money Market Series

Prudential MoneyMart Assets, Inc.
-TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series

Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series

-COMMAND FUNDS

Command Money Fund
Command Government Fund
Command Tax-Free Fund

-INSTITUTIONAL MONEY MARKET FUNDS

Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series

B-1
<PAGE>

No dealer, sales representative or any other person has been authorized to
give any information or to make any representations, other than those
contained in this Prospectus, in connection with the offer contained
herein, and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Fund or the
Distributor. This Prospectus does not constitute an offer by the Fund or by
the Distributor to sell, or a solicitation of any offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS........................................................... 2
Risk Factors and Special Characteristics................................ 2
FUND EXPENSES............................................................. 4
FINANCIAL HIGHLIGHTS...................................................... 5
HOW THE FUND INVESTS...................................................... 12
Investment Objectives and Policies...................................... 12
Hedging and Return Enhancement Strategies............................... 18
Other Investments and Policies.......................................... 20
Investment Restrictions................................................. 21
HOW THE FUND IS MANAGED................................................... 22
Manager................................................................. 22
Distributor............................................................. 23
Portfolio Transactions.................................................. 25
Custodian and Transfer and Dividend Disbursing Agent.................... 25
HOW THE FUND VALUES ITS SHARES............................................ 25
HOW THE FUND CALCULATES PERFORMANCE....................................... 25
TAXES, DIVIDENDS AND DISTRIBUTIONS........................................ 26
GENERAL INFORMATION....................................................... 28
Description of Shares................................................... 28
Additional Information.................................................. 29
SHAREHOLDER GUIDE......................................................... 29
How to Buy Shares of the Fund........................................... 29
Alternative Purchase Plan............................................... 30
How to Sell Your Shares................................................. 33
Conversion Feature -- Class B Shares.................................... 36
How to Exchange Your Shares............................................. 37
Shareholder Services.................................................... 38
DESCRIPTION OF SECURITY RATINGS........................................... A-1
THE PRUDENTIAL MUTUAL FUND FAMILY......................................... B-1
</TABLE>

-----------------------------------------------------
MF134A 44414OE

<TABLE>
<S> <C> <C>
Balanced: Class A: 74429R108
Class B: 74429R207
CUSIP NOS.: Class C: 74429R306
Class Z: 74429R702
Strategy: Class A: 74429R405
Class B: 74429R504
Class C: 74429R603
Class Z: 74429R801
</TABLE>

Prudential
Allocation
Fund
- ---------------------------------------------------------------

Balanced Portfolio
Strategy Portfolio

PROSPECTUS
September 27, 1996

Prudential Mutual Funds (Logo)
<PAGE>

PRUDENTIAL ALLOCATION FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED SEPTEMBER 27, 1996

Prudential Allocation Fund (the Fund), is an open-end, diversified,
management investment company. The Fund is comprised of two separate
portfolios--the Balanced Portfolio and the Strategy Portfolio. The investment
objective of the Balanced Portfolio is to achieve a high total investment return
consistent with moderate risk. The investment objective of the Strategy
Portfolio is to achieve a high total investment return consistent with
relatively higher risk than the Balanced Portfolio. While each Portfolio will
seek to achieve its objective by investing in a diversified portfolio of money
market instruments, debt obligations and equity securities (including securities
convertible into equity securities), the Portfolios will differ with respect to
the proportions of investments in debt and equity securities, the quality and
maturity of debt securities purchased and the price volatility of equity
securities purchased. It is expected that the Strategy Portfolio will offer
investors a higher potential return with a correspondingly higher risk of loss
than the Balanced Portfolio. There can be no assurance that the Portfolios'
investment objectives will be achieved. See "Investment Objectives and
Policies."

The Fund's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.

This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated September 27, 1996, a copy
of which may be obtained from the Fund upon request.

TABLE OF CONTENTS

CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ---------------
General Information...................................... B-2 28
Investment Objectives and Policies....................... B-2 12
Investment Restrictions.................................. B-11 21
Trustees and Officers.................................... B-13 22
Manager.................................................. B-15 22
Distributor.............................................. B-17 23
Portfolio Transactions and Brokerage..................... B-20 25
Purchase and Redemption of Fund Shares................... B-21 29
Shareholder Investment Account........................... B-25 38
Net Asset Value.......................................... B-28 25
Taxes.................................................... B-29 26
Performance Information.................................. B-31 25
Organization and Capitalization.......................... B-33 28
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants................................. B-34 25
Financial Statements..................................... B-35 --
Appendix I--Historical Performance Data.................. I-1 --
Appendix II--General Investment Information.............. II-1 --
Appendix III--Information Relating to the Prudential..... III-1 --

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

MF134B 444141C
<PAGE>
GENERAL INFORMATION

The Fund was organized on February 23, 1987 and consisted of two Portfolios,
the Aggressively Managed Portfolio and the Conservatively Managed Portfolio. On
November 30, 1990, the name of the Aggressively Managed Portfolio was changed to
the Strategy Portfolio. On February 28, 1991, the Trustees approved an amendment
to the Declaration of Trust to change the Fund's name from Prudential-Bache
FlexiFund to Prudential FlexiFund and, on February 8, 1994, the Trustees
approved an amendment to the Declaration of Trust to change the Fund's name from
Prudential FlexiFund to Prudential Allocation Fund, effective August 1, 1994. On
May 3, 1995, the Trustees approved a change in the name of the Conservatively
Managed Portfolio to the Balanced Portfolio, effective September 29, 1995.

INVESTMENT OBJECTIVES AND POLICIES

The investment objective of the Balanced Portfolio is to achieve a high
total investment return consistent with moderate risk. The investment objective
of the Strategy Portfolio is to achieve a high total investment return
consistent with relatively higher risk than the Balanced Portfolio. Each
Portfolio will seek to achieve its objective by investing in a diversified
portfolio of money market instruments, debt obligations and equity securities.
However, the asset mix and the type of portfolio securities purchased by the
Portfolios will differ. It is anticipated that, under normal conditions, the
Balanced Portfolio will have a smaller percentage of its assets invested in
equity securities and a larger percentage invested in money market instruments
than the Strategy Portfolio. In addition, the average duration of the debt
securities held by the Balanced Portfolio will be shorter than that of the
Strategy Portfolio, and a greater proportion of the equity securities held by
the Balanced Portfolio will typically be less volatile securities of larger and
more mature companies than the equity securities held by the Strategy Portfolio.
There can be no assurance that the Portfolios' investment objectives will be
achieved. See "How the Fund Invests--Investment Objectives and Policies" in the
Prospectus.

RISKS OF TRANSACTIONS IN OPTIONS

A Portfolio will write (I.E., sell) covered call options only on equity
securities, on stock indices which are traded on a securities exchange or which
are listed on NASDAQ or in the over-the-counter market, on currencies and on
futures contracts which are traded on an exchange or board of trade. A call
option gives the purchaser of the option the right to buy, and the writer the
obligation to sell, the underlying security at the exercise price during the
option period. A Portfolio will write covered call options for hedging purposes
and to augment its income.

So long as the obligation of the writer of the call continues, the writer
may be assigned an exercise notice. The exercise notice would require the writer
of a call option to deliver the underlying security against payment of the
exercise price. This obligation terminates upon expiration of the option, or at
such earlier time that the writer effects a closing purchase transaction by
purchasing an option covering the same underlying security and having the same
exercise price and expiration date (of the same series) as the one previously
sold. Once an option has been exercised, the writer may not execute a closing
purchase transaction. To secure the obligation to deliver the underlying
security the writer of the option is required to deposit in escrow the
underlying security or other assets in accordance with the rules of The Options
Clearing Corporation (the OCC), the Chicago Board of Trade and the Chicago
Mercantile Exchange, institutions which interpose themselves between buyers and
sellers of options. Technically, each of these institutions assumes the other
side of every purchase and sale transaction on an exchange and, by doing so,
gives its guarantee to the transaction.

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

Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or

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series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or a clearing corporation may not at all times be adequate to
handle current trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in the class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by a clearing corporation as a result of trades on that exchange
would continue to be exercisable in accordance with their terms. There is no
assurance that higher than anticipated trading activity or other unforeseen
events might not, at times, render certain of the facilities of any of the
clearing corporations inadequate, and thereby result in the institution by an
exchange of special procedures which may interfere with the timely execution of
customers' orders. However, the OCC, based on forecasts provided by the U.S.
exchanges, believes that its facilities are adequate to handle the volume of
reasonably anticipated options transactions, and such exchanges have advised
such clearing corporation that they believe their facilities will also be
adequate to handle reasonably anticipated volume.

OPTIONS ON STOCK INDICES

Except as described below, a Portfolio will write call options on indices
only if on such date it holds a portfolio of securities at least equal to the
value of the index times the multiplier times the number of contracts. When a
Portfolio writes a call option on a broadly-based stock market index, the
Portfolio will segregate or put into escrow with its Custodian, or pledge to a
broker as collateral for the option, cash, cash equivalents or at least one
"qualified security" with a market value at the time the option is written of
not less than 100% of the current index value times the multiplier times the
number of contracts. A Portfolio will write call options on broadly-based stock
market indices only if at the time of writing it holds a diversified portfolio
of stocks.

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

If at the close of business on any day the market value of such qualified
securities so segregated, escrowed or pledged falls below 100% of the current
index value times the multiplier times the number of contracts, a Portfolio will
segregate, escrow or pledge an amount in cash, U.S. Government obligations,
equity securities or other liquid, unencumbered assets, marked-to-market daily,
equal in value to the difference. In addition, when the Portfolio writes a call
on an index which is in-the-money at the time the call is written, the Portfolio
will segregate with the Fund's Custodian or pledge to the broker as collateral
cash, U.S. Government obligations, equity securities or other liquid,
unencumbered assets, marked-to-market daily, equal in value to the amount by
which the call is in-the-money times the multiplier times the number of
contracts. Any amount segregated pursuant to the foregoing sentence may be
applied to the Portfolio's obligation to segregate additional amounts in the
event that the market value of the qualified securities falls below 100% of the
current index value times the multiplier times the number of contracts. A
"qualified security" is an equity security which is listed on a securities
exchange or listed on NASDAQ against which the Portfolio has not written a stock
call option and which has not been hedged by the Portfolio by the sale of stock
index futures. However, if the Portfolio holds a call on the same index as the
call written where the exercise price of the call held is equal to or less than
the exercise price of the call written or greater than the exercise price of the
call written if the difference is maintained by the Portfolio in cash, Treasury
bills or other high-grade short-term debt obligations in a segregated account
with the Fund's Custodian, it will not be subject to the requirements described
in this paragraph.

RISKS OF OPTIONS ON INDICES

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

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Because the value of an index option depends upon movements in the level of
the index rather than the price of a particular stock, successful use by the
Fund of options on indices would be subject to the investment adviser's ability
to predict correctly movements in the direction of the stock market generally or
of a particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks.

Index prices may be distorted if trading of certain securities included in
the index is interrupted. Trading in the index options also may be interrupted
in certain circumstances, such as if trading were halted in a substantial number
of securities included in the index. If this occurred, the Portfolio would not
be able to close out options which it had purchased or written and, if
restrictions on exercise were imposed, might be unable to exercise an option it
holds, which could result in substantial losses to the Portfolio. It is each
Portfolio's policy to purchase or write options only on indices which include a
number of securities sufficient to minimize the likelihood of a trading halt in
the index.

Trading in stock index options commenced in April 1983 with the S&P 100
option (formerly called the CBOE 100). Since that time a number of additional
index option contracts have been introduced, including options on industry
indices. Although the markets for certain index option contracts have developed
rapidly, the markets for other index options are still relatively illiquid. The
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid secondary market. It is not certain
that this market will develop in all index option contracts. Neither Portfolio
will purchase or sell any index option contract unless and until, in the
investment adviser's opinion, the market for such options has developed
sufficiently that the risk in connection with such transactions is no greater
than the risk in connection with options on stocks.

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

When a Portfolio has written a call, there is also a risk that the market
may decline between the time the Portfolio has a call exercised against it, at a
price which is fixed as of the closing level of the index on the date of
exercise, and the time the Portfolio is able to sell securities in its
portfolio. As with stock options, the Portfolio will not learn that an index
option has been exercised until the day following the exercise date but, unlike
a call on stock where the Portfolio would be able to deliver the underlying
securities in settlement, the Portfolio may have to sell part of its portfolio
in order to make settlement in cash, and the price of such securities might
decline before they can be sold. This timing risk makes certain strategies
involving more than one option substantially more risky with index options than
with stock options. For example, even if an index call which the Portfolio has
written is "covered" by an index call held by the Portfolio with the same strike
price, the Portfolio will bear the risk that the level of the index may decline
between the close of trading on the date the exercise notice is filed with the
clearing corporation and the close of trading on the date the Portfolio
exercises the call it holds or the time the Portfolio sells the call, which in
either case would occur no earlier than the day following the day the exercise
notice was filed.

RISKS OF OPTIONS ON FOREIGN CURRENCIES

Because there are two currencies involved, developments in either or both
countries can affect the values of options on foreign currencies. Risks include
those described in the Prospectus under "How the Fund Invests--Investment
Objectives and Policies," including government actions affecting currency
valuation and the movements of currencies from one country to another. The
quantities of currency underlying option contracts represent odd lots in a
market dominated by transactions between banks; this can mean extra transaction
costs upon exercise. Option markets may be closed while round-the-clock
interbank currency markets are open, and this can create price and rate
discrepancies.

RISKS RELATED TO FORWARD CURRENCY EXCHANGE CONTRACTS

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

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in the relationship between the U.S. dollar and the subject foreign currency
during the period between the date on which the security is purchased or sold,
or on which the dividend or interest payment is declared, and the date on which
such payments are made or received.

Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, a Portfolio may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. A Portfolio does not intend to enter into
such forward contracts to protect the value of its portfolio securities on a
regular or continuous basis. A Portfolio will also not enter into such forward
contracts or maintain a net exposure to such contracts where the consummation of
the contracts would obligate the Portfolio to deliver an amount of foreign
currency in excess of the value of the portfolio securities or other assets
denominated in that currency. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the long-term
investment decisions made with regard to overall diversification strategies.
However, the Fund believes that it is important to have the flexibility to enter
into such forward contracts when it determines that the best interests of the
Portfolio will thereby be served. If the Portfolio enters into a position
hedging transaction, the transaction will be "covered" by the position being
hedged or the Fund's Custodian or sub-custodian will place cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets into a
segregated account of the Portfolio (less the value of the "covering" positions,
if any) in an amount equal to the value of the Portfolio's total assets
committed to the consummation of the given forward contract. The assets placed
in the segregated account will be marked-to-market daily, and if the value of
the securities placed in the segregated account declines, additional cash or
securities will be placed in the account so that the value of the account will,
at all times, equal the amount of the Portfolio's net commitment with respect to
such contract.

A Portfolio generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Portfolio may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.

It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly, it
may be necessary for the Portfolio to purchase additional foreign currency on
the spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency that the Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.

If the Portfolio retains the portfolio security and engages in an offsetting
transaction, the Portfolio will incur a gain or a loss to the extent that there
has been movement in forward contract prices. Should forward contract prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
contract prices increase, the Portfolio will suffer a loss to the extent that
the price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.

A Portfolio's dealings in forward foreign currency exchange contracts will
be limited to the transactions described above. Of course, the Portfolio is not
required to enter into such transactions with regard to its foreign
currency-denominated securities. It also should be realized that this method of
protecting the value of the portfolio securities against a decline in the value
of a currency does not eliminate fluctuations in the underlying prices of the
securities which are unrelated to exchange rates. Additionally, although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time they tend to limit any potential gain which
might result should the value of such currency increase.

Although each Portfolio values its assets daily in terms of U.S. dollars, it
does not intend physically to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on

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the difference (the spread) between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer.

RISKS OF TRANSACTIONS IN FUTURES CONTRACTS

There are several risks involved in the use of futures contracts as a
hedging device. Due to the imperfect correlation between the price of futures
contracts and movements in the price of the underlying securities, the price of
a futures contract may move more or less than the price of the securities being
hedged. Therefore, a correct forecast of interest rate or stock market trends by
the investment adviser may still not result in a successful hedging transaction.

Although a Portfolio will purchase or sell futures contracts only on
exchanges where there appears to be an adequate secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular contract or at any particular time. Accordingly, there can be no
assurance that it will be possible, at any particular time, to close a futures
position. In the event a Portfolio could not close a futures position and the
value of such position declined, the Portfolio would be required to continue to
make daily cash payments of variation margin. However, in the event a futures
contract has been used to hedge portfolio securities, such securities will not
be sold until the futures contract can be terminated. In such circumstances, an
increase in the price of the securities, if any, may partially or completely
offset losses on the futures contract. However, there is no guarantee that the
price movements of the securities will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on the
futures contract.

Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act of 1940, as amended (the Investment
Company Act), are exempt from the definition of "commodity pool operator,"
subject to compliance with certain conditions. The exemption is conditioned upon
the Portfolio's purchasing and selling futures contracts and options thereon for
BONA FIDE hedging transactions, except that a Portfolio of the Fund may purchase
and sell futures contracts or options thereon for any other purpose, to the
extent that the aggregate initial margin and option premiums do not exceed 5% of
the liquidation value of the Portfolio's total assets. In addition, a Portfolio
may not enter into futures contracts or options thereon if the sum of initial
and variation margin on outstanding futures contracts, together with the premium
paid on outstanding options, exceeds 20% of the Portfolio's total assets. The
Fund will use futures and options thereon in a manner consistent with these
requirements.

If a Portfolio maintains a short position in a futures contract, it will
cover this position by holding, in a segregated account maintained at the
Custodian, cash, U.S. Government securities, equity securities or other liquid,
unencumbered assets, marked-to-market daily, equal in value (when added to any
initial or variation margin on deposit) to the market value of the securities
underlying the futures contract. Such a position may also be covered by owning
the securities underlying the futures contract, or by holding a call option
permitting the Portfolio to purchase the same contract at a price no higher than
the price at which the short position was established.

In addition, if a Portfolio holds a long position in a futures contract, it
will hold cash, U.S. Government securities, equity securities or other liquid,
unencumbered assets, marked-to-market daily, equal to the purchase price of the
contract (less the amount of initial or variation margin on deposit) in a
segregated account maintained for the Portfolio by the Fund's Custodian.
Alternatively, a Portfolio could cover its long position by purchasing a put
option on the same futures contract with an exercise price as high as or higher
than the price of the contract held by the Portfolio.

Exchanges limit the amount by which the price of a futures contract may move
on any day. If the price moves equal the daily limit on successive days, then it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased. In the event of adverse price movements, the Portfolios would
continue to be required to make daily cash payments of variation margin on open
futures positions. In such situations, if a Portfolio has insufficient cash, it
may be disadvantageous to do so. In addition, a Portfolio may be required to
take or make delivery of the instruments underlying futures contracts it holds
at a time when it is disadvantageous to do so. The ability to close out options
and futures positions could also have an adverse impact on a Portfolio's ability
to effectively hedge its portfolio.

In the event of the bankruptcy of a broker through which a Portfolio engages
in transactions in futures or options thereon, the Portfolio could experience
delays and/or losses in liquidating open positions purchased or sold through the
broker and/or incur a loss of all or part of its margin deposits with the
broker. Transactions are entered into by the Portfolio only with brokers or
financial institutions deemed creditworthy by the investment adviser.

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There are risks inherent in the use of futures contracts and options
transactions for the purpose of hedging a Portfolio's portfolio securities. One
such risk which may arise in employing futures contracts to protect against the
price volatility of portfolio securities is that the prices of securities
subject to futures contracts (and thereby the futures contract prices) may
correlate imperfectly with the behavior of the cash prices of the Portfolio's
portfolio securities. Another such risk is that prices of futures contracts may
not move in tandem with the changes in prevailing interest rates against which
the Portfolio seeks a hedge. A correlation may also be distorted by the fact
that the futures market is dominated by short-term traders seeking to profit
from the difference between a contract or security price objective and their
cost of borrowed funds. Such distortions are generally minor and would diminish
as the contract approached maturity.

There may exist an imperfect correlation between the price movements of
futures contracts purchased by a Portfolio and the movements in the prices of
the securities which are the subject of the hedge. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationships between the securities and futures market could result.
Price distortions could also result if investors in futures contracts elect to
make or take delivery of underlying securities rather than engage in closing
transactions due to the resultant reduction in the liquidity of the futures
market. In addition, due to the fact that, from the point of view of
speculators, the deposit requirements in the futures markets are less onerous
than margin requirements in the cash market, increased participation by
speculators in the futures markets could cause temporary price distortions. Due
to the possibility of price distortions in the futures market and because of the
imperfect correlation between movements in the prices of securities and
movements in the prices of futures contracts, a correct forecast of interest
rate or stock market trends by the investment adviser may still not result in a
successful hedging transaction.

Successful use of futures contracts by a Portfolio is also subject to the
ability of the Fund's investment adviser to predict correctly movements in the
direction of interest rates and other factors affecting markets for securities.
For example, if a Portfolio has hedged against the possibility of an increase in
interest rates which would adversely affect the price of securities in its
portfolio and the price of such securities increases instead, the Portfolio will
lose part or all of the benefit of the increased value of its securities because
it will have offsetting losses in its futures positions. In addition, in such
situations, if a Portfolio has insufficient cash to meet daily variation margin
requirements, it may need to sell securities to meet such requirements. Such
sales of securities may be, but will not necessarily be, at increased prices
which reflect the rising market. A Portfolio may have to sell securities at a
time when it is disadvantageous to do so.

The hours of trading of futures contracts may not conform to the hours
during which a Portfolio may trade the underlying securities. To the extent that
the futures markets close before the securities markets, significant price and
rate movements can take place in the securities markets that cannot be reflected
in the futures markets.

OPTIONS ON FUTURES CONTRACTS

An option on a futures contract gives the purchaser the right, but not the
obligation, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of the
option is required upon exercise to assume an offsetting futures position (a
short position if the option is a call and a long position if the option is a
put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by delivery
of the accumulated cash balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. Currently, options can
be purchased or written with respect to futures contracts on U.S. Treasury
Bills, Notes and Bonds and on the S&P 500 Stock Index and the NYSE Composite
Index.

The holder or writer of an option may terminate his or her position by
selling or purchasing an option of the same series. There is no guarantee that
such closing transactions can be effected.

LIMITATIONS ON PURCHASE AND SALE OF OPTIONS, FUTURES AND OPTIONS THEREON

Each Portfolio may write call options on stocks only if they are covered,
and such options must remain covered so long as the Fund is obligated as a
writer. The Fund has undertaken with certain state securities commissions that,
so long as shares of a Portfolio of the Fund are registered in those states,
neither Portfolio will purchase (i) put options on stocks not held by the
Portfolio, (ii) put options on indices and (iii) call options on stock or stock
indices or foreign currencies if, after any such purchase, the total premiums
paid for such options would exceed 10% of the Portfolio's total assets;
provided, however, that a

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Portfolio may purchase put options on stock held by the Portfolio if after such
purchase the aggregate premiums paid for such options do not exceed 20% of the
Portfolio's total net assets. In addition, the aggregate value of the securities
that are the subject of put options will not exceed 50% of the Portfolio's net
assets.

POSITION LIMITS. Transactions by a Portfolio in futures contracts and
options will be subject to limitations, if any, established by each of the
exchanges, boards of trade or other trading facilities (including NASDAQ)
governing the maximum number of options in each class which may be written or
purchased by a single investor or group of investors acting in concert,
regardless of whether the options are written on the same or different
exchanges, boards of trade or other trading facilities or are held or written in
one or more accounts or through one or more brokers. Thus, the number of futures
contracts and options which the Portfolio may write or purchase may be affected
by the futures contracts and options written or purchased by other investment
advisory clients of the investment adviser. An exchange, board of trade or other
trading facility may order the liquidations of positions found to be in excess
of these limits, and it may impose certain other sanctions.

RISK FACTORS RELATING TO HIGH YIELD SECURITIES

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

The amount of high yield securities outstanding proliferated in the 1980's
in conjunction with the increase in merger and acquisition and leveraged buyout
activity. An economic downturn could severely affect the ability of highly
leveraged issuers to service their debt obligations or to repay their
obligations upon maturity. In addition, the secondary market for high yield
securities which is concentrated in relatively few market makers, may not be as
liquid as the secondary market for more highly rated securities. Under adverse
market or economic conditions, the secondary market for high yield securities
could contract further, independent of any specific adverse changes in the
condition of a particular issuer. As a result, the investment adviser could find
it more difficult to sell these securities or may be able to sell the securities
only at prices lower than if such securities were widely traded. Prices realized
upon the sale of such lower-rated or unrated securities, under these
circumstances, may be less than the prices used in calculating a Portfolio's net
asset value.

Federal laws require the divestiture by federally insured savings and loan
associations of their investments in high yield bonds and limit the
deductibility of interest by certain corporate issuers of high yield bonds.
These laws could adversely affect a Portfolio's net asset value and investment
practices, the secondary market for high yield securities, the financial
condition of issuers of these securities and the value of outstanding high yield
securities.

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

MORTGAGE-RELATED SECURITIES

Each Portfolio may also invest in Collateralized Mortgage Obligations
(CMOs). A CMO is a debt security that is backed by a portfolio of mortgages or
mortgage-backed securities. The issuer's obligation to make interest and
principal payments is secured by the underlying portfolio of mortgages or
mortgage-backed securities. CMOs generally are partitioned into several classes
with a ranked priority as to the time that principal payments will be made with
respect to each of the classes.

Each Portfolio may also invest in Real Estate Mortgage Investment Conduits
(REMICs). An issuer of REMICs may be a trust, partnership, corporation,
association, segregated pool of mortgages, or agency of the U.S. Government and,
in each case, must qualify and elect treatment as such under the Tax Reform Act
of 1986. A REMIC must consist of one or more classes of "regular interests" some
of which may be adjustable rate, and a single class of "residual interests." To
qualify as a REMIC, substantially all the assets of the entity must be directly
or indirectly secured, principally by real property. The Fund does not

B-8
<PAGE>
intend to invest in residual interests. REMICs are intended by the U.S. Congress
ultimately to become the exclusive vehicle for the issuance of multi-class
securities backed by real estate mortgages. As of January 1, 1992, if a trust or
partnership that issues CMOs does not elect or qualify for REMIC status, it is
taxed at the entity level as a corporation.

Certain issuers of CMOs, including CMOs that have elected to be treated as
REMICs, are not considered investment companies pursuant to a Rule adopted by
the Securities and Exchange Commission (SEC), and each Portfolio may invest in
the securities of such issuers without the limitations imposed by the Investment
Company Act of 1940 on investments by an investment company in other investment
companies. In addition, in reliance on an earlier SEC interpretation, a
Portfolio's investments in certain qualifying CMOs, which cannot or do not rely
on the rule, including CMOs that have elected to be treated as REMICs, are not
subject to the Investment Company Act's limitation on acquiring interests in
other investment companies. In order to be able to rely on the SEC's
interpretation, the CMOs and REMICs must be unmanaged, fixed-asset issuers that
(a) invest primarily in mortgage-backed securities, (b) do not issue redeemable
securities, (c) operate under general exemptive orders exempting them from all
provisions of the Investment Company Act, and (d) are not registered or
regulated under the Investment Company Act as investment companies. To the
extent that a Portfolio selects CMOs or REMICs that do not meet the above
requirements, the Portfolio may not invest more than 10% of its assets in all
such entities and may not acquire more than 3% of the voting securities of any
single such entity.

MONEY MARKET INSTRUMENTS

Each Portfolio may invest in money market instruments, including commercial
paper of corporations, certificates of deposit, bankers' acceptances and other
obligations of domestic and foreign banks, and obligations issued or guaranteed
by the U.S. Government, its instrumentalities or its agencies. A Portfolio will
invest in foreign banks and foreign branches of U.S. banks only if, after giving
effect to such investment, all such investments would constitute less than 10%
of such Portfolio's total assets (taken at current value). Such investments may
be subject to certain risks, including future political and economic
developments, the possible imposition of withholding taxes on interest income,
the seizure or nationalization of foreign deposits and foreign exchange controls
or other restrictions.

Each Portfolio may also invest in money market instruments that are
guaranteed by an insurance company or other non-bank entity. Under the
Investment Company Act, a guaranty is not deemed to be a security of the
guarantor for purposes of satisfying the diversification requirements provided
that the securities issued or guaranteed by the guarantor and held by a
Portfolio do not exceed 10% of the Portfolio's total assets.

REPURCHASE AGREEMENTS

The Fund's repurchase agreements will be collateralized by U.S. Government
obligations. The Fund will enter into repurchase transactions only with parties
meeting creditworthiness standards approved by the Fund's Trustees. The Fund's
investment adviser will monitor the creditworthiness of such parties under the
general supervision of the Trustees. In the event of a default or bankruptcy by
a seller, the Fund will promptly seek to liquidate the collateral. To the extent
that the proceeds from any sale of such collateral upon a default in the
obligation to repurchase are less than the repurchase price, the Fund will
suffer a loss.

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

LENDING OF SECURITIES

Consistent with applicable regulatory requirements, each Portfolio may lend
its portfolio securities to brokers, dealers and financial institutions provided
that outstanding loans do not exceed in the aggregate 33% of the value of the
Portfolio's total assets and provided further that such loans are callable at
any time by the Portfolio and are at all times secured by cash or equivalent
collateral that is equal to at least the market value, determined daily, of the
loaned securities. The advantage of such loans is that a Portfolio continues to
receive payments in lieu of the interest and dividends of the loaned securities,
while at the same time earning interest either directly from the borrower or on
the collateral which will be invested in short-term obligations.

A loan may be terminated by the borrower on one business day's notice or by
a Portfolio at any time. If the borrower fails to maintain the requisite amount
of collateral, the loan automatically terminates and the Portfolio can use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of

B-9
<PAGE>
credit, there are risks of delay in recovery and in some cases loss of rights in
the collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms determined to be
creditworthy pursuant to procedures approved by the Trustees of the Fund. On
termination of the loan, the borrower is required to return the securities to
the Portfolio, and any gain or loss in the market price during the loan would
inure to the Portfolio.

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

WARRANTS

Each Portfolio will not invest more than 5% of its net assets in warrants,
nor will it invest more than 2% of its net assets in warrants which are not
listed on the New York or American Stock Exchanges or a major foreign exchange.
In the application of such limitation, warrants will be valued at the lower of
cost or market value, except that warrants acquired by a Portfolio in units or
attached to other securities will be deemed to be without value.

ILLIQUID SECURITIES

The Fund may not hold more than 10% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market (either within or outside of the United States) or
legal or contractual restrictions on resale. Historically, illiquid securities
have included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (Securities Act), securities which are otherwise not readily marketable
and repurchase agreements having a maturity of longer than seven days.
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.

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

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

Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Trustees. In reaching liquidity decisions, the investment adviser will consider,
INTER ALIA, the following factors: (1) the frequency of trades and quotes for
the security; (2) the number of dealers wishing to puchase or sell the security
and the number of other potential purchasers; (3) dealer undertakings to make a
market in the security; and (4) the nature of the security and the nature of the
marketplace trades (E.G., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer). In addition, in order
for commercial paper that is

B-10
<PAGE>
issued in reliance on Section 4(2) of the Securities Act to be considered
liquid, (i) it must be rated in one of the two highest rating categories by at
least two nationally recognized statistical rating organizations (NRSRO), or if
only one NRSRO rates the securities, by that NRSRO, or, if unrated, be of
comparable quality in the view of the investment adviser, and (ii) it must not
be "traded flat" (I.E., without accrued interest) or in default as to principal
or interest. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.

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

SECURITIES OF OTHER INVESTMENT COMPANIES

Each Portfolio may invest up to 5% of its total assets in securities of
other registered investment companies. Generally, the Portfolios do not intend
to invest in such securities. If a Portfolio does invest in securities of other
registered investment companies, shareholders of the Portfolio may be subject to
duplicate management and advisory fees.

PORTFOLIO TURNOVER

As a result of the investment policies described above, each Portfolio may
engage in a substantial number of portfolio transactions, but each Portfolio's
portfolio turnover rate is not expected to exceed 200%. The portfolio turnover
rates for the Balanced Portfolio for the fiscal years ended July 31, 1995 and
1996 were 201% and 97%, respectively. The portfolio turnover rates for the
Strategy Portfolio for the fiscal years ended July 31, 1995 and 1996 were 180%
and 147%, respectively. The portfolio turnover rate is generally the percentage
computed by dividing the lesser of portfolio purchases or sales (excluding all
securities, including options, whose maturities or expiration date at
acquisition were one year or less) by the monthly average value of such
portfolio securities. High portfolio turnover involves correspondingly greater
brokerage commissions and other transaction costs, which are borne directly by
each Portfolio. In addition, high portfolio turnover may also mean that a
proportionately greater amount of distributions to shareholders will be taxed as
ordinary income rather than long-term capital gains compared to investment
companies with lower portfolio turnover. See "Portfolio Transactions and
Brokerage" and "Taxes."

INVESTMENT RESTRICTIONS

The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the outstanding voting securities of a Portfolio. A "majority of the
outstanding voting securities of a Portfolio," when used in this Statement of
Additional Information, means the lesser of (i) 67% of the voting shares
represented at a meeting at which more than 50% of the outstanding voting shares
are present in person or represented by proxy or (ii) more than 50% of the
outstanding voting shares.

Each Portfolio may not:

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

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

3. Issue senior securities, borrow money or pledge its assets, except that
the Portfolio may borrow up to 20% of the value of its total assets (calculated
when the loan is made) for temporary, extraordinary or emergency purposes or for
the clearance of transactions. The Portfolio may pledge up to 20% of the value
of its total assets to secure such borrowings. For purposes of this restriction,
the preference as to shares of a Portfolio in liquidation and as to dividends
over all other Portfolios of the Fund with respect to assets specifically
allocated to that Portfolio, the purchase or sale of securities on a when-issued
or delayed delivery basis, the purchase of forward foreign currency exchange
contracts and collateral arrangements relating thereto, the purchase and sale of
options, financial futures contracts, options on such contracts and collateral
arrangements with respect thereto and with respect to interest rate swap
transactions and obligations of the Fund to Trustees pursuant to deferred
compensation arrangements are not deemed to be the issuance of a senior security
or a pledge of assets.

B-11
<PAGE>
4. Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities) if as a result: (i) with respect to 75% of
the Portfolio's assets, more than 5% of the total assets of the Portfolio
(determined at the time of investment) would then be invested in securities of a
single issuer or (ii) more than 25% of the total assets of the Portfolio
(determined at the time of investment) would be invested in a single industry.
As to utility companies, gas, electric and telephone companies will be
considered as separate industries.

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

6. Purchase any security if as a result the Portfolio would then have more
than 5% of its total assets (determined at the time of investment) invested in
securities of companies (including predecessors) less than three years old,
except that the Portfolio may invest in the securities of any U.S. Government
agency or instrumentality, and in any security guaranteed by such an agency or
instrumentality.

7. Buy or sell real estate or interests in real estate, except that it may
purchase and sell securities which are secured by real estate, securities of
companies which invest or deal in real estate and publicly traded securities of
real estate investment trusts.

8. Buy or sell commodities or commodity contracts, except that it may
purchase and sell futures contracts and options thereon. (For purposes of this
restriction, a forward foreign currency exchange contract is not deemed to be a
commodity or commodity contract.)

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

10. Make investments for the purpose of exercising control or management.

11. Invest in securities of other registered investment companies, except by
purchases in the open market involving only customary brokerage commissions and
as a result of which not more than 5% of its total assets (determined at the
time of investment) would be invested in such securities, or except as part of a
merger, consolidation or other acquisition.

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

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

In order to comply with certain state "blue sky" restrictions, each
Portfolio will not as a matter of operating policy:

1. Purchase the securities of any one issuer if, to the knowledge of the
Fund, any officer or Trustee of the Fund or any officer or director of the
Manager or Subadviser owns more than 1/2 of 1% of the outstanding securities of
such issuer, and such officers, Trustees and directors who own more than 1/2 of
1% own in the aggregate more than 5% of the outstanding securities of such
issuer;

2. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, or securities of
issuers which are restricted as to disposition, if more than 15% of its total
assets would be invested in such securities. This restriction shall not apply to
mortgage-backed securities, asset-backed securities or obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities;

3. Invest more than 5% of its total assets in securities of unseasoned
issuers, including their predecessors, which have been in operation for less
than three years, and in equity securities of issuers which are not readily
marketable;

4. Purchase securities which are secured by real estate or securities of
companies which invest or deal in real estate unless such securities are readily
marketable; and invest in oil, gas and mineral leases; and

5. Engage in arbitrage transactions.

Whenever any fundamental investment policy or investment restriction states
a maximum percentage of a Portfolio's assets, it is intended that if the
percentage limitation is met at the time the investment is made, a later change
in percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the
Portfolio's asset coverage for borrowings falls below 300%, the Portfolio will
take prompt action to reduce its borrowings, as required by applicable law.

B-12
<PAGE>
TRUSTEES AND OFFICERS

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE THE FUND DURING PAST 5 YEARS
- ------------------------------ ----------------------- --------------------------------------------------------------
<S> <C> <C>
Edward D. Beach (71) Trustee President and Director of BMC Fund, Inc., a closed-end
c/o Prudential Mutual Fund investment company; formerly Vice Chairman of Broyhill
Management, Inc. Furniture Industries, Inc.; Certified Public Accountant;
One Seaport Plaza Secretary and Treasurer of Broyhill Family Foundation, Inc.;
New York, NY Member of the Board of Trustees of Marshall College
President, Treasurer and Director of First Financial Fund,
Inc. and The High Yield Plus Fund, Inc.; President and
Director of Global Utility Fund, Inc.

Donald D. Lennox (77) Trustee Chairman (since February 1990) and Director (since April 1989)
c/o Prudential Mutual Fund of International Imaging Materials, Inc.; Retired Chairman,
Management, Inc. Chief Executive Officer and Director of Schlegel Corporation
One Seaport Plaza (industrial manufacturing) (March 1987-February 1989);
New York, NY Director of Gleason Corporation, Personal Sound Technologies,
Inc. and The High Yield Income Fund, Inc.

Douglas H. McCorkindale (57) Trustee Vice Chairman, Gannett Co. Inc. (publishing and media) (since
c/o Prudential Mutual Fund March 1984); Director of Continental Airlines, Inc., Gannett
Management, Inc. Co. Inc. and Frontier Corporation.
One Seaport Plaza
New York, NY

Thomas T. Mooney (54) Trustee President of the Greater Rochester Metro Chamber of Commerce;
c/o Prudential Mutual Fund formerly Rochester City Manager; Trustee of Center for
Management, Inc. Governmental Research, Inc.; Director of Blue Cross of
One Seaport Plaza Rochester, Monroe County Water Authority, Rochester Jobs,
New York, NY Inc., Executive Service Corps of Rochester, Monroe County
Industrial Development Corporation, Northeast Midwest
Institute, First Financial Fund, Inc. and The High Yield Plus
Fund, Inc.

*Richard A. Redeker (52) President and Trustee President, Chief Executive Officer and Director (since October
One Seaport Plaza 1993), Prudential Mutual Fund Management, Inc. (PMF);
New York, NY Executive Vice President, Director and Member of Operating
Committee (since October 1993), Prudential Securities
Incorporated (Prudential Securities); Director (since October
1993) of Prudential Securities Group, Inc.; Executive Vice
President, The Prudential Investment Corporation (since
January 1994); Director (since January 1994), Prudential
Mutual Fund Distributors, Inc. (PMFD) and Prudential Mutual
Fund Services, Inc. (PMFS); formerly Senior Executive Vice
President and Director of Kemper Financial Services, Inc.
(September 1978-September 1993); President and Director of
The High Yield Income Fund, Inc.**
</TABLE>

- ------------------------
* "Interested" Trustee, as defined in the investment Company Act, by reason of
his affiliation with Prudential Securities and PMF.

** Mr. Redeker has resigned as President, Chief Executive Officer and Director
of PMF, effective on or before December 31, 1996. It is anticipated that Mr.
Redeker will remain associated with PMF and Prudential and will continue to
serve as President of the Fund.

B-13
<PAGE>

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE THE FUND DURING PAST 5 YEARS
- ------------------------------ ----------------------- --------------------------------------------------------------
<S> <C> <C>
Louis A. Weil, III (55) Trustee Publisher and Chief Executive Officer (since January 1996) and
c/o Prudential Mutual Fund Director (since September 1991) of Central Newspapers Inc.;
Management, Inc. Chairman of the Board (since January 1996), Publisher and
One Seaport Plaza Chief Executive Officer (August 1991-December 1995) of
New York, NY Phoenix Newspapers, Inc.; prior thereto, Publisher of Time
Magazine (May 1989-March 1991); formerly President, Publisher
and Chief Executive Officer of The Detroit News (February
1986-August 1989); formerly member of the Advisory Board,
Chase Manhattan Bank-Westchester.

Robert F. Gunia (49) Vice President Chief Administrative Officer (since July 1990), Director
One Seaport Plaza (since January 1989) and Executive Vice President, Treasurer
New York, NY and Chief Financial Officer (since June 1987) of PMF;
Comptroller (since 1996) of the Money Management Group of The
Prudential Insurance Company of America (Prudential); Senior
Vice President (since March 1987) of Prudential Securities;
Executive Vice President, Treasurer, Comptroller and Director
(since March 1991) of PMFD; Director (since June 1987) of
PMFS; Vice President and Director (since May 1989) of The
Asia Pacific Fund, Inc.

Susan C. Cote (41) Treasurer and Principal Managing Director, Prudential Investment Advisors, and Vice
751 Broad Street Financial and President, The Prudential Investment Corporation (since
Newark, NJ Accounting Officer February 1995); Senior Vice President (January 1989-January
1995) of PMF; Senior Vice President (January 1992-January
1995) and Vice President (January 1986-December 1991) of
Prudential Securities.

Stephen M. Ungerman (43) Assistant Treasurer First Vice President of PMF (since February 1993); Tax
One Seaport Plaza Director of the Money Management Group and the Private Asset
New York, NY Group of Prudential (since March 1996); prior thereto, Senior
Tax Manager of Price Waterhouse (1981-January 1993).

S. Jane Rose (50) Secretary Senior Vice President (since January 1991) and Senior Counsel
One Seaport Plaza (since June 1987) of PMF; Senior Vice President and Senior
New York, NY Counsel (since July 1992) of Prudential Securities; formerly
Vice President and Associate General Counsel of Prudential
Securities.

Marguerite E. H. Morrison (40) Assistant Secretary Vice President and Associate General Counsel (since June 1991)
One Seaport Plaza of PMF; Vice President and Associate General Counsel of
New York, NY Prudential Securities.
</TABLE>

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

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

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

B-14
<PAGE>

The Trustees have nominated a new slate of Trustees of the Fund which will
be submitted to shareholders at a special meeting scheduled to be held on or
about October 30, 1996.

The Fund pays each of its Trustees who is not an affiliated person of PMF
annual compensation of $8,500 in addition to certain out-of-pocket expenses.

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

Pursuant to the terms of the Management Agreement with the Fund, the Manager
pays all compensation of officers and employees of the Fund as well as the fees
and expenses of all Trustees of the Fund who are affiliated persons of the
Manager.

The following table sets forth the aggregate compensation paid by the Fund
to the Trustees who are not affiliated with the Manager for the fiscal year
ended July 31, 1996 and the aggregate compensation paid to such Trustees for
service on the Fund's Board and the Boards of any other investment companies
managed by PMF (Fund Complex) for the calendar year ended December 31, 1995.

COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM FUND AND
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FUND COMPLEX
COMPENSATION AS PART OF FUND BENEFITS UPON PAID TO
NAME AND POSITION FROM FUND EXPENSES RETIREMENT TRUSTEES
- ----------------------------------- ------------- ----------------- ----------------- -------------
<S> <C> <C> <C> <C>
Edward D. Beach--Trustee $ 8,500 None N/A $183,500 (22/43)*
Donald D. Lennox--Trustee 8,500 None N/A 86,250 (10/22)*
Douglas H. McCorkindale--Trustee 8,500 None N/A 63,750 (7/10)*
Thomas T. Mooney--Trustee 8,500 None N/A 125,625 (14/19)*
Louis A. Weil III--Trustee 8,500 None N/A 93,750 (11/16)*
<FN>
- ------------------------
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
</TABLE>

As of September 13, 1996, the Trustees and officers of the Fund, as a group,
owned beneficially less than 1% of the outstanding shares of beneficial interest
of each Portfolio of the Fund. As of September 13, 1996, Prudential Securities
Inc., F.A. Charles A. Linsmeier, 9952 Wildwood Way, Villa Park, CA 92667-4315,
and Elsie I. Hammond, TOD Bonnie Maret, Subject to state TOD Rules - NJ, 6122 NE
Upper Wood Road, Lees Summit, MO 64064-2441, were the beneficial owners of
25,264 and 27,653 Class C shares of the Balanced Portfolio (7.4% and 8.5%,
respectively) and Prudential Securities Inc., F. A. Issac Weber & Eve Weber, 307
Prospect Ave, Hackensack, NJ 07601-2574 was the beneficial owner of 8,205 Class
C shares of the Strategy Porfolio (12.6%).

As of September 13, 1996, Prudential Securities was record holder for other
beneficial owners of 10,863,096 Class A shares (or 47.7% of the outstanding
Class A shares) of the Balanced Portfolio and 2,699,972 Class A shares (or 31.4%
of the outstanding Class A shares) of the Strategy Portfolio, 10,911,241 Class B
shares (or 31.8% of the outstanding Class B shares) of the Balanced Portfolio
and 9,259,154 Class B shares (or 49.2% of the outstanding Class B shares) of the
Strategy Portfolio and 97 Class C shares (or .02% of the outstanding Class C
shares) of the Balanced Portfolio and 51 Class C shares (or .07% of the
outstanding Class C shares) of the Strategy Portfolio. In the event of any
meetings of shareholders, Prudential Securities will forward, or cause the
forwarding of, proxy material to the beneficial owners for which it is the
record holder.

MANAGER

The manager of the Fund is Prudential Mutual Fund Management, Inc. (PMF or
the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as manager
to all of the other investment companies that, together with the Fund, comprise
the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. As of August 31, 1996, PMF managed

B-15
<PAGE>

and/or administered open-end and closed-end management investment companies with
assets of approximately $52 billion. According to the Investment Company
Institute, as of August 31, 1996, the Prudential Mutual Funds were the 17th
largest family of mutual funds in the United States.

PMF is a subsidiary of Prudential Securities and Prudential. PMF has three
wholly-owned subsidiaries: Prudential Mutual Fund Distributors, Inc., Prudential
Mutual Fund Services, Inc. (PMFS or the Transfer Agent) and Prudential Mutual
Fund Investment Management. PMFS serves as the transfer agent for the Prudential
Mutual Funds and, in addition, provides customer service, recordkeeping and
management and administration services to qualified plans.

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

For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .65 of 1% of the average daily net assets of each
Portfolio. The fee is computed daily and payable monthly. The Management
Agreement also provides that, in the event the expenses of the Fund (including
the fees of PMF, but excluding interest, taxes, brokerage commissions,
distribution fees and litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Fund's
business) for any fiscal year exceed the lowest applicable annual expense
limitation established and enforced pursuant to the statutes or regulations of
any jurisdiction in which the Fund's shares are qualified for offer and sale,
the compensation due PMF will be reduced by the amount of such excess.
Reductions in excess of the total compensation payable to PMF will be paid by
PMF to the Fund. No such reductions were required during the fiscal year ended
July 31, 1996. Currently, the Fund believes that the most restrictive expense
limitation of state securities commissions is 2 1/2% of a Portfolio's average
daily net assets up to $30 million, 2% of the next $70 million of such assets
and 1 1/2% of such assets in excess of $100 million.

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

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

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

(c) the costs and expenses payable to The Prudential Investment Corporation
(PIC) pursuant to the subadvisory agreement between PMF and PIC (the Subadvisory
Agreement).

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

B-16
<PAGE>

The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. The Management Agreement
was last approved by the Trustees of the Fund, including a majority of the
Trustees who are not parties to the contract or interested persons of any such
party, as defined in the Investment Company Act, on May 8, 1996 and by
shareholders of each Portfolio of the Fund on February 19, 1988.

For the fiscal year ended July 31, 1996, PMF received management fees of
$4,475,647 and $2,362,457 on behalf of the Balanced Portfolio and Strategy
Portfolio, respectively. For the fiscal year ended July 31, 1995, PMF received
management fees of $3,120,574 and $2,370,080 on behalf of the Balanced Portfolio
and Strategy Portfolio, respectively. For the fiscal year ended July 31, 1994,
PMF received management fees of $2,743,056 and $2,555,883 on behalf of the
Balanced Portfolio and Strategy Portfolio, respectively.

PMF has entered into the Subadvisory Agreement with PIC (the Subadviser).
The Subadvisory Agreement provides that PIC will furnish investment advisory
services in connection with the management of the Fund. In connection therewith,
PIC is obligated to keep certain books and records of the Fund. PMF continues to
have responsibility for all investment advisory services pursuant to the
Management Agreement and supervises PIC's performance of such services. PIC is
reimbursed by PMF for the reasonable costs and expenses incurred by PIC in
furnishing those services. Investment advisory services are provided to the Fund
by a unit of the Subadviser known as Prudential Mutual Fund Investment
Management.

The Subadvisory Agreement was last approved by the Trustees, including a
majority of the Trustees who are not parties to the contract or interested
persons of any such party as defined in the Investment Company Act, on May 8,
1996, and by shareholders of each Portfolio of the Fund on February 19, 1988.

The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PMF or PIC upon not more than 60 days', nor less than 30
days', written notice. The Subadvisory Agreement provides that it will continue
in effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least annually in accordance with
the requirements of the Investment Company Act.

DISTRIBUTOR

Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, acts as the distributor of the shares
of the Fund. Prior to January 2, 1996, Prudential Mutual Fund Distributors, Inc.
(PMFD), One Seaport Plaza, New York, New York 10292, served as the distributor
of the Class A shares of the Fund.

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

Prior to January 22, 1990, the Fund offered only one class of shares (the
then existing Class B shares). On October 11, 1989, the Trustees, including a
majority of the Trustees who are not interested persons of the Fund and who have
no direct or indirect financial interest in the operation of the Class A or
Class B Plan or in any agreement related to either Plan (the Rule 12b-1
Trustees), at a meeting called for the purpose of voting on each Plan, adopted a
new plan of distribution for the Class A shares of the Fund (the Class A Plan)
and approved an amended and restated plan of distribution with respect to the
Class B shares of the Fund (the Class B Plan). On May 4, 1993, the Trustees,
including a majority of the Rule 12b-1 Trustees, at a meeting called for the
purpose of voting on each Plan, approved the continuance of the Plans and
Distribution Agreements and approved modifications of the Fund's Class A and
Class B Plans and Distribution Agreements to conform them with recent amendments
to the NASD maximum sales charge rule described below. As so modified, the Class
A Plan provides that (i) up to .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and the maintenance of
shareholder

B-17
<PAGE>
accounts (service fee) and (ii) total distribution fees (including the service
fee of .25 of 1%) may not exceed .30 of 1%. As so modified, the Class B Plan
provides that (i) up to .25 of 1% of the average daily net assets of the Class B
shares may be paid as a service fee and (ii) up to .75 of 1% (not including the
service fee) of the average daily net assets of the Class B shares

(asset-based sales charge) may be used as reimbursement for distribution-related
expenses with respect to the Class B shares. On May 4, 1993, the Trustees,
including a majority of the Rule 12b-1 Trustees, at a meeting called for the
purpose of voting on each Plan, adopted a plan of distribution for the Class C
shares of the Fund and approved further amendments to the plans of distribution
for the Fund's Class A and Class B shares, changing them from reimbursement type
plans to compensation type plans. The Plans were last approved by the Trustees,
including a majority of the Rule 12b-1 Trustees, on May 8, 1996. The Class A
Plan, as amended, was approved by Class A and Class B shareholders of each
Portfolio, and the Class B Plan, as amended, was approved by Class B
shareholders of each Portfolio on July 19, 1994. The Class C Plan was approved
by the sole shareholder of Class C shares of each Portfolio on August 1, 1994.

CLASS A PLAN. For the fiscal year ended July 31, 1996, PMFD and PSI received
payments of $616,522 and $244,002 on behalf of the Balanced Portfolio and
Strategy Portfolio, respectively, under the Class A Plan. These amounts were
primarily expended for payments of account servicing fees to financial advisers
and other persons who sell Class A shares. For the fiscal year ended July 31,
1996, PMFD and PSI also received approximately $238,100 and $150,800 on behalf
of the Balanced Portfolio and Strategy Portfolio, respectively, in initial sales
charges.

CLASS B PLAN. For the fiscal year ended July 31, 1996, Prudential Securities
received $4,377,921 and $2,653,866 from the Balanced Portfolio and Strategy
Portfolio, respectively, under the Class B Plan and spent approximately the
following amounts on behalf of the Portfolios of the Fund:

<TABLE>
<CAPTION>
PRINTING AND COMMISSION COMPENSATION APPROXIMATE
MAILING PAYMENTS TO TO PRUSEC FOR TOTAL AMOUNT
PROSPECTUSES TO FINANCIAL OVERHEAD COMMISSION SPENT BY
OTHER THAN ADVISERS OF COSTS PAYMENTS TO DISTRIBUTOR ON
CURRENT PRUDENTIAL OF PRUDENTIAL REPRESENTATIVES AND BEHALF OF
PORTFOLIO SHAREHOLDERS SECURITIES SECURITIES* OTHER EXPENSES* PORTFOLIO
- ------------------------- --------------- ----------- --------------- ------------------- --------------
<S> <C> <C> <C> <C> <C>
Balanced Portfolio....... $29,400 $ 719,000 $ 887,600 $1,650,200 $ 2,286,200
Strategy Portfolio....... 25,100 502,400 549,700 499,400 1,576,600
<FN>
- ------------------------
* Including lease, utility and sales promotional expenses.
</TABLE>

The term "overhead costs" represents (a) the expenses of operating the
branch offices of Prudential Securities and Pruco Securities Corporation, an
affiliated broker-dealer (Prusec), in connection with the sale of Fund shares,
including lease costs, the salaries and employee benefits of operations and
sales support personnel, utility costs, communication costs and the costs of
stationery and supplies, (b) the cost of client sales seminars, (c) expenses of
mutual fund sales coordinators to promote the sale of Fund shares and (d) other
incidental expenses relating to branch promotion of Fund sales.

Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by investors upon certain redemptions of Class B shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus. For the fiscal year ended July 31, 1996, Prudential
Securities received approximately $767,300 and $416,300 on behalf of the
Balanced Portfolio and Strategy Portfolio, respectively, in contingent deferred
sales charges attributable to Class B shares.

CLASS C PLAN. For the fiscal year ended July 31, 1996, Prudential Securities
received $24,436 and $4,674 on behalf of the Balanced Portfolio and Strategy
Portfolio, respectively, under the Class C Plan and spent approximately $39,100
and $7,500, respectively, in distributing Class C shares. It is estimated that
the latter amount was spent on (i) payments of commissions and account servicing
fees to financial advisers ($13,900 and $2,500, respectively), (ii) payments to
Prusec ($10,900 and $2,100, respectively) and (iii) an allocation of overhead
and other branch office distribution related expenses for payments of related
expenses ($14,300 and $2,900, respectively). Prudential Securities also receives
the proceeds of contingent deferred sales charges paid by investors upon certain
redemptions of Class C shares. See "Shareholder Guide--How to Sell Your Shares--
Contingent Deferred Sales Charges" in the Prospectus. For the fiscal year ended
July 31, 1996, Prudential Securities received approximately $1,400 and $700 on
behalf of the Balanced Portfolio and Strategy Portfolio, respectively, in
contingent deferred sales charges attributable to Class C shares.

The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Trustees, including a majority vote of the Rule 12b-1 Trustees, cast in
person at a

B-18
<PAGE>
meeting called for the purpose of voting on such continuance. The Plans may each
be terminated at any time, without penalty, by the vote of a majority of the
Rule 12b-1 Trustees or by the vote of the holders of a majority of the
outstanding shares of the applicable class on not more than 30 days' written
notice to any other party to the Plans. The Plans may not be amended to increase
materially the amounts to be spent for the services described therein without
approval by the shareholders of the applicable class (by both Class A and Class
B shareholders, voting separately, in the case of material amendments to the
Class A Plan), and all material amendments are required to be approved by the
Trustees in the manner described above. Each Plan will automatically terminate
in the event of its assignment. The Fund will not be contractually obligated to
pay expenses incurred under any Plan if it is terminated or not continued.

Pursuant to each Plan, the Trustees will review at least quarterly a written
report of the distribution expenses incurred on behalf of each class of shares
of the Portfolios by the Distributor. The report includes an itemization of the
distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of the Rule
12b-1 Trustees shall be committed to the Rule 12b-1 Trustees.

Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against certain
liabilities under the Securities Act of 1933, as amended. The restated
Distribution Agreement was approved by the Trustees, including a majority of the
Rule 12b-1 Trustees, on May 8, 1996. On November 3, 1995, the Trustees approved
the transfer of the Distribution Agreement for Class A shares with PMFD to
Prudential Securities.

On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including the
establishment of a Compliance Committee of its Board of Directors. Pursuant to
the terms of the SEC settlement, PSI established a settlement fund in the amount
of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.

On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 3, 1990. Without
admitting or denying the allegations, PSI consented to a reprimand, agreed to
cease and desist from future violations, and to provide voluntary donations to
the State of Texas in the aggregate of $1,500,000. The firm agreed to suspend
the creation of new customer accounts, the general solicitation of new accounts,
and the offer for sale of securities in or from PSI's North Dallas office to new
customers during a period of twenty consecutive business days, and agreed that
its other Texas offices would be subject to the same restrictions for a period
of five consecutive business days. PSI also agreed to institute training
programs for its securities salesmen in Texas.

On October 27, 1994, Prudential Securities Group, Inc. (PSG) and PSI entered
into agreements with the United States Attorney deferring prosecution (provided
PSI complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities

B-19
<PAGE>
shall report any allegations or instances of criminal conduct and material
improprieties to the new director. The new director will submit compliance
reports which shall identify all such allegations or instances of criminal
conduct and material improprieties every three months for a three-year period.

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

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Manager is responsible for decisions to buy and sell securities and
options on securities and futures for each Portfolio of the Fund, the selection
of brokers, dealers and futures commission merchants to effect the transactions
and the negotiation of brokerage commissions, if any. The term "Manager" as used
in this section includes the Subadviser. Broker-dealers may receive brokerage
commissions on portfolio transactions, including options and the purchase and
sale of underlying securities upon the exercise of options. Orders may be
directed to any broker or futures commission merchant including, to the extent
and in the manner permitted by applicable law, Prudential Securities and its
affiliates. Brokerage commissions on United States securities, options and
futures exchanges or boards of trade are subject to negotiation between the
Manager and the broker or futures commission merchant.

In the over-the-counter market, securities and bonds, including convertible
bonds, are generally traded on a "net" basis with dealers acting as principal
for their own accounts without a stated commission, although the price of the
security usually includes a profit to the dealer. In underwritten offerings,
securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments and U.S.
Government agency securities may be purchased directly from the issuer, in which
case no commissions or discounts are paid. The Fund will not deal with
Prudential Securities in any transaction in which Prudential Securities (or any
affiliate) acts as principal. Thus, it will not deal with Prudential Securities
acting as market maker, and it will not execute a negotiated trade with
Prudential Securities if execution involves Prudential Securities acting as
principal with respect to any part of the Fund's order.

In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. Within the framework of this policy, the Manager will
consider the research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to portfolio transactions
of the Fund, the Manager or the Manager's other clients. Such research and
investment services are those which brokerage houses customarily provide to
institutional investors and include statistical and economic data and research
reports on particular companies and industries. Such services are used by the
Manager in connection with all of its investment activities, and some of such
services obtained in connection with the execution of transactions for the Fund
may be used in managing other investment accounts. Conversely, brokers, dealers
or futures commission merchants furnishing such services may be selected for the
execution of transactions of such other accounts, whose aggregate assets are far
larger than the Fund's, and the services furnished by such brokers, dealers or
futures commission merchants may be used by the Manager in providing investment
management for the Fund. Commission rates are established pursuant to
negotiations with the broker, dealer or futures commission merchant based on the
quality and quantity of execution services provided by the broker, dealer or
futures commission merchant in the light of generally prevailing rates. The
policy of the Manager is to pay higher commissions to brokers, other than
Prudential Securities, for particular transactions than might be charged if a
different broker had been selected, on occasions when, in the Manager's opinion,
this policy furthers the objective of obtaining best price and execution. In
addition, the Manager is authorized to pay higher commissions on brokerage
transactions for the Fund to brokers other than Prudential Securities in order
to secure research and investment services described above, subject to review by
the Fund's Trustees from time to time as to the extent and continuation of this
practice. The allocation of orders among brokers and the commission rates paid
are reviewed periodically by the Fund's Trustees. Portfolio securities may not
be purchased from any underwriting or selling syndicate of which Prudential
Securities (or any affiliate), during the existence of the syndicate, is a
principal underwriter (as defined in the Investment Company Act), except in
accordance with rules of the SEC. This limitation, in

B-20
<PAGE>
the opinion of the Fund, will not significantly affect the Portfolios' ability
to pursue their present investment objectives. However, in the future in other
circumstances, the Portfolios may be at a disadvantage because of this
limitation in comparison to other funds with similar objectives but not subject
to such limitations.

Subject to the above considerations, Prudential Securities may act as a
securities broker or futures commission merchant for the Fund. In order for
Prudential Securities (or any affiliate) to effect any portfolio transactions
for the Fund, the commissions, fees or other remuneration received by Prudential
Securities (or any affiliate) must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers or futures
commission merchants in connection with comparable transactions involving
similar securities or futures contracts being purchased or sold on an exchange
or board of trade during a comparable period of time. This standard would allow
Prudential Securities (or any affiliate) to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker or
futures commission merchant in a commensurate arm's-length transaction.
Furthermore, the Trustees of the Fund, including a majority of the
non-interested Trustees, have adopted procedures which are reasonably designed
to provide that any commissions, fees or other remuneration paid to Prudential
Securities (or any affiliate) are consistent with the foregoing standard. In
accordance with Section 11(a) of the Securities Exchange Act of 1934, Prudential
Securities may not retain compensation for effecting transactions on a national
securities exchange for a Portfolio unless the Fund has expressly authorized the
retention of such compensation. Prudential Securities must furnish to the Fund
at least annually a statement setting forth the total amount of all compensation
retained by Prudential Securities from transactions effected for the Portfolios
during the applicable period. Brokerage and futures transactions with Prudential
Securities (or any affiliate) are also subject to such fiduciary standards as
may be imposed upon Prudential Securities (or such affiliate) by applicable law.

Transactions in options by the Fund will be subject to limitations
established by each of the exchanges governing the maximum number of options
which may be written or held by a single investor or group of investors acting
in concert, regardless of whether the options are written or held on the same or
different exchanges or are written or held in one or more accounts or through
one or more brokers. Thus, the number of options which the Fund may write or
hold may be affected by options written or held by the Manager and other
investment advisory clients of the Manager. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.

The table below sets forth information concerning the payment of commissions
by the Fund, including the amount of such commissions paid to Prudential
Securities, for the three years ended July 31, 1996:

<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund.................................. $ 1,622,075 $ 1,810,839 $ 906,929
Total brokerage commissions paid to Prudential
Securities................................................................... $ 83,991 $ 106,448 $ 49,834
Percentage of total brokerage commissions paid to Prudential
Securities................................................................... 5.2% 5.9% 5.5%
</TABLE>

The Fund effected approximately 5.2% of the total dollar amount of its
transactions involving the payment of commissions to Prudential Securities
during the year ended July 31, 1996. Of the total brokerage commissions paid
during such period, $970,470 and $651,605 (or 60% and 40%), respectively, were
paid to firms which provide research, statistical or other services to PMF on
behalf of the Balanced Portfolio and Strategy Portfolio, respectively. PMF has
not separately identified a portion of such brokerage commissions as applicable
to the provision of such research, statistical or other services.

PURCHASE AND REDEMPTION OF FUND SHARES

Shares of each Portfolio of the Fund may be purchased at a price equal to
the next determined net asset value per share plus a sales charge which, at the
election of the investor, may be imposed either (i) at the time of purchase
(Class A shares) or (ii) on a deferred basis (Class B or Class C shares). Class
Z shares of the Portfolios are offered to a limited group of investors at net
asset value without any sales charges. See "Shareholder Guide--How to Buy Shares
of the Fund" in the Prospectus.

Each class of shares represents an interest in the same assets of each
Portfolio of the Fund and is identical in all respects, except that (i) each
class is subject to different sales charges and distribution and/or service fees
(except for Class Z shares, which are not subject to any sales charges and
distribution and/or service fees), which may affect performance, (ii) each class
has exclusive voting rights on any matter submitted to shareholders that relates
solely to its arrangement and has separate voting

B-21
<PAGE>

rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of any other class, (iii) each class has a
different exchange privilege, (iv) only Class B shares have a conversion feature
and (v) Class Z shares are offered exclusively for sale to a limited group of
investors. See "Distributor" and "Shareholder Investment Account--Exchange
Privilege."

SPECIMEN PRICE MAKE-UP

Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of 5%
and Class B*, Class C* and Class Z** shares of the Fund are sold at net asset
value. Using each Portfolio's net asset value at July 31, 1996, the maximum
offering price of the Fund's shares is as follows:

<TABLE>
<CAPTION>
BALANCED STRATEGY
PORTFOLIO PORTFOLIO
--------- -------
<S> <C> <C>
CLASS A
Net asset value and redemption price per Class A share..... $11.85 $ 12.04
Maximum sales charge (5% of offering price)................ .62 .63
--------- ------
Maximum offering price to public........................... $12.47 $ 12.67
--------- ------
--------- ------
CLASS B
Net asset value, offering price and redemption price to
public per Class B share*................................ $11.80 $ 11.96
--------- ------
--------- ------
CLASS C
Net asset value, offering price and redemption price to
public per Class C share*................................ $11.80 $ 11.96
--------- ------
--------- ------
CLASS Z
Net asset value, offering price and redemption price to
public per Class Z share**............................... $11.85 $ 12.04
--------- ------
--------- ------
<FN>
- ------------------------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
** Class Z shares of the Strategy Portfolio did not exist at July 31, 1996.
</TABLE>

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

COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder
Guide--Alternative Purchase Plan" in the Prospectus.

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

(a) an individual;

(b) the individual's spouse, their children and their parents;

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

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

(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse;

(g) one or more employee benefits plans of a company controlled by an
individual; and

(h) (i) a client of a Prudential Securities financial adviser who gives such
financial adviser discretion to purchase the Prudential Mutual Funds for his or
her account only in connection with participation in a market timing program and
for which program Prudential Securities receives a separate advisory fee or (ii)
a client of an unaffiliated registered investment adviser which

B-22
<PAGE>
is a client of a Prudential Securities financial adviser, if such unaffiliated
adviser has discretion to purchase the Prudential Mutual Funds for the accounts
of his or her customers but only if the client of such unaffiliated adviser
participates in a market timing program conducted by such unaffiliated adviser;
provided such accounts in the aggregate have assets of at least $15 million
invested in the Prudential Mutual Funds.

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

The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in any
retirement or group plans.

RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of a
Portfolio and shares of other Prudential Mutual Funds (excluding money market
funds other than those acquired pursuant to the exchange privilege) to determine
the reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (net asset value plus maximum sales charge) as
of the previous business day. See "How the Fund Values its Shares" in the
Prospectus.

The Distributor must be notified at the time of purchase that the
shareholder is entitled to a reduced sales charge. The reduced sales charge will
be granted subject to confirmation of the investor's holdings. Rights of
Accumulation are not available to individual participants in any retirement or
group plans.

LETTERS OF INTENT. Reduced sales charges are also available to investors (or
an eligible group of related investors), including retirement and group plans,
who enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of a Portfolio and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may also
qualify to purchase Class A shares at net asset value by entering into a Letter
of Intent whereby they agree to enroll, within a thirteen-month period, a
specified number of eligible employees or participants (Participant Letter of
Intent).

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

A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish minimum eligible employee or participant goal
over a thirteen-month period. Each investment made during the period, in the
case of an Investment Letter of Intent, will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. In the case of a Participant Letter of Intent, each investment made
during the period will be made at net asset value. Escrowed Class A shares
totaling 5% of the dollar amount of the Letter of Intent will be held by the
Transfer Agent in the name of the purchaser, except in the case of retirement
and group plans where the employer or plan sponsor will be responsible for
paying any applicable sales charge. The effective date of an Investment Letter
of Intent (except in the case of retirement and group plans) may be back-dated
up to 90 days, in order that any investments made during this 90-day period,
valued at the purchaser's cost, can be applied to the fulfillment of the Letter
of Intent goal.

The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter of
Intent does not obligate the retirement or group plan to enroll the indicated
number of eligible employees or participants. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser (or the
employer or plan sponsor, in the case of any retirement or group plan) is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and the sales charge actually paid. Such
payment may be made directly to the Distributor or, if not paid, the Distributor
will liquidate sufficient escrowed shares to obtain such difference. Investors
electing to purchase Class A shares of a Portfolio pursuant to a Letter of
Intent should carefully read such Letter of Intent.

B-23
<PAGE>

The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to individual
participants in any retirement or group plans.

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

The contingent deferred sales charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide-- How to Sell Your Shares--Waiver of
the Contingent Deferred Sales Charges--Class B Shares" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit the
supporting documentation set forth below.

<TABLE>
<S> <C>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death
certificate or, in the case of a trust,
a copy of the grantor's death
certificate, plus a copy of the trust
agreement identifying the grantor.
Disability - An individual A copy of the Social Security
will be considered disabled if Administration award letter or a letter
he or she is unable to engage from a physician on the physician's
in any substantial gainful letterhead stating that the shareholder
activity by reason of any (or, in the case of a trust, the
medically determinable physi- grantor) is permanently disabled. The
cal or mental impairment which letter must also indicate the date of
can be expected to result in disability.
death or to be of
long-continued and indefinite
duration.
Distribution from an IRA or A copy of the distribution form from the
403(b) Custodial Account custodial firm indicating (i) the date
of birth of the shareholder and (ii)
that the shareholder is over age 59 1/2
and is taking a normal
distribution--signed by the shareholder.
Distribution from Retirement A letter signed by the plan
Plan administrator/trustee indicating the
reason for the distribution.
Excess Contributions A letter from the shareholder (for an
IRA) or the plan administrator/trustee
on company letterhead indicating the
amount of the excess and whether or not
taxes have been paid.
</TABLE>

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

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

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

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

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

B-24
<PAGE>
SHAREHOLDER INVESTMENT ACCOUNT

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

AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS

For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of a Portfolio. An
investor may direct the Transfer Agent in writing not less than five full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payment will be made directly to the dealer. Any
shareholder who receives a cash payment representing a dividend or distribution
may reinvest such dividend or distribution at net asset value by returning the
check or the proceeds to the Transfer Agent within 30 days after the payment
date. The investment will be made at the net asset value per share next
determined after receipt of the check or proceeds by the Transfer Agent. Such
shareholders will receive credit for any contingent deferred sales charge paid
in connection with the amount of proceeds being reinvested.

EXCHANGE PRIVILEGE

Each Portfolio of the Fund makes available to its shareholders the privilege
of exchanging their shares for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
Mutual Funds may also be exchanged for shares of a Portfolio. All exchanges are
made on the basis of relative net asset value next determined after receipt of
an order in proper form. An exchange will be treated as a redemption and
purchase for tax purposes. Shares may be exchanged for shares of another fund
only if shares of such fund may legally be sold under applicable state laws. For
retirement and group plans having a limited menu of Prudential Mutual Funds, the
exchange privilege is available for those funds eligible for investment in the
particular program.

It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.

CLASS A. Shareholders of a Portfolio may exchange their Class A shares for
Class A shares of another Portfolio, shares of certain other Prudential Mutual
Funds, shares of Prudential Government Securities Trust (Short-Intermediate Term
Series) and shares of the money market funds specified below. No fee or sales
load will be imposed upon the exchange. Shareholders of money market funds who
acquired such shares upon exchange of Class A shares may use the Exchange
Privilege only to acquire Class A shares of the Prudential Mutual Funds
participating in the Exchange Privilege.

The following money market funds participate in the Class A Exchange
Privilege:

Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc.
Prudential Tax-Free Money Fund, Inc.

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

B-25
<PAGE>
Class B and Class C shares of each Portfolio may also be exchanged for
shares of an eligible money market fund without imposition of any CDSC at the
time of exchange. Upon subsequent redemption from such money market fund or
after re-exchange into the Fund, such shares will be subject to the CDSC
calculated without regard to the time such shares were held in the money market
fund. In order to minimize the period of time in which shares are subject to a
CDSC, shares exchanged out of the money market fund will be exchanged on the
basis of their remaining holding periods, with the longest remaining holding
periods being transferred first. In measuring the time period shares are held in
a money market fund and "tolled" for purposes of calculating the CDSC holding
period, exchanges are deemed to have been made on the last day of the month.
Thus, if shares are exchanged into the Fund from a money market fund during the
month (and are held in the Fund at the end of month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.

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

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

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

DOLLAR COST AVERAGING

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

Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 2011, the cost of four years at a
private college could reach $210,000 and over $90,000 at a public university.(1)

The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)

<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- --------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
25 Years................... $ 110 $ 165 $ 220 $ 275
20 Years................... 176 264 352 440
15 Years................... 296 444 592 740
10 Years................... 555 833 1,110 1,388
5 Years.................... 1,371 2,057 2,742 3,428

See "Automatic Savings Accumulation Plan."
<FN>
- ------------------------
(1) Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room and
board for the 1993-1994 academic year.
(2) The chart assumes an effective rate of return of 8% (assuming compounding).
This example is for illustrative purposes only and is not intended to reflect
the performance of an investment in shares of the Fund. The investment return
and principal value of an investment will fluctuate so that an investor's shares
when redeemed may be worth more or less than their original cost.
</TABLE>

B-26
<PAGE>
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)

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

Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.

SYSTEMATIC WITHDRAWAL PLAN

A systematic withdrawal plan is available to shareholders through Prudential
Securities or the Transfer Agent. Such withdrawal plan provides for monthly or
quarterly checks in any amount, except as provided below, up to the value of the
shares in the shareholder's account. Withdrawals of Class B or Class C shares
may be subject to a CDSC. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.

In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment Account--
Automatic Reinvestment of Dividends and/or Distributions."

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

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

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

TAX-DEFERRED RETIREMENT PLANS

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

Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.

TAX-DEFERRED RETIREMENT ACCOUNTS

INDIVIDUAL RETIREMENT ACCOUNT. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.

B-27
<PAGE>

<TABLE>
<CAPTION>
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
---------------------------------- -------- --------
<S> <C> <C>
10 years.......................... $ 26,165 $ 31,291
15 years.......................... 44,675 58,649
20 years.......................... 68,109 98,846
25 years.......................... 97,780 157,909
30 years.......................... 135,346 244,692
<FN>
- ------------------------
(1) The chart is for illustrative purposes only and does not represent the
performance of either Portfolio of the Fund or any specific investment. It shows
taxable versus tax-deferred compounding for the periods and on the terms
indicated. Earnings in the IRA account will be subject to tax when withdrawn
from the account.
</TABLE>

MUTUAL FUND PROGRAMS

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

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

NET ASSET VALUE

Under the Investment Company Act, the Trustees are responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Trustees, the value of investments
listed on a securities exchange and NASDAQ National Market System securities
(other than options on stock and stock indices) are valued at the last sales
price on the day of valuation, or, if there was no sale on such day, the mean
between the last bid and asked prices on such day, as provided by a pricing
service or principal market maker. Corporate bonds (other than convertible debt
securities) and U.S. Government securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued on the basis of valuations
provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, agency ratings, market
transactions in comparable securities and various relationships between
securities in determining value. Convertible debt securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued at the mean
between the last reported bid and asked prices provided by principal market
maker. Options on stock and stock indices traded on an exchange are valued at
the mean between the most recently quoted bid and asked prices on the respective
exchange and futures contracts and options thereon are valued at their last
sales prices as of the close of the commodities exchange or board of trade.
Quotations of foreign securities in a foreign currency are converted to U.S.
dollar equivalents at the current rate obtained from a recognized bank or dealer
and forward currency exchange contracts are valued at the current cost of
covering or offsetting such contracts. Should an extraordinary event, which is
likely to affect the value of the security, occur after the close of an exchange
on which a portfolio security is traded, such security will be valued at fair
value considering factors determined in good faith by the investment adviser
under procedures established by and under the general supervision of the Fund's
Trustees.

Securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
Trustees. Short-term debt securities are valued at cost, with interest accrued
or discount amortized to the date of maturity, if their original maturity was 60
days or less, unless this is determined by the Trustees not to represent fair
value. Short-term securities with remaining maturities of more than 60 days, for
which market quotations are readily available, are valued at their current
market quotations as supplied by an independent pricing agent or principal
market maker. The Fund will compute its net asset value at 4:15 P.M., New York
time, on each day the New York Stock Exchange is open for trading except on days
on which no

B-28
<PAGE>
orders to purchase, sell or redeem Fund shares have been received or days on
which changes in the value of the Fund's portfolio securities do not affect net
asset value. In the event the New York Stock Exchange closes early on any
business day, the net asset value of the Portfolio's shares shall be determined
at a time between such closing and 4:15 P.M., New York time.

Net asset value is calculated separately for each class. The net asset value
of Class B and Class C shares will generally be lower than the net asset value
of Class A shares as a result of the larger distribution-related fee to which
Class B and Class C shares are subject. It is expected, however, that the net
asset value per share of each class will tend to converge immediately after the
recording of dividends, if any, which will differ by approximately the amount of
the distribution and/or service fee expense accrual differential among the
classes.

TAXES

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

Qualification of a Portfolio as a regulated investment company requires,
among other things, that (a) at least 90% of the Portfolio's annual gross
income, without offset for losses from the sale or other disposition of
securities, be derived from payments with respect to securities loans, interest,
dividends and gains from the sale or other disposition of securities, futures
contracts or options thereon or foreign currencies, or other income (including
but not limited to gains from options, futures or forward contracts) derived
with respect to its business of investing in such securities or currencies; (b)
the Portfolio derive less than 30% of its gross income from gains (without
offset for losses) from the sale or other disposition of securities, options
thereon, futures contracts, options thereon, forward contracts and foreign
currencies held for less than three months (except for foreign currencies
directly related to the Fund's business of investing in securities); (c) the
Portfolio diversify its holdings so that, at the end of each quarter of the
taxable year, (i) at least 50% of the value of its assets is represented by
cash, U.S. Government securities and other securities limited in respect of any
one issuer to an amount not greater than 5% of the value of the assets of the
Portfolio and 10% of the outstanding voting securities of such issuer, and (ii)
not more than 25% of the value of its assets is invested in the securities of
any one issuer (other than U.S. Government securities); and (d) the Portfolio
distribute to its shareholders at least 90% of its net investment income and net
short-term gains (I.E., the excess of net short-term capital gains over net
long-term capital losses) in each year.

Gains or losses on sales of securities by each Portfolio of the Fund will be
treated as long-term capital gains or losses if the securities have been held by
it for more than one year, except in certain cases where the Portfolio acquires
a put or writes a call thereon or otherwise holds an offsetting position with
respect to the securities. Other gains or losses on the sale of securities will
be short-term capital gains or losses. Gains and losses on the sale, lapse or
other termination of options on securities will generally be treated as gains
and losses from the sale of securities. If an option written by a Portfolio on
securities lapses or is terminated through a closing transaction, such as a
repurchase by the Portfolio of the option from its holder, the Portfolio will
generally realize short-term capital gain or loss. If securities are sold by the
Portfolio pursuant to the exercise of a call option written by it, the Portfolio
will include the premium received in the sale proceeds of the securities
delivered in determining the amount of gain or loss on the sale. If securities
are purchased by a Portfolio pursuant to the exercise of a put option written by
it, the Portfolio will subtract the premium received from its cost basis in the
securities purchased. Certain transactions of a Portfolio may be subject to wash
sale, short sale, straddle and anti-conversion provisions of the Internal
Revenue Code. In addition, debt securities acquired by the Portfolios may be
subject to original issue discount and market discount rules.

Special rules will apply to most options on stock indices, futures contracts
and options thereon, and forward foreign currency exchange contracts in which
the Portfolios may invest. See "Investment Objectives and Policies." These
investments will generally constitute "Section 1256 contracts" and will be
required to be "marked to market" for federal income tax purposes at the end of
each Portfolio's taxable year; that is, treated as having been sold at market
value. Except with respect to certain forward foreign currency exchange
contracts, 60 percent of any gain or loss recognized on such "deemed sales" and
on actual dispositions will be treated as long-term capital gain or loss, and
the remainder will be treated as short-term capital gain or loss. The
Portfolios' ability

B-29
<PAGE>
to invest in forward foreign currency exchange contracts, options on equity
securities and on stock indices, futures contracts and options thereon may be
affected by the 30% limitation on gains derived from securities held less than
three months, discussed above.

Gains or losses attributable to fluctuations in exchange rates which occur
between the time a Portfolio accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Portfolio actually collects such receivables or pays such liabilities are
treated as ordinary income or ordinary loss. Similarly, gains or losses on
forward foreign currency exchange contracts or dispositions of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security and the
date of disposition also are treated as ordinary gain or loss. These gains,
referred to under the Internal Revenue Code as "Section 988" gains or losses,
increase or decrease the amount of the Portfolio's investment company taxable
income available to be distributed to its shareholders as ordinary income,
rather than increasing or decreasing the amount of the Portfolio's net capital
gain. If Section 988 losses exceed other investment company taxable income
during a taxable year, the Portfolio would not be able to make any ordinary
dividend distributions, or distributions made before the losses were realized
would be recharacterized as a return of capital to shareholders, rather than as
an ordinary dividend, reducing each shareholder's basis in his or her Portfolio
shares.

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

Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. Therefore, prior to purchasing shares of any
Portfolio of the Fund, the investor should carefully consider the impact of
dividends or capital gains distributions which are expected to be or have been
announced.

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

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

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

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

Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject, since the amount of the Fund's
assets to be invested in various countries is not known.

B-30
<PAGE>
PERFORMANCE INFORMATION

AVERAGE ANNUAL TOTAL RETURN. Each Portfolio of the Fund may from time to
time advertise its average annual total return. Average annual total return is
determined separately for Class A, Class B and Class C shares. See "How the Fund
Calculates Performance" in the Prospectus.

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

P(1+T)to the power of n = ERV

Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical $1000
payment made at the beginning of the 1, 5 or 10 year periods.

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

The average annual total return for the Class A shares for the one year,
five year and since inception (January 22, 1990) periods ended July 31, 1996 was
(0.4)%, 8.4% and 9.3% for the Balanced Portfolio and (0.4)%, 7.6% and 8.8% for
the Strategy Portfolio, respectively. The average annual total return for the
Class B shares for the one and five year and since inception (September 15,
1987) periods ended July 31, 1996 was (1.0)%, 8.6% and 8.0% for the Balanced
Portfolio and (1.0)%, 7.8% and 7.9% for the Strategy Portfolio, respectively.
The average annual total return for the Class C shares for the one year and
since inception (August 1, 1994) periods ended July 31, 1996 was 3.1% and 8.2%
for the Balanced Portfolio and 3.0% and 8.3% for the Strategy Portfolio,
respectively. The average annual total return for the Class Z shares of the
Balanced Portfolio for the since inception (March 1, 1996) period ended July 31,
1996 was (3.0)%.

AGGREGATE TOTAL RETURN. Each Portfolio may also advertise its aggregate
total return. Aggregate total return is determined separately for Class A, Class
B and Class C shares. See "How the Fund Calculates Performance" in the
Prospectus.

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

Where: P = a hypothetical initial payment of $1000.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical $1000
payment made at the beginning of the 1, 5 or 10 year periods.

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

The aggregate total return for Class A shares for the one year, five year
and since inception (January 22, 1990) periods ended July 31, 1996 was 4.9%,
57.8% and 88.4% for the Balanced Portfolio and 4.8%, 52.1% and 82.6% for the
Strategy Portfolio, respectively. The aggregate total return for Class B shares
for the one and five year and since inception (September 15, 1987) periods ended
July 31, 1996 was 4.1%, 51.9% and 98.3% for the Balanced Portfolio and 4.0%,
46.4% and 96.8% for the Strategy Portfolio, respectively. The aggregate total
return for Class C shares for the one year period ended July 31, 1996 was 4.1%
and 17.0% for the Balanced Portfolio and 4.0% and 17.3% for the Strategy
Portfolio, respectively. The aggregate total return for the Class Z shares of
the Balanced Portfolio for the since inception (March 1, 1996) period ended July
31, 1996 was (1.2)%.

B-31
<PAGE>
YIELD. A Portfolio of the Fund may from time to time advertise its yield as
calculated over a 30-day period. Yield is calculated separately for Class A,
Class B and Class C shares. This yield will be computed by dividing the
Portfolio's net investment income per share earned during this 30-day period by
the maximum offering price per share on the last day of this period. Yield is
calculated according to the following formula:

a - b
YIELD = 2[( ------- +1)to the power of 6 - 1]
cd

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

Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in a Portfolio will actually yield for any
given period.

The 30-day yields for the period ended July 31, 1996 were 2.39% and 1.79%
for the Class A shares of the Balanced Portfolio and the Strategy Portfolio,
respectively; and 1.77% and 1.13% for the Class B shares of the Balanced
Portfolio and the Strategy Portfolio, respectively; and 1.77% and 1.14% for the
Class C shares of the Balanced Portfolio and the Strategy Portfolio,
respectively; and 2.76% for the Class Z shares of the Balanced Portfolio.

From time to time, the performance of the Portfolios may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.(1)

[CHART]

PERFORMANCE COMPARISON OF DIFFERENT TYPES OF INVESTMENTS OVER THE LONG TERM
(1/1926-12/1994)

Common Stocks - 10.2%
Long-term Govt. Bonds - 4.8%
Inflation - 3.1%

(1) Source: Ibbotson Associates. "Stocks, Bonds, Bills and Inflation--1995
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. Common stock returns
are based on the Standard & Poor's 500 Stock Index, a market-weighted, unmanaged
index of 500 common stocks in a variety of industry sectors. It is a commonly
used indicator of broad stock price movements. This chart is for illustrative
purposes only, and is not intended to represent the performance of any
particular investment or fund. Investors cannot invest directly in an index.
Past performance is not a guarantee of future results.

B-32
<PAGE>
ORGANIZATION AND CAPITALIZATION

The Declaration of Trust and the By-Laws of the Fund are designed to make
the Fund similar in certain respects to a Massachusetts business corporation.
The principal distinction between a Massachusetts business trust and a
Massachusetts business corporation relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, in certain
circumstances, be held personally liable for the obligations of the Fund, which
is not the case with a corporation. The Fund believes that this risk is not
material. The Declaration of Trust of the Fund provides that shareholders shall
not be subject to any personal liability for the acts or obligations of the Fund
and that every written obligation, contract, instrument or undertaking made by
the Fund shall contain a provision to the effect that the shareholders are not
individually bound thereunder.

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

The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his or her
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his or her duties. It also provides that all third parties shall look solely to
the Fund property or the property of the appropriate Portfolio for satisfaction
of claims arising in connection with the affairs of the Fund or of the
particular Portfolio of the Fund, respectively. With the exceptions stated, the
Declaration of Trust permits the Trustees to provide for the indemnification of
Trustees, officers, employees or agents of the Fund against all liability in
connection with the affairs of the Fund.

The Fund does not intend to hold annual meetings of shareholders.

The Fund and each Portfolio thereof shall continue without limitation of
time subject to the provisions in the Declaration of Trust concerning
termination by action of the shareholders or by the Trustees by written notice
to the shareholders.

The authorized capital of the Fund consists of an unlimited number of shares
of beneficial interest, $.01 par value, issued in separate Portfolios and
divided into separate classes. Each Portfolio of the Fund, for federal income
tax and Massachusetts state law purposes, will constitute a separate trust which
will be governed by the provisions of the Declaration of Trust. All shares of
any Portfolio issued and outstanding are fully paid and nonassessable by the
Fund. Each share of each Portfolio represents an equal proportionate interest in
that Portfolio with each other share of that Portfolio. The assets of the Fund
received for the issue or sale of the shares of each Portfolio and all income,
earnings, profits and proceeds thereof, subject only to the rights of creditors
of that Portfolio, are specially allocated to the Portfolio and constitute the
underlying assets of the Portfolio. The underlying assets of each Portfolio are
segregated on the books of account and are to be charged with the liabilities in
respect to the Portfolio and with a share of the general liabilities of the
Fund. Under no circumstances would the assets of a Portfolio be used to meet
liabilities that are not otherwise properly chargeable to it. Expenses with
respect to any two or more Portfolios are to be allocated in proportion to the
asset value of the respective Portfolio except where allocations of direct
expenses can otherwise be fairly made. The officers of the Fund, subject to the
general supervision of the Trustees, have the power to determine which
liabilities are allocable to a given Portfolio or which are general. Upon
redemption of shares of a Portfolio of the Fund, the shareholder will receive
proceeds solely of the assets of such Portfolio. In the event of the dissolution
or liquidation of the Fund, the holders of the shares of any Portfolio are
entitled to receive as a class the underlying assets of that Portfolio available
for distribution to shareholders.

Shares of the Fund entitle their holders to one vote per share. Matters will
be acted upon by the vote of the shareholders of each Portfolio separately,
except to the extent otherwise provided in the Investment Company Act. A change
in the investment objective or investment restrictions for a Portfolio would be
voted upon only by shareholders of the Portfolio involved. In addition, approval
of the investment advisory agreement is a matter to be determined separately by
each Portfolio. Approval by the shareholders of a Portfolio is effective as to
that Portfolio whether or not enough votes are received from the shareholders of
the other Portfolio to approve the proposal as to that Portfolio.

B-33
<PAGE>
Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset value
procedures) with such preferences, privileges, limitations and voting and
dividend rights as the Trustees may determine. All consideration received by the
Fund for shares of any additional series, and all assets in which such
consideration is invested would belong to that series (subject only to the
rights of creditors of that series) and would be subject to the liabilities
related thereto. Pursuant to the Investment Company Act, shareholders of any
additional series of shares would normally have to approve the adoption of any
advisory contract relating to such series and of any changes in the investment
policies related thereto.

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

CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND INDEPENDENT ACCOUNTANTS

State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash, and in that capacity maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States. See "How
the Fund is Managed--Custodian and Transfer and Dividend Disbursing Agent" in
the Prospectus.

Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer and Dividend Disbursing Agent of the Fund. It
is a wholly-owned subsidiary of PMF. PMFS provides customary transfer agency
services to the Fund, including the handling of shareholder communications, the
processing of shareholder transactions, the maintenance of shareholder account
records, the payment of dividends and distributions and related functions. For
these services, PMFS receives an annual fee per shareholder account, a new
account set-up fee for each manually established account and a monthly inactive
zero balance account fee per shareholder account. PMFS is also reimbursed for
its out-of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communications expenses and other costs. For the fiscal year
ended July 31, 1996, the Fund incurred fees of approximately $2,078,500
($1,274,000--Balanced Portfolio and $804,500--Strategy Portfolio) for the
services of PMFS.

Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.

B-34
<PAGE>
PRUDENTIAL ALLOCATION FUND
Portfolio of Investments as of July 31, 1996 BALANCED PORTFOLIO
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--93.0%
COMMON STOCKS--48.8%
------------------------------------------------------------
Aerospace/Defense--0.6%
46,700 Boeing Co. $ 4,132,950
- ------------------------------------------------------------
Chemicals--1.9%
441,400 Agrium Inc. (Canada) 5,590,189
180,400 Polymer Group, Inc. 2,300,100
119,800 Union Carbide Corp. 5,031,600
-------------
12,921,889
- ------------------------------------------------------------
Computer Related Equipment--2.8%
108,500 Comverse Technology, Inc.* 3,349,938
93,700 COMSAT Corp. 1,803,725
47,300 Dupont Canada Inc. (Canada) 898,700
63,400 Ross Technology Inc.* 554,750
49,000 Sun Microsystems Inc.* 2,676,625
327,500 Western Digital Corp. 9,784,062
-------------
19,067,800
- ------------------------------------------------------------
Computer Software & Services--8.6%
223,100 Bay Networks, Inc.* 5,131,300
381,200 Cisco Systems, Inc.* 19,727,100
74,000 Engineering Animation Inc. 1,184,000
146,600 Macromedia, Inc. 2,363,925
101,600 Microsoft Corp.* 11,976,100
157,700 Network Express, Inc.* 1,222,175
30,000 Open Market Inc. 525,000
216,000 Oracle Systems Corp.* 8,451,000
28,300 PIXAR Inc.* 374,975
97,400 Primark Corporation* 2,629,800
295,000 SoftKey International Inc.* 5,457,500
-------------
59,042,875
Containers & Packing--0.8%
448,800 Stone Container Corp. $ 5,610,000
- ------------------------------------------------------------
Drugs & Health Care--4.5%
134,600 AMGEN, Inc.* 7,352,525
70,600 Bard (C.R.), Inc. 2,153,300
133,000 Ciba-Geigy Ltd. (ADR) (Switzerland) 7,946,750
149,300 St. Jude Medical, Inc.* 5,020,212
252,500 United States Surgical Corp. 8,648,125
-------------
31,120,912
- ------------------------------------------------------------
Electronics--6.1%
53,000 Applied Materials, Inc.* 1,265,375
187,200 Burr-Brown Corp. 3,322,800
213,700 Intel Corp. 16,054,212
165,000 LSI Logic Corp. 3,217,500
235,700 Tencor Instruments* 3,771,200
247,800 Ultratech Stepper Inc.* 4,212,600
391,100 Uniphase Corp.* 10,168,600
-------------
42,012,287
- ------------------------------------------------------------
Exploration & Production--0.4%
133,200 Alberta Energy Co. Ltd. 2,447,550
- ------------------------------------------------------------
Financial Services--8.6%
147,650 Advanta Corp. 6,348,950
55,900 Advanta Corp. (ADS) 2,431,650
80,812 Citicorp 6,616,482
454,100 Federal National Mortgage Association 14,417,675
170,100 Imperial Credit Industries, Inc.* 4,975,425
45,700 Republic New York Corp. 2,896,238
81,500 Student Loan Marketing Association 5,949,500
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-35

<PAGE>
PRUDENTIAL ALLOCATION FUND
Portfolio of Investments as of July 31, 1996 BALANCED PORTFOLIO
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Financial Services (cont'd)
394,600 The Money Store, Inc. $ 9,618,375
146,700 Travelers Group, Inc. 6,198,075
-------------
59,452,370
- ------------------------------------------------------------
Foods--0.7%
165,900 RJR Nabisco Holdings Corp. 5,101,425
- ------------------------------------------------------------
Hospital Management--0.7%
77,800 Columbia/ HCA Healthcare Corp. 3,987,250
84,300 Physician Corp. of America* 864,075
-------------
4,851,325
- ------------------------------------------------------------
Insurance--3.0%
110,000 Aetna, Inc. 6,393,750
51,100 Amerin Corp.* 1,136,975
70,100 Equitable of Iowa Cos. 2,435,975
63,500 SunAmerica, Inc. 3,857,625
161,200 The Allstate Corp. 6,871,150
-------------
20,695,475
- ------------------------------------------------------------
Metals-Non Ferrous--1.8%
113,300 Aluminum Co. of America 6,571,400
163,600 UCAR International Inc.* 5,705,550
-------------
12,276,950
- ------------------------------------------------------------
Miscellaneous Industrial--0.9%
138,600 Varity Corp.* 6,514,200
- ------------------------------------------------------------
Oil Services--1.8%
148,000 BJ Services Co. 4,902,500
126,000 Smith International, Inc.* 4,221,000
134,200 Weatherford Enterra Inc. 3,304,675
-------------
12,428,175
Restaurants--1.9%
144,300 Lone Star Steakhouse & Saloon, Inc. $ 4,509,375
185,000 McDonald's Corp. 8,579,375
-------------
13,088,750
- ------------------------------------------------------------
Retail--0.7%
155,500 Dillard Department Stores, Inc. 4,878,813
- ------------------------------------------------------------
Steel & Metals--0.7%
99,200 AK Steel Holding Corp. 3,372,800
164,500 National Steel Corp.* 1,624,438
-------------
4,997,238
- ------------------------------------------------------------
Telecommunications--2.3%
196,800 ADC Telecommunications, Inc. 8,314,800
330,400 NEXTEL Communications, Inc.* 4,997,300
110,100 Westell Technologies Inc. 2,669,925
-------------
15,982,025
-------------
Total common stocks
(cost $307,346,909) 336,623,009
-------------
PREFERRED STOCKS--3.3%
- ------------------------------------------------------------
Drugs & Health Care--0.9%
180,400 United States Surgical Corp.,
Conv. Pfd. 6,133,600
- ------------------------------------------------------------
Foods--0.8%
905,700 RJR Nabisco Holdings Corp.,
Conv. Pfd. 5,547,412
- ------------------------------------------------------------
Insurance--0.3%
38,200 American General Delaware,
Conv. Pfd. 1,910,000
- ------------------------------------------------------------
Retail--1.3%
185,400 Kmart Financing,
Conv. Pfd. 9,015,075
-------------
Total preferred stocks
(cost $21,605,692) 22,606,087
-------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-36

Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
DEBT OBLIGATIONS--40.9%
CORPORATE BONDS--14.0%
- ------------------------------------------------------------
Computer Hardware--0.5%
B1 $ 1,886 Seagate Technology, Inc.,
5.00%, 11/1/03 $ 3,503,245
- ------------------------------------------------------------
Computer Related Equipment--0.7%
Ba3 4,226 EMC Corp.,
4.25%, 1/1/01 4,587,872
- ------------------------------------------------------------
Computers--0.7%
Ba1 4,975 Digital Equipment Corp.,
7.125%, 10/15/02 4,738,837
- ------------------------------------------------------------
Conglomerates--0.8%
B1 13,580 Valhi, Inc.,
Zero Coupon, 10/20/07 5,381,075
- ------------------------------------------------------------
Containers & Packing--0.7%
B2 4,000 Stone Container Corp.
8.875%, 7/15/00 4,950,000
- ------------------------------------------------------------
Drugs & Health Care--0.6%
NR 5,385 Roche Holdings Inc.,
(Switzerland),
Zero Coupon, 9/23/08 4,119,525
- ------------------------------------------------------------
Electronics--1.3%
B2 5,340 Integrated Device Technology Inc.,
5.50%, 6/1/02 4,005,000
A1 4,155 Motorola Inc.,
Zero Coupon, 9/27/13 3,024,632
Ba1 2,500 Westinghouse Electric
Corp.,
6.875%, 9/1/03 2,283,350
------------
9,312,982
Financial Services--2.7%
Aa3 $ 200 Associates Corp. of North
America,
8.375%, 1/15/98 $ 205,176
NR 3,070 Banco Nacional de Mexico
S.A.,
7.00%, 12/15/99 2,816,725
A2 1,000 First Union Corp.,
9.45%, 6/15/99 1,068,410
A1 5,000 Ford Motor Credit Co.,
7.75%, 3/15/05 5,077,500
A2 10,000 Sears Roebuck Acceptance Corp.,
6.75%, 9/15/05 9,554,300
------------
18,722,111
- ------------------------------------------------------------
Food & Beverage--0.1%
A3 500 Coca Cola Enterprises
Inc.,
6.50%, 11/15/97 500,640
- ------------------------------------------------------------
Foreign Industrial--0.1%
NR 1,590 Nippon Denro Ispat, Ltd.,
(India)
3.00%, 4/1/01 735,375
- ------------------------------------------------------------
Hospital Management--1.6%
B3 6,000 Beverly Enterprises, Inc.,
5.50%, 8/1/18 5,707,500
Ba1 5,000 Tenet Healthcare Corp.,
8.625%, 12/1/03 5,100,000
------------
10,807,500
- ------------------------------------------------------------
Insurance--0.6%
Baa3 6,925 USF&G Corp.,
Zero Coupon, 3/3/09 4,062,343
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. -----

B-37

Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
Leisure & Tourism--0.7%
Baa3 $ 5,000 Royal Caribbean Cruises
Ltd., (Liberia),
8.25%, 4/1/05 $ 5,138,750
- ------------------------------------------------------------
Oil & Gas--1.0%
Ba2 1,000 Arkla, Inc., MTN,
9.30%, 1/15/98 1,034,370
Baa3 5,274 Noble Affiliates, Inc.,
4.25%, 11/1/03 5,994,587
------------
7,028,957
- ------------------------------------------------------------
Oil Services--0.5%
3,500 BJ Services Co.,
7.00%, 2/1/06 3,263,750
- ------------------------------------------------------------
Retail--0.7%
Ba3 6,000 K Mart Corp.,
8.125%, 12/1/06 4,980,000
- ------------------------------------------------------------
Tobacco--0.7%
Baa3 5,000 RJR Nabisco, Inc.,
7.625%, 9/15/03 4,755,250
------------
Total corporate bonds
(cost $97,673,431) 96,588,212
------------
U.S. GOVERNMENT SECURITIES--23.3%
United States Treasury
Bonds,
15,000 7.625%, 2/15/25 16,059,300
United States Treasury
Notes,
25,000 5.625%, 10/31/97 24,875,000
15,000 6.00%, 5/31/98 14,946,150
20,000 6.875%, 8/31/99 20,240,600
30,000 6.125%, 7/31/00 29,587,500
5,000 5.625%, 2/28/01 4,819,550
30,000 6.25%, 4/30/01 29,615,700
$ 20,100 U.S. Treasury Note,
7.50%, 2/15/05 $ 21,051,534
------------
Total U.S. government
securities
(cost $162,545,751) 161,195,334
------------
SOVEREIGN BONDS--3.6%
25,000 United Mexican States,
Zero Coupon, 8/6/01
(cost $24,875,000) 24,945,000
------------
Total debt obligations
(cost $285,094,182) 282,728,546
------------
Total long-term
investments
(cost $614,046,783) 641,957,642
------------
SHORT-TERM INVESTMENTS--9.4%
CORPORATE BONDS--0.8%
- ------------------------------------------------------------
Aa3 750 Associates Corp. of North
America,
6.875%, 1/15/97 753,083
Baa1 3,030 Carnival Cruise Lines,
Inc.,
4.50%, 7/1/97 4,671,533
------------
Total corporate bonds
(cost $4,895,987) 5,424,616
------------
REPURCHASE AGREEMENT--8.6%
59,198 Joint Repurchase Agreement
Account,
5.64%, 8/1/96,
(cost $59,198,000; Note
5) 59,198,000
------------
Total short-term
investments
(cost $64,093,987) 64,622,616
------------
- ------------------------------------------------------------
Total Investments--102.4%
(cost $678,140,770; Note
4) 706,580,258
Liabilities in excess of
other
assets--(2.4%) (16,478,759)
------------
Net Assets--100% $690,101,499
------------
------------
</TABLE>
- ---------------
* Non-income producing security.
ADR--American Depository Receipt.
ADS--American Depository Shares.
MTN--Medium Term Note.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-38

<PAGE>
PRUDENTIAL ALLOCATION FUND
Statement of Assets and Liabilities BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Assets July 31, 1996
Investments, at value (cost $678,140,770).................................................................... $706,580,258
Cash......................................................................................................... 87,657
Receivable for investments sold.............................................................................. 6,340,322
Dividends and interest receivable............................................................................ 4,801,843
Receivable for Fund shares sold.............................................................................. 461,839
Deferred expenses............................................................................................ 23,820
-------------
Total assets.............................................................................................. 718,295,739
-------------
Liabilities
Payable for investments purchased............................................................................ 25,958,987
Payable for Fund shares reacquired........................................................................... 1,215,421
Due to Distributor........................................................................................... 418,454
Due to Manager............................................................................................... 383,734
Accrued expenses............................................................................................. 217,644
-------------
Total liabilities......................................................................................... 28,194,240
-------------
Net Assets................................................................................................... $690,101,499
-------------
-------------
Net assets were comprised of:
Shares of beneficial interest, at par..................................................................... $ 583,763
Paid-in capital in excess of par.......................................................................... 624,803,860
-------------
625,387,623
Undistributed net investment income....................................................................... 3,473,368
Accumulated net realized gain on investments.............................................................. 32,801,020
Net unrealized appreciation on investments................................................................ 28,439,488
-------------
Net assets, July 31, 1996.................................................................................... $690,101,499
-------------
-------------
Class A:
Net asset value and redemption price per share
($262,095,582 / 22,116,821 shares of beneficial interest issued and outstanding)....................... $11.85
Maximum sales charge (5% of offering price)............................................................... .62
------
Maximum offering price to public.......................................................................... $12.47
------
Class B: ------
Net asset value, offering price and redemption price per share
($420,465,265 / 35,621,917 shares of beneficial interest issued and outstanding)....................... $11.80
------
------
Class C:
Net asset value, offer price and redemption price per share
($3,525,260 / 298,666 shares of beneficial interest issued and outstanding)............................ $11.80
------
------
Class Z:
Net asset value, offer price and redemption price per share
($4,015,392 / 338,862 shares of beneficial interest issued and outstanding)............................ $11.85
------
------
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. -----

B-39

<PAGE>
PRUDENTIAL ALLOCATION FUND
BALANCED PORTFOLIO
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income July 31, 1996
<S> <C>
Income
Interest (net of foreign withholding taxes
of $1,263)............................... $ 19,771,563
Dividends (net of foreign withholding taxes
of $40,169).............................. 5,904,638
-------------
Total income............................. 25,676,201
-------------
Expenses
Distribution fee--Class A................... 616,522
Distribution fee--Class B................... 4,377,921
Distribution fee--Class C................... 24,436
Management fee.............................. 4,475,647
Transfer agent's fees and expenses.......... 1,341,000
Reports to shareholders..................... 309,000
Custodian's fees and expenses............... 145,000
Registration fees........................... 97,600
Legal fees and expenses..................... 75,000
Audit fees and expenses..................... 23,150
Trustees' fees and expenses................. 22,000
Insurance................................... 13,000
Miscellaneous............................... 655
-------------
Total expenses........................... 11,520,931
-------------
Net investment income.......................... 14,155,270
-------------
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency Transactions
Net realized gain (loss) on:
Investment transactions..................... 42,517,558
Foreign currency transactions............... (103,699)
-------------
42,413,859
-------------
Net change in unrealized appreciation on
investments................................. (32,532,379)
-------------
Net gain on investments........................ 9,881,480
-------------
Net Increase in Net Assets
Resulting from Operations...................... $ 24,036,750
-------------
-------------
</TABLE>

PRUDENTIAL ALLOCATION FUND
BALANCED PORTFOLIO
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended July 31,
in Net Assets 1996 1995
<S> <C> <C>
Operations
Net investment income.......... $ 14,155,270 $ 11,616,551
Net realized gain on
investments and foreign
currency transactions....... 42,413,859 24,855,840
Net change in unrealized
appreciation (depreciation)
of investments.............. (32,532,379) 21,889,387
------------ ------------
Net increase in net assets
resulting from operations... 24,036,750 58,361,778
------------ ------------
Net equalization credits
(debits)....................... 266,040 (108,882)
------------ ------------
Dividends and distributions (Note
1)
Dividends from net investment
income
Class A..................... (5,700,390) (2,234,935)
Class B..................... (7,051,910) (9,204,130)
Class C..................... (41,036) (21,646)
Class Z..................... (56,180) --
------------ ------------
(12,849,516) (11,460,711)
------------ ------------
Distributions from net realized
gains on investment
transactions
Class A..................... (10,904,493) (701,041)
Class B..................... (17,821,478) (7,720,336)
Class C..................... (80,545) (13,746)
------------ ------------
(28,806,516) (8,435,123)
------------ ------------
Fund share transactions (net of
share conversions) (Note 6)
Net proceeds from shares
subscribed (Note 7)......... 382,325,569 177,082,018
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........... 37,994,029 18,598,887
Cost of shares reacquired...... (228,029,907) (201,993,091)
------------ ------------
Net increase (decrease) in net
assets from Fund shares
transactions................ 192,289,691 (6,312,186)
------------ ------------
Total increase.................... 174,936,449 32,044,876
Net Assets
Beginning of year................. 515,165,050 483,120,174
------------ ------------
End of year....................... $690,101,499 $515,165,050
------------ ------------
------------ ------------
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-40

<PAGE>
PRUDENTIAL ALLOCATION FUND
Notes to Financial Statements BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
Prudential Allocation Fund (the ``Fund'') is registered under the Investment
Company Act of 1940, as a diversified, open-end management investment company.
The Fund was organized as an unincorporated business trust in Massachusetts on
February 23, 1987 and consists of two series, namely: Balanced Portfolio and
Strategy Portfolio. The investment objective of the Balanced Portfolio (the
``Portfolio'') is to achieve a high total investment return consistent with
moderate risk by investing in a diversified portfolio of money market
instruments, debt obligations and equity securities. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic developments in a specific country, industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of generally accepted accounting policies followed by
the Fund in the preparation of its financial statements.
Securities Valuation: Any security for which the primary market is on an
exchange (including NASDAQ National Market System equity securities) is valued
at the last sale price on such exchange on the day of valuation or, if there was
no sale on such day, the mean between the last bid and asked prices quoted on
such day. Corporate bonds (other than convertible debt securities) and U.S.
Government and agency securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued on the basis of valuations
provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, agency ratings, market
transactions in comparable securities and various relationships between
securities in determining value. Convertible debt securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued at the mean
between the most recently quoted bid and asked prices provided by principal
market makers. Forward currency exchange contracts are valued at the current
cost of offsetting the contract on the day of valuation. Options are valued at
the mean between the most recently quoted bid and asked prices. Futures and
options thereon are valued at their last sales price as of the close of the
commodities exchange or board of trade.
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.
To the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to ensure the
adequacy of the collateral. If the seller defaults and the value of the
collateral declines or if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Fund may be
delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at the
closing daily rate of exchange.
(ii) purchases and sales of investment securities, income and expenses--at the
rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the fiscal period, the Fund does not isolate
that portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of long-term securities held at the end of the fiscal period. Similarly,
the Fund does not isolate the effect of changes in foreign exchange rates from
the fluctuations arising from changes in the market prices of long-term
portfolio securities sold during the fiscal period. Accordingly, realized
foreign currency gains (losses) are included in the reported net realized gains
on investment transactions.
Net realized gains on foreign currency transactions represent net foreign
exchange gains from the holding of foreign currencies, currency gains or losses
realized between the trade and settlement dates on securities transactions, and
the difference between the amounts of dividends, interest and foreign taxes
recorded on the Fund's books and the U.S. dollar equivalent amounts actually
received or paid.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic
- --------------------------------------------------------------------------------
-----

B-41

<PAGE>
PRUDENTIAL ALLOCATION FUND
Notes to Financial Statements BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
instability or the level of governmental supervision and regulation of foreign
securities markets.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date 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.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Fund is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the ``initial margin.'' Subsequent payments, known as ``variation
margin,'' are made or received by the Fund each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Fund invests in financial futures contracts in order to hedge its existing
portfolio securities, or securities the Fund intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates move unexpectedly, the Fund may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.
Equalization: The Fund follows the accounting practice known as equalization by
which a portion of the proceeds from sales and costs of reacquisitions of Fund
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or reacquisitions of the Fund's shares.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of each series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its taxable net income
to its shareholders. Therefore, no federal income tax provision is required.
Withholding taxes on foreign interest and dividends have been provided for in
accordance with the Fund's understanding of the applicable country's tax rates.
Dividends and Distributions: The Fund expects to pay dividends of net investment
income quarterly and make distributions at least annually of any net capital
gains. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gains distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments of wash sales and foreign currency transactions.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with American Institute of Certified
Public Accountants, Statement of Position 93-2: Determination, Disclosure, and
Financial Statement Presentation of Income; Capital Gain, and Return of Capital
Distributions by Investment Companies. For the year ended July 31, 1996, the
Balanced Portfolio decreased undistributed net investment income and increased
accumulated net realized gain on investments by $13,031. Net realized gains and
net assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the services of PIC, the
compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
- --------------------------------------------------------------------------------

B-42

<PAGE>
PRUDENTIAL ALLOCATION FUND
Notes to Financial Statements BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
The management fee paid PMF is computed daily and payable monthly at an annual
rate of .65 of 1% of the average daily net assets of each of the series.
The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Prudential Securities Incorporated (``PSI'')
became the distributor of the Class A shares of the Fund effective January 2,
1996 and is serving the Fund under the same terms and conditions as under the
arrangement with PMFD and continues as the distributor of the Class B, Class C
and Class Z shares of the Portfolio. The Portfolio compensated PMFD and PSI for
distributing and servicing the Portfolio's Class A, Class B and Class C shares,
pursuant to plans of distribution (the ``Class A, B and C Plans''), regardless
of expenses actually incurred by them. The distribution fees are accrued daily
and payable monthly.
Pursuant to the Class A, B and C Plans, the Portfolio compensated PSI and PMFD
(for the period August 1, 1995 through January 1, 1996 with respect to Class A
shares), for distribution-related activities at an annual rate of up to .30 of
1%, 1% and 1% of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .25 of 1%, 1% and 1% of the
average daily net assets of the Class A, B and C shares, respectively, for the
year ended July 31, 1996.
PMFD and PSI have advised the Portfolio that they received approximately
$238,100 in front-end sales charges resulting from sales of Class A shares
during the year ended July 31, 1996. From these fees, PMFD and PSI paid such
sales charges to dealers which in turn paid commissions to salespersons.
PSI has advised the Portfolio that for the year ended July 31, 1996, it received
approximately $768,700 in contingent deferred sales charges imposed upon certain
redemptions by Class B and C shareholders.
PMFD was a wholly-owned subsidiary of PMF, PSI, PIC and PMF are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Portfolio's transfer agent. During the year ended July 31,
1996, the Portfolio incurred fees of approximately $1,274,000 for the services
of PMFS. As of July 31, 1996, approximately $97,900 of such fees were due to
PMFS. Transfer agent fees and expenses in the Statement of Operations also
include certain out-of-pocket expenses paid to non-affiliates.
For the year ended July 31, 1996, PSI received approximately $39,500 in
brokerage commissions from portfolio transactions executed on behalf of the
Portfolio.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities of the Portfolio, other than
short-term investments, for the year ended July 31, 1996, were $788,064,839 and
$621,649,441, respectively.
The cost basis of investments for federal income tax purposes as of July 31,
1996 was $678,594,171 and accordingly, net appreciation of investments for
federal income tax purposes was $27,986,087, gross unrealized appreciation
$69,302,201; gross unrealized depreciation $(41,316,114).
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Government or federal agency obligations. As of July 31, 1996, the
Portfolio had a 4.9% undivided interest in the repurchase agreements in the
joint account. The undivided interest for the Portfolio represented $59,198,000
in principal amount. As of such date, each repurchase agreement in the joint
account and the value of the collateral therefor was as follows:
Bear, Stearns & Co., Inc., 5.625%, dated 7/31/96, in the principal amount of
$344,000,000, repurchase price $344,053,750, due 8/1/96. The value of the
collateral including accrued interest is $351,232,252.
Chase Securities, Inc., 5.64%, dated 7/31/96, in the principal amount of
$183,822,000, repurchase price $183,850,593, due 8/1/96. The value of the
collateral including accrued interest is $188,037,739.
CS First Boston Corp., 5.70%, dated 7/31/96, in the principal amount of
$208,000,000, repurchase price $208,032,933, due 8/1/96. The value of the
collateral including accrued interest is $212,392,225.
Goldman, Sachs Co., 5.62%, dated 7/31/96, in the principal amount of
$136,000,000, repurchase price $136,021,231, due 8/1/96. The value of the
collateral including accrued interest is $138,720,353.
- --------------------------------------------------------------------------------

B-43

<PAGE>
PRUDENTIAL ALLOCATION FUND
Notes to Financial Statements BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
Smith Barney Inc., 5.64%, dated 7/31/96, in the principal amount of
$344,000,000, repurchase price $344,053,893, due 8/1/96. The value of the
collateral including accrued interest is $350,880,898.
- ------------------------------------------------------------
Note 6. Capital
The Portfolio offers Class A, Class B, Class C and Class Z shares. Class A
shares are sold with a front-end sales charge of up to 5%. Class B shares are
sold with a contingent deferred sales charge which declines from 5% to zero
depending on the period of time the shares are held. Class C shares are sold
with a contingent deferred sales charge of 1% during the first year. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase. A special exchange privilege is also
available for shareholders who qualified to purchase Class A shares at net asset
value. Effective March 1, 1996, the Portfolio commenced offering Class Z shares.
Class Z shares are not subject to any sales or redemption charge and are offered
exclusively for sale to the Trustee of the PSI 401(k) Plan, a defined
contribution plan sponsored by PSI.
The Fund has authorized an unlimited number of shares of beneficial interest of
each class at $.01 par value per share.
Transactions in shares of beneficial interest for the years ended July 31, 1996
and July 31, 1995 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended July 31, 1996:
Shares issued..................... 6,671,164 $ 80,509,210
Shares issued in connection with
acquisition of Prudential
IncomeVertible(R) Fund, Inc.
(Note 7)........................ 12,372,804 153,694,070
Shares issued in reinvestment of
dividends and distributions..... 1,222,084 14,673,158
Shares reacquired................. (10,761,405) (130,646,163)
----------- -------------
Net increase in shares outstanding
before conversion............... 9,504,647 118,230,275
Shares issued upon conversion from
Class B......................... 2,661,105 32,556,721
----------- -------------
Net increase in shares
outstanding..................... 12,165,752 $ 150,786,996
----------- -------------
----------- -------------
<CAPTION>
Class A Shares Amount
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended July 31, 1995:
Shares issued..................... 3,862,947 $ 44,308,109
Shares issued in reinvestment of
dividends and distributions..... 251,790 2,763,092
Shares reacquired................. (3,252,889) (37,646,830)
----------- -------------
Net increase in shares outstanding
before conversion............... 861,848 9,424,371
Shares issued upon conversion from
Class B......................... 5,717,102 62,038,822
----------- -------------
Net increase in shares
outstanding..................... 6,578,950 $ 71,463,193
----------- -------------
----------- -------------
<CAPTION>
Class B
- ----------------------------------
<S> <C> <C>
Year ended July 31, 1996:
Shares issued..................... 5,453,476 $ 65,698,493
Shares issued in connection with
acquisition of Prudential
IncomeVertible(R) Fund, Inc.
(Note 7)........................ 5,994,600 74,209,881
Shares issued in reinvestment of
dividends and distributions..... 1,934,648 23,143,383
Shares reacquired................. (7,782,895) (93,671,895)
----------- -------------
Net increase in shares outstanding
before conversion............... 5,599,829 69,379,862
Shares reacquired upon conversion
into Class A.................... (2,673,189) (32,556,721)
----------- -------------
Net increase in shares
outstanding..................... 2,926,640 $ 36,823,141
----------- -------------
----------- -------------
Year ended July 31, 1995:
Shares issued..................... 5,899,203 $ 65,629,606
Shares issued in reinvestment of
dividends and distributions..... 1,480,760 15,800,410
Shares reacquired................. (9,125,344) (100,071,801)
----------- -------------
Net decrease in shares outstanding
before conversion............... (1,745,381) (18,641,785)
Shares reacquired upon conversion
into Class A.................... (5,738,270) (62,038,822)
----------- -------------
Net decrease in shares
outstanding..................... (7,483,651) $ (80,680,607)
----------- -------------
----------- -------------
</TABLE>

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

B-44

<PAGE>
PRUDENTIAL ALLOCATION FUND
Notes to Financial Statements BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Shares Amount
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended July 31, 1996:
Shares issued..................... 279,411 $ 3,368,769
Shares issued in connection with
acquisition of Prudential
IncomeVertible(R) Fund, Inc.
(Note 7)........................ 252 3,122
Shares issued in reinvestment of
dividends and distributions..... 10,109 121,326
Shares reacquired................. (244,931) (2,928,958)
----------- -------------
Net increase in shares
outstanding..................... 44,841 $ 564,259
----------- -------------
----------- -------------
August 1, 1994* through July 31,
1995:
Shares issued..................... 442,652 $ 5,105,480
Shares issued in reinvestment of
dividends and distributions..... 3,269 35,385
Shares reacquired................. (192,096) (2,235,637)
----------- -------------
Net increase in shares
outstanding..................... 253,825 $ 2,905,228
----------- -------------
----------- -------------
<CAPTION>
Class Z
- ----------------------------------
<S> <C> <C>
March 1, 1996** through
July 31, 1996:
Shares issued..................... 398,041 $ 4,842,024
Shares issued in reinvestment of
dividends and distributions..... 4,624 56,162
Shares reacquired................. (63,803) (782,891)
----------- -------------
Net increase in shares
outstanding..................... 338,862 $ 4,115,295
----------- -------------
----------- -------------
</TABLE>

- ---------------
* Commencement of offering of Class C shares.
** Commencement of offering of Class Z shares.
- ------------------------------------------------------------
Note 7. Acquisition of Prudential IncomeVertible(R) Fund
On September 29, 1995, the Balanced Portfolio acquired all the net assets of
Prudential IncomeVertible(R) Fund, Inc. (``IncomeVertible'') pursuant to a plan
of reorganization approved by IncomeVertible shareholders on September 6, 1995.
The acquisition was accomplished by a tax-free exchange of 12,372,804 Class A
shares, 5,994,600 Class B shares, and 252 Class C shares of the Balanced
Portfolio (valued at $227,907,073 in the aggregate) for 12,616,603 Class A
shares, 6,083,045 Class B shares, and 256 Class C shares, respectively, of
IncomeVertible outstanding on September 29, 1995. IncomeVertible's net assets at
that date ($227,907,073), including $22,146,090 of unrealized appreciation were
combined with those of the Balanced Portfolio. The aggregate net assets of the
Balanced Portfolio and IncomeVertible immediately before the acquisition were
$514,749,678 and $227,907,073 respectively.
- ------------------------------------------------------------
Note 8. Proposed Reorganization
On May 8, 1996, the Board of Trustees of the Fund approved an Agreement and Plan
of Reorganization and Liquidation (the ``Plan'') which provides for the transfer
of substantially all of the assets and liabilities of The Prudential
Institutional Fund-Balanced Fund (``Balanced Fund'') into Prudential Allocation
Fund-Balanced Portfolio (the ``Portfolio'') in exchange solely for Class Z
shares of the Portfolio.
The Plan is subject to approval by the shareholders of the Balanced Fund on
September 6, 1996. If the Plan is approved, it is expected that the
reorganization will take place on September 20, 1996. The Portfolio and the
Balanced Fund will each bear their pro-rata share of the costs of the
reorganization, including costs of proxy solicitation.
- ------------------------------------------------------------
Note 9. Dividends
On September 16, 1996 the Board of Trustees of the Fund declared the following
dividends per share, payable on September 23, 1996 to shareholders of record on
September 20, 1996:
<TABLE>
<CAPTION>
Class B
Class A and C Class Z
-------- -------- --------
<S> <C> <C> <C>
Ordinary Income.................. $0.0825 $ 0.06 $ 0.09
</TABLE>

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

B-45

- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-46

<PAGE>
PRUDENTIAL ALLOCATION FUND
Financial Highlights BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------------ ----------------------
August 1,
Year 1994(a)
Year Ended July 31, Ended through
------------------------------------------------------------ July 31, July 31,
1996 1995 1994 1993 1992 1996 1995
-------- -------- -------- -------- -------- -------- ---------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $ 12.00 $ 11.09 $ 11.72 $ 10.98 $ 10.71 $ 12.00 $ 11.12
-------- -------- -------- -------- -------- -------- ---------
Income from investment operations
Net investment income................ .21 .26 .24 .34 .35 .21 .21
Net realized and unrealized gain
(loss) on investment
transactions...................... .28 1.10 (.05) 1.16 .82 .28 1.12
-------- -------- -------- -------- -------- -------- ---------
Total from investment
operations..................... .49 1.36 .19 1.50 1.17 .49 1.33
-------- -------- -------- -------- -------- -------- ---------
Less distributions
Dividends from net investment
income............................ (.20) (.25) (.28) (.29) (.36) (.20) (.25)
Distributions from net realized gains
on investment and foreign currency
transactions...................... (.49) (.20) (.54) (.47) (.54) (.49) (.20)
-------- -------- -------- -------- -------- -------- ---------
Total distributions............... (.69) (.45) (.82) (.76) (.90) (.69) (.45)
-------- -------- -------- -------- -------- -------- ---------
Net asset value, end of period....... $ 11.80 $ 12.00 $ 11.09 $ 11.72 $ 10.98 $ 11.80 $ 12.00
-------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- ---------
TOTAL RETURN(c):..................... 4.05% 12.79% 1.61% 14.27% 11.48% 4.05% 12.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $420,465 $392,291 $445,609 $321,831 $225,995 $ 3,525 $ 3,046
Average net assets (000)............. $437,792 $409,419 $392,133 $267,340 $189,358 $ 2,444 $ 920
Ratios to average net assets:(c)
Expenses, including distribution
fees........................... 1.95% 1.97% 2.00% 1.97% 2.09% 1.95% 2.04%(b)
Expenses, excluding distribution
fees........................... .95% .97% 1.00% .97% 1.09% .95% 1.04%(b)
Net investment income............. 1.78% 2.34% 2.08% 3.04% 3.25% 1.78% 2.20%(b)
<CAPTION>
Class Z
--------
<S> <C>
March 1,
1996(d)
through
July 31,
1996
--------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $12.16
--------
Income from investment operations
Net investment income................ .13
Net realized and unrealized gain
(loss) on investment
transactions...................... (.28)
--------
Total from investment
operations..................... (.15)
--------
Less distributions
Dividends from net investment
income............................ (.16)
Distributions from net realized gains
on investment and foreign currency
transactions...................... --
--------
Total distributions............... (.16)
--------
Net asset value, end of period....... $11.85
--------
--------
TOTAL RETURN(c):..................... (1.24)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $4,015
Average net assets (000)............. $4,217
Ratios to average net assets:(c)
Expenses, including distribution
fees........................... .95%(b)
Expenses, excluding distribution
fees........................... .95%(b)
Net investment income............. 2.72%(b)
</TABLE>

- ---------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. -----

B-47

<PAGE>
PRUDENTIAL ALLOCATION FUND
Report of Independent Accountants BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Allocation Fund--Balanced Portfolio
We have audited the accompanying statements of assets and liabilities, including
the portfolio of investments, of Prudential Allocation Fund --Balanced Portfolio
as of July 31, 1996, the related statements of operations for the year then
ended and of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits 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 and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
July 31, 1996 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. 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 audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential
Allocation Fund--Balanced Portfolio as of July 31, 1996, the results of its
operations, the changes in its net assets and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.

DELOITTE & TOUCHE LLP
New York, New York
September 16, 1996
- --------------------------------------------------------------------------------

B-48

<PAGE>

Portfolio of Investments as of PRUDENTIAL ALLOCATION FUND
July 31, 1996 STRATEGY PORTFOLIO
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------------
LONG-TERM INVESTMENTS--72.0%
COMMON STOCKS--51.1%
- ------------------------------------------------------------------
Aerospace/Defense--1.3%
50,000 Boeing Co. $ 4,425,000
- ------------------------------------------------------------------
Airlines--1.9%
16,600 AMR Corp. 1,309,325
277,700 USAir Group Inc. 5,068,025
-------------
6,377,350
- ------------------------------------------------------------------
Chemicals--2.4%
223,900 Agrium Inc. (Canada) 2,835,621
95,200 Polymer Group, Inc. 1,213,800
96,300 Union Carbide Corp. 4,044,600
-------------
8,094,021
- ------------------------------------------------------------------
Computer Related Equipment--1.4%
75,700 Comverse Technology, Inc.* 2,337,238
24,900 Dupont Canada Inc. (Canada) 473,100
36,000 Ross Technology Inc.* 315,000
49,000 Western Digital Corp. 1,463,875
-------------
4,589,213
- ------------------------------------------------------------------
Computer Software & Services--4.0%
118,000 Cisco Systems, Inc.* 6,106,500
36,000 Engineering Animation Inc. 576,000
72,200 Macromedia, Inc. 1,164,225
18,000 Microsoft Corp.* 2,121,750
128,100 Network Express, Inc.* 992,775
15,900 PIXAR Inc.* 210,675
26,600 Primark Corporation* 718,200
87,000 Softkey International Inc.* 1,609,500
-------------
13,499,625
Containers & Packing--0.8%
210,800 Stone Container Corp. $ 2,635,000
- ------------------------------------------------------------------
Drugs & Health Care--5.2%
82,000 AMGEN, Inc.* 4,479,250
46,900 Bard (C.R.), Inc. 1,430,450
70,600 Ciba-Geigy Ltd. (ADR) (Switzerland) 4,218,350
85,700 St. Jude Medical, Inc.* 2,881,662
129,200 United States Surgical Corp. 4,425,100
-------------
17,434,812
- ------------------------------------------------------------------
Electrical Equipment--2.0%
188,700 UCAR International Inc.* 6,580,913
- ------------------------------------------------------------------
Electronics--3.1%
61,700 Burr-Brown Corp. 1,095,175
26,000 Intel Corp. 1,953,250
84,000 Ultratech Stepper Inc.* 1,428,000
225,000 Uniphase Corp.* 5,850,000
-------------
10,326,425
- ------------------------------------------------------------------
Exploration & Production--1.4%
70,000 Alberta Energy Co. Ltd. 1,286,250
85,000 Noble Affiliates, Inc. 3,346,875
-------------
4,633,125
- ------------------------------------------------------------------
Financial Services--8.5%
99,000 Advanta Corp. (ADS) 4,306,500
57,800 Citicorp 4,732,375
181,200 Federal National Mortgage Association 5,753,100
49,200 Student Loan Marketing Association 3,591,600
213,400 The Money Store, Inc. 5,201,625
111,150 Travelers Group Inc. 4,696,087
-------------
28,281,287
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. -----

B-49

<PAGE>

Portfolio of Investments as of PRUDENTIAL ALLOCATION FUND
July 31, 1996 STRATEGY PORTFOLIO
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------------
Foods--1.7%
186,700 RJR Nabisco Holdings Corp. $ 5,741,025
- ------------------------------------------------------------------
Hospital Management--1.6%
91,800 Columbia/ HCA Healthcare Corp. 4,704,750
71,400 Physician Corp. of America* 731,850
-------------
5,436,600
- ------------------------------------------------------------------
Insurance--2.8%
53,000 Aetna, Inc. 3,080,625
23,300 Amerin Corp.* 518,425
20,600 Equitable of Iowa Cos. 715,850
31,500 SunAmerica, Inc. 1,913,625
64,600 The PMI Group, Inc. 3,068,500
-------------
9,297,025
- ------------------------------------------------------------------
Integrated Producers--2.7%
55,000 Exxon Corp. 4,523,750
125,000 Societe Nationale Elf Aquitaine, ADR
(France) 4,500,000
--------------
9,023,750
- ------------------------------------------------------------------
Leisure--0.9%
107,800 Carnival Cruise Lines, Inc. 2,897,125
- ------------------------------------------------------------------
Metals-Non Ferrous--1.2%
70,600 Aluminum Co. of America 4,094,800
- ------------------------------------------------------------------
Miscellaneous Industrial--1.2%
83,600 Varity Corp.* 3,929,200
- ------------------------------------------------------------------
Oil Services--0.5%
69,400 Weatherford Enterra Inc. 1,708,975
- ------------------------------------------------------------------
Restaurants--2.2%
76,100 Lone Star Steakhouse & Saloon, Inc. 2,378,125
105,000 McDonald's Corp. 4,869,375
-------------
7,247,500
Retail--1.1%
115,400 Dillard Department Stores, Inc. $ 3,620,675
- ------------------------------------------------------------------
Steel & Metals--0.7%
44,700 AK Steel Holding Corp.* 1,637,138
80,000 National Steel Corp.* 790,000
-------------
2,427,138
- -----------------------------------------------------------------
Telecommunications--2.5%
114,600 ADC Telecommunications, Inc. 4,841,850
151,100 NEXTEL Communications, Inc.* 2,285,387
55,500 Westell Technologies Inc. 1,345,875
-------------
8,473,112
-------------
Total common stocks
(cost $162,078,652) 170,773,696
-------------
</TABLE>

<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000)
- ------------ --------
<S> <C> <C> <C>
DEBT OBLIGATIONS--20.9%
CORPORATE BONDS--3.0%
- -----------------------------------------------------------------
Chemicals--1.2%
Ba3 $ 2,000 G I Holdings, Inc.,
Sr. Notes Ser. B,
10.00%, 2/15/06 1,930,000
Ba3 2,000 Owens-Illinois Inc.,
Gtd. Deb.,
11.00%, 12/1/03 2,155,000
------------
4,085,000
- -------------------------------------------------------------------
Hospital Management--0.6%
Ba3 2,000 Tenet Healthcare Corp.,
Sr. Sub. Notes,
10.125%, 3/1/05 2,120,000
</TABLE>

- --------------------------------------------------------------------------------
- ----- See Notes to Financial Statements.

B-50

<PAGE>

SHORT-TERM INVESTMENTS--28.0%
U.S. GOVERNMENT SECURITIES--0.3%
$ 1,000 United States Treasury
Bills,
5.06%, 9/19/96,
(cost $993,114) $ 993,201
------------
REPURCHASE AGREEMENT--27.7%
92,510 Joint Repurchase Agreement
Account,
5.64%, 8/1/96,
(cost $92,510,000; Note
5) 92,510,000
------------
Total short-term
investments
(cost $93,503,114) 93,503,201
------------
- --------------------------------------------------------------------
Total Investments--100.0%
(cost $325,490,382; Note
4) 334,112,197
Liabilities in excess of
other
assets (132,204)
------------
Net Assets--100% $333,979,993
------------
------------
</TABLE>
- ---------------
* Non-income producing security.
ADR--American Depository Receipt.
ADS--American Depository Shares.
The Fund's current prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. -----

B-51

<PAGE>
PRUDENTIAL ALLOCATION FUND
Statement of Assets and Liabilities STRATEGY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Assets July 31, 1996
-------------
Investments, at value (cost $325,490,382).................................................................... $334,112,197
Cash......................................................................................................... 17,712
Dividends and interest receivable............................................................................ 1,040,660
Receivable for investments sold.............................................................................. 514,573
Receivable for Fund shares sold.............................................................................. 242,645
Deferred expenses............................................................................................ 24,702
-------------
Total assets.............................................................................................. 335,952,489
-------------
Liabilities
Payable for investments purchased............................................................................ 786,601
Payable for Fund shares reacquired........................................................................... 529,428
Due to Distributor........................................................................................... 222,993
Due to Manager............................................................................................... 187,064
Accrued expenses............................................................................................. 246,410
-------------
Total liabilities......................................................................................... 1,972,496
-------------
Net Assets................................................................................................... $333,979,993
-------------
-------------
Net assets were comprised of:
Shares of beneficial interest, at par..................................................................... $ 278,605
Paid-in capital in excess of par.......................................................................... 294,828,764
-------------
295,107,369
Undistributed net investment income....................................................................... 1,072,074
Accumulated net realized gain on investments.............................................................. 29,178,735
Net unrealized appreciation on investments................................................................ 8,621,815
-------------
Net assets, July 31, 1996.................................................................................... $333,979,993
-------------
-------------
Class A:
Net asset value and redemption price per share
($100,211,435 / 8,322,219 shares of beneficial interest issued and outstanding)........................ $12.04
Maximum sales charge (5.00% of offering price)............................................................ .63
-------------
Maximum offering price to public.......................................................................... $12.67
-------------
-------------
Class B:
Net asset value, offering price and redemption price per share
($233,040,001 / 19,477,424 shares of beneficial interest issued and outstanding)....................... $11.96
-------------
-------------
Class C:
Net asset value, offering price and redemption price per share
($728,557 / 60,892 shares of beneficial interest issued and outstanding)............................... $11.96
-------------
-------------
</TABLE>

- --------------------------------------------------------------------------------
- ----- See Notes to Financial Statements.

B-52

<PAGE>
PRUDENTIAL ALLOCATION FUND
STRATEGY PORTFOLIO
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income July 31, 1996
<S> <C>
Income
Interest (net of foreign withholdings taxes of
$1,135).................................... $ 9,729,582
Dividends (net of foreign withholding taxes of
$9,523).................................... 2,370,904
-------------
Total income............................... 12,100,486
-------------
Expenses
Distribution fee--Class A..................... 244,002
Distribution fee--Class B..................... 2,653,866
Distribution fee--Class C..................... 4,674
Management fee................................ 2,362,457
Transfer agent's fees and expenses............ 850,000
Reports to shareholders....................... 181,000
Custodian's fees and expenses................. 167,000
Registration fees............................. 55,000
Legal fees.................................... 25,000
Trustees' fees and expenses................... 22,000
Audit fee and expenses........................ 17,100
Insurance expense............................. 8,029
Miscellaneous................................. 2,487
-------------
Total expenses............................. 6,592,615
-------------
Net investment income............................ 5,507,871
-------------
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency
Net realized gain (loss) on:
Investment transactions....................... 36,432,055
Financial futures contracts................... (309,212)
Foreign currency transactions................. 192,017
-------------
36,314,860
-------------
Net change in unrealized appreciation
(depreciation) on:
Investments................................... (25,360,377)
Foreign currency transactions................. 9,095
-------------
(25,351,282)
-------------
Net gain on investments.......................... 10,963,578
-------------
Net Increase in Net Assets
Resulting from Operations........................ $ 16,471,449
-------------
-------------
</TABLE>

PRUDENTIAL ALLOCATION FUND
STRATEGY PORTFOLIO
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended July 31,
in Net Assets
<S> <C> <C>
1996 1995
Operations
Net investment income.......... $ 5,507,871 $ 7,631,204
Net realized gain on
investments................. 36,314,860 15,712,614
Net change in unrealized
appreciation of
investments................. (25,351,282) 20,668,517
------------ ------------
Net increase in net assets
resulting from operations... 16,471,449 44,012,335
------------ ------------
Net equalization debits........... (91,163) (274,536)
------------ ------------
Dividends and distributions (Note
1)
Dividends from net investment
income
Class A..................... (1,971,726) (1,553,405)
Class B..................... (3,432,191) (5,542,190)
Class C..................... (5,649) (3,515)
------------ ------------
(5,409,566) (7,099,110)
------------ ------------
Distributions from net realized
gains on investment
transactions
Class A..................... (6,072,810) (1,061,481)
Class B..................... (16,739,446) (9,845,692)
Class C..................... (23,748) (5,857)
------------ ------------
(22,836,004) (10,913,030)
------------ ------------
Fund share transactions (net of
share conversions) (Note 6)
Net proceeds from shares
subscribed.................. 55,447,312 87,194,600
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........... 27,153,769 17,309,043
Cost of shares reacquired...... (102,839,745) (147,769,905)
------------ ------------
Net decrease in net assets from
Fund share transactions..... (20,238,664) (43,266,262)
------------ ------------
Total decrease.................... (32,103,948) (17,540,603)
Net Assets
Beginning of year................. 366,083,941 383,624,544
------------ ------------
End of year....................... $333,979,993 $366,083,941
------------ ------------
------------ ------------
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. -----

B-53

<PAGE>
PRUDENTIAL ALLOCATION FUND
Notes to Financial Statements STRATEGY PORTFOLIO
- --------------------------------------------------------------------------------
Prudential Allocation Fund (the ``Fund'') is registered under the Investment
Company Act of 1940, as a diversified, open-end management investment company.
The Fund was organized as an unincorporated business trust in Massachusetts on
February 23, 1987 and consists of two series, namely: Balanced Portfolio and
Strategy Portfolio. The investment objective of the Strategy Portfolio is to
achieve a high total investment return consistent with relatively higher risk
through varying the proportions of investments in debt and equity securities,
the quality and maturity of debt securities purchased and the price volatility
and the type of issuer of equity securities purchased. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic developments in a specific country, industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies

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

Securities Valuation: Any security for which the primary market is on an
exchange (including NASDAQ National Market System equity securities) is valued
at the last sale price on such exchange on the day of valuation or, if there
was no sale on such day, the mean between the last bid and asked prices quoted
on such day. Corporate bonds (other than convertible debt securities) and U.S.
Government and agency securities that are actively traded in the over-the-
counter market, including listed securities for which the primary market is
believed to be over-the-counter, are valued on the basis of valuations provided
by a pricing service which uses information with respect to transactions in
bonds, quotations from bond dealers, agency ratings, market transactions in
comparable securities and various relationships between securities in
determining value. Convertible debt securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at the mean between the
most recently quoted bid and asked prices provided by principal market makers.
Forward currency exchange contracts are valued at the current cost of offsetting
the contract on the day of valuation. Options are valued at the mean between
the most recently quoted bid and asked prices. Futures and options thereon are
valued at their last sales price as of the close of the commodities exchange or
board of trade.

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.
To the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to ensure the
adequacy of the collateral. If the seller defaults and the value of the
collateral declines or if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Fund may be
delayed or limited.

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

(i) market value of investment securities, other assets and liabilities--at the
closing daily rate of exchange.

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

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

Net realized gains on foreign currency transactions represent net foreign
exchange gains from the holding of foreign currencies, currency gains or losses
realized between the trade and settlement dates on securities transactions, and
the difference between the amounts of dividends, interest and foreign taxes
recorded on the Fund's books and the U.S. dollar equivalent amounts actually
received or paid.

Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic
- --------------------------------------------------------------------------------
- ----- B-54

Options: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates or foreign currency exchange rates with respect to
securities or currencies which the Fund currently owns or intends to purchase.
When the Fund purchases an option, it pays a premium and an amount equal to that
premium is recorded as an investment. When the Fund writes an option, it
receives a premium and an amount equal to that premium is recorded as a
liability. The investment or liability is adjusted daily to reflect the current
market value of the option. If an option expires unexercised, the Fund realizes
a gain or loss to the extent of the premium received or paid. If an option is
exercised, the premium received or paid is an adjustment to the proceeds from
the sale or the cost basis of the purchase in determining whether the Fund has
realized a gain or loss. The difference between the premium and the amount
received or paid on effecting a closing purchase or sale transaction is also
treated as a realized gain or loss. Gain or loss on purchased options is
included in net realized gain (loss) on investment transactions. Gain or loss on
written options is presented separately as net realized gain (loss) on written
option transactions.

The Fund, as writer of an option, has no control over whether the underlying
securities or currencies may be sold (called) or purchased (put). As a result,
the Fund bears the market risk of an unfavorable change in the price of the
security or currency underlying the written option. The Fund, as purchaser of an
option, bears the risk of the potential inability of the counterparties to meet
the terms of their contracts.

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.

Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.

Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Fund is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the ``initial margin.'' Subsequent payments, known as ``variation
margin,'' are made or received by the Fund each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.

The Fund invests in financial futures contracts in order to hedge its existing
portfolio securities, or securities the Fund intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates move unexpectedly, the Fund may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.

Equalization: The Fund follows the accounting practice known as equalization by
which a portion of the proceeds from sales and costs of reacquisitions of Fund
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or reacquisitions of the Fund's shares.

Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of each series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its taxable net income
to its shareholders. Therefore, no federal income tax provision is required.
Withholding taxes on foreign interest and dividends have been provided for in
accordance with the Fund's understanding of the applicable country's tax rates.

Dividends and Distributions: The Fund expects to pay dividends of net investment
income quarterly and make distributions at least annually of any net capital
gains. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gains distributions are determined in
accordance with income tax regulations which may differ from generally
- --------------------------------------------------------------------------------
-----
B-55

<PAGE>
PRUDENTIAL ALLOCATION FUND
Notes to Financial Statements STRATEGY PORTFOLIO
- --------------------------------------------------------------------------------
accepted accounting principles. These differences are primarily due to differing
treatments of wash sales and foreign currency transactions.

Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with American Institute of Certified
Public Accountants, Statement of Position 93-2: Determination, Disclosure, and
Financial Statement Presentation of Income; Capital Gain, and Return of Capital
Distributions by Investment Companies. For the year ended July 31, 1996, the
Strategy Portfolio decreased undistributed net investment income and increased
accumulated net realized gain on investments by $474,349. Net realized gains and
net assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements

The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the services of PIC, the
compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.

The management fee paid PMF is computed daily and payable monthly at an annual
rate of .65 of 1% of the average daily net assets of each of the series.

The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Prudential Securities Incorporated (``PSI'')
became the distributor of the Class A shares of the Fund effective January 2,
1996 and is serving the Fund under the same terms and conditions as under the
arrangement with PMFD and continues as the distributor of the Class B and Class
C shares of the Portfolio. The Portfolio compensated PMFD and PSI for
distributing and servicing the Portfolio's Class A, Class B and Class C shares,
pursuant to plans of distribution (the ``Class A, B and C Plans''), regardless
of expenses actually incurred by them. The distribution fees are accrued daily
and payable monthly.

Pursuant to the Class A, B and C Plans, the Portfolio compensated PSI and PMFD
(for the period August 1, 1995 through January 1, 1996 with respect to Class A
shares), for distribution-related activities at an annual rate of up to .30 of
1%, 1% and 1% of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .25 of 1%, 1% and 1% of the
average daily net assets of the Class A, B and C shares, respectively, for the
year ended July 31, 1996.

PMFD and PSI have advised the Portfolio that they received approximately
$150,800 in front-end sales charges resulting from sales of Class A shares
during the year ended July 31, 1996. From these fees, PMFD and PSI paid such
sales charges to dealers which in turn paid commissions to salespersons.

PSI has advised the Portfolio that for the year ended July 31, 1996, it received
approximately $417,000 in contingent deferred sales charges imposed upon certain
redemptions by Class B and C shareholders.

PMFD was a wholly-owned subsidiary of PMF, PSI, PIC and PMF are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates

Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Portfolio's transfer agent. During the year ended July 31,
1996, the Portfolio incurred fees of approximately $804,500 for the services of
PMFS. As of July 31, 1996, approximately $61,000 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations also include
certain out-of-pocket expenses paid to non-affiliates.

For the year ended July 31, 1996, PSI received approximately $44,200 in
brokerage commissions from portfolio transactions executed on behalf of the
Portfolio.
- ------------------------------------------------------------
Note 4. Portfolio Securities

Purchases and sales of investment securities of the Portfolio, other than
short-term investments, for the year ended July 31, 1996 aggregated $439,485,099
and $536,144,172, respectively.

The cost basis of investments for federal income tax purposes is substantially
the same as for financial reporting purposes and, accordingly, as of July 31,
1996, net unrealized appreciation for federal income tax purposes was $8,621,815
(gross unrealized appreciation--19,101,833, gross unrealized
depreciation--$10,480,018.
- --------------------------------------------------------------------------------
- -----

B-56

The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Government or federal agency obligations. As of July 31, 1996, the
Portfolio had a 7.6% undivided interest in the repurchase agreements in the
joint account. The undivided interest for the Portfolio represented $92,510,000
in principal amount. As of such date, each repurchase agreement in the joint
account and the value of the collateral therefor was as follows:

Bear, Stearns & Co., Inc., 5.625%, dated 7/31/96, in the principal amount of
$344,000,000, repurchase price $344,053,750, due 8/1/96. The value of the
collateral including accrued interest is $351,232,252.

Chase Securities, Inc., 5.64%, dated 7/31/96, in the principal amount of
$183,822,000, repurchase price $183,850,593, due 8/1/96. The value of the
collateral including accrued interest is $188,037,739.

CS First Boston Corp., 5.70%, dated 7/31/96, in the principal amount of
$208,000,000, repurchase price $208,032,933, due 8/1/96. The value of the
collateral including accrued interest is $212,392,225.

Goldman, Sachs Co., 5.62%, dated 7/31/96, in the principal amount of
$136,000,000, repurchase price $136,021,231, due 8/1/96. The value of the
collateral including accrued interest is $138,720,353.

Smith Barney Inc., 5.64%, dated 7/31/96, in the principal amount of
$344,000,000, repurchase price $344,053,893, due 8/1/96. The value of the
collateral including accrued interest is $350,880,898.
- ------------------------------------------------------------
Note 6. Capital

The Portfolio offers Class A, Class B and Class C shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. A special exchange privilege is also available for
shareholders who qualified to purchase Class A shares at net asset value.

The Fund has authorized an unlimited number of shares of beneficial interest of
each class at $.01 par value per share.

Transactions in shares of beneficial interest for the years ended July 31, 1996
and July 31, 1995 were as follows:

<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ----------- ------------
<S> <C> <C>
Year ended July 31, 1996:
Shares issued...................... 2,260,476 $ 28,118,465
Shares issued in reinvestment of
dividends and distributions...... 633,928 7,815,389
Shares reacquired.................. (3,190,632) (39,885,580)
----------- ------------
Net decrease in shares outstanding
before conversion................ (296,228) (3,951,726)
Shares issued upon conversion from
Class B.......................... 1,640,084 20,771,295
----------- ------------
Net increase in shares
outstanding...................... 1,343,856 $ 16,819,569
----------- ------------
----------- ------------
Year ended July 31, 1995:
Shares issued...................... 1,390,817 $ 15,562,421
Shares issued in reinvestment of
dividends and distributions...... 226,669 2,532,533
Shares reacquired.................. (1,480,078) (17,030,049)
----------- ------------
Net increase in shares outstanding
before conversion................ 137,408 1,064,905
Shares issued upon conversion from
Class B.......................... 4,041,405 45,163,786
----------- ------------
Net increase in shares
outstanding...................... 4,178,813 $ 46,228,691
----------- ------------
----------- ------------
<CAPTION>
Class B
- -----------------------------------
<S> <C> <C>
Year ended July 31, 1996:
Shares issued...................... 2,151,781 $ 26,736,221
Shares issued in reinvestment of
dividends and distributions...... 1,576,044 19,309,058
Shares reacquired.................. (5,059,562) (62,798,210)
----------- ------------
Net decrease in shares outstanding
before conversion................ (1,331,737) (16,752,931)
Shares reacquired upon conversion
into Class A..................... (1,650,974) (20,771,295)
----------- ------------
Net decrease in shares
outstanding...................... (2,982,711) $(37,524,226)
----------- ------------
----------- ------------
Year ended July 31, 1995:
Shares issued...................... 2,294,936 $ 26,157,592
Shares issued in reinvestment of
dividends and distributions...... 1,357,022 14,767,213
Shares reacquired.................. (7,554,633) (85,523,598)
----------- ------------
Net decrease in shares outstanding
before conversion................ (3,902,675) (44,598,793)
Shares reacquired upon conversion
into Class A..................... (4,066,519) (45,163,786)
----------- ------------
Net decrease in shares
outstanding...................... (7,969,194) $(89,762,579)
----------- ------------
----------- ------------
</TABLE>
- --------------------------------------------------------------------------------
-----

B-57
<PAGE>
PRUDENTIAL ALLOCATION FUND
Notes to Financial Statements STRATEGY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Shares Amount
- ----------------------------------- ----------- ------------
Year ended July 31, 1996:
<S> <C> <C>
Shares issued...................... 47,663 $ 592,626
Shares issued in reinvestment of
dividends and distributions...... 2,388 29,322
Shares reacquired.................. (12,428) (155,955)
----------- ------------
Net increase in shares
outstanding...................... 37,623 $ 465,993
----------- ------------
----------- ------------
August 1, 1994* Through July 31,
1995:
Shares issued...................... 26,928 $ 310,801
Shares issued in reinvestment of
dividends and distributions...... 850 9,297
Shares reacquired.................. (4,509) (52,472)
----------- ------------
Net increase in shares
outstanding...................... 23,269 $ 267,626
----------- ------------
----------- ------------
</TABLE>

- ---------------
* Commencement of offering of Class C shares.
- ------------------------------------------------------------
Note 7. Dividends

On September 16, 1996 the Board of Trustees of the Fund declared the following
dividends per share, payable on September 23, 1996 to shareholders of record on
September 20, 1996:

<TABLE>
<CAPTION>
Class B
Class A and C
------- -------
<S> <C> <C>
Ordinary Income.......................... $0.06 $0.0375
</TABLE>

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

B-58

Year Ended July 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year... $ 12.48 $ 11.60 $ 11.82 $ 12.03 $ 11.45
-------- ------- ------- ------- -------
Income from investment operations
Net investment income................ .27 .38 .30 .42 .35
Net realized and unrealized gain on
investment and foreign currency
transactions...................... .35 1.14 .05 .70 1.02
-------- ------- ------- ------- -------
Total from investment
operations..................... .62 1.52 .35 1.12 1.37
-------- ------- ------- ------- -------
Less distributions
Dividends from net investment
income............................ (.25) (.30) (.22) (.37) (.37)
Dividends in excess of net investment
income............................ -- -- (.01) -- --
Distributions from net realized gains
on investment and foreign currency
transactions...................... (.81) (.34) (.34) (.96) (.42)
-------- ------- ------- ------- -------
Total distributions............... (1.06) (.64) (.57) (1.33) (.79)
-------- ------- ------- ------- -------
Net asset value, end of year......... $ 12.04 $ 12.48 $ 11.60 $ 11.82 $ 12.03
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
TOTAL RETURN(a):..................... 4.84% 13.95% 2.88% 10.02% 12.36%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........ $100,211 $87,081 $32,485 $28,641 $20,378
Average net assets (000)............. $97,601 $57,020 $30,634 $24,216 $15,705
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.27% 1.33% 1.26% 1.21% 1.26%
Expenses, excluding distribution
fees........................... 1.02% 1.08% 1.03% 1.01% 1.06%
Net investment income............. 2.06% 3.34% 2.52% 3.61% 3.05%
For Class A, B and C shares:
Portfolio turnover rate........... 147% 180% 96% 145% 241%
Average commission rate paid per
share $.0552 N/A N/A N/A N/A
</TABLE>

B-59

<PAGE>
PRUDENTIAL ALLOCATION FUND
Financial Highlights STRATEGY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------------ ----------------------
August 1,
Year 1994(a)
Year Ended July 31, Ended through
------------------------------------------------------------ July 31, July 31,
1996 1995 1994 1993 1992 1996 1995
-------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 12.41 $ 11.54 $ 11.79 $ 12.01 $ 11.43 $12.41 $ 11.57
-------- -------- -------- -------- -------- -------- ---------
Income from investment operations
Net investment income................ .17 .20 .21 .34 .26 .17 .25
Net realized and unrealized gain on
investment and foreign currency
transactions...................... .35 1.22 .05 .70 1.02 .35 1.14
-------- -------- -------- -------- -------- -------- ---------
Total from investment
operations..................... .52 1.42 .26 1.04 1.28 .52 1.39
-------- -------- -------- -------- -------- -------- ---------
Less distributions
Dividends from net investment
income............................ (.16) (.21) (.16) (.30) (.28) (.16) (.21)
Dividends in excess of net investment
income............................ -- -- (.01) -- -- -- --
Distributions from net realized gains
on investment and foreign currency
transactions...................... (.81) (.34) (.34) (.96) (.42) (.81) (.34)
-------- -------- -------- -------- -------- -------- ---------
Total distributions............... (.97) (.55) (.51) (1.26) (.70) (.97) (.55)
-------- -------- -------- -------- -------- -------- ---------
Net asset value, end of period....... $ 11.96 $ 12.41 $ 11.54 $ 11.79 $ 12.01 $11.96 $ 12.41
-------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- ---------
TOTAL RETURN(c):..................... 4.03% 13.05% 2.11% 9.21% 11.53% 4.03% 12.75%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $233,040 $278,714 $351,140 $357,287 $314,771 $729 $289
Average net assets (000)............. $265,387 $307,439 $362,579 $339,225 $267,525 $467 $170
Ratios to average net assets:(c)
Expenses, including distribution
fees........................... 2.02% 2.08% 2.03% 2.01% 2.06% 2.02% 2.10%(b)
Expenses, excluding distribution
fees........................... 1.02% 1.08% 1.03% 1.01% 1.06% 1.02% 1.10%(b)
Net investment income............. 1.31% 1.77% 1.77% 2.79% 2.27% 1.31% 2.27%(b)
</TABLE>
- ---------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
- --------------------------------------------------------------------------------
- ----- See Notes to Financial Statements.

B-60
<PAGE>
PRUDENTIAL ALLOCATION FUND
Report of Independent Accountants STRATEGY PORTFOLIO
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Allocation Fund--Strategy Portfolio

We have audited the accompanying statements of assets and liabilities, including
the portfolio of investments, of Prudential Allocation Fund--Strategy Portfolio
as of July 31, 1996, the related statements of operations for the year then
ended and of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Portfolio's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.

We conducted our audits 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 and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
July 31, 1996 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. 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 audits provide a reasonable basis for our
opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential
Allocation Fund--Strategy Portfolio as of July 31, 1996, the results of its
operations, the changes in its net assets and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.

DELOITTE & TOUCHE LLP
New York, New York
September 16, 1996

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

B-61
<PAGE>

APPENDIX I--HISTORICAL PERFORMANCE DATA

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

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

EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
(VALUE OF $1 INVESTED ON 12/31/25)

[CHART]

<TABLE>
<S> <C>
SMALL STOCKS $ 3,822
COMMON STOCKS $ 1,114
LONG-TERM
BONDS $ 34
TREASURY BILLS $ 13
INFLATION $ 9
</TABLE>

Source: Prudential Investment Corporation based on data from Ibbotson
Associates' ENCORR Software, Chicago, Illinois. Used with permission. All rights
reserved. This chart is for illustrative purposes only and is not indicative of
the past, present, or future performance of any asset class or any Prudential
Mutual Fund.

Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile than
bond prices over the long-term.

Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.

Long-term government bond returns are represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each year
a new bond with a then-current coupon replaces the old bond. Treasury bill
returns are for a one-month bill. Treasuries are guaranteed by the government as
to the timely payment of principal and interest; equities are not. Inflation is
measured by the consumer price index (CPI).

IMPACT OF INFLATION. The "real" rate of investment return is that which exceeds
the rate of inflation, the percentage change in the value of consumer goods and
the general cost of living. A common goal of long-term investors is to outpace
the erosive impact of inflation on investment returns.

I-1
<PAGE>

Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
through 1995. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.

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

HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS

[CHART]

<TABLE>
<CAPTION>
YEAR '87 '88 '89 '90 '91 '92 '93 '94
- ------------------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. TREASURY BONDS 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% -3.4%
MORTGAGE SECURITIES 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% -1.6%
U.S. CORPORATE BONDS 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% -3.9%
U.S. HIGH YIELD CORPORATE BONDS 5.0% 12.5% 0.8% -9.6% 46.2% 15.8% 17.1% -1.0%
WORLD GOVERNMENT BONDS 35.2% 2.3% -3.4% 15.3% 16.2% 4.8% 15.1% 6.0%
DIFFERENCE BETWEEN HIGHEST AND LOWEST
RETURN IN PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9

<CAPTION>
YEAR '95
- ------------------------------------------- ---------
<S> <C>
U.S. TREASURY BONDS 18.4%
MORTGAGE SECURITIES 16.8%
U.S. CORPORATE BONDS 22.3%
U.S. HIGH YIELD CORPORATE BONDS 19.2%
WORLD GOVERNMENT BONDS 19.6%
DIFFERENCE BETWEEN HIGHEST AND LOWEST
RETURN IN PERCENT 5.5
</TABLE>

(1) LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.

(2) LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).

(3) LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.

(4) LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.

(5) SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the U.S.,
but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.

I-2
<PAGE>

This chart illustrates the performance of major world stock markets for the
period from 1986 through 1995. It does not represent the performance of any
Prudential Mutual Fund.

[CHART]

<TABLE>
<S> <C> <C> <C>
HONG KONG 23.8% FRANCE 15.3%
BELGIUM 20.7% U.K. 15.0%
SWEDEN 19.4% U.S. 14.8%
NETHERLAND 19.3% JAPAN 12.8%
SPAIN 17.9% AUSTRIA 10.9%
SWITZERLAND 17.1% GERMANY 10.7%
</TABLE>

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

This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 stock index with and without reinvested
dividends.

[CHART]

<TABLE>
<S> <C>
CAPITAL APPRECIATION
AND REINVESTING
DIVIDENDS $ 186,208
CAPITAL APPRECIATION
ONLY $ 66,913
</TABLE>

Source: Stocks, Bonds, Bills, and Inflation 1996 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is used for illustrative
purposes only and is not intended to represent the past, present or future
performance of any Prudential Mutual Fund. Common stock total return is based on
the Standard & Poor's 500 Stock Index, a market-value-weighted index made up of
500 of the largest stocks in the U.S. based upon their stock market value.
Investors cannot invest directly in indices.

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

WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL: $9.2 TRILLION

[CHART]

<TABLE>
<S> <C>
CANADA 2.2%
EUROPE 28.3%
U.S. 40.8%
PACIFIC
BASIN 28.7%
</TABLE>

Source: Morgan Stanley Capital International, December 1995. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of 1579 companies
in 22 countries (representing approximately 60% of the aggregate market value of
the stock exchanges). This chart is for illustrative purposes only and does not
represent the allocation of any Prudential Mutual Fund.

I-3
<PAGE>

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

LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1995)

[CHART]

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

Source: Stocks, Bonds, Bills, and Inflation 1996 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of the long-term U.S. Treasury Bond from 1926-1994. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.

The following chart, although not relevant to share ownership in the Fund,
may provide useful information about the effects of a hypothetical investment
diversified over different asset portfolios. The chart shows the range of annual
total returns for major stock and bond indices for the period from December 31,
1975 through December 31, 1995. The horizontal "Best Returns Zone" band shows
that a hypothetical blended portfolio constructed of one-third U.S. stock (S&P
500), one-third foreign stock (EAFE Index), and one-third U.S. bonds (Lehman
Index) would have eliminated the "highest highs" and "lowest lows" of any single
asset class.

[CHART]

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

* Source: Prudential Investment Corporation based on data from Lipper Analytical
New Application (LANA). Past performance is not indicative of future results.
The S&P 500 Index is a weighted, unmanaged index comprised of 500 stocks which
provides a broad indication of stock price movements. The Morgan Stanley EAFE
Index is an unmanaged index comprised of 20 overseas stock markets in Europe,
Australia, New Zealand and the Far East. The Lehman Aggregate Index includes
all publicly-issued investment grade debt with maturities over one year,
including U.S. government and agency issues, 15 and 30 year fixed-rate
government agency mortgage securities, dollar denominated SEC registered
corporate and government securities, as well as asset-backed securities.
Investors cannot invest directly in stock or bond market indices.

I-4
<PAGE>

APPENDIX II--GENERAL INVESTMENT INFORMATION

ASSET ALLOCATION

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

DIVERSIFICATION

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

DURATION

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

Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, I.E., principal and interest
rate payments. Duration is expressed as a measure of time in years the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).

MARKET TIMING

Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.

POWER OF COMPOUNDING

Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.

II-1
<PAGE>

APPENDIX III--INFORMATION RELATING TO THE PRUDENTIAL

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

INFORMATION ABOUT PRUDENTIAL

The Manager and PIC(1) are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1995. Its primary business is to offer a full range of products and services in
three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs more
than 92,000 persons worldwide, and maintains a sales force of approximately
13,000 agents and 5,600 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.

INSURANCE. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to more than 50 million people
worldwide one of every five people in the United States. Long one of the largest
issuers of individual life insurance, the Prudential has 19 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($11.4 billion) of any life insurance company in
the United States. The Prudential provides auto insurance for more than 1.7
million cars and insures more than 1.4 million homes.

MONEY MANAGEMENT. The Prudential is one of the largest pension fund managers
in the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k) plans.
In July 1995, INSTITUTIONAL INVESTOR ranked Prudential the third largest
institutional money manager of the 300 largest money management organizations in
the United States as of December 31, 1994. As of December 31, 1995, Prudential
had more than $314 billion in assets under management. Prudential's Money
Management Group (of which Prudential Mutual Funds is a key part) manages over
$190 billion in assets of institutions and individuals.

REAL ESTATE. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 34,000 brokers and
agents and more than 1,100 offices in the United States.(2)

HEALTHCARE. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.

FINANCIAL SERVICES. The Prudential Bank, a wholly-owned subsidiary of the
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.

INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS

Prudential Mutual Fund Management is one of the sixteen largest mutual fund
companies in the country, with over 2.5 million shareholders invested in more
than 50 mutual fund portfolios and variable annuities with more than 3.7 million
shareholder accounts.

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

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

(1)Prudential Mutual Fund Investment Management, a unit of PIC, serves as the
Subadviser to substantially all of the Prudential Mutual Funds. Wellington
Management Company serves as the subadviser to Global Utility Fund, Inc.,
Nicholas-Applegate Capital Management as subadviser to Nicholas-Applegate
Fund, Inc., Jennison Associates Capital Corp. as the subadviser to Prudential
Jennison Fund, Inc. and BlackRock Financial Management, Inc. as subadviser to
The BlackRock Government Income Trust. There are multiple subadvisers for The
Target Portfolio Trust.

(2)As of December 31, 1994.

III-1
<PAGE>

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

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

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

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

Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.

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

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

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

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

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

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

(3)As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.

(4)Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios of
the Prudential Series Fund and institutional and non-US accounts managed by
Prudential Mutual Fund Investment Management, a division of PIC, for the year
ended December 31, 1995.

(5)Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage Funds.

(6)As of December 31, 1994.

III-2
<PAGE>

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

INFORMATION ABOUT PRUDENTIAL SECURITIES

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

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

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

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

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

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

(7)As of December 31, 1994.

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

III-3
<PAGE>
PART C
OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(A) FINANCIAL STATEMENTS:

(1) The following financial statements are included in the Prospectus
constituting Part A of this Registration Statement:

Financial Highlights.

(2) The following financial statements are included in the Statement of
Additional Information constituting Part B of this Registration Statement:

Portfolio of Investments at July 31, 1996.

Statement of Assets and Liabilities at July 31, 1996.

Statement of Operations for the year ended July 31, 1996.

Statement of Changes in Net Assets for the years ended July 31, 1996
and 1995.

Notes to Financial Statements.

Financial Highlights.

Independent Auditors' Report.

(B) EXHIBITS:

1. (a) Amended and Restated Declaration of Trust. Incorporated by
reference to Exhibit No. 1(a) to Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A filed via EDGAR on September
29, 1994 (File No. 33-12531).

(b) Amended Certificate of Designation.*

2. By-Laws of the Registrant. Incorporated by reference to Exhibit No.
2 to Post-Effective Amendment No. 13 to the Registration Statement
on Form N-1A filed via EDGAR on September 29, 1994 (File No.
33-12531).

4. (a) Specimen receipt for shares of beneficial interest issued by the
Registrant. Incorporated by reference to Exhibit No. 4 to
Post-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on March 1, 1988 (File No. 33-12531).

(b) Specimen receipt for Class A shares of beneficial interest of
the Conservatively Managed Portfolio of the Registrant. Incorporated
by reference to Exhibit No. 4(b) to Post-Effective Amendment No. 7
to the Registration Statement on Form N-1A filed on November 30,
1990 (File No. 33-12531).

(c) Specimen receipt for Class A and Class B shares of beneficial
interest of the Strategy Portfolio. Incorporated by reference to
Exhibit No. 4(c) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed on November 30, 1990 (File
No. 33-12531).

C-1
<PAGE>
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc. Incorporated by reference to Exhibit
No. 5(a) to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A filed on October 31, 1989 (File No.
33-12531).

(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. Incorporated by
reference to Exhibit No. 5(b) to Post-Effective Amendment No.4 to
the Registration Statement on Form N-1A filed on October 31, 1989
(File No. 33-12531).

6. Restated Distribution Agreement.*

8. (a) Custodian Contract betwen the Registrant and State Street Bank
and Trust Company. Incorporated by reference to Exhibit No. 8 to
Post-Effective Amendment No. 4 to the Registration Statement on Form
N-1A filed on October 31, 1989 (File No. 33-12531).

(b) Amendment to Custodian Contract. Incorporated by reference to
Exhibit No. 8(b) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed on November 30, 1990 (File
No. 33-12531).

9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorporated by reference to
Exhibit No. 9 to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A filed on October 31, 1989 (File No.
33-12531).

10. Opinion of Counsel. Incorporated by reference to Exhibit No. 10 to
Pre-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on August 31, 1987 (File No. 33-12531).

11. Consent of Independent Auditors.*

13. Purchase Agreement. Incorporated by reference to Exhibit No. 13 to
Pre-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on August 31, 1987 (File No. 33-12531).

15. (a) Distribution and Service Plan for Class A shares. Incorporated
by reference to Exhibit No. 15(a) to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A filed via EDGAR on
September 29, 1994 (File No. 33-12531).

(b) Distribution and Service Plan for Class B shares. Incorporated
by reference to Exhibit No. 15(b) to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A filed via EDGAR on
September 29, 1994 (File No. 33-12531).

(c) Distribution and Service Plan for Class C shares. Incorporated
by reference to Exhibit No. 15(c) to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A filed via EDGAR on
September 29, 1994 (File No. 33-12531).

16. (a) Schedule of Computation of Performance Quotations. Incorporated
by reference to Exhibit No. 16 to Post-Effective Amendment No. 4 to
the Registration Statement on Form N-1A filed on October 31, 1989
(File No. 33-12531).

(b) Schedule of Computation of Performance Quotations for Class A
shares. Incorporated by reference to Exhibit No. 16(b) to
Post-Effective Amendment No. 7 to the Registration Statement on Form
N-1A filed on November 30, 1990 (File No. 33-12531).

17. Financial Data Schedules.*

18. Rule 18f-3 Plan.*

C-2
<PAGE>
Other Exhibits

Powers of Attorney for: Edward D. Beach, Donald D. Lennox, Douglas H.
McCorkindale, Thomas T. Mooney and Louis A. Weil, III. Executed copies
incorporated by reference to Other Exhibits to Post-Effective Amendment No. 4 to
the Registration Statement on Form N-1A filed on October 31, 1989 (File No.
33-12531).
- --------------
* Filed herewith

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

No person is controlled by or under common control with the Registrant.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

As of September 13, 1996, there were 38,021 Class A shareholders of the
Balanced Portfolio and 19,188 Class A shareholders of the Strategy Portfolio;
53,048 Class B shareholders of the Balanced Portfolio and 34,042 Class B
shareholders of the Strategy Portfolio; 673 Class C shareholders of the Balanced
Portfolio and 170 Class C shareholders of the Strategy Portfolio; and 773 Class
Z shareholders of the Balanced Portfolio.

ITEM 27. INDEMNIFICATION.

As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940
(the "1940 Act") and pursuant to Article VI of the Fund's By-Laws (Exhibit 2 to
the Registration Statement), officers, Trustees, employees and agents of the
Registrant will not be liable to the Registrant, any shareholder, officer,
trustee, employee, agent or other person for any action or failure to act,
except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
As permitted by Section 17(i) of the 1940 Act, pursuant to Section 10 of the
Distribution Agreement (Exhibit 6 to the Registration Statement), the
Distributor of the Registrant may be indemnified against liabilities which it
may incur, except liabilities arising from bad faith, gross negligence, willful
misfeasance or reckless disregard of duties.

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

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

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

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

C-3
<PAGE>
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

(a) Prudential Mutual Fund Management, Inc.

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

The business and other connections of the executive officers of PMF are
listed in Schedules A and D of Form ADV of PMF as currently on file with the
Securities and Exchange Commission, the text of which is hereby incorporated by
reference (File No. 801-31104, filed on March 30, 1996).

The business and other connections of PMF's directors and principal
executive officers are set forth below. The address of each person is One
Seaport Plaza, New York, NY 10292.

<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- ------------------------------ ------------------------------ --------------------------------------------------
<S> <C> <C>
Stephen P . Fisher Senior Vice President Senior Vice President, PMF; Senior Vice President,
Prudential Securities Incorporated (Prudential
Securities); Vice President, Prudential Mutual
Fund Distributors, Inc. (PMFD)
Frank W. Giordano Executive Vice President, Executive Vice President, General Counsel,
General Counsel, Secretary and Secretary and Director, PMF and PMFD; Senior
Director Vice President, Prudential Securities; Director,
Prudential Mutual Fund Services, Inc. (PMFS)
Robert F. Gunia Executive Vice President, Executive Vice President, Chief Financial and
Chief Financial and Administrative Officer, Treasurer and Director,
Administrative Officer, PMF; Senior Vice President, Prudential
Treasurer and Director Securities; Comptroller of the Money Management
Group of The Prudential Insurance Company of
America (Prudential); Executive Vice President,
Chief Financial Officer, Treasurer and Director,
PMFD; Director, PMFS
Theresa A. Hamacher Director Director, PMF; Vice President, Prudential; Vice
751 Broad Street President, The Prudential Investment Corporation
Newark, NJ 07102 (PIC); President, Prudential Mutual Fund
Investment Management (PMFIM)
Timothy J. O'Brien Director President, Chief Executive Officer, Chief
Raritan Plaza One Operating Officer and Director, PMFD; Chief
Edison, NJ 08837 Executive Officer and Director, PMFS; Director,
PMF
Richard A. Redeker President, Chief Executive President, Chief Executive Officer and Director,
Officer and Director PMF; Executive Vice President, Director and
Member of Operating Committee, Prudential
Securities; Director, Prudential Securities
Group, Inc. (PSG); Executive Vice President,
PIC; Director, PMFD; Director, PMFS
S. Jane Rose Senior Vice President, Senior Senior Vice President, Senior Counsel and
Counsel and Assistant Assistant Secretary, PMF; Senior Vice President
Secretary and Senior Counsel, Prudential Securities
Donald Webber Executive Vice President and Executive Vice President and Director of Sales,
Director of Sales PMF
</TABLE>

C-4
<PAGE>
(b) The Prudential Investment Corporation (PIC)

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

<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ------------------------------ ------------------------------ --------------------------------------------------
<S> <C> <C>
William M. Bethke Senior Vice President Senior Vice President, Prudential; Senior Vice
Two Gateway Center President, PIC
Newark, NJ 07102
E. Michael Caulfield Chairman of the Board, Chief Executive Officer of The Money Management
President and Chief Executive Group of Prudential
Officer and Director
Jonathan M. Greene Senior Vice President and President-Investment Management of the Money
Director Management Group of Prudential
Theresa A. Hamacher Vice President Vice President, Prudential; Vice President, PIC;
Director, PMF; President, PMFIM
Richard A. Redeker Executive Vice President President, Chief Executive Officer and Director,
One Seaport Plaza PMF; Executive Vice President, Director and
New York, NY 10292 Member of Operating Committee, Prudential
Securities; Director, PSG; Executive Vice
President, PIC; Director, PMFD; Director, PMFS
Eric A. Simonson Vice President and Director Vice President and Director, PIC; Executive Vice
President, Prudential
</TABLE>

ITEM 29. PRINCIPAL UNDERWRITERS

(a) Prudential Securities Incorporated

Prudential Securities is distributor for The BlackRock Government Income
Trust, The Global Government Plus Fund, Inc., The Global Total Return Fund,
Inc., Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc.
(Nicholas-Applegate Growth Equity Fund), Prudential Allocation Fund, Prudential
California Municipal Fund, Prudential Distressed Securities Fund, Inc.,
Prudential Diversified Bond Fund, Inc., Prudential Equity Fund, Inc., Prudential
Equity Income Fund, Prudential Europe Growth Fund, Inc., Prudential Global
Genesis Fund, Inc., Prudential Global Limited Maturity Fund, Inc., Prudential
Government Income Fund, Inc., Prudential Government Securities Trust, Prudential
High Yield Fund, Inc., Prudential Institutional Liquidity Portfolio, Inc.,
Prudential Intermediate Global Income Fund, Inc., Prudential Jennison Series
Fund, Inc., Prudential MoneyMart Assets, Inc., Prudential Mortgage Income Fund,
Inc., Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund,
Prudential Municipal Series Fund, Prudential National Municipals Fund, Inc.,
Prudential Natural Resources Fund, Inc., Prudential Pacific Growth Fund, Inc.,
Prudential Small Companies Fund, Inc., Prudential Special Money Market Fund,
Inc., Prudential Structured Maturity Fund, Inc., Prudential Tax-Free Money Fund,
Inc., Prudential Utility Fund, Inc., Prudential World Fund, Inc. and The Target
Portfolio Trust. Prudential Securities is also a depositor for the following
unit investment trusts:

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

C-5
<PAGE>

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

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

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS

All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, The Prudential Investment Corporation, Prudential Plaza,
745 Broad Street, Newark, New Jersey 07102 the Registrant, One Seaport Plaza,
New York, New York 10292, and Prudential Mutual Fund Services, Inc., Raritan
Plaza One, Edison, New Jersey 08837. Documents required by Rules 31a-1 (b)(5),
(6), (7), (9), (10) and (11) and 31a-1(f) will be kept at Two Gateway Center,
Newark, New Jersey 07102. Documents required by Rules 31a-1(b)(4) and (11) and
31a-1(d) at One Seaport Plaza and the remaining accounts, books and other
documents required by such other pertinent provisions of Section 31(a) and the
Rules promulgated thereunder will be kept by State Street Bank and Trust Company
and Prudential Mutual Fund Services, Inc.

ITEM 31. MANAGEMENT SERVICES

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

ITEM 32. UNDERTAKINGS

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

C-6
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
and the State of New York, on the 25th day of September, 1996.

PRUDENTIAL ALLOCATION FUND

/s/ Richard A. Redeker
-----------------------------------------------------------------------
(RICHARD A. REDEKER, PRESIDENT)

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- --------------------
<S> <C> <C>
/s/ Susan C. Cote Treasurer and Principal Financial September 25, 1996
- --------------------------------- and Accounting Officer
SUSAN C. COTE

/s/ Edward D. Beach Trustee September 25, 1996
- ---------------------------------
EDWARD D. BEACH

/s/ Donald D. Lennox Trustee September 25, 1996
- ---------------------------------
DONALD D. LENNOX

/s/ Douglas H. McCorkindale Trustee September 25, 1996
- ---------------------------------
DOUGLAS H. MCCORKINDALE

/s/ Thomas T. Mooney Trustee September 25, 1996
- ---------------------------------
THOMAS T. MOONEY

/s/ Richard A. Redeker Trustee and President September 25, 1996
- ---------------------------------
RICHARD A. REDEKER

/s/ Louis A. Weil, III Trustee September 25, 1996
- ---------------------------------
LOUIS A. WEIL, III
</TABLE>

<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- ------------------------------------------------------------------------- ----
<C> <S> <C>
1. (a) Amended and Restated Declaration of Trust. Incorporated by --
reference to Exhibit No. 1(a) to Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A filed via EDGAR on September
29, 1994 (File No. 33-12531).
(b) Amended Certificate of Designation.*
2. By-Laws of the Registrant. Incorporated by reference to Exhibit No. --
2 to Post-Effective Amendment No. 13 to the Registration Statement
on Form N-1A filed via EDGAR on September 29, 1994 (File No.
33-12531).
4. (a) Specimen receipt for shares of beneficial interest issued by the --
Registrant. Incorporated by reference to Exhibit No. 4 to
Post-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on March 1, 1988 (File No. 33-12531).
(b) Specimen receipt for Class A shares of beneficial interest of --
the Conservatively Managed Portfolio of the Registrant. Incorporated
by reference to Exhibit No. 4(b) to Post-Effective Amendment No. 7
to the Registration Statement on Form N-1A filed on November 30,
1990 (File No. 33-12531).
(c) Specimen receipt for Class A and Class B shares of beneficial --
interest of the Strategy Portfolio. Incorporated by reference to
Exhibit No. 4(c) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed on November 30, 1990 (File
No. 33-12531).
5. (a) Management Agreement between the Registrant and Prudential --
Mutual Fund Management, Inc. Incorporated by reference to Exhibit
No. 5(a) to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A filed on October 31, 1989 (File No.
33-12531).
(b) Subadvisory Agreement between Prudential Mutual Fund Management, --
Inc. and The Prudential Investment Corporation. Incorporated by
reference to Exhibit No. 5(b) to Post-Effective Amendment No.4 to
the Registration Statement on Form N-1A filed on October 31, 1989
(File No. 33-12531).
6. Restated Distribution Agreement.*
8. (a) Custodian Contract betwen the Registrant and State Street Bank --
and Trust Company. Incorporated by reference to Exhibit No. 8 to
Post-Effective Amendment No. 4 to the Registration Statement on Form
N-1A filed on October 31, 1989 (File No. 33-12531).
(b) Amendment to Custodian Contract. Incorporated by reference to --
Exhibit No. 8(b) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed on November 30, 1990 (File
No. 33-12531).
9. Transfer Agency and Service Agreement between the Registrant and --
Prudential Mutual Fund Services, Inc. Incorpo-
rated by reference to Exhibit No. 9 to Post-Effective Amendment No.
4 to the Registration Statement on Form N-1A
filed on October 31, 1989 (File No. 33-12531).
10. Opinion of Counsel. Incorporated by reference to Exhibit No. 10 to --
Pre-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on August 31, 1987 (File No. 33-12531).
11. Consent of Independent Auditors.*
13. Purchase Agreement. Incorporated by reference to Exhibit No. 13 to --
Pre-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on August 31, 1987 (File No. 33-12531).
</TABLE>

<PAGE>

<TABLE>
<C> <S> <C>
15. (a) Distribution and Service Plan for Class A shares. Incorporated --
by reference to Exhibit No. 15(a) to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A filed via EDGAR on
September 29, 1994 (File No. 33-12531).
(b) Distribution and Service Plan for Class B shares. Incorporated --
by reference to Exhibit No. 15(b) to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A filed via EDGAR on
September 29, 1994 (File No. 33-12531).
(c) Distribution and Service Plan for Class C shares. Incorporated --
by reference to Exhibit No. 15(c) to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A filed via EDGAR on
September 29, 1994 (File No. 33-12531).
16. (a) Schedule of Computation of Performance Quotations. Incorporated --
by reference to Exhibit No. 16 to Post-Effective Amendment No. 4 to
the Registration Statement on Form N-1A filed on October 31, 1989
(File No. 33-12531).
(b) Schedule of Computation of Performance Quotations for Class A --
shares. Incorporated by reference to Exhibit No. 16(b) to
Post-Effective Amendment No. 7 to the Registration Statement on Form
N-1A filed on November 30,
1990 (File No. 33-12531).
17. Financial Data Schedules.*
18. Rule 18f-3 Plan.*
<FN>
- --------------
* Filed herewith
</TABLE>

<PAGE>

Exhibit 99.1(b)
AMENDED CERTIFICATE OF DESIGNATION

PRUDENTIAL ALLOCATION FUND

The undersigned, being the Assistant Secretary of Prudential Allocation
Fund (hereinafter referred to as the "Trust"), a trust with transferable
shares of the type commonly called a Massachusetts business trust, DOES
HEREBY CERTIFY that, pursuant to the authority conferred upon the Trustees of
the Trust by Section 6.9 and Section 9.3 of the Declaration of Trust dated
February 23, 1987, as amended to date (referred to as the "Declaration of
Trust"), and by the affirmative vote of a majority of the Trustees at a
meeting duly called and held on May 8, 1996, the Amended and Restated
Establishment and Designation of Series of Shares of Beneficial Interest,
$.01 Par Value, dated November 16, 1990 and filed with the Secretary of The
Commonwealth of Massachusetts on November 27, 1990, the Certificate of
Designation dated January 11, 1990 and filed with the Secretary of The
Commonwealth of Massachusetts on January 18, 1990, the Amended and Restated
Certificate of Designation dated July 27, 1994 and filed with the Secretary
of The Commonwealth of Massachusetts on July 28, 1994, the Amended and
Restated Certificate of Designation dated July 19, 1995 and filed with the
Secretary of The Commonwealth of Massachusetts on July 20, 1995, and the
Amended Certificate of Designation dated February 12, 1996 and filed with the
Secretary of The Commonwealth of Massachusetts on February 14, 1996 amending
the Declaration of Trust are amended and restated effective as of
June 28, 1996, as follows:

The shares of beneficial interest of the Trust are divided into two
separate series, each series to have the following special and relative
rights:

(1) The series shall be designated as follows:

Balanced Portfolio
Strategy Portfolio

(2) Each series shall be authorized to invest in cash, securities,
instruments and other property as from time to time described in the Trust's
then currently effective registration

<PAGE>

statement under the Securities Act of 1933. Each share of beneficial
interest of each series ("share") shall be redeemable, shall be entitled to
one vote or fraction thereof in respect of a fractional share on matters on
which shares of that series shall be entitled to vote and shall represent a
pro rata beneficial interest in the assets allocated to that series, and
shall be entitled to receive its pro rata share of net assets of that eries
upon liquidation of that series, all as provided in the Declaration of Trust.

(3) The shares of beneficial interest of each series of the Trust are
classified into four classes, designated "Class A Shares," "Class B Shares,"
"Class C Shares" and "Class Z Shares." An unlimited number of each such class
of each series may be issued. All Class A Shares, Class B Shares, Class C
Shares and Class Z Shares of the Balanced Portfolio outstanding on the date
on which the amendments provided for herein become effective shall be and
continue to be Class A Shares, Class B Shares, Class C Shares and Class Z
Shares, respectively, of the Balanced Portfolio.

(4) The holders of Class A Shares, Class B Shares, Class C Shares and
Class Z Shares of each series shall be considered Shareholders of such
series, and shall have the relative rights and preferences set forth herein
and in the Declaration of Trust with respect to Shares of such series, and
shall also be considered Shareholders of the Trust for all other purposes
(including, without limitation, for purposes of receiving reports and notices
and the right to vote) and, for matters reserved to the Shareholders of one
or more other classes or series by the Declaration of Trust or by any
instrument establishing and designating a particular class or series, or as
required by the Investment Company Act of 1940 and/or the rules and
regulations of the Securities and Exchange Commission thereunder
(collectively, as from time to time in effect, the "1940 Act") or other
applicable laws.

(5) The Class A Shares, Class B Shares, Class C Shares and Class Z
Shares of each series shall represent an equal proportionate interest in the
share of such class in the Trust Property belonging to that series, adjusted
for any liabilities specifically allocable to the Shares of that class, and
each Share of any such class shall have identical voting, dividend,
liquidation

-2-

<PAGE>

and other rights and the same terms and conditions, except that the expenses
related directly or indirectly to the distribution of the Shares of a class,
and any service fees to which such class is subject (as determined by the
Trustees), shall be borne solely by such class, and such expenses shall be
appropriately reflected in the determination of net asset value and the
dividend, distribution and liquidation rights of such class.

(6) (a) Class A Shares of each series shall be subject to (i) a
front-end sales charge and (ii) (A) an asset-based sales charge pursuant to a
plan under Rule 12b-1 of the 1940 Act (a "Plan"), and/or (B) a service fee
for the maintenance of shareholder accounts and personal services, in such
amounts as shall be determined from time to time.

(b) Class B Shares of each series shall be subject to (i) a
contingent deferred sales charge and (ii) (A) an asset-based sales charge
pursuant to a Plan, and/or (B) a service fee for the maintenance of
shareholder accounts and personal services, in such amounts as shall be
determined from time to time.

(c) Class C Shares of each series shall be subject to (i) a
contingent deferred sales charge and (ii) (A) an asset-based sales charge
pursuant to a Plan, and/or (B) a service fee for the maintenance of
shareholder accounts and personal services, in such amounts as shall be
determined from time to time.

(d) Class Z Shares of each series shall not be subject to either an
initial or contingent deferred sales charge nor subject to any Rule 12b-1 fee.

(7) Subject to compliance with the requirements of the 1940 Act, the
Trustees shall have the authority to provide that holders of Shares of any
series shall have the right to convert said Shares into Shares of one or more
other series of registered investment companies specified for the purpose in
this Trust's Prospectus for the series accorded such right, that holders of
any class of Shares of a series shall have the right to convert such Shares
into Shares of one or more other classes of such series, and that Shares of
any class of a series shall be automatically converted into Shares of another
class of such series, in each case in accordance with such requirements and
procedures as the Trustees may from time to time establish. The requirements

-3-

<PAGE>

and procedures applicable to such mandatory or optional conversion of Shares
of any such class or series shall be set forth in the Prospectus in effect
with respect to such Shares.

(8) Shareholders of each series and class shall vote as a separate
series or class, as the case may be, on any matter to the extent required by,
and any matter shall be deemed to have been effectively acted upon with
respect to any series or class as provided in, Rule 18f-2, as from time to
time in effect, under the 1940 Act, or any successor rule and by the
Declaration of Trust. Except as otherwise required by the 1940 Act, the
Shareholders of each class of any series having more than one class of
Shares, voting as a separate class, shall have sole and exclusive voting
rights with respect to the provisions of any Plan applicable to Shares of
such class, and shall have no voting rights with respect to provisions of any
Plan applicable solely to any other class of Shares of such series.

(9) The assets and liabilities of the Trust shall be allocated among
the above-referenced series as set forth in Section 6.9 of the Declaration of
Trust, except as provided below.

(a) Costs incurred and payable by the Trust in connection with its
organization and initial registration and public offering of shares shall be
divided equally between the Balanced Portfolio and Strategy Portfolio and
shall be amortized for each such series over the period beginning on the date
that such costs become payable and ending sixty months after the commencement
of operations of the Trust.

(b) The liabilities, expenses, costs, charges or reserves of the
Trust (other than the investment advisory fee or the organization expenses
paid by the Trust) which are not readily identifiable as belonging to any
particular series shall be allocated among the series on the basis of their
relative average daily net assets.

-4-

<PAGE>

(10) The Trustees (including any successor Trustees) shall have the
right at any time and from time to time to reallocate assets and expenses or
to change the designation of any series now or hereafter created, or to
otherwise change the special and relative rights of any such series provided
that such change shall not adversely affect the rights of holders of shares
of a series. IN WITNESS WHEREOF, the undersigned has set her hand and seal
this 18th day of June, 1996.

/s/ Marguerite E. H. Morrison
_________________________________________
Marguerite E. H. Morrison,
Assistant Secretary

-5-

<PAGE>

ACKNOWLEDGMENT

STATE OF NEW YORK )
) SS June 18, 1996
COUNTY OF NEW YORK )

Then personally appeared before me the above named Marguerite E. H.
Morrison, Assistant Secretary, and acknowledged the foregoing instrument to
be her free act and deed.

/s/ Kathleen M. Dietz (Kirchner)
__________________________________________
Notary Public

-6-

<PAGE>

PRUDENTIAL ALLOCATION FUND

DISTRIBUTION AGREEMENT

Agreement made as of May 8, 1996 between Prudential Allocation
Fund, a Massachusetts business trust (the Fund), and Prudential Securities
Incorporated, a Delaware corporation (the Distributor).

WITNESSETH

WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
shares for sale continuously;

WHEREAS, the shares of the Fund may be divided into classes and/or
series (all such shares being referred to herein as Shares) and the Fund
currently is authorized to offer Class A, Class B, Class C and Class Z Shares;

WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;

WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the Fund's Shares
from and after the date hereof in order to promote the growth of the Fund and
facilitate the distribution of its Shares; and

WHEREAS, upon approval by the holders of the respective classes and/or
series of Shares of the Fund it is contemplated that the Fund will adopt a plan
(or plans) of distribution pursuant to Rule 12b-1 under the Investment Company
Act with respect to certain of its classes and/or series of Shares (the Plans)
authorizing payments by the Fund to the Distributor with respect to the
distribution of such classes and/or series of Shares and the maintenance of
related shareholder accounts.

NOW, THEREFORE, the parties agree as follows:

Section 1. APPOINTMENT OF THE DISTRIBUTOR

The Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Shares of the Fund to sell Shares to the public on behalf
of the Fund and the Distributor
<PAGE>

hereby accepts such appointment and agrees to act hereunder. The Fund hereby
agrees during the term of this Agreement to sell Shares of the Fund through the
Distributor on the terms and conditions set forth below.

Section 2. EXCLUSIVE NATURE OF DUTIES

The Distributor shall be the exclusive representative of the Fund to
act as principal underwriter and distributor of the Fund's Shares, except that:

2.1 The exclusive rights granted to the Distributor to sell Shares of
the Fund shall not apply to Shares of the Fund issued in connection with the
merger or consolidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding shares of any such company by
the Fund.

2.2 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to reinvestment of dividends or capital gains distributions or
through the exercise of any conversion feature or exchange privilege.

2.3 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to the reinstatement privilege afforded redeeming shareholders.

2.4 Such exclusive rights shall not apply to purchases made through
the Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.

Section 3. PURCHASE OF SHARES FROM THE FUND

3.1 The Distributor shall have the right to buy from the Fund on
behalf of investors the Shares needed, but not more than the Shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Shares placed with the Distributor by investors or registered and qualified
securities dealers and other financial institutions (selected dealers).

3.2 The Shares shall be sold by the Distributor on behalf of the Fund
and delivered by the Distributor or selected

2
<PAGE>

dealers, as described in Section 6.4 hereof, to investors at the offering price
as set forth in the Prospectus.

3.3 The Fund shall have the right to suspend the sale of any or
all classes and/or series of its Shares at times when redemption is suspended
pursuant to the conditions in Section 4.3 hereof or at such other times as
may be determined by the Trustees. The Fund shall also have the right to
suspend the sale of any or all classes and/or series of its Shares if a
banking moratorium shall have been declared by federal or New York
authorities.

3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Shares. The Fund (or its agent) will confirm
orders upon their receipt, will make appropriate book entries and upon receipt
by the Fund (or its agent) of payment therefor, will deliver deposit receipts
for such Shares pursuant to the instructions of the Distributor. Payment shall
be made to the Fund in New York Clearing House funds or federal funds. The
Distributor agrees to cause such payment and such instructions to be delivered
promptly to the Fund (or its agent).

Section 4. REPURCHASE OR REDEMPTION OF SHARES BY THE FUND

4.1 Any of the outstanding Shares may be tendered for redemption
at any time, and the Fund agrees to repurchase or redeem the Shares so
tendered in accordance with its Declaration of Trust as amended from time to
time, and in accordance with the applicable provisions of the Prospectus.
The price to be paid to redeem or repurchase the Shares shall be equal to the
net asset value determined as set forth in the Prospectus. All payments by
the Fund hereunder shall be made in the manner set forth in Section 4.2 below.

4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Shares shall be
paid by the Fund as follows: (i) in the case of Shares subject to a contingent
deferred sales charge, any applicable contingent deferred sales charge shall be
paid to the Distributor, and the balance shall be paid to or for the account of
the redeeming shareholder, in each case in accordance with applicable provisions
of the Prospectus; and (ii) in the case of all other Shares, proceeds shall be
paid to or for the account of the redeeming shareholder, in each case in
accordance with applicable provisions of the Prospectus.

3
<PAGE>

4.3 Redemption of any class and/or series of Shares or payment may be
suspended at times when the New York Stock Exchange is closed for other than
customary weekends and holidays, when trading on said Exchange is restricted,
when an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or during any
other period when the Securities and Exchange Commission, by order, so permits.

Section 5. DUTIES OF THE FUND

5.1 Subject to the possible suspension of the sale of Shares as
provided herein, the Fund agrees to sell its Shares so long as it has Shares of
the respective class and/or series available.

5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Shares, and this shall
include one certified copy, upon request by the Distributor, of all financial
statements prepared for the Fund by independent public accountants. The Fund
shall make available to the Distributor such number of copies of its Prospectus
and annual and interim reports as the Distributor shall reasonably request.

5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Trustees and the shareholders, all necessary action
to fix the number of authorized Shares and such steps as may be necessary to
register the same under the Securities Act, to the end that there will be
available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be
no untrue statement of a material fact in the Registration Statement, or
necessary in order that there will be no omission to state a material fact in
the Registration Statement which omission would make the statements therein
misleading.

5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Shares for sales under the
securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Declaration of Trust
or By-Laws to comply with the laws of any state, to maintain an office in any
state, to change the terms of the offering of its Shares in any state from the
terms set forth in its Registration Statement, to qualify as a foreign
corporation in any state or to consent to service of process in any state other
than with respect to claims arising out of the offering of its Shares.

4
<PAGE>

Any such qualification may be withheld, terminated or withdrawn by the Fund at
any time in its discretion. As provided in Section 9 hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualifications.

Section 6. DUTIES OF THE DISTRIBUTOR

6.1 The Distributor shall devote reasonable time and effort to effect
sales of Shares, but shall not be obligated to sell any specific number of
Shares. Sales of the Shares shall be on the terms described in the Prospectus.
The Distributor may enter into like arrangements with other investment
companies. The Distributor shall compensate the selected dealers as set forth
in the Prospectus.

6.2 In selling the Shares, the Distributor shall use its best efforts
in all respects duly to conform with the requirements of all federal and state
laws relating to the sale of such securities. Neither the Distributor nor any
selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.

6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of the National Association of Securities Dealers, Inc. (NASD).

6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Shares, provided that the
Fund shall approve the forms of such agreements. Within the United States, the
Distributor shall offer and sell Shares only to such selected dealers as are
members in good standing of the NASD. Shares sold to selected dealers shall be
for resale by such dealers only at the offering price determined as set forth in
the Prospectus.

Section 7. PAYMENTS TO THE DISTRIBUTOR

7.1 With respect to classes and/or series of Shares which impose a
front-end sales charge, the Distributor shall receive and may retain any portion
of any front-end sales charge which is imposed on such sales and not reallocated
to selected dealers as set forth in the Prospectus, subject to the limitations
of Article III, Section 26 of the NASD Rules of Fair Practice.

5
<PAGE>

Payment of these amounts to the Distributor is not contingent upon the adoption
or continuation of any applicable Plans.

7.2 With respect to classes and/or series of Shares which impose a
contingent deferred sales charge, the Distributor shall receive and may retain
any contingent deferred sales charge which is imposed on such sales as set forth
in the Prospectus, subject to the limitations of Article III, Section 26 of the
NASD Rules of Fair Practice. Payment of these amounts to the Distributor is not
contingent upon the adoption or continuation of any Plan.

Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN

8.1 The Fund shall pay to the Distributor as compensation for
services under any Plans adopted by the Fund and this Agreement a distribution
and service fee with respect to the Fund's classes and/or series of Shares as
described in each of the Fund's respective Plans and this Agreement.

8.2 So long as a Plan or any amendment thereto is in effect, the
Distributor shall inform the Trustees of the commissions and account servicing
fees with respect to the relevant class and/or series of Shares to be paid by
the Distributor to account executives of the Distributor and to broker-dealers
and financial institutions which have dealer agreements with the Distributor.
So long as a Plan (or any amendment thereto) is in effect, at the request of
the Trustees or any agent or representative of the Fund, the Distributor shall
provide such additional information as may reasonably be requested concerning
the activities of the Distributor hereunder and the costs incurred in
performing such activities with respect to the relevant class and/or series of
Shares.

Section 9. ALLOCATION OF EXPENSES

The Fund shall bear all costs and expenses of the continuous offering
of its Shares (except for those costs and expenses borne by the Distributor
pursuant to a Plan and subject to the requirements of Rule 12b-1 under the
Investment Company Act), including fees and disbursements of its counsel and
auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and all amendments and supplements thereto, and preparing
and mailing annual and periodic reports and proxy materials to shareholders
(including but not limited to the expense of setting in type any such
Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of qualification of
the Shares for sale, and, if necessary or advisable in connection therewith, of
qualifying the Fund as a

6
<PAGE>

broker or dealer, in such states of the United States or other jurisdictions as
shall be selected by the Fund and the Distributor pursuant to Section 5.4 hereof
and the cost and expense payable to each such state for continuing qualification
therein until the Fund decides to discontinue such qualification pursuant to
Section 5.4 hereof. As set forth in Section 8 above, the Fund shall also bear
the expenses it assumes pursuant to any Plan, so long as such Plan is in effect.

Section 10. INDEMNIFICATION

10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) which the Distributor,
its officers, directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except insofar as such claims,
demands, liabilities or expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with information furnished in writing by the Distributor
to the Fund for use in the Registration Statement or Prospectus; provided,
however, that this indemnity agreement shall not inure to the benefit of any
such officer, director, trustee or controlling person unless a court of
competent jurisdiction shall determine in a final decision on the merits, that
the person to be indemnified was not liable by reason of willful misfeasance,
bad faith or gross negligence in the performance of its duties, or by reason of
its reckless disregard of its obligations under this Agreement (disabling
conduct), or, in the absence of such a decision, a reasonable determination,
based upon a review of the facts, that the indemnified person was not liable by
reason of disabling conduct, by (a) a vote of a majority of a quorum of
directors or trustees who are neither "interested persons" of the Fund as
defined in Section 2(a)(19) of the Investment Company Act nor parties to the
proceeding, or (b) an independent legal counsel in a written opinion. The Fund's
agreement to indemnify the Distributor, its officers and directors or trustees
and any such controlling person as aforesaid is expressly conditioned upon the
Fund's being promptly notified of any action brought against the Distributor,
its officers or directors or trustees, or any such controlling person, such
notification to be given by letter or telegram addressed to the Fund at its
principal business office. The Fund agrees promptly to notify the Distributor
of the

7
<PAGE>

commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issue and sale of any Shares.

10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Trustees and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any reasonable counsel fees incurred in connection therewith) which the
Fund, its officers and Trustees or any such controlling person may incur under
the Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Trustees or officers or such
controlling person resulting from such claims or demands shall arise out of or
be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to make such information not misleading. The Distributor's agreement to
indemnify the Fund, its officers and Trustees and any such controlling person as
aforesaid, is expressly conditioned upon the Distributor's being promptly
notified of any action brought against the Fund, its officers and Trustees or
any such controlling person, such notification being given to the Distributor at
its principal business office.

Section 11. DURATION AND TERMINATION OF THIS AGREEMENT

11.1 This Agreement shall become effective as of the date first
above written and shall remain in force for two years from the date hereof
and thereafter, but only so long as such continuance is specifically approved
at least annually by (a) the Trustees of the Fund, or by the vote of a
majority of the outstanding voting securities of the applicable class and/or
series of the Fund, and (b) by the vote of a majority of those Trustees who
are not parties to this Agreement or interested persons of any such parties
and who have no direct or indirect financial interest in this Agreement or in
the operation of any of the Fund's Plans or in any agreement related thereto
(Independent Trustees), cast in person at a meeting called for the purpose of
voting upon such approval.

11.2 This Agreement may be terminated at any time, without the payment
of any penalty, by a majority of the Independent Trustees or by vote of a
majority of the outstanding voting securities of the applicable class and/or
series of the Fund, or by the Distributor, on sixty (60) days' written

8
<PAGE>

notice to the other party. This Agreement shall automatically terminate in the
event of its assignment.

11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities", when used in
this Agreement, shall have the respective meanings specified in the Investment
Company Act.

Section 12. AMENDMENTS TO THIS AGREEMENT

This Agreement may be amended by the parties only if such amendment
is specifically approved by (a) the Trustees of the Fund, or by the vote
of a majority of the outstanding voting securities of the applicable class
and/or series of the Fund, and (b) by the vote of a majority of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such amendment.

Section 13. SEPARATE AGREEMENT AS TO CLASSES AND/OR SERIES

The amendment or termination of this Agreement with respect to any
class and/or series shall not result in the amendment or termination of this
Agreement with respect to any other class and/or series unless explicitly so
provided.

Section 14. GOVERNING LAW

The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.

Section 15. LIABILITIES OF THE FUND

The name Prudential Allocation Fund is the designation of the Trustees
under a Declaration of Trust, as amended and restated on August 16, 1994, as
thereafter amended, and all persons dealing with the Fund must look solely to
the property of the Fund for the enforcement of any claims against the Fund as
neither the Trustees, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund.

9
<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.

Prudential Securities Incorporated

By: /s/ Robert F. Gunia
------------------------
Robert F. Gunia
Senior Vice President

Prudential Allocation Fund

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

<PAGE>

CONSENT OF INDEPENDENT AUDITORS

We consent to the use in Post-Effective Amendment No. 18 to Registration
Statement No. 33-12531 of Prudential Allocation Fund of our reports dated
September 16, 1996, appearing in the Statement of Additional Information,
which is a part of such Registration Statement, and to the references to us
under the headings "Financial Highlights" in the Prospectus, which is a part
of such Registration Statement, and "Custodian, Transfer and Dividend
Disbursing Agent and Independent Accountants" in the Statement of Additional
Information.

Deloitte & Touche LLP
New York, New York
September 25, 1996

<PAGE>

EXHIBIT 99.18

PRUDENTIAL ALLOCATION FUND
(the Fund)

PLAN PURSUANT TO RULE 18F-3

The Fund hereby adopts this plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940 (the 1940 Act), setting forth the separate
arrangement and expense allocation of each class of shares. Any material
amendment to this plan is subject to prior approval of the Board of
Trustees, including a majority of the independent Trustees.

CLASS CHARACTERISTICS

CLASS A SHARES: Class A shares are subject to a high initial sales charge
and a distribution and/or service fee pursuant to
Rule 12b-1 under the 1940 Act (Rule 12b-1 fee) not to
exceed .30 of 1% per annum of the average daily net assets
of the class. The initial sales charge is waived or
reduced for certain eligible investors.

CLASS B SHARES: Class B shares are not subject to an initial sales charge
but are subject to a high contingent deferred sales charge
(declining by 1% each year) which will be imposed on
certain redemptions and a Rule 12b-1 fee not to exceed
1% per annum of the average daily net assets of the class.
The contingent deferred sales charge is waived for certain
eligible investors. Class B shares automatically convert
to Class A shares approximately seven years after purchase.

CLASS C SHARES: Class C shares are not subject to an initial sales charge
but are subject to a low contingent deferred sales charge
(declining by 1% each year) which will be imposed on
certain redemptions and a Rule 12b-1 fee not to exceed 1%
per annum of the average daily net assets of the class.

<PAGE>

CLASS Z SHARES: Class Z shares are not subject to either an initial or
contingent deferred sales charge nor are they subject to
any Rule 12b-1 fee.

INCOME AND EXPENSE ALLOCATIONS

Income, any realized and unrealized capital gains and losses, and
expenses not allocated to a particular class, will be allocated to each class
on the basis of the net asset value of that class in relation to the net
asset value of the Fund.

DIVIDENDS AND DISTRIBUTIONS

Dividends and other distributions paid by the Fund to each class of
shares, to the extent paid, will be paid on the same day and at the same
time, and will be determined in the same manner and will be in the same
amount, except that the amount of the dividends and other distributions
declared and paid by a particular class may be different from that paid
by another class because of Rule 12b-1 fees and other expenses borne
exclusively by that class.

EXCHANGE PRIVILEGE

Each class of shares is generally exchangeable for the same class of
shares (or the class of shares with similar characteristics), if any, of
the other Prudential Mutual Funds (subject to certain minimum investment
requirements) at relative net asset value without the imposition of any
sales charge.

Class B and Class C shares (which are not subject to a contingent
deferred sales charge) of shareholders who qualify to purchase Class A
shares at net asset value will be automatically exchanged for Class A
shares on a quarterly basis, unless the shareholder elects otherwise.

CONVERSION FEATURES

<PAGE>

GENERAL

A. Each class of shares shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and shall
have separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other
class.

B. On an ongoing basis, the Trustees, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund
for the existence of any material conflicts among the interests of its
several classes. The Trustees, including a majority of the independent
Trustees, shall take such action as is reasonably necessary to
eliminate any such conflicts that may develop. Prudential Mutual Fund
Management, Inc., the Fund's Manager, will be responsible for reporting
any potential or existing conflicts to the Trustees.

C. For purposes of expressing an opinion on the financial statements of the
Fund, the methodology and procedures for calculating the net asset value
and dividends/distributions of the Fund's several classes and the proper
allocation of income and expenses among such classes will be examined
annually by the Fund's independent auditors who, in performing such
examination, shall consider the factors set forth in the relevant auditing
standards adopted, from time to time, by the American Institute of
Certified Public Accountants.

Dated: May 8, 1996

<PAGE>
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<PAGE>
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<NET-CHANGE-FROM-OPS> 24,036,750
<EQUALIZATION> 266,040
<DISTRIBUTIONS-OF-INCOME> (12,849,516)
<DISTRIBUTIONS-OF-GAINS> (28,806,516)
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<NUMBER-OF-SHARES-SOLD> 382,325,569
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<SHARES-REINVESTED> 37,994,029
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<PER-SHARE-NAV-BEGIN> 12.00
<PER-SHARE-NII> 0.21
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<PAGE>
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<PAGE>
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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000811444
<NAME> PRUDENTIAL ALLOCATION FUND
<SERIES>
<NUMBER> 005
<NAME> STRATEGY PORTFOLIO - CLASS A

<S> <C>
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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000811444
<NAME> PRUDENTIAL ALLOCATION FUND
<SERIES>
<NUMBER> 006
<NAME> STRATEGY PORTFOLIO - CLASS B

<S> <C>
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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000811444
<NAME> PRUDENTIAL ALLOCATION FUND
<SERIES>
<NUMBER> 007
<NAME> STRATEGY PORTFOLIO - CLASS C

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1996
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</TABLE>