PRUDENTIAL BALANCED FUND, 485APOS, 1999-07-29

PRUDENTIAL BALANCED FUND
485APOS, 1999-07-29

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<PAGE>

As filed with the Securities and Exchange Commission on July 29, 1999

Securities Act Registration No. 33-12531
Investment Company Act Registration No. 811-5055
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /

PRE-EFFECTIVE AMENDMENT NO. / /

POST-EFFECTIVE AMENDMENT NO. 21 /X/

AND/OR

REGISTRATION STATEMENT UNDER THE

INVESTMENT COMPANY ACT OF 1940 / /

AMENDMENT NO. 23 /X/

(CHECK APPROPRIATE BOX OR BOXES)
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PRUDENTIAL BALANCED FUND

(Exact name of registrant as specified in charter)

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

(Address of Principal Executive Offices) (Zip Code)

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

MARGUERITE E.H. MORRISON, ESQ.

GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE)

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective
date of the Registration Statement.
--------------

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

/ / immediately upon filing pursuant to paragraph (b)

/ / on (date) pursuant to paragraph (b)

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

/X/ on September 29, 1999 pursuant to paragraph (a)(1)

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

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

If appropriate, check the following box:

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

Title of Securities Being Registered. . . . . . . Shares of Beneficial
Interest, $.01 par value per share.

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<PAGE>
FUND TYPE:
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Stock and bond

INVESTMENT OBJECTIVE:
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High total investment return consistent with
moderate risk

[LOGO]

PRUDENTIAL
BALANCED FUND
- ------------------
PROSPECTUS: SEPTEMBER 29, 1999

As with all mutual funds, the Securities
and Exchange Commission has not
approved or disapproved the Fund's
shares, nor has the SEC determined
that this prospectus is complete or
accurate. It is a criminal offense to
state otherwise. [LOGO]
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<S> <C>
1 RISK/RETURN SUMMARY
1 Investment Objective and Principal Strategies
2 Principal Risks
3 Evaluating Performance
5 Fees and Expenses

7 HOW THE FUND INVESTS
7 Investment Objective and Policies
10 Derivative Strategies
11 Other Investments
11 Additional Strategies
12 Investment Risks

17 HOW THE FUND IS MANAGED
17 Board of Trustees
17 Manager
17 Investment Adviser
17 Portfolio Managers
18 Distributor
18 Year 2000 Readiness Disclosure

20 FUND DISTRIBUTIONS AND TAX ISSUES
20 Distributions
21 Tax Issues
22 If You Sell or Exchange Your Shares

24 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND
24 How to Buy Shares
32 How to Sell Your Shares
36 How to Exchange Your Shares

38 FINANCIAL HIGHLIGHTS
38 Class A Shares
39 Class B Shares
40 Class C Shares
41 Class Z Shares

42 THE PRUDENTIAL MUTUAL FUND FAMILY

FOR MORE INFORMATION (Back Cover)
</TABLE>

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PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- -------------------------------------

This section highlights key information about the PRUDENTIAL BALANCED FUND,
which we refer to as "the Fund." Additional information follows this summary.

INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is to achieve a HIGH TOTAL INVESTMENT RETURN CONSISTENT
WITH MODERATE RISK. This means we seek investments that present moderate risks
and whose prices will increase over time. We normally invest in a wide variety
of equity-related securities, debt securities and money market instruments. The
Fund's investment adviser determines, at least monthly, what percentage of
assets to allocate among the different types of securities. While we make every
effort to achieve our objective, we can't guarantee success.
Equity-related securities in which the Fund primarily invests are common
stocks, nonconvertible preferred stocks and convertible securities.
Under normal circumstances, we will invest at least 25% of total assets in
debt securities. Some of these obligations are rated below investment-grade.
We also may invest in money market instruments, which include the commercial
paper of U.S. and non-U.S. corporations, short-term obligations of U.S. and
foreign banks and short-term obligations guaranteed by the U.S. government or
its agencies.
We can invest up to 30% of the Fund's assets in foreign equity and debt
securities and money market instruments. We may also use derivatives.

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WE'RE GROWTH EQUITY INVESTORS
In deciding which stocks to buy, we use what is known as a growth investment
style for half of the portfolio's equity securities. This means we invest in
stocks we believe could experience superior sales or earnings growth.
WE'RE ALSO VALUE EQUITY INVESTORS
In deciding which stocks to buy for the other half of the equity portfolio, we
use what is known as a value investment style. This means we invest in stocks
that we believe are undervalued, given the company's earnings, assets, cash flow
and dividends.
WE ALSO INVEST IN DEBT INSTRUMENTS
Issuers of bonds and other debt instruments pay a fixed or variable rate of
interest and must repay the amount borrowed at maturity.
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1
<PAGE>
RISK/RETURN SUMMARY
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PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Since the Fund
invests in equity-related securities, there is the risk that the price of a
particular stock we own could go down, or the value of the equity markets or a
sector of them could go down. Stock markets are volatile. The Fund's equity
holdings can vary significantly from broad market indexes, and performance of
the Fund can deviate from the performance of such indexes.
The Fund invests in debt obligations which have credit, market and interest
rate risks. Credit risk is the possibility that an issuer of a debt obligation
fails to pay the Fund interest or repay principal. Market risk, which may affect
an industry, a sector or the entire market, is the possibility that the market
value of an investment may move up or down and that its movement may occur
quickly or unpredictably. Interest rate risk refers to the fact that the value
of most bonds will fall when interest rates rise. The longer the maturity and
the lower the credit quality of a bond, the more likely its value will decline.
Debt securities rated below investment grade--also known as "junk" bonds--have a
higher risk of default and tend to be less liquid.
Since the Fund invests in foreign securities, there are additional risks.
Foreign markets are often more volatile than U.S. markets and are generally not
subject to regulatory requirements comparable to those of U.S. issuers. Changes
in currency exchange rates can reduce or increase market performance.
Some of our investment strategies--such as using derivatives--also involve
above-average risks. The Fund may use risk management techniques to try to
preserve assets or enhance return. Derivatives may not fully offset the
underlying positions and this could result in losses to the Fund that would not
otherwise have occurred.
Like any mutual fund, an investment in the Fund could lose value and you
could lose money. For more detailed information about the risks associated with
the Fund, see "How the Fund Invests--Investment Risks."
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.

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2 PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------

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

ANNUAL RETURNS* (CLASS A SHARES)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
1991
1992
1993
1994
1995
1996
1997
1998
BEST QUARTER: __% (__ quarter of 19__)
WORST QUARTER: __% (__ quarter of 19__)
</TABLE>

* THESE ANNUAL RETURNS DO NOT INCLUDE SALES CHARGES. IF THE SALES CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. WITHOUT THE
DISTRIBUTION AND SERVICE (12B-1) FEE WAIVER, THE ANNUAL RETURNS WOULD HAVE
BEEN LOWER, TOO. THE RETURN FOR THE SIX MONTHS ENDED JUNE 30, 1999 WAS %
FOR THE CLASS A SHARES.

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3
<PAGE>
RISK/RETURN SUMMARY
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AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
1 YR 5 YRS 10 YRS SINCE INCEPTION
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares (since 1-22-90)
Class B shares (since 1-15-87)
Class C shares (since 8-1-94)
Class Z shares (since 3-1-96)
S&P 500(2) 8.60% 28.59% N/A
Lehman Govt./Corp.(3) 1.60% 8.56% N/A
Lipper Average(4) 19.99% 15.07% N/A
</TABLE>

1 THE FUND'S RETURNS ARE AFTER DEDUCTION OF SALES CHARGES AND EXPENSES.
WITHOUT THE DISTRIBUTION AND SERVICE (12B-1) FEE WAIVER FOR CLASS A SHARES,
THE RETURNS WOULD HAVE BEEN LOWER.
2 THE STANDARD & POOR'S 500 STOCK INDEX (S&P 500)--AN UNMANAGED INDEX OF 500
STOCKS OF LARGE U.S. COMPANIES--GIVES A BROAD LOOK AT HOW STOCK PRICES HAVE
PERFORMED. THESE RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGES.
THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF SALES CHARGES.
S&P 500 RETURNS SINCE THE INCEPTION OF EACH CLASS ARE %, FOR CLASS A,
% FOR CLASS B, % FOR CLASS C AND % FOR CLASS Z. SOURCE: LIPPER
INC.
3 THE LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX IS A WEIGHTED INDEX OF
PUBLIC, FIXED-RATE, NONCONVERTIBLE DOMESTIC CORPORATE DEBT SECURITIES RATED
AT LEAST INVESTMENT GRADE AND PUBLIC OBLIGATIONS OF THE U.S. TREASURY.
THESE RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGES. THESE RETURNS
WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF SALES CHARGES. LEHMAN
BROTHERS GOVT./CORP. BOND INDEX RETURNS SINCE THE INCEPTION OF EACH CLASS
ARE % FOR CLASS A, % FOR CLASS B, % FOR CLASS C AND %
FOR CLASS Z. SOURCE:
4 THE LIPPER AVERAGE IS BASED ON THE AVERAGE RETURN OF ALL MUTUAL FUNDS IN
THE LIPPER BALANCED FUND CATEGORY AND DOES NOT INCLUDE THE EFFECT OF ANY
SALES CHARGES. AGAIN, THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE
EFFECT OF SALES CHARGES. SOURCE: LIPPER INC.

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4 PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
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FEES AND EXPENSES
These tables show the sales charges, fees and expenses that you may pay if you
buy and hold shares of each share class of the Fund--Class A, B, C and Z. Each
share class has different sales charges--known as loads--and expenses, but
represents an investment in the same fund. Class Z shares are available only to
a limited group of investors. For more information about which share class may
be right for you, see "How to Buy, Sell and Exchange Shares of the Fund."

SHAREHOLDER FEES(1) (PAID DIRECTLY FROM YOUR INVESTMENT)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
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<S> <C> <C> <C> <C>
Maximum sales charge (load)
imposed on purchases (as a
percentage of offering
price) 5% None 1% None
Maximum deferred sales
charge (load) (as a
percentage of the lower of
original purchase price or
sale proceeds) None 5%(2) 1%(3) None
Maximum sales charge (load)
imposed on reinvested
dividends and other
distributions None None None None
Redemption fees None None None None
Exchange fee None None None None
</TABLE>

ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management fees .65% .65% .65% .65%
+ Distribution and service
(12b-1) fees .30%(4) 1.00% 1.00% None
+ Other expenses % % % %
= Total annual Fund
operating expenses % % % %
- Fee waiver or expense
reimbursement .05% None None None
= NET ANNUAL FUND OPERATING
EXPENSES %(4) % % %
</TABLE>

1 YOUR BROKER MAY CHARGE YOU A SEPARATE OR ADDITIONAL FEE FOR PURCHASES AND
SALES OF SHARES.
2 THE CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B SHARES DECREASES BY
1% ANNUALLY TO 1% IN THE FIFTH AND SIXTH YEARS AND 0% IN THE SEVENTH YEAR.
CLASS B SHARES CONVERT TO CLASS A SHARES APPROXIMATELY SEVEN YEARS AFTER
PURCHASE.
3 THE CDSC FOR CLASS C SHARES IS 1% FOR SHARES REDEEMED WITHIN 18 MONTHS OF
PURCHASE.
4 FOR THE FISCAL YEAR ENDING JULY 31, 2000, THE DISTRIBUTOR OF THE FUND HAS
CONTRACTUALLY AGREED TO REDUCE ITS DISTRIBUTION AND SERVICE (12B-1) FEES
FOR CLASS A SHARES TO .25 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE
CLASS A SHARES.

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5
<PAGE>
RISK/RETURN SUMMARY
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EXAMPLE
This example will help you compare the fees and expenses of the Fund's different
share classes and the cost of investing in the Fund with the cost of investing
in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. After the first year, the example
does not take into consideration the Distributor's agreement to reduce its
distribution and service (12b-1) fees for Class A shares. Although your actual
costs may be higher or lower, based on these assumptions, your costs would be:

<TABLE>
<CAPTION>
- ------------------------------------------------------------
1 YR 3 YRS 5 YRS 10 YRS
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $ $ $ $
Class B shares $ $ $ $
Class C shares $ $ $ $
Class Z shares $ $ $ $
</TABLE>

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

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6 PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to achieve a HIGH TOTAL INVESTMENT RETURN
CONSISTENT WITH MODERATE RISK. This means we seek investments that present
moderate risks whose price will increase over time. While we make every effort
to achieve our objective, we can't guarantee success.
In pursuing our objective, we normally invest in a wide variety of equity-
related securities, debt securities and money market instruments. For
investments in equity-related securities, the Fund's strategy is to combine the
efforts of two portfolio managers with different styles--one has a value
approach, while the other focuses on growth. A third portfolio manager focuses
on debt securities with the potential for total return.
In addition to common stocks, nonconvertible preferred stocks and
convertible securities, equity-related securities include American Depositary
Receipts (ADRs); warrants and rights that can be exercised to obtain stock;
investments in various types of business ventures, including partnerships and
joint ventures; real estate investment trusts (REITs) and similar securities.
Convertible securities are securities--like bonds, corporate notes and preferred
stocks--that we can convert into the company's common stock or some other equity
security. We may buy common stocks of companies of every size--small-, medium-
and large-capitalization.
Debt obligations include corporate and noncorporate obligations, such as
U.S. government securities. The average duration of the debt securities held by
the Fund will not be more than 10 years. "Duration" is a measure of the expected
life of a fixed-income security on a present value basis. For any fixed-income
security with interest payments occurring before payment of principal, duration
is ordinarily less than maturity. We can invest up to

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OUR GROWTH EQUITY STYLE
Our growth portfolio manager, Jeff Rose, invests in mid-size and large companies
experiencing some or all of the following: high sales growth, high unit growth,
high or improving returns on assets and equity and a strong balance sheet. These
companies generally trade at high prices relative to their current earnings.
OUR VALUE EQUITY STYLE
Our value portfolio manager, Warren Spitz, invests in companies selling at a
price that is low relative to a company's earnings, assets, cash flow and
dividends.
OUR DEBT STRATEGY
[TO COME]
- -------------------------------------------------------------------

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7
<PAGE>
HOW THE FUND INVESTS
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25% of total assets in debt obligations rated BB or lower by Standard & Poor's
Ratings Group (S&P) or Ba or lower by Moody's Investors Service, Inc. (Moody's).
These lower-rated obligations--also known as "junk bonds" -- have a higher risk
of default and tend to be less liquid and more volatile. We also may invest in
obligations that are not rated, but that we believe are of comparable quality to
these obligations.
We may also invest in money market instruments, which include the commercial
paper of corporations, certificates of deposit, bankers' acceptances and other
obligations of domestic and foreign banks, nonconvertible debt securities
(corporate and government), short-term obligations issued or guaranteed by the
U.S. government or its agencies or instrumentalities, repurchase agreements and
cash (foreign currencies or U.S. dollars). Generally, money market instruments
provide a fixed rate of return, but provide less opportunity for capital
appreciation than stocks.
Jeff Rose, who uses a growth style to manage his portion of the equity
portfolio, considers selling or reducing a stock position when, in his opinion,
the stock has [TO COME]. Warren Spitz, who uses a value style to manage his
portion of the equity portfolio, considers selling a security when in his
opinion it has increased in price to the point where it is no longer
undervalued.

U.S. GOVERNMENT SECURITIES
The Fund may invest in securities issued or guaranteed by the U.S. government or
by an agency or instrumentality of the U.S. government. Not all U.S. government
securities are backed by the full faith and credit of the United States, which
means that payment of principal and interest are guaranteed, but market value is
not. Some are supported only by the credit of the issuing agency and depend
entirely on their own resources to repay their debt.

MORTGAGE-RELATED SECURITIES
We may invest in mortgage-related securities issued or guaranteed by U.S.
governmental entities. These securities are usually pass-through instruments
that pay investors a share of all interest and principal payments from an
underlying pool of fixed or adjustable rate mortgages.

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8 PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------

Mortgage-related securities include collateralized mortgage obligations and
multi-class pass-through securities. A COLLATERALIZED MORTGAGE OBLIGATION (CMO)
is a security backed by an underlying portfolio of mortgages or mortgage-backed
securities that may be issued or guaranteed by U.S. governmental entities. A
MULTI-CLASS PASS-THROUGH SECURITY is an equity interest in a trust composed of
underlying mortgage assets. Payments of principal and interest on the mortgage
assets and any reinvestment income thereon provide the funds to pay debt service
on the CMO or to make scheduled distributions on the multi-class pass-through
security.
The values of mortgage-backed securities vary with changes in market
interest rates and yields. Such values are particularly sensitive to changes in
prepayments of the underlying mortgages. For example, during periods of falling
interest rates, prepayments tend to increase as homeowners and others refinance
their higher-rate mortgages. These prepayments reduce the anticipated duration
of the mortgage-related securities. Conversely, during periods of rising
interest rates, prepayments can be expected to decline.

ASSET-BACKED SECURITIES
We may also invest in asset-backed debt securities. An asset-backed security is
another type of pass-through instrument that pays interest based upon the cash
flow of an underlying pool of assets, such as automobile loans and credit card
receivables. Unlike mortgage-related securities, asset-backed securities are
usually not collateralized.

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

REAL ESTATE INVESTMENT TRUSTS
We may invest in the securities of real estate investment trusts known as REITS.
REITs are like corporations, except that they do not pay income taxes if they
meet certain IRS requirements. However, while REITs themselves do not pay income
taxes, the distributions they make to investors are taxable. REITs invest
primarily in real estate or real estate mortgages and distribute almost all of
their income--most of which comes from rents, mortgages and gains on sales of
property--to shareholders.

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9
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------

DERIVATIVE STRATEGIES
We may use various derivative strategies to try to improve the Fund's returns or
protect its assets. We cannot guarantee that these strategies will work, that
the instruments necessary to implement these strategies will be available or
that the Fund will not lose money. Derivatives--such as futures, options,
foreign currency forward contracts and options on futures--involve costs and can
be volatile. With derivatives, the investment adviser tries to predict whether
the underlying investment--a security, market index, currency, interest rate or
some other benchmark--will go up or down at some future date. We may use
derivatives to try to reduce risk or to increase return consistent with the
Fund's overall investment objective. The investment adviser will consider other
factors (such as cost) in deciding whether to employ any particular strategy or
use any particular instrument. Any derivatives we use may not match the Fund's
underlying holdings.

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

FUTURES CONTRACTS AND RELATED OPTIONS,
FOREIGN CURRENCY FORWARD CONTRACTS
The Fund may purchase and sell financial futures contracts and related options
on financial futures. A futures contract is an agreement to buy or sell a set
quantity of an underlying product at a future date, or to make or receive a cash
payment based on the value of a securities index. The Fund also may enter into
foreign currency forward contracts to protect the value of its assets against
future changes in the level of foreign exchange rates. A foreign currency
forward contract is an obligation to buy or sell a given currency on a future
date at a set price.
For more information, see "Investment Risks" and the Statement of Additional
Information, "Description of the Fund, Its Investments and Risks." The Statement
of Additional Information--which we refer to as the SAI--contains additional
information about the Fund. To obtain a copy, see the back cover page of this
prospectus.

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10 PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------

The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board can change investment policies
that are not fundamental.

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

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

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

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11
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------

INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Fund is no
exception. Since the Fund's holdings can vary significantly from broad market
indexes, performance of the Fund can deviate from performance of the indexes.
This chart outlines the key risks and potential rewards of the Fund's principal
investments and certain other investments the Fund may make. See, too,
"Description of the Fund, Its Investments and Risks" in the SAI.
INVESTMENT TYPE

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- -----------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------
EQUITY-RELATED SECURITIES -- Individual stocks -- Historically, stocks
PERCENTAGE VARIES could lose value have outperformed
-- The equity markets other investments
could go down, over the long term
resulting in a -- Generally, economic
decline in value of growth means higher
the Fund's corporate profits,
investments which lead to an
-- Companies that pay increase in stock
dividends may not do prices, known as
so if they don't have capital appreciation
profits or adequate -- May be a source of
cash flow dividend income
-- Changes in economic or
political conditions,
both domestic and
international, may
result in a decline
in value of the
Fund's investments
- ------------------------------------------------------------------------------------
</TABLE>

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12 PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------

INVESTMENT TYPE (CONT'D)

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- -----------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------------
FIXED-INCOME OBLIGATIONS -- The Fund's holdings, -- Regular interest
PERCENTAGE VARIES share price and total income
return may fluctuate -- Generally, more secure
in response to bond than stocks since
market movements companies must pay
-- Credit risk--the risk their debts before
that the default of they pay dividends
an issuer would leave -- Most bonds will rise
the Fund with unpaid in value when
interest or interest rates fall
principal. The lower -- Bonds have generally
a bond's quality, the outperformed money
higher its potential market instruments
volatility over the long term,
-- Market risk--the risk with less risk than
that the market value stocks
of an investment may -- Investment-grade bonds
move up or down, have a lower risk of
sometimes rapidly or default
unpredictably. Market -- Junk bonds offer
risk may affect an higher yields and
industry, a sector, higher potential
or the market as a gains
whole
-- Interest rate
risk--the risk that
the value of most
bonds will fall when
interest rates rise.
The longer a bond's
maturity and the
lower its credit
quality, the more its
value typically
falls. It can lead to
price volatility,
particularly for junk
bonds
-- Junk bonds have a
higher risk of
default, tend to be
less liquid and may
be more difficult to
value
- --------------------------------------------------------------------------------------
</TABLE>

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13
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------

INVESTMENT TYPE (CONT'D)

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- -----------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------------
MORTGAGE-RELATED SECURITIES -- Prepayment risk--the -- Regular interest
PERCENTAGE VARIES risk that the income
underlying mortgage -- The U.S. government
may be pre-paid guarantees interest
partially or and principal
completely, generally payments on certain
during periods of securities
falling interest -- May benefit from
rates, which could security interest in
adversely affect real estate
yield to maturity and collateral
could require the -- Pass-through
Fund to reinvest in instruments provide
lower-yielding greater
securities diversification than
-- Credit risk--the risk direct ownership of
that the underlying loans
mortgages will not be
paid by debtors or by
credit insurers or
guarantors of such
instruments. Some
mortgage securities
are unsecured or
secured by
lower-rated insurers
or guarantors and
thus may involve
greater risk
-- See market risk and
interest rate risk
- ------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES -- See prepayment risk -- Regular interest
PERCENTAGE VARIES -- The security interest income
in the underlying -- Prepayment risk is
collateral may not be generally lower than
as great as with with mortgage-related
mortgage-related securities
securities -- Pass-through
-- Credit risk--the risk instruments provide
that the underlying greater
receivables will not diversification than
be paid by debtors or direct ownership of
by credit insurers or loans
guarantors of such
instruments. Some
asset-backed
securities are
unsecured or secured
by lower-rated
insurers or
guarantors and thus
may involve greater
risk
-- See market risk and
interest rate risk
- ------------------------------------------------------------------------------------
</TABLE>

- -------------------------------------------------------------------
14 PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------

INVESTMENT TYPE (CONT'D)

- --------------------------------------------------------------------------------
15
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------

INVESTMENT TYPE (CONT'D)

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- -----------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------------
DERIVATIVES -- Derivatives such as -- The Fund could make
PERCENTAGE VARIES futures, options and money and protect
foreign currency against losses if the
forward contracts investment analysis
that are used for proves correct
hedging purposes may -- Derivatives that
not fully offset the involve leverage
underlying positions could generate
and this could result substantial gains at
in losses to the Fund low cost
that would not have -- One way to manage the
otherwise occurred Fund's risk/return
-- Derivatives used for balance is to lock in
risk management may the value of an
not have the intended investment ahead of
effects and may time
result in losses or
missed opportunities
-- The other party to a
derivatives contract
could default
-- Derivatives that
involve leverage
could magnify losses
-- Certain types of
derivatives involve
costs to the Fund
that can reduce
returns
- ------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES -- Limits potential for -- May preserve the
PERCENTAGE VARIES capital appreciation Fund's assets
-- See market risk, -- Regular interest
credit risk and income
interest rate risk -- Generally more secure
-- Not all U.S. than lower quality
government securities debt securities and
are insured by the equity securities
U.S. government, but -- Principal and interest
only by the issuing may be guaranteed by
agency the U.S. government
- ------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS -- Limits potential for -- May preserve the
PERCENTAGE VARIES capital appreciation Fund's assets
-- See credit risk and
market risk
- ------------------------------------------------------------------------------------
ILLIQUID SECURITIES -- May be difficult to -- May offer a more
UP TO 15% OF NET ASSETS value precisely attractive yield or
-- May be difficult to potential for growth
sell at the time or than more widely
price desired traded securities
- ------------------------------------------------------------------------------------
</TABLE>

- -------------------------------------------------------------------
16 PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND IS MANAGED
- -------------------------------------

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

MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102-4077

Under a management agreement with the Fund, PIFM manages the Fund's
investment operations and administers its business affairs. For the fiscal year
ended July 31, 1999, the Fund paid PIFM management fees of .65% of the Fund's
average net assets.
As of August 31, 1999, PIFM served as the Manager to all of the
Prudential mutual funds, and as Manager or administrator to closed-end
investment companies, with aggregate assets of approximately $ billion.

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

PORTFOLIO MANAGERS
WARREN SPITZ, a Managing Director of Prudential Investments, has been a
portfolio manager for the Fund since July 1997 and is responsible for the value
portion of the Fund's equity portfolio. Mr. Spitz joined Prudential Investments
in 1987 as a portfolio manager. He earned a B.S. from Allegheny College and an
M.B.A. from the University of Pennsylvania's Wharton School of Business.
JEFF ROSE, CFA, a Managing Director of Prudential Investments, has been a
portfolio manager for the Fund since March 1998. Mr. Rose is responsible for the
growth portion of the Fund's equity portfolio. Mr. Rose

- --------------------------------------------------------------------------------
17
<PAGE>
HOW THE FUND IS MANAGED
- ------------------------------------------------

joined Prudential Investments in 1994 as an equity analyst. Mr. Rose received a
B.A. from Cornell University and an M.B.A. from the Amos Tuck School--Dartmouth
College. He also holds a Certified Financial Analyst designation.
BARBARA KENWORTHY, a Managing Director of Prudential Investments, has been a
portfolio manager for the Fund since July 1997 and is responsible for the
fixed-income portion of the Fund. Ms. Kenworthy has over 30 years of investment
experience and is a member of the Treasury Borrowing Advisory Committee of the
Public Securities Association. Ms. Kenworthy earned a B.A. from Wilson College
and an M.B.A. from New York University.

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

YEAR 2000 READINESS DISCLOSURE
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such an
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although, at this time,
there can be no assurance that there will be no adverse impact on the Fund, the
Manager, the Distributor, the Transfer Agent and the Custodian have advised the
Fund that they have been actively working on necessary changes to their computer
systems to prepare for the year 2000. The Fund and its Board receive, and have
received since early 1998, satisfactory quarterly reports from the principal

- -------------------------------------------------------------------
18 PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND IS MANAGED
- ------------------------------------------------

service providers as to their preparations for year 2000 readiness, although
there can be no assurance that the service providers (or other securities market
participants) will successfully complete the necessary changes in a timely
manner. Moreover, the Fund at this time has not considered retaining alternative
service providers or directly undertaken efforts to achieve year 2000 readiness,
the latter of which would involve substantial expenses without an assurance of
success.
Additionally, issuers of securities generally, as well as those purchased by
the Fund, may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/ or a specific
issuer's performance and could result in a decline in the value of the
securities held by the Fund.

- --------------------------------------------------------------------------------
19
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- -------------------------------------

Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund distributes DIVIDENDS of ordinary income and any
realized net CAPITAL GAINS to shareholders. These distributions are subject to
taxes, unless you hold your shares in a 401(k) plan, an Individual Retirement
Account (IRA), or some other qualified tax-deferred plan or account.
Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless you hold your
shares in a qualified tax-deferred plan or account.
The following briefly discusses some of the important federal tax issues you
should be aware of, but is not meant to be tax advice. For tax advice, please
speak with your tax adviser.

DISTRIBUTIONS
The Fund distributes DIVIDENDS of any net investment income to shareholders
typically every quarter. For example, if the Fund owns ACME Corp. stock and the
stock pays a dividend, the Fund will pay out a portion of this dividend to its
shareholders, assuming the Fund's income is more than its costs and expenses.
The dividends you receive from the Fund will be taxed as ordinary income whether
or not they are reinvested in the Fund.
The Fund also distributes realized net CAPITAL GAINS to shareholders--
typically once a year--which are generated when the Fund sells its assets for a
profit. For example, if the Fund bought 100 shares of ACME Corp. stock for a
total of $1,000 and more than one year later sold the shares for a total of
$1,500, the Fund has net long-term capital gains of $500, which it will pass on
to shareholders (assuming the Fund's total gains are greater than any losses it
may have). Capital gains are taxed differently depending on how long the Fund
holds the security--if a security is held more than one year before it is sold,
LONG-TERM capital gains are taxed at the rate of 20%, but if the security is
held one year or less, SHORT-TERM capital gains are taxed at ordinary income
rates of up to 39.6%. Different rates apply to corporate shareholders.
For your convenience, Fund distributions of dividends and capital gains are
AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask us to
pay the distributions in cash, we will send you a check if your account is with
the Transfer Agent. Otherwise, if your account is with a broker, you will
receive a credit to your account. Either way, the distributions

- -------------------------------------------------------------------
20 PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
may be subject to taxes, unless your shares are held in a qualified tax-deferred
plan or account. For more information about automatic reinvestment and other
shareholder services, see "Step 4: Additional Shareholder Services" in the next
section.

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

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

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

- --------------------------------------------------------------------------------
21
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
when dividends are paid out, the value of each share of the Fund decreases by
the amount of the dividend and the market changes (if any) to reflect the
payout. The distribution you receive makes up for the decrease in share value.
However, the timing of your purchase does mean that part of your investment came
back to you as taxable income.

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

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

[CHART]

CAPITAL GAIN
+$ (taxes owed)
RECEIPTS
FROM SALE OR

CAPITAL LOSS
-$ (offset against gain)

Exchanging your shares of the Fund for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the taxes
described above.
Any gain or loss you may have from selling or exchanging Fund shares will
not be reported on the Form 1099; however, proceeds from the sale or exchange
will be reported on Form 1099-B. Therefore, unless you hold your shares in a
qualified tax-deferred plan or account, you or your financial adviser should
keep track of the dates on which you buy and sell--or

- -------------------------------------------------------------------
22 PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------

exchange--Fund shares, as well as the amount of any gain or loss on each
transaction. For tax advice, please see your tax adviser.

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

- --------------------------------------------------------------------------------
23
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- -------------------------------------

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

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

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

STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that better meets
your needs. With Class A shares, you pay the sales charge at the time of
purchase, but the operating expenses each year are lower than the expenses of
Class B and Class C shares. With Class B shares, you only pay a sales charge if
you sell your shares within six years (that is why it is called a Contingent
Deferred Sales Charge or CDSC), but the operating expenses each year are higher
than the Class A share expenses. With Class C shares, you pay a 1% front-end
sales charge and a 1% CDSC if you sell within 18 months of purchase, but the
operating expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:

-- The amount of your investment

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

-- The different sales charges that apply to each share class-- Class
A's front-end sales charge vs. Class B's CDSC vs. Class C's low
front-end sales charge and low CDSC

- -------------------------------------------------------------------
24 PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------

-- Whether you qualify for any reduction or waiver of sales charges

-- The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase

-- Whether you qualify to purchase Class Z shares.
See "How to Sell Your Shares" for a description of the impact of CDSCs.

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

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minimum purchase amount(1) $1,000 $1,000 $2,500 None
Minimum amount for subsequent $100 $100 $100 None
purchases(1)
Maximum initial sales charge 5% of the public None 1% of the public None
offering price offering price
Contingent Deferred Sales Charge None If sold 1% on sales made None
(CDSC)(2) during: within 18 months of
Year 1 5% purchase(2)
Year 2 4%
Year 3 3%
Year 4 2%
Years 5/6 1%
Year 7 0%
Annual distribution and service .30 of 1% 1% 1% None
(12b-1) fees shown as a percentage of (.25 of 1%
average net assets(3) currently)
</TABLE>

1 THE MINIMUM INVESTMENT REQUIREMENTS DO NOT APPLY TO CERTAIN RETIREMENT AND
EMPLOYEE SAVINGS PLANS AND CUSTODIAL ACCOUNTS FOR MINORS. THE MINIMUM
INITIAL AND SUBSEQUENT INVESTMENT FOR PURCHASES MADE THROUGH THE AUTOMATIC
INVESTMENT PLAN IS $50. FOR MORE INFORMATION, SEE "ADDITIONAL SHAREHOLDER
SERVICES--AUTOMATIC INVESTMENT PLAN."
2 FOR MORE INFORMATION ABOUT THE CDSC AND HOW IT IS CALCULATED, SEE "HOW TO
SELL YOUR SHARES-- CONTINGENT DEFERRED SALES CHARGE (CDSC)." CLASS C SHARES
BOUGHT BEFORE NOVEMBER 2, 1998, HAVE A 1% CDSC IF SOLD WITHIN ONE YEAR.
3 THESE DISTRIBUTION FEES ARE PAID FROM THE FUND'S ASSETS ON A CONTINUOUS
BASIS. OVER TIME, THE FEES WILL INCREASE THE COST OF YOUR INVESTMENT AND
MAY COST YOU MORE THAN PAYING OTHER TYPES OF SALES CHARGES. THE SERVICE FEE
FOR CLASS A, CLASS B AND CLASS C SHARES IS .25 OF 1%. THE DISTRIBUTION FEE
FOR CLASS A SHARES IS LIMITED TO .30 OF 1% (INCLUDING THE .25 OF 1% SERVICE
FEE) AND IS .75 OF 1% FOR CLASS B AND CLASS C SHARES.

- --------------------------------------------------------------------------------
25
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------

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

INCREASE THE AMOUNT OF YOUR INVESTMENT. You can reduce Class A's sales
charge by increasing the amount of your investment. This table shows you
how the sales charge decreases as the amount of your investment
increases.

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

* IF YOU INVEST $1 MILLION OR MORE, YOU CAN BUY ONLY CLASS A SHARES, UNLESS
YOU QUALIFY TO BUY CLASS Z SHARES.

To satisfy the purchase amounts above, you can:

-- Invest with an eligible group of related investors

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

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

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

BENEFIT PLANS. Certain group retirement and savings plans may purchase Class A
shares without the initial sales charge, provided that they meet the required
minimum for amount of assets, average account balance or

- -------------------------------------------------------------------
26 PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------

number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.

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

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

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

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

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

WAIVING CLASS C'S INITIAL SALES CHARGE
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at (800)
353-2847.

INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. The initial
sales charge will be waived for purchases of Class C shares if the

- --------------------------------------------------------------------------------
27
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------

purchase is made with money from the redemption of shares of any unaffiliated
investment company, as long as the shares were not held in an account at
Prudential Securities Incorporated (Prudential Securities) or one of its
affiliates. Such purchases must be made within 60 days of the redemption. To
qualify for this waiver, you must do one of the following:

-- Purchase your shares through an account at Prudential Securities

-- Purchase your shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation

-- Purchase your shares through another broker.

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

QUALIFYING FOR CLASS Z SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares,
provided that they meet the required minimum amount of assets, average account
balance or number of eligible employees. For more information about these
requirements, call Prudential at (800) 353-2847.

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

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

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

- -------------------------------------------------------------------
28 PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------

OTHER TYPES OF INVESTORS. Class Z shares also can be purchased by any of the
following:

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

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

-- Prudential with an investment of $10 million or more

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

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

- --------------------------------------------------------------------------------
29
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------

STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of the Fund is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE or NAV-- is
determined by a simple calculation: it's the total value of the Fund (assets
minus liabilities) divided by the total number of shares outstanding. For
example, if the value of the investments held by Fund XYZ (minus its
liabilities) is $1,000 and there are 100 shares of Fund XYZ owned by
shareholders, the price of one share of the fund--or the NAV--is $10 ($1,000
divided by 100). Portfolio securities are valued based upon market quotations
or, if not readily available, at fair value as determined in good faith under
procedures established by the Fund's Board. Most national newspapers report the
NAVs of most mutual funds, which allows investors to check the price of mutual
funds daily.
We determine the NAV of our shares once each business day at 4:15 p.m. New
York Time on days that the New York Stock Exchange is open for trading. We do
not determine the NAV on days when we have not received any orders to purchase,
sell or exchange Fund shares, or when changes in the value of the Fund's
portfolio do not materially affect the NAV.

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

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

- -------------------------------------------------------------------
30 PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------

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

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

PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015

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

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

THE PRUTECTOR PROGRAM. Optional group term life insurance--which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges, and
is not available in all states.

- --------------------------------------------------------------------------------
31
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------

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

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

HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Fund--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer Agent,
the Distributor or your broker receives your order to sell. If your broker holds
your shares, your broker must receive your order to sell by 4:15 p.m. New York
Time to process the sale on that day. Otherwise contact:

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

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

RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. This

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32 PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
may happen during unusual market conditions or emergencies when the Fund can't
determine the value of its assets or sell its holdings. For more information,
see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
If you are selling more than $100,000 of shares, you want the check sent to
someone or some place that is not in our records or you are a business or a
trust and if you hold your shares directly with the Transfer Agent, you will
need to have the signature on your sell order guaranteed by a financial
institution. For more information, see the SAI, "Purchase, Redemption and
Pricing of Fund Shares--Sale of Shares--Signature Guarantee."

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

-- Amounts representing shares you purchased with reinvested dividends
and distributions

-- Amounts representing the increase in NAV above the total amount of
payments for shares made during the past six years for Class B shares
and 18 months for Class C shares (one year for Class C shares
purchased before November 2, 1998)

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

Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the cost
of shares held for the longest period of time within the applicable CDSC period.

- --------------------------------------------------------------------------------
33
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------

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

WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:

-- After a shareholder is deceased or disabled (or, in the case of a
trust account, the death or disability of the grantor). This waiver
applies to individual shareholders, as well as shares owned in joint
tenancy (with rights of survivorship), provided the shares were
purchased before the death or disability

-- To provide for certain distributions--made without IRS penalty-- from
a tax-deferred retirement plan, IRA or Section 403(b) custodial
account

-- On certain sales from a Systematic Withdrawal Plan.

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

WAIVER OF THE CDSC--CLASS C SHARES
BENEFIT PLANS. The CDSC will be waived for redemptions by certain group
retirement plans for which Prudential or brokers not affiliated with Prudential
provide administrative or recordkeeping services. The CDSC also will be waived
for certain redemptions by benefit plans sponsored by

- -------------------------------------------------------------------
34 PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
Prudential and its affiliates. For more information, call Prudential at (800)
353-2847.

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

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

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

- --------------------------------------------------------------------------------
35
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------

RETIREMENT PLANS
To sell shares and receive a distribution from a retirement account, call your
broker or the Transfer Agent for a distribution request form. There are special
distribution and income tax withholding requirements for distributions from
retirement plans and you must submit a withholding form with your request to
avoid delay. If your retirement plan account is held for you by your employer or
plan trustee, you must arrange for the distribution request to be signed and
sent by the plan administrator or trustee. For additional information, see the
SAI.

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

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

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

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36 PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------

Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account--Exchange Privilege."
If you own Class B or Class C shares and qualify to purchase Class A shares
without paying an initial sales charge, we will automatically exchange your
Class B or Class C shares which are not subject to a CDSC for Class A shares. We
make such exchanges on a quarterly basis if you qualify for this exchange
privilege. We have obtained a legal opinion that this exchange is not a "taxable
event" for federal income tax purposes. This opinion is not binding on the IRS.

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

- --------------------------------------------------------------------------------
37
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------

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

CLASS A SHARES
The financial highlights for the three years ended July 31, 1999 were audited by
, independent accountants, and the financial highlights for the
two years ended July 31, 1996 were audited by other independent auditors, whose
reports were unqualified.

CLASS A SHARES (FISCAL YEARS ENDED 7-31)

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PER SHARE OPERATING
PERFORMANCE 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $14.01 $11.85 $12.04 $11.12
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .33 .34 .31 .34
Net realized and unrealized
gain on investment
transactions .29 2.96 .28 1.11
TOTAL FROM INVESTMENT
OPERATIONS .62 3.30 .59 1.45
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.34) (.36) (.29) (.33)
Distributions from net
realized gains on investment
and foreign currency
transactions (1.66) (.78) (.49) (.20)
TOTAL DISTRIBUTIONS (2.00) (1.14) (.78) (.53)
NET ASSET VALUE, END OF YEAR $12.63 $14.01 $11.85 $12.04
TOTAL RETURN(1) 5.05% 29.09% 4.89% 13.67%
- ----------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $485,690 $497,461 $262,096 $119,829
Average net assets (000) $493,828 $306,717 $246,609 $69,754
RATIOS TO AVERAGE NET ASSETS:
Expenses, including
distribution fees 1.19% 1.17% 1.20% 1.22%
Expenses, excluding
distribution fees .94% .92% .95% .97%
Net investment income 2.51% 2.84% 2.53% 2.90%
Portfolio turnover 144% 140% 97% 201%
</TABLE>

1 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED.

- -------------------------------------------------------------------
38 PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------

CLASS B SHARES
The financial highlights for the three years ended July 31, 1999 were audited by
, independent accountants, and the financial highlights for the
two years ended July 31, 1996 were audited by other independent auditors, whose
reports were unqualified.

CLASS B SHARES (FISCAL YEARS ENDED 7-31)

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PER SHARE OPERATING
PERFORMANCE 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $13.96 $11.80 $12.00 $11.09
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .24 .26 .21 .26
Net realized and unrealized
gain on investment
transactions .27 2.95 .28 1.10
TOTAL FROM INVESTMENT
OPERATIONS .51 3.21 .49 1.36
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.24) (.27) (.20) (.25)
Distributions from net
realized gains on investment
and foreign currency
transactions (1.66) (.78) (.49) (.20)
TOTAL DISTRIBUTIONS (1.90) (1.05) (.69) (.45)
NET ASSET VALUE, END OF YEAR $12.57 $13.96 $11.80 $12.00
TOTAL RETURN(1) 4.28% 28.24% 4.05% 12.79%
- ----------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $533,354 $625,715 $420,465 $392,291
Average net assets (000) $578,432 $431,425 $437,792 $409,419
RATIOS TO AVERAGE NET ASSETS:
Expenses, including
distribution fees 1.94% 1.92% 1.95% 1.97%
Expenses, excluding
distribution fees .94% .92% .95% .97%
Net investment income (loss) 1.76% 2.09% 1.78% 2.34%
Portfolio turnover 144% 140% 97% 201%
</TABLE>

- --------------------------------------------------------------------------------
39
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------

CLASS C SHARES
The financial highlights for the three years ended July 31, 1999 were audited by
, independent accountants, and the financial highlights for the
two years ended July 31, 1996 were audited by other independent auditors, whose
reports were unqualified.

CLASS C SHARES (FISCAL PERIODS ENDED 7-31)

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PER SHARE OPERATING
PERFORMANCE 1999 1998 1997 1996 1995(1)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $12.57 $13.96 $11.80 $12.00 $11.12
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .24 .26 .21 .21
Net realized and unrealized
gain on investment
transactions .27 2.95 .28 1.12
TOTAL FROM INVESTMENT
OPERATIONS .51 3.21 .49 1.33
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.24) (.27) (.20) (.25)
Distributions from net
realized gains on investment
and foreign currency
transactions (1.66) (.78) (.49) (.20)
TOTAL DISTRIBUTIONS (1.90) (1.05) (.69) (.45)
NET ASSET VALUE, END OF
PERIOD $12.57 $13.96 $11.80 $12.00
TOTAL RETURN(2) 4.28% 28.24% 4.05% 12.49%
- ----------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995(1)
- ----------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD
(000) $9,201 $7,023 $3,525 $3,046
Average net assets (000) $8,175 $4,790 $2,444 $920
RATIOS TO AVERAGE NET ASSETS:
Expenses, including
distribution fees 1.94% 1.92% 1.95% 2.04%(3)
Expenses, excluding
distribution fees .94% .92% .95% 1.04%(3)
Net investment income (loss) 1.76% 2.09% 1.78% 2.20%(3)
Portfolio turnover 144% 140% 97% 201%
</TABLE>

1 INFORMATION SHOWN IS FOR THE PERIOD 8-1-94 (WHEN CLASS C SHARES WERE FIRST
OFFERED) THROUGH 7-31-95.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT
ANNUALIZED.
3 ANNUALIZED.

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40 PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------

CLASS Z SHARES
The financial highlights for the three years ended July 31, 1999 were audited by
, independent accountants, and the financial highlights for the
period from March 1, 1996 through July 31, 1996 were audited by other
independent auditors, whose reports were unqualified.

CLASS Z SHARES (FISCAL PERIOD ENDED 7-31)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
PER SHARE OPERATING
PERFORMANCE 1999 1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $12.64 $14.01 $11.85 $12.16
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .37 .46 .13
Net realized and unrealized
gain (loss) on investment
transactions .29 2.87 (.28)
TOTAL FROM INVESTMENT
OPERATIONS .66 3.33 (.15)
- ---------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.37) (.39) (.16)
Distributions from net
realized gains on investment
and foreign currency
transactions (1.66) (.78) --
TOTAL DISTRIBUTIONS (2.03) (1.17) (.16)
NET ASSET VALUE, END OF
PERIOD $12.64 $14.01 $11.85
TOTAL RETURN(2) 5.37% 29.39% (1.24)%
- ---------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999(1) 1998(1) 1997(1) 1996(1)
- ---------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD
(000) $131,671 $129,459 $4,015
Average net assets (000) $128,358 $99,391 $4,217
RATIOS TO AVERAGE NET ASSETS:
Expenses, including
distribution fees .94% .92% .95%(3)
Expenses, excluding
distribution fees .94% .92% .95%(3)
Net investment income (loss) 2.76% 3.12% 2.72%(3)
Portfolio turnover 144% 140% 97%
</TABLE>

1 INFORMATION SHOWN IS FOR THE PERIOD 3-1-96 (WHEN CLASS Z SHARES WERE FIRST
OFFERED) THROUGH 7-31-96.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT
ANNUALIZED.
3 ANNUALIZED.

- --------------------------------------------------------------------------------
41
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
- -------------------------------------

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

STOCK FUNDS
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
PRUDENTIAL EMERGING GROWTH FUND, INC.
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL EQUITY INCOME FUND
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL SMALL-CAP INDEX FUND
PRUDENTIAL STOCK INDEX FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH FUND
PRUDENTIAL JENNISON GROWTH & INCOME FUND
PRUDENTIAL MID-CAP VALUE FUND
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL FINANCIAL SERVICES FUND
PRUDENTIAL HEALTH SCIENCES FUND
PRUDENTIAL TECHNOLOGY FUND
PRUDENTIAL UTILITY FUND
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
PRUDENTIAL TAX-MANAGED EQUITY FUND
PRUDENTIAL 20/20 FOCUS FUND
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND

ASSET ALLOCATION/BALANCED FUNDS
PRUDENTIAL BALANCED FUND
PRUDENTIAL DIVERSIFIED FUNDS
CONSERVATIVE GROWTH FUND
MODERATE GROWTH FUND
HIGH GROWTH FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL ACTIVE BALANCED FUND

GLOBAL FUNDS
GLOBAL STOCK FUNDS
PRUDENTIAL DEVELOPING MARKETS FUND
PRUDENTIAL DEVELOPING MARKETS EQUITY FUND
PRUDENTIAL LATIN AMERICA EQUITY FUND
PRUDENTIAL EUROPE GROWTH FUND, INC.
PRUDENTIAL GLOBAL GENESIS FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL EUROPE INDEX FUND
PRUDENTIAL PACIFIC INDEX FUND
PRUDENTIAL NATURAL RESOURCES FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
GLOBAL SERIES
INTERNATIONAL STOCK SERIES
GLOBAL UTILITY FUND, INC.

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

- -------------------------------------------------------------------
42 PRUDENTIAL BALANCED FUND [LOGO] (800) 225-1852
<PAGE>
- -------------------------------------

BOND FUNDS
TAXABLE BOND FUNDS
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
PRUDENTIAL GOVERNMENT SECURITIES TRUST
SHORT-INTERMEDIATE TERM SERIES
PRUDENTIAL HIGH YIELD FUND, INC.
PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL BOND MARKET INDEX FUND
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
INCOME PORTFOLIO

TAX-EXEMPT BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
CALIFORNIA INCOME SERIES
PRUDENTIAL MUNICIPAL BOND FUND
HIGH INCOME SERIES
INSURED SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
MASSACHUSETTS SERIES
NEW JERSEY SERIES
NEW YORK SERIES
NORTH CAROLINA SERIES
OHIO SERIES
PENNSYLVANIA SERIES
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.

MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
LIQUID ASSETS FUND
NATIONAL MONEY MARKET FUND
PRUDENTIAL GOVERNMENT SECURITIES TRUST
MONEY MARKET SERIES
U.S. TREASURY MONEY MARKET SERIES
PRUDENTIAL SPECIAL MONEY MARKET FUND, INC.
MONEY MARKET SERIES
PRUDENTIAL MONEYMART ASSETS, INC.

TAX-FREE MONEY MARKET FUNDS
PRUDENTIAL TAX-FREE MONEY FUND, INC.
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
MASSACHUSETTS MONEY MARKET SERIES
NEW JERSEY MONEY MARKET SERIES
NEW YORK MONEY MARKET SERIES

COMMAND FUNDS
COMMAND MONEY FUND
COMMAND GOVERNMENT FUND
COMMAND TAX-FREE FUND

INSTITUTIONAL MONEY MARKET FUNDS
PRUDENTIAL INSTITUTIONAL LIQUIDITY PORTFOLIO, INC.
INSTITUTIONAL MONEY MARKET SERIES

- --------------------------------------------------------------------------------
43
<PAGE>
FOR MORE INFORMATION:
- --------------------------------------------------------------------------------

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

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

- --------------------------------
Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769

- ------------------------------------
Visit Prudential's Web Site At:
http://www.prudential.com

- --------------------------------
Additional information about the Fund can be obtained without charge and can be
found in the following documents:

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

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

SEMI-ANNUAL REPORT

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

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

In Person:
Public Reference Room in
Washington, DC
(For hours of operation, call
(800) SEC-0330.)

Via the Internet:
http://www.sec.gov

- --------------------------------
CUSIP Numbers:

Class A: 74431M-10-5
Class B: 74431M-20-4
Class C: 74431M-30-3
Class Z: 74431M-40-2

Investment Company Act File No:

811-5055

MF134A [LOGO] Printed on Recycled Paper
<PAGE>

PRUDENTIAL BALANCED FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED SEPTEMBER 29, 1999

Prudential Balanced Fund (the Fund) is an open-end, diversified, management
investment company. The investment objective of the Fund is to achieve a high
total investment return consistent with moderate risk. The Fund will seek to
achieve its objective by investing in a diversified portfolio of equity-related
securities (including securities convertible into equity securities), debt
obligations and money market instruments. There can be no assurance that the
Fund's investment objective will be achieved. See "Description of the Fund, Its
Investments and Risks."

The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, and its telephone number is (800) 225-1852.

This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated September 29, 1999, a copy
of which may be obtained from the Fund upon request.

TABLE OF CONTENTS

PAGE
----
Fund History............................................. B-2
Description of the Fund, Its Investments and Risks....... B-2
Investment Restrictions.................................. B-17
Management of the Fund................................... B-18
Control Persons and Principal Holders of Securities...... B-21
Investment Advisory and Other Services................... B-21
Brokerage Allocation and Other Practices................. B-26
Capital Shares, Other Securities and Organization........ B-27
Purchase, Redemption and Pricing of Fund Shares.......... B-29
Shareholder Investment Account........................... B-37
Net Asset Value.......................................... B-42
Taxes, Dividends and Distributions....................... B-43
Performance Information.................................. B-45
Financial Statements..................................... B-47
Report of Independent Accountants........................ B-
Description of Security Ratings.......................... A-1
Appendix I--General Investment Information............... I-1
Appendix II--Historical Performance Data................. II-1
Appendix III--Information Relating to Prudential......... III-1

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MF134B
<PAGE>

FUND HISTORY

The Fund was established as a Massachusetts business trust on February 23,
1987. It was originally comprised of two portfolios. On July 25, 1997,
shareholders of the Strategy Portfolio became shareholders of the Balanced
Portfolio. The Strategy Portfolio was terminated effective with the closing of
the reorganization. Effective July 25, 1997, Prudential Allocation Fund
(Balanced Portfolio) changed its name to Prudential Balanced Fund.

DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS

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

(B) AND (C) INVESTMENT STRATEGIES, POLICIES AND RISKS. The investment
objective of the Fund is to achieve a high total investment return consistent
with moderate risk. The Fund will seek to achieve its objective by investing in
a diversified portfolio of equity-related securities, debt obligations and money
market instruments. The following table summarizes the types of investments in
which the Fund may invest under normal circumstances in seeking to achieve its
objective:

<TABLE>
<CAPTION>
EQUITY SECURITIES
- ----------------------------
<S> <C>
Type of issuer Common stock and common stock equivalents of major, established
companies AND smaller, faster growing companies

DEBT SECURITIES
- ----------------------------
<S> <C>
Quality Investment grade debt securities AND up to 25% of its assets in debt
securities rated below investment grade

Percent of Fund's assets At least 25% of its assets in fixed-income senior securities

Average duration 10 years or less; weighted average maturity will exceed the average
duration
</TABLE>

The Fund's investment adviser determines the allocation of assets among the
different investment vehicles available (asset mix) to the Fund 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-related securities, including convertible securities);
(2) the distribution of debt securities among short, intermediate and long-term
maturities; and (3) the distribution of equity-related 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 the Fund 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 risk
objective of the Fund in making asset mix determinations. While the principal
investment policies and strategies for seeking to achieve the Fund's objective
are described in the Fund's Prospectus, the Fund may from time to time also use
the securities, instruments, policies and strategies described below in trying
to achieve its objective. The Fund may not succeed in achieving its objective
and you could lose money.

EQUITY-RELATED SECURITIES

The equity-related securities in which the Fund may invest include common
stocks, preferred stocks, securities convertible or exchangeable for common
stocks or preferred stocks, equity investments in partnerships, joint ventures,
other forms of non-corporate investments, American Depositary Receipts (ADRs),
American Depositary Shares (ADSs) and warrants and rights exercisable for equity
securities.

CONVERTIBLE SECURITIES. The Fund 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

B-2
<PAGE>

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" (that is, its value as a fixed-income security)
or its "conversion value" (that is, its value upon conversion into its
underlying common stock). 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.

AMERICAN DEPOSITARY RECEIPTS AND AMERICAN DEPOSITARY SHARES. ADRs and ADSs
are U.S. dollar-denominated certificates or shares issued by a United States
bank or trust company and represent the right to receive securities of a foreign
issuer deposited in a domestic bank or foreign branch of a United States bank
and traded on a United States exchange or in the over-the-counter market.
Generally, ADRs and ADSs are in registered form. There are no fees imposed on
the purchase or sale of ADRs and ADSs when purchased from the issuing bank or
trust company in the initial underwriting, although the issuing bank or trust
company may impose charges for the collection of dividends and the conversion of
ADRs and ADSs into the underlying securities. Investment in ADRs and ADSs has
certain advantages over direct investment in the underlying foreign securities
since: (1) ADRs and ADSs are denominated in U.S. dollars, registered
domestically, easily transferable, and market quotations are readily available
for them; and (2) issuers whose securities are represented by ADRs and ADSs are
usually subject to auditing, accounting, and financial reporting standards
comparable to those of domestic issuers.

WARRANTS AND RIGHTS. A warrant gives the holder thereof the right to
subscribe by a specified date to a stated number of shares of stock of the
issuer at a fixed price. Warrants tend to be more volatile than the underlying
stock, and if, at a warrant's expiration date the stock is trading at a price
below the price set in the warrant, the warrant will expire worthless.
Conversely, if at the expiration date, the underlying stock is trading at a
price higher than the price set in the warrant, the Fund can acquire the stock
at a price below its market value. Rights are similar to warrants but normally
have a shorter duration and are distributed directly by the issuer to
shareholders. Rights and warrants have no voting rights, receive no dividends
and have no rights with respect to the corporation issuing them.

REAL ESTATE INVESTMENT TRUSTS. The Fund may invest in securities of real
estate investment trusts or REITs. Unlike corporations, REITs do not have to pay
income taxes if they meet certain requirements of the Internal Revenue Code of
1986, as amended (Internal Revenue Code). To qualify, a REIT must distribute at
least 95% of its taxable income to its shareholders and receive at least 75% of
that income from rents, mortgages and sales of property. REITs offer investors
greater liquidity and diversification than direct ownership of a handful of
properties, as well as greater income potential than an investment in common
stocks. Like any investment in real estate, though, a REIT's performance depends
on several factors, such as its ability to find tenants for its properties, to
renew leases and to finance property purchases and renovations.

DEBT OBLIGATIONS

In addition to money market instruments described below, the Fund may invest
in longer-term debt securities. It is anticipated that the average duration of
the debt securities held by the Fund 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 Fund.

B-3
<PAGE>

Debt securities acquired by the Fund will generally be rated at the time of
purchase within the four highest categories determined by Standard & Poor's
Ratings Group (S&P), Moody's Investors Service, Inc. (Moody's) or comparably
rated by another nationally recognized statistical rating organization (NRSRO),
or, if not rated, be of comparable quality in the opinion of the investment
adviser. However, the Fund 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 (or comparably rated by another NRSRO), or, if not rated, of
comparable quality in the opinion of the investment adviser, all of which are
commonly known as "junk bonds."

RISK FACTORS RELATING TO 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. 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 also may 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).
Although lower-rated obligations typically provide a higher yield than
higher-rated obligations of similar maturity, lower-rated or unrated (that is,
high yield) securities are more likely to react to developments affecting market
and credit risk than are more highly-rated securities, which react primarily to
movements in the general level of interest rates. The investment adviser
considers both credit risk and market risk in making investment decisions for
the Fund.

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 the Fund's net
asset value.

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

U.S. GOVERNMENT SECURITIES. The Fund may invest in securities issued by 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
Fund must look principally to the agency or instrumentality issuing or
guaranteeing the obligation for ultimate repayment, and may not be able to
assert a claim against the United States itself if the agency or instrumentality
does not meet its commitments.

MORTGAGE-RELATED SECURITIES. The Fund also may invest in Collateralized
Mortgage Obligations (CMOs). A CMO is a debt security that is backed by a
portfolio of mortgages (such as GNMA, FNMA and FHLMC certificates) 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.

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 Fund'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

B-4
<PAGE>

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 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 Fund reinvests the prepaid
amounts in securities the yields of which reflect interest rates prevailing at
the time. Therefore, the Fund'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 Fund also may 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 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 (the Commission), and the Fund may invest
in the securities of such issuers without the limitations imposed by the
Investment Company Act of 1940, as amended (Investment Company Act) on
investments by an investment company in other investment companies. In addition,
in reliance on an earlier Commission interpretation, the Fund's investments in
certain qualifying CMOs, that 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 Commission's interpretation, the CMOs and
REMICs must be unmanaged, fixed-asset issuers that (1) invest primarily in
mortgage-backed securities, (2) do not issue redeemable securities, (3) operate
under general exemptive orders exempting them from all provisions of the
Investment Company Act, and (4) are not registered or regulated under the
Investment Company Act as investment companies. To the extent that the Fund
selects CMOs or REMICs that do not meet the above requirements, the Fund 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.

ASSET-BACKED SECURITIES. The Fund also may 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 Fund 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.

MONEY MARKET INSTRUMENTS

The Fund may invest in the following money market instruments generally
maturing in 13 months 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 Fund of such
obligations, total assets of not less than $1 billion or its equivalent. The
Fund may invest in obligations of domestic banks, foreign banks, and

B-5
<PAGE>

branches and offices thereof, but the Fund will invest in foreign banks and
foreign branches of U.S. banks only if, after making such investment, all
such investments would constitute less than 10% of the Fund'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. 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,
funding agreements and other obligations issued by a U.S. company, a foreign
company or a foreign government, its agencies, instrumentalities or
political subdivisions, maturing in 13 months or less, denominated in U.S.
dollars, and, at the date of investment, rated at least A or A-2 by S&P or A
or Prime-2 by Moody's, or comparably rated by another NRSRO 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, or comparably rated by
another NRSRO. 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 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. 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 the Fund do not exceed 10%
of the Fund's total assets.

FOREIGN SECURITIES

The Fund may invest up to 30% of its total assets in foreign equity and debt
securities and money market instruments. For purposes of this limitation, ADRs,
ADSs, Yankee bonds (that is, U.S. 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 that 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 Fund 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 Fund 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 the Fund's currency exchange transactions do not fully protect
the Fund against adverse changes in currency exchange rates, decreases in the
value of currencies of the foreign countries in which the Fund will invest
relative to the U.S. dollar will result in a corresponding decrease in the U.S.
dollar value of the Fund'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 the Fund invests relative to the
U.S. dollar will result in a corresponding increase in the U.S. dollar value of
the Fund'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.

B-6
<PAGE>

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

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

The conversion may adversely affect the Fund if the euro does not take
effect as planned; if a participating state withdraws from the European Monetary
Union; or if the computing, accounting and trading systems used by the Fund's
service providers, or by entities with which the Fund or its service providers
do business, are not capable of recognizing the euro as a distinct currency at
the time of, and following, euro conversion. In addition, the conversion could
cause markets to become more volatile.

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

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

RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES

The Fund also may engage in various portfolio strategies, including using
derivatives, to seek to reduce certain risks of its investments and to attempt
to enhance return but not for speculation. These strategies currently include
the use of options on stock indexes and futures contracts and options on
indexes. The Fund also may purchase futures contracts on foreign currencies and
on debt securities and aggregates of debt securities. The Fund's ability to use
these strategies may be limited by various factors, such as market conditions,
regulatory limits and tax considerations and there can be no assurance that any
of these strategies will succeed. The Fund, and thus its investors, may lose
money through any unsuccessful use of these strategies. If new financial
products and risk management techniques are developed, the Fund may use them to
the extent consistent with its investment objective and policies.

TRANSACTIONS IN OPTIONS

The Fund will write (that is, sell) covered call options only on equity
securities, on stock indexes that 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 that are traded on an exchange or board of trade. The Fund may
write covered put and call options to generate additional income through the
receipt of premiums, purchase put options in an effort to protect the value of a
security that it owns against a decline in market value and purchase call
options in an effort to protect against an increase in the price of securities
it intends to purchase. The Fund may also purchase put and call options to
offset previously written put and call options of the same series.

A call option gives the purchaser, in exchange for a premium paid, the
right, for a specified period of time, to purchase the securities subject to the
option at a specified price (the exercise price or strike price). The writer of
a call option, in return for the premium, has the obligation, upon exercise of
the option, to deliver, depending upon the terms of the option contract, the
underlying securities or a specified amount of cash to the purchaser upon
receipt of the exercise price. When the Fund writes a call option, the Fund
gives up the potential for gain on the underlying securities in excess of the
exercise price of the option during the period that the option is open.

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.

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

The Fund will write only "covered" options. An option is covered if, as long
as the Fund is obligated under the option, it (1) owns an offsetting position in
the underlying security or (2) segregates cash or other liquid assets in an
amount equal to or greater than its obligation under the option. Under the first
circumstance, the Fund's losses are limited because it owns the underlying
position; under the second circumstance, in the case of a written call option,
the Fund's losses are potentially unlimited. There is no limitation on the
amount of call options the Fund may write.

RISKS OF TRANSACTIONS IN OPTIONS

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

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

Except as described below, the Fund will write call options on indexes 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 the Fund
writes a call option on a broadly-based stock market index, the Fund will
segregate, or pledge to a broker as collateral for the option, cash, other
liquid assets 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. The Fund will write call
options on broadly-based stock market indexes only if at the time of writing it
holds a diversified portfolio of stocks.

If the Fund has written an option on an industry or market segment index, it
will so segregate 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

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<PAGE>
of the industry or market segment index and will represent at least 50% of the
Fund's holdings in that industry or market segment. No individual security will
represent more than 15% of the amount so segregated or pledged in the case of
broadly-based stock market index options or 25% of such amount in the case of
industry or market segment index options.

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

RISKS OF OPTIONS ON INDEXES

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

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 indexes 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 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 Fund would not be able
to close out options that it had purchased or written and, if restrictions on
exercise were imposed, might be unable to exercise an option it holds, which
could result in substantial losses to the Fund. It is the Fund's policy to
purchase or write options only on indexes that include a number of securities
sufficient to minimize the likelihood of a trading halt in the index.

The ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop in all index option contracts. The
Fund will not purchase or sell any index option contract unless and until, in
the 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 INDEXES. Unless the Fund has other liquid
assets that are sufficient to satisfy the exercise of a call, the Fund would be
required to liquidate portfolio securities in order to satisfy the exercise.
Because an exercise must be settled within hours after receiving the notice of
exercise, if the Fund fails to anticipate an exercise, it may have to borrow
from a bank (in amounts not exceeding 20% of the Fund's total assets) pending
settlement of the sale of securities in its portfolio and would incur interest
charges thereon.

When the Fund has written a call, there is also a risk that the market may
decline between the time the Fund has a call exercised against it, at a price
which is fixed as of the closing level of the index on the date of exercise, and
the time the Fund is able to sell securities in its portfolio. As with stock
options, the Fund will not learn that an index option has been exercised until
the day following the exercise date but, unlike a call on stock where the Fund
would be able to deliver the underlying securities in settlement, the Fund may
have to sell part of its 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
that the Fund has written is "covered" by an index call held by the Fund with
the same strike price, the Fund will bear the risk that the level of the index
may decline between the close of trading on the date the exercise notice is
filed with the clearing corporation and the close of trading on the date the
Fund exercises the call it holds or the time the Fund sells the call, which in
either case would occur no earlier than the day following the day the exercise
notice was filed.

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<PAGE>
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 above under "Foreign Securities," 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 FOREIGN CURRENCY FORWARD CONTRACTS

The Fund may enter into foreign currency forward contracts in several
circumstances. When the Fund enters into a contract for the purchase or sale of
a security denominated in a foreign currency, or when the Fund anticipates the
receipt in a foreign currency of dividends or interest payments on a security
which it holds, the Fund may desire to "lock-in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for a fixed amount of
dollars, for the purchase or sale of the amount of foreign currency involved in
the underlying transactions, the Fund will be able to protect itself against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the subject foreign currency during the period between the date
on which the security is purchased or sold, or on which the dividend or interest
payment is declared, and the date on which such 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 Fund may enter into a forward contract for a fixed amount of dollars,
to sell the amount of foreign currency approximating the value of some or all of
the portfolio securities denominated in such foreign currency. The precise
matching of the forward contract amounts and the value of the securities
involved will generally not be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. The Fund does not intend to enter into
such forward contracts to protect the value of its portfolio securities on a
regular or continuous basis. The Fund also will not enter into such forward
contracts or maintain a net exposure to such contracts where the consummation of
the contracts would obligate the Fund to deliver an amount of foreign currency
in excess of the value of the 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 Manager and
Subadviser believe that it is important to have the flexibility to enter into
such forward contracts when they determine that the best interests of the Fund
will thereby be served. If the Fund enters into a position hedging transaction,
the transaction will be "covered" by the position being hedged or the Fund's
Custodian or sub-custodian will segregate cash or other liquid assets in an
amount equal to the value of the Fund's total assets committed to the
consummation of the given forward contract (less the value of the "covering"
positions, if any). The assets segregated will be marked-to-market daily, and if
the value of the assets segregated declines, additional cash or other liquid
assets will be placed in the account so that the value of the account will, at
all times, equal the amount of the Fund's net commitment with respect to such
contract. The Fund's ability to enter into foreign currency forward contracts
may be limited by certain requirements for qualification as a regulated
investment company under the Internal Revenue Code. See "Taxes, Dividends and
Distributions."

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

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

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

B-10
<PAGE>
agreed to sell exceeds the price of the currency it has agreed to purchase.
Should forward contract prices increase, the Fund will suffer a loss to the
extent that the price of the currency it has agreed to purchase exceeds the
price of the currency it has agreed to sell.

The Fund's dealings in foreign currency forward contracts will be limited to
the transactions described above. Of course, the Fund is not required to enter
into such transactions with regard to its foreign currency-denominated
securities. 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 that 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 the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (the spread) between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.

RISKS OF TRANSACTIONS IN FUTURES CONTRACTS

A futures contract is an agreement to purchase or sell an agreed amount of
securities at a set price for delivery in the future. The futures contracts and
options thereon in which the Fund will invest will be on interest-bearing
securities, financial indexes and interest rate indexes. 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. In the case of
futures contracts on securities indexes, the correlation between the price of
the futures contract and the movements in the index may not be perfect.
Therefore, a correct forecast of interest rate or stock market trends by the
investment adviser may still not result in a successful hedging transaction. The
use of these instruments will hedge only the currency risks associated with
investments in foreign securities, not market risk.

Although the Fund 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. If the
Fund could not close a futures position and the value of such position declined,
the Fund 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 are exempt from the definition of
"commodity pool operator," subject to compliance with certain conditions. The
exemption is conditioned upon the Fund's purchasing and selling futures
contracts and options thereon for BONA FIDE hedging transactions, except that
the Fund may purchase and sell futures contracts 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 Fund's total assets.
In addition, a Fund 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 Fund's
total assets. The Fund will use futures and options thereon in a manner
consistent with these requirements.

If the Fund maintains a short position in a futures contract, it will cover
this position by segregating cash or other liquid assets 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 Fund to purchase the same contract at a price no higher
than the price at which the short position was established.

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<PAGE>
In addition, if the Fund holds a long position in a futures contract, it
will segregate with its Custodian cash or other liquid assets equal to the
purchase price of the contract (less the amount of initial or variation margin
on deposit). Alternatively, the Fund 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 Fund.

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 Fund would continue to
be required to make daily cash payments of variation margin on open futures
positions. In such situations, if the Fund has insufficient cash, it may be
disadvantageous to do so. In addition, the Fund 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 the Fund's ability to effectively
hedge its portfolio.

In the event of the bankruptcy of a broker through which the Fund engages in
transactions in futures or options thereon, the Fund 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 Fund only with brokers or financial
institutions deemed creditworthy by the investment adviser.

There are risks inherent in the use of futures contracts and options
transactions for the purpose of hedging the Fund'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 Fund'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 Fund seeks a hedge. A correlation also may 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 the Fund and the movements in the prices of the
securities that 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 also
could 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 still may not result in a successful hedging transaction.

Successful use of futures contracts by the Fund also is 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 the Fund 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 Fund 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 the Fund 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. The Fund 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 the Fund 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

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<PAGE>

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.

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

POSITION LIMITS. Transactions by the Fund 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 Fund 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.

RISKS OF RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES

Participation in the options or futures market and in currency exchange
transactions involves investment risks and transaction costs to which the Fund
would not be subject absent the use of these strategies. The Fund, and thus its
investors, may lose money through any unsuccessful use of these strategies. If
the Subadviser's predictions of movements in the direction of the securities or
foreign currency markets are inaccurate, the adverse consequences to the Fund
may leave the Fund in a worse position than if such strategies were not used.
Risks inherent in the use of these strategies include: (1) dependence on the
Subadviser's ability to predict correctly movements in the direction of
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 or currencies being hedged; (3) the fact that skills
needed to use these strategies are different from those needed to select
portfolio securities; (4) the possible absence of a liquid secondary market for
any particular instrument at any time; (5) the risk that the counterparty may be
unable to complete the transaction; and (6) the possible inability of the Fund
to purchase or sell a portfolio security at a time that otherwise would be
favorable for it to do so, or the possible need for the Fund to sell a portfolio
security at a disadvantageous time, due to the need for the Fund to maintain
"cover" or to segregate assets in connection with hedging transactions.

INTEREST RATE SWAPS

The Fund 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 the Fund intends to acquire. Interest rate
swaps involve the exchange by the Fund with another party of their respective
commitments to pay or receive interest (for example, an exchange of
floating-rate payments for fixed-rate payments). The Fund 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 Fund uses its interest
rate swaps for hedging purposes and not as a speculative investment.

The use of interest rate swaps is a highly speculative activity that
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 the Fund 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 the Fund is contractually
obligated to make. If the other party to an interest rate swap defaults, the
Fund's risk of loss consists of the net amount of interest payments that the
Fund is contractually entitled to receive. Since interest rate swaps are
individually negotiated, the Fund 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.

B-13
<PAGE>

REPURCHASE AGREEMENTS

The Fund may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The 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 Fund's money is invested in the
repurchase agreement. The Fund's repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily, and if the value of the
instruments declines, the Fund will require additional collateral. If the seller
defaults and the value of the collateral securing the repurchase agreement
declines, the Fund may incur a loss.

The Fund will enter into repurchase transactions only with parties meeting
creditworthiness standards approved by the Fund's Trustees. The Fund's
investment adviser will monitor the creditworthiness of such parties under the
general supervision of the Trustees. In the event of a default or bankruptcy by
a seller, the Fund will promptly seek to liquidate the collateral. 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 Investments Fund Management LLC (PIFM) pursuant
to an order of the Commission. On a daily basis, any uninvested cash balances of
the Fund may be aggregated with those of such investment companies and invested
in one or more repurchase agreements. Each fund participates in the income
earned or accrued in the joint account based on the percentage of its
investment.

LENDING OF SECURITIES

Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions provided
that outstanding loans do not exceed in the aggregate 33% of the value of the
Fund's total assets and provided further that such loans are callable at any
time by the Fund and are at all times secured by cash or other liquid assets or
an irrevocable letter of credit in favor of the Fund equal to at least 100% of
the market value, determined daily, of the loaned securities. The advantage of
such loans is that the Fund continues to receive payments in lieu of the
interest and dividends on the loaned securities, while at the same time earning
interest either directly from the borrower or on the collateral which will be
invested in short-term obligations.

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

Since voting or consent rights that accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Fund's investment in the securities
that are the subject of the loan. The Fund 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.

BORROWING

The Fund may borrow up to 20% of the value of its total assets (computed at
the time the loan is made) for temporary, extraordinary or emergency purposes or
for the clearance of transactions. The Fund may pledge up to 20% of its total
assets to secure these borrowings. If the Fund borrows to invest in securities,
any investment gains made on the securities in excess of interest paid on the
borrowing will cause the net asset value of the shares to rise faster than would
otherwise be the case. On the other hand, if the investment performance of the
additional securities purchased fails to cover their cost (including any
interest paid on the money borrowed) to the Fund, the net asset value of the
Fund's shares will decrease faster than would otherwise be the case. This is the
speculative factor known as "leverage."

B-14
<PAGE>
ILLIQUID SECURITIES

The Fund may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements that have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities markets
(either within or outside of the United States). Repurchase Agreements subject
to demand are deemed to have a maturity equal to the applicable notice period.

Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (Securities Act),
securities that are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities that 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 also might have to register such
restricted securities 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 privately placed commercial paper for which there is a
readily available market are treated as liquid only when deemed liquid under
procedures established by the Trustees. The Fund's investment in Rule 144A
securities could have the effect of increasing liquidity to the extent that
qualified institutional buyers become, for a limited time, uninterested in
purchasing Rule 144A securities. The investment adviser will monitor the
liquidity of such restricted securities subject to the supervision of the
Trustees. In reaching liquidity decisions, the investment adviser will consider,
among others, the following factors: (1) the frequency of trades and quotes for
the security; (2) the number of dealers wishing to 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 (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer). In addition, in
order for commercial paper that is issued in reliance on Section 4(2) of the
Securities Act to be considered liquid, (a) it must be rated in one of the two
highest rating categories by at least two nationally recognized statistical
rating organizations (NRSRO), or if only one NRSRO rates the securities, by that
NRSRO, or, if unrated, be of comparable quality in the view of the investment
adviser, and (b) it must not be "traded flat" (that is, without accrued
interest) or in default as to principal or interest.

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

SHORT SALES AGAINST-THE-BOX

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

B-15
<PAGE>
SECURITIES OF OTHER INVESTMENT COMPANIES

The Fund may invest up to 5% of its total assets in securities of other
registered investment companies. The Fund does not intend to invest in such
securities during the coming year. If the Fund does invest in securities of
other registered investment companies, shareholders of the Fund may be subject
to duplicate management and advisory fees.

SEGREGATED ASSETS

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

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

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

(d) TEMPORARY DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS

When adverse market or economic conditions dictate a defensive strategy, the
Fund may temporarily invest without limit in high quality money market
instruments, including commercial paper of corporations, foreign government
securities, certificates of deposit, bankers' acceptances and other obligations
of domestic and foreign banks, non-convertible debt securities (corporate and
government), obligations issued or guaranteed by the U.S. Government, its
agencies or its instrumentalities, repurchase agreements and cash (foreign
currencies or U.S. dollars). Money market instruments typically have a maturity
of one year or less as measured from the date of purchase.

The Fund may also temporarily hold cash or invest in high quality foreign or
domestic money market instruments pending investment of proceeds from new sales
of Fund shares or to meet ordinary daily cash needs.

(e) PORTFOLIO TURNOVER

As a result of the investment policies described above, the Fund may engage
in a substantial number of portfolio transactions. The portfolio turnover rates
for the Fund for the fiscal years ended July 31, 1998 and 1999 were 144% and
%, 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 (100% or more) involves
correspondingly greater brokerage commissions and other transaction costs, which
are borne directly by the Fund. In addition, high portfolio turnover may also
mean that a proportionately greater amount of distributions to shareholders will
be taxed as ordinary income rather than long-term capital gains compared to
investment companies with lower portfolio turnover. See "Brokerage Allocation
and Other Practices" and "Taxes, Dividends and Distributions."

B-16
<PAGE>
INVESTMENT RESTRICTIONS

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

The Fund may not:

1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Fund of initial or maintenance margin in
connection with 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 Fund may borrow up to 20% of the value of its total assets (calculated when
the loan is made) for temporary, extraordinary or emergency purposes or for the
clearance of transactions. The Fund may pledge up to 20% of the value of its
total assets to secure such borrowings. For purposes of this restriction, the
purchase or sale of securities on a when-issued or delayed delivery basis, 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.

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

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

6. Purchase any security if as a result the Fund 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 Fund may invest in the securities of
companies which invest in or sponsor such programs.

B-17
<PAGE>
13. Make loans, except through repurchase agreements and loans of portfolio
securities (limited to 33% of the Fund's total assets).

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

MANAGEMENT OF THE FUND

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) THE FUND DURING PAST FIVE YEARS
- ------------------------------ ----------------------- --------------------------------------------------------------
<S> <C> <C>
Edward D. Beach (74) Trustee President and Director of BMC Fund, Inc., a closed-end
investment company; formerly Vice Chairman of Broyhill
Furniture Industries, Inc.; Certified Public Accountant;
Secretary and Treasurer of Broyhill Family Foundation, Inc.;
Member of the Board of Trustees of Mars Hill College;
Director of The High Yield Income Fund, Inc.; Director or
Trustee of 44 funds within the Prudential Mutual Funds.

Delayne Dedrick Gold (60) Trustee Marketing and Management Consultant; Director of The High
Yield Income Fund, Inc.; Director or Trustee of 44 funds
within the Prudential Mutual Funds.

*Robert F. Gunia (52) Trustee Vice President (since September 1997) of Prudential
Investments; Executive Vice President and Treasurer (since
December 1996) of Prudential Investments Fund Management LLC
(PIFM); Senior Vice President (since March 1987) of
Prudential Securities Incorporated (Prudential Securities);
formerly Chief Adminstrative Officer (July 1990-September
1996), Director (January 1989-September 1996) and Executive
Vice President, Treasurer and Chief Financial Officer (June
1987-September 1996) of Prudential Mutual Fund Management,
Inc.; Vice President and Director of The Asia Pacific Fund,
Inc. (since May 1989); Director of The High Yield Income
Fund, Inc.; Director or Trustee of 44 funds within the
Prudential Mutual Funds.

Douglas H. McCorkindale (59) Trustee Vice Chairman (since March 1984) and President (since
September 1997) of Gannett Co. Inc. (publishing and media);
Director of Continental Airlines, Inc., Gannett Co. Inc. and
Frontier Corporation; Director or Trustee of 23 funds within
the Prudential Mutual Funds.

Thomas T. Mooney (57) Trustee President of the Greater Rochester Metro Chamber of Commerce;
formerly Rochester City Manager; Trustee of Center for
Governmental Research, Inc.; Director of Blue Cross of
Rochester, The Business Council of New York State, Monroe
County Water Authority, Rochester Jobs, Inc., Executive
Service Corps of Rochester, Monroe County Industrial
Development Corporation and Northeast Midwest Institute;
President, Director and Treasurer of First Financial Fund,
Inc. and The High Yield Plus Fund, Inc.; Director or Trustee
of 33 other funds within the Prudential Mutual Funds.
</TABLE>

B-18
<PAGE>

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) THE FUND DURING PAST FIVE YEARS
- ------------------------------ ----------------------- --------------------------------------------------------------
<S> <C> <C>
Stephen P. Munn (56) Trustee Chairman (since January 1994), Director and President (since
1988) and Chief Executive Officer (1988-December 1993) of
Carlisle Companies Incorporated (manufacturer of industrial
products); Director or Trustee of 18 funds within the
Prudential Mutual Funds.

Richard A. Redeker (55) Trustee Formerly President, Chief Executive Officer and Director
(October 1993-September 1996), Prudential Mutual Fund
Management, Inc., Executive Vice President, Director and
Member of Operating Committee (October 1993-September 1996),
Prudential Securities, Director (October 1993-September 1996)
of Prudential Securities Group, Inc., Executive Vice
President (January 1994-September 1996), The Prudential
Investment Corporation, Director (January 1994-September
1996), Prudential Mutual Fund Distributors, Inc. and
Prudential Mutual Fund Services, Inc. and Senior Executive
Vice President and Director of Kemper Financial Services,
Inc. (September 1978-September 1993); Director or Trustee of
30 funds within the Prudential Mutual Funds.

Robin B. Smith (59) Trustee Chairman and Chief Executive Officer (since August 1996) of
Publishers Clearing House; formerly President and Chief
Executive Officer (January 1988-August 1996) and President
and Chief Operating Officer (September 1981-December 1988) of
Publishers Clearing House; Director of BellSouth Corporation,
Texaco Inc., Spring Industries Inc. and Kmart Corporation;
Director or Trustee of 32 funds within the Prudential Mutual
Funds.

*John R. Strangfeld, Jr. (45) President and Trustee Chief Executive Officer, Chairman, President and Director
(since January 1990), of The Prudential Investment
Corporation, Executive Vice President (since February 1998),
Prudential Global Asset Management Group of Prudential, and
Chairman (since August 1989), Pricoa Capital Group; formerly
various positions to Chief Executive Officer (November
1994-December 1998), Private Asset Management Group of
Prudential and Senior Vice President (January 1986-August
1989), Prudential Capital Group, a unit of Prudential;
President and Director or Trustee of 44 funds within the
Prudential Mutual Funds.

Louis A. Weil, III (58) Trustee Chairman (since January 1999), President and Chief Executive
Officer (since January 1996) and Director (since September
1991) of Central Newspapers Inc.; Chairman of the Board
(since January 1996), Publisher and Chief Executive Officer
(August 1991-December 1995), Phoenix Newspapers, Inc.;
formerly Publisher of Time Magazine (May 1989-March 1991),
President, Publisher and Chief Executive Officer of The
Detroit News (February 1986-August 1989) and member of the
Advisory Board, Chase Manhattan Bank--Westchester; Director
or Trustee of 30 funds within the Prudential Mutual Funds.
</TABLE>

B-19
<PAGE>

Marguerite E. H. Morrison (43) Secretary Vice President (since December 1996) of PIFM; Vice President
and Associate General Counsel (since September 1987) of
Prudential Securities; formerly Vice President and Associate
General Counsel (June 1991-September 1996) of Prudential
Mutual Fund Management, Inc.

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

Stephen M. Ungerman (45) Assistant Treasurer Tax Director (since March 1996) of Prudential Investments;
formerly First Vice President of Prudential Mutual Fund
Management, Inc. (February 1993-September 1996).
</TABLE>

- ------------------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities, Prudential or PIFM.
** Unless otherwise stated, the address of the Trustees and officers is c/o
Prudential Investments Fund Management LLC, Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077.

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

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

Pursuant to the 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 Fund pays each of its Trustees who is not an affiliated person of
PIFM or the investment adviser annual compensation of $2,875 in addition to
certain out-of-pocket expenses. The amount of annual compensation paid to each
Trustee may change as a result of the introduction of additional funds on the
boards of which the Trustee will be asked to serve.

Trustees may receive their 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 a Commission exemptive order, at the daily
rate of return of the Fund. Payment of the interest so accrued is also deferred
and accruals become payable at the option of the Trustee. The Fund's obligation
to make payments of deferred Trustees' fees, together with interest thereon, is
a general obligation of the Fund.

B-20
<PAGE>

The following table sets forth the aggregate compensation paid by the Fund
to the Trustees who are not affiliated with the Manager for the fiscal year
ended July 31, 1999 and the aggregate compensation paid to such Trustees for
service on the Fund's Board and the boards of all other investment companies
managed by PIFM (Fund Complex) for the calendar year ended December 31, 1998.

COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FROM FUND
AGGREGATE AND FUND
COMPENSATION COMPLEX PAID
NAME AND POSITION FROM FUND TO TRUSTEES
- ----------------------------------------------------------------- ------------- ------------------
<S> <C> <C>
Edward D. Beach--Trustee $ $ 135,000(44/71)*
Delayne Dedrick Gold--Trustee $ $ 135,000(44/71)*
Robert F. Gunia--Trustee+ --
Douglas H. McCorkindale--Trustee** $ $ 70,000(23/40)*
Thomas T. Mooney--Trustee** $ $ 115,000(35/70)*
Stephen P. Munn--Trustee $ $ 45,000(18/24)*
Richard A. Redeker--Trustee+ --
Robin B. Smith--Trustee** $ $ 90,000(32/41)*
John R. Strangfeld, Jr.--Trustee+ -- --
Louis A. Weil, III--Trustee $ $ 90,000(30/54)*
Clay T. Whitehead--Trustee $ $ 45,000(18/24)*
<FN>
- ------------------------
* Indicates number of funds/portfolios in Fund Complex (including the Fund)
to which aggregate compensation relates.

** Total compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1998, includes amounts deferred at the
election of Trustees under the funds' deferred compensation plans.
Including accrued interest, total compensation amounted to $71,145,
$119,740 and $116,225 for Messrs. McCorkindale and Mooney and Ms. Smith,
respectively.

+ Interested Trustees do not receive compensation from the Fund or any fund
in the Fund Complex. Mr. Redeker is no longer an interested Trustee.
</TABLE>

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

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

As of September , 1999, the Trustees and officers of the Fund, as a group,
owned less than 1% of the outstanding shares of the Fund.

As of September , 1999, Prudential Securities was the record holder for
other beneficial owners of Class A shares (or % of the outstanding Class A
shares), Class B shares (or % of the outstanding Class B shares), Class
C shares (or % of the outstanding Class C shares), and Class Z shares (or
% of the outstanding Class Z shares) of the Fund. In the event of any meetings
of shareholders, Prudential Securities will forward, or cause the forwarding of,
proxy materials to the beneficial owners for which it is the record holder.

INVESTMENT ADVISORY AND OTHER SERVICES

(a) MANAGER AND INVESTMENT ADVISER

The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM serves as manager to all of the other investment companies
that, together with the Fund, comprise the Prudential Mutual Funds. See "How the
Fund is Managed--Manager" in the Prospectus. As

B-21
<PAGE>

of August 31, 1999, PIFM managed and/or administered open-end and closed-end
management investment companies with assets of approximately $ billion.
According to the Investment Company Institute, as of , 1999, the
Prudential Mutual Funds were the largest family of mutual funds in the United
States.

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

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

For its services, PIFM receives, pursuant to the Management Agreement, a fee
at an annual rate of .65 of 1% of the average daily net assets of the Fund. The
fee is computed daily and payable monthly. The Management Agreement also
provides that, in the event the expenses of the Fund (including the fees of
PIFM, but excluding interest, taxes, brokerage commissions, distribution fees
and litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due PIFM will be
reduced by the amount of such excess. No jurisdiction currently limits the
Fund's expenses.

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

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

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

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

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

The Management Agreement provides that PIFM will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will

B-22
<PAGE>

terminate automatically if assigned, and that it may be terminated without
penalty by either party upon not more than 60 days' nor less than 30 days'
written notice. The Management Agreement will continue in effect for a period of
more than two years from the date of execution only so long as such continuance
is specifically approved at least annually in conformity with the Investment
Company Act.

For the fiscal years ended July 31, 1999, 1998 and 1997, PIFM received
management fees of $ , $7,857,149 and $7,666,065, respectively, from
the Fund.

PIFM has entered into the Subadvisory Agreement with PI. The Subadvisory
Agreement provides that PI will furnish investment advisory services in
connection with the management of the Fund. In connection therewith, PI is
obligated to keep certain books and records of the Fund. Under the Subadvisory
Agreement, PI, subject to the supervision of PIFM, is responsible for managing
the assets of the Fund in accordance with its investment objectives and
policies. PI determines what securities and other instruments are purchased and
sold for the Fund and is responsible for obtaining and evaluating financial data
relevant to the Fund. PIFM continues to have responsibility for all investment
advisory services pursuant to the Management Agreement and supervises PI's
performance of such services. PI is reimbursed by PIFM for the reasonable costs
and expenses incurred by PI in furnishing investment advisory services.

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

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

Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Fund. PIMS is a subsidiary of
Prudential.

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

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

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

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

CLASS A PLAN. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related expenses with respect to Class A shares at an annual
rate of up to .30 of 1% of the average daily net assets of the Class A shares.
The Class A Plan provides that (1) up to .25 of 1% of the average daily net
assets of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (2) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. The Distributor has
contractually agreed to limit its distribution-related fees payable under the
Class A Plan to .25 of 1% of the average daily net assets of the Class A shares
for the fiscal year ending July 31, 2000 and contractually limited its
distribution-related fees for the fiscal year ended July 31, 1999 to .25 of 1%
of the average daily net assets of the Class A shares.

B-23
<PAGE>

For the fiscal year ended July 31, 1999, the Distributor received payments
of $ under the Class A Plan and spent approximately $ in distributing
the Fund's shares. This amount was primarily expended for payment of account
servicing fees to financial advisers and other persons who sell Class A shares.
For the fiscal year ended July 31, 1999, the Distributor also received
approximately $ in initial sales charges.

CLASS B PLAN AND CLASS C PLANS. Under the Class B and Class C Plans, the
Fund pays the Distributor for its distribution-related expenses 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. The Class B and Class C Plans
provide for the payment to the Distributor of (1) 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, respectively, and (2) 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 to
pay for personal service and/or the maintenance of shareholder accounts. The
Distributor also receives contingent deferred sales charges from certain
redeeming shareholders and, with respect to Class C shares, an initial sales
charge.

CLASS B PLAN. For the fiscal year ended July 31, 1999, the Distributor
received $ from the Fund under the Class B Plan and spent approximately
$ in distributing the Class B shares. It is estimated that of the latter
amount, approximately % ($ ) was spent on printing and mailing of
prospectuses to other than current shareholders; % ($ ) was spent on
compensation to broker-dealers for commissions to its representatives and other
expenses, including an allocation on account of overhead and other branch office
distribution-related expenses, incurred for distribution of Class B shares; and
% ($ ) was spent on the aggregate of (1) payments of commissions and
account servicing fees to financial advisers ( % or $ ) and (2) an
allocation on account of overhead and other branch office distribution-related
expenses ( % or $ ). The term "overhead and other branch office
distribution-related expenses" represents (a) the expenses of operating
Prudential Securities' and Pruco Securities Corporation's (Prusec's) branch
offices in connection with the sale of Fund shares, including lease costs, the
salaries and employee benefits of operations and sales support personnel,
utility costs, communications costs and the costs of stationery and supplies,
(b) the costs of client sales seminars, (c) expenses of mutual fund sales
coordinators to promote the sale of Fund shares and (d) other incidental
expenses relating to branch promotion of Fund sales.

The Distributor also receives the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of Class B shares. For the
fiscal year ended July 31, 1999, the Distributor received approximately $ in
contingent deferred sales charges attributable to Class B shares.

CLASS C PLAN. For the fiscal year ended July 31, 1999, the Distributor
received $ from the Fund under the Class C Plan and spent approximately
$ in distributing the Fund's Class C shares. It is estimated that of the
latter amount, approximately % ($ ) was spent on printing and mailing of
prospectuses to other than current shareholders; % ($ ) was spent on
compensation to broker-dealers for commissions to representatives and other
expenses, including an allocation on account of overhead and other branch office
distribution-related expenses, incurred for distribution of Class C shares; and
% ($ ) was spent on the aggregate of (1) commission credits to
Prudential Securities branch offices, for payments of commissions and account
servicing fees to financial advisers ( % or $ ) and (2) an allocation
on account of overhead and other branch office distribution-related expenses
( % or $ ).

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

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

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 of the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
Class A, Class B and Class C Plan or in any agreement related to the Plans (the
Rule 12b-1 Trustees), cast in person at a meeting called for the purpose of
voting on such continuance. A Plan may be terminated at any time, without
penalty, by the vote of a majority of the Rule 12b-1 Trustees or by the vote of
the holders of a majority of the outstanding shares of the applicable class of
the Fund on not more than 60 days', nor less than 30 days',

B-24
<PAGE>
written notice to any other party to the Plan. The Plans may not be amended to
increase materially the amounts to be spent for the services described therein
without approval by the shareholders of the applicable class (by both Class A
and Class B shareholders, voting separately, in the case of material amendments
to the Class A Plan), and all material amendments are required to be approved by
the Trustees in the manner described above. Each Plan will automatically
terminate in the event of its assignment. The Fund will not be contractually
obligated to pay expenses incurred under any Plan if it is terminated or not
continued.

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

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

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

FEE WAIVERS/SUBSIDIES

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

NASD MAXIMUM SALES CHARGE RULE

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

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

Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Fund.
PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, payment of dividends and distributions and related
functions. For these services, PMFS receives an annual fee per shareholder
account of $10.00, a new account set-up fee for each manually established
account of $2.00 and a monthly inactive zero balance account fee per shareholder
account of $.20. PMFS is also reimbursed for its out-of-pocket expenses,
including but not limited to postage, stationery, printing, allocable
communication expenses and other costs.

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

B-25
<PAGE>

BROKERAGE ALLOCATION AND OTHER PRACTICES

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

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

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

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

When the Manager deems the purchase or sale of equities to be in the best
interests of the Fund or its other clients, including Prudential, the Manager
may, but is under no obligation to, aggregate the transactions in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the transactions, as well as the
expenses incurred in the transaction, will be made by the Manager in the manner
it considers to be most equitable and consistent with its fiduciary obligations
to its clients.

The allocation of orders among firms and the commission rates paid are
reviewed periodically by the Fund's Trustees. Portfolio securities may not be
purchased from any underwriting or selling syndicate of which Prudential
Securities or any

B-26
<PAGE>

affiliate during the existence of the syndicate, is a principal underwriter (as
defined in the Investment Company Act), except in accordance with rules of the
Commission. This limitation, in the opinion of the Fund, will not significantly
affect the Fund's ability to pursue its present investment objective. However,
in the future in other circumstances, the Fund may be at a disadvantage because
of this limitation in comparison to other funds with similar objectives but not
subject to such limitations.

Subject to the above considerations, Prudential Securities may act as a
securities broker or futures commission merchant for the Fund. In order for
Prudential Securities (or any affiliate) to effect any portfolio transactions
for the Fund, the commissions, fees or other remuneration received by Prudential
Securities (or any affiliate) must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other firms 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 firm 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, as
amended, Prudential Securities may not retain compensation for effecting
transactions on a national securities exchange for the Fund unless the Fund has
expressly authorized the retention of such compensation. Prudential Securities
must furnish to the Fund at least annually a statement setting forth the total
amount of all compensation retained by Prudential Securities from transactions
effected for the Fund during the applicable period. Brokerage and futures
transactions with Prudential Securities (or any affiliate) also are subject to
such fiduciary standards as may be imposed upon Prudential Securities (or such
affiliate) by applicable law.

The table below sets forth information concerning the payment of commissions
by the Fund, including the amount of such commissions paid to Prudential
Securities, for the three years ended July 31, 1999:

<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, 1999 JULY 31, 1998 JULY 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund............................ $ $ 1,649,700 $ 1,432,068
Total brokerage commissions paid to Prudential
Securities............................................................. $ $ 103,450 $ 77,615
Percentage of total brokerage commissions paid to Prudential
Securities............................................................. % 6.5% 5.4%
</TABLE>

The Fund effected approximately % of the total dollar amount of its
transactions involving the payment of commissions to Prudential Securities
during the year ended July 31, 1999. Of the total brokerage commissions paid
during such period, $ (or %) was paid to firms which provide research,
statistical or other services to PIFM on behalf of the Fund. PIFM has not
separately identified a portion of such brokerage commissions as applicable to
the provision of such research, statistical or other services.

The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company Act)
and their parents at July 31, 1999. As of July 31, 1999, the Fund held
securities of in the aggregate amount of .

CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION

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

B-27
<PAGE>

Fund's Declaration of Trust, the Trustees may authorize the creation of
additional series and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Trustees may
determine. The voting rights of the shareholders of a series or class can be
modified only by the vote of shareholders of that series or class.

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

The Fund does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Fund will not be required to hold meetings of
shareholders unless, for example, the election of Trustees is required to be
acted on by shareholders under the Investment Company Act. Shareholders have
certain rights, including the right to call a meeting upon the vote of 10% of
the Fund's outstanding shares for the purpose of voting on the removal of one or
more Trustees or to transact any other business.

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

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

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

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

B-28
<PAGE>

PURCHASE, REDEMPTION AND PRICING OF FUND SHARES

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

PURCHASE BY WIRE

For an initial purchase of shares of the Fund by wire, you must complete an
application and telephone PMFS to receive an account number at (800) 225-1852
(toll-free). 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 Balanced Fund, specifying on the wire the
account number assigned by PMFS and your name and identifying the class in which
you are eligible to invest (Class A, Class B, Class C or Class Z shares).

If you arrange for receipt by State Street of federal funds prior to the
calculation of NAV (4:15 P.M., New York Time) on a business day, you may
purchase shares of the Fund as of that day.

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

ISSUANCE OF FUND SHARES FOR SECURITIES

Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to: (1) reorganizations, (2) statutory mergers, or
(3) other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Fund's investment adviser.

SPECIMEN PRICE MAKE-UP

Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of
5%, Class C* shares are sold with a 1% sales charge, and Class B* and Class Z
shares of the Fund are sold at NAV. Using the Fund's NAV at July 31, 1999, the
maximum offering price of the Fund's shares is as follows:

<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share..... $
Maximum sales charge (5% of offering price)................
------
Maximum offering price..................................... $
------
------
CLASS B
Net asset value, offering price and redemption price per
Class B share*........................................... $
------
------
CLASS C
Net asset value and redemption price per Class C share*.... $
Sales charge (1% of offering price)........................
------
Offering price to public................................... $
------
------
CLASS Z
Net asset value, offering price and redemption price per
Class Z share............................................ $
------
------
<FN>
- ------------------------

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

B-29
<PAGE>

SELECTING A PURCHASE ALTERNATIVE

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

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

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

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

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

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

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

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

OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
the Distributor or the Transfer Agent, by:

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

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

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

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

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

- investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, or within one year
in the case of Benefit Plans, (2) the purchase is made with

B-30
<PAGE>

proceeds of a redemption of shares of any open-end non-money market fund
sponsored by the financial adviser's previous employer (other than a fund
which imposes a distribution or service fee of .25 of 1% or less) and (3)
the financial adviser served as the client's broker on the previous
purchase,

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

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

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

Class A shares also may be purchased at NAV by members of the Board of
Directors of Prudential.

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

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

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

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

- an individual,

- the individual's spouse, their children and their parents,

- the individual's and spouse's Individual Retirement Account (IRA),

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

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

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

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

B-31
<PAGE>

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

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

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

The Distributor or the Transfer Agent must be notified at the time of
purchase that the 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 also are available to investors (or
an eligible group of related investors), including retirement and group plans,
who enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may also
qualify to purchase Class A shares at NAV by entering into a Letter of Intent
whereby they agree to enroll, within a thirteen-month period, a specified number
of eligible employees or participants (Participant Letter of Intent).

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

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

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

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

B-32
<PAGE>

CLASS B SHARES

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

The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates the
ability of the Fund to sell the Class B shares without an initial sales charge
being deducted at the time of purchase. The Distributor anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC and
the distribution fee.

CLASS C SHARES

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

WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES

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

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

CLASS Z SHARES

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

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

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

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

OTHER TYPES OF INVESTORS. Class Z shares also are available for purchase by
the following categories of investors:

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

- current and former Director/Trustees of the Prudential mutual
funds (including the Fund)

- Prudential with an investment of $10 million or more

B-33
<PAGE>

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

SALE OF SHARES

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

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

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

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

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

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

B-34
<PAGE>

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

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

CONTINGENT DEFERRED SALES CHARGE

Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within 18 months of purchase (one year in the case of shares purchased
before November 2, 1998) will be subject to a 1% CDSC. The CDSC will be deducted
from the redemption proceeds and reduce the amount paid to you. The CDSC will be
imposed on any redemption by you which reduces the current value of your Class B
or Class C shares to an amount which is lower than the amount of all payments by
you for shares during the preceding six years, in the case of Class B shares,
and 18 months, in the case of Class C shares (one year for Class C shares
purchased before November 2, 1998). A CDSC will be applied on the lesser of the
original purchase price or the current value of the shares being redeemed.
Increases in the value of your shares or shares acquired through reinvestment of
dividends or distributions are not subject to a CDSC. The amount of any CDSC
will be paid to and retained by the Distributor.

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

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

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

In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments for
the purchase of Class B shares made during the preceding six years and 18 months
for Class C shares (one year for Class C shares bought before November 2, 1998);
then of amounts representing the cost of shares held beyond the applicable CDSC
period; and finally, of amounts representing the cost of shares held for the
longest period of time within the applicable CDSC period.

B-35
<PAGE>

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 decide to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.

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

WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. The CDSC will be
waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(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 also will be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. For more information, call Prudential at (800) 353-2847.

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

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

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

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

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

B-36
<PAGE>

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

WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES

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

CONVERSION FEATURE--CLASS B SHARES

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

Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions)(the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (1)
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 (2) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.

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

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

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

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

SHAREHOLDER INVESTMENT ACCOUNT

Upon the initial purchase of shares of the Fund, 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

B-37
<PAGE>
each transaction. Certificates are issued only for full shares and may be
redeposited in the Account at any time. There is no charge to the investor for
issuance of a certificate. The Fund makes available to its shareholders the
following privileges and plans.

AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS

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

EXCHANGE PRIVILEGE

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

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

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

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

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

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

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

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

The following money market funds participate in the Class A exchange
privilege:

Prudential California Municipal Fund
(California Money Market Series)

B-38
<PAGE>
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.

CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B
shares and Class C shares of the Fund for Class B and Class C 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.

Class B and Class C shares of the Fund 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 the Fund without subjecting such shares to any CDSC. Shares of any fund
participating in the Class B or Class C exchange privilege that were acquired
through reinvestment of dividends or distributions may be exchanged for Class B
or Class C shares of other funds, respectively, without being subject to any
CDSC.

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

SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for shareholders
who qualify to purchase Class Z shares. Under this exchange privilege, amounts
representing any Class B and Class C shares which are not subject to a CDSC held
in such a shareholder's account will be automatically exchanged for Class A
shares for shareholders who qualify to purchase Class A shares at NAV on a
quarterly basis, unless the shareholder elects otherwise.

Shareholders who qualify to purchase Class Z shares will have their Class B
and Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. Eligibility for this exchange
privilege will be calculated on the business day prior to the date of the
exchange. Amounts representing Class B or Class C shares which are not subject
to a CDSC include the following: (1) amounts representing Class B or Class C
shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the NAV above the total
amount of payments for the purchase of Class B or Class C shares and (3) amounts
representing Class B or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through Prudential Securities, Prusec or another broker that they are
eligible for this special exchange privilege.

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

B-39
<PAGE>

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

Additional details about the exchange privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent, the
Distributor or your broker. The exchange privilege may be modified, terminated
or suspended on 60 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.................. $ 105 $ 158 $ 210 $ 263
20 Years.................. 170 255 340 424
15 Years.................. 289 433 578 722
10 Years.................. 547 820 1,093 1,366
5 Years................... 1,361 2,041 2,721 3,402

See "Automatic Investment 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>

AUTOMATIC INVESTMENT PLAN (AIP)

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

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

SYSTEMATIC WITHDRAWAL PLAN

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

B-40
<PAGE>

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

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

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

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

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

TAX-DEFERRED RETIREMENT ACCOUNTS

INDIVIDUAL RETIREMENT 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.

<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 the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
a traditional IRA account will be subject to tax when withdrawn from the
account. Distributions from a Roth IRA which meet the conditions required under
the Internal Revenue Code will not be subject to tax upon withdrawal from the
account.
</TABLE>

MUTUAL FUND PROGRAMS

From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an

B-41
<PAGE>

investment theme, such as, to seek greater diversification, protection from
interest rate movements or access to different management styles. In the event
such a program is instituted, there may be a minimum investment requirement for
the program as a whole. The Fund may waive or reduce the minimum initial
investment requirements in connection with such a program.

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

NET ASSET VALUE

The Fund's net asset value per share or NAV is determined by subtracting its
liabilities from the value of its assets and dividing the remainder by the
number of shares outstanding. NAV is calculated separately for each class. The
Fund will compute its NAV at 4:15 P.M., New York Time, on each day the New York
Stock Exchange is open for trading except on days on which no orders to
purchase, sell or redeem Fund shares have been received or days on which changes
in the value of the Fund's portfolio securities do not affect NAV. In the event
the New York Stock Exchange closes early on any business day, the NAV of the
Fund's shares shall be determined at a time between such closing and 4:15 P.M.,
New York Time. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Martin Luther King, Jr. Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

Under the Investment Company Act, the Trustees are responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Trustees, the value of investments
listed on a securities exchange and NASDAQ National Market System securities
(other than options on stock and stock indices) are valued at the last sales
price on such exchange system on the day of valuation, or, if there was no sale
on such day, the mean between the last bid and asked prices on such day, or at
the bid price on such day in the absence of an asked price. Corporate bonds
(other than convertible debt securities) and U.S. Government securities that are
actively traded in the over-the-counter market, including listed securities for
which the primary market is believed by the Manager in consultation with the
Subadviser to be over-the-counter, are valued on the basis of valuations
provided by an independent pricing agent or principal market maker which uses
information with respect to transactions in bonds, quotations from bond dealers,
agency ratings, market transactions in comparable securities and various
relationships between securities in determining value. Convertible debt
securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed by the Manager in
consultation with the Subadviser to be over-the-counter, are valued at the mean
between the last reported bid and asked prices provided by principal market
makers. Options on stock and stock indexes traded on an exchange are valued at
the mean between the most recently quoted bid and asked prices on the respective
exchange and futures contracts and options thereon are valued at their last
sales prices as of the close of trading on the applicable commodities exchange
or board of trade or, if there was no sale on the applicable commodities
exchange or board of trade on such day, at the mean between the most recently
quoted bid and asked prices on such exchange or board of trade. Quotations of
foreign securities in a foreign currency are converted to U.S. dollar
equivalents at the current rate obtained from a recognized bank or dealer and
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 reliable market quotations are not
readily available, or for which the pricing agent or principal market maker does
not provide a valuation or methodology or provides a valuation or methodology
that, in the judgment of the Manager or Subadviser (or Valuation Committee or
Board of Trustees), does not represent fair value, are valued by the Valuation
Committee or Board of Trustees in consultation with the Manager or the
Subadviser, including its portfolio manager, traders, and its research and
credit analysts, on the basis of the following factors: cost of the security,
transactions in comparable securities, relationships among various securities
and such other factors as may be determined by the Manager, Subadviser, Board of
Trustees or Valuation Committee to materially affect the value of the security.
Short-term debt securities are valued at cost, with interest accrued or discount
amortized to the date of maturity, if their original maturity was 60 days or
less, unless this is determined by the Trustees not to represent fair value.
Short-term securities with remaining maturities of more than 60 days, for which
market quotations are readily available, are valued at their current market
quotations as supplied by an independent pricing agent or principal market
maker.

B-42
<PAGE>

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

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

Qualification of the Fund as a regulated investment company requires, among
other things, that (a) the Fund derives at least 90% of its annual gross income,
without reduction for losses from the sale or other disposition of securities or
foreign currencies, from payments with respect to securities loans, interest,
dividends and gains from the sale or other disposition of securities or options
thereon or foreign currencies, or other income (including but not limited to
gains from options, futures or forward contracts) derived with respect to its
business of investing in such securities or currencies; (b) the Fund diversify
its holdings so that, at the end of each quarter of the taxable year, (1) at
least 50% of the value of the Fund's assets is represented by cash, U.S.
Government securities and other securities limited in respect of any one issuer
to an amount not greater than 5% of the value of the assets of the Fund and 10%
of the outstanding voting securities of such issuer, and (2) not more than 25%
of the value of its assets is invested in the securities of any one issuer
(other than U.S. Government securities); and (c) the Fund distribute to its
shareholders at least 90% of its net investment income and net short-term gains
(that is, the excess of net short-term capital gains over net long-term capital
losses) in each year.

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

Special rules will apply to most options on stock indexes, futures contracts
and options thereon, and foreign currency forward contracts in which the Fund
may invest. These investments will generally constitute "Section 1256 contracts"
and will be required to be "marked to market" for federal income tax purposes at
the end of the Fund's taxable year; that is, treated as having been sold at
market value. Except with respect to certain foreign currency forward contracts,
60 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.

Foreign currency forward contracts, options and futures contracts entered
into by the Fund may create "straddles" for federal income tax purposes.
Positions which are part of a straddle will be subject to certain wash sale,
short sale and constructive sale provisions of the Internal Revenue Code. In the
case of a straddle, the Fund may be required to defer the recognition of losses
on positions it holds to the extent of any unrecognized gain on offsetting
positions held by the Fund.

B-43
<PAGE>

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

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

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. The Fund
also is required to distribute during the calendar year 98% of the capital gain
net income it earned during the twelve months ending on October 31 of such
calendar year. In addition, the Fund must distribute during the calendar year
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, the Fund will be subject to a non-deductible 4% excise tax on the
undistributed amount. For purposes of this excise tax, income on which the Fund
pays income tax is treated as distributed.

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

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

A shareholder who acquires shares 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 and lower
on Class A shares in relation to Class Z 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. Foreign shareholders
are advised to consult their own tax advisers with respect to the particular tax
consequences of an investment in the Fund.

The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. If the Fund acquires and holds stock in a PFIC
beyond the end of the year of its acquisition, the Fund will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock or on any gain from disposition of the stock (collectively, PFIC income),
plus interest thereon, even if the Fund distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included in
the Fund's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders. The
Fund may make a "mark-to-market" election with respect to any marketable stock
it holds of a PFIC. If the election is in effect, at the end of the Fund's
taxable year, the Fund will recognize the amount of gains, if any, as

B-44
<PAGE>

ordinary income with respect to PFIC stock. No loss will be recognized on PFIC
stock, except to the extent of gains recognized in prior years. Alternatively,
the Fund, if it meets certain requirements, may elect to treat any PFIC in which
it invests as a "qualified electing fund," in which case, in lieu of the
foregoing tax and interest obligation, the Fund will be required to include in
income each year its PRO RATA share of the qualified electing fund's annual
ordinary earnings and net capital gain, even if they are not distributed to the
Fund; those amounts would be subject to the distribution requirements applicable
to the Fund described above. Dividends and distributions also may be subject to
state and local taxes.

PERFORMANCE INFORMATION

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

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

P(1+T)(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.

Below are the average annual total returns for the Fund's share classes for
the periods ended July 31, 1999.

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
---------- ---------- ---------- ---------------------
<S> <C> <C> <C> <C>
Class A................................. N/A (1/22/90)
Class B................................. (9/15/87)
Class C................................. N/A (8/1/94)
Class Z................................. N/A N/A (3/1/96)
</TABLE>

AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares.

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

ERV - P
-------

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.

Below are the aggregate total returns for Fund's share classes for the
periods ended July 31, 1999.

B-45
<PAGE>
YIELD. The Fund may from time to time advertise its yield as calculated over
a 30-day period. Yield is calculated separately for Class A, Class B, Class C
and Class Z shares. This yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of this period. Yield is calculated
according to the following formula:

a - b
YIELD = 2[( ------- +1)(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 the Fund will actually yield for any
given period.

The 30-day yields for the period ended July 31, 1999 were % for the Class
A shares of the Fund; % for the Class B shares of the Fund; % for the
Class C shares of the Fund; and % for the Class Z shares of the Fund.

The Fund may include comparative performance information in advertising or
marketing the Fund's shares. Such performance information may include data from
Lipper, Inc., Morningstar Publications, Inc. and other industry publications,
business periodicals and market indexes. Set forth below is a chart which
compares the performance of different types of investments over the long-term
and the rate of inflation.(1)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
PERFORMANCE COMPARISON OF
DIFFERENT TYPES OF INVESTMENTS
OVER THE LONG TERM
(12/31/25-12/31/98)
<S> <C>

Common Stocks 11.2%
Long-Term
Gov't. Bonds 5.3%
Inflation 3.1%
</TABLE>

(1) Source: Ibbotson Associates. 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-46
<PAGE>
Portfolio of Investments as of July 31, 1998 PRUDENTIAL BALANCED FUND
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--90.2%
COMMON STOCKS--59.9%
- ------------------------------------------------------------
Advertising--0.6%
121,000 Interpublic Group of Companies, Inc. $ 7,290,250
- ------------------------------------------------------------
Airlines--0.2%
303,600 Trans World Airlines, Inc. 2,523,675
- ------------------------------------------------------------
Automobiles--1.9%
188,200 Ford Motor Co. 10,715,638
161,000 General Motors Corp. 11,642,312
-------------
22,357,950
- ------------------------------------------------------------
Banks--2.4%
122,600 Chase Manhattan Corp. 9,271,625
187,692 First Union Corp. 11,308,443
216,200 Norwest Corp. 7,769,687
-------------
28,349,755
- ------------------------------------------------------------
Beverages--1.0%
304,200 PepsiCo, Inc. 11,806,763
- ------------------------------------------------------------
Chemicals--2.0%
344,800 Agrium, Inc. (Canada) 4,069,246
121,200 Dow Chemical Co. 10,998,900
368,600 Geon Co. 8,270,462
-------------
23,338,608
- ------------------------------------------------------------
Commercial Services--0.6%
409,700 Cendant Corp.(a) 7,092,931
- ------------------------------------------------------------
Computer Software & Services--3.1%
150,000 BMC Software, Inc.(a) 7,396,875
309,600 Compaq Computer Corp. 10,178,100
50,700 Computer Associates International,
Inc. 1,682,606
103,100 Microsoft Corp.(a) $ 11,353,888
217,200 Unisys Corp.(a) 5,986,575
-------------
36,598,044
- ------------------------------------------------------------
Construction--1.8%
283,500 Hanson PLC (ADR) 7,300,125
229,200 J. Ray McDermott, S.A.(a) 6,474,900
195,900 US Home Corp.(a) 7,334,006
-------------
21,109,031
- ------------------------------------------------------------
Diversfied Consumer Products--5.1%
86,300 Avon Products, Inc. 7,464,950
109,700 Colgate-Palmolive Co. 10,140,394
272,000 The Dial Corp. 6,494,000
188,800 Gillette Co. 9,888,400
103,300 Illinois Tool Works, Inc. 5,791,256
81,400 Estee Lauder Cos., Inc. 5,229,950
101,300 Procter & Gamble Co. 8,040,687
74,000 The Unilever Group PLC (ADR)
(United Kingdom) 5,143,000
-------------
58,192,637
- ------------------------------------------------------------
Diversified Operations--0.9%
116,150 General Electric Co. 10,373,647
- ------------------------------------------------------------
Electrical Services--2.2%
298,200 Duke Energy Corp. 17,034,675
214,200 Texas Utilities Co. 8,581,387
-------------
25,616,062
- ------------------------------------------------------------
Electronics--2.7%
88,900 Intel Corp. 7,506,494
281,700 Mattel, Inc. 10,827,843
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-47
<PAGE>
Portfolio of Investments as of July 31, 1998 PRUDENTIAL BALANCED FUND
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Electronics (cont'd.)
215,500 Uniphase Corp.(a) $ 10,775,000
155,500 VLSI Technology, Inc.(a) 2,488,000
-------------
31,597,337
- ------------------------------------------------------------
Entertainment--1.3%
145,500 Carnival Corp. 5,374,406
263,100 The Walt Disney Co. 9,060,506
-------------
14,434,912
- ------------------------------------------------------------
Financial Services--3.6%
24,622 Associates First Capital Corp. 1,912,822
111,500 Bear Stearns Co., Inc. 6,271,875
230,900 Federal National Mortgage Association 14,315,800
326,300 MBNA Corp. 10,931,050
108,400 Providian Financial Corp. 8,516,175
-------------
41,947,722
- ------------------------------------------------------------
Foods--0.5%
106,700 Bestfoods 5,935,188
- ------------------------------------------------------------
Hospital Management--2.7%
335,200 Columbia/HCA Healthcare Corp. 9,553,200
363,600 Healthsouth Corp.(a) 9,135,450
333,100 Manor Care, Inc. 12,428,794
-------------
31,117,444
- ------------------------------------------------------------
Insurance--2.0%
80,150 American International Group, Inc. 12,087,622
120,000 Provident Companies, Inc. 4,425,000
95,099 Travelers Group, Inc. 6,371,633
-------------
22,884,255
Hotels & Leisure--0.3%
128,600 Hilton Hotels Corp. $ 3,239,113
- ------------------------------------------------------------
Media--0.8%
284,600 CBS Corp.(a) 9,658,613
- ------------------------------------------------------------
Medical Products & Services--1.7%
77,200 Cardinal Health, Inc. 7,416,025
179,200 Health Care & Retirement Corp.(a) 6,764,800
93,500 Tyco International Ltd. 5,791,156
-------------
19,971,981
- ------------------------------------------------------------
Medical Technology--1.4%
49,000 Abbott Laboratories 2,036,562
260,100 HBO & Co. 7,664,822
111,600 IMS Health, Inc. 7,009,875
-------------
16,711,259
- ------------------------------------------------------------
Metals-Nonferrous--2.1%
175,600 Aluminum Co. of America 12,171,275
123,200 Reynolds Metals Co. 6,468,000
203,900 UCAR International Inc.(a) 5,377,863
-------------
24,017,138
- ------------------------------------------------------------
Mining--0.5%
291,000 Newmont Mining Corp. 5,492,625
- ------------------------------------------------------------
Networking--1.0%
119,900 Cisco Systems, Inc.(a) 11,480,425
- ------------------------------------------------------------
Oil & Gas--3.0%
213,100 Exxon Corp. 14,943,637
477,200 McDermott International, Inc. 12,377,375
376,800 Pioneer Natural Resources Co. 7,418,250
-------------
34,739,262
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-48
<PAGE>
Portfolio of Investments as of July 31, 1998 PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Oil & Gas Equipment & Services--2.4%
237,800 Enron Corp. $ 12,588,537
91,536 Marketspan Corp. 2,522,961
125,200 Schlumberger Ltd. 7,582,425
412,200 Western Gas Resources, Inc. 4,766,063
-------------
27,459,986
- ------------------------------------------------------------
Paper & Forest Products--0.8%
194,000 Longview Fibre Co. 2,279,500
322,900 Louisiana-Pacific Corp. 6,437,819
-------------
8,717,319
- ------------------------------------------------------------
Pharmaceuticals--2.6%
91,000 Bristol Myers Squibb Co. 10,368,313
76,250 Merck & Co., Inc. 9,402,578
90,500 Pfizer, Inc. 9,955,000
-------------
29,725,891
- ------------------------------------------------------------
Real Estate Investment Trust--1.9%
171,300 CCA Prison Realty Trust, 3,693,656
229,800 Crescent Real Estate Equities Co. 6,750,375
252,200 Patriot American Hospitality, Inc. 4,791,800
183,100 Vornado Realty Trust 6,614,488
-------------
21,850,319
- ------------------------------------------------------------
Retail--3.5%
253,200 American Stores Co. 5,871,075
144,300 CVS Corp. 5,916,300
291,000 Kmart Corp.(a) $ 4,746,937
161,200 Proffitt's, Inc.(a) 5,077,800
80,100 Rite Aid Corp. 3,163,950
183,600 Sears Roebuck & Co. 9,317,700
261,900 The Limited, Inc. 7,022,194
-------------
41,115,956
- ------------------------------------------------------------
Steel - Producers--0.8%
183,600 AK Steel Holding Corp. 2,926,125
310,400 British Steel PLC (ADR) (United
Kingdom) 6,499,000
-------------
9,425,125
- ------------------------------------------------------------
Telecommunications--1.1%
95,200 Alcatel Alsthom, Inc. 3,730,650
58,400 Omnipoint Corp.(a) 1,230,050
142,800 WorldCom, Inc.(a) 7,550,550
-------------
12,511,250
- ------------------------------------------------------------
Tobacco--1.0%
101,900 Philip Morris Co., Inc. 4,464,494
286,100 RJR Nabisco Holdings Corp. 6,991,569
-------------
11,456,063
- ------------------------------------------------------------
Waste Management--0.4%
92,400 Waste Management, Inc.(a) 5,093,550
-------------
Total common stocks
(cost $646,090,146) 695,232,086
-------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-49
<PAGE>
Portfolio of Investments as of July 31, 1998 PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
DEBT OBLIGATIONS--30.3%
CORPORATE BONDS--23.9%
- ------------------------------------------------------------
Aerospace--0.3%
Baa1 3,000 Raytheon Co., Sr. Note,
5.95%, 3/15/01 $ 2,987,550
- ------------------------------------------------------------
Airlines--0.5%
Baa3 5,000 United Airlines, Inc.,
10.67%, 5/1/04 5,954,000
- ------------------------------------------------------------
Automobiles--0.2%
Ba1 2,000 Navistar International
Corp., Sr. Note,
7.00%, 2/1/03 2,007,500
- ------------------------------------------------------------
Banks--1.2%
A1 3,900 Bank Nova Scotia NY,
6.50%, 7/15/07 3,934,125
Baa3 3,000 Capital One Bank,
Sr. Note,
7.08%, 10/30/01 3,062,010
A1 2,100 National Australia Bank
Ltd.,
6.40%, 12/10/07 2,161,362
Baa1 5,000 Skandinaviska Enskilda
Banken,
7.50%, 3/29/49 5,170,000
--------------
14,327,497
- ------------------------------------------------------------
Cable & Pay Television Systems--0.4%
Ba3 2,000 Century Communications
Corp., Sr. Note,
9.75%, 2/15/02 2,150,000
Baa3 2,000 Comcast Cable
Communications,
8.375%, 5/1/07 2,229,380
--------------
4,379,380
- ------------------------------------------------------------
Chemicals--0.2%
Ba3 2,000 ISP Holdings, Inc.,
Sr. Note,
9.75%, 2/15/02 2,110,000
Computer Software--0.3%
Baa1 $ 4,000 Computer Associates
International, Inc.,
6.375%, 4/15/05 $ 3,931,720
- ------------------------------------------------------------
Diversified Products--0.3%
Baa1 1,000 SB Treasury Co.,
9.40%, 12/29/49 995,000
A3 3,000 Tokai Preferred Cap, LLC
1.00%, 12/29/49 2,786,250
--------------
3,781,250
- ------------------------------------------------------------
Engineering--0.1%
Ba2 1,200 CSC Holdings, Inc.,
Sr. Note,
7.625%, 7/15/18 1,205,400
- ------------------------------------------------------------
Entertainment--0.5%
Baa3 5,000 Royal Caribbean Cruises
Ltd.,
Sr. Note,
8.25%, 4/1/05 5,390,000
- ------------------------------------------------------------
Financial Services--7.7%
B2 5,000 Advanta Corp.,
7.25%, 8/16/99 4,931,450
Baa3 9,500 AT&T Capital Corp.,
6.41%, 8/13/99 9,542,750
Ba2 4,000 Conseco Finance Trust,
8.796%, 4/1/27 4,393,640
Contifinancial Corp.,
Sr. Notes,
Ba1 5,000 8.375%, 8/15/03 5,035,700
Ba1 3,300 8.125%, 4/1/08 3,187,437
A3 3,300 ERP Operating, LP,
6.63%, 4/13/05 3,290,694
Aa3 11,000 Team Fleet Financing
Corp.,
7.35%, 5/15/03 11,464,062
Ford Motor Credit Co.,
Notes,
A1 6,000 7.32%, 5/23/02 6,060,000
A1 5,000 7.75%, 3/15/05 5,390,000
Baa1 17,000 Lehman Brothers Holdings, Inc.,
6.33%, 8/1/00 17,084,150
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-50
<PAGE>
Portfolio of Investments as of July 31, 1998 PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
Financial Services (cont'd.)
A2 $ 18,000 Salomon, Inc.,
7.30%, 5/15/02 $ 18,625,140
--------------
89,005,023
- ------------------------------------------------------------
Foods--0.3%
Baa3 3,400 Kroger Co., Sr. Note,
6.375%, 3/1/08 3,365,082
- ------------------------------------------------------------
Hotels & Leisure--0.6%
ITT Corp., Notes,
Ba1 3,500 6.25%, 11/15/00 3,414,635
Ba1 3,500 6.75%, 11/15/03 3,372,390
--------------
6,787,025
- ------------------------------------------------------------
Industrial--0.6%
Scotia Pacific Co.,
A3 2,200 7.11%, 1/20/14 2,170,256
Baa2 4,800 7.71%, 1/20/14 4,781,280
--------------
6,951,536
- ------------------------------------------------------------
Media--1.9%
Baa3 14,000 News America Holdings
Inc.,
6.703%, 5/21/04 14,140,000
Baa3 5,500 Time Warner, Inc.,
8.11%, 8/15/06 6,043,070
Ba2 1,850 Viacom, Inc.,
7.75%, 6/1/05 1,962,943
--------------
22,146,013
- ------------------------------------------------------------
Oil & Gas Equipment & Services--0.8%
Baa2 3,500 BJ Services Co., Sr.
Note,
7.00%, 2/1/06 3,571,190
R & B Falcon Corp.,
Sr. Notes,
Ba1 5,000 6.50%, 4/15/03 4,968,400
Ba1 1,500 7.375%, 4/15/18 1,440,000
--------------
9,979,590
- ------------------------------------------------------------
Packaging--0.2%
Ba1 2,100 Owens Illinois Inc.,
7.50%, 5/15/10 2,120,832
Paper & Forest Products--0.2%
Baa3 $ 2,000 Fort James Corp., Note,
6.234%, 3/15/01 $ 2,000,440
- ------------------------------------------------------------
Real Estate Investment Trust--0.1%
Baa3 550 Colonial Realty, LP,
Sr. Note,
7.00%, 7/14/07 546,975
Baa2 500 First Industrial Realty
Trust
7.60%, 7/15/28 493,325
--------------
1,040,300
- ------------------------------------------------------------
Restaurants--0.6%
Darden Restaurants, Inc.,
Baa1 2,500 6.375%, 2/1/06 2,389,025
Baa1 4,500 7.125%, 2/1/16 4,435,650
--------------
6,824,675
- ------------------------------------------------------------
Retail--1.6%
Federated Dept. Stores,
Inc.,
Baa2 7,500 8.125%, 10/15/02 7,958,625
Baa2 2,500 8.50%, 6/15/03 2,715,000
Baa2 2,000 10.00%, 2/15/01 2,168,800
Ba2 2,000 Fred Meyer, Inc.,
7.375%, 3/1/05 2,001,160
Ba2 5,000 Kmart Corp.,
8.125%, 12/1/06 5,225,000
--------------
20,068,585
- ------------------------------------------------------------
Telecommunications--1.1%
A3 2,000 Cable & Wireless
Communication, Note,
6.375%, 3/6/03 2,004,480
Ba1 3,000 LCI International Inc.,
7.25%, 6/15/07 3,078,240
Baa3 7,000 Tele-Communications,
Inc., Sub. Deb.,
9.25%, 4/15/02 7,667,100
--------------
12,749,820
- ------------------------------------------------------------
Transportation/Trucking/Shipping--1.9%
Baa2 10,000 CSX Corp., Sub. Deb.,
7.45%, 5/1/07 10,623,900
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-51
<PAGE>
Portfolio of Investments as of July 31, 1998 PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
Transportation/Trucking/Shipping (cont'd.)
Baa1 $ 11,000 Norfolk Southern Corp.,
Note,
6.95%, 5/1/02 $ 11,296,120
--------------
21,920,020
- ------------------------------------------------------------
Utilities--2.1%
Aaa 3,000 California
Infrastructure, PG&E,
6.32%, 9/25/05 3,030,000
Cleveland Electric
Illuminating,
Ba1 3,000 7.19%, 7/1/00 3,044,400
Ba1 2,000 7.67%, 7/1/04 2,091,200
Baa1 450 Hyder, PLC
6.875%, 12/15/07 457,236
Niagara Mohawk Power Corp.,
Ba1 2,875 6.875%, 4/1/03 2,920,799
Ba1 4,500 7.375%, 8/1/03 4,682,070
Ba1 2,000 8.00%, 6/1/04 2,138,660
Ba2 6,000 Western Massachusetts
Electric Co.,
7.375%, 7/1/01 6,088,800
--------------
24,453,165
- ------------------------------------------------------------
Waste Management--0.1%
Baa3 1,000 USA Waste Services, Inc.,
Note,
6.125%, 7/15/01 998,020
Total corporate bonds
(cost $270,416,937) 276,484,423
--------------
- ------------------------------------------------------------
U.S. GOVERNMENT SECURITIES--6.1%
United States Treasury Bonds,
4,026 3.625%, 4/15/28 3,974,151
27,000 8.125%, 8/15/19 34,488,180
24,450 6.125%, 11/15/27 25,844,383
United States Treasury Notes,
1,100 5.50%, 2/15/08 1,095,182
3,050 5.625%, 5/15/08 3,078,578
1,250 6.125%, 8/15/07 1,297,075
900 7.25%, 5/15/04 974,394
--------------
Total U.S. government
securities
(cost $70,831,066) 70,751,943
--------------
FOREIGN GOVERNMENT BONDS--0.3%
Ba2 $ 4,000 City of Moscow, (Russia)
9.50%, 5/31/00 $ 3,440,000
B+(b) 500 City of St. Petersburg,
(Russia)
9.50%, 6/18/02 350,000
--------------
Total foreign government
(cost $4,518,260) 3,790,000
--------------
Total debt obligations
(cost $345,766,263) 351,026,366
--------------
Total long-term
investments
(cost $991,856,409) 1,046,258,452
--------------
SHORT-TERM INVESTMENTS--9.0%
CORPORATE BONDS--0.1%
- ------------------------------------------------------------
Banks
A2 1,000 First Union Corp.,
9.45%, 6/15/99
(cost $1,104,060) 1,029,000
--------------
- ------------------------------------------------------------
REPURCHASE AGREEMENT--8.9%
103,812 Joint Repurchase
Agreement Account
5.61%, 8/3/98,
(cost $103,812,000;
Note 5) 103,812,000
--------------
Total short-term
investments
(cost $104,916,060) 104,841,000
--------------
- ------------------------------------------------------------
Total Investments--99.2%
(cost $1,096,772,469;
Note 4) 1,151,099,452
Other assets in excess of
liabilities--0.8% 8,816,299
--------------
Net Assets--100% $1,159,915,751
--------------
--------------
</TABLE>
- ---------------
(a) Non-income producing security.
(b) Standard & Poor's rating.
ADR--American Depository Receipt.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-52
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets July 31, 1998
<S> <C>
Investments, at value (cost $1,096,772,469)................................................................. $1,151,099,452
Cash........................................................................................................ 228,772
Receivable for investments sold............................................................................. 10,287,068
Dividends and interest receivable........................................................................... 7,917,001
Receivable for Fund shares sold............................................................................. 749,674
Prepaid expenses............................................................................................ 45,886
--------------
Total assets............................................................................................. 1,170,327,853
--------------
Liabilities
Payable for investments purchased........................................................................... 6,728,546
Payable for Fund shares reacquired.......................................................................... 2,167,343
Management fee payable...................................................................................... 665,535
Distribution fee payable.................................................................................... 585,949
Accrued expenses............................................................................................ 264,729
--------------
Total liabilities........................................................................................ 10,412,102
--------------
Net Assets.................................................................................................. $1,159,915,751
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 920,239
Paid-in capital in excess of par......................................................................... 1,015,617,864
--------------
1,016,538,103
Undistributed net investment income...................................................................... 1,384,812
Accumulated net realized gain on investments............................................................. 87,665,853
Net unrealized appreciation on investments............................................................... 54,326,983
--------------
Net assets, July 31, 1998................................................................................... $1,159,915,751
--------------
--------------
Class A:
Net asset value and redemption price per share
($485,689,864 / 38,457,582 shares of beneficial interest issued and outstanding)...................... $12.63
Maximum sales charge (5% of offering price).............................................................. .66
Maximum offering price to public......................................................................... $13.29
Class B:
Net asset value, offering price and redemption price per share
($533,353,620 / 42,414,858 shares of beneficial interest issued and outstanding)...................... $12.57
Class C:
Net asset value, offering price and redemption price per share
($9,201,203 / 731,714 shares of beneficial interest issued and outstanding)........................... $12.57
Class Z:
Net asset value, offering price and redemption price per share
($131,671,064 / 10,419,748 shares of beneficial interest issued and outstanding)...................... $12.64
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-53
<PAGE>
PRUDENTIAL BALANCED FUND
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income July 31, 1998
<S> <C>
Income
Interest................................... $ 36,163,798
Dividends (net of foreign withholding taxes
of $143,621)............................ 8,602,741
-------------
Total income............................ 44,766,539
-------------
Expenses
Management fee............................. 7,857,149
Distribution fee--Class A.................. 1,234,570
Distribution fee--Class B.................. 5,784,317
Distribution fee--Class C.................. 81,752
Transfer agent's fees and expenses......... 2,640,000
Reports to shareholders.................... 335,000
Custodian's fees and expenses.............. 215,000
Registration fees.......................... 190,000
Legal fees................................. 41,000
Audit fees................................. 30,000
Insurance.................................. 24,000
Trustees' fees and expenses................ 20,000
Miscellaneous.............................. 20,078
-------------
Total expenses.......................... 18,472,866
-------------
Net investment income......................... 26,293,673
-------------
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency
Net realized gain (loss) on:
Investment transactions.................... 155,550,453
Foreign currency transactions.............. (650)
-------------
155,549,803
-------------
Net change in unrealized appreciation
(depreciation) on investments.............. (126,216,321)
-------------
Net gain on investments....................... 29,333,482
-------------
Net Increase in Net Assets
Resulting from Operations..................... $ 55,627,155
-------------
-------------
</TABLE>

<TABLE>
PRUDENTIAL BALANCED FUND
Statement of Changes in Net Assets
<CAPTION>
Increase (Decrease) Year Ended July 31,
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income....... $ 26,293,673 $ 20,934,760
Net realized gain on
investments and foreign
currency transactions.... 155,549,803 92,822,065
Net change in unrealized
appreciation
(depreciation) of
investments.............. (126,216,321) 97,850,789
-------------- --------------
Net increase in net assets
resulting from
operations............... 55,627,155 211,607,614
-------------- --------------
Dividends and distributions
(Note 1)
Dividends to shareholders
from net investment
income
Class A.................. (12,700,788) (8,678,960)
Class B.................. (10,437,329) (8,766,533)
Class C.................. (148,597) (97,195)
Class Z.................. (3,608,837) (2,758,541)
-------------- --------------
(26,895,551) (20,301,229)
-------------- --------------
Distributions from net
realized gains on
investment transactions
Class A.................. (57,771,866) (17,250,282)
Class B.................. (69,878,157) (26,414,816)
Class C.................. (920,721) (273,589)
Class Z.................. (14,427,869) (6,764,801)
-------------- --------------
(142,998,613) (50,703,488)
-------------- --------------
Fund share transactions (net of
share conversions) (Note 6)
Net proceeds from shares
sold..................... 195,965,154 583,212,616
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........ 160,126,884 65,884,101
Cost of shares reacquired... (341,566,835) (220,143,556)
-------------- --------------
Net increase in net assets
from Fund shares
transactions............. 14,525,203 428,953,161
-------------- --------------
Total increase (decrease)...... (99,741,806) 569,556,058
Net Assets
Beginning of year.............. 1,259,657,557 690,101,499
-------------- --------------
End of year(a)................. $1,159,915,751 $1,259,657,557
-------------- --------------
-------------- --------------
- ---------------
(a) Includes undistributed net
investment income of....... $ 1,384,812 $ 1,986,876
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-54
<PAGE>
Notes to Financial Statements PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
Prudential Balanced 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. The investment objective of the Fund 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, under triparty repurchase agreements, as the case may be, take
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction, including accrued interest.
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 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.
- --------------------------------------------------------------------------------

B-55
<PAGE>
Notes to Financial Statements PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
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.

Federal Income Taxes: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable net income to its shareholders.
Therefore, no federal income tax provision is required.

Withholding taxes on foreign 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. The effect of applying this statement was
to decrease undistributed net investment income by $186, increase accumulated
net realized gain on investments by $99,848 and decrease paid in capital by
$99,662 for the year ended July 31, 1998. Net realized gains and net assets were
not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM 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 PIFM is computed daily and payable monthly at an annual
rate of .65 of 1% of the Fund's average daily net assets.

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

Pursuant to the Class A, B and C Plans, the Fund compensated PSI 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,
1998.

PSI has advised the Fund that it received approximately $359,000 in front-end
sales charges resulting from sales of Class A shares during the year ended July
31, 1998. From these fees, PSI paid such sales charges to
- --------------------------------------------------------------------------------

B-56
<PAGE>
Notes to Financial Statements PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
affiliated broker-dealers, which in turn paid commissions to salespersons and
incurred other distribution costs.
PSI has advised the Fund that for the year ended July 31, 1998, it received
approximately $820,000 and $5,000 in contingent deferred sales charges imposed
upon certain redemptions by Class B and C shareholders, respectively.

PSI, PIC, PIFM and PIMS are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.

The Fund, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. Interest on any such borrowings outstanding will be at market
rates. The purpose of the Agreement is to serve as an alternative source of
funding for capital share redemptions. The Fund did not borrow any amounts
pursuant to the Agreement during the year ended July 31, 1998. The Funds pay a
commitment fee at an annual rate of .055 of 1% on the unused portion of the
credit facility. The commitment fee is accrued and paid quarterly on a pro rata
basis by the Funds. The Agreement expired on December 30, 1997 and has been
extended through December 29, 1998 under the same terms.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended July 31, 1998, the
Fund incurred fees of approximately $2,170,000 for the services of PMFS. As of
July 31, 1998, approximately $172,000 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 nonaffiliates.

For the year ended July 31, 1998, PSI received approximately $103,500 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities of the Fund, other than short-term
investments, for the fiscal year ended July 31, 1998, were $1,577,446,098 and
$1,693,942,904, respectively, which includes purchases and sales of U.S.
government obligations of $444,746,462 and $399,778,178, respectively.

The cost basis of investments for federal income tax purposes as of July 31,
1998 was $1,096,883,147 and accordingly, net unrealized appreciation of
investments for federal income tax purposes was $54,216,305 (gross unrealized
appreciation--$103,786,088; gross unrealized depreciation--$49,569,783).
- ------------------------------------------------------------
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, 1998, the Fund
had a 13.7% undivided interest in repurchase agreements in the joint account.
The undivided interest for the Fund represented $103,812,000 in principal
amount. As of such date, each repurchase agreement in the joint account and the
value of the collateral therefor was as follows:

Credit Suisse First Boston Corp., 5.67%, dated 7/31/98, in the principal amount
of $175,000,000, repurchase price $175,082,689, due 8/3/98. The value of the
collateral including accrued interest is $180,594,823.

Bear, Stearns & Co. Inc., 5.66%, dated 7/31/98, in the principal amount of
$175,000,000, repurchase price $175,082,542, due 8/3/98. The value of the
collateral including accrued interest is $179,027,728.

Salomon Smith Barney Inc., 5.64%, dated 7/31/98, in the principal amount of
$175,000,000, repurchase price $175,082,251, due 8/3/98. The value of the
collateral including accrued interest is $178,789,931.

SBC Warburg Dillon Read Inc., 5.52% dated 7/31/98, in the principal amount of
$235,118,000, repurchase price $235,226,153, due 8/3/98. The value of the
collateral including accrued interest is $240,150,611.
- ------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. 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. Class
Z shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.

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

B-57
<PAGE>
Notes to Financial Statements PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
Transactions in shares of beneficial interest for the years ended July 31, 1998
and July 31, 1997 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended July 31, 1998:
Shares sold....................... 3,967,817 $ 52,091,809
Shares issued in reinvestment of
dividends and distributions..... 5,263,433 64,754,657
Shares reacquired................. (9,908,242) (129,373,980)
----------- -------------
Net decrease in shares outstanding
before conversion............... (676,992) (12,527,514)
Shares issued upon conversion from
Class B......................... 3,632,745 46,694,238
----------- -------------
Net increase in shares
outstanding..................... 2,955,753 $ 34,166,724
----------- -------------
----------- -------------
Year ended July 31, 1997:
Shares sold....................... 3,337,159 $ 42,801,873
Shares issued in connection with
acquisition of Prudential
Allocation Fund--Strategy
Portfolio....................... 10,702,166 148,314,174
Shares issued in reinvestment of
dividends and distributions..... 1,818,378 23,032,477
Shares reacquired................. (7,231,992) (92,932,910)
----------- -------------
Net increase in shares outstanding
before conversion............... 8,625,711 121,215,614
Shares issued upon conversion from
Class B......................... 4,759,297 60,515,298
----------- -------------
Net increase in shares
outstanding..................... 13,385,008 $ 181,730,912
----------- -------------
----------- -------------
<CAPTION>
Class B
- ----------------------------------
Year ended July 31, 1998:
Shares sold....................... 5,179,076 $ 67,414,895
Shares issued in reinvestment of
dividends and distributions..... 6,244,089 76,307,531
Shares reacquired................. (10,219,280) (133,027,987)
----------- -------------
Net increase in shares outstanding
before conversion............... 1,203,885 10,694,439
Shares reacquired upon conversion
into Class A.................... (3,615,791) (46,694,238)
----------- -------------
Net decrease in shares
outstanding..................... (2,411,906) $ (35,999,799)
----------- -------------
----------- -------------
Year ended July 31, 1997:
Shares sold....................... 4,838,750 $ 61,524,309
Shares issued in connection with
acquisition of Prudential
Allocation Fund--Strategy
Portfolio....................... 13,556,615 187,167,091
Shares issued in reinvestment of
dividends and distributions..... 2,613,632 32,974,262
Shares reacquired................. (7,023,090) (89,550,269)
----------- -------------
Net increase in shares outstanding
before conversion............... 13,985,907 192,115,393
Shares reacquired upon conversion
into Class A.................... (4,781,062) (60,515,298)
----------- -------------
Net increase in shares
outstanding..................... 9,204,845 $ 131,600,095
----------- -------------
----------- -------------
<CAPTION>
Class C Shares Amount
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended July 31, 1998:
Shares sold....................... 323,478 $ 4,203,230
Shares issued in reinvestment of
dividends and distributions..... 84,293 1,030,457
Shares reacquired................. (178,945) (2,326,256)
----------- -------------
Net increase in shares
outstanding..................... 228,826 $ 2,907,431
----------- -------------
----------- -------------
Year ended July 31, 1997:
Shares sold....................... 232,388 $ 2,935,142
Shares issued in connection with
acquisition of Prudential
Allocation Fund--Strategy
Portfolio....................... 91,197 1,259,091
Shares issued in reinvestment of
dividends and distributions..... 28,051 354,029
Shares reacquired................. (147,414) (1,879,415)
----------- -------------
Net increase in shares
outstanding..................... 204,222 $ 2,668,847
----------- -------------
----------- -------------
<CAPTION>
Class Z
- ----------------------------------
Year ended July 31, 1998:
Shares sold....................... 5,472,022 $ 72,255,220
Shares issued in reinvestment of
dividends and distributions..... 1,463,704 18,034,239
Shares reacquired................. (5,753,738) (76,838,612)
----------- -------------
Net increase in shares
outstanding..................... 1,181,988 $ 13,450,847
----------- -------------
----------- -------------
Year ended July 31, 1997:
Shares sold....................... 2,901,740 $ 37,167,348
Shares issued in connection with
acquisition of Prudential
Allocation Fund--Strategy
Portfolio....................... 891 12,363
Shares issued in connection with
acquisition of The Prudential
Institutional Fund--Balanced
Fund............................ 8,056,026 102,031,225
Shares issued in reinvestment of
dividends and distributions..... 752,454 9,523,333
Shares reacquired................. (2,812,213) (35,780,962)
----------- -------------
Net increase in shares
outstanding..................... 8,898,898 $ 112,953,307
----------- -------------
----------- -------------
</TABLE>
- ------------------------------------------------------------
Note 7. Dividends
On September 22, 1998 the Board of Trustees of the Fund declared the following
dividends per share, payable on September 30, 1998 to shareholders of record on
September 25, 1998:
<TABLE>
<CAPTION>
Class B
Class A and C Class Z
-------- -------- --------
<S> <C> <C> <C>
Ordinary Income.................. $ .075 $ .05 $ .0825
</TABLE>

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

B-58
<PAGE>
Financial Highlights PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------
Year Ended July 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year...... $ 14.01 $ 11.85 $ 12.04 $ 11.12 $ 11.75
-------- -------- -------- -------- -------
Income from investment operations
Net investment income................... .33 .34 .31 .34 .33
Net realized and unrealized gain (loss)
on investment transactions........... .29 2.96 .28 1.11 (.05)
-------- -------- -------- -------- -------
Total from investment operations..... .62 3.30 .59 1.45 .28
-------- -------- -------- -------- -------
Less distributions
Dividends from net investment income.... (.34) (.36) (.29) (.33) (.37)
Distributions from net realized gains on
investment and foreign currency
transactions......................... (1.66) (.78) (.49) (.20) (.54)
-------- -------- -------- -------- -------
Total distributions.................. (2.00) (1.14) (.78) (.53) (.91)
-------- -------- -------- -------- -------
Net asset value, end of year............ $ 12.63 $ 14.01 $ 11.85 $ 12.04 $ 11.12
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
TOTAL RETURN(a):........................ 5.05% 29.09% 4.89% 13.67% 2.39%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........... $485,690 $497,461 $262,096 $119,829 $37,512
Average net assets (000)................ $493,828 $306,717 $246,609 $ 69,754 $29,875
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.19% 1.17% 1.20% 1.22% 1.23%
Expenses, excluding distribution
fees.............................. .94% .92% .95% .97% 1.00%
Net investment income................ 2.51% 2.84% 2.53% 2.90% 2.84%
For Class A, B, C and Z shares:
Portfolio turnover rate.............. 144% 140% 97% 201% 108%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-59
<PAGE>
Financial Highlights PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------
Year Ended July 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year...... $ 13.96 $ 11.80 $ 12.00 $ 11.09 $ 11.72
-------- -------- -------- -------- --------
Income from investment operations
Net investment income................... .24 .26 .21 .26 .24
Net realized and unrealized gain (loss)
on investment transactions........... .27 2.95 .28 1.10 (.05)
-------- -------- -------- -------- --------
Total from investment operations..... .51 3.21 .49 1.36 .19
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income.... (.24) (.27) (.20) (.25) (.28)
Distributions from net realized gains on
investment and foreign currency
transactions......................... (1.66) (.78) (.49) (.20) (.54)
-------- -------- -------- -------- --------
Total distributions.................. (1.90) (1.05) (.69) (.45) (.82)
-------- -------- -------- -------- --------
Net asset value, end of year............ $ 12.57 $ 13.96 $ 11.80 $ 12.00 $ 11.09
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(a):........................ 4.28% 28.24% 4.05% 12.79% 1.61%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........... $533,354 $625,715 $420,465 $392,291 $445,609
Average net assets (000)................ $578,432 $431,425 $437,792 $409,419 $392,133
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.94% 1.92% 1.95% 1.97% 2.00%
Expenses, excluding distribution
fees.............................. .94% .92% .95% .97% 1.00%
Net investment income................ 1.76% 2.09% 1.78% 2.34% 2.08%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-60
<PAGE>
Financial Highlights PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
-------------------------------------------------- ------------------------
August 1,
1994(a)
Year Ended July 31, through Year Ended July 31,
------------------------------------ July 31, ------------------------
1998 1997 1996 1995 1998 1997
-------- ----- -------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $13.96 $11.80 $12.00 $ 11.12 $ 14.01 $ 11.85
-------- ----- -------- --------- ----------- --------
Income from investment operations
Net investment income................... .24 .26 .21 .21 .37 .46
Net realized and unrealized gain (loss)
on investment transactions........... .27 2.95 .28 1.12 .29 2.87
-------- ----- -------- --------- ----------- --------
Total from investment operations..... .51 3.21 .49 1.33 .66 3.33
-------- ----- -------- --------- ----------- --------
Less distributions
Dividends from net investment income.... (.24) (.27) (.20) (.25) (.37) (.39)
Distributions from net realized gains on
investment and foreign currency
transactions......................... (1.66) (.78) (.49) (.20) (1.66) (.78)
-------- ----- -------- --------- ----------- --------
Total distributions.................. (1.90) (1.05) (.69) (.45) (2.03) (1.17)
-------- ----- -------- --------- ----------- --------
Net asset value, end of period.......... $12.57 $13.96 $11.80 $ 12.00 $ 12.64 $ 14.01
-------- ----- -------- --------- ----------- --------
-------- ----- -------- --------- ----------- --------
TOTAL RETURN(b):........................ 4.28% 28.24% 4.05% 12.49% 5.37% 29.39%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $9,201 $7,023 $3,525 $ 3,046 $ 131,671 $129,459
Average net assets (000)................ $8,175 $4,790 $2,444 $ 920 $ 128,358 $ 99,391
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.94% 1.92% 1.95% 2.04%(d) .94% .92%
Expenses, excluding distribution
fees.............................. .94% .92% .95% 1.04%(d) .94% .92%
Net investment income................ 1.76% 2.09% 1.78% 2.20%(d) 2.76% 3.12%

<CAPTION>
March 1,
1996(c)
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 (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(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:
Expenses, including distribution
fees.............................. .95%(d)
Expenses, excluding distribution
fees.............................. .95%(d)
Net investment income................ 2.72%(d)
</TABLE>
- ---------------
(a) Commencement of offering of Class C 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 each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Commencement of offering of Class Z shares.
(d) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-61
<PAGE>
Report of Independent Accountants PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Balanced Fund:

1177 Avenue of the Americas
New York, New York
September 17, 199

B-62
<PAGE>
Portfolio of Investments as
of January 31, 1999 (Unaudited) PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>

Shares Description Value (Note 1)
<C> <S> <C>
-----------------------------------------------------------
LONG-TERM INVESTMENTS--90.3%
COMMON STOCKS--60.4%
-----------------------------------------------------------
Advertising--1.1%
86,500 Interpublic Group of Companies, Inc. $ 6,844,312
149,900 Young & Rubicam Inc.(a) 6,014,738
-------------
12,859,050
- ------------------------------------------------------------
Airlines--0.2%
37,100 US Airways Group, Inc.(a) 1,845,725
- ------------------------------------------------------------
Automobiles--2.6%
203,100 Ford Motor Co. 12,477,956
188,600 General Motors Corp. 16,926,850
-------------
29,404,806
- ------------------------------------------------------------
Banks--0.2%
79,500 Wells Fargo Co. 2,777,531
- ------------------------------------------------------------
Beverages--0.7%
190,800 PepsiCo, Inc. 7,453,125
- ------------------------------------------------------------
Chemicals--2.6%
404,000 Agrium, Inc. (Canada) 3,655,022
142,000 Dow Chemical Co. 12,504,875
45,000 Du Pont (E.I.) De Nemours 2,303,437
431,900 Geon Co. 10,365,600
-------------
28,828,934
- ------------------------------------------------------------
Computer Software & Services--4.5%
26,900 America Online, Inc.(a) 4,725,994
77,300 BMC Software, Inc.(a) 3,608,944
218,300 Compaq Computer Corp. 10,396,537
88,500 EMC Corp.(a) $ 9,635,437
41,800 Microsoft Corp.(a) 7,315,000
140,900 Oracle Corp.(a) 7,802,337
233,700 Unisys Corp.(a) 7,741,313
-------------
51,225,562
- ------------------------------------------------------------
Construction--2.2%
332,100 Hanson PLC (ADR) 10,876,275
268,500 J. Ray McDermott, S.A.(a) 6,376,875
229,500 U.S. Home Corp.(a) 8,147,250
-------------
25,400,400
- ------------------------------------------------------------
Diversfied Consumer Products--2.8%
113,400 Avon Products, Inc. 4,188,713
60,200 Colgate-Palmolive Co. 4,842,338
42,700 Estee Lauder Cos., Inc. 3,504,069
67,600 Gillette Co. 3,971,500
72,900 Illinois Tool Works, Inc. 4,396,781
69,900 Procter & Gamble Co. 6,352,162
178,100 The Dial Corp. 4,864,356
-------------
32,119,919
- ------------------------------------------------------------
Diversified Operations--2.1%
149,900 Applied Materials, Inc.(a) 9,471,806
97,950 General Electric Co. 10,272,506
238,800 UCAR International Inc.(a) 4,402,875
-------------
24,147,187
- ------------------------------------------------------------
Electrical Services--0.9%
231,100 Texas Utilities Co. 10,153,956
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-63
<PAGE>
Portfolio of Investments as
of January 31, 1999 (Unaudited) PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
Electronics--3.1%
94,900 Altera Corp.(a) $ 5,966,838
81,700 Intel Corp. 11,514,594
64,200 Motorola, Inc. 4,638,450
122,900 Uniphase Corp.(a) 11,199,262
182,200 VLSI Technology, Inc.(a) 2,163,625
-------------
35,482,769
- ------------------------------------------------------------
Entertainment--1.1%
157,000 Carnival Corp. 7,702,813
144,500 Park Place Entertainment Corp.(a) 984,406
104,200 The Walt Disney Co. 3,438,600
-------------
12,125,819
- ------------------------------------------------------------
Financial Services--5.1%
130,600 Bear Stearns Co., Inc. 6,154,525
103,400 Chase Manhattan Corp. 7,955,337
176,600 Federal National Mortgage Association 12,869,725
498,950 MBNA Corp. 13,939,416
167,700 Providian Financial Corp. 16,906,256
-------------
57,825,259
- ------------------------------------------------------------
Foods--0.6%
125,000 Bestfoods 6,289,063
- ------------------------------------------------------------
Hospital Management--2.1%
392,700 Columbia/HCA Healthcare Corp. 7,117,688
390,300 HCR Manor Care, Inc.(a) 10,440,525
413,900 HEALTHSOUTH Corp.(a) 5,613,519
-------------
23,171,732
- ------------------------------------------------------------
Hotels & Leisure--0.2%
144,500 Hilton Hotels Corp. 2,086,219
Insurance--1.6%
104,025 American International Group, Inc. $ 10,708,073
140,500 Provident Companies, Inc. 6,023,938
70,000 Selective Insurance Group, Inc. 1,277,500
-------------
18,009,511
- ------------------------------------------------------------
Media--1.5%
348,100 CBS Corp.(a) 11,835,400
173,100 Infinity Broadcasting Corp.(a) 4,792,706
-------------
16,628,106
- ------------------------------------------------------------
Medical Products & Services--1.7%
103,350 Cardinal Health, Inc. 7,641,441
54,390 McKesson HBOC, Inc. 4,086,049
104,000 Tyco International Ltd. 8,014,500
-------------
19,741,990
- ------------------------------------------------------------
Medical Technology--1.3%
156,900 Abbott Laboratories 7,286,044
188,200 IMS Health, Inc. 6,892,825
-------------
14,178,869
- ------------------------------------------------------------
Metals-NonFerrous--2.1%
205,700 Alcoa Inc. 17,201,663
144,400 Reynolds Metals Co. 7,057,550
-------------
24,259,213
- ------------------------------------------------------------
Mining--0.7%
341,000 Newmont Mining Corp. 6,031,438
65,800 Stillwater Mining Co.(a) 1,727,250
-------------
7,758,688
- ------------------------------------------------------------
Networking--1.1%
106,150 Cisco Systems, Inc.(a) 11,842,359
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-64
<PAGE>
Portfolio of Investments as
of January 31, 1999 (Unaudited) PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
Oil & Gas Equipment & Services--4.6%
145,800 Enron Corp. $ 9,622,800
214,900 Exxon Corp. 15,137,019
107,236 KeySpan Energy 2,902,074
514,800 McDermott International, Inc. 10,649,925
144,100 Noble Affiliates, Inc. 2,836,969
441,400 Pioneer Natural Resources Co. 3,641,550
482,900 Western Gas Resources, Inc. 2,655,950
135,200 Williams Companies, Inc. 4,461,600
-------------
51,907,887
- ------------------------------------------------------------
Paper & Forest Products--0.9%
227,300 Longview Fibre Co. 2,415,062
378,300 Louisiana-Pacific Corp. 7,589,644
-------------
10,004,706
- ------------------------------------------------------------
Pharmaceuticals--2.1%
76,700 Bristol- Myers Squibb Co. 9,831,981
65,850 Merck & Co., Inc. 9,663,488
33,800 Pfizer, Inc. 4,347,525
-------------
23,842,994
- ------------------------------------------------------------
Real Estate Investment Trust--1.8%
329,600 Crescent Real Estate Equities Co. 6,983,400
292,053 Patriot American Hospitality, Inc. 1,569,790
200,700 Prison Realty Corp. 4,114,350
218,800 Vornado Realty Trust 7,726,375
-------------
20,393,915
- ------------------------------------------------------------
Restaurants--0.5%
78,400 McDonald's Corp. 6,178,900
Retail--4.0%
296,700 American Stores Co. $ 10,755,375
105,600 CVS Corp. 5,781,600
341,000 Kmart Corp.(a) 5,988,813
67,600 Rite Aid Corp. 3,320,850
215,100 Sears Roebuck & Co. 8,630,887
306,900 The Limited, Inc. 10,472,962
-------------
44,950,487
- ------------------------------------------------------------
Steel Producers--1.1%
232,900 AK Steel Holding Corp. 4,847,231
363,700 British Steel PLC (ADR) (United
Kingdom) 8,001,400
-------------
12,848,631
- ------------------------------------------------------------
Telecommunications--1.5%
172,900 MCI WorldCom, Inc.(a) 13,788,775
51,200 Telecomunicacoes Brasileiras S.A.
(ADR) (Brazil)(a) 3,222,400
-------------
17,011,175
- ------------------------------------------------------------
Tobacco--1.3%
119,300 Philip Morris Co., Inc. 5,607,100
335,200 RJR Nabisco Holdings Corp. 9,050,400
-------------
14,657,500
- ------------------------------------------------------------
Waste Management--0.5%
108,300 Waste Management, Inc. 5,408,231
-------------
Total common stocks
(cost $610,588,971) 682,820,218
-------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-65
<PAGE>
Portfolio of Investments as
of January 31, 1999 (Unaudited) PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
DEBT OBLIGATIONS--29.9%
CORPORATE BONDS--26.9%
- ------------------------------------------------------------
Aerospace--0.4%
Raytheon Co., Sr. Notes,
Baa1 $ 3,000 6.40%, 12/15/18 $ 3,026,640
Baa1 1,050 7.00%, 11/1/28 1,129,086
--------------
4,155,726
- ------------------------------------------------------------
Airlines--0.8%
Continental Airlines,
Inc.,
Aa3 1,000 6.545%, 8/2/20 1,019,200
Ba2 2,000 8.00%, 12/15/05 1,967,660
Baa3 5,000 United Airlines, Inc.,
10.67%, 5/1/04 5,889,250
--------------
8,876,110
- ------------------------------------------------------------
Asset-Backed Securities--1.3%
Aaa 3,000 California Infrastructure,
PG&E,
6.32%, 9/25/05 3,095,625
Aa3 11,000 Team Fleet Financing
Corp.,
7.35%, 5/15/03 11,372,969
--------------
14,468,594
- ------------------------------------------------------------
Automobiles--0.2%
Ba1 2,000 Navistar International
Corp.,
Sr. Note,
7.00%, 2/1/03 2,025,000
- ------------------------------------------------------------
Banks--1.8%
A1 3,900 Bank Nova Scotia NY,
6.50%, 7/15/07 3,876,300
Aaa 2,500 Bayerische Landesbank NY,
5.875%, 12/1/08 2,525,650
Baa3 3,000 Capital One Bank, Sr.
Note,
7.08%, 10/30/01 3,016,740
A2 4,000 Morgan (J.P.) & Co., Inc.,
6.00%, 1/15/09 3,976,400
A1 $ 2,100 National Australia Bank
Ltd.,
6.40%, 12/10/07 $ 2,163,000
Baa1 5,000 Skandinaviska Enskilda
Banken,
7.50%, 3/29/49 4,996,100
--------------
20,554,190
- ------------------------------------------------------------
Cable & Pay Television Systems--1.1%
Ba3 2,000 Century Communications
Corp., Sr. Note,
9.75%, 2/15/02 2,150,000
Baa3 2,000 Comcast Cable
Communications,
8.375%, 5/1/07 2,347,260
A2 7,000 Tele-Communications, Inc.,
Sr. Note,
9.25%, 4/15/02 7,779,800
--------------
12,277,060
- ------------------------------------------------------------
Chemicals--0.2%
Ba3 2,000 ISP Holdings, Inc.,
Sr. Note,
9.75%, 2/15/02 2,085,000
- ------------------------------------------------------------
Financial Services--3.0%
B2 5,000 Advanta Corp.,
7.25%, 8/16/99 4,967,850
Aa3 2,600 Associates Corp., N.A.,
6.95%, 11/1/18 2,800,148
Baa3 2,000 AT&T Capital Corp.,
7.50%, 11/15/00 2,029,540
Contifinancial Corp.,
Sr. Notes,
B3 5,000 8.375%, 8/15/03 3,550,000
B3 3,300 8.125%, 4/1/08 2,079,000
Ford Motor Credit Co.,
Notes,
A1 6,000 7.32%, 5/23/02 6,030,000
A1 5,000 7.75%, 3/15/05 5,559,450
Household Finance Corp.,
A2 1,000 5.875%, 2/1/09 994,350
A2 3,000 6.50%, 11/15/08 3,151,500
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-66
<PAGE>
Portfolio of Investments as
of January 31, 1999 (Unaudited) PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
Financial Services (cont'd.)
Aa1 $ 3,000 Toyota Motor Credit Corp.,
Note,
5.625%, 11/13/03 $ 3,030,000
--------------
34,191,838
- ------------------------------------------------------------
Forest Products--0.5%
Scotia Pacific Co.,
A3 1,600 7.11%, 1/20/14 1,540,720
Baa2 4,800 7.71%, 1/20/14 4,478,496
--------------
6,019,216
- ------------------------------------------------------------
Hotels & Leisure--0.6%
Starwood Hotels & Resorts,
Inc., Notes,
Ba1 3,500 6.25%, 11/15/00 3,378,270
Ba1 3,500 6.75%, 11/15/03 3,225,285
--------------
6,603,555
- ------------------------------------------------------------
Insurance--0.2%
Ba3 3,200 Conseco Finance Trust,
8.796%, 4/1/27 2,989,792
- ------------------------------------------------------------
Investment Banking--2.8%
Lehman Brothers Holdings,
Inc.,
Baa1 3,000 6.625%, 2/5/06 2,988,420
Baa1 9,800 6.33%, 8/1/00 9,864,484
Aa3 3,300 Merrill Lynch & Co., Inc.,
6.875%, 11/15/18 3,444,243
Aa3 15,000 Salomon Inc.,
Sr. Note,
7.30%, 5/15/02 15,820,050
--------------
32,117,197
- ------------------------------------------------------------
Leisure & Tourism--0.5%
Baa3 5,000 Royal Caribbean Cruises
Ltd.,
Sr. Note,
8.25%, 4/1/05 5,451,150
Manufacturing--0.4%
Baa1 $ 4,100 Tyco International Group
S.A.,
6.875%, 1/15/29 $ 4,318,243
- ------------------------------------------------------------
Media--2.5%
Baa3 14,000 News America Holdings
Inc.,
6.703%, 5/21/34 14,455,000
Time Warner, Inc.,
Baa3 5,500 8.11%, 8/15/06 6,285,950
Baa3 6,000 6.625%, 5/15/29 6,111,000
Baa3 950 Viacom, Inc., Sr. Note,
7.75%, 6/1/05 1,042,330
--------------
27,894,280
- ------------------------------------------------------------
Oil & Gas Equipment & Services--0.8%
Baa2 3,500 BJ Service Co., Sr. Note,
7.00%, 2/1/06 3,564,540
R & B Falcon Corp.,
Sr. Notes,
Ba1 5,000 6.50%, 4/15/03 4,555,150
Ba1 1,500 7.375%, 4/15/18 1,147,500
--------------
9,267,190
- ------------------------------------------------------------
Packaging--0.3%
Owens Illinois Inc.,
Ba1 2,100 7.50%, 5/15/10 2,174,886
Ba1 1,000 7.35%, 5/15/08 1,032,060
--------------
3,206,946
- ------------------------------------------------------------
Paper & Forest Products--0.2%
Baa2 2,000 Fort James Corp., Note,
6.234%, 3/15/01 2,011,380
- ------------------------------------------------------------
Real Estate Investment Trust--0.8%
Baa3 550 Colonial Realty, LP,
Sr. Note,
7.00%, 7/14/07 531,009
ERP Operating, LP,
A3 3,300 6.63%, 4/13/15 3,302,805
A3 5,000 6.15%, 9/15/00 4,980,500
--------------
8,814,314
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-67
<PAGE>
Portfolio of Investments as
of January 31, 1999 (Unaudited) PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
Restaurants--0.6%
Darden Restaurants, Inc.,
Baa1 $ 2,500 6.375%, 2/1/06 $ 2,467,425
Baa1 4,500 7.125%, 2/1/16 4,367,475
--------------
6,834,900
- ------------------------------------------------------------
Retail--2.0%
Federated Dept. Stores,
Inc.,
Baa2 7,500 8.125%, 10/15/02 8,098,575
Baa2 2,500 8.50%, 6/15/03 2,767,150
Ba2 5,000 Kmart Corp.,
8.125%, 12/1/06 5,325,000
Baa3 4,200 Saks Inc.,
8.25%, 11/15/08 4,231,500
A2 3,000 Sears Roebuck & Co.,
Note,
6.50%, 12/1/28 2,938,500
--------------
23,360,725
- ------------------------------------------------------------
Supermarkets--0.5%
Ba2 2,000 Fred Meyer, Inc.,
7.375%, 3/1/05 2,126,920
Baa3 3,400 Kroger Co., Sr. Note,
6.375%, 3/1/08 3,519,340
--------------
5,646,260
- ------------------------------------------------------------
Telecommunications--1.7%
Baa1 1,200 Cable & Wireless
Communications, Note,
6.75%, 12/1/08 1,246,500
Cia de Telecomunicationes
de Chile S.A., Sr. Note,
8.375%, 1/1/06 906,750
Ba1 3,000 LCI International Inc.,
Sr. Note,
7.25%, 6/15/07 3,037,680
MCI WorldCom, Inc.,
Sr. Notes,
Baa2 $ 4,800 6.95%, 8/15/28 $ 5,213,088
Baa2 1,300 6.125%, 8/15/01 1,322,906
Ba1 3,000 Qwest Communications
Int'l., Inc., Sr. Note,
7.50%, 11/1/08 3,202,500
Baa1 4,750 Sprint Capital Corp.,
6.875%, 11/15/28 5,029,585
--------------
19,959,009
- ------------------------------------------------------------
Transportation/Trucking/Shipping--1.3%
Baa2 5,000 CSX Corp., Sub. Debs.,
6.25%, 10/15/08 5,110,050
Baa1 9,000 Norfolk Southern Corp.,
Note,
6.95%, 5/1/02 9,403,380
--------------
14,513,430
- ------------------------------------------------------------
Utilities--2.3%
Ba1 4,500 Calenergy Co., Inc.,
Sr. Note,
6.96%, 9/15/03 4,673,430
Cleveland Electric
Illuminating, Notes,
Ba1 3,000 7.19%, 7/1/00 3,045,000
Ba1 2,000 7.67%, 7/1/04 2,118,000
Niagara Mohawk Power
Corp.,
Baa3 2,875 6.875%, 4/1/03 2,978,212
Baa3 4,500 7.375%, 8/1/03 4,825,170
Baa3 2,000 8.00%, 6/1/04 2,224,400
Ba2 6,000 Western Massachusetts
Electric Co.,
7.375%, 7/1/01 6,117,600
--------------
25,981,812
- ------------------------------------------------------------
Waste Management--0.1%
Baa3 1,000 Waste Management, Inc.,
Note,
6.125%, 7/15/01 1,005,820
--------------
Total corporate bonds
(cost $299,671,504) 304,628,737
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-68
<PAGE>
PRUDENTIAL BALANCED FUND
Portfolio of Investments as of January 31, 1999
(Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
U.S. GOVERNMENT SECURITIES--3.0%
United States Treasury Bonds,
$ 4,300 6.25%, 8/15/23 $ 4,830,792
1,300 5.50%, 8/15/28 1,363,167
5,000 7.25%, 8/15/22 6,238,281
14,500 8.125%, 8/15/19 19,454,940
United States Treasury Notes,
1,200 6.50%, 5/15/05 1,317,192
500 4.75%, 11/15/08 503,985
--------------
Total U.S. government
securities
(cost $32,639,798) 33,708,357
--------------
Total debt obligations
(cost $332,311,302) 338,337,094
--------------
Total long-term
investments
(cost $942,900,273) 1,021,157,312
--------------
SHORT-TERM INVESTMENTS--8.9%
- ------------------------------------------------------------
REPURCHASE AGREEMENT
101,148 Joint Repurchase Agreement Account,
4.72%, 2/1/99,
(cost $101,148,000; Note 5) 101,148,000
--------------
- ------------------------------------------------------------
Total Investments--99.2%
(cost $1,044,048,273; Note
4) 1,122,305,312
Other assets in excess of
liabilities--0.8% 8,980,513
--------------
Net Assets--100% $1,131,285,825
--------------
--------------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-69
<PAGE>
Statement of Assets and Liabilities (Unaudited) PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets January 31, 1999
<S> <C>
Investments, at value (cost $1,044,048,273)............................................................... $ 1,122,305,312
Cash...................................................................................................... 116,184
Receivable for investments sold........................................................................... 20,787,579
Dividends and interest receivable......................................................................... 7,144,574
Receivable for Fund shares sold........................................................................... 633,122
Prepaid expenses.......................................................................................... 37,677
Due from broker - variation margin........................................................................ 13,491
----------------
Total assets........................................................................................... 1,151,037,939
----------------
Liabilities
Payable for investments purchased......................................................................... 15,596,686
Payable for Fund shares reacquired........................................................................ 2,534,331
Management fee payable.................................................................................... 623,497
Distribution fee payable.................................................................................. 542,529
Accrued expenses.......................................................................................... 455,071
----------------
Total liabilities...................................................................................... 19,752,114
----------------
Net Assets................................................................................................ $ 1,131,285,825
----------------
----------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 918,550
Paid-in capital in excess of par....................................................................... 1,010,512,989
----------------
1,011,431,539
Undistributed net investment income.................................................................... 1,432,014
Accumulated net realized gain on investments........................................................... 40,344,951
Net unrealized appreciation on investments............................................................. 78,077,321
----------------
Net assets, January 31, 1999.............................................................................. $ 1,131,285,825
----------------
----------------
Class A:
Net asset value and redemption price per share
($499,948,797 / 40,516,025 shares of beneficial interest issued and outstanding).................... $12.34
Maximum sales charge (5% of offering price)............................................................ .65
Maximum offering price to public....................................................................... $12.99
Class B:
Net asset value, offering price and redemption price per share
($506,455,189 / 41,220,778 shares of beneficial interest issued and outstanding).................... $12.29
Class C:
Net asset value and redemption price per share
($9,667,815 / 786,892 shares of beneficial interest issued and outstanding)......................... $12.29
Maximum sales charge (1% of offering price)............................................................ .12
Maximum offering price to public....................................................................... $12.41
Class Z:
Net asset value, offering price and redemption price per share
($115,214,024 / 9,331,273 shares of beneficial interest issued and outstanding)..................... $12.35
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-70
<PAGE>
PRUDENTIAL BALANCED FUND
Statement of Operations (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
Net Investment Income January 31, 1999
<S> <C>
Income
Interest................................... $ 14,997,066
Dividends (net of foreign withholding taxes
of $59,690)............................. 5,367,185
----------------
Total income............................ 20,364,251
----------------
Expenses
Management fee............................. 3,622,679
Distribution fee--Class A.................. 598,434
Distribution fee--Class B.................. 2,514,875
Distribution fee--Class C.................. 46,384
Transfer agent's fees and expenses......... 1,331,000
Custodian's fees and expenses.............. 97,000
Reports to shareholders.................... 91,000
Registration fees.......................... 50,000
Legal fees................................. 20,000
Audit fees................................. 15,000
Insurance.................................. 14,000
Trustees' fees and expenses................ 10,200
Miscellaneous.............................. 2,020
----------------
Total expenses.......................... 8,412,592
----------------
Net investment income......................... 11,951,659
----------------
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency
Net realized gain (loss) on:
Investment transactions.................... 29,866,127
Financial futures transactions............. (41,511)
Foreign currency transactions.............. (1,263)
----------------
29,823,353
----------------
Net change in unrealized appreciation (depreciation) on:
Investments................................ 23,930,057
Financial futures.......................... (179,719)
----------------
23,750,338
----------------
Net gain on investments....................... 53,573,691
----------------
Net Increase in Net Assets
Resulting from Operations..................... $ 65,525,350
----------------
----------------
</TABLE>

PRUDENTIAL BALANCED FUND
Statement of Changes in Net Assets (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) January 31, July 31,
in Net Assets 1999 1998
<S> <C> <C>
Operations
Net investment income....... $ 11,951,659 $ 26,293,673
Net realized gain on
investments and foreign
currency transactions.... 29,823,353 155,549,803
Net change in unrealized
appreciation
(depreciation) of
investments.............. 23,750,338 (126,216,321)
-------------- --------------
Net increase in net assets
resulting from
operations............... 65,525,350 55,627,155
-------------- --------------
Dividends and distributions
(Note 1)
Dividends to shareholders
from net investment
income
Class A.................. (5,929,314) (12,700,788)
Class B.................. (4,263,383) (10,437,329)
Class C.................. (79,288) (148,597)
Class Z.................. (1,632,472) (3,608,837)
-------------- --------------
(11,904,457) (26,895,551)
-------------- --------------
Distributions from net
realized gains on
investment transactions
Class A.................. (33,257,135) (57,771,866)
Class B.................. (35,467,912) (69,878,157)
Class C.................. (662,890) (920,721)
Class Z.................. (7,756,318) (14,427,869)
-------------- --------------
(77,144,255) (142,998,613)
-------------- --------------
Fund share transactions (net of
share conversions) (Note 6)
Net proceeds from shares
sold..................... 76,903,216 195,965,154
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........ 84,701,659 160,126,884
Cost of shares reacquired... (166,711,439) (341,566,835)
-------------- --------------
Net increase (decrease) in
net assets from Fund
shares transactions...... (5,106,564) 14,525,203
-------------- --------------
Total decrease................. (28,629,926) (99,741,806)
Net Assets
Beginning of period............ 1,159,915,751 1,259,657,557
-------------- --------------
End of period(a)............... $1,131,285,825 $1,159,915,751
-------------- --------------
-------------- --------------
- ---------------
(a) Includes undistributed net
investment income of....... $ 1,432,014 $ 1,384,812
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-71
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
Prudential Balanced 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. The investment objective of the Fund 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, under triparty repurchase agreements, as the case may be, take
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction, including accrued interest.
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 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.
- --------------------------------------------------------------------------------

B-72
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
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.
Federal Income Taxes: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable net income to its shareholders.
Therefore, no federal income tax provision is required.
Withholding taxes on foreign 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 six months ended January 31,
1999, the Fund decreased undistributed net investment income and increased
accumulated net realized gain on investments by $1,263. Net realized gains and
net assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM 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 PIFM is computed daily and payable monthly at an annual
rate of .65 of 1% of the Fund's average daily net assets.
The Fund has a distribution agreement with Prudential Investment Management
Services LLC ('PIMS') which acts as the distributor of the Class A, Class B,
Class C and Class Z shares. The Fund compensates PIMS for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the 'Class A, B and C Plans'), regardless of expenses actually
incurred. The distribution fees were accrued daily and payable monthly. No
distribution or service fees were paid to PIMS as distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensated PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were .25 of 1%, 1% and 1% of the average daily net
assets of the Class A, B and C shares, respectively, for the period ended
January 31, 1999.
PIMS has advised the Fund that it received approximately $109,900 in front-end
sales charges resulting from sales of Class A shares and after November 2, 1998
Class C shares during the period ended January 31, 1999. From these fees, PIMS
paid such sales charges to affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
- --------------------------------------------------------------------------------

B-73
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
PIMS has advised the Fund that for the period ended January 31, 1999, it
received approximately $262,700 and $2,800 in contingent deferred sales charges
imposed upon certain redemptions by Class B and C shareholders, respectively.
PIC, PIFM and PIMS are indirect, wholly owned subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. Interest on any such borrowings outstanding will be at market
rates. The purpose of the Agreement is to serve as an alternative source of
funding for capital share redemptions. The Fund did not borrow any amounts
pursuant to the Agreement during the period ended January 31, 1999. The Funds
pay a commitment fee at an annual rate of .055 of 1% on the unused portion of
the credit facility. The commitment fee is accrued and paid quarterly on a pro
rata basis by the Funds. The Agreement expired on February 28, 1999 and has been
extended through March 12, 1999 under the same terms.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the period ended January 31, 1999,
the Fund incurred fees of approximately $1,014,000 for the services of PMFS. As
of January 31, 1999, approximately $161,000 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 nonaffiliates.
For the period ended January 31, 1999, PSI received approximately $533,900 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities of the Fund, other than short-term
investments, for the fiscal period ended January 31, 1999, were $440,819,366 and
$520,651,865, respectively, which includes purchases and sales of U.S.
government obligations of $132,668,322 and $173,431,378, respectively.
The cost basis of investments for federal income tax purposes as of January 31,
1999 was $1,045,523,467 and accordingly, net unrealized appreciation of
investments for federal income tax purposes was $76,781,845 (gross unrealized
appreciation--$151,039,485; gross unrealized depreciation--$74,257,640).
- ------------------------------------------------------------
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 January 31, 1999, the
Fund had a 14.9% undivided interest in repurchase agreements in the joint
account. The undivided interest for the Fund represented $101,148,000 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., 4.75%, in the principal amount of $200,000,000,
repurchase price $200,079,167, due 2/1/99. The value of the collateral including
accrued interest is $206,615,704.
Salomon Brothers Inc., 4.73%, in the principal amount of $200,000,000,
repurchase price $200,078,833, due 2/1/99. The value of the collateral including
accrued interest is $204,209,880.
Morgan (J.P.) Securities Inc., 4.72%, in the principal amount of $200,000,000,
repurchase price $200,078,667, due 2/1/99. The value of the collateral including
accrued interest is $204,000,313.
Warburg Dillon Read LLC, 4.62%, in the principal amount of $80,255,000,
repurchase price $80,285,898, due 2/1/99. The value of the collateral including
accrued interest is $81,862,553.
- ------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending upon
the period of time the shares are held. Prior to November 2, 1998, Class C
shares were sold with a contingent deferred sales charge of 1% during the first
year. Effective November 2, 1998, Class C shares are sold with a front-end sales
charge of 1% and a contingent deferred sales charge of 1% during the first 18
months. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. A special exchange
privilege is also available for shareholders who qualified to purchase Class A
shares at net asset value. Class Z shares are not subject to any sales or
redemption charge and are offered exclusively for sale to a limited group of
investors.
- --------------------------------------------------------------------------------

B-74
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
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 period ended January 31,
1999 and July 31, 1998 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ---------------------------------- ----------- -------------
<S> <C> <C>
Six months ended January 31, 1999:
Shares sold....................... 2,233,286 $ 26,682,571
Shares issued in reinvestment of
dividends and distributions..... 3,099,585 36,538,284
Shares reacquired................. (4,780,707) (57,965,470)
----------- -------------
Net increase in shares outstanding
before conversion............... 552,164 5,255,385
Shares issued upon conversion from
Class B......................... 1,506,279 17,590,588
----------- -------------
Net increase in shares
outstanding..................... 2,058,443 $ 22,845,973
----------- -------------
----------- -------------
Year ended July 31, 1998:
Shares sold....................... 3,967,817 $ 52,091,809
Shares issued in reinvestment of
dividends and distributions..... 5,263,433 64,754,657
Shares reacquired................. (9,908,242) (129,373,980)
----------- -------------
Net decrease in shares outstanding
before conversion............... (676,992) (12,527,514)
Shares issued upon conversion from
Class B......................... 3,632,745 46,694,238
----------- -------------
Net increase in shares
outstanding..................... 2,955,753 $ 34,166,724
----------- -------------
----------- -------------
<CAPTION>
Class B
- ----------------------------------
<S> <C> <C>
Six months ended January 31, 1999:
Shares sold....................... 2,385,725 $ 28,742,919
Shares issued in reinvestment of
dividends and distributions..... 3,243,018 38,079,721
Shares reacquired................. (5,310,305) (63,530,256)
----------- -------------
Net increase in shares outstanding
before conversion............... 318,438 3,292,384
Shares reacquired upon conversion
into Class A.................... (1,512,518) (17,590,588)
----------- -------------
Net decrease in shares
outstanding..................... (1,194,080) $ (14,298,204)
----------- -------------
----------- -------------
Year ended July 31, 1998:
Shares sold....................... 5,179,076 $ 67,414,895
Shares issued in reinvestment of
dividends and distributions..... 6,244,089 76,307,531
Shares reacquired................. (10,219,280) (133,027,987)
----------- -------------
Net increase in shares outstanding
before conversion............... 1,203,885 10,694,439
Shares reacquired upon conversion
into Class A.................... (3,615,791) (46,694,238)
----------- -------------
Net decrease in shares
outstanding..................... (2,411,906) $ (35,999,799)
----------- -------------
----------- -------------
<CAPTION>
Class C Shares Amount
- ---------------------------------- ----------- -------------
<S> <C> <C>
Six months ended January 31, 1999:
Shares sold....................... 157,618 $ 1,911,720
Shares issued in reinvestment of
dividends and distributions..... 59,382 697,263
Shares reacquired................. (161,822) (1,941,479)
----------- -------------
Net increase in shares
outstanding..................... 55,178 $ 667,504
----------- -------------
----------- -------------
Year ended July 31, 1998:
Shares sold....................... 323,478 $ 4,203,230
Shares issued in reinvestment of
dividends and distributions..... 84,293 1,030,457
Shares reacquired................. (178,945) (2,326,256)
----------- -------------
Net increase in shares
outstanding..................... 228,826 $ 2,907,431
----------- -------------
----------- -------------
<CAPTION>
Class Z
- ----------------------------------
<S> <C> <C>
Six months ended January 31, 1999:
Shares sold....................... 1,615,448 $ 19,566,006
Shares issued in reinvestment of
dividends and distributions..... 795,963 9,386,391
Shares reacquired................. (3,499,886) (43,274,234)
----------- -------------
Net decrease in shares
outstanding..................... (1,088,475) $ (14,321,837)
----------- -------------
----------- -------------
Year ended July 31, 1998:
Shares sold....................... 5,472,022 $ 72,255,220
Shares issued in reinvestment of
dividends and distributions..... 1,463,704 18,034,239
Shares reacquired................. (5,753,738) (76,838,612)
----------- -------------
Net increase in shares
outstanding..................... 1,181,988 $ 13,450,847
----------- -------------
----------- -------------
</TABLE>

- ------------------------------------------------------------
Note 7. Dividends
On March 29, 1999 the Board of Trustees of the Fund declared the following
dividends per share, payable on March 31, 1999 to shareholders of record on
March 30, 1999:
<TABLE>
<CAPTION>
Class B
Class A and C Class Z
-------- -------- --------
<S> <C> <C> <C>
Ordinary Income.................. $0.065 $ 0.04 $0.0725
Long-Term Capital Gains.......... $ 0.01 $ 0.01 $ 0.01
</TABLE>
- --------------------------------------------------------------------------------

B-75
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------------------------
Six Months
Ended Year Ended July 31,
January 31, -----------------------------------------------------------
1999 1998 1997 1996 1995 1994
----------- -------- -------- -------- -------- -------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $ 12.63 $ 14.01 $ 11.85 $ 12.04 $ 11.12 $ 11.75
----------- -------- -------- -------- -------- -------
Income from investment operations
Net investment income................ .15 .33 .34 .31 .34 .33
Net realized and unrealized gain
(loss) on investment
transactions...................... .60 .29 2.96 .28 1.11 (.05)
----------- -------- -------- -------- -------- -------
Total from investment
operations..................... .75 .62 3.30 .59 1.45 .28
----------- -------- -------- -------- -------- -------
Less distributions
Dividends from net investment
income............................ (.16) (.34) (.36) (.29) (.33) (.37)
Distributions from net realized gains
on investment and foreign currency
transactions...................... (.88) (1.66) (.78) (.49) (.20) (.54)
----------- -------- -------- -------- -------- -------
Total distributions............... (1.04) (2.00) (1.14) (.78) (.53) (.91)
----------- -------- -------- -------- -------- -------
Net asset value, end of period....... $ 12.34 $ 12.63 $ 14.01 $ 11.85 $ 12.04 $ 11.12
----------- -------- -------- -------- -------- -------
----------- -------- -------- -------- -------- -------
TOTAL RETURN(a):..................... 6.33% 5.05% 29.09% 4.89% 13.67% 2.39%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $ 499,949 $485,690 $497,461 $262,096 $119,829 $37,512
Average net assets (000)............. $ 474,844 $493,828 $306,717 $246,609 $ 69,754 $29,875
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.19%(b) 1.19% 1.17% 1.20% 1.22% 1.23%
Expenses, excluding distribution
fees........................... .94%(b) .94% .92% .95% .97% 1.00%
Net investment income............. 2.46%(b) 2.51% 2.84% 2.53% 2.90% 2.84%
For Class A, B, C and Z shares:
Portfolio turnover rate........... 44% 144% 140% 97% 201% 108%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-76
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
----------------------------------------------------------------------------
Six Months
Ended Year Ended July 31,
January 31, ------------------------------------------------------------
1999 1998 1997 1996 1995 1994
----------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $ 12.57 $ 13.96 $ 11.80 $ 12.00 $ 11.09 $ 11.72
----------- -------- -------- -------- -------- --------
Income from investment operations
Net investment income................ .11 .24 .26 .21 .26 .24
Net realized and unrealized gain
(loss) on investment
transactions...................... .60 .27 2.95 .28 1.10 (.05)
----------- -------- -------- -------- -------- --------
Total from investment
operations..................... .71 .51 3.21 .49 1.36 .19
----------- -------- -------- -------- -------- --------
Less distributions
Dividends from net investment
income............................ (.11) (.24) (.27) (.20) (.25) (.28)
Distributions from net realized gains
on investment and foreign currency
transactions...................... (.88) (1.66) (.78) (.49) (.20) (.54)
----------- -------- -------- -------- -------- --------
Total distributions............... (.99) (1.90) (1.05) (.69) (.45) (.82)
----------- -------- -------- -------- -------- --------
Net asset value, end of period....... $ 12.29 $ 12.57 $ 13.96 $ 11.80 $ 12.00 $ 11.09
----------- -------- -------- -------- -------- --------
----------- -------- -------- -------- -------- --------
TOTAL RETURN(a):..................... 5.92% 4.28% 28.24% 4.05% 12.79% 1.61%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $ 506,455 $533,354 $625,715 $420,465 $392,291 $445,609
Average net assets (000)............. $ 498,875 $578,432 $431,425 $437,792 $409,419 $392,133
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.94%(b) 1.94% 1.92% 1.95% 1.97% 2.00%
Expenses, excluding distribution
fees........................... .94%(b) .94% .92% .95% .97% 1.00%
Net investment income............. 1.71%(b) 1.76% 2.09% 1.78% 2.34% 2.08%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-77

<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
---------------------------------------------------------- ------------------------
August 1, Year
Six Months 1994(a) Six Months Ended
Ended Year Ended July 31, through Ended July 31,
January 31, ---------------------------- July 31, January 31, --------
1999 1998 1997 1996 1995 1999 1998
----------- ------ ------ ------ --------- ----------- --------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $ 12.57 $13.96 $11.80 $12.00 $ 11.12 $ 12.64 $ 14.01
----- ------ ------ ------ --------- ----------- --------
Income from investment operations
Net investment income................ .11 .24 .26 .21 .21 .18 .37
Net realized and unrealized gain
(loss) on investment
transactions...................... .60 .27 2.95 .28 1.12 .58 .29
----- ------ ------ ------ --------- ----------- --------
Total from investment
operations..................... .71 .51 3.21 .49 1.33 .76 .66
----- ------ ------ ------ --------- ----------- --------
Less distributions
Dividends from net investment
income............................ (.11) (.24) (.27) (.20) (.25) (.17) (.37)
Distributions from net realized gains
on investment and foreign currency
transactions...................... (.88) (1.66) (.78) (.49) (.20) (.88) (1.66)
----- ------ ------ ------ --------- ----------- --------
Total distributions............... (.99) (1.90) (1.05) (.69) (.45) (1.05) (2.03)
----- ------ ------ ------ --------- ----------- --------
Net asset value, end of period....... $ 12.29 $12.57 $13.96 $11.80 $ 12.00 $ 12.35 $ 12.64
----- ------ ------ ------ --------- ----------- --------
----- ------ ------ ------ --------- ----------- --------
TOTAL RETURN(b):..................... 5.92% 4.28% 28.24% 4.05% 12.49% 6.46% 5.37%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $ 9,668 $9,201 $7,023 $3,525 $ 3,046 $ 115,214 $131,671
Average net assets (000)............. $ 9,201 $8,175 $4,790 $2,444 $ 920 $ 122,663 $128,358
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.94%(d) 1.94% 1.92% 1.95% 2.04%(d) .94%(d) .94%
Expenses, excluding distribution
fees........................... .94%(d) .94% .92% .95% 1.04%(d) .94%(d) .94%
Net investment income............. 1.71%(d) 1.76% 2.09% 1.78% 2.20%(d) 2.72%(d) 2.76%
<CAPTION>
March 1,
1996(c)
through
July 31,
1997 1996
-------- --------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C>
Net asset value, beginning of
period............................ $ 11.85 $12.16
-------- --------
Income from investment operations
Net investment income................ .46 .13
Net realized and unrealized gain
(loss) on investment
transactions...................... 2.87 (.28)
-------- --------
Total from investment
operations..................... 3.33 (.15)
-------- --------
Less distributions
Dividends from net investment
income............................ (.39) (.16)
Distributions from net realized gains
on investment and foreign currency
transactions...................... (.78) --
-------- --------
Total distributions............... (1.17) (.16)
-------- --------
Net asset value, end of period....... $ 14.01 $11.85
-------- --------
-------- --------
TOTAL RETURN(b):..................... 29.39% (1.24)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $129,459 $4,015
Average net assets (000)............. $ 99,391 $4,217
Ratios to average net assets:
Expenses, including distribution
fees........................... .92% .95%(d)
Expenses, excluding distribution
fees........................... .92% .95%(d)
Net investment income............. 3.12% 2.72%(d)
</TABLE>
- ---------------
(a) Commencement of offering of Class C 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 each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Commencement of offering of Class Z shares.
(d) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-78
<PAGE>

DESCRIPTION OF SECURITY RATINGS

MOODY'S INVESTORS SERVICE, INC.

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.

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.

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

- Leading market positions in well-established industries.

- High rates of return on funds employed.

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

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

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

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

A-1
<PAGE>

STANDARD & POOR'S RATINGS GROUP

DEBT RATINGS

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

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

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

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

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

COMMERCIAL PAPER RATINGS

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

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

A-2
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION

The following terms are used in mutual fund investing.

ASSET ALLOCATION

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

DIVERSIFICATION

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

DURATION

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

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

MARKET TIMING

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

POWER OF COMPOUNDING

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

STANDARD DEVIATION

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

I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA

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

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

EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
VALUE OF $1.00 INVESTED
ON
1/1/26 THROUGH 12/31/98
<S> <C>
Small Stocks $5,116.95
Common Stocks $2,350.89
Long-Term Bonds $44.18
Treasury Bills $14.94
Inflation $9.16
</TABLE>

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

Generally, stock returns are due to capital appreciation and the reinvestment of
any gains. Bond returns are due to reinvesting interest. Also, stock prices are
usually more volatile than bond prices over the long-term. Small stock returns
for 1926-1980 are those of stocks comprising the 5th quintile of the New York
Stock Exchange. Thereafter, returns are those of the Dimensional Fund Advisors
(DFA) Small Company Fund. Common stock returns are based on the S&P Composite
Index, a market-weighted, unmanaged index 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 measured using a constant one bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).

II-1
<PAGE>

Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1988
through 1998. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.

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

HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS

<TABLE>
<CAPTION>
'88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0%
- --------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
MORTGAGE
SECURITIES(2) 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0%
- --------------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT
GRADE
CORPORATE
BONDS(3) 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.6%
- --------------------------------------------------------------------------------------------------------------------
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6%
- --------------------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)% 5.3%
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN
HIGHEST
AND LOWEST RETURN
PERCENT 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7 17.12 8.4
</TABLE>

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

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

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

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

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

II-2
<PAGE>

This chart illustrates the performance of major world stock markets for the
period from December 31, 1985 through December 31, 1998. It does not represent
the performance of any Prudential Mutual Fund.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN OF MAJOR WORLD STOCK MARKETS
(12/31/85 - 12/31/98) (IN U.S. DOLLARS)
<S> <C>
Belgium 22.7%
Spain 22.5%
The Netherlands 20.8%
Sweden 19.9%
Switzerland 18.3%
USA 18.1%
Hong Kong 17.8%
France 17.4%
UK 16.7%
Germany 13.4%
Austria 8.9%
Japan 6.5%
</TABLE>

Source: Morgan Stanley Capital International (MSCI) and Lipper, Inc. as of
12/31/98. 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.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C> <C>
Capital Appreciation and Reinvesting
Dividends $391,707
Capital Appreciation only $133,525
</TABLE>

Source: Lipper Inc. 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: $15.8 Trillion

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C> <C>
Canada 1.8%
U.S. 51.0%
Europe 34.7%
Pacific Basin 12.5%
</TABLE>

Source: Morgan Stanley Capital International, December 31, 1998. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of approximately
1577 companies in 22 countries (representing approximately 60% of the aggregate
market value of the stock exchanges). This chart is for illustrative purposes
only and does not represent the allocation of any Prudential Mutual Fund.

II-3
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Long Term U.S. Treasury Bond Yield in Percent
(1926-1998)
</TABLE>

[CHART]

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

Source: Ibbotson Associates. Used with permission. All rights reserved. The
chart illustrates the historical yield of the long-term U.S. Treasury Bond from
1926-1998. Yields represent that of an annually renewed one-bond portfolio with
a remaining maturity of approximately 20 years. This chart is for illustrative
purposes and should not be construed to represent the yields of any Prudential
Mutual Fund.

II-4
<PAGE>
APPENDIX III--INFORMATION RELATING TO PRUDENTIAL

Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "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,
1997 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.

INFORMATION ABOUT PRUDENTIAL

The Manager and PIC(1) are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1997. Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs almost 81,000 persons
worldwide, and maintains a sales force of approximately 11,500 agents and nearly
6,500 domestic and international financial advisers. Prudential is a major
issuer of annuities, including variable annuities. Prudential seeks to develop
innovative products and services to meet consumer needs in each of its business
areas. Prudential uses the rock of Gibraltar as its symbol. The Prudential rock
is a recognized brand name throughout the world.

INSURANCE. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to nearly 40 million people worldwide.
Long one of the largest issuers of life insurance, Prudential has 25 million
life insurance policies in force today with a face value of almost $1 trillion.
Prudential has the largest capital base ($12.1 billion) of any life insurance
company in the United States. Prudential provides auto insurance for more than
1.5 million cars and insures approximately 1.2 million homes.

MONEY MANAGEMENT. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It manages
$36 billion of individual retirement plan assets, such as 401(k) plans. As of
December 31, 1997, Prudential had more than $370 billion in assets under
management. Prudential Investments, a business group of Prudential (of which
Prudential Mutual Funds is a key part), manages over $211 billion in assets of
institutions and individuals. In INSTITUTIONAL INVESTOR July, 1998, Prudential
was ranked eighth in terms of total assets under management as of December 31,
1997.

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

HEALTHCARE. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.9
million Americans receive healthcare from a Prudential managed care
membership.(3)

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

INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS

As of November 30, 1998, Prudential Investments Fund Management is the
eighteenth largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.

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

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

(1) PIC serves as the subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as the subadviser
to Nicholas-Applegate Fund, Inc., Jennison Associates LLC as one of the
subadvisers to Prudential Diversified Funds, Prudential 20/20 Focus Fund,
Prudential Sector Funds, Inc. and The Prudential Investment Portfolios,
Inc., and Mercator Asset Management LP as the subadviser to International
Stock Series, a portfolio of Prudential World Fund, Inc. There are multiple
subadvisers for The Target Portfolio Trust.

(2) As of December 31, 1996.

(3)On December 10, 1998 Prudential announced its intention to sell Prudential
Health Care to Aetna Inc. for $1 billion.

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. Prudential Equity Fund is managed with a "value" investment
style by PIC. In 1995, Prudential Securities introduced Prudential Jennison
Fund, a growth-style equity fund managed by Jennison Associates LLC, a premier
institutional equity manager and a subsidiary of Prudential.

HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitors
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase.(4) Non-investment grade bonds, also
known as junk bonds or high yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.

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

Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from PULP AND PAPER FORECASTER to WOMEN'S
WEAR DAILY--to keep them informed of the industries they follow.

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

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

INFORMATION ABOUT PRUDENTIAL SECURITIES

Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1998, assets held by Prudential Securities for its
clients approximated $268 billion. During 1998, over 31,000 new customer
accounts were opened each month at Prudential Securities.(5)

Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university," which
provides advanced education in a wide array of investment and financial planning
areas.

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

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

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

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

(5) As of December 31, 1998.

III-2
<PAGE>
PART C
OTHER INFORMATION

ITEM 23. EXHIBITS.

(a) (1) Amended and Restated Declaration of Trust. Incorporated by
reference to Exhibit 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).

(2) Amended Certificate of Designation. Incorporated by reference to
Exhibit No. 1(b) to Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A filed via EDGAR on September 26,
1997 (File No. 33-12531).

(3) Certificate of Amendment of Declaration of Trust. Incorporated
by reference to Exhibit No. 1(c) to Post-Effective Amendment No. 19
to the Registration Statement on Form N-1A filed via EDGAR on
September 26, 1997 (File No. 33-12531).

(4) Amended and Restated Certificate of Designation.*

(b) Amended By-Laws of the Registrant. Incorporated by reference to
Exhibit No. 2 to Post-Effective Amendment No. 20 to the Registration
Statement on Form N-1A filed via EDGAR on September 28, 1998 (File
No. 33-12531).

(c) Specimen receipt for shares of beneficial interest issued by the
Registrant. Incorporated by reference to Exhibit No. 4 to
Post-Effective Amendment No. 19 to the Registration Statement on
Form N-1A filed via EDGAR on September 26, 1997 (File No. 33-12531).

(d) (1) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc. Incorporated by reference to Exhibit
No. 6(a) to the Registration Statement on Form N-14 filed via EDGAR
on April 14, 1997 (File No. 333-25133).

(2) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. Incorporated by
reference to Exhibit No. 6(b) to the Registration Statement on Form
N-14 filed via EDGAR on April 14, 1997 (File No. 333-25133).

(e) (1) Distribution Agreement. Incorporated by reference to Exhibit No.
6(a) to Post-Effective Amendment No. 20 to the Registration
Statement on Form N-1A filed via EDGAR on September 28, 1998 (File
No. 33-12531).

(2) Form of Selected Dealer Agreement. Incorporated by reference to
Exhibit No. 6(b) to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A filed via EDGAR on September 28,
1998 (File No. 33-12531).

(g) (1) Custodian Contract between the Registrant and State Street Bank
and Trust Company. Incorporated by reference to Exhibit No. 9(a) to
the Registration Statement on Form N-14 filed via EDGAR on April 14,
1997 (File No. 333-25133).

(2) Amendment to Custodian Contract. Incorporated by reference to
Exhibit No. 9(b) to the Registration Statement on Form N-14 filed
via EDGAR on April 14, 1997 (File No. 333-25133).

(3) Amendment to Custodian Contract. Incorporated by reference to
Exhibit No. 8(c) to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A filed via EDGAR on September 28,
1998 (File No. 33-12531).

C-1
<PAGE>

(h) 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. 19 to the Registration
Statement on Form N-1A filed via EDGAR on September 26, 1997 (File
No. 33-12531).

(i) Opinion and Consent of Counsel.*

(m) (1) Amended and Restated Distribution and Service Plan for Class A
shares. Incorporated by reference to Exhibit No. 15(a) to
Post-Effective Amendment No. 20 to the Registration Statement on
Form N-1A filed via EDGAR on September 28, 1998 (File No. 33-12531).

(2) Amended and Restated Distribution and Service Plan for Class B
shares. Incorporated by reference to Exhibit No. 15(b) to
Post-Effective Amendment No. 20 to the Registration Statement on
Form N-1A filed via EDGAR on September 28, 1998 (File No. 33-12531).

(3) Amended and Restated Distribution and Service Plan for Class C
shares. Incorporated by reference to Exhibit No. 15(c) to
Post-Effective Amendment No. 20 to the Registration Statement on
Form N-1A filed via EDGAR on September 28, 1998 (File No. 33-12531).

(o) Amended Rule 18f-3 Plan. Incorporated by reference to Exhibit No. 18
to Post-Effective Amendment No. 20 to the Registration Statement on
Form N-1A filed via EDGAR on September 28, 1998 (File No. 33-12531).

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

ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND.

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

ITEM 25. INDEMNIFICATION.

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

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended ("Securities Act") may be permitted to trustees, officers
and controlling persons of the Registrant pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the 1940 Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a trustee, officer, or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
trustee, officer or controlling person 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.

C-2
<PAGE>

Section 9 of the Management Agreement (Exhibit (d)(1) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit (d)(2) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC ("PIFM") and The Prudential Investment Corporation ("PIC"),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective 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.

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

(a) Prudential Investments Fund Management LLC (PIFM).

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

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

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

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

(b) The Prudential Investment Corporation (PIC)

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

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

<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ------------------------------ ------------------------------ --------------------------------------------------
<S> <C> <C>
Jeffrey Hiller Chief Compliance Officer Chief Compliance Officer, Prudential Private Asset
Management
John R. Strangfeld, Jr. Chairman of the Board, President of Private Asset Management Group of
President, Chief Executive Prudential; Senior Vice President, Prudential;
Officer and Director Chairman of the Board, President, Chief
Executive Officer and Director, PIC
Bernard Winograd Senior Vice President and Chief Executive Officer, Prudential Real Estate
Director Investors; Senior Vice President and Director,
PIC
</TABLE>

ITEM 27. PRINCIPAL UNDERWRITERS

(a) Prudential Investment Management Services LLC (PIMS)

PIMS is distributor for Cash Accumulation Trust, Command Money Fund, Command
Government Fund, Command Tax-Free Fund, The Global Total Return Fund, Inc.,
Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate
Growth Equity Fund), Prudential Balanced Fund, Prudential California Municipal
Fund, Prudential Distressed Securities Fund, Inc., Prudential Diversified Bond
Fund, Inc., Prudential Diversified Funds, Prudential Emerging Growth Fund, Inc.,
Prudential Equity Fund, Inc., Prudential Equity Income Fund, Prudential Europe
Growth Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential

C-3
<PAGE>

Global Limited Maturity Fund, Inc., Prudential Government Income Fund, Inc.,
Prudential Government Securities Trust, Prudential High Yield Fund, Inc.,
Prudential High Yield Total Return Fund, Inc., Prudential Index Series Fund,
Prudential Institutional Liquidity Portfolio, Inc., Prudential Intermediate
Global Income Fund, Inc., Prudential International Bond Fund, Inc., Prudential
Mid-Cap Value Fund, Prudential MoneyMart Assets, Inc., Prudential Municipal Bond
Fund, Prudential Municipal Series Fund, Prudential National Municipals Fund,
Inc., Prudential Natural Resources Fund, Inc., Prudential Pacific Growth Fund,
Inc., Prudential Real Estate Securities Fund, Prudential Sector Funds, Inc.,
Prudential Small-Cap Quantum Fund, Inc., Prudential Small Company Value Fund,
Inc., Prudential Special Money Market Fund, Inc., Prudential Structured Maturity
Fund, Inc., Prudential Tax-Free Money Fund, Inc., Prudential Tax-Managed Equity
Fund, Prudential 20/20 Focus Fund, Prudential World Fund, Inc., The Prudential
Investment Portfolios, Inc. and The Target Portfolio Trust.

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

<TABLE>
<CAPTION>
POSITIONS
AND
POSITIONS AND OFFICES
OFFICES WITH WITH
NAME(1) UNDERWRITER REGISTRANT
- ----------------------------------- --------------------------------------------- -----------
<S> <C> <C>
Margaret Deverell.................. Vice President and Chief Financial Officer None
Robert F. Gunia.................... President Vice
President
and
Trustee
Kevin Frawley...................... Senior Vice President and Compliance None
Officer
William V. Healy................... Senior Vice President, Secretary and Chief None
Legal Officer
Brian Henderson.................... Senior Vice President and Chief Operating None
Officer
John R. Strangfeld, Jr............. Advisory Board Member President
and
Trustee
</TABLE>

- --------------
(1) The address of each person named is 751 Broad Street, Newark, New Jersey
07102-4077 unless otherwise noted.

ITEM 28. LOCATION OF ACCOUNTS AND RECORDS

All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, The Prudential Investment Corporation, Prudential Plaza,
745 Broad Street, Newark, New Jersey 07102 the Registrant, Gateway Center Three,
100 Mulberry Street, Newark, New Jersey 07102-4077 and Prudential Mutual Fund
Services LLC, Raritan Plaza One, Edison, New Jersey 08837. Documents required by
Rules 31a-1 (b)(5), (6), (7), (9), (10) and (11) 31a-1(f) Rules 31a-1(b)(4) and
(11) and 31a-1(d) will be kept at Gateway Center Three, 100 Mulberry Street,
Newark, New Jersey 07102-4077 and the remaining accounts, books and other
documents required by such other pertinent provisions of Section 31(a) and the
Rules promulgated thereunder will be kept by State Street Bank and Trust Company
and Prudential Mutual Fund Services LLC.

ITEM 29. MANAGEMENT SERVICES

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

ITEM 30. UNDERTAKINGS

Not applicable.

C-4
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act and the Investment Company
Act, the Fund has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, duly authorized, in the City of Newark,
and the State of New Jersey, on the day of July, 1999.

PRUDENTIAL BALANCED FUND

/s/ John R. Strangfeld, Jr.
----------------------------------------
(JOHN R. STRANGFELD, JR., PRESIDENT)

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- --------------------
<S> <C> <C>
/s/ Edward D. Beach Trustee July , 1999
- ---------------------------------
EDWARD D. BEACH

/s/ Delayne D. Gold Trustee July , 1999
- ---------------------------------
DELAYNE D. GOLD

/s/ Robert F. Gunia Trustee July , 1999
- ---------------------------------
ROBERT F. GUNIA

/s/ Douglas H. McCorkindale Trustee July , 1999
- ---------------------------------
DOUGLAS H. MCCORKINDALE

/s/ Thomas T. Mooney Trustee July , 1999
- ---------------------------------
THOMAS T. MOONEY

/s/ Stephen P. Munn Trustee July , 1999
- ---------------------------------
STEPHEN P. MUNN

/s/ Richard A. Redeker Trustee July , 1999
- ---------------------------------
RICHARD A. REDEKER

/s/ Robin B. Smith Trustee July , 1999
- ---------------------------------
ROBIN B. SMITH

/s/ John R. Strangfeld, Jr. President and Trustee July , 1999
- ---------------------------------
JOHN R. STRANGFELD, JR.

/s/ Louis A. Weil, III Trustee July , 1999
- ---------------------------------
LOUIS A. WEIL, III

/s/ Clay T. Whitehead Trustee July , 1999
- ---------------------------------
CLAY T. WHITEHEAD

/s/ Grace C. Torres Treasurer and Principal Financial July , 1999
- --------------------------------- and Accounting Officer
GRACE C. TORRES
</TABLE>

<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------------------------------------------------------------------------
<C> <S>
(a) (1) 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).
(2) Amended Certificate of Designation. Incorporated by reference to
Exhibit No. 1(b) to Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A filed via EDGAR on September 26,
1997 (File No. 33-12531).
(3) Certificate of Amendment of Declaration of Trust. Incorporated
by reference to Exhibit No. 1(c) to Post-Effective Amendment No. 19
to the Registration Statement on Form N-1A filed via EDGAR on
September 26, 1997 (File No. 33-12531).
(4) Amended and Restated Certificate of Designation.*
(b) Amended By-Laws of the Registrant. Incorporated by reference to
Exhibit No. 2 to Post Effective Amendment No. 20 to the Registration
Statement on Form N-1A filed via EDGAR on September 28, 1998 (File
No. 33-12531).
(c) Specimen receipt for shares of beneficial interest issued by the
Registrant. Incorporated by reference to Exhibit No. 4 to
Post-Effective Amendment No. 19 to the Registration Statement in
Form N-1A filed via EDGAR on September 26, 1997 (File No. 33-12531).
(d) (1) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc. Incorporated by reference to Exhibit
No. 6(a) to the Registration Statement on Form N-14 filed via EDGAR
on April 14, 1997 (File No. 333-25133).
(2) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. Incorporated by
reference to Exhibit No. 6(b) to the Registration Statement on Form
N-14 filed via EDGAR on April 14, 1997 (File No. 333-25133).
(e) (1) Distribution Agreement. Incorporated by reference to Exhibit No.
6(a) to Post Effective Amendment No. 20 to the Registration
Statement on Form N-1A filed via EDGAR on September 28, 1998 (File
No. 33-12531).
(2) Form of Selected Dealer Agreement. Incorporated by reference to
Exhibit No. 6(b) to Post Effective Amendment No. 20 to the
Registration Statement on Form N-1A filed via EDGAR on September 28,
1998 (File No. 33-12531).
(g) (1) Custodian Contract between the Registrant and State Street Bank
and Trust Company. Incorporated by reference to Exhibit No. 9(a) to
the Registration Statement on Form N-14 filed via EDGAR on April 14,
1997 (File No. 333-25133).
(2) Amendment to Custodian Contract. Incorporated by reference to
Exhibit No. 9(b) to the Registration Statement on Form N-14 filed
via EDGAR on April 14, 1997 (File No. 333-25133).
(3) Amendment to Custodian Contract. Incorporated by reference to
Exhibit No. 8(c) to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A filed via EDGAR on September 28,
1998 (File No. 33-12531).
(h) 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. 19 to the Registration
Statement on Form N-1A filed via EDGAR on September 26, 1997 (File
No. 33-12531).
(i) Opinion and Consent of Counsel.*
(m) (1) Amended and Restated Distribution and Service Plan for Class A
shares. Incorporated by reference to Exhibit No. 15(a) to
Post-Effective Amendment No. 20 to the Registration Statement on
Form N-1A filed via EDGAR on September 28, 1998 (File No. 33-12531).
(2) Amended and Restated Distribution and Service Plan for Class B
shares. Incorporated by reference to Exhibit No. 15(b) to
Post-Effective Amendment No. 20 to the Registration Statement on
Form N-1A filed via EDGAR on September 28, 1998 (File No. 33-12531).
(3) Amended and Restated Distribution and Service Plan for Class C
shares. Incorporated by reference to Exhibit No. 15(c) to
Post-Effective Amendment No. 20 to the Registration Statement on
Form N-1A filed via EDGAR on September 28, 1998 (File No. 33-12531).
(o) Amended Rule 18f-3 Plan. Incorporated by reference to Exhibit No. 18
to Post-Effective Amendment No. 20 to the Registration Statement on
Form N-1A filed via EDGAR on September 28, 1998 (File No. 33-12531).
<FN>
- ------------------------
* Filed herewith
</TABLE>

<PAGE>

PRUDENTIAL BALANCED FUND
(FORMERLY PRUDENTIAL ALLOCATION FUND, AND
INITIALLY, PRUDENTIAL FLEXIFUND)

AMENDED AND RESTATED CERTIFICATE OF DESIGNATION

The undersigned, being the duly elected and acting Assistant Secretary of
Prudential Balanced Fund, a trust with transferable shares established under
Massachusetts law of the type commonly called a Massachusetts business trust
(the "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 Amended and
Restated Declaration of Trust dated August 16, 1994 and filed with the Secretary
of The Commonwealth of Massachusetts on September 15, 1994, as amended by a
Certificate of Amendment dated July 22, 1997 and filed with the Secretary of
such Commonwealth on July 25, 1997 (as so amended, the "DECLARATION OF TRUST"),
and pursuant to the affirmative vote of a majority of the Trustees at a meeting
duly called and held on August 25, 1998, the Amended and Restated Certificate of
Designation dated July 19, 1995 and filed with the Secretary of State of such
Commonwealth on July 20, 1995, as most recently amended and restated by an
Amended Certificate of Designation dated July 23, 1997 and filed with the
Secretary of such Commonwealth on July 25, 1997, is hereby further amended and
restated effective as of November 2, 1998 to read in its entirety as follows:

The shares of beneficial interest of the Trust (the "SHARES") shall not be
divided into series, but shall be classified into four classes (each, a
"CLASS"), designated "Class A Shares," "Class B Shares," "Class C Shares" and
"Class Z Shares," respectively, of which an unlimited number may be issued.
Class A Shares, Class B Shares, Class C Shares and Class Z Shares outstanding on
the date on which the amendments provided for herein become effective shall be
and shall continue to be Class A Shares, Class B Shares, Class C Shares and
Class Z Shares of the Trust.

(2) The holders of Class A Shares, Class B Shares, Class C Shares and Class
Z Shares shall be considered Shareholders of the Trust for all 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 by the Declaration of Trust or by any instrument establishing
and designating a particular Class, 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. The holders of Shares of each Class shall be
entitled to one vote per Share, and to a fraction of a vote proportional to each
fractional Share held, on all matters on which Shares of that Class shall be
entitled to vote, all as provided in the Declaration of Trust.

(3) The Shares of each Class shall represent an equal proportionate
interest in the share of such Class in the Trust Property, adjusted for any
liabilities specifically allocable to the Shares of that Class, and each Share
of a Class shall have identical voting, dividend, liquidation and other rights,
and the same terms and conditions, as the Shares of each other Class, 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

<PAGE>

-2-

Class, and such expenses shall be appropriately reflected in the determination
of the net asset value and the dividend, distribution and liquidation rights of
such Class.

(4) Each Class shall be subject to such asset-based charges as may be
imposed pursuant to a plan under Rule 12b-1 of the 1940 Act (a "PLAN") in effect
for such Class, and/or to such service fees for the maintenance of shareholder
accounts and personal services for such Class in such amounts as shall be
determined by the Trustees from time to time, and the Shares of each Class may
be issued and sold subject to such sales charges and/or contingent deferred
sales charges, and upon such other terms, as may from time to time be determined
by the Trustees and described in the Trust's then current registration statement
under the Securities Act.

(5) Subject to compliance with the requirements of the 1940 Act, the
Trustees shall have the authority to provide (a) that holders of Shares of any
Class shall have the right to convert such Shares into shares of such one or
more other registered investment companies as shall have agreed with the Trust
to accord such shareholders such right, (b) that holders of any Class of Shares
shall have the right to convert such Shares into Shares of one or more other
Classes, and (c) that Shares of any Class shall be automatically converted into
Shares of another Class, in each case in accordance with such requirements and
procedures as the Trustees may from time to time establish, all as may be
specified for the purpose in the Trust's then current registration statement
under the Securities Act applicable to the Shares accorded such right or rights.

(6) Shareholders of each Class shall vote as a separate Class on any
matter to the extent required by, and any matter shall be deemed to have been
effectively acted upon with respect to any Class as provided in, Rule 18f-2
under the 1940 Act, as from time to time in effect, or any successor rule, and
by the Declaration of Trust. Except as otherwise required by the 1940 Act, the
Shareholders of each Class, voting as a separate Class, shall have sole and
exclusive voting rights with respect to matters relating to expenses being borne
solely by such Class.

(7) The Trustees from time to time in office shall have the authority at
any time and from time to time to reallocate assets and expenses or to change
the designation of any Class now or hereafter created, or otherwise to change
the special and relative rights of any such Class, PROVIDED, that no such change
shall adversely affect the rights of holders of outstanding Shares of any Class.

IN WITNESS WHEREOF, I have hereunto set my hand and the seal of the Trust,
this 29th day of October, 1998.

/s/ Marguerite E.H. Morrison
----------------------------
Marguerite E.H. Morrison
Assistant Secretary

<PAGE>

-3-

ACKNOWLEDGMENT

STATE OF NEW JERSEY )
: October 29, 1998
COUNTY OF ESSEX ) ss

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/ Alby Mulvihill
-----------------------
Notary Public

[NOTARIAL SEAL]

<PAGE>

SULLIVAN & WORCESTER LLP
One Post Office Square
Boston, Massachusetts 02109
(617) 338-2800
Fax No. 617-338-2880

Boston
July 29, 1999

Prudential Investments Fund
Management LLC
Three Gateway Center
Newark, N.J. 07102-4077

Re: PRUDENTIAL BALANCED FUND

Ladies and Gentlemen:

You have requested our opinions as to certain matters of Massachusetts
law relating to the organization and shares of Prudential Balanced Fund
(formerly "Prudential Allocation Fund" and initially "Prudential-Bache
FlexiFund"), a trust with transferable shares under Massachusetts law (the
"FUND"). We understand that our opinions are requested in connection with
the filing by the Fund with the Securities and Exchange Commission (the
"SEC") of Post-Effective Amendment No. 21 to its Registration Statement on
Form N-1A, Registration No. 33-12531, pursuant to the Securities Act of 1933,
as amended (the "SECURITIES ACT"), and Post-Effective Amendment No. 23 to
its Registration Statement pursuant to the Investment Company Act of 1940, as
amended, Registration No. 811-5055 (collectively, the "AMENDMENT"),
relating to the several classes of shares of beneficial interest, $.01 par
value, of the Fund (the "SHARES").

The Fund was established pursuant to a Declaration of Trust dated
February 23, 1987 (the "ORIGINAL DECLARATION"), which, as theretofore
amended, amended and restated and supplemented, was restated in its entirety
by an Amended and Restated Declaration of Trust dated August 16, 1994 (the
Original Declaration, as so amended, amended and restated and supplemented,
the "RESTATED DECLARATION"). The Restated Declaration was thereafter
amended by a Certificate of Amendment dated July 22, 1997 (the Restated
Declaration, as so amended, the "AMENDED RESTATED DECLARATION"), and
supplemented by an Amended and Restated Certificate of Designation dated July
19, 1995, as further amended by Amended Certificates of Designation dated
February 12, 1996, June 18, 1996, July 22, 1997 and October 19, 1998 (as so
amended, the "CERTIFICATE OF DESIGNATION", and the Amended Restated
Declaration, as supplemented by the Certificate of Designation, the
"DECLARATION").

We are Massachusetts counsel to the Fund, and for purposes of this
opinion we have examined and are familiar with the Declaration and the
Certificate of Designation, and we have reviewed the text of the Amendment,
substantially in the form in which it is to be filed with the SEC, the form
of the Prospectus (the "PROSPECTUS") and the Statement of Additional
Information (the "SAI") to be included in the Amendment, records of the
actions taken by the Trustees of the Fund to authorize the issuance and sale
of its Shares, the By-laws of the Fund, certificates of officers of the Fund
and

<PAGE>

Prudential Investments Fund
Management LLC -2- July 29, 1999

of public officials as to matters of fact relevant to the opinons expressed
below, and such other documents and instruments, certified or otherwise
identified to our satisfaction, and such questions of law and fact, as we
have considered necessary or appropriate for purposes of such opinions. We
call to your attention that, in doing so, we have assumed the genuineness of
the signatures on, and the authenticity of, all documents furnished to us,
and the conformity to the originals of documents submitted to us as copies,
which we have not independently verified.

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

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

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

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

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

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

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

Very truly yours,

/s/ Sullivan & Worcester LLP
SULLIVAN & WORCESTER LLP