PRUDENTIAL INSTITUTIONAL FUND
485B24E, 1996-11-27
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     As filed with the Securities and Exchange Commission on November 27, 1996
    
                                                      Registration Nos. 33-48066
                                                                        811-6677
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                 ---------------
   
                                    FORM N-1A
             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933     [ ]
                         POST-EFFECTIVE AMENDMENT NO. 7                  [ ]
                                       AND
                        REGISTRATION STATEMENT UNDER THE
                         INVESTMENT COMPANY ACT OF 1940                  [ ]
                                 AMENDMENT NO. 8                         [ ]
                        (CHECK APPROPRIATE BOX OR BOXES)

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

                             PRUDENTIAL DRYDEN FUND
                  (formerly The Prudential Institutional Fund)
               (Exact name of registrant as specified in charter)

                              GATEWAY CENTER THREE
                          NEWARK, NEW JERSEY 07102-4077
               (Address of Principal Executive Offices) (Zip Code)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 225-1852
                                 MARK R. FETTING
                             30 SCRANTON OFFICE PARK
                         MOOSIC, PENNSYLVANIA 18507-1789
                     (Name and Address of Agent for Service)
    
                                 ---------------

                                   COPIES TO:
                            CLIFFORD ALEXANDER, ESQ.
                           KIRKPATRICK & LOCKHART LLP
                         1800 MASSACHUSETTS AVENUE, N.W.
                            WASHINGTON, DC 20036-1800

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

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

     It is proposed that this filing will become effective (check appropriate
box):
   
          [ ]   immediately upon filing pursuant to paragraph (b)
          [X]   on November 29, 1996 pursuant to paragraph (b)
          [ ]   60 days after filing pursuant to paragraph (a)
          [ ]   on (date) pursuant to paragraph (a) of Rule 485
          [ ]   75 days after filing pursuant to paragraph (a)(ii)
          [ ]   on (date) pursuant to paragraph (a)(ii) 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.
<TABLE>
<CAPTION>
   
                                            CALCULATION OF REGISTRATION FEE
=============================================================================================================
                                                    Proposed Maximum      Proposed Maximum         Amount of
        Title of Securities        Amount Being      Offering Price           Aggregate          Registration
         Being Registered           Registered         Per Share*         Offering Price**            Fee
- -------------------------------------------------------------------------------------------------------------
<S>                                 <C>                  <C>                <C>                    <C>
Shares of beneficial interest,
 par value $.001 per share ....     77,923,810           $14.99             $330,000               $100
=============================================================================================================
</TABLE>
*  The calculation of the maximum offering price was made pursuant to Rule 24e-2
   and was based on the offering price of $14.99 per share equal to the average
   of the offering prices of the classes of each series as of the close of
   business on November 25, 1996 pursuant to Rule 457(d). The total number of
   shares redeemed during the fiscal year ended September 30, 1996 amounted to
   160,765,553 shares. Of this number, no shares have been used for reduction
   pursuant to paragraph (a) of Rule 24e-2 in all previous filings of
   post-effective amendments during the current year and 82,863,757 shares have
   been used for reduction pursuant to paragraph (c) of Rule 24f-2 in all
   previous filings during the current year. 77,901,796 ($353,077,684) of the
   redeemed shares for the fiscal year ended September 30, 1996 are being used
   for the reductions in the post-effective amendment being filed herein.

** Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant
   has previously registered an indefinite number of shares of beneficial
   interest, par value $.001 per share. The Registrant filed a notice under such
   Rule for its fiscal year ended September 30, 1996 on November 27, 1996.

    

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

<PAGE>

                              CROSS REFERENCE SHEET
                            (AS REQUIRED BY RULE 495)

 N-1A Item No.                            Location
- --------------                            ---------
PART A

Item  1. Cover Page ..................... Cover Page

Item  2. Synopsis ....................... Fund Highlights; Fund Expenses

Item  3. Condensed Financial
         Information .................... Fund Expenses; Financial Highlights;
                                          How the Fund Calculates Performance
   
Item  4. General Description of
         Registrant ..................... Cover Page; Fund Highlights; General
                                          Information; How the Fund Invests
    
Item  5. Management of the Fund ......... Fund Highlights; How the Fund is
                                          Managed
   
Item 5A. Management's Discussion of Fund
         Performance .................... Financial Highlights
    
Item  6. Capital Stock and Other
         Securities ..................... Fund Highlights; How the Fund is
                                          Managed; Taxes, Dividends and
                                          Distributions; General Information
   
Item  7. Purchase of Securities Being
         Offered ........................ How the Fund is Managed; How the Fund
                                          Values its Shares; Shareholder Guide

Item  8. Redemption or Repurchase ....... Shareholder Guide
    
Item  9. Pending Legal Proceedings ...... Not Applicable

PART B

Item 10. Cover Page ..................... Cover Page

Item 11. Table of Contents .............. Table of Contents

Item 12. General Information and
         History ........................ Not Applicable
   
Item 13. Investment Objectives and
         Policies ....................... Investment Objectives and Policies;
                                          Investment Restrictions

Item 14. Management of the Fund ......... Trustees and Officers; Manager and
                                          Subadvisers
    
Item 15. Control Persons and Principal
         Holders of Securities .......... Trustees and Officers

Item 16. Investment Advisory and Other
         Services ....................... Manager and Subadvisers; Distributor;
                                          Custodian, Transfer and Dividend
                                          Disbursing Agent
   
Item 17. Brokerage Allocation and
         Other Practices ................ Portfolio Transactions and Brokerage
    
Item 18. Capital Stock and Other
         Securities ..................... Purchase and Redemption of Fund Shares

Item 19. Purchase, Redemption and Pricing
         of Securities Being Offered .... Purchase and Redemption of Fund Shares

Item 20. Tax Status ..................... Taxes

Item 21. Underwriters ................... Distributor

Item 22. Calculation of Performance
         Data ........................... Performance and Yield Information

Item 23. Financial Statements ........... Financial Statements

 PART C
        Information required to be included in Part C is set forth under the
        appropriate Item, so numbered, in Part C to this Registration Statement.

<PAGE>

PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
   
PROSPECTUS DATED NOVEMBER 29, 1996
    
- --------------------------------------------------------------------------------

Prudential Active Balanced Fund (the Fund) is a series of Prudential Dryden Fund
(formerly The Prudential Institutional Fund) (the Company), a diversified,
open-end, management investment company. The Fund's investment objective is to
achieve total returns approaching equity returns, while accepting less risk than
an all-equity portfolio, through an actively-managed portfolio of equity
securities, fixed income securities and money market instruments. There can be
no assurance that the Fund's investment objective will be achieved. See "How the
Fund Invests--Investment Objective and Policies." The Fund's address is Gateway
Center Three, Newark, NJ 07102-4077, and its telephone number is (800) 225-1852.

THE FUND RESERVES THE RIGHT TO BORROW MONEY FOR TEMPORARY, EXTRAORDINARY OR
EMERGENCY PURPOSES OR FOR THE CLEARANCE OF TRANSACTIONS AND IN ORDER TO TAKE
ADVANTAGE OF INVESTMENT OPPORTUNITIES, WHICH MAY BE CONSIDERED SPECULATIVE DUE
TO THE INCREASED COSTS AND EXPENSES INVOLVED.

   
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated November 29, 1996, which information
is incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
    

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

Investors are advised to read this Prospectus and retain it for future
reference.

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

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


<PAGE>

                                 FUND HIGHLIGHTS

     The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.

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

WHAT IS PRUDENTIAL ACTIVE BALANCED FUND?
   
     Prudential Active Balanced Fund is a mutual fund. A mutual fund pools the
resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Company is a diversified, open-end,
management investment company.
    
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

     The Fund's investment objective is to seek to achieve total returns
approaching equity returns, while accepting less risk than an all-equity
portfolio, through an actively-managed portfolio of equity securities, fixed
income securities and money market instruments. The Fund's investments will be
actively shifted among these asset classes in order to capitalize on
intermediate term (i.e., 12 to 18 months) valuation opportunities and to
maximize the Fund's total investment return. There can be no assurance that the
Fund's investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies" at page 7.

RISK FACTORS AND SPECIAL CHARACTERISTICS
   
     With respect to the equity portion of the Fund, the Fund invests primarily
in common stocks of established companies with growth prospects which are, in
the opinion of the Fund's investment adviser, Jennison Associates Capital Corp.
(Jennison), underappreciated by the market. These may include companies that are
experiencing important changes in their business structure and management
philosophy. The ability of the investment adviser to successfully identify these
changes will be an important factor in the Fund's performance record. See "How
the Fund Invests--Investment Objective and Policies" at page 7.

     The Fund may invest up to 15% of its total assets in equity securities and
20% of its total assets in debt securities of foreign issuers. Investing in
securities of foreign companies and countries involves certain risks and
considerations not typically associated with investments in domestic companies.
See "How the Fund Invests--Risk Factors and Special Considerations of Investing
in Foreign Securities" at page 14. The Fund may commit up to 20% of the value of
its total assets to investment techniques such as dollar rolls, forward rolls
and reverse repurchase agreements. See "How the Fund Invests--Investment
Objective and Policies--Forward Rolls, Dollar Rolls and Reverse Repurchase
Agreements" at page 9. The Fund may invest up to 5% of its total assets in
non-investment grade debt securities or in unrated securities of comparable
quality. Non-investment grade securities are securities rated lower than Baa by
Moody's Investors Service, Inc. or BBB by Standard & Poor's Ratings Group and
are commonly known as "junk bonds." These securities are considered speculative
and are subject to a greater risk of loss of principal and interest than higher
rated securities as well as greater price volatility. See "How the Fund
Invests--Risk Factors Relating to Investing in Debt Securities Rated Below
Investment Grade (Junk Bonds)" at page 14. The Fund also may engage in various
hedging and return enhancement strategies and invest in derivative securities.
See "How the Fund Invests--Hedging and Return Enhancement Strategies--Risks of
Hedging and Return Enhancement Strategies" at page 18. As with an investment in
any mutual fund, an investment in this Fund can decrease in value and you can
lose money.
    
- --------------------------------------------------------------------------------

                                       2
<PAGE>
- --------------------------------------------------------------------------------

WHO MANAGES THE FUND?
   
     Prudential Mutual Fund Management LLC (PMF or the Manager) is the manager
of the Company and is compensated by the Fund for its services at an annual rate
of .65 of 1% of average daily net assets of the Fund. As of October 31, 1996,
PMF served as manager or administrator to 62 investment companies, including 40
mutual funds, with aggregate assets of approximately $53.4 billion. Jennison
furnishes investment advisory services in connection with the management of the
Fund under a Subadvisory Agreement with PMF. The Prudential Investment
Corporation (PIC) invests available cash balances for the Fund through a joint
repurchase agreement account. See "How the Fund is Managed--Manager" at page 19
and "How the Fund is Managed--Subadvisers" at page 19.
    
WHO DISTRIBUTES THE FUND'S SHARES?
   
     Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Fund's Class A, Class B, Class C and
Class Z shares. Prudential Securities is paid a distribution and service fee
with respect to Class A shares which is currently being charged at the annual
rate of .25 of 1% of the average daily net assets of the Class A shares and is
paid a distribution and service fee with respect to Class B and Class C shares
at an annual rate of 1% of the average daily net assets of each of the Class B
and Class C shares. Prudential Securities incurs the expense of distributing the
Fund's Class Z shares under a Distribution Agreement with the Company, none of
which is reimbursed or paid for by the Fund. See "How the Fund is
Managed--Distributor" at page 20.
    

WHAT IS THE MINIMUM INVESTMENT?

     The minimum initial investment is $1,000 per class for Class A and Class B
shares and $5,000 for Class C shares. There is no minimum initial investment
requirement for investors who qualify to purchase Class Z shares. The minimum
subsequent investment is $100 for all classes, except for Class Z shares for
which there is no such minimum. There is no minimum investment requirement for
certain retirement and employee savings plans or custodial accounts for the
benefit of minors. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Guide--How to Buy Shares of the Fund" at page 26 and "Shareholder
Guide--Shareholder Services" at page 35.

HOW DO I PURCHASE SHARES?

     You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at
the net asset value per share (NAV) next determined after receipt of your
purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). Class Z shares are
offered to a limited group of investors at NAV without any sales charge.
Participants in programs sponsored by Prudential Retirement Services should
contact their client representative for more information about Class Z shares.
See "How the Fund Values its Shares" at page 22 and "Shareholder Guide--How to
Buy Shares of the Fund" at page 26.

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

                                       3

<PAGE>
- --------------------------------------------------------------------------------

WHAT ARE MY PURCHASE ALTERNATIVES?

     The Fund offers four classes of shares:

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

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

o Class C Shares: Sold without an initial sales charge but, for one year after
                  purchase, are subject to a CDSC of 1% on redemptions. Like
                  Class B shares, Class C shares are subject to higher ongoing
                  distribution-related expenses than Class A shares but do not
                  convert to another class.
   
o Class Z Shares: Sold without an initial or contingent deferred sales charge to
                  a limited group of investors. Class Z shares are not subject
                  to any ongoing service- or distribution-related expenses.
    

     See "Shareholder Guide--Alternative Purchase Plan" at page 27.

HOW DO I SELL MY SHARES?

     You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. Participants in programs sponsored by Prudential Retirement Services
should contact their client representative for more information about selling
their Class Z shares. See "Shareholder Guide--How to Sell Your Shares" at page
30.

HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?

     The Fund expects to pay dividends of net investment income, if any, and
distributions of any net capital gains at least annually. Dividends and
distributions will be automatically reinvested in additional shares of the Fund
at NAV without a sales charge unless you request that they be paid to you in
cash. See "Taxes, Dividends and Distributions" at page 23.

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

                                       4
<PAGE>
<TABLE>
                                  FUND EXPENSES
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
                                            Class A Shares   Class B Shares   Class C Shares   Class Z Shares**
                                            --------------   --------------   --------------   ----------------
<S>                                             <C>         <C>               <C>                    <C>
SHAREHOLDER TRANSACTION EXPENSES+

  Maximum Sales Load Imposed on Purchases
   (as a percentage of offering price) ....       5%              None             None              None

  Maximum Deferred Sales Load (as a 
   percentage of original purchase price
   or redemption proceeds, whichever is
   lower) .................................      None        5% during the    1% on redemptions      None
                                                             first year,      made within one
                                                             decreasing by    year of purchase
                                                             1% annually to
                                                             1% in the fifth
                                                             and sixth years
                                                             and 0% the
                                                             seventh year*
                            

  Maximum Sales Load
    Imposed on Reinvested Dividends .......      None            None               None             None
   Redemption Fees ........................      None            None               None             None
   Exchange Fee ...........................      None            None               None             None

<CAPTION>

ANNUAL FUND OPERATING EXPENSES              Class A Shares    Class B Shares     Class C Shares  Class Z Shares
                                            --------------   --------------   --------------   ----------------
<S>                                              <C>             <C>               <C>                <C>
(as a percentage of average net assets)
   Management Fees                                .65%            .65%               .65%              .65%
   12b-1 Fees (After Reduction)                   .25%++         1.00%              1.00%             None
   Other Expenses                                 .24%            .24%               .24%              .24%
                                                 ----            ----               ----               --- 
   Total Fund Operating Expenses
    (After Reduction)                            1.14%           1.89%              1.89%              .89%
                                                 ====            ====               ====               === 
<CAPTION>

                                                                                    1      3      5     10
EXAMPLE                                                                           Year   Years  Years  Years
                                                                                  ----   -----  -----  -----
<S>                                                                              <C>     <C>    <C>    <C>  
           
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:

           Class A ...........................................................    $61    $84    $110    $182
           Class B ...........................................................    $69    $89    $112    $192
           Class C ...........................................................    $29    $59    $102    $221
           Class Z ...........................................................    $ 9    $28    $ 49    $110

You would pay the following expenses on the same investment, assuming no redemption:

           Class A ...........................................................    $61    $84    $110    $182
           Class B ...........................................................    $19    $59    $102    $192
           Class C ...........................................................    $19    $59    $102    $221
           Class Z ...........................................................    $ 9    $28    $ 49    $110
</TABLE>

   

The above example is based on restated data for the Fund's fiscal year ended
September 30, 1996 which would be expected to have been incurred if the Fund
operated in accordance with the new fee and operating expense arrangements which
were effective October 31, 1996. The example should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.
    

The purpose of this table is to assist investors in understanding the various
types of costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Fund is Managed." "Other Expenses" includes estimated
operating expenses of the Fund for the fiscal year ended September 30, 1996,
such as Trustees' and professional fees, registration fees, reports to
shareholders and transfer agency and custodian (domestic and foreign) fees (but
excludes foreign withholding taxes).

- ----------
 *      Class B shares will  automatically  convert to Class A shares 
        approximately  seven years after purchase. See "Shareholder Guide--
        Conversion Feature--Class B Shares."

**      Prior to October 30, 1996, the Fund had one class of shares which became
        Class Z shares effective October 30, 1996.

+       Pursuant to rules of the National Association of Securities Dealers,
        Inc., the aggregate initial sales charges, deferred sales charges and
        asset-based sales charges (12b-1 fees) on shares of the Fund may not
        exceed 6.25% of total gross sales, subject to certain exclusions. This
        6.25% limitation is imposed on each class of the Fund rather than on a
        per shareholder basis. Therefore, long-term Class B and Class C
        shareholders of the Fund may pay more in total sales charges than the
        economic equivalent of 6.25% of such shareholders' investment in such
        shares. See "How the Fund is Managed--Distributor."

++      Although the Class A Distribution and Service Plan provides that the
        Fund may pay a distribution fee of up to .30 of 1% per annum of the
        average daily net assets of the Class A shares, the Distributor has
        agreed to limit its distribution fees with respect to Class A shares of
        the Fund so as not to exceed .25 of 1% of the average daily net assets
        of the Class A shares for the fiscal year ending September 30, 1997. See
        "How the Fund is Managed--Distributor." Total Fund Operating Expenses
        would be 1.19% absent this limitation with respect to Class A shares.

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

                                       5
<PAGE>

                              FINANCIAL HIGHLIGHTS
            (FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
                                (CLASS Z SHARES)
   
     The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class Z share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the period indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide -- Shareholder Services -- Reports to Shareholders." During
these periods, no Class A, Class B or Class C shares were outstanding.
    
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
                                                                                              January 4,
                                                                       Year Ended              1993(c)
                                                                      September 30,            Through
                                                        ----------------------------------    September
                                                          1996          1995        1994       30,1993
                                                        --------      --------     -------     -------
   
<S>                                                     <C>           <C>          <C>         <C>
PER SHARE OPERATING PERFORMANCE:

Net asset value, beginning of period ................   $  12.46      $  10.92     $ 11.05     $ 10.00
                                                        --------      --------     -------     -------
INCOME FROM INVESTMENT OPERATIONS

Net investment income(b) ............................        .29           .33         .24         .21
Net realized and unrealized gain (loss) on investment
 and foreign currency transactions ..................        .81          1.54        (.12)        .84
                                                        --------      --------     -------     -------
 Total from investment operations ...................       1.10          1.87         .12        1.05
                                                        ========      ========     =======     =======
LESS DISTRIBUTIONS:
Dividends from net investment income ................       (.37)         (.29)       (.14)        --
Distributions from net realized income ..............       (.18)         (.04)       (.11)        --
                                                        --------      --------     -------     -------
 Total distributions ................................       (.55)         (.33)       (.25)        --
                                                        --------      --------     -------     -------
Net asset value, end of period ......................   $  13.01      $  12.46     $ 10.92     $ 11.05
                                                        ========      ========     =======     =======
TOTAL RETURN(D): ....................................       9.11%        17.66%       1.07%      10.50%

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) .....................   $153,588      $133,352     $81,176     $38,786
Average net assets (000) ............................   $142,026      $104,821     $58,992     $12,815

Ratios to average net assets(b):
 Expenses ...........................................       1.00%         1.00%       1.00%       1.00%(c)
 Net investment income ..............................       3.09%         3.53%       3.06%       2.68%(c)
Portfolio turnover rate .............................         51%           30%         40%         47%
Average Commission paid per share ...................   $  .0654           N/A         N/A         N/A
</TABLE>
    
- -----------
(a)   Commencement of investment operations.
(b)   Net of expense subsidy.
(c)   Annualized.
(d)   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 other distributions. Total return for
      periods of less than a full year are not annualized. Total return includes
      the effect of expense subsidies.

- --------------------------------------------------------------------------------
                                       6
<PAGE>

                              HOW THE FUND INVESTS

INVESTMENT OBJECTIVE AND POLICIES

   
     THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK TO ACHIEVE TOTAL RETURNS
APPROACHING EQUITY RETURNS, WHILE ACCEPTING LESS RISK THAN AN ALL-EQUITY
PORTFOLIO, THROUGH AN ACTIVELY-MANAGED PORTFOLIO OF EQUITY SECURITIES, FIXED
INCOME SECURITIES AND MONEY MARKET INSTRUMENTS. THERE CAN BE NO ASSURANCE THAT
THE FUND'S OBJECTIVE WILL BE ACHIEVED. See "Investment Objectives and
Policies--Investment Policies Applicable to Prudential Active Balanced Fund" in
the Statement of Additional Information.

     Jennison, the investment adviser to the Fund, uses the following ranges as
the normal operating parameters for the securities to be purchased by the Fund:
(i) 40-75% of the total assets of the Fund will be invested in common stocks,
preferred stocks and other equity-related securities; (ii) 25-60% of the total
assets of the Fund will be invested in investment grade fixed income securities;
and (iii) 0-35% of the total assets of the Fund will be invested in money market
instruments. Within these parameters, at least 25% of the Fund's total assets
will be invested in fixed income senior securities.

     The Fund's investments will be actively shifted among these asset classes
in order to capitalize on intermediate term (i.e., 12 to 18 months) valuation
opportunities and to maximize the Fund's total investment return. The equity
component of this Fund will be invested in the common stocks, preferred stocks
and other equity-related securities of companies that are expected to generate
superior earnings growth or are attractively valued. The fixed income component
of this Fund will be invested primarily in fixed income securities rated A or
better by Moody's Investors Service, Inc. (Moody's) or Standard & Poor's Ratings
Group (S&P Ratings) or, if not rated, determined by Jennison to be of comparable
quality to securities so rated. However, the Fund also may invest up to 20% of
the fixed income portion of its portfolio in securities rated Baa/BBB (or the
equivalent rating of another nationally recognized statistical rating
organization (NRSRO)) or, if not rated, determined by Jennison to be of
comparable quality to securities so rated. The weighted average maturity of the
fixed income component of the Fund will normally be between 5 and 25 years.
    

     Under normal market conditions at least 65% of the value of the Fund's
total assets will be invested according to the above allocations. Within these
allocations, the Fund's assets may be invested as follows: (i) up to 15% of the
Fund's total assets, in common stocks, preferred stocks and other equity-related
securities of foreign issuers; (ii) up to 20% of the Fund's total assets, in
investment grade fixed income securities of foreign issuers; (iii) in
mortgage-backed securities; (iv) in custodial receipts and asset-backed
securities; and (v) in obligations issued or guaranteed by the U.S. Government,
its agencies and instrumentalities.

     In order to invest uncommitted cash balances, to maintain liquidity to meet
redemptions, or for hedging or incidental return enhancement, the Fund may: (i)
enter into repurchase agreements, when-issued, delayed delivery and forward
commitment transactions; (ii) lend its portfolio securities; (iii) purchase and
sell put and call options on securities, stock indices and interest rate
indices; (iv) purchase and sell futures contracts on stock indices and interest
rate indices and options thereon and (v) purchase and sell futures contracts on
securities.

     The Fund also may: (i) purchase and sell currency spot contracts; 
(ii) purchase and sell currency futures contracts and currency forward
contracts; and (iii) purchase and sell put and call options on currencies and on
foreign currency futures contracts in each case to attempt to reduce risks
associated with currency fluctuations.

     The Fund reserves the right as a defensive measure to hold temporarily
other types of securities without limit, including high quality commercial
paper, bankers' acceptances, non-convertible debt securities (corporate and
government) or government and high quality money market securities of U.S. and
non-U.S. issuers, or cash (foreign

                                       7

<PAGE>

currencies or U.S. dollars), in such proportions as, in the opinion of
Jennison, prevailing market, economic or political conditions warrant. The Fund
may also temporarily hold cash and 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. See "Other Investments and
Policies" below.

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

     U.S. GOVERNMENT SECURITIES

     The Fund may invest in securities issued or guaranteed by the U.S. Treasury
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. Some are supported only by the credit of the issuing agency. See
"Investment Objectives and Policies--Investment Policies Applicable to Both
Funds--U.S. Government Securities" in the Statement of Additional Information.

     CORPORATE AND OTHER DEBT OBLIGATIONS

     The Fund may invest in investment grade corporate and other debt
obligations of domestic and foreign issuers, including convertible securities
and money market instruments. See "Money Market Instruments" below. Bonds and
other debt securities are used by issuers to borrow money from investors. The
issuer pays the investor a fixed or variable rate of interest and must repay the
amount borrowed at maturity. Investment grade debt securities are rated within
the four highest quality grades as determined by Moody's (currently Aaa, Aa, A
and Baa for bonds), or S&P Ratings (currently AAA, AA, A and BBB for bonds), or
by another NRSRO or, in unrated securities which are of equivalent quality in
the opinion of Jennison. Securities rated Baa by Moody's, although considered to
be investment grade, lack outstanding investment characteristics and, in fact,
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make interest
and principal payments than is the case with higher grade bonds. Such lower
rated securities are subject to a greater risk of loss of principal and
interest.

     NON-INVESTMENT GRADE FIXED INCOME SECURITIES

     Up to 5% of the total assets of the Fund may be invested in non-investment
grade fixed income securities, including convertible securities. See
"Convertible Securities, Warrants and Rights" below. Non-investment grade fixed
income securities (those rated below Baa by Moody's or BBB by S&P Ratings or
comparably rated by another NRSRO or unrated securities determined by Jennison
to be of comparable quality) have speculative characteristics (including the
possibility of default or bankruptcy of the issuers of such securities, market
price volatility based upon interest rate sensitivity, questionable
creditworthiness and relative liquidity of the secondary trading market).
Because these securities have been found to be more sensitive to adverse
economic changes or individual corporate developments and less sensitive to
interest rate changes than higher-rated investments, an economic downturn could
disrupt the market for these securities and adversely affect the value of these
securities and the ability of issuers to repay principal and interest. See "Risk
Factors Relating to Investing in Debt Securities Rated Below Investment Grade
(Junk Bonds)" below.

     EQUITY-RELATED SECURITIES

     The Fund may invest in equity-related securities. Equity-related securities
are common stocks, preferred stocks, rights, warrants and debt securities or
preferred stocks which are convertible or exchangeable for common stocks or
preferred stocks. See "Convertible Securities, Warrants and Rights" below.

                                       8

<PAGE>

     CONVERTIBLE SECURITIES, WARRANTS AND RIGHTS

     A convertible security is a bond, debenture, corporate note, preferred
stock or other similar security that may be converted into or exchanged for a
prescribed amount of common stock or other equity securities of the same or
a different issuer within a particular period of time at a specified price or
formula. A warrant or right entitles the holder to purchase equity securities at
a specific price for a specific period of time. Convertible securities are
senior to common stocks in a corporation's capital structure, but are usually
subordinated to similar nonconvertible 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 nonconvertible security), a
convertible security also affords an investor the opportunity, through its
conversion feature, to participate in the capital appreciation dependent upon a
market price advance in the convertible security's underlying common stock.

     In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed income security) or
its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security is
also influenced by the market value of the security's underlying 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. See "Risk Factors Relating
to Investing in Debt Securities Rated Below Investment Grade (Junk Bonds)"
below.

     In recent years, convertible securities have been developed which combine
higher or lower current income with options and other features. The Fund may
invest in these types of convertible securities.

     SECURITIES OF FOREIGN ISSUERS

     The Fund may invest a portion of its assets in fixed income securities and
equity securities of foreign issuers (denominated in either U.S. or foreign
currency). The Fund may purchase American Depositary Receipts (ADRs), which are
U.S. dollar-denominated certificates issued by a U.S. 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 U.S. bank and traded on a U.S. exchange or
in an over-the-counter market. Generally, ADRs are in registered form. There are
no fees imposed on the purchase or sale of ADRs 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 into the underlying securities. Investment in ADRs has
certain advantages over direct investment in the underlying foreign securities
since: (i) ADRs are U.S. dollar-denominated investments that are registered
domestically, easily transferable, and for which market quotations are readily
available; and (ii) issuers whose securities are represented by ADRs are usually
subject to comparable auditing, accounting and financial reporting standards as
domestic issuers.

     FORWARD ROLLS, DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS

     The Fund may commit up to 20% of the value of its total assets to
investment techniques such as dollar rolls, forward rolls and reverse repurchase
agreements. A forward roll is a transaction in which the Fund sells a security
to a financial institution, such as a bank or broker-dealer, and simultaneously
agrees to repurchase the same or similar security from the institution at a
later date at an agreed upon price. With respect to mortgage-related securities,
such transactions are often called "dollar rolls." In dollar roll transactions,
the mortgage-related securities that are repurchased will bear the same coupon
rate as those sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories than those sold. During the roll
period, the Fund forgoes principal and interest paid on the

                                        9

<PAGE>

securities and is compensated by the difference between the current sales
price and the forward price for the future purchase as well as by interest
earned on the cash proceeds of the initial sale. A "covered roll" is a specific
type of dollar roll for which there is an offsetting cash position or a cash
equivalent security position which matures on or before the forward settlement
date of the dollar roll transaction.

     Reverse repurchase agreements involve sales by the Fund of portfolio
securities to a financial institution concurrently with an agreement by the Fund
to repurchase the same securities at a later date at a fixed price. During the
reverse repurchase agreement period, the Fund continues to receive principal and
interest payments on these securities.

     Reverse repurchase agreements, forward rolls and dollar rolls involve the
risk that the market value of the securities purchased by the Fund with the
proceeds of the initial sale may decline below the price of the securities the
Fund has sold but is obligated to repurchase under the agreement. In the event
the buyer of securities under a reverse repurchase agreement, forward roll or
dollar roll files for bankruptcy or becomes insolvent, the Fund's use of the
proceeds of the agreement may be restricted pending a determination by the other
party, or its trustee or receiver, whether to enforce the Fund's obligations to
repurchase the securities. The staff of the Securities and Exchange Commission
(SEC) has taken the position that reverse repurchase agreements, forward rolls
and dollar rolls are to be treated as borrowings. The Company expects that under
normal conditions most of the borrowings of the Fund will consist of such
investment techniques rather than bank borrowings. See "Other Investments and
Policies--Borrowing" below.

     CUSTODIAL RECEIPTS

     The Fund may acquire custodial receipts or certificates, such as CATS,
TIGRs and FICO Strips, underwritten by securities dealers or banks, that
evidence ownership of future interest payments, principal payments or both on
certain notes or bonds issued by the U.S. Government, its agencies or
instrumentalities. The underwriters of these certificates or receipts generally
purchase a U.S. Government security and deposit the security in an irrevocable
trust or custodial account with a custodian bank, which then issues receipts or
certificates that evidence ownership of the periodic unmatured coupon payments
and the final principal payment on the U.S. Government security. Custodial
receipts evidencing specific coupon or principal payments have the same general
attributes as zero coupon U.S. Government securities but are not U.S. Government
securities and are neither insured nor guaranteed by the U.S. Government.

     MORTGAGE-BACKED SECURITIES

     Mortgage-backed securities represent interests in pools of mortgages.
Principal and interest payments made on the mortgages in the pools are passed
through to the holder of such securities. Payment of principal and interest on
some mortgage-backed securities (but not the market value of the securities
themselves) may be guaranteed by the full faith and credit of the U.S.
Government, or guaranteed by agencies or instrumentalities of the U.S.
Government. Mortgage-backed securities created by non-governmental issuers (such
as commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers, and other secondary market issuers) may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance, and letters of credit, which may be
issued by governmental entities, private insurers or the mortgage poolers.

     Mortgage-backed securities include collateralized mortgage obligations
(CMOs), which are obligations fully collateralized by the portfolio of mortgaged
or mortgage-related securities. Payments of principal and interest on the
mortgages are passed through to the holders of the CMO as they are received,
although certain classes of CMOs have priority over others for receipt of
mortgage prepayments. Typically, CMOs are collateralized by Government National
Mortgage Association (GNMA), Federal National Mortgage Association (FNMA) or
Federal Home Loan Mortgage Corporation (FHLMC) Certificates, but also may be
collateralized by whole loans or private mortgage pass-through securities
(referred to below as Underlying Assets).

                                       10

<PAGE>

     CMOs may be issued by agencies or instrumentalities of the U.S. Government,
or by private originators of, or investors in, mortgage loans, including
depository institutions, mortgage banks, investment banks and special-purpose
subsidiaries of the foregoing. The issuer of a series of CMOs may elect to be
treated as a Real Estate Mortgage Investment Conduit (REMIC).

     In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of a CMO, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Underlying Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Underlying
Assets may be allocated among the several classes of a CMO series in a number of
different ways. Generally, the purpose of the allocation of the cash flow of a
CMO to the various classes is to obtain a more predictable cash flow to the
individual tranches than exists with the underlying collateral of the CMO. As a
general rule, the more predictable the cash flow on a CMO tranche, the lower the
anticipated yield will be on that tranche at the time of issuance compared to
prevailing market yields on mortgage-backed securities.

     Unscheduled or early repayment of principal on mortgage pass-through
securities (arising from prepayments of principal due to the sale of the
underlying property, refinancing, or foreclosure, net of fees and costs which
may be incurred) may expose the Fund to a lower rate of return upon reinvestment
of principal. Like other fixed income securities, when interest rates rise, the
value of a mortgage-related security generally will decline; however, when
interest rates are declining, the value of mortgage-related securities with
prepayment features may not increase as much as other fixed income securities.

     ASSET-BACKED SECURITIES

     The Fund may purchase asset-backed securities that represent either
fractional interests or participations in pools of leases, retail installment
loans, or revolving credit receivables held by a trust or limited purpose
finance subsidiary. Such asset-backed securities may be secured by the
underlying assets (such as certificates for automobile receivables) or may be
unsecured (such as credit card receivable securities). Depending on the
structure of the asset-backed security, monthly or quarterly payments of
principal and interest or interest only are passed-through or paid through to
certificate holders. Asset-backed securities may be guaranteed up to certain
amounts by guarantees, insurance, or letters of credit issued by a financial
institution affiliated or unaffiliated with the originator of the pool.

     Underlying automobile sales contracts and credit card receivables are, of
course, subject to prepayment (although to a lesser degree than mortgage
pass-through securities), which may shorten the securities' weighted average
life and reduce their overall return to certificate holders. On the other hand,
asset-backed securities may present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities often do not have the
benefit of a security interest in the related collateral. Credit card
receivables are generally unsecured and the 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.

     Unlike traditional fixed income securities, interest and principal payments
on asset-backed securities are made more frequently, usually monthly, and
principal may be prepaid at any time. As a result, if the Fund purchases such a
security at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity, while a prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity. Alternatively, if
the Fund purchases these securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments will reduce
yield to maturity. Certificate holders may also experience delays in payment if
the full amounts due on underlying loans, leases or receivables are not realized
because of unanticipated legal or administrative costs of

                                       11

<PAGE>

enforcing the contracts or because of depreciation or damage to the
collateral (usually automobiles) securing certain contracts, or other factors.
If consistent with its investment objective and policies, the Fund may invest in
other asset-backed securities that may be developed in the future.

     TYPES OF CREDIT ENHANCEMENT. Mortgage-backed securities and asset-backed
securities are often backed by a pool of assets representing the obligations of
a number of different parties. To lessen the effect of failures by obligors on
underlying assets to make payments, those securities may contain elements of
credit support, which fall into two categories: (i) liquidity protection and
(ii) protection against losses resulting from ultimate default by an obligor on
the underlying assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to ensure that the
receipt of payments on the underlying pool occurs in a timely fashion.
Protection against losses resulting from default ensures ultimate payment of the
obligations on at least a portion of the assets in the pool. This protection may
be provided through guarantees, insurance policies or letters of credit obtained
by the issuer or sponsor from third parties, through various means of
structuring the transaction or through a combination of such approaches. The
Fund will not pay any fees for credit support, although the existence of credit
support may increase the price of a security.

     LIQUIDITY PUTS

     The Fund may purchase instruments together with the right to resell the
instruments at an agreed-upon price or yield, within a specified period prior to
the maturity date of the instruments. This instrument is commonly known as a
"liquidity put" or a "tender option bond."

     MONEY MARKET INSTRUMENTS

     The Fund may invest in high quality money market instruments, including
commercial paper of a U.S. or non-U.S. company, foreign government securities,
certificates of deposit, bankers' acceptances and time deposits of domestic and
foreign banks, and obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities. These obligations will be U.S. dollar
denominated or denominated in a foreign currency. Money market instruments
typically have a maturity of one year or less as measured from the date of
purchase. The Fund may invest in money market instruments without limit for
temporary defensive and cash management purposes. To the extent the Fund
otherwise invests in money market instruments, it is subject to the limitations
described above.

OTHER INVESTMENTS AND POLICIES

     BORROWING

     The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) from banks or through forward
rolls, dollar rolls or reverse repurchase agreements to take advantage of
investment opportunities, 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's asset coverage for borrowings
falls below 300%, the Fund will take prompt action to reduce its borrowings. The
Fund will not purchase portfolio securities when borrowings exceed 5% of the
value of its total assets. See "Investment Objectives and Policies--Investment
Policies Applicable to Both Funds--Borrowing" in the Statement of Additional
Information.

     ILLIQUID SECURITIES

     The Fund may hold up to 10% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and

                                       12

<PAGE>

securities that are not readily marketable in securities markets either
within or outside of the United States. Restricted securities eligible for
resale pursuant to Rule 144A under the Securities Act of 1933, as amended (the
Securities Act) and privately placed commercial paper that have a readily
available market are not considered illiquid for purposes of this limitation.
The investment adviser will monitor the liquidity of such restricted securities
under the supervision of the Trustees. The Fund's investment in Rule 144A
securities could have the effect of increasing illiquidity to the extent that
qualified institutional buyers become, for a limited time, uninterested in
purchasing Rule 144A securities. See "Investment Restrictions" in the Statement
of Additional Information. Repurchase agreements subject to demand are deemed to
have a maturity equal to the applicable notice period.

     REPURCHASE AGREEMENTS

     The Fund will enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original purchase, although it may extend over a number of months. The
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the resale price. 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 may participate in a joint repurchase account
managed by PIC. See "Investment Objectives and Policies--Investment Policies
Applicable to Both Funds--Repurchase Agreements" in the Statement of Additional
Information.

     WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

   
     The Fund may purchase or sell securities (including equity securities) on a
when-issued or delayed delivery basis. When-issued or delayed delivery
transactions arise when securities are purchased or sold by the Fund with
payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and/or yield to the Fund at the time of
entering into the transaction. While the Fund will only purchase securities on a
when-issued or delayed delivery basis with the intention of acquiring the
securities, the Fund may sell the securities before the settlement date, if it
is deemed advisable. At the time the Fund makes the commitment to purchase
securities on a when-issued or delayed delivery basis, the Fund will record the
transaction and thereafter reflect the value, each day, of such security in
determining the net asset value of the Fund. At the time of delivery of the
securities, the value may be more or less than the purchase price. The Fund's
Custodian will maintain, in a segregated account of the Fund, cash or liquid
assets having a value equal to or greater than the Fund's purchase commitments.
Subject to this requirement, the Fund may purchase securities on such basis
without limit. See "Investment Objectives and Policies--Investment Policies
Applicable to Both Funds--When-Issued and Delayed Delivery Securities" in the
Statement of Additional Information.
    

     SECURITIES LENDING

     The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Fund in an amount equal to at least 100%,
determined daily, of the market value of the securities loaned which are
maintained in a segregated account pursuant to applicable regulations. During
the time portfolio securities are on loan, the borrower will pay the Fund an
amount equivalent to any dividend or interest paid on such securities and the
Fund may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower. 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. As a matter of fundamental policy, the Fund cannot lend more than
30% of the value of its total assets. See "Investment Objectives and
Policies--Investment

                                       13

<PAGE>

Policies Applicable to Both Funds--Securities Lending" in the Statement of
Additional Information. The Fund may pay reasonable administration and custodial
fees in connection with a loan.

     SEGREGATED ACCOUNTS. The Fund will establish a segregated account with its
Custodian, State Street Bank and Trust Company (State Street), in which it will
maintain cash, U.S. Government securities, equity securities or other liquid,
unencumbered assets equal in value to its obligations in respect of potentially
leveraged transactions, including forward contracts, when-issued and delayed
delivery securities, repurchase and reverse repurchase agreements, forward
rolls, dollar rolls, futures contracts, written options and options on futures
contracts (unless otherwise covered). The assets deposited in the segregated
account will be marked-to-market daily.

RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN FOREIGN SECURITIES

     FOREIGN SECURITIES INVOLVE CERTAIN RISKS, WHICH SHOULD BE CONSIDERED
CAREFULLY BY AN INVESTOR IN THE FUND. THESE RISKS INCLUDE POLITICAL OR ECONOMIC
INSTABILITY IN THE COUNTRY OF THE ISSUER, THE DIFFICULTY OF PREDICTING
INTERNATIONAL TRADE PATTERNS, THE POSSIBLE IMPOSITION OF EXCHANGE CONTROLS AND
THE RISK OF CURRENCY FLUCTUATIONS. Such securities may be subject to greater
fluctuations in price than securities issued by U.S. corporations or issued or
guaranteed by the U.S. Government, its instrumentalities or agencies. In
addition, there may be less publicly available information about a foreign
company than about a domestic company. Foreign companies generally are not
subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic companies. There is generally less
government regulation of securities exchanges, brokers and listed companies
abroad than in the United States and there is a possibility of expropriation,
confiscatory taxation or diplomatic developments which could affect investment.

     ADDITIONAL COSTS COULD BE INCURRED IN CONNECTION WITH THE FUND'S
INTERNATIONAL INVESTMENT ACTIVITIES. Foreign brokerage commissions are generally
higher than U.S. brokerage commissions. Increased custodian costs as well as
administrative difficulties (such as the applicability of foreign laws to
foreign custodians in various circumstances) may be associated with the
maintenance of assets in foreign jurisdictions.

     If the security is denominated in a foreign currency, it will be affected
by changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of the Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency declines after the Fund's income has been accrued and translated into
U.S. dollars, the Fund could be required to liquidate portfolio securities to
make such distributions, particularly in instances in which the amount of income
the Fund is required to distribute is not immediately reduced by the decline in
such currency. Similarly, if an exchange rate declines between the time the Fund
incurs expenses in U.S. dollars and the time such expenses are paid, the amount
of such currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in any such
currency of such expenses at the time they were incurred. The Fund may, but need
not, enter into forward foreign currency exchange contracts, options on foreign
currencies and futures contracts on foreign currencies and related options, for
hedging purposes, including: locking-in the U.S. dollar price of the purchase or
sale of securities denominated in a foreign currency; locking-in the U.S. dollar
equivalent of dividends to be paid on such securities which are held by the
Fund; and protecting the U.S. dollar value of such securities which are held by
the Fund.

RISK FACTORS RELATING TO INVESTING IN DEBT SECURITIES RATED BELOW
INVESTMENT GRADE (JUNK BONDS)

     The Fund may invest up to 5% of its total assets in non-investment grade
debt securities, including convertible securities. Fixed income securities are
subject to the risk of an issuer's inability to meet principal and interest
payments

                                       14

<PAGE>
   

on the obligations (credit risk) and may also be subject to price
volatility due to such factors as interest rate sensitivity, market perception
of the creditworthiness of the issuer and general market liquidity (market
risk). Lower rated or unrated (i.e., high yield or high risk) securities
(commonly referred to as junk bonds) are more likely to react to developments
affecting market and credit risk than are more highly rated securities, which
react primarily to movements in the general level of interest rates. The
investment adviser considers both credit risk and market risk in making
investment decisions for the Fund.

     Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. In addition, the secondary market for high yield
securities, which is concentrated in relatively few market makers, may not be as
liquid as the secondary market for more highly rated securities and, from time
to time, it may be more difficult to value high yield securities than 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 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 debt portion of its portfolio and
increasing the exposure of the Fund to the risks of high yield securities.

     From time to time, federal laws have been enacted which have required the
divestiture by companies of their investments in high yield bonds and have
limited the deductibility of interest by certain corporate issuers of high yield
bonds. These types of laws could adversely affect the Fund's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities. There is currently no legislation pending that would
adversely impact the market for junk bonds. However, there can be no assurance
that such legislation will not be proposed or enacted in the future.

HEDGING AND RETURN ENHANCEMENT STRATEGIES

   
     THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES TO REDUCE CERTAIN
RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN. THE FUND, AND THUS
THE INVESTOR, MAY LOSE MONEY THROUGH THE UNSUCCESSFUL USE OF THESE STRATEGIES.
These strategies currently include the use of derivatives, such as options,
forward currency exchange contracts and futures contracts and options thereon.
The Fund's ability to use these strategies may be limited by market conditions,
regulatory limits and tax considerations and there can be no assurance that any
of these strategies will succeed. See "Investment Objectives and Policies" and
"Taxes" in the Statement of Additional Information. Jennison does not intend to
buy all of these instruments or use all of these strategies to the full extent
permitted unless it believes that doing so will help the Fund achieve its
objective. New financial products and risk management techniques continue to be
developed and the Fund may use these new investments and techniques to the
extent consistent with its investment objective and policies.
    

   OPTIONS TRANSACTIONS

     THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON ANY
SECURITIES IN WHICH IT MAY INVEST OR OPTIONS ON ANY SECURITIES INDEX BASED ON
SECURITIES IN WHICH THE FUND MAY INVEST. THESE OPTIONS ARE TRADED ON U.S. OR
FOREIGN SECURITIES EXCHANGES OR IN THE OVER-THE-COUNTER MARKET TO HEDGE ITS
PORTFOLIO. 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

                                       15

<PAGE>

protect the value of securities (or currencies) 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 (or currencies) 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. See "Investment Objectives and
Policies--Investment Policies Applicable to Both Funds--Options on Securities
and Securities Indices" in the Statement of Additional Information.

     A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE
RIGHT FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES, SECURITIES IN
THE INDEX OR CURRENCY 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 or currency in excess of the exercise price of the option during the
period that the option is open.

     A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES OR CURRENCY 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 or currency underlying the option at the
exercise price. The Fund might, therefore, be obligated to purchase the
underlying securities or currency for more than their current market price.

   
     THE FUND WILL WRITE ONLY "COVERED" OPTIONS. A written option is covered if,
as long as the Fund is obligated under the option, it (i) owns an offsetting
position in the underlying security or currency or (ii) maintains in a
segregated account cash or liquid assets in an amount equal to or greater than
its obligation under the option. Under the first circumstance, the Fund's losses
are limited because it owns the underlying security or currency; under the
second circumstance, in the case of a written call option, the Fund's losses are
potentially unlimited. See "Investment Objectives and Policies-- Investment
Policies Applicable to Both Funds--Options on Securities and Securities Indices"
in the Statement of Additional Information. There is no limitation on the amount
of options the Fund may write.
    

     The Fund would normally purchase put options to hedge against a decline in
the market value of securities in its portfolio (protective puts). The purchase
of a put option would entitle the Fund, in exchange for the premium paid, to
sell specified securities at a specified price, upon exercise of the option,
during the option period. Gains and losses on the purchase of protective puts
would tend to be offset by countervailing changes in the value of underlying
Fund securities. The Fund would ordinarily realize a gain if, during the option
period, the value of the underlying securities decreases below the exercise
price sufficiently to cover the premium and transaction costs; otherwise, the
Fund would realize a loss on the purchase of the put option. The Fund may also
write a call option, which can serve as a limited short hedge because decreases
in value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security appreciates to a price
higher than the exercise price of the call option, it can be expected that the
option will be exercised and the Fund will be obligated to sell the security at
less than its market value.

     The Fund may purchase and sell put and call options on securities indices
for hedging against a decline in the value of the securities owned by the Fund
or against an increase in the market value of the type of securities in which
the Fund may invest. Securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Options on securities indices are
similar to options on securities, except that the exercise of securities index
options requires cash payments and does not involve the actual purchase or sale
of securities. When purchasing or selling securities index options, the Fund is
subject to the risk that the value of its portfolio securities may not change as
much as or more than the index because the Fund's investments generally will not
match the composition of the index. See "Investment Objectives and
Policies--Investment Policies Applicable to Both Funds--Options on Securities
and Securities Indices" and "Taxes" in the Statement of Additional Information.

                                       16

<PAGE>

     FUTURES CONTRACTS AND OPTIONS THEREON

   
     THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE TO REDUCE
CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN IN ACCORDANCE
WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION (CFTC). THE FUND,
AND THUS THE INVESTOR, MAY LOSE MONEY THROUGH THE UNSUCCESSFUL USE OF THESE
STRATEGIES. These futures contracts and related options will be on securities,
securities indices, interest rate indices and foreign currencies. A futures
contract is an agreement to purchase or sell an agreed amount of securities or
currencies at a set price for delivery in the future. A stock index futures
contract is an agreement to purchase or sell cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made. The Fund may purchase and sell futures contracts or related options as a
hedge against changes in market conditions.
    

     The Fund may not purchase or sell futures contracts and related options to
attempt to enhance return, if immediately thereafter the sum of the amount of
initial margin deposits on the Fund's existing futures and options on futures
and premiums paid for such related options would exceed 5% of the liquidation
value of the Fund's total assets. The Fund may purchase and sell futures
contracts and related options, without limitation, for bona fide hedging
purposes in accordance with regulations of the CFTC (i.e., to reduce certain
risks of its investments). The value of all futures contracts sold will not
exceed the total market value of the Fund's portfolio.

   

     Futures contracts and related options are generally subject to segregation
and coverage requirements of the CFTC or the SEC. If the Fund does not hold the
security or currency underlying the futures contract, the Fund will be required
to segregate on an ongoing basis with its Custodian cash or liquid assets in an
amount at least equal to the Fund's obligations with respect to such futures
contracts.
    

     THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET AND
IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements in the
price of a futures contract and the movements in the index or price of the
currencies underlying the futures contract is imperfect and there is a risk that
the value of the indices or currencies underlying the futures contract may
increase or decrease at a greater rate than the related futures contracts
resulting in losses to the Fund. Certain futures exchanges or boards of trade
have established daily limits on the amount that the price of futures contracts
or related options may vary, either up or down, from the previous day's
settlement price. These daily limits may restrict the Fund's ability to purchase
or sell certain futures contracts or related options on any particular day.

   

     The Fund's ability to enter into futures contracts and options thereon is
limited by the requirements of the Internal Revenue Code for qualification as a
regulated investment company. See "Investment Objectives and Policies" and
"Taxes" in the Statement of Additional Information.
    

     FORWARD CURRENCY EXCHANGE CONTRACTS

     THE FUND MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO
PROTECT THE VALUE OF ITS ASSETS AGAINST FUTURE CHANGES IN THE LEVEL OF CURRENCY
EXCHANGE RATES AND MAY PURCHASE AND SELL FOREIGN CURRENCY FORWARD CONTRACTS,
FUTURES CONTRACTS ON FOREIGN CURRENCY, AND OPTIONS ON FUTURES CONTRACTS ON
FOREIGN CURRENCY TO PROTECT AGAINST THE EFFECT OF ADVERSE CHANGES ON FOREIGN
CURRENCIES. The Fund may enter into such contracts on a spot, i.e., cash, basis
at the rate then prevailing in the currency exchange market or on a forward
basis, by entering into a forward contract to purchase or sell currency. A
forward contract on foreign currency is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days agreed
upon by the parties from the date of the contract at a price set on the date of
the contract. These contracts are traded in the market conducted directly
between currency traders (typically large commercial banks) and their customers.
See "Investment Objectives and Policies--Investment Policies Applicable to
Prudential Active Balanced Fund--Foreign Currency Forward Contracts, Options and
Futures Transactions" in the Statement of Additional Information.

                                       17

<PAGE>

   
     THE FUND'S DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING
INVOLVING EITHER SPECIFIC TRANSACTIONS OR PORTFOLIO POSITIONS. When the Fund
invests in foreign securities, it may enter into forward contracts in several
circumstances to protect the value of its assets. The Fund may not use forward
contracts, options on foreign currencies, futures contracts on foreign
currencies and options on such contracts in order to generate income, although
the use of such contracts may incidentally generate income. Transaction hedging
is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a different currency (cross hedge). Although there
are no limits on the number of forward contracts which the Fund may enter into,
the Fund may not position hedge (including cross hedges) with respect to a
particular currency for an amount greater than the aggregate market value
(determined at the time of making any sale of forward currency) of the
securities being hedged. See "Investment Objectives and Policies" in the
Statement of Additional Information.
    

     RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES

   
     PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS INVOLVES INVESTMENT RISKS AND TRANSACTION COSTS TO WHICH THE FUND
WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. THE FUND, AND THUS THE
INVESTOR, MAY LOSE MONEY THROUGH THE UNSUCCESSFUL USE OF THESE STRATEGIES. If
the investment adviser's predictions of movements in the direction of the
securities, foreign currency and interest rate 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 options, foreign
currency and futures contracts and options on futures contracts include (1)
dependence on the investment adviser's ability to predict correctly movements in
the direction of interest rates, securities prices and currency markets; (2)
imperfect correlation between the price of options and futures contracts and
options thereon and movements in the prices of the securities 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 possible need to defer closing out certain hedged positions to avoid
adverse tax consequences; 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 securities in connection with hedging transactions. See "Taxes" in the
Statement of Additional Information.
    

     The Fund will generally purchase options and futures on an exchange only if
there appears to be a liquid secondary market for such options or futures; the
Fund will generally purchase OTC options only if the investment adviser believes
that the other party to options will continue to make a market for such options.
However, there can be no assurance that a liquid secondary market will continue
to exist or that the other party will continue to make a market. Thus, it may
not be possible to close an options or futures transaction. The inability to
close options and futures positions also could have an adverse impact on the
Fund's ability to effectively hedge its portfolio. There is also the risk of
loss by the Fund of margin deposits or collateral in the event of bankruptcy of
a broker with whom the Fund has an open position in an option, a futures
contract or related option.

INVESTMENT RESTRICTIONS

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

                                       18

<PAGE>

                             HOW THE FUND IS MANAGED

     THE COMPANY HAS A BOARD OF TRUSTEES WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, DECIDES UPON MATTERS
OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISERS FURNISH DAILY INVESTMENT ADVISORY
SERVICES.

     For the fiscal year ended September 30, 1996, total expenses as a
percentage of average net assets were 1.00% for Class Z shares. No Class A,
Class B or Class C shares of the Fund were outstanding during this period.

MANAGER
   
     PRUDENTIAL MUTUAL FUND MANAGEMENT LLC (PMF OR THE MANAGER), GATEWAY CENTER
THREE, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER OF THE COMPANY AND IS
COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .65 OF 1% OF THE FUND'S
AVERAGE DAILY NET ASSETS. It was established as a New York limited liability
company in 1996. See "Manager and Subadvisers" in the Statement of Additional
Information. Prior to October 30, 1996, the manager of the Fund was Prudential
Institutional Fund Management, Inc. It was compensated for its services at an
annual rate of .70 of 1% of the Fund's average daily net assets.

     As of October 31, 1996, PMF served as the manager to 40 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $53.4 billion.
    

     Under the Management Agreement with the Company, PMF manages the investment
operations of the Fund and also administers the Company's business affairs. See
"Manager and Subadvisers" in the Statement of Additional Information.

SUBADVISERS

   
     JENNISON ASSOCIATES CAPITAL CORP. (JENNISON OR THE SUBADVISER), 466
LEXINGTON AVENUE, NEW YORK, NEW YORK, 10017, IS THE SUBADVISER TO THE COMPANY.
It was incorporated in 1969 under the laws of the State of New York. As of
October 31, 1996, Jennison had over $31 billion in assets under management for
institutional and mutual fund clients.
    
     PURSUANT TO A SUBADVISORY AGREEMENT WITH PMF, JENNISON FURNISHES INVESTMENT
ADVISORY SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS
COMPENSATED BY PMF FOR ITS SERVICES AT AN ANNUAL RATE OF .30 OF 1% OF THE FUND'S
AVERAGE DAILY NET ASSETS UP TO AND INCLUDING $300 MILLION AND .25 OF 1% OF THE
FUND'S AVERAGE DAILY NET ASSETS IN EXCESS OF $300 MILLION.

     Under the Subadvisory Agreement, Jennison, subject to the supervision of
PMF, is responsible for managing the assets of the Fund in accordance with its
investment objective, investment program and policies. Jennison 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.
   
     BRADLEY GOLDBERG IS THE PORTFOLIO MANAGER AND PETER REINEMANN AND G. TODD
SILVA ARE ASSOCIATE PORTFOLIO MANAGERS OF THE FUND. Mr. Goldberg is an Executive
Vice President of Jennison, and is responsible for the day-to-day management of
the Fund. Mr. Goldberg has managed the Fund since its inception in January 1993
and has been employed as a portfolio manager at Jennison since 1974. Mr.
Goldberg also serves as the Portfolio Manager of the Prudential Jennison Growth
& Income Fund, a series of the Prudential Jennison Series Fund, Inc., which is a
registered investment company. Mr. Reinemann, a Senior Vice President and
Director, joined Jennison in 1992 as an associate portfolio manager. Prior to
that time, he served as a Vice President at Paribas Asset Management, Inc. Mr.
Silva, a Senior Vice President of Jennison, joined Jennison in June 1996. He was
previously a Vice President and assistant Portfolio manager in the Growth &
Income Group at Scudder, Stevens & Clark Inc. and an equity analyst at Putnam
Investments. Mr. Reinemann and Mr. Silva are also Associate Portfolio Managers
of the Prudential Jennison Growth & Income Fund.
    

                                        19
<PAGE>

    THE PRUDENTIAL INVESTMENT CORPORATION (PIC), 751 BROAD STREET, NEWARK, NEW
JERSEY 07102, INVESTS AVAILABLE CASH BALANCES FOR THE FUND THROUGH A JOINT
REPURCHASE AGREEMENT ACCOUNT. The Manager reimburses PIC for the reasonable
costs and expenses it incurs in providing such services.

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

DISTRIBUTOR

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

     UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS
B PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (ALSO THE DISTRIBUTOR) INCURS THE
EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B AND CLASS C SHARES.
PRUDENTIAL SECURITIES ALSO INCURS THE EXPENSES OF DISTRIBUTING THE FUND'S CLASS
Z SHARES UNDER THE DISTRIBUTION AGREEMENT, NONE OF WHICH IS REIMBURSED BY OR
PAID FOR BY THE FUND. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
Pruco Securities Corporation (Prusec), an affiliated broker-dealer, commissions
and account servicing fees paid to, or on account of, other broker-dealers or
financial institutions (other than national banks) which have entered into
agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses.

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

     UNDER THE CLASS A PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED 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 (i) up to .25 of 1% of the average daily net assets
of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. Prudential Securities has agreed
to limit its distribution-related fees payable under the Class A Plan to .25 of
1% of the average daily net assets of the Class A shares for the fiscal year
ending September 30, 1997.

     UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS PRUDENTIAL SECURITIES
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
Prudential Securities of (i) an asset-based sales charge of .75 of 1% of the
average daily net assets of the Class B and Class C shares, respectively, and
(ii) a service fee of .25 of 1% of the average daily net assets of each of the
Class B and Class C shares. The service fee is used to pay for personal service
and/or the maintenance of shareholder accounts. Prudential Securities also
receives contingent deferred sales charges from certain redeeming shareholders.
See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges."

     Distribution expenses attributable to the sale of shares of the Fund will
be allocated to each class based upon the ratio of sales of each class to the
sales of all 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.

                                       20

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

     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 and other persons which distribute shares of the Fund
(including Class Z shares). Such payments may be calculated by reference to the
net asset value of shares sold by such persons or otherwise.

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

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

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

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

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

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

FEE WAIVERS AND SUBSIDY

     PMF 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. Fee waivers
and expense subsidies will increase the Fund's total return. See "Performance
and Yield Information" in the Statement of Additional Information and "Fund
Expenses" above.

                                       21

<PAGE>

PORTFOLIO TRANSACTIONS

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

CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT

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

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

                         HOW THE FUND VALUES ITS SHARES

     THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING
ITS LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. For
valuation purposes, quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents. THE TRUSTEES FIXED THE SPECIFIC TIME OF
DAY FOR THE COMPUTATION OF THE FUND'S NAV TO BE AS OF 4:15 P.M., NEW YORK TIME.

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

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

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

                       HOW THE FUND CALCULATES PERFORMANCE

     FROM TIME TO TIME THE FUND MAY ADVERTISE ITS TOTAL RETURN (INCLUDING
"AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) AND YIELD IN
ADVERTISEMENTS OR SALES LITERATURE. TOTAL RETURN AND YIELD ARE CALCULATED
SEPARATELY FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES. These figures are
based on historical earnings and are not intended to indicate future
performance. The "total return" shows how much an investment in the Fund would
have

                                       22

<PAGE>

   
increased (decreased) over a specified period of time (i.e., one, five or ten
years or since inception of the Fund) assuming that all distributions and
dividends by the Fund were reinvested on the reinvestment dates during the
period and less all recurring fees. The "aggregate" total return reflects actual
performance over a stated period of time. "Average annual" total return is a
hypothetical rate of return that, if achieved annually, would have produced the
same aggregate total return if performance had been constant over the entire
period. "Average annual" total return smooths out variations in performance and
takes into account any applicable initial or contingent deferred sales charges.
Neither "average annual" total return nor "aggregate" total return takes into
account any federal or state income taxes which may be payable upon redemption.
The "yield" refers to the income generated by an investment in the Fund over a
one-month or 30-day period. This income is then "annualized;" that is, the
amount of income generated by the investment during that 30-day period is
assumed to be generated each 30-day period for twelve periods and is shown as a
percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The Fund also
may include comparative performance information in advertising or marketing the
Fund's shares. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., and other industry
publications, business periodicals and market indices. See "Performance and
Yield Information" in the Statement of Additional Information. Further
performance information will be contained in the Fund's annual and semi-annual
reports to shareholders, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
    

                       TAXES, DIVIDENDS AND DISTRIBUTIONS
   

     TAXATION OF THE FUND
    

     THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
(THE INTERNAL REVENUE CODE). ACCORDINGLY, THE FUND WILL NOT BE SUBJECT TO
FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME AND CAPITAL GAINS, IF ANY,
THAT IT DISTRIBUTES TO ITS SHAREHOLDERS.

     The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations which derive a majority of
their income from passive sources. For tax purposes, the Fund's investments in
PFICs are subject to special tax provisions that may result in the taxation of
certain gains realized by the Fund. See "Taxes" in the Statement of Additional
Information.

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

     Gains or losses on disposition of debt securities denominated in a foreign
currency attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security and the date of disposition are treated
as ordinary gain or loss. These gains or losses increase or decrease the amount
of the Fund's investment company taxable income available to be distributed to
shareholders as ordinary income, rather than increasing or decreasing the amount
of the Fund's net capital gain. If currency fluctuation losses exceed other
investment company taxable income during a taxable year, distributions made by
the Fund during the year would be characterized as a return of capital to
shareholders, reducing the shareholder's basis in his or her Fund shares.

     The Fund may incur foreign income taxes in connection with some of its
foreign investments.

                                       23

<PAGE>

     TAXATION OF SHAREHOLDERS

     All dividends out of net investment income, together with distributions of
net short-term capital gains, will be taxable as ordinary income to the
shareholder whether or not reinvested. Any net long-term capital gains
distributed to shareholders will be taxable as such to the shareholder, whether
or not reinvested and regardless of the length of time a shareholder has owned
his or her shares. The maximum long-term capital gains rate for corporate
shareholders is currently the same as the maximum tax rate for ordinary income.
The maximum long-term capital gains rate for individual shareholders is
currently 28% and the maximum tax rate for ordinary income is 39.6%.

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

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

     WITHHOLDING TAXES

     Under U.S. Treasury Regulations, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividend, capital gain income and redemption
proceeds, payable on the accounts of those shareholders who fail to furnish
their tax identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of
certain foreign shareholders) with the required certifications regarding the
shareholder's status under the federal income tax law.

     Shareholders are urged to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Taxes" in the Statement of
Additional Information.

     DIVIDENDS AND DISTRIBUTIONS

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

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

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

                                       24

<PAGE>

                               GENERAL INFORMATION

DESCRIPTION OF SHARES

   

     THE COMPANY WAS ESTABLISHED AS A DELAWARE BUSINESS TRUST ON MAY 11, 1992.
THE COMPANY IS AUTHORIZED TO ISSUE AN UNLIMITED NUMBER OF SHARES OF BENEFICIAL
INTEREST, $.001 PAR VALUE PER SHARE, DIVIDED INTO TWO SERIES OR PORTFOLIOS, THE
FUND AND PRUDENTIAL STOCK INDEX FUND. THE FUND IS FURTHER DIVIDED INTO FOUR
CLASSES OF SHARES, DESIGNATED CLASS A, CLASS B, CLASS C AND CLASS Z. Prudential
Stock Index Fund offers one class of shares. Each class of beneficial interest
of the Fund represents an interest in the same assets of the Fund and is
identical in all respects except that (i) each class (with the exception of
Class Z shares) is subject to different sales charges and distribution and/or
service fees, which may affect performance, (ii) each class has exclusive voting
rights on any matter submitted to shareholders that relates solely to its
arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class of the Fund, (iii) each class has a different exchange
privilege, (iv) only Class B shares have a conversion feature and (v) Class Z
shares are offered exclusively for sale to a limited group of investors. See
"How the Fund is Managed--Distributor." In accordance with the Company's
Declaration of Trust, the Trustees may authorize the creation of additional
series of beneficial interest and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.

     The Company's expenses generally are allocated between the Fund and
Prudential Stock Index Fund on the basis of relative net assets at the time of
allocation, except that expenses directly attributable to the Fund or the other
series of the Company are charged to the Fund or the other series, as the case
may be.
    

     The Trustees may increase or decrease the number of authorized shares
without the approval of shareholders. Shares of the Fund, when issued, are fully
paid, nonassessable, fully transferable and redeemable at the option of the
holder. Shares are also redeemable at the option of the Fund under certain
circumstances as described under "Shareholder Guide--How to Sell Your Shares."
Each share of each class is equal as to earnings, assets and voting privileges,
except as noted above, and each class bears the expenses related to the
distribution of its shares (with the exception of Class Z shares, which are not
subject to any distribution or service fees). 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 debts 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 Company's shares do not have cumulative
voting rights for the election of Trustees.

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

     ADDITIONAL INFORMATION

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

                                       25

<PAGE>

                                SHAREHOLDER GUIDE

HOW TO BUY SHARES OF THE FUND

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

     The minimum initial investment is $1,000 per class for Class A and Class B
shares and $5,000 for Class C shares. There is no minimum initial investment
requirement for Class Z shares. The minimum subsequent investment is $100 for
all classes, except for Class Z shares for which there is no such minimum. All
minimum investment requirements are waived for certain retirement and employee
savings plans or custodial accounts for the benefit of minors. For purchases
through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. See "Shareholder Services" below.
    

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

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

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

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

   
     PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must first telephone PMFS 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,
Boston, Massachusetts, Custody and Shareholder Services Division, Attention:
Prudential Dryden Fund, Prudential Active Balanced Fund, specifying on the wire
the account number assigned by PMFS and your name and identifying the sales
charge alternative (Class A, Class B, Class C or Class Z shares).
    

     If you arrange for receipt by State Street of federal funds prior to 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 Dryden Fund,
Prudential Active 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.

                                       26

<PAGE>

ALTERNATIVE PURCHASE PLAN

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

<TABLE>
<CAPTION>

                                                       Annual 12B-1 Fees
                                                   (As a % of average daily
                      Sales Charge                        net assets)                   Other Information
                      ------------                 -------------------------            -----------------
<S>       <C>                                      <C>                       <C>

CLASS A   Maximum initial sales charge of 5% of    .30 of 1% (Currently      Initial sales charge waived or reduced
          the public offering price                 being charged at a       for certain purchases
                                                    rate of .25 of 1%)

CLASS B   Maximum contingent deferred sales        1%                        Shares convert to Class A shares
          charge or CDSC of 5% of the lesser of                              approximately seven years after
          the amount invested or the redemption                              purchase
          proceeds; declines to zero after six
          years

CLASS C   Maximum CDSC of 1% of the lesser         1%                        Shares do not convert to another class
          of the amount invested or the
          redemption proceeds on redemptions
          made within one year of purchase

CLASS Z   None                                     None                      Sold to a limited group of investors

</TABLE>


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

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

   
     IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares automatically
convert to Class A shares approximately seven years after purchase (see
"Conversion Feature--Class B Shares" below).
    

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

     If you intend to hold your investment in the Fund for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to an initial sales charge of 5% and Class B shares are
subject to a CDSC

                                       27

<PAGE>

of 5% which declines to zero over a 6-year period, you should consider
purchasing Class C shares over either Class A or Class B shares.

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

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

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

   

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

CLASS A SHARES

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

                         Sales Charge As   Sales Charge As    Dealer Concession
                          Percentage of     Percentage of     as Percentage of
                         Offering Price    Amount Invested     Offering Price
                        ----------------   ----------------   ------------------
 Less than $25,000           5.00%              5.26%               4.75%
 $25,000 to $49,999          4.50               4.71                4.25
 $50,000 to $99,999          4.00               4.17                3.75
 $100,000 to $249,999        3.25               3.36                3.00
 $250,000 to $499,999        2.50               2.56                2.40
 $500,000 to $999,999        2.00               2.04                1.90
 $1,000,000 and above        None               None                None

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

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

     REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money

                                       28
<PAGE>

market funds other than those acquired pursuant to the exchange privilege)
may be aggregated to determine the applicable reduction. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.

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

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

     Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray or SmartPath Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.

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

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

                                       29

<PAGE>

CLASS B AND CLASS C SHARES

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

CLASS Z SHARES

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

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

HOW TO SELL YOUR SHARES

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

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

                                       30

<PAGE>

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

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

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

     REDEMPTION IN KIND. If the Trustees determines 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 SEC.
Securities will be readily marketable and will be valued in the same manner as a
regular redemption. See "How the Fund Values its Shares." If your shares are
redeemed in kind, you would incur transaction costs in converting the assets
into cash. The Company has, however, elected to be governed by Rule 18f-1 under
the Investment Company Act, under which the Fund is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of the net asset value of the
Fund during the 90-day period for any one shareholder.

   
     INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the
Trustees may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
any such shareholder 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 redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. (If less than a full repurchase is made
the credit will be on a pro rata basis.) You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities or Prusec, at the time
the repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege will generally not affect
the federal income 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 results in a loss, some or all of the loss, depending on the amount
reinvested, may not be allowed for federal income tax purposes.
    

                                       31

<PAGE>

CONTINGENT DEFERRED SALES CHARGES

   
     Redemptions of Class B shares will be subject to a contingent deferred
sales charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid to
you. The CDSC will be imposed on any redemption by you which reduces the current
value of your Class B or Class C shares to an amount which is lower than the
amount of all payments by you for shares during the preceding six years, in the
case of Class B shares, and one year, in the case of Class C shares. A CDSC will
be applied on the lesser of the original purchase price or the current value of
the shares being redeemed. Increases in the value of your shares or shares
purchased through reinvestment of dividends or distributions are not subject to
CDSC. The amount of any CDSC will be paid to and retained by the Distributor.
See "How the Fund is Managed--Distributor" and "Waiver of Contingent Deferred
Sales Charges--Class B Shares" below.
    

     The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of your 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 following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:

                                             Contingent Deferred Sales
                                              Charge ss a Percentage
      Year Since Purchase                     of Dollars Invested or
      Payment Made                              Redemption Proceeds
      ------------                           -------------------------
      First ................................           5.0%
      Second ...............................           4.0%
      Third ................................           3.0%
      Fourth ...............................           2.0%
      Fifth ................................           1.0%
      Sixth ................................           1.0%
      Seventh ..............................           None

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

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

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

     WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or

                                       32

<PAGE>

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), or a trust, at the time of death or initial
determination or disability, provided that the shares were purchased prior to
death or disability.

     The CDSC will also be waived in the case of a total or partial redemption
in connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service, i.e.,
following voluntary or involuntary termination of employment or following
retirement. Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan unless such
redemptions otherwise qualify as a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.

     In addition, the CDSC will be waived on redemptions of shares held by a
Trustee of the Fund. 
   
     You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to waiver
of the CDSC and provide the Transfer Agent with such supporting documentation as
it may deem appropriate. The waiver will be granted subject to confirmation of
your entitlement. See "Purchase and Redemption of Fund Shares--Waiver of the
Contingent Deferred Sales Charge--Class B Shares" in the Statement of Additional
Information.
    
CONVERSION FEATURE--CLASS B SHARES

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

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

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

                                       33
<PAGE>

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

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

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

HOW TO EXCHANGE YOUR SHARES

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

   
     IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, 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. (THE FUND OR ITS AGENTS COULD BE SUBJECT TO LIABILITY
IF THEY FAIL TO EMPLOY REASONABLE PROCEDURES.) All exchanges will be made on the
basis of the relative NAV of the two funds next determined after the request is
received in good order.The exchange privilege is available only in states where
the exchange may legally be made.
    

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

                                       34

<PAGE>

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

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

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

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

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

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

   
     The Exchange Privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders. 
    
SHAREHOLDER SERVICES

     In addition to the exchange privilege, as a shareholder in the Fund, you
can take advantage of the following additional services and privileges:

     o AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTION WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have 

                                       35

<PAGE>

subsequent dividends and/or distributions sent in cash rather than reinvested.
If you hold shares through Prudential Securities, you should contact your
financial adviser.

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

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

     o SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders, which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges." See also "Shareholder Investment
Account--Systematic Withdrawal Plan" in the Statement of Additional Information.

   
     o REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 (toll-free) or by writing to the Fund at
Gateway Center Three, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data are available upon request from the Fund.

     o SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
Gateway Center Three, Newark, New Jersey 07102-4077, or by telephone, at (800)
225-1852 (toll-free) or, from outside the U.S.A. at (908) 417-7555 (collect).
    

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

                                       36

<PAGE>

                        THE PRUDENTIAL MUTUAL FUND FAMILY

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

        TAXABLE BOND FUNDS

Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
 Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
 Income Portfolio
The BlackRock Government Income Trust

      TAX-EXEMPT BOND FUNDS

Prudential California Municipal Fund
 California Series
 California Income Series
Prudential Municipal Bond Fund
 High Yield Series
 Insured Series
 Intermediate  Series
Prudential Municipal Series Fund
 Florida Series
 Hawaii Income Series
 Maryland Series
 Massachusetts Series
 Michigan Series
 New Jersey Series
 New York Series
 North Carolina Series
 Ohio Series
 Pennsylvania Series
Prudential National Municipals Fund, Inc.

      GLOBAL FUNDS

Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
 Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
 Global Series
 International Stock Series
The Global Government Plus Fund, Inc.
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.

      EQUITY FUNDS

Prudential Allocation Fund
 Balanced Portfolio
 Strategy Portfolio
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
 Prudential Active Balanced Fund
 Prudential Stock Index Fund
   
Prudential Emerging Growth Fund, Inc.
    
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
 Prudential Jennison Growth Fund
 Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small Companies Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
 Nicholas-Applegate Growth Equity Fund

      MONEY MARKET FUNDS

o  Taxable Money Market Funds
Prudential Government Securities Trust
 Money Market Series
 U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
 Money Market Series
Prudential MoneyMart Assets, Inc.
o  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
o  Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
o  Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
 Institutional Money Market Series

                                      A-1
<PAGE>

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

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

                                TABLE OF CONTENTS

                                                                          Page
                                                                          ----
FUND HIGHLIGHTS ........................................................    2
 Risk Factors and Special Characteristics ..............................    2
FUND EXPENSES ..........................................................    5
FINANCIAL HIGHLIGHTS ...................................................    6
HOW THE FUND INVESTS ...................................................    7
 Investment Objective and Policies .....................................    7
 Other Investments and Policies ........................................   12
 Risk Factors and Special Considerations of
  Investing in Foreign Securities ......................................   14
 Risk Factors Relating to Investing in Debt 
   Securities Rated Below Investment Grade 
  (Junk Bonds) .........................................................   14
 Hedging and Return Enhancement Strategies .............................   15
 Investment Restrictions ...............................................   18
 HOW THE FUND IS MANAGED ...............................................   19
 Manager ...............................................................   19
 Subadvisers ...........................................................   19
 Distributor ...........................................................   20
 Fee Waivers and Subsidy ...............................................   21
 Portfolio Transactions ................................................   22
 Custodian and Transfer and 
  Dividend Disbursing Agent ............................................   22
HOW THE FUND VALUES ITS SHARES .........................................   22
HOW THE FUND CALCULATES PERFORMANCE ....................................   22
TAXES, DIVIDENDS AND DISTRIBUTIONS .....................................   23
GENERAL INFORMATION ....................................................   25
 Description of Shares .................................................   25
 Additional Information ................................................   25
SHAREHOLDER GUIDE ......................................................   26
 How to Buy Shares of the Fund .........................................   26
 Alternative Purchase Plan .............................................   27
 How to Sell Your Shares ...............................................   30
 Conversion Feature--Class B Shares ....................................   33
 How to Exchange Your Shares ...........................................   34
 Shareholder Services ..................................................   35
THE PRUDENTIAL MUTUAL FUND FAMILY ......................................  A-1

- --------------------------------------------------------------------------------
MF174A-1
- --------------------------------------------------------------------------------
                           Class A: 74431F506
              CUSIP Nos.:  Class B: 74431F605
                           Class C: 74431F704
                           Class Z: 74431F803
- --------------------------------------------------------------------------------
                          PRUDENTIAL
                          ACTIVE
                          BALANCED
                          FUND












                               P R O S P E C T U S

                                NOVEMBER 29, 1996


                                     [LOGO]
                                   PRUDENTIAL
                                  INVESTMENTS
<PAGE>

PRUDENTIAL STOCK INDEX FUND

- --------------------------------------------------------------------------------
   
PROSPECTUS DATED NOVEMBER 29, 1996
    
- --------------------------------------------------------------------------------

Prudential Stock Index Fund (the Fund) is a series of Prudential Dryden Fund
(formerly The Prudential Institutional Fund) (the Company), a diversified,
open-end, management investment company. The Fund's investment objective is to
seek to provide investment results that correspond to the price and yield
performance of Standard & Poor's 500 Composite Stock Price Index (S&P 500
Index). There can be no assurance that the Fund's investment objective will be
achieved. See "How the Fund Invests--Investment Objective and Policies." The
Fund's address is Gateway Center Three, Newark, NJ 07102-4077, and its telephone
number is (800) 225-1852.

THE FUND RESERVES THE RIGHT TO BORROW MONEY FOR TEMPORARY, EXTRAORDINARY OR
EMERGENCY PURPOSES OR FOR THE CLEARANCE OF TRANSACTIONS AND IN ORDER TO TAKE
ADVANTAGE OF INVESTMENT OPPORTUNITIES, WHICH MAY BE CONSIDERED SPECULATIVE DUE
TO THE INCREASED COSTS AND EXPENSES INVOLVED.

   
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated November 29, 1996, which information
is incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
    

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

Investors are advised to read this Prospectus and retain it for future
reference.

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

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

<PAGE>


                                 FUND HIGHLIGHTS

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

     The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.

WHAT IS PRUDENTIAL STOCK INDEX FUND?

     Prudential Stock Index Fund is a mutual fund. A mutual fund pools the
resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Company is a diversified, open-end,
management investment company.

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

     The Fund's investment objective is to seek to provide investment results
that correspond to the price and yield performance of Standard & Poor's 500
Composite Stock Price Index. There can be no assurance that the Fund's
investment objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies" at page 6.

RISK FACTORS AND SPECIAL CHARACTERISTICS

     The Fund's performance will not precisely correspond to the performance of
the S&P 500 Index. The Fund will attempt to achieve a correlation between its
performance and that of the S&P 500 Index of at least 0.95, without taking into
account expenses. Potential tracking differences, brokerage and other
transaction costs and other Fund expenses may cause the Fund's return to be
lower then the return of the S&P 500 Index. See "How the Fund
Invests--Investment Objective and Policies" at page 6.

   
     The Fund may engage in various hedging and return enhancement strategies
and invest in derivative securities. See "How the Fund Invests--Hedging and
Return Enhancement Strategies--Risks of Hedging and Return Enhancement
Strategies" at page 11. As with an investment in any mutual fund, an investment
in this Fund can decrease in value and you can lose money. 
    

WHO MANAGES THE FUND?

   
     Prudential Mutual Fund Management LLC (PMF or the Manager) is the manager
of the Company and is compensated for its services at an annual rate of .30 of
1% of average daily net assets of the Fund. As of October 31, 1996, PMF served
as manager or administrator to 62 investment companies, including 40 mutual
funds, with aggregate assets of approximately $53.4 billion. The Prudential
Investment Corporation (PIC, the Subadviser or the investment adviser) furnishes
investment advisory services in connection with the management of the Fund under
a Subadvisory Agreement with PMF. See "How the Fund is Managed--Manager" at page
12 and "How the Fund is Managed--Subadviser" at page 12.
    

WHO DISTRIBUTES THE FUND'S SHARES?

     Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's shares. Prudential Securities incurs the expense of
distributing the Fund's shares under a Distribution Agreement with the Company,
none of which is reimbursed or paid for by the Fund. See "How the Fund is
Managed--Distributor" at page 12.

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

                                       2
<PAGE>
- --------------------------------------------------------------------------------

WHAT IS THE MINIMUM INVESTMENT?

     There is no minimum initial or subsequent investment requirement for
investors who qualify to purchase shares. See "Shareholder Guide--How to Buy
Shares of the Fund" at page 17 and "Shareholder Guide--Shareholder Services" at
page 20.


HOW DO I PURCHASE SHARES?

   
     You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at
the net asset value per share (NAV) next determined after receipt of your
purchase order by the Transfer Agent or Prudential Securities. Shares of the
Fund are offered to (i) investors who purchase $1 million or more of shares of
the Fund (or who already own $1 million of shares of other Prudential Mutual
Funds); (ii) participants in any fee-based program sponsored by Prudential
Securities (or one of its affiliates) which includes mutual funds as investment
options and for which the Fund is an available option and (iii) investors who
were, or who executed a letter of intent to become, shareholders of any series
of the Company on or before one or more series of the Company reorganized or who
on that date had investments in certain products for which the Company provided
exchangeability. Participants in programs sponsored by Prudential Retirement
Services should contact their client representative for more information about
purchasing shares of the Fund. See "How the Fund Values its Shares" at page 14
and "Shareholder Guide--How to Buy Shares of the Fund" at page 17.
    


WHAT ARE MY PURCHASE ALTERNATIVES? 

    
The Fund offers one class of shares, sold without an initial or contingent
deferred sales charge to a limited group of investors. Shares of the Fund are
not subject to any ongoing service- or distribution-related expenses.
    

HOW DO I SELL MY SHARES? 

     You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order.
Participants in programs sponsored by Prudential Retirement Services should
contact their client representative for more information about selling their
shares. See "Shareholder Guide--How to Sell Your Shares" at page 19. 


HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?

     The Fund expects to pay dividends of net investment income, if any, and
distributions of any net capital gains at least annually. Dividends and
distributions will be automatically reinvested in additional shares of the Fund
at NAV without a sales charge unless you request that they be paid to you in
cash. See "Taxes, Dividends and Distributions" at page 15.

                                       3
<PAGE>

                                              FUND EXPENSES
<TABLE>

<CAPTION>
- --------------------------------------------------------------------------------------------------
<S>                                                                                           <C>
   
SHAREHOLDER TRANSACTION EXPENSES
    Maximum Sales Load Imposed on Purchases ..............................................    None
    Maximum Deferred Sales Load ..........................................................    None
    Maximum Sales Load Imposed on Reinvested Dividends ...................................    None
    Redemption Fees ......................................................................    None
    Exchange Fee .........................................................................    None
    

ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
    Management Fees ......................................................................    .30%
    12b-1 Fees ...........................................................................    None
    Other Expenses .......................................................................    .28%
                                                                                              --- 
    Total Fund Operating Expenses ........................................................    .58%
                                                                                              === 

</TABLE>


<TABLE>
<CAPTION>

                                                                             1      3       5     10
EXAMPLE                                                                    Year   Years   Years  Years
                                                                           ----   -----   -----  -----
   
<S>                                                                         <C>    <C>    <C>     <C>
You would pay the following expenses on a $1,000 investment, assuming
 (1) 5% annual return and (2) redemption at the end of each time period ... $6     $19    $32     $73

     The above example is based on restated data for the Fund's fiscal year
ended September 30, 1996 which would be expected to have been incurred if the
Fund operated in accordance with the new fee and operating expense arrangements
which were effective October 31, 1996. The example should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.

The purpose of this table is to assist investors in understanding the various
types of costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Fund is Managed." "Other Expenses" includes estimated
operating expenses of the Fund for the fiscal year ended September 30, 1996,
such as Trustees' and professional fees, registration fees, reports to
shareholders and transfer agency and custodian fees.
</TABLE>

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

                                       4
<PAGE>


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

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

<TABLE>
<CAPTION>
   
- -----------------------------------------------------------------------------------------------------------
                                                                                                 November 5, 
                                                                        Year Ended                1992(a)
                                                                       September 30,              Through
                                                              ------------------------------     September
                                                               1996        1995       1994        30,1993
                                                              ------      ------      ------      -------
<S>                                                            <C>         <C>         <C>          <C>   
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ......................    $14.22      $11.27      $11.12       $10.00
                                                               ------      ------      ------       ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income(b) ..................................       .25         .23         .26          .23
Net realized and unrealized gain (loss) on investment
 and foreign currency transactions ........................      2.44        2.97         .11          .94
                                                               ------      ------      ------       ------
 Total from investment operations .........................      2.69        3.20         .37         1.17
                                                               ======      ======      ======       ======
LESS DISTRIBUTIONS:
Dividends from net investment income ......................      (.28)       (.22)       (.18)        (.05)
Distributions from net realized income ....................      (.57)       (.03)       (.04)          --
                                                               ------      ------      ------       ------
 Total distributions ......................................      (.85)       (.25)       (.22)        (.05)
                                                               ------      ------      ------       ------
Net asset value, end of period ............................    $16.06      $14.22      $11.27       $11.12
                                                               ======      ======      ======       ======
TOTAL RETURN(d): ..........................................     19.72%      29.02%       3.33%       11.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ...........................  $184,379    $101,945     $50,119      $27,142
Average net assets (000) ..................................  $142,540    $ 71,711     $38,098      $18,807
Ratios to average net assets(b):
 Expenses .................................................       .60%        .60%        .60%         .60%(c)
 Net investment income ....................................      1.92%       2.55%       2.34%        2.41%(c)
Portfolio turnover rate ...................................         2%         11%          2%           1%
Average commission rate paid per share ....................  $ 0.0250         N/A         N/A          N/A
    
</TABLE>
- -----------

(a)  Commencement of investment operations.

(b)  Net of expense subsidy.

(c)  Annualized.

(d)  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 other distributions. Total return for periods
     of less than a full year are not annualized. Total return includes the
     effect of expense subsidies.

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

                                        5
<PAGE>

                              HOW THE FUND INVESTS
  
INVESTMENT OBJECTIVE AND POLICIES

   
     THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK TO PROVIDE INVESTMENT RESULTS
THAT CORRESPOND TO THE PRICE AND YIELD PERFORMANCE OF S&P 500 INDEX. THERE CAN
BE NO ASSURANCE THAT THE FUND'S OBJECTIVE WILL BE ACHIEVED. See "Investment
Objectives and Policies--Investment Policies Applicable to Prudential Stock
Index Fund" in the Statement of Additional Information.

     The Fund seeks to provide investment results that correspond to the price
and yield performance of the S&P 500 Index. The S&P 500 Index is an unmanaged,
market-weighted index of 500 stocks selected by Standard & Poor's Corporation
(S&P) on the basis of their market size, liquidity and industry group
representation. Inclusion in the S&P 500 Index in no way implies an opinion by
S&P as to a stock's attractiveness as an investment. The S&P 500 Index, composed
of stocks representing more than 70% of the total market value of all publicly
traded U.S. common stocks, is widely regarded as representative of the
performance of the U.S. stock market as a whole. "Standard & Poor's(r)",
"S&P(r)", "S&P 500(r)", "Standard & Poor's 500", and "500" are trademarks of
McGraw-Hill, Inc. and have been licensed for use by The Prudential Insurance
Company of America (Prudential) and its affiliates and subsidiaries. The Fund is
not sponsored, endorsed, sold or promoted by S&P and S&P makes no representation
regarding the advisability of investing in the Fund. See "Investment Objectives
and Policies--Investment Policies Applicable to Prudential Stock Index Fund" in
the Statement of Additional Information regarding certain additional disclaimers
and limitations of liability on behalf of S&P.
    

     Traditional methods of security analysis will not be used in connection
with the management of the Fund by PIC, the investment adviser for the Fund, in
making investment decisions. Instead, PIC will use a passive, indexing approach.
To achieve its investment objective, the Fund will purchase equity securities
that as a group reflect the price and yield performance of the S&P 500 Index.
The Fund intends to purchase all 500 stocks included in the S&P 500 Index in
approximately the same proportions as they are represented in the S&P 500 Index.
In addition, from time to time adjustments may be made in the Fund's holdings
due to changes in the composition of the S&P 500 Index or due to receipt of
distributions of securities of companies spun off from S&P 500 companies. The
Fund will not adopt a temporary defensive investment posture in times of
generally declining market conditions, and investors in the Fund therefore will
bear the risk of such market conditions. 


     PIC believes that this investment approach will provide an effective method
of tracking the performance of the S&P 500 Index. Nevertheless, PIC does not
expect that the Fund's performance will precisely correspond to the performance
of the S&P 500 Index. The Fund will attempt to achieve a correlation between its
performance and that of the S&P 500 Index of at least 0.95, without taking into
account expenses. A correlation of 1.00 would indicate perfect correlation,
which would be achieved when the Fund's net asset value, including the value of
its dividends and capital gains distributions, increases or decreases in exact
proportion to changes in the S&P 500 Index. PIC will, of course, attempt to
minimize any tracking differential (i.e., the statistical measure of the
difference between the investment results of the Fund and that of the S&P 500
Index). Tracking will be monitored at least on a monthly basis. All tracking
maintenance activities will be reviewed regularly to determine whether any
changes in policies or techniques are necessary. However, in addition to
potential tracking differences, brokerage and other transaction costs, as well
as other Fund expenses, may cause the Fund's return to be lower than the return
of the S&P 500 Index. Consequently, there can be no assurance as to how closely
the Fund's performance will correspond to the performance of the S&P 500 Index.


     The Fund intends that at least 80% of the value of its total assets will be
invested in securities included in the S&P 500 Index. The Fund may invest the
balance of its assets in: (i) other equity-related securities; (ii) obligations
issued or guaranteed by the U.S. Government, its agencies and instrumentalities;
(iii) put and call options on securities and stock indices; and (iv) futures
contracts on stock indices and options thereon.

                                       6
<PAGE>

     Options, futures contracts, and options on futures contracts are used, if
at all, primarily to invest uncommitted cash balances, to maintain liquidity to
meet redemptions, to facilitate tracking, to reduce transaction costs or to
hedge the Fund's portfolio.


     In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for incidental returnenhancement purposes, the Fund may also
(i) enter into repurchase agreements, when-issued, delayed delivery and forward
commitment transactions; and (ii) lend its portfolio securities.

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

EQUITY-RELATED SECURITIES

     The Fund may invest in equity-related securities. Equity-related securities
are common stocks, preferred stocks, rights, warrants and debt securities or
preferred stocks which are convertible or exchangeable for common stocks or
preferred stocks. See "Investment Objectives and Policies--Investment Policies
Applicable to Both Funds--Convertible Securities, Warrants and Rights" in the
Statement of Additional Information.

SECURITIES OF FOREIGN ISSUERS

     The Fund may invest a portion of its assets in equity securities of foreign
issuers denominated in U.S. currency. 

   
     The Fund may purchase American Depositary Receipts (ADRs), which are U.S.
dollar-denominated certificates issued by a United States bank or trust company
and represent the right to receive securities of a foreign issuer deposited in a
domestic bank or foreign branch of a U.S. bank and traded on a U.S. exchange or
in an over-the-counter market. Generally, ADRs are in registered form. There are
no fees imposed on the purchase or sale of ADRs 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 into the underlying securities. Investment in ADRs has
certain advantages over direct investment in the underlying foreign securities
since: (i) ADRs are U.S. dollar-denominated investments that are registered
domestically, easily transferable, and for which market quotations are readily
available; and (ii) issuers whose securities are represented by ADRs are usually
subject to comparable auditing, accounting and financial reporting standards as
domestic issuers.
    

U.S. GOVERNMENT SECURITIES

     The Fund may invest in securities issued or guaranteed by the U.S. Treasury
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. Some are supported only by the credit of the issuing agency. See
"Investment Objectives and Policies--Investment Policies Applicable to Both
Funds--U.S. Government Securities" in the Statement of Additional Information.

MONEY MARKET INSTRUMENTS

     The Fund may invest in high quality money market instruments, including
commercial paper of a U.S. or non-U.S. company, foreign government securities,
certificates of deposit, bankers' acceptances and time deposits of domestic and
foreign banks, and obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities. These obligations will be U.S. dollar
denominated. Money market instruments typically have a maturity of one year or
less as measured from the date of purchase. The Fund may invest in money market
instruments without limit for temporary defensive and cash management purposes.
To the extent the Fund otherwise invests in money market instruments, it is
subject to the limitations described above.

                                       7
<PAGE>

OTHER INVESTMENTS AND POLICIES

     BORROWING

     The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) from banks to take advantage of
investment opportunities, 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's asset coverage for borrowings
falls below 300%, the Fund will take prompt action to reduce its borrowings. The
Fund will not purchase portfolio securities when borrowings exceed 5% of the
value of its total assets. See "Investment Objectives and Policies--Investment
Policies Applicable to Both Funds--Borrowing" in the Statement of Additional
Information.

     ILLIQUID SECURITIES

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

     REPURCHASE AGREEMENTS

     The Fund will enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original purchase, although it may extend over a number of months. The
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the resale price. 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 may participate in a joint repurchase account
managed by PIC. See "Investment Objectives and Policies--Investment Policies
Applicable to Both Funds--Repurchase Agreements" in the Statement of Additional
Information.

     WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
   
     The Fund may purchase or sell securities (including equity securities) on a
when-issued or delayed delivery basis. When-issued or delayed delivery
transactions arise when securities are purchased or sold by the Fund with
payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and/or yield to the Fund at the time of
entering into the transaction. While the Fund will only purchase securities on a
when-issued or delayed delivery basis with the intention of acquiring the
securities, the Fund may sell the securities before the settlement date, if it
is deemed advisable. At the time the Fund makes the commitment to purchase
securities on a when-issued or delayed delivery basis, the Fund will record the
transaction and thereafter reflect the value, each day, of such security in
determining the net asset value of the Fund. At the time of delivery of the
securities, the value may be more or less than the purchase price. The Fund's
Custodian will maintain, in a segregated account of the Fund, cash or liquid
assets, having a value equal to or greater than the Fund's purchase commitments.
Subject to this requirement, the Fund may purchase securities on such basis
without limit. See "Investment Objectives and Policies--Investment
    

                                       8
<PAGE>


Policies Applicable to Both Funds--When-Issued and Delayed Delivery Securities"
in the Statement of Additional Information.

     SECURITIES LENDING

   
     The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Fund in an amount equal to at least 100%,
determined daily, of the market value of the securities loaned which are
maintained in a segregated account pursuant to applicable regulations. During
the time portfolio securities are on loan, the borrower will pay the Fund an
amount equivalent to any dividend or interest paid on such securities and the
Fund may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower. 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. As a matter of fundamental policy, the Fund cannot lend more than
30% of the value of its total assets. See "Investment Objectives and
Policies--Investment Policies Applicable to Both Funds--Securities Lending"
in the Statement of Additional Information. The Fund may pay reasonable
administration and custodial fees in connection with a loan.
    
     SEGREGATED ACCOUNTS. The Fund will establish a segregated account with its
Custodian, State Street Bank and Trust Company (State Street), in which it will
maintain cash, U.S. Government securities, equity securities or other liquid,
unencumbered assets equal in value to its obligations in respect of potentially
leveraged transactions, including forward contracts, when-issued and delayed
delivery securities, repurchase agreements, futures contracts, written options
and options on futures contracts (unless otherwise covered). The assets
deposited in the segregated account will be marked-to-market daily.

HEDGING AND RETURN ENHANCEMENT STRATEGIES

   
     THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES TO REDUCE CERTAIN
RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN. THE FUND, AND THUS
THE INVESTOR, MAY LOSE MONEY THROUGH THE UNSUCCESSFUL USE OF THESE STRATEGIES.
These strategies currently include the use of derivatives, such as options,
futures contracts and options thereon. The Fund's ability to use these
strategies may be limited by market conditions, regulatory limits and tax
considerations and there can be no assurance that any of these strategies will
succeed. See "Investment Objectives and Policies" and "Taxes" in the Statement
of Additional Information. PIC does not intend to buy all of these instruments
or use all of these strategies to the full extent permitted unless it believes
that doing so will help the Fund achieve its objective. New financial products
and risk management techniques continue to be developed and the Fund may use
these new investments and techniques to the extent consistent with its
investment objective and policies.
    

     OPTIONS TRANSACTIONS

   
     THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON ANY
SECURITIES IN WHICH IT MAY INVEST OR OPTIONS ON ANY SECURITIES INDEX BASED ON
SECURITIES IN WHICH THE FUND MAY INVEST. THESE OPTIONS ARE TRADED ON U.S.
EXCHANGES OR IN THE OVER-THE-COUNTER MARKET TO HEDGE ITS PORTFOLIO. 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
securities 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. See
"Investment Objectives and Policies--Investment Policies Applicable to Both
Funds--Options on Securities and Securities Indices" in the Statement of
Additional Information.
    

     A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE
RIGHT FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES OR SECURITIES IN
THE INDEX SUBJECT TO THE OPTION AT A SPECIFIED PRICE (THE EXERCISE PRICE OR

                                       9
<PAGE>

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 or
in excess of the exercise price of the option during the period that the option
is open.

     A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES SUBJECT TO THE OPTION TO THE
WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of the put option,
in return for the premium, has the obligation, upon exercise of the option, to
acquire the securities underlying the option at the exercise price. 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 (i) owns an offsetting
position in the underlying security or (ii) maintains in a segregated account,
cash or liquid assets in an amount equal to or greater than its obligation under
the option. Under the first circumstance, the Fund's losses are limited because
it owns the underlying security or currency; under the second circumstance, in
the case of a written call option, the Fund's losses are potentially unlimited.
See "Investment Objectives and Policies--Other Investments and Policies--Options
on Securities and Securities Indices" in the Statement of Additional
Information. There is no limitation on the amount of options the Fund may write.
    

     The Fund may also write a call option, which can serve as a limited short
hedge because decreases in value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the Fund will be obligated to
sell the security at less than its market value.

     The Fund may purchase and sell put and call options on securities indices.
Securities index options are designed to reflect price fluctuations in a group
of securities or segment of the securities market rather than price fluctuations
in a single security. Options on securities indices are similar to options on
securities, except that the exercise of securities index options requires cash
payments and does not involve the actual purchase or sale of securities. When
purchasing or selling securities index options, the Fund is subject to the risk
that the value of its portfolio securities may not change as much as or more
than the index because the Fund's investments generally will not match the
composition of the index. See "Investment Objectives and Policies--Investment
Policies Applicable to Both Funds--Options on Securities and Securities Indices"
and "Taxes" in the Statement of Additional Information.

FUTURES CONTRACTS AND OPTIONS THEREON

   
     THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE TO REDUCE
CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN IN ACCORDANCE
WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION (CFTC). THE FUND,
AND THUS THE INVESTOR, MAY LOSE MONEY THROUGH THE UNSUCCESSFUL USE OF THESE
STRATEGIES. These futures contracts and related options will be on securities
indices. A futures contract is an agreement to purchase or sell an agreed amount
of securities at a set price for delivery in the future. A stock index futures
contract is an agreement to purchase or sell cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made. The Fund may purchase and sell futures contracts or related options as a
hedge against changes in market conditions.
    

     The Fund may not purchase or sell futures contracts and related options to
attempt to enhance return, if immediately thereafter the sum of the amount of
initial margin deposits on the Fund's existing futures and options on futures
and premiums paid for such related options would exceed 5% of the liquidation
value of the Fund's total assets. The Fund may purchase and sell futures
contracts and related options, without limitation, for bona fide hedging
purposes in accordance with regulations of the CFTC (i.e., to reduce certain
risks of its investments). The value of all futures contracts sold will not
exceed the total market value of the Fund's portfolio.

                                       10
<PAGE>

   
     Futures contracts and related options are generally subject to segregation
and coverage requirements of the CFTC or the SEC. If the Fund does not hold the
security underlying the futures contract, the Fund will be required to segregate
on an ongoing basis with its Custodian cash or liquid assets in an amount at
least equal to the Fund's obligations with respect to such futures contracts.
    

     THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements in the
price of a futures contract and the movements in the index is imperfect and
there is a risk that the value of the indices underlying the futures contract
may increase or decrease at a greater rate than the related futures contracts
resulting in losses to the Fund. Certain futures exchanges or boards of trade
have established daily limits on the amount that the price of futures contracts
or related options may vary, either up or down, from the previous day's
settlement price. These daily limits may restrict the Fund's ability to purchase
or sell certain futures contracts or related options on any particular day.

     The Fund's ability to enter into futures contracts and options thereon is
limited by the requirements of the Internal Revenue Code for qualification as a
regulated investment company. See "Investment Objectives and Policies" and
"Taxes" in the Statement of Additional Information.

     RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES

   
     PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS INVOLVES INVESTMENT RISKS
AND TRANSACTION COSTS TO WHICH THE FUND WOULD NOT BE SUBJECT ABSENT THE USE OF
THESE STRATEGIES. THE FUND, AND THUS THE INVESTOR, MAY LOSE MONEY THROUGH THE
UNSUCCESSFUL USE OF THESE STRATEGIES. Risks inherent in the use of options,
futures contracts and options on futures contracts include (1) imperfect
correlation between the price of options and futures contracts and options
thereon and movements in the prices of the securities being hedged; (2) the fact
that skills needed to use these strategies are different from those needed to
select portfolio securities; (3) the possible absence of a liquid secondary
market for any particular instrument at any time; (4) the possible need to defer
closing out certain hedged positions to avoid adverse tax consequences; and (5)
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 securities in connection with
hedging transactions. See "Taxes" in the Statement of Additional Information.
    

     The Fund will generally purchase options and futures on an exchange only if
there appears to be a liquid secondary market for such options or futures; the
Fund will generally purchase OTC options only if the investment adviser believes
that the other party to options will continue to make a market for such options.
However, there can be no assurance that a liquid secondary market will continue
to exist or that the other party will continue to make a market. Thus, it may
not be possible to close an options or futures transaction. The inability to
close options and futures positions also could have an adverse impact on the
Fund's ability to effectively hedge its portfolio. There is also the risk of
loss by the Fund of margin deposits or collateral in the event of bankruptcy of
a broker with whom the Fund has an open position in an option, a futures
contract or related option.

INVESTMENT RESTRICTIONS

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

                                       11
<PAGE>

                             HOW THE FUND IS MANAGED

     THE COMPANY HAS A BOARD OF TRUSTEES WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, DECIDES UPON MATTERS
OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.

     For the fiscal year ended September 30, 1996, total expenses as a
percentage of average net assets were .60%.

MANAGER
   
     PRUDENTIAL MUTUAL FUND MANAGEMENT LLC (PMF OR THE MANAGER), GATEWAY CENTER
THREE, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER OF THE COMPANY AND IS
COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .30 OF 1% OF THE FUND'S
AVERAGE DAILY NET ASSETS. It was established as a New York limited liability
company in 1996. See "Manager and Subadvisers" in the Statement of Additional
Information. Prior to October 30, 1996, the manager of the Fund was Prudential
Institutional Fund Management, Inc. It was compensated for its services at an
annual rate of .40 of 1% of the Fund's average daily net assets.

     As of October 31, 1996, PMF served as the manager to 40 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $53.4 billion.
    

     Under the Management Agreement with the Company, PMF manages the investment
operations of the Fund and also administers the Company's business affairs. See
"Manager and Subadvisers" in the Statement of Additional Information.

SUBADVISER

     THE PRUDENTIAL INVESTMENT CORPORATION, 751 BROAD STREET, NEWARK, NEW JERSEY
07102, SERVES AS SUBADVISER TO THE FUND.

     PURSUANT TO A SUBADVISORY AGREEMENT WITH PMF, PIC FURNISHES INVESTMENT
ADVISORY SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE COMPANY AND IS
REIMBURSED FOR ALL REASONABLE COSTS AND EXPENSES INCURRED BY PIC.

     Under the Subadvisory Agreement, PIC, subject to the supervision of PMF, is
responsible for managing the assets of the Fund in accordance with its
investment objective, investment program and policies. PIC 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.

     Prudential Diversified Investment Strategies (PDI Strategies), a unit of
PIC, is responsible for the day-to-day management of the Fund. PDI Strategies
employs a team approach to the management of the Fund.

     PMF and PIC are wholly owned subsidiaries of Prudential, a major
diversified insurance and financial services company, and are part of Prudential
Investments, a business group of Prudential.

DISTRIBUTOR

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

                                       12
<PAGE>

     UNDER A DISTRIBUTION AGREEMENT (THE DISTRIBUTION AGREEMENT), PRUDENTIAL
SECURITIES (ALSO THE DISTRIBUTOR) INCURS THE EXPENSES OF DISTRIBUTING THE FUND'S
SHARES, NONE OF WHICH IS REIMBURSED BY OR PAID FOR BY THE FUND. These expenses
include commissions and account servicing fees paid to, or on account of,
financial advisers of Prudential Securities and Pruco Securities Corporation
(Prusec), an affiliated broker-dealer, commissions and account servicing fees
paid to, or on account of, other broker-dealers or financial institutions (other
than national banks) which have entered into agreements with the Distributor,
advertising expenses, the cost of printing and mailing prospectuses to potential
investors and indirect and overhead costs of Prudential Securities and Prusec
associated with the sale of Fund shares, including lease, utility,
communications and sales promotion expenses.

     The Manager (or one of its affiliates) may make payments to dealers and
other persons which distribute shares of the Fund. Such payments may be
calculated by reference to the net asset value of shares sold by such persons or
otherwise.

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

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

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

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

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

FEE WAIVERS AND SUBSIDY

     PMF 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. Fee waivers
and expense subsidies will increase the Fund's total return. See "Performance
and Yield Information" in the Statement of Additional Information and "Fund
Expenses" above.

                                       13
<PAGE>

PORTFOLIO TRANSACTIONS

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

CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT

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

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

                         HOW THE FUND VALUES ITS SHARES

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

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

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

                       HOW THE FUND CALCULATES PERFORMANCE

     FROM TIME TO TIME THE FUND MAY ADVERTISE ITS TOTAL RETURN (INCLUDING
"AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) AND YIELD IN
ADVERTISEMENTS OR SALES LITERATURE. These figures are based on historical
earnings and are not intended to indicate future performance. The "total return"
shows how much an investment in the Fund would have increased (decreased) over a
specified period of time (i.e., one, five or ten years or since inception of the
Fund) assuming that all distributions and dividends by the Fund were reinvested
on the reinvestment dates during the period and less all recurring fees. The
"aggregate" total return reflects actual performance over a stated period of
time. "Average annual" total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. "Average annual" total
return smooths out variations in performance. Neither "average annual" total
return nor "aggregate" total return takes into account any federal or state
income taxes which may be payable upon redemption. The "yield" refers to the
income

                                       14
<PAGE>

   
generated by an investment in the Fund over a one-month or 30-day period. This
income is then "annualized;" that is, the amount of income generated by the
investment during that 30-day period is assumed to be generated each 30-day
period for twelve periods and is shown as a percentage of the investment. The
income earned on the investment is also assumed to be reinvested at the end of
the sixth 30-day period. The Fund also may include comparative performance
information in advertising or marketing the Fund's shares. Such performance
information may include data from Lipper Analytical Services, Inc., Morningstar
Publications, Inc., and other industry publications, business periodicals and
market indices. See "Performance and Yield Information" in the Statement of
Additional Information. Further performance information will be contained in the
Fund's annual and semi-annual reports to shareholders, which may be obtained
without charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."
    


                       TAXES, DIVIDENDS AND DISTRIBUTIONS

   
     TAXATION OF THE FUND
    

     THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
(THE INTERNAL REVENUE CODE). ACCORDINGLY, THE FUND WILL NOT BE SUBJECT TO
FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME AND CAPITAL GAINS, IF ANY,
THAT IT DISTRIBUTES TO ITS SHAREHOLDERS.

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

     TAXATION OF SHAREHOLDERS

     All dividends out of net investment income, together with distributions of
net short-term capital gains, will be taxable as ordinary income to the
shareholder whether or not reinvested. Any net long-term capital gains
distributed to shareholders will be taxable as such to the shareholder, whether
or not reinvested and regardless of the length of time a shareholder has owned
his or her shares. The maximum long-term capital gains rate for corporate
shareholders is currently the same as the maximum tax rate for ordinary income.
The maximum long-term capital gains rate for individual shareholders is
currently 28% and the maximum tax rate for ordinary income is 39.6%.

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

     WITHHOLDING TAXES

     Under U.S. Treasury Regulations, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividend, capital gain income and redemption
proceeds, payable on the accounts of those shareholders who fail to furnish
their tax identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of
certain foreign shareholders) with the required certifications regarding the
shareholder's status under the federal income tax law.

                                       15
<PAGE>

     Shareholders are urged to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Taxes" in the Statement of
Additional Information.

     DIVIDENDS AND DISTRIBUTIONS

     THE FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY, AND TO
MAKE DISTRIBUTIONS OF ANY CAPITAL GAINS IN EXCESS OF NET LONG-TERM CAPITAL
LOSSES AT LEAST ANNUALLY. SEE "HOW THE FUND VALUES ITS SHARES."

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

     When the Fund goes "ex-dividend," its NAV is reduced by the amount of the
dividend or distribution. If you buy shares just prior to the ex-dividend date
(which generally occurs four business days prior to the record date), the price
you pay will include the dividend or distribution and a portion of your
investment will be returned to you as a taxable distribution. You should,
therefore, consider the timing of dividends when making your purchases.

                               GENERAL INFORMATION

DESCRIPTION OF SHARES

     THE COMPANY WAS ESTABLISHED AS A DELAWARE BUSINESS TRUST ON MAY 11, 1992.
THE COMPANY IS AUTHORIZED TO ISSUE AN UNLIMITED NUMBER OF SHARES OF BENEFICIAL
INTEREST, $.001 PAR VALUE PER SHARE, DIVIDED INTO TWO SERIES OR PORTFOLIOS, THE
FUND AND PRUDENTIAL ACTIVE BALANCED FUND. THE FUND OFFERS ONE CLASS OF SHARES.
Prudential Active Balanced Fund offers four classes of shares. The Company is
permitted to issue and sell multiple classes of shares. In accordance with the
Company's Declaration of Trust, the Trustees may authorize the creation of
additional series of beneficial interest and classes within such series, with
such preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.

     The Company's expenses generally are allocated between the Fund and the
other series of the Company on the basis of relative net assets at the time of
allocation, except that expenses directly attributable to the Fund or the other
series of the Company are charged to the Fund or the other series, as the case
may be.

     The Trustees may increase or decrease the number of authorized shares
without the approval of shareholders. Shares of the Fund, when issued, are fully
paid, nonassessable, fully transferable and redeemable at the option of the
holder. Shares are also redeemable at the option of the Fund under certain
circumstances as described under "Shareholder Guide--How to Sell Your Shares."
The Company's shares do not have cumulative voting rights for the election of
Trustees.

     THE COMPANY DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW.THE COMPANY 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,

                                       16

<PAGE>

INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OR MORE OF THE
COMPANY'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.

ADDITIONAL INFORMATION

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

                                SHAREHOLDER GUIDE

HOW TO BUY SHARES OF THE FUND

     YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC
OR DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. PARTICIPANTS IN PROGRAMS
SPONSORED BY PRUDENTIAL RETIREMENT SERVICES SHOULD CONTACT THEIR CLIENT
REPRESENTATIVE FOR MORE INFORMATION ABOUT PURCHASING SHARES OF THE FUND. The
offering price is the NAV next determined following receipt of an order by the
Transfer Agent or Prudential Securities. Shares of the Fund are offered to a
limited group of investors at net asset value without any sales charge. See "How
the Fund Values its Shares."

   
     There is no minimum subsequent investment requirement for shares of the
Fund. See "Shareholder Services."
    

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

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

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

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

ELIGIBLE PURCHASERS

   
     Shares of the Fund are available for purchase by (i) investors who purchase
$1 million or more of shares (or who already own $1 million of shares of other
Prudential Mutual Funds), including those described under "Benefit Plans" and
"PruArray and SmartPath Plans" below; (ii) participants in any fee-based program
sponsored by Prudential Securities (or one of its affiliates) which includes
mutual funds as investment options and for which the Fund is an available
option; and (iii) investors who were, or executed a letter of intent to become,
shareholders of any series of the Company on or before one or more series of the
Company reorganized or who on that date had investments in certain products for
which the Company provided exchangeability.
    

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

                                       17
<PAGE>

     PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must first 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,
Boston, Massachusetts, Custody and Shareholder Services Division, Attention:
Prudential Dryden Fund, Prudential Stock Index Fund, specifying on the wire the
account number assigned by PMFS and your name.

     If you arrange for receipt by State Street of federal funds prior to 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 Dryden Fund,
Prudential Stock Index Fund, 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.
   
     RIGHT OF ACCUMULATION. Shares of the Fund and shares of other Prudential
Mutual Funds (excluding money market funds other than those acquired pursuant to
the exchange privilege) may be aggregated to determine eligibility. See
"Purchase and Redemption of Fund Shares" in the Statement of Additional
Information.

     BENEFIT PLANS. Shares of the Fund may be purchased by pension,
profit-sharing or other employee benefit plans qualified under Section 401 of
the Internal Revenue Code and deferred compensation and annuity plans under
Sections 457 or 403(b)(7) of the Internal Revenue Code (collectively, Benefit
Plans), provided that the plan has existing assets of at least $1 million
invested in shares of Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) or 250 eligible
employees or participants. In the case of Benefit Plans whose accounts are held
directly with the Transfer Agent or Prudential Securities and for which the
Transfer Agent or Prudential Securities does individual account recordkeeping
(Direct Account Benefit Plans) and Benefit Plans sponsored by PSI or its
subsidiaries (PSI or Subsidiary Prototype Benefit Plans), shares may be
purchased by participants who are repaying loans made from such plans to the
participant.

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

     OTHER WAIVERS. In addition, shares of the Fund may be purchased at NAV,
through Prudential Securities or the Transfer Agent, by the following persons:
(a) officers and current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund), (b) employees of Prudential Securities and PMF and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent and
(c) employees and special agents of Prudential and its subsidiaries and all
persons who have retired directly from active service with Prudential or one of
its subsidiaries.
    
                                       18
<PAGE>

HOW TO SELL YOUR SHARES

     YOU CAN REDEEM SHARES OF THE FUND AT ANY TIME FOR CASH AT THE NAV PER SHARE
NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."

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

     If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer 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 Prudential Preferred Financial Services offices.
   
     PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the SEC, by
order, so permits; provided that applicable rules and regulations of the SEC
shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.
    
     PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.

     REDEMPTION IN KIND. If the Trustees determines 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 SEC.
Securities will be readily marketable and will be valued in the same manner as a
regular redemption. See "How the Fund Values its Shares." If your shares are
redeemed in kind, you would incur transaction costs in converting the assets
into cash. The Company has, however, elected to be governed by Rule 18f-1 under
the Investment Company Act, under which the Fund is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of the net asset value of the
Fund during the 90-day period for any one shareholder.

     INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the
Trustees may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net

                                       19
<PAGE>

asset value of less than $500 due to a redemption. The Fund will give any such
shareholder 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption.

HOW TO EXCHANGE YOUR SHARES
   
     AS A SHAREHOLDER OF THE FUND YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE COMPANY AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE
OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE MINIMUM INVESTMENT
REQUIREMENTS OF SUCH FUNDS. SHAREHOLDERS WHO ARE OTHERWISE ELIGIBLE TO PURCHASE
CLASS Z SHARES HAVE THE ABILITY TO EXCHANGE THEIR SHARES OF THE FUND FOR CLASS Z
SHARES OF ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV. SHAREHOLDERS WHO ARE
OTHERWISE ELIGIBLE TO PURCHASE CLASS A SHARES HAVE THE ABILITY TO EXCHANGE THEIR
SHARES OF THE FUND FOR CLASS A SHARES OF ANOTHER FUND ON THE BASIS OF THE
RELATIVE NAV. An exchange will be treated as a redemption and purchase for tax
purposes.

     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. (THE FUND OR ITS AGENTS COULD BE SUBJECT TO LIABILITY
IF THEY FAIL TO EMPLOY REASONABLE PROCEDURES.) All exchanges will be made on the
basis of the relative NAV of the two funds next determined after the request is
received in good order.The exchange privilege is available only in states where
the exchange may legally be made.
    

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

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

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

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

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

   
     The Exchange Privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
    

SHAREHOLDER SERVICES

     In addition to the exchange privilege, as a shareholder in the Fund, you
can take advantage of the following additional services and privileges:

                                       20

<PAGE>

     O AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTION. For your
convenience, all dividends and distributions are automatically reinvested in
full and fractional shares of the Fund at NAV. You may direct the Transfer Agent
in writing not less than 5 full business days prior to the record date to have
subsequent dividends and/or distributions sent in cash rather than reinvested.
If you hold shares through Prudential Securities, you should contact your
financial adviser.

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

     O SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders, which provides for monthly or quarterly checks. See also
"Shareholder Investment Account--Systematic Withdrawal Plan" in the Statement of
Additional Information.

     O REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 (toll-free) or by writing to the Fund at
Gateway Center Three, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data are available upon request from the Fund.

     O SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
Gateway Center Three, Newark, New Jersey 07102-4077, or by telephone, at (800)
225-1852 (toll-free) or, from outside the U.S.A. at (908) 417-7555 (collect).

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

                                       21

<PAGE>

                      [This page intentionally left blank]


<PAGE>
                        THE PRUDENTIAL MUTUAL FUND FAMILY

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

  Prudential Diversified Bond Fund, Inc.
  Prudential Government Income Fund, Inc.
  Prudential Government Securities Trust
   Short-Intermediate Term Series
  Prudential High Yield Fund, Inc.
  Prudential Mortgage Income Fund, Inc.
  Prudential Structured Maturity Fund, Inc.
   Income Portfolio
  The BlackRock Government Income Trust

        TAX-EXEMPT BOND FUNDS

  Prudential California Municipal Fund
   California Series
   California Income Series
  Prudential Municipal Bond Fund
   High Yield Series
   Insured Series
   Intermediate Series
  Prudential Municipal Series Fund
   Florida Series
   Hawaii Income Series
   Maryland Series
   Massachusetts Series
   Michigan Series
   New Jersey Series
   New York Series
   North Carolina Series
   Ohio Series
   Pennsylvania Series
  Prudential National Municipals Fund, Inc.

        GLOBAL FUNDS

  Prudential Europe Growth Fund, Inc.
  Prudential Global Genesis Fund, Inc.
  Prudential Global Limited Maturity Fund, Inc.
   Limited Maturity Portfolio
  Prudential Intermediate Global Income Fund, Inc.
  Prudential Natural Resources Fund, Inc.
  Prudential Pacific Growth Fund, Inc.
  Prudential World Fund, Inc.
       
    
   Global Series
   International Stock Series
  The Global Government Plus Fund, Inc.
  The Global Total Return Fund, Inc.
    
  Global Utility Fund, Inc.

        EQUITY FUNDS

  Prudential Allocation Fund
   Balanced  Portfolio
   Strategy Portfolio
  Prudential Distressed Securities Fund, Inc.
  Prudential Dryden Fund
   Prudential Active Balanced Fund
   Prudential Stock Index Fund
   
  Prudential Emerging Growth Fund, Inc.
    
  Prudential Equity Fund, Inc.
  Prudential Equity Income Fund
   
  Prudential Jennison Series Fund, Inc.
    
   Prudential Jennison Growth Fund
   Prudential Jennison Growth & Income Fund
  Prudential Multi-Sector Fund, Inc.
  Prudential Small Companies Fund, Inc.
  Prudential Utility Fund, Inc.
  Nicholas-Applegate Fund, Inc.
   Nicholas-Applegate Growth Equity Fund

        MONEY MARKET FUNDS

  o  Taxable Money Market Funds
  Prudential Government Securities Trust
   Money Market Series
   U.S. Treasury Money Market Series
  Prudential Special Money Market Fund, Inc.
   Money Market Series
  Prudential MoneyMart Assets, Inc.
  o  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
  o  Command Funds
  Command Money Fund
  Command Government Fund
  Command Tax-Free Fund
  o  Institutional Money Market Funds
  Prudential Institutional Liquidity Portfolio, Inc.
   Institutional Money Market Series
- --------------------------------------------------------------------------------
                                      A-1

<PAGE>

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

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

                                TABLE OF CONTENTS

   
                                                                         Page
                                                                         ----
  FUND HIGHLIGHTS ................................................         2
   Risk Factors and Special Characteristics ......................         2
  FUND EXPENSES ..................................................         4
  FINANCIAL HIGHLIGHTS ...........................................         5
  HOW THE FUND INVESTS ...........................................         6
   Investment Objective and Policies .............................         6
   Other Investments and Policies ................................         8
   Hedging and Return Enhancement Strategies .....................         9
   Investment Restrictions .......................................        11
  HOW THE FUND IS MANAGED ........................................        12
   Manager .......................................................        12
   Subadviser ....................................................        12
   Distributor ...................................................        12
   Fee Waivers and Subsidy .......................................        13
   Portfolio Transactions ........................................        14
   Custodian and Transfer and
    Dividend Disbursing Agent ....................................        14
  HOW THE FUND VALUES ITS SHARES .................................        14
  HOW THE FUND CALCULATES PERFORMANCE ............................        14
  TAXES, DIVIDENDS AND DISTRIBUTIONS .............................        15
  GENERAL INFORMATION ............................................        16
   Description of Shares .........................................        16
   Additional Information ........................................        17
  SHAREHOLDER GUIDE ..............................................        17
   How to Buy Shares of the Fund .................................        17
   How to Sell Your Shares .......................................        19
   How to Exchange Your Shares ...................................        20
   Shareholder Services ..........................................        20
  THE PRUDENTIAL MUTUAL FUND FAMILY ..............................       A-1
    
  -------------------------------------------------------------------------- 
  MF174A 
                                              
              CUSIP No.:  74431F209


  PRUDENTIAL
  STOCK
  INDEX
  FUND










   
                               P R O S P E C T U S
                                November 29, 1996


                                     [LOGO]
                                   PRUDENTIAL
                                  INVESTMENTS
    
<PAGE>

                         PRUDENTIAL ACTIVE BALANCED FUND

                           PRUDENTIAL STOCK INDEX FUND
   
                       Statement of Additional Information
                             dated November 29, 1996
    
     Prudential Active Balanced Fund and Prudential Stock Index Fund (each a
Fund and collectively, the Funds) are each a series of Prudential Dryden Fund
(formerly The Prudential Institutional Fund) (the Company). The investment
objective of Prudential Active Balanced Fund is to seek to achieve total returns
approaching equity returns, while accepting less risk than an all-equity
portfolio, through an actively-managed portfolio of equity securities, fixed
income securities and money market instruments. Under normal market conditions,
Prudential Active Balanced Fund intends to invest at least 65% of its total
assets as follows: (i) 40-75% of the total assets of the Fund will be invested
in common stocks, preferred stocks and other equity-related securities; (ii)
25-60% of the total assets of the Fund will be invested in investment grade
fixed income securities; and (iii) 0-35% of the total assets of the Fund will be
invested in money market instruments. Within these parameters, at least 25% of
the Fund's total assets will be invested in fixed income senior securities.

     The investment objective of Prudential Stock Index Fund is to seek to
provide investment results that correspond to the price and yield performance of
the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index). The S&P
500 Index is an unmanaged, market-weighted index of 500 stocks selected by
Standard & Poor's Corporation (S&P) on the basis of their market size, liquidity
and industry group representation. Inclusion in the S&P 500 Index in no way
implies an opinion by S&P as to a stock's attractiveness as an investment. The
S&P 500 Index, composed of stocks representing more than 70% of the total market
value of all publicly traded U.S. common stocks, is widely regarded as
representative of the performance of the U.S. stock market as a whole. To
achieve its investment objective, the Fund will purchase equity securities that
as a group reflect the price and yield performance of the S&P 500 Index. The
Fund intends to purchase all 500 stocks included in the S&P 500 Index in
approximately the same proportions as they are represented in the S&P 500 Index.
Under normal market conditions, the Prudential Stock Index Fund intends that at
least 80% of the value of its total assets will be invested in securities
included in the S&P 500 Index. The Fund may invest the balance of its assets in:
(i) other equity-related securities; (ii) obligations issued or guaranteed by
the U.S. Government, its agencies and instrumentalities; (iii) put and call
options on securities and stock indices; and (iv) futures contracts on stock
indices and options thereon. There can be no assurance that either Fund's
investment objective will be achieved. See "Investment Objectives and Policies."

     The Company's address is Gateway Center Three, Newark, NJ 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 Prospectus of Prudential Active Balanced Fund,
dated November 29, 1996 and the Prospectus of Prudential Stock Index Fund, dated
November 29, 1996, copies of which may be obtained from the Company upon
request.
    
                                TABLE OF CONTENTS

   
                                                                            Page
                                                                            ----
General Information ................................................        B-2
Investment Objectives and Policies .................................        B-2
Investment Restrictions ............................................        B-13
Trustees and Officers ..............................................        B-15
Manager and Subadvisers ............................................        B-20
Distributor ........................................................        B-22
Portfolio Transactions and Brokerage ...............................        B-25
Purchase and Redemption of Fund Shares .............................        B-26
Shareholder Investment Account .....................................        B-29
Net Asset Value ....................................................        B-32
Taxes ..............................................................        B-33
Performance and Yield Information ..................................        B-36
Custodian, Transfer and Dividend Disbursing Agent and
  Independent Accountants ..........................................        B-37
Financial Statements ...............................................        B-38
Appendix--Description of S&P Ratings, Moody's and
  Duff & Phelps Ratings ............................................         A-1
Appendix I--Historical Performance Data ............................         I-1
Appendix II--General Investment Information ........................        II-1
Appendix III--Information Relating to The Prudential ...............       III-1
    


                                       B-1
<PAGE>

                               GENERAL INFORMATION
   
     The Company changed its name from The Prudential Institutional Fund to
Prudential Dryden Fund effective October 30, 1996. In addition, Active Balanced
Fund changed its name to Prudential Active Balanced Fund and Stock Index Fund
changed its name to Prudential Stock Index Fund at the same time.
    
                       INVESTMENT OBJECTIVES AND POLICIES

INVESTMENT POLICIES APPLICABLE TO PRUDENTIAL ACTIVE BALANCED FUND

FORWARD ROLLS AND DOLLAR ROLLS
   
     Forward roll and dollar roll transactions involve the risk that the market
value of the securities sold by Prudential Active Balanced Fund may decline
below the repurchase price of those securities. At the time the Fund enters into
a forward roll transaction, it will place in a segregated account with its
Custodian cash or liquid assets, having a value equal to the repurchase price
(including accrued interest). 
    
MORTGAGE-RELATED SECURITIES
   
     Mortgage-backed securities may be classified as private, governmental or
government related, depending on the issuer or guarantor. Private
mortgage-backed securities represent pass-through pools consisting principally
of conventional residential mortgage loans created by non-governmental issuers,
such as commercial banks, savings and loan associations and private mortgage
insurance companies. Governmental mortgage-backed securities are backed by the
full faith and credit of the United States. Government National Mortgage
Association (GNMA), the principal U.S. guarantor of such securities, is a wholly
owned corporate instrumentality of the United States within the Department of
Housing and Urban Development. Pass-through securities issued by the Federal
National Mortgage Association (FNMA) are guaranteed as to timely payment of
principal and interest by FNMA, which guarantee is not backed by the full faith
and credit of the U.S. Government. The Federal Home Loan Mortgage Corporation
(FHLMC) is a corporate instrumentality of the United States, the stock of which
is owned by the Federal Home Loan Banks. Participation certificates representing
interests in mortgages from FHLMC's national portfolio are guaranteed as to the
timely payment of interest and ultimate, but generally not timely, collection of
principal by FHLMC. The obligations of the FHLMC under its guarantee are
obligations solely of FHLMC and are not backed by the full faith and credit of
the U.S. Government.
    
     Prudential Active Balanced Fund expects that private and governmental
entities may create mortgage loan pools offering pass-through investments in
addition to those described above. The mortgages underlying these securities may
be alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to maturity may be
shorter than previously customary. As new types of mortgage-backed securities
are developed and offered to investors, the Fund, consistent with its respective
investment objectives and policies, will consider making investments in those
new types of securities.

     The Fund may also invest in pass-through securities backed by adjustable
rate mortgages that have been issued by GNMA, FNMA and FHLMC or private issuers.
These securities bear interest at a rate that is adjusted monthly, quarterly or
annually. The prepayment experience of the mortgages underlying these securities
may vary from that for fixed rate mortgages.

     The average maturity of pass-through pools of mortgage-related securities
varies with the maturities of the underlying mortgage instruments. In addition,
a pool's stated maturity may be shortened by unscheduled payments on the
underlying mortgages. Factors affecting mortgage prepayments include the level
of interest rates, general economic and social conditions, the location of the
mortgaged property and age of the mortgage. Because prepayment rates of
individual pools vary widely, it is not possible to predict accurately the
average life of a particular pool. Common practice is to assume that prepayments
will result in an average life ranging from two to ten years for pools of fixed
rate 30-year mortgages. Pools of mortgages with other maturities or different
characteristics will have varying average life assumptions.
   
     Because prepayments of principal generally occur when interest rates are
declining, it is likely that the Fund will have to reinvest the proceeds of
prepayments at lower interest rates than those at which the assets were
previously invested. If this occurs, the Fund's yield will correspondingly
decline. Thus, mortgage-related securities may have less potential for capital
appreciation in periods of falling interest rates than other fixed income
securities of comparable maturity, although these securities may have a
comparable risk of decline in market value in periods of rising interest rates.
To the extent that the Fund purchases mortgage-related securities at a premium,
unscheduled prepayments, which are made at par, will result in a loss equal to
any unamortized premium.
    


                                      B-2
<PAGE>

   
     Government stripped mortgage-related interest-only (IOs) and principal only
(POs) securities are currently traded in an over-the-counter market maintained
by several large investment banking firms. There can be no assurance that the
Fund will be able to effect a trade of IOs or POs at a time when it wishes to do
so. The Fund will acquire IOs and POs only if, in the opinion of the Fund's
Subadviser, a secondary market for the securities exists at the time of
acquisition, or is subsequently expected. The Fund will treat IOs and POs that
are not U.S. Government securities as illiquid and will limit its investments in
these securities, together with other illiquid investments, in order not to hold
more than 10% of its net assets in illiquid securities. With respect to IOs and
POs that are issued by the U.S. Government, the Subadviser, subject to the
supervision of the Trustees, may determine that such securities are liquid, if
they determine the securities can be disposed of promptly in the ordinary course
of business at a value reasonably close to that used in the calculation of net
asset value per share.
    
     Investing in IOs and POs involves the risks normally associated with
investing in government and government agency mortgage-related securities. In
addition, the yields on IOs and POs are extremely sensitive to the prepayment
experience on the mortgage loans underlying the certificates collateralizing the
securities. If a decline in the level of prevailing interest rates results in a
rate of principal prepayments higher than anticipated, distributions of
principal will be accelerated, thereby reducing the yield to maturity on IOs and
increasing the yield to maturity on POs. Sufficiently high prepayment rates
could result in the Fund not fully recovering its initial investment in an IO.
   
     Mortgage-related securities may not be readily marketable.
    
COLLATERALIZED MORTGAGE OBLIGATIONS

     Prudential Active Balanced Fund also may invest in, among other things,
parallel pay Collateralized Mortgage Obligations (CMOs), and Planned
Amortization Class CMOs (PAC Bonds). Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.

     In reliance on Securities and Exchange Commission (SEC) rules and orders,
the Fund's investments in certain qualifying CMOs, including CMOs that have
elected to be treated as Real Estate Mortgage Investment Conduits (REMICs), are
not subject to the limitations of the Investment Company Act of 1940 (Investment
Company Act) on acquiring interests in other investment companies. In order to
be able to rely on the SEC's interpretation, the CMOs and REMICs must be
unmanaged, fixed-asset issuers that (i) invest primarily in mortgage-backed
securities, (ii) do not issue redeemable securities, (iii) operate under general
exemptive orders exempting them from all provisions of the Investment Company
Act, and (iv) 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 value of these securities may change because of changes in the market's
perception of the creditworthiness of the servicing agent for the pool, the
originator of the pool, or the financial institution providing credit support
enhancement for the pool. 

CUSTODIAL RECEIPTS

     Prudential Active Balanced Fund may acquire custodial receipts or
certificates, such as CATS, TIGRs and FICO Strips, underwritten by securities
dealers or banks, that evidence ownership of future interest payments, principal
payments or both on certain notes or bonds issued by the U.S. Government, its
agencies or instrumentalities. The underwriters of these certificates or
receipts purchase a U.S. Government security and deposit the security in an
irrevocable trust or custodial account with a custodian bank, which then issues
receipts or certificates that evidence ownership of the periodic unmatured
coupon payments and the final principal payment on the U.S. Government security.
Custodial receipts evidencing specific coupon or principal payments have the
same general attributes as zero coupon U.S. Government securities.

     There are a number of risks associated with investments in custodial
receipts. Although typically under the terms of a custodial receipt, the Fund is
authorized to assert its rights directly against the issuer of the underlying
obligation, the 

                                      B-3
<PAGE>

Fund may be required to assert through the custodian bank such rights as may
exist against the underlying issuer. Thus, in the event the underlying
issuer fails to pay principal and/or interest when due, the Fund may be subject
to delays, expenses and risks that are greater than those that would have been
involved if the Fund had purchased a direct obligation of the issuer. In
addition, in the event that the trust or custodial account in which the
underlying security has been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, the yield on the
underlying security would be reduced in respect of any taxes paid.

LIQUIDITY PUTS

     Prudential Active Balanced Fund may purchase instruments together with the
right to resell the instruments at an agreed-upon price or yield, within a
specified period prior to the maturity date of the instruments. This instrument
is commonly known as a "put bond" or a "tender option bond."

     Consistent with its investment objective, the Fund may purchase a put so
that it will be fully invested in securities while preserving the necessary
liquidity to purchase securities on a when-issued basis, to meet unusually large
redemptions and to purchase at a later date securities other than those subject
to the put. The Fund will generally exercise the puts or tender options on their
expiration date when the exercise price is higher than the current market price
for the related fixed income security. Puts or tender options may be exercised
prior to the expiration date in order to fund obligations to purchase other
securities or to meet redemption requests. These obligations may arise during
periods in which proceeds from sales of Fund shares and from recent sales of
portfolio securities are insufficient to meet such obligations or when the funds
available are otherwise allocated for investment. In addition, puts may be
exercised prior to the expiration date in the event the Subadviser for the Fund
revises its evaluation of the creditworthiness of the issuer of the underlying
security. In determining whether to exercise puts or tender options prior to
their expiration date and in selecting which puts or tender options to exercise
in such circumstances, the Fund's Subadviser considers, among other things, the
amount of cash available to the Fund, the expiration dates of the available puts
or tender options, any future commitments for securities purchases, the yield,
quality and maturity dates of the underlying securities, alternative investment
opportunities and the desirability of retaining the underlying securities in the
Fund.

     These instruments are not deemed to be "put options" for purposes of the
Fund's investment restriction.

FOREIGN CURRENCY FORWARD CONTRACTS, OPTIONS AND FUTURES TRANSACTIONS

     There is no limitation on the value of forward contracts into which
Prudential Active Balanced Fund may enter. However, the Fund's transactions in
forward contracts will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of a forward contract with respect to specific receivables or payables of the
Fund generally arising in connection with the purchase or sale of its securities
and accruals of interest or dividends receivable and Fund expenses. Position
hedging is the sale of a foreign currency with respect to security positions
denominated or quoted in that currency. The Fund may not position hedge with
respect to a particular currency for an amount greater than the aggregate market
value (determined at the time of making any sale of a forward contract) of
securities, denominated or quoted in, or currently convertible into, such
currency. A forward contract generally has no deposit requirements, and no
commissions are charged for such trades.

     The Fund may enter into a forward contract to hedge against risk in the
following circumstances: (i) during the time period when the Fund contracts for
the purchase or sale of a security denominated in a foreign currency, or (ii)
when the Fund anticipates the receipt in a foreign currency of dividends or
interest payments on a security which it holds. 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 transaction, 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 Fund's Subadviser believes
that the currency of a particular foreign country may suffer a substantial
decline against the U.S. dollar, the Fund may enter into a forward contract, for
a fixed amount of dollars, to sell the amount of foreign currency approximating
the value of some or all of the securities of the Fund denominated in such
foreign currency. Further, the Fund may enter into a forward contract in one
foreign currency, or basket of currencies, to hedge against the decline or
increase in value in another foreign currency. Use of a different currency or
basket of currencies magnifies the risk that movements in the price of the
forward contract will not correlate or will correlate unfavorably with the
foreign currency being hedged.

     Forward currency contracts (i) are traded in an interbank market conducted
directly between currency traders (typically commercial banks or other financial
institutions) and their customers, (ii) generally have no deposit

                                      B-4



<PAGE>

requirements and (iii) are typically consummated without payment of any
commissions. Failure by the Fund's contra party to make or take delivery of the
underlying currency at the maturity of the forward contract would result in the
loss to the Fund of any expected benefit of the transaction.

     As is the case with futures contracts, purchasers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the contra party. Thus, there can be no assurance
that the Fund will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the contra party, the Fund might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Fund would continue
to be subject to market risk with respect to the position, and would continue to
be required to maintain a position in the securities or currencies that are the
subject of the hedge or to maintain cash or securities in a segregated account.

     Prudential Active Balanced Fund may purchase and write put and call options
on foreign currencies traded on securities exchanges or boards of trade (foreign
and domestic) and OTC options for hedging purposes in a manner similar to that
in which forward foreign currency exchange contracts and futures contracts on
foreign currencies will be employed. Options on foreign currencies are similar
to options on securities, except that the Fund has the right to take or make
delivery of a specified amount of foreign currency, rather than securities.

     Generally, the OTC foreign currency options used by the Fund are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.

     If the Fund's Subadviser anticipates purchasing a foreign security and also
anticipates a rise in the value of such foreign currency (thereby increasing the
cost of such security), the Fund may purchase call options or write put options
on the foreign currency. The Fund could also enter into a long forward contract
or a long futures contract on such currency, or purchase a call option, or write
a put option, on a currency futures contract. The use of such instruments could
offset, at least partially, the effects of the adverse movements of the exchange
rates. 

FOREIGN CURRENCY STRATEGIES--SPECIAL CONSIDERATIONS

     Prudential Active Balanced Fund may use options on foreign currencies,
futures on foreign currencies, options on futures on foreign currencies and
forward currency contracts, to hedge against movements in the values of the
foreign currencies in which the Fund's securities are denominated. Such currency
hedges can protect against price movements in a security that the Fund owns or
intends to acquire that are attributable to changes in the value of the currency
in which it is denominated. Such hedges do not, however, protect against price
movements in the securities that are attributable to other causes.

     The Fund might seek to hedge against changes in the value of a particular
currency when no futures contract, forward contract or option involving that
currency is available or one of such contracts is more expensive than certain
other contracts. In such cases, the Fund may hedge against price movements in
that currency by entering into a contract on another currency or basket of
currencies, the values of which the Fund's Subadviser believes will have a
positive correlation to the value of the currency being hedged. The risk that
movements in the price of the contract will not correlate perfectly with
movements in the price of the currency being hedged is magnified when this
strategy is used.

     The value of futures contracts, options on futures contracts, forward
contracts and options on foreign currencies depends on the value of the
underlying currency relative to the U.S. dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of futures contracts, forward
contracts or options, the Fund could be disadvantaged by dealing in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.

     There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirements that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the futures contracts or options until they
reopen.


                                      B-5
<PAGE>

   
     Settlement of futures contracts, forward contracts and options involving
foreign currencies might be required to take place within the country issuing
the underlying currency. Thus, the Fund might be required to accept or make
delivery of the underlying foreign currency in accordance with any U.S. or
foreign regulations regarding the maintenance of foreign banking arrangements by
U.S. residents and might be required to pay any fees, taxes and charges
associated with such delivery assessed in the issuing country.
    
COVERED FORWARD CURRENCY CONTRACTS, FUTURES CONTRACTS AND OPTIONS
   
     Transactions using forward currency contracts, futures contracts and
options (other than options that the Fund has purchased) expose the Fund to an
obligation to another party. Prudential Active Balanced Fund will not enter into
any such transactions unless it owns either (1) an offsetting ("covered")
position in securities, currencies, or other options, forward currency contracts
or futures contracts, or (2) liquid assets with a value sufficient at all times
to cover its potential obligations not covered as provided in (1) above.
Prudential Active Balanced Fund will comply with SEC guidelines regarding cover
for these instruments and, if the guidelines so require, set aside cash or
liquid assets in a segregated account with its Custodian in the prescribed
amount.

     Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding forward currency contract, futures contract or
option is open, unless they are replaced with similar assets. As a result, the
commitment of a large portion of the Fund's assets to cover or segregated
accounts could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
    
INVESTMENT POLICIES APPLICABLE TO PRUDENTIAL STOCK INDEX FUND

     If net cash outflows from Prudential Stock Index Fund are anticipated, the
Fund may sell stocks (in proportion to their weighting in the S&P 500 Index) in
amounts in excess of those needed to satisfy the cash outflows and hold the
balance of the proceeds in short-term investments if such a transaction appears,
taking into account transaction costs, to be more efficient than selling only
the amount of stocks needed to meet the cash requirements. The Fund will not
increase its holdings of cash in anticipation of any decline in the value of the
S&P 500 Index or of the stock markets generally. If the Stock Index Fund does
hold un-hedged short-term investments as a result of the patterns of cash flows
to and from the Fund, such holdings may cause its performance to differ from
that of the S&P 500 Index.

     THE FUND IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY S&P. S&P MAKES NO
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO THE SHAREHOLDERS OF THE FUND
OR ANY MEMBER OF THE PUBLIC REGARDING THE ADVISABILITY OF INVESTING IN
SECURITIES GENERALLY OR IN THE FUND PARTICULARLY OR THE ABILITY OF THE S&P 500
INDEX TO TRACK GENERAL STOCK MARKET PERFORMANCE. S&P'S ONLY RELATIONSHIP TO
PRUDENTIAL MUTUAL FUND MANAGEMENT LLC (MANAGER) AND ITS AFFILIATES IS THE
LICENSING OF CERTAIN TRADEMARKS AND TRADE NAMES OF S&P AND OF THE S&P 500 INDEX
WHICH IS DETERMINED, COMPOSED AND CALCULATED BY S&P WITHOUT REGARD TO THE
MANAGER OR THE FUND. S&P HAS NO OBLIGATION TO TAKE THE NEEDS OF THE MANAGER OR
THE SHAREHOLDERS INTO CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE
S&P 500 INDEX. S&P IS NOT RESPONSIBLE FOR AND HAS NOT PARTICIPATED IN THE
DETERMINATION OF THE PRICES AND AMOUNT OF THE FUND OR THE TIMING OF THE ISSUANCE
OR SALE OF THE SHARES OF THE FUND. S&P HAS NO OBLIGATION OR LIABILITY IN
CONNECTION WITH THE ADMINISTRATION, MARKETING OR TRADING OF THE FUND.

     S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED AS TO THE RESULTS TO BE OBTAINED BY MANAGER, SHAREHOLDERS, OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN.
S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY
OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. 

   
INVESTMENT POLICIES APPLICABLE TO BOTH FUNDS
    

U.S. GOVERNMENT SECURITIES

     Securities issued or guaranteed by the U.S. Government or one of its
agencies, authorities or instrumentalities in which the Funds may invest include
debt obligations of varying maturities issued by the U.S. Treasury or issued or


                                      B-6
<PAGE>

   
guaranteed by an agency or instrumentality of the U.S. Government, including the
Federal Housing Administration, Farmers Home Administration, Export-Import Bank
of the U.S., Small Business Administration, GNMA, General Services
Administration, Central Bank for Cooperatives, Federal Farm Credit Banks,
Federal Home Loan Banks, FHLMC, Federal Intermediate Credit Banks, Federal Land
Banks, FNMA, Maritime Administration, Tennessee Valley Authority, District of
Columbia Armory Board, Student Loan Marketing Association and Resolution Trust
Corporation. Direct obligations of the U.S. Treasury include a variety of
securities that differ in their interest rates, maturities and dates of
issuance. Because the U.S. Government is not obligated by law to provide support
to an instrumentality that it sponsors, a Fund will invest in obligations issued
by an instrumentality of the U.S. Government only if the Fund's investment
adviser determines that the instrumentality's credit risk does not render its
securities unsuitable for investment by the Fund.
    
CONVERTIBLE SECURITIES, WARRANTS AND RIGHTS

     A convertible security is a bond, debenture, corporate note, preferred
stock or other similar security that may be converted into or exchanged for a
prescribed amount of common stock or other equity securities of the same or a
different issuer within a particular period of time at a specified price or
formula. A warrant or right entitles the holder to purchase equity securities at
a specific price for a specific period of time. Convertible securities are
senior to common stocks in a corporation's capital structure, but are usually
subordinated to similar nonconvertible 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 nonconvertible security), a
convertible security also affords an investor the opportunity, through its
conversion feature, to participate in the capital appreciation dependent upon a
market price advance in the convertible security's underlying common stock.

     In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed income security) or
its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security is
also influenced by the market value of the security's underlying 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.
   
     In recent years, convertibles have been developed which combine higher or
lower current income with options and other features. The Funds may invest in
these types of convertible securities.
    
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
   
     Prudential Active Balanced Fund may enter into in repurchase and reverse
repurchase agreements. Prudential Stock Index Fund may enter into repurchase
agreements. Each Fund may enter into such agreements with banks and securities
dealers which meet the creditworthiness standards established by the Company's
Trustees (Qualified Institutions). The investment adviser will monitor the
continued creditworthiness of Qualified Institutions, subject to the oversight
of the Company's Trustees. The resale price of the securities purchased reflects
the purchase price plus an agreed upon market rate of interest which is
unrelated to the coupon rate or date of maturity of the purchased security. The
Funds receive collateral equal to the resale price, which is marked-to-market
daily. These agreements permit each Fund to keep all its assets earning interest
while retaining "overnight" flexibility to pursue investments of a longer-term
nature.

     The use of repurchase agreements and reverse repurchase agreements involve
certain risks. For example, if the seller of securities under a repurchase
agreement defaults on its obligation to repurchase the underlying securities, as
a result of its bankruptcy or otherwise, a Fund will seek to dispose of such
securities, which action could involve costs or delays. If the seller becomes
insolvent and subject to liquidation or reorganization under applicable
bankruptcy or other laws, the Fund's ability to dispose of the underlying
securities may be restricted. Finally, it is possible that a Fund may not be
able to substantiate its interest in the underlying securities. To minimize this
risk, the securities underlying the agreement will be held by the Custodian at
all times in an amount at least equal to the repurchase price, including accrued
interest. If the counterparty fails to resell or repurchase the securities, a
Fund may suffer a loss to the extent proceeds from the sale of the underlying
collateral are less than the repurchase price. Reverse repurchase agreements
involve the risk that the market value of the securities retained in lieu of
sale by Prudential Active Balanced Fund may decline below the price of the
securities the Fund has sold but is obligated to repurchase.
    

                                      B-7
<PAGE>


FIXED INCOME SECURITIES

     In general, the ratings of Moody's Investors Service, Inc. (Moody's),
Standard & Poor's Ratings Group (S&P Ratings), Duff and Phelps, Inc. (Duff &
Phelps) and other nationally recognized statistical rating organizations
(NRSROs) represent the opinions of those organizations as to the quality of debt
obligations that they rate. These ratings are relative and subjective, are not
absolute standards of quality and do not evaluate the market risk of securities.
These ratings will be among the initial criteria used for the selection of
portfolio securities. Among the factors that the rating agencies consider are
the long-term ability of the issuer to pay principal and interest and general
economic trends.

     Subsequent to its purchase by a Fund, an issue of debt obligations may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Fund. Neither event will require the sale of the debt obligation
by the Fund, but the Fund's Subadviser will consider the event in its
determination of whether the Fund should continue to hold the obligation. In
addition, to the extent that the ratings change as a result of changes in rating
organizations or their rating systems or owing to a corporate restructuring of
Moody's, S&P Ratings, Duff & Phelps or another NRSRO, the Fund will attempt to
use comparable ratings as standards for its investments in accordance with its
investment objectives and policies. An Appendix to this Statement of Additional
Information contains further information concerning the ratings of Moody's, S&P
Ratings and Duff & Phelps and their significance.

     Prudential Active Balanced Fund may invest, to a limited extent, in medium,
lower-rated and unrated debt securities. Debt securities rated in the lowest
category of investment grade debt (i.e., Baa by Moody's) may have speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case with higher grade bonds.

     Non-investment grade fixed income securities are rated lower than Baa (or
the equivalent rating or, if not rated, determined by the relevant Subadviser to
be of comparable quality to securities so rated) and are commonly referred to as
high risk or high yield securities or "junk" bonds. High yield securities are
generally riskier than higher quality securities and are subject to more credit
risk, including risk of default, and the prices of such securities are more
volatile than higher quality securities. Such securities may also have less
liquidity than higher quality securities. Neither Fund is authorized to invest
in excess of 5% of its net assets in non-investment grade fixed income
securities.

     The markets in which medium and lower-rated securities (or unrated
securities that are equivalent to medium and lower-rated securities) are traded
are generally more limited than those in which higher-rated securities are
traded. The existence of limited markets may make it more difficult for the
Funds to obtain accurate market quotations for purposes of valuing its portfolio
and calculating its net asset value. Moreover, the lack of liquid trading market
may restrict the availability of debt securities for a Fund to purchase and may
also have the effect of limiting the ability of a Fund to sell debt securities
at their fair value either to meet redemption requests or to respond to changes
in the economy or the financial markets.

     Lower-rated fixed income securities present risks based on payment
expectations. If an issuer calls the obligation for redemption, a Fund may have
to replace the security with a lower-yielding security, resulting in a decreased
return for investors. Also, as the principal value of fixed income securities
moves inversely with movements in interest rates, in the event of rising
interest rates, the value of the securities held by a Fund may decline
proportionately more than a Fund consisting of higher-rated securities.
Investments in zero coupon bonds may be more speculative and subject to greater
fluctuations in value due to changes in interest rates than bonds that pay
interest currently. If a Fund experiences unexpected net redemptions, it may be
forced to sell its higher-rated bonds, resulting in a decline in the overall
credit quality of the securities held by the Fund and increasing the exposure of
the Fund to the risks of lower-rated securities.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

     To secure prices deemed advantageous at a particular time, each Fund may
purchase securities on a when-issued or delayed delivery basis, in which case
delivery of the securities occurs beyond the normal settlement period; payment
for or delivery of the securities would be made at the same time or prior to the
reciprocal delivery or payment by the other


                                      B-8



<PAGE>


party to the transaction. A Fund will enter into when-issued or delayed delivery
transactions for the purpose of acquiring securities and not for the purpose of
leverage. When-issued securities purchased by a Fund may include securities
purchased on a "when, as and if issued" basis under which the issuance of the
securities depends on the occurrence of a subsequent event, such as approval of
a merger, corporate reorganization or debt restructuring.

     Securities purchased on a when-issued or delayed delivery basis may expose
a Fund to risk because the securities may experience fluctuations in value prior
to their actual delivery. A Fund does not accrue income with respect to a
when-issued or delayed delivery security prior to its stated delivery date.
Purchasing securities on a when-issued or delayed delivery basis may involve the
additional risk that the yield available in the market when the delivery takes
place may be higher than that obtained in the transaction itself.

SECURITIES LENDING

     A Fund will enter into securities lending transactions only with Qualified
Institutions. A Fund will comply with the following conditions whenever it lends
securities: (i) the Fund must receive at least 100% cash collateral or
equivalent securities from the borrower; (ii) the value of the loan is "marked
to market" on a daily basis; (iii) the Fund must be able to terminate the loan
at any time; (iv) the Fund must receive reasonable interest on the loan, as well
as any dividends, interest or other distributions on the loaned securities and
any increase in market value; (v) the Fund may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower except that, if a material event adversely
affecting the investment in the loaned securities occurs, the Fund must
terminate the loan and regain the right to vote the securities. A Fund may pay
reasonable finders', administrative and custodial fees in connection with a loan
of its securities. In these transactions, there are risks of delay in recovery
and in some cases even of loss of rights in the collateral should the borrower
of the securities fail financially. 

BORROWING

     Each Fund may borrow from time to time, at its Subadviser's discretion, to
take advantage of investment opportunities, when yields on available investments
exceed interest rates and other expenses of related borrowing, or when, in the
Subadviser's opinion, unusual market conditions otherwise make it advantageous
for the Fund to increase its investment capacity. A Fund will only borrow when
there is an expectation that it will benefit the Fund after taking into account
considerations such as interest income and possible losses upon liquidation.
Borrowing by a Fund creates an opportunity for increased net income but, at the
same time, creates risks, including the fact that leverage may exaggerate
changes in the net asset value of Fund shares and in the yield on the Fund. A
Fund may also borrow for temporary, extraordinary or emergency purposes and for
the clearance of transactions. 

SECURITIES OF FOREIGN ISSUERS

     The value of a Fund's foreign investments may be significantly affected by
changes in currency exchange rates. The dollar value of a foreign security
generally decreases when the value of the dollar rises against the foreign
currency in which the security is denominated and tends to increase when the
value of the dollar falls against such currency. In addition, the value of the
Fund's assets may be affected by losses and other expenses incurred in
converting between various currencies in order to purchase and sell foreign
securities and by currency restrictions and exchange control regulation.

     The economies of many of the countries in which a Fund may invest are not
as developed as the economy of the U.S. and may be subject to significantly
different forces. Political or social instability, expropriation or confiscatory
taxation, and limitations on the removal of funds or other assets, could also
adversely affect the value of investments.

     Foreign companies are generally not subject to the regulatory controls
imposed on U.S. issuers and, in general, there is less publicly available
information about foreign securities than is available about domestic
securities. Many foreign companies are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to domestic companies. Income from foreign
securities owned by a Fund may be reduced by a withholding tax at the source
which would reduce dividend income payable to shareholders.


                                       B-9
<PAGE>


     Brokerage commission rates in foreign countries, which are generally fixed
rather than subject to negotiation as in the U.S. are likely to be higher. The
securities markets in many of the countries in which a Fund may invest will have
substantially less trading volume than the principal U.S. markets. As a result,
the securities of some companies in these countries may be less liquid and more
volatile than comparable U.S. securities. There is generally less government
regulation and supervision of foreign stock exchanges, brokers and issuers which
may make it difficult to enforce contractual obligations.

OPTIONS ON SECURITIES AND SECURITIES INDICES

     A number of risk factors are associated with options transactions. There is
no assurance that a liquid secondary market on an options exchange will exist
for any particular option, at any particular time. If a Fund is unable to effect
a closing purchase transaction with respect to covered options it has written, a
Fund will not be able to sell the underlying securities or dispose of assets
held in a segregated account until the options expire or are exercised.
Similarly, if a Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it would have to exercise the options in order to
realize any profit and may incur transaction costs upon the purchase or sale of
underlying securities. The ability to terminate over-the-counter (OTC) option
positions is more limited than the ability to terminate exchange-traded option
positions because a Fund would have to negotiate directly with a contra party.
In addition, with OTC options, there is a risk that the contra party in such
transactions will not fulfill its obligations.
   
     A Fund pays brokerage commissions or spreads in connection with its options
transactions, as well as for purchases and sales of underlying securities. The
writing of options could result in significant increases in a Fund's turnover
rate. A Fund's transactions in options may be limited by the requirements of the
Internal Revenue Code of 1986, as amended (the Internal Revenue Code) for
qualification as a regulated investment company.
    
     The risks of investment in index options may be greater than options on
securities. Because index options are settled in cash, when a Fund writes a call
option on an index it cannot provide in advance for its potential settlement
obligations by acquiring and holding the underlying securities. A Fund can
offset some of the risk of writing a call index option position by holding a
diversified portfolio of securities similar to those on which the underlying
index is based. However, the Fund cannot, as a practical matter, acquire and
hold a portfolio containing exactly the same securities as underlie the index
and, as a result, bears a risk that the value of the securities held will vary
from the value of the index.

     Even if a Fund could assemble a securities portfolio that exactly
reproduced the composition of the underlying index, it still would not be fully
covered from a risk standpoint because of the "timing risk" inherent in writing
index options. When an index option is exercised, the amount of cash that the
holder is entitled to receive is determined by the difference between the
exercise price and the closing index level on the date when the option is
exercised. As with other kinds of options, the Fund as the call writer will not
know that it has been assigned until the next business day at the earliest. The
time lag between exercise and notice of assignment poses no risk for the writer
of a covered call on a specific underlying security, such as a common stock,
because there the writer's obligation is to deliver the underlying security, not
to pay its value as of a fixed time in the past. So long as the writer already
owns the underlying security, it can satisfy its settlement obligations by
simply delivering it, and the risk that its value may have declined since the
exercise date is borne by the exercising holder. In contrast, even if the writer
of an index call holds securities that exactly match the composition of the
underlying index, it will not be able to satisfy its assignment obligations by
delivering those securities against payment of the exercise price. Instead, it
will be required to pay cash in an amount based on the closing index value on
the exercise date; and by the time it learns that it has been assigned, the
index may have declined, with a corresponding decline in the value of its
securities portfolio. This "timing risk" is an inherent limitation on the
ability of index call writers to cover their risk exposure by holding securities
positions.

     If a Fund has purchased an index option and exercises it before the closing
index value for that day it available, it runs the risk that the level of the
underlying index may subsequently change. If such a change causes the exercised
option to fall out-of-the-money, the Fund will be required to pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.


                                      B-10
<PAGE>


     A Fund will not purchase put options or call options if, after any such
purchase, the aggregate premiums paid for such options would exceed 20% of the
Fund's net assets. The aggregate value of the obligations underlying put options
will not exceed 25% of a Fund's net assets. 

FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS

     A futures contract on securities or currency is an agreement to buy and
sell securities or currency at a specified price at a designated date. Futures
contracts and options thereon may be entered into for hedging purposes and for
the other purposes described in each Fund's Prospectus. A Fund may enter into
futures contracts in order to hedge against changes in interest rates, stock
market prices or currency exchange rates.

     The purchase of futures or call options thereon can serve as a long hedge,
and the sale of futures or the purchase of put options thereon can serve as a
short hedge. Writing call options on futures contracts can serve as a limited
short hedge, and writing put options on futures contracts can serve as a limited
long hedge.

     No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract, a Fund is required to deposit "initial margin,"
consisting of cash or U.S. Government securities, in an amount generally equal
to 10% or less of the contract value. Margin must also be deposited when writing
a call or put option on a futures contract, in accordance with applicable
exchange rules. Unlike margin in securities transactions, initial margin does
not represent a borrowing, but rather is in the nature of a performance bond or
good-faith deposit that is returned to the Fund at the termination of the
transaction if all contractual obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, a Fund may be required by an
exchange to increase the level of its initial margin payment.

     Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of a Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs are all that is at risk. In contrast, when a Fund purchases or
sells a futures contract or writes a call or put option thereon, it is subject
to daily variation margin calls that could be substantial in the event of
adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.

     Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
Each Fund intends to enter into futures and options on futures transactions only
on exchanges or boards of trade where there appears to be a liquid secondary
market. However, there can be no assurance that such a market will exist for a
particular contract at a particular time.

     Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or option on a futures contract can
vary from the previous day's settlement price; once that limit is reached, no
trades may be made that day at a price beyond the limit. Daily price limits do
not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.

     If a Fund were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the future or option or to maintain cash or securities
in a segregated account.

     Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or options on futures contracts
might not correlate perfectly with movements in the prices of the investments
being


                                      B-11
<PAGE>


hedged. For example, all participants in the futures and options on futures
contracts markets are subject to daily variation margin calls and might be
compelled to liquidate futures or options on futures contract positions whose
prices are moving unfavorably to avoid being subject to further calls. These
liquidations could increase price volatility of the instruments and distort the
normal price relationship between the futures or options and the investments
being hedged. Also, because initial margin deposit requirements in the futures
market are less onerous than margin requirements in the securities markets,
there might be increased participation by speculators in the futures markets.
This participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets involving
arbitrage, "program trading" and other investment strategies might result in
temporary price distortions. 

ILLIQUID SECURITIES

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

     In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities 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 of 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 will expand
further as a result of this new 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 and
commercial paper for which there is a readily available market will not be
deemed illiquid. The Subadvisers will monitor the liquidity of such restricted
securities, subject to the supervision of the Trustees. In reaching liquidity
decisions, Advisers will consider, among other things, the following factors:
(1) the frequency of trades and quotes for the security; (2) the number of
dealers wishing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security
and (4) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer). In addition, in order for commercial
paper that is issued in reliance on Section 4(2) of the Securities Act to be
considered liquid, (i) it must be rated in one of


                                      B-12
<PAGE>


the two highest rating categories by at least two NRSROs, or if only one NRSRO
rates the securities, by that NRSRO, or, if unrated, be of comparable quality in
the view of the investment adviser, and (ii) it must not be "traded flat" (i.e.,
without accrued interest) or in default as to principal or interest. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.

     The staff of the SEC has taken the position that purchased OTC options and
the assets used as "cover" for written OTC options are illiquid securities
unless the Fund and the counterparty have provided for the Fund, at the Fund's
election, to unwind the OTC option. The exercise of such an option would
ordinarily 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 securities used as "cover" as liquid. The Fund will also treat
non-U.S. Government IOs and POs as illiquid so long as the staff of the SEC
maintains its position that such securities are illiquid.

OTHER INVESTMENT TECHNIQUES

     Each Fund may take advantage of opportunities in the area of options and
futures contracts and any other derivative instruments that are not presently
contemplated for use by such Fund or that are not currently available but that
may be developed, to the extent such opportunities are both consistent with its
investment objective and legally permissible for the Fund. Before entering into
such transactions or making any such investment, the Fund will provide
appropriate disclosure in its prospectus.

                             INVESTMENT RESTRICTIONS
   
     The investment restrictions listed below have been adopted by the Company
as fundamental policies of the Funds, except as otherwise indicated. Under the
Investment Company Act, a fundamental policy of a Fund may not be changed
without the vote of a majority of the outstanding voting securities of the Fund.
As defined in the Investment Company Act, a "majority of a Fund's outstanding
voting securities" means the lesser of (i) 67% of the shares represented at a
meeting at which more than 50% of the outstanding shares are present in person
or represented by proxy or (ii) more than 50% of the outstanding shares. For
purposes of the following limitations: (i) all percentage limitations apply
immediately after a purchase or initial investment; and (ii) any subsequent
change in any applicable percentage resulting from market fluctuations does not
require elimination of any asset from the Fund.
    
     A Fund may not:

     1. Purchase any security if, as a result, with respect to 75% of the Fund's
total assets, more than 5% of the value of its total assets (determined at the
time of investment) would then be invested in the securities of any one issuer.

     2. Purchase a security if more than 10% of the outstanding voting
securities of any one issuer would be held by the Fund.

     3. Purchase a security if, as a result, 25% or more of the value of its
total assets (determined at the time of investment) would be invested in
securities of one or more issuers having their principal business activities in
the same industry. This restriction does not apply to obligations issued or
guaranteed by the United States Government, its agencies or instrumentalities.

     4. Purchase or sell real estate or interests therein (including limited
partnership interests), although a Fund may purchase securities of issuers which
engage in real estate operations and securities which are secured by real estate
or interests therein.

     5. Purchase or sell commodities or commodity futures contracts, except that
a Fund may purchase and sell financial futures contracts and options thereon and
that forward contracts are not deemed to be commodities or commodity futures
contracts.

     6. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that a Fund may invest in the
securities of companies which operate, invest in or sponsor such programs.


                                      B-13
<PAGE>


     7. Issue senior securities, borrow money or pledge its assets, except that
each Fund may borrow from banks or through forward rolls, dollar rolls or
reverse repurchase agreements up to 20% of the value of its total assets to take
advantage of investment opportunities, for temporary, extraordinary or emergency
purposes, or for the clearance of transactions and 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 and sale of options, financial futures
contracts and options thereon; the entry into repurchase agreements and
collateral and margin arrangements with respect to any of the foregoing, will
not be deemed to be a pledge of assets nor the issuance of senior securities.

     8. Make loans except by the purchase of fixed income securities in which a
Fund may invest consistently with its investment objective and policies or by
use of reverse repurchase and repurchase agreements, forward rolls, dollar rolls
and securities lending arrangements.

     9. Make short sales of securities.

     10. Purchase securities on margin, except for such short-term loans as are
necessary for the clearance of purchases of portfolio securities. (For the
purpose of this restriction, the deposit or payment by any Fund of initial or
maintenance margin in connection with financial futures contracts is not
considered the purchase of a security on margin.)

     11. 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. The Fund has no limit with respect to
investments in restricted securities.
       
     Whenever any fundamental investment policy or investment restriction states
a maximum percentage of a 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 a Fund's asset
coverage for borrowings falls below 300%, the Fund will take prompt action to
reduce its borrowings, as required by applicable law.


                                      B-14
<PAGE>


<TABLE>
                                     TRUSTEES AND OFFICERS
<CAPTION>

                                POSITION WITH                              PRINCIPAL OCCUPATIONS
    NAME, ADDRESS AND AGE          COMPANY                                DURING PAST FIVE YEARS
    ---------------------       -------------                             ----------------------
<S>                              <C>               <C>
Edward D. Beach (71)             Trustee           President and Director of BMC Fund, Inc., a closed-end
c/o Prudential Mutual Fund                           investment company; prior thereto, Vice Chairman of
  Management LLC                                     Broyhill Furniture Industries, Inc.; Certified Public
Gateway Center Three                                 Accountant; Secretary and Treasurer of Broyhill Family
Newark, NJ 07102-4077                                Foundation; Member of the Board of Trustees of Mars Hill
                                                     College; President, Treasurer and Director of First Financial
                                                     Fund, Inc. and The High Yield Plus Fund, Inc.; President and
                                                     Director of Global Utility Fund, Inc.

Delayne Dedrick Gold (58)        Trustee           Marketing and Management Consultant.
c/o Prudential Mutual Fund
  Management LLC
Gateway Center Three
Newark, NJ 07102-4077
   
* Robert F. Gunia (49)           Trustee           Comptroller, Prudential Investments (since May 1996);
  Gateway Center Three                               Senior Vice President (since March 1987) of Prudential
  Newark, NJ 07102-4077                              Securities Incorporated (Prudential Securities); Director 
                                                     (since June 1987), Prudential Mutual Fund Services, Inc.
                                                     (PMFS); formerly Chief Administrative Officer (July
                                                     1990-September 1996), Director (January 1989-September 1996),
                                                     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) and Director of
                                                     Nicholas-Applegate Fund, Inc. (since February 1992).
    
Donald D. Lennox (77)            Trustee           Chairman (since February 1990) and Director (since April
c/o Prudential Mutual Fund                           1989) of International Imaging Materials, Inc. (thermal
  Management LLC                                     transfer ribbon manufacturer); Retired Chairman, Chief
Gateway Center Three                                 Executive Officer and Director of Schlegel Corporation
Newark, NJ 07102-4077                                (industrial manufacturing) (March 1987-February 1989); 
                                                     Director of Gleason Corporation, Personal Sound Technologies, Inc. 
                                                     and The High Yield Income Fund, Inc.

Douglas H. McCorkindale (57)     Trustee           Vice Chairman, Gannett Co. Inc. (publishing and media) (since
c/o Prudential Mutual Fund                           March 1984); Director of Gannett Co. Inc., Frontier
  Management LLC                                     Corporation and Continental Airlines, Inc.
Gateway Center Three
Newark, NJ 07102-4077
</TABLE>


                                                      B-15
<PAGE>


<TABLE>
<CAPTION>
   
                                POSITION WITH                              PRINCIPAL OCCUPATIONS
    NAME, ADDRESS AND AGE          COMPANY                                DURING PAST FIVE YEARS
    ---------------------       -------------                             ----------------------
<S>                              <C>               <C>
* Mendel A. Melzer (35)          Trustee           Chief Investment Officer (since October 1996) of Prudential
  751 Broad St.                                      Mutual Funds; formerly Chief Financial Officer of
  Newark, NJ 07102                                   Prudential Investments (November 1995-September 1996), 
                                                     Senior Vice President and Chief Financial Officer of
                                                     Prudential Preferred Financial Services (April 1993-November
                                                     1995), Managing Director of Prudential Investment Advisors
                                                     (April 1991-April 1993) and Senior Vice President of
                                                     Prudential Capital Corporation (July 1989-April 1991);
                                                     Chairman and Director of Prudential Series Fund, Inc.


Thomas T. Mooney (54)            Trustee           President of the Greater Rochester Metro Chamber of
c/o Prudential Mutual Fund                           Commerce; former Rochester City Manager; Trustee of
  Management LLC                                     Center for Governmental Research, Inc.; Director of Blue
Gateway Center Three                                 Cross of Rochester, Monroe County Water Authority,
Newark, NJ 07102-4077                                Rochester Jobs, Inc., Executive Service Corps of
                                                     Rochester, Monroe County Industrial Development Corporation,
                                                     Northeast Midwest Institute, The Business Council of New York
                                                     State, First Financial Fund, Inc.


Stephen P. Munn (54)             Trustee           Chairman (since January 1994), Director and President (since
c/o Prudential Mutual Fund                           1988) and Chief Executive Officer (1988-December 1993)
  Management LLC                                     of Carlisle Companies Incorporated (manufacturer of
Gateway Center Three                                 industrial products).
Newark, NJ 07102-4077

* Richard A. Redeker (53)        Trustee           Employee of Prudential Investments; formerly President, Chief
  Gateway Center Three                               Executive Officer and Director (October 1993-September
  Newark, NJ 07102-4077                              1996), Prudential Mutual Fund Management, Inc., Executive 
                                                     Vice President, Director and Member of the Operating
                                                     Committee (October 1993-September 1996), Prudential
                                                     Securities; formerly Director (October 1993-September 1996)
                                                     of Prudential Securities Group, Inc.; formerly Executive Vice
                                                     President, The Prudential Investment Corporation (October
                                                     1993-September 1996); formerly Director (January
                                                     1994-September 1996), PMFS; previously Senior Executive Vice
                                                     President and Director of Kemper Financial Services, Inc.
                                                     (September 1978-September 1993); President and Director of
                                                     The High Yield Income Fund, Inc.

Robin B. Smith (57)              Trustee           Chairman (since August 1996) and Chief Executive Officer
c/o Prudential Mutual Fund                           (since August 1996), former President (September
  Management LLC                                     1981-August 1996) of Publishers Clearing House; Director
Gateway Center Three                                 of BellSouth Corporation, The Omnicom Group, Inc.,
Newark, NJ 07102-4077                                Texaco Inc., Spring Industries Inc., First Financial 
                                                     Fund, Inc. and The High Yield Income Fund, Inc.
</TABLE>
    

                                                      B-16
<PAGE>


<TABLE>
<CAPTION>
   
                                POSITION WITH                              PRINCIPAL OCCUPATIONS
    NAME, ADDRESS AND AGE          COMPANY                                DURING PAST FIVE YEARS
    ---------------------       -------------                             ----------------------
<S>                              <C>               <C>
Louis A Weil, III (55)           Trustee           President and Chief Executive Officer (since January 1996)
c/o Prudential Mutual Fund                           and Director(since September 1991) of Central Newspapers, Inc.;
  Management LLC                                     Chairman of the Board (since January 1996), Publisher and
Gateway Center Three                                 Chief Executive Officer (August 1991-December 1995) of
Newark, NJ 07102-4077                                Phoenix Newspapers, Inc.; formerly Publisher of Time
                                                     Magazine (May 1989-March 1991); formerly President,
                                                     Publisher & CEO of The Detroit News (February 1986-August
                                                     1989); formerly member of the Advisory Board, Chase
                                                     Manhattan Bank-Westchester.

Clay T. Whitehead (57)           Trustee           President, National Exchange Inc. (new business development
c/o Prudential Mutual Fund                           firm) (since May 1983).
Management LLC
Gateway Center Three
Newark, NJ 07102-4077

Eugene S. Stark (38)             Treasurer         First Vice President (January 1990-September 1996)
Gateway Center Three                                 of Prudential Mutual Fund Management, Inc.; First
Newark, NJ 07102-4077                                Vice President (since January 1992) of Prudential Securities.

S. Jane Rose (50)                Secretary         Senior Vice President(January 1991-September 1996) and 
Gateway Center Three                                 Senior Counsel (June 1987-September 1996) of
Newark, NJ 07102-4077                                Prudential Mutual Fund Management, Inc.; Senior Vice
                                                     President and Senior Counsel of Prudential Securities
                                                     (since July 1992); formerly Vice President and Associate
                                                     General Counsel of Prudential Securities.

Marguerite E.H. Morrison (40)    Assistant         Vice President and Associate General Counsel (June 
Gateway Center Three             Secretary           1991-September 1996) of Prudential Mutual Fund
Newark, NJ 07102-4077                                Management, Inc.; Vice President and Associate
                                                     General Counsel of Prudential Securities.
</TABLE>

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

* "Interested" Trustee, as defined in the Investment Company Act, by reason of
  his affiliation with The Prudential Insurance Company of America or Prudential
  Securities.
    

                                      B-17
<PAGE>

   
     As of November 22, 1996, the Trustees and officers of the Company as a
group owned beneficially less than 1% of the shares of beneficial interest of
the Company. As of October 31, 1996, each of the following entities owned more
than 5% of the outstanding voting securities of each of the portfolios
indicated: 
    
PORTFOLIO                                                          SHARES 
- ---------                                                          ------ 
   
Prudential Active 
  Balanced Fund
    Class A shares     Stephen P. Munn                              149 (90.8%)
                       8522 Chippendale Circle
                       Manlius, NY 13104-9413

    Class Z shares     PAMCO VCA OA Account                    1,575,825(13.3%)
                       30 Scranton Office Park
                       Moosic, PA 18507-1789

                       Dobson Park Industries Inc. and           652,658 (5.5%)
                       Affiliates Savings Plan and
                       Dodson Park Industries Inc. and
                         Affiliates Cash Balance
                         Pension Plan

                       Dobson Technologies, Inc.
                       c/o IRD Mechanalysis
                       6150 Huntley Road
                       Columbus, OH 43229

                       Rite Aid Employee Investment            1,076,420 (9.1%)
                         Opportunity Plan
                       Rite Aid Corporation
                       30 Hunter Lane
                       Camp Hill, PA 17011

                       Thompson & Knight Savings Plan and      1,117,342 (9.4%)
                       Thompson & Knight Retirement Plan
                       300 First City Center
                       1700 Pacific Ave.
                       Dallas, TX 75201

Prudential Stock 
  Index Fund 
    Class A shares     Daisy Chan                                 2,811 (17.3%)
                       817 West Hellman Avenue
                       Alhambra, CA 91803

                       Daisy Tung                                    854 (5.2%)
                       1403 Essex Lane
                       Glendale, CA 91207

                       Christina Chow                             2,855 (17.6%)
                       9043 E. Arcadia Avenue
                       San Gabriel, CA 91775-1401

    Class Z shares     PAMCO VCA OA Account                    1,619,698(13.7%)
                       30 Scranton Office Park
                       Moosic, PA 18507-1789

                       Prudential Employee Savings Plan        3,471,976(29.3%)
                       71 Hanover Road
                       Florham Park, NJ 07932-1502
    

                                      B-18
<PAGE>

   
                       Eden Brewery Thrift Savings Plan and      636,285 (5.4%)]
                       Fort Worth Brewery Thrift Savings Plan
                       Miller Brewing Company
                       3939 West Highland Blvd.
                       Milwaukee, WI 53201-0482
    
     The Prudential Insurance Company of America (Prudential) is a mutual life
insurance company incorporated in 1873 under the laws of the state of New
Jersey. The Prudential Employee Savings Plan is a defined contribution
retirement plan. The PAMCO VCA OA Account is a portion of The Prudential
Variable Contract Investment Fund, a separate account, established in 1962, of
Prudential.
   
     The interested Trustees serve without compensation. The following table
sets forth the aggregate compensation paid by the Company to the Trustees who
were not affiliated with the Manager for the fiscal year ended September 30,
1996 and the aggregate compensation paid to such Trustees for service on the
Company's Board and that of all other funds managed by Prudential Mutual Fund
Management, Inc. (Fund Complex) for the year ended December 31, 1995.
    

<TABLE>
<CAPTION>
                                            COMPENSATION TABLE
                                            ------------------

                                                            PENSION OR                           TOTAL
                                                            RETIREMENT                       COMPENSATION
                                                         BENEFITS ACCRUED     ESTIMATED      FROM COMPANY
                                           AGGREGATE        AS PART OF         ANNUAL          AND FUND
                                         COMPENSATION         COMPANY       BENEFITS UPON    COMPLEX PAID
NAME AND POSITION                        FROM COMPANY        EXPENSES        RETIREMENT       TO TRUSTEES
- -----------------                        ------------        --------        ----------       -----------
<S>                                        <C>                 <C>               <C>       <C>
   
Edward D. Beach--Trustee                       --              NONE              N/A       $183,500(22/43)**
Mark R. Fetting--Trustee+/++                   --              NONE              N/A            --
David A. Finley--Trustee++                 $21,000             NONE              N/A         21,000(1/7)**
William E. Fruhan, Jr.--Trustee++           21,000             NONE              N/A         21,000(1/7)**
Delayne D. Gold--Trustee                       --              NONE              N/A        183,250(24/45)**
Robert F. Gunia--Trustee+                      --              NONE              N/A            --
Donald D. Lennox--Trustee                      --              NONE              N/A         86,250(10/22)**
Douglas H. McCorkingdale--Trustee              --              NONE              N/A         63,750(7/10)**
Mendel A. Melzer--Trustee+                     --              NONE              N/A             --
Thomas T. Mooney--Trustee                      --              NONE              N/A        125,625(14/19)**
Stephen P. Munn--Trustee                       --              NONE              N/A         39,375(6/8)**
August G. Olsen--Trustee*/++                21,000             NONE              N/A         21,000(1/7)**
Richard A. Redeker--Trustee+                   --              NONE              N/A             --
Robin B. Smith--Trustee+++                     --              NONE              N/A         91,875(10/19)**
Herbert G. Stolzer--Trustee*/++             21,000             NONE              N/A         21,000(1/7)**
Louis A. Weil, III--Trustee                    --              NONE              N/A         93,750(11/16)**
Clay T. Whitehead--Trustee                     --              NONE              N/A         35,500(4/5)**
</TABLE>
    
- ----------

  *  All of the compensation from the Company for the fiscal year ended
     September 30, 1996 represents deferred compensation. Aggregate compensation
     from the Company and the Fund Complex for the fiscal year ended September
     30, 1996, including accrued income and appreciation, amounted to
     approximately $24,000 for Mr. Olsen and approximately $24,500 for Mr.
     Stolzer.

 **  Indicates number of Funds/portfolios in Fund Complex to wich aggregate
     compensation relates.

                                      B-19
<PAGE>

   
  +  Mark R. Fetting, Robert F. Gunia, Mendel A. Melzer and Richard A. Redeker,
     who are interested Trustees, do not receive compensation from the Company
     or any fund in the Prudential Mutual Fund Family.
    
 ++  Indicates Trustee who did not stand for reelection.

+++  Aggregate compensation from the Fund Complex for the year ended December
     31, 1995, including accrued income and appreciation, amounted to
     approximately $100,700.

                             MANAGER AND SUBADVISERS
   
     The manager of the Company is Prudential Mutual Fund Management LLC (PMF or
the Manager), Gateway Center Three, Newark, New Jersey 07102-4077. PMF serves as
manager to all of the other investment companies that, together with the Funds,
comprise the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in
the Prospectus of each Fund. As of October 31, 1996, PMF managed and/or
administered open-end and closed-end management investment companies with assets
of approximately $52 billion. According to the Investment Company Institute, as
of August 31, 1996, the Prudential Mutual Funds were the 17th largest family of
mutual funds in the United States.
    
     PMF is a subsidiary of Prudential Securities Incorporated (Prudential
Securities or PSI). PMF has three wholly owned subsidiaries: Prudential Mutual
Fund Distributors, Inc., Prudential Mutual Fund Services, Inc. (PMFS or the
Transfer Agent) and Prudential Mutual Fund Investment Management. PMFS serves as
the transfer agent for the Prudential Mutual Funds and, in addition, provides
customer service, recordkeeping and management and administration services to
qualified plans.


     Pursuant to the Management Agreement with the Company (the Management
Agreement), PMF, subject to the supervision of the Company's Board of Trustees
and in conformity with the stated policies of each Fund, manages both the
investment operations of each Fund and the composition of each Fund's portfolio,
including the purchase, retention, disposition and loan of securities and other
assets. In connection therewith, PMF is obligated to keep certain books and
records of the Company. PMF also administers the Company's corporate affairs
and, in connection therewith, furnishes the Company with office facilities,
together with those ordinary clerical and bookkeeping services which are not
being furnished by State Street Bank and Trust Company, the Funds' custodian
(the Custodian), and PMFS, the Funds' transfer and dividend disbursing agent.
The management services of PMF for the Funds are not exclusive under the terms
of the Management Agreement and PMF is free to, and does, render management
services to others.
   
     For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .65 of 1% of Prudential Active Balanced Fund's average
daily net assets and .30 of 1% of Prudential Stock Index Fund's average daily
net assets. The fee is computed daily and payable monthly. The Management
Agreement also provides that, in the event the expenses of a Fund (including the
fees of PMF, but excluding interest, taxes, brokerage commissions, distribution
fees and litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of the Fund's business) for any
fiscal year exceed the lowest applicable annual expense limitation established
and enforced pursuant to the statutes or regulations of any jurisdiction in
which the Fund's shares are qualified for offer and sale, the compensation due
to PMF will be reduced by the amount of such excess. Reductions in excess of the
total compensation payable to PMF will be paid by PMF to the Company.
    
     In connection with its management of the business affairs of the Company,
the Manager bears the following expenses:

     (i) the salaries and expenses of all of its and the Company's personnel
except the fees and expenses of Trustees who are not affiliated persons of the
Manager or the Funds' Subadvisers;

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

                                      B-20

<PAGE>

   
     (iii) the costs and expenses or fees payable to The Prudential Investment
Corporation (PIC) and Jennison Associates Capital Corp. (Jennison)
(collectively, the Subadvisers) pursuant to the subadvisory agreements between
the Manager and the Subadvisers (collectively, the Advisory Agreements).
    
     Under the terms of the Management Agreement, the Company is responsible for
the payment of the following expenses: (i) the fees payable to the Manager, (ii)
the fees and expenses of Trustees who are not affiliated persons of the Manager
or the Funds' Subadvisers, (iii) the fees and certain expenses of the Custodian
and Transfer and Dividend Disbursing Agent, including the cost of providing
records to the Manager in connection with its obligation of maintaining required
records of the Company, pricing the Funds' shares and the cashiering function,
(iv) the charges and expenses of legal counsel and independent accountants for
the Company, (v) brokerage commissions and any issue or transfer taxes
chargeable to the Company in connection with its securities and futures
transactions, (vi) all taxes and corporate fees payable by the Company to
governmental agencies, (vii) the fees of any trade associations of which the
Company may be a member, (viii) the cost of stock certificates representing
shares of Funds of the Company, if any, (ix) the cost of fidelity and liability
insurance, (x) the fees and expenses involved in registering and maintaining
registration of the Company and of its shares with the SEC, registering the
Company and qualifying its shares under state securities laws, including the
preparation and printing of the Company's registration statements and
prospectuses for such purposes, (xi) licensing fees, if any, (xii) 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 and (xiii) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Company's business.

     The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Company in connection with the
matters to which the Management Agreement relates, except a loss resulting from
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
The Management Agreement provides that it will terminate automatically if
assigned and that it may be terminated without penalty by either party upon not
more than 60 days' nor less than 30 days' written notice. The Management
Agreement will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the Investment Company Act. The Management
Agreement was last approved by the Trustees of the Company, including all of the
Trustees who are not parties to the contract or interested persons of any such
party as defined in the Investment Company Act, on May 17, 1996 and by the
shareholders of the Company on October 30, 1996. The Manager received, before
any reduction due to the subsidy by the Manager of certain expenses of each
Fund, the following management fees from each Fund, expressed both as a dollar
amount and as a percentage of each Fund's average daily net assets:

                       YEAR ENDED            YEAR ENDED           YEAR ENDED
                   SEPTEMBER 30, 1996    SEPTEMBER 30, 1995   SEPTEMBER 30, 1994
                   ------------------   -------------------   ------------------
FUND                AMOUNT      RATE     AMOUNT      RATE       AMOUNT     RATE
- ----               --------     ----    --------     ----      --------    ----
Stock Index        $570,160     .40%    $286,843     .40%      $152,392    .40%
Active Balanced     994,182     .70      733,748     .70        412,941    .70

During the same period the Manager subsidized certain expenses of the Fund. See
"How the Fund is Managed--Fee Waivers and Subsidy" in the Prospectus.

     The Manager has entered into Advisory Agreements with the Subadvisers. The
Advisory Agreements provide that the Subadvisers furnish investment advisory
services in connection with the management of their respective Funds. For its
service as Subadviser, Jennison is paid at an annual rate of .30 of 1% of
Prudential Active Balanced Fund's average daily

                                      B-21
<PAGE>
net assets up to and including $300 million and .25 of 1% of the Fund's
average daily net assets in excess of $300 million. PIC is reimbursed by the
Manager for the reasonable costs and expenses incurred in furnishing its
service. In connection therewith, the Subadvisers are obligated to keep certain
books and records of the respective Funds to which they provide advisory
services. The Manager continues to have responsibility for all investment
advisory services to all the Funds pursuant to the Management Agreement and
supervises the Subadvisers' performance of such services.

   
     Jennison is the subadviser for the Prudential Active Balanced Fund.
Acquired by the Prudential in 1985, Jennison has been engaged in the equity
investment management business since 1969. As of September 30, 1996, Jennison
managed $31.3 billion in assets for 177 clients, including approximately $3.5
billion (11.3%) in mutual funds. Of the $31.3 billion in assets, $1.8 billion
were in actively managed balanced portfolios (including the Fund) and $17.3
billion in assets were in equity portfolios. Approximately 40% of Jennison's
equity clients are "Fortune 500" companies (as defined by Fortune Magazine in
the issue dated April 29, 1996). Many of these companies have retained
Jennisons' asset management services for more than ten years, some for more then
25 years as of September 30, 1996. As of September 30, 1996, Jennison also
managed $2.8 billion in international equity portfolios, and $9.5 billion in
fixed income portfolios.

     Bradley Goldberg, a senior portfolio manager at Jennison, oversees the
Prudential Active Balanced Fund. He has more than 25 years of investment
experience. Mr. Goldberg combines successful stock and bond investing with an
active asset allocation strategy to generate equity-like results with less risk
than a pure equity portfolio. When selecting stocks for the Fund, Mr. Goldberg
draws on the growth investing expertise of Jennison and modifies the style to
identify undervalued companies with attractive earnings growth prospects.
    

     PIC advises Prudential Stock Index Fund through Prudential Diversified
Investment Strategies (PDI). PDI is dedicated to equity index and balanced fund
investing for institutional clients. Founded in 1975, PDI is among the oldest
quantitatively-oriented balanced managers in the country. PDI currently manages
close to $21 billion in balanced and indexed assets.

     PIC also manages short-term assets and cash for Prudential Active Balanced
Fund and invests available cash balances for the Fund through a joint repurchase
agreement account. PIC is reimbursed by PMF for reasonable costs and expenses
incurred by it in furnishing such services.

     The Advisory Agreements were last approved by the Trustees, including a
majority of the Trustees who are not parties to the Agreements or interested
persons of any such party as defined in the Investment Company Act, on May 17,
1996, and by the shareholders of each Fund on October 30, 1996.

     Each Advisory 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. Each Advisory Agreement may be terminated by the
Company, the Manager or the relevant Subadviser upon not more than 60 days', nor
less than 30 days', written notice. Each Advisory Agreement provides that it
will continue in effect for a period of more than two years from its execution
only so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act.

                                   DISTRIBUTOR

     Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, acts as the distributor of shares of
Prudential Stock Index Fund and the Class A, Class B, Class C and Class Z shares
of Prudential Active Balanced Fund.

                                      B-22
<PAGE>


     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
Company under Rule 12b-1 under the Investment Company Act and a distribution
agreement (the Distribution Agreement), Prudential Securities (also the
Distributor) incurs the expenses of distributing Prudential Active Balanced
Fund's Class A, Class B and Class C shares. Prudential Securities serves as the
Distributor of shares of Prudential Stock Index Fund and the Class Z shares of
Prudential Active Balanced Fund and incurs the expenses of distributing the
shares under a Distribution Agreement with the Company, none of which are
reimbursed by or paid for by the Funds. See "How the Fund is
Managed--Distributor" in the Prospectus of each Fund.

     On May 17, 1996, the Board of Trustees, including a majority of the
Trustees who are not interested persons of the Company and who have no direct or
indirect financial interest in the operation of the Class A, Class B or Class C
Plan or in any agreement related to the Plans (the Rule 12b-1 Trustees), at a
meeting called for the purpose of voting on each Plan, approved the Plans with
respect to Prudential Active Balanced Fund and the Distribution Agreements for
both Funds. The Class A Plan provides that (i) .25 of 1% of the average daily
net assets of the Class A shares may be used to pay for personal service and the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1%. The
Class B and Class C Plans provide that (i) .25 of 1% of the average daily net
assets of the Class B and Class C shares, respectively, may be paid as a service
fee and (ii) .75 of 1% (not including the service fee) may be paid for
distribution-related expenses with respect to the Class B and Class C shares,
respectively (asset-based sales charge). The Plans were each approved by the
sole shareholder of the Class A, Class B and Class C shares of Prudential Active
Balanced Fund on October 30, 1996.

     The Class A, Class B and Class C Plans for Prudential Active Balanced Fund
will continue in effect from year to year, provided that each such continuance
is approved at least annually by a vote of the Board of Trustees, including a
majority vote of the Rule 12b-1 Trustees, cast in person at a meeting called for
the purpose of voting on such continuance. The Plans may each be terminated at
any time, without penalty, by the vote of a majority of the Rule 12b-1 Trustees
or by the vote of the holders of a majority of the outstanding shares of the
applicable class on not more than 60 days', nor less than 30 days' written
notice to any other party to the Plans. The Plans may not be amended to increase
materially the amounts to be spent for the services described therein without
approval by the shareholders of the applicable class, and all material
amendments are required to be approved by the Board of Trustees in the manner
described above. Each Plan will automatically terminate in the event of its
assignment. The Fund will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.

     Pursuant to each Plan, the Board of Trustees will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of Prudential Active Balanced Fund by the Distributor. The report will
include 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 Rule 12b-1 Trustees shall be committed to the Rule 12b-1
Trustees.

     Pursuant to the Distribution Agreement, the Company has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against certain
liabilities under the Securities Act.

     On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10

                                      B-23
<PAGE>

million civil penalty; and (iii) required PSI to adopt certain remedial
measures including the establishment of a Compliance Committee of its Board of
Directors. Pursuant to the terms of the SEC settlement, PSI established a
settlement fund in the amount of $330,000,000 and procedures, overseen by a
court approved Claims Administrator, to resolve legitimate claims for
compensatory damages by purchasers of the partnership interests. PSI has agreed
to provide additional funds, if necessary, for that purpose. PSI's settlement
with the state securities regulators included an agreement to pay a penalty of
$500,000 per jurisdiction. PSI consented to a censure and to the payment of a
$5,000,000 fine in settling the NASD action. In settling the above referenced
matters, PSI neither admitted nor denied the allegations asserted against it.

     On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend solicitation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Texas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.

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

NASD MAXIMUM SALES CHARGE RULE

     Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares of Prudential
Active Balanced Fund. In the case of Class B shares, interest charges 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 required to
be included in the calculation of the 6.25% limitation. The annual asset-based
sales charge with respect to Class B and Class C shares of Prudential Active
Balanced Fund may not exceed .75 of 1%. The 6.25% limitation applies to 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.

                                      B-24

<PAGE>

                      PORTFOLIO TRANSACTIONS AND BROKERAGE

PORTFOLIO TURNOVER

     There are no limitations on the length of time that securities must be held
by the Funds and the Funds' annual portfolio turnover rate may vary
significantly from year to year. A portfolio turnover rate in excess of 100% may
exceed that of other investment companies with similar objectives. High
portfolio turnover (over 100%) may involve correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Funds. In addition, high portfolio turnover may result in increased short-term
capital gains, which, when distributed to shareholders, are treated as ordinary
income. See "Taxes."

     Decisions to buy and sell assets for a Fund are made by the Fund's
Subadviser, subject to the overall review of the Manager and the Trustees.
Although investment decisions for the Funds are made independently from those of
the other accounts managed by a Subadviser, investments of the type that the
Funds may make also may be made for those other accounts. When a Fund and one or
more other accounts managed by a Subadviser are prepared to invest in, or desire
to dispose of, the same security, available investments or opportunities for
sales will be allocated in a manner believed by the Subadviser to be equitable
to each. In some cases, this procedure may adversely affect the price paid or
received by a Fund or the size of the position obtained or disposed of by a
Fund.

     Transactions on U.S. stock exchanges and some foreign stock exchanges
involve the payment of negotiated brokerage commissions. On exchanges on which
commissions are negotiated, the cost of transactions may vary among different
brokers. On most foreign exchanges, commissions are generally fixed. No stated
commission is generally applicable to securities traded in U.S. OTC markets, but
the prices of those securities includes commissions or mark-ups. The cost of
securities purchased from underwriters includes an underwriting commission or
concession and the prices at which securities are purchased from and sold to
dealers include a dealer's mark-up or mark-down. U.S. Government securities
generally are purchased from underwriters or dealers, although certain
newly-issued U.S. Government securities may be purchased directly from the U.S.
Treasury or from the issuing agency or instrumentality.

     In selecting brokers or dealers to execute securities transactions on
behalf of a Fund, its Subadviser seeks the best overall terms available. The
Funds have no obligation to do business with any broker-dealer or group of
broker-dealers in executing transactions in securities. In placing orders, the
Subadvisers are subject to the Company's policy to seek the most favorable price
and efficient execution taking into account such factors as price (including the
applicable commission or dealer spread), size, type, and difficulty of the
transaction, and the firm's general execution and operating facilities. In
assessing the best overall terms available for any transaction, the Subadviser
will consider the factors that it deems relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis. In
addition, the Subadvisers, subject to seeking best price and execution, are
authorized to cause a Fund to pay broker-dealers that furnish brokerage and
research services (as defined by Section 28(e) of the Securities Exchange Act of
1934, as amended (1934 Act)), a higher commission than another broker-dealer
that does not furnish such brokerage and research services might charge. The
Subadvisers must regard such higher commissions as reasonable in relation to the
brokerage and research services provided, viewed in terms of each Subadviser's
responsibilities to the Fund or other accounts, if any, as to which it exercises
investment discretion. The fees under the Management Agreement and the Advisory
Agreements, respectively, are not reduced by reason of a Fund's Subadviser
receiving brokerage and research services. The Trustees of the Company will
periodically review the commissions paid by a Fund to determine if the
commissions paid over representative periods of time were reasonable in relation
to the benefits inuring to the Fund. OTC purchases and sales by a Fund are
transacted directly with principal market makers except in those cases in which
better prices and executions may be obtained elsewhere.

     To the extent consistent with applicable provisions of the Investment
Company Act and the rules and exemptions adopted by the SEC under the Investment
Company Act, the Trustees have determined that transactions for a Fund may be
executed through Prudential Securities and other affiliated broker-dealers if,
in the judgment of the Subadviser, the use of an affiliated broker-dealer is
likely to result in price and execution at least as favorable as those of other
qualified broker-dealers, and if, in the transaction, the affiliated
broker-dealer charges the Fund a fair and reasonable rate. Furthermore, the
Trustees of the Company, including a majority of the Trustees who are not
"interested" Trustees, have adopted procedures which are reasonably designed to
provide that any commissions, fees or other remuneration paid to PSI are
consistent with the foregoing standard. In accordance with Section 11(a) of the
1934 Act, Prudential Securities may not retain compensation for effecting
transactions on a national securities exchange for the Funds unless a Fund has
expressly authorized the retention of such compensation in a written contract
executed by the Fund and Prudential Securities. Section 11(a) provides that
Prudential Securities must furnish to the Funds at least annually a statement
setting forth the total amount of all compensation retained by Prudential
Securities from transactions

                                      B-25
<PAGE>


effected for a Fund during the applicable period. Brokerage transactions with
PSI also are subject to such fiduciary standards as may be imposed by applicable
law.

     The Funds may use PSI and other affiliated broker-dealers as a futures
commission merchant in connection with entering into futures contracts and
options on futures contracts if, in the judgment of a Fund's Subadviser, the
affiliated broker-dealer charges the Fund a fair and reasonable rate. This
standard would allow PSI to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arm's-length
transaction.

     The Company does not market its shares through intermediary brokers or
dealers; therefore, it is not the Company's practice to allocate brokerage or
principal business on the basis of sales of its shares which may be made through
such firms. However, the Subadvisers may place portfolio orders with qualified
broker-dealers who recommend the Company to clients, and may, when a number of
brokers and dealers can provide best price and execution on a particular
transaction, consider such recommendations by a broker or dealer in selecting
among broker-dealers.

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

     The Funds will not purchase any security, including U.S. Government
securities, during the existence of any underwriting or selling group relating
thereto of which PSI is a member, except to the extent permitted by SEC rules.

     During the years ended September 30, 1996, 1995 and 1994, the Company paid
$0, $965 and $3,247, respectively, in brokerage commissions to Prudential
Securities.

                     PURCHASE AND REDEMPTION OF FUND SHARES

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

     Each class represents an interest in the same assets of Prudential Active
Balanced Fund and is identical in all respects except that (i) each class is
subject to different sales charges and distribution and/or service expenses
(except for Class Z shares which are not subject to any sales charge or
distribution and/or service fees), which may affect performance, (ii) each class
has exclusive voting rights on any matter submitted to shareholders that relates
solely to its arrangements and has separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class, (iii) each class has a different exchange
privilege, (iv) only Class B shares have a conversion feature and (v) Class Z
shares are offered exclusively for sale to a limited group of investors. See
"Distributor" and "Shareholder Investment Account--Exchange Privilege."

SPECIMEN PRICE MAKE-UP

   
     Using the net asset value of Prudential Stock Index Fund at September 30,
1996, the maximum offering price of the Fund's shares is $16.06. For Prudential
Active Balanced Fund, under the current distribution arrangements between the
Company and the Distributor, Class A shares are sold with a maximum sales charge
of 5% and Class B*,
    

                                      B-26
<PAGE>

   
Class C* and Class Z shares are sold at net asset value. Using the net asset
value of Prudential Active Balanced Fund at September 30, 1996, the maximum
offering price of the Fund's shares is as follows:
    
                                                               PRUDENTIAL ACTIVE
                                                                 BALANCED FUND
                                                               -----------------
CLASS A**
Net asset value and redemption price per Class A share .......      $13.01
Maximum sales charge (5% of offering price) ..................         .68
                                                                    ------
Offering price to public .....................................      $13.69
                                                                    ======
CLASS B**
Net asset value, redemption price and offering price
  per Class B share* .........................................      $13.01
                                                                    ======
CLASS C**
Net asset value, redemption price and offering price
  per Class C share* .........................................      $13.01
                                                                    ======
CLASS Z
Net asset value, redemption price and offering price
  per Class Z share ..........................................      $13.01
                                                                    ======
- -------------
 * Class B and Class C shares are subject to a contingent deferred sales charge
 on certain redemptions. See "Shareholder Guide--How to Sell Your
 Shares--Contingent Deferred Sales Charges" in the Prospectus of Prudential
 Active Balanced Fund.
   
** Class A, Class B and Class C shares of Prudential Active Balanced Fund were
 not offered on September 30, 1996.
    
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES

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

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

          (a) an individual;

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

          (c) the individual's and spouse's Individual Retirement Account (IRA);

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

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

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

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

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

     The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in
pension, profit-sharing or other employee benefit plans qualified under Section
401 of the Internal Revenue Code and deferred compensation and annuity plans
under Sections 457 and 403(b)(7) of the Internal Revenue Code.

     RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of
Prudential Active Balanced Fund and shares of other Prudential Mutual Funds
(excluding money market funds other than those acquired pursuant to the


                                      B-27
<PAGE>

exchange privilege) to determine the reduced sales charge. The value of shares
held directly with the Transfer Agent and through Prudential Securities will not
be aggregated to determine the reduced sales charge. All shares must be held
either directly with the Transfer Agent or through Prudential Securities. The
value of existing holdings for purposes of determining the reduced sales charge
is calculated using the maximum offering or price (net asset value plus maximum
sales charge) as of the previous business day. See "How the Fund Values its
Shares" in the Prospectus of Prudential Active Balanced Fund. The Distributor
must be notified at the time of purchase that the investor is entitled to a
reduced sales charge. The reduced sales charges will be granted subject to
confirmation of the investor's holdings. Rights of Accumulation are not
available to individual participants in any retirement or group plans.

     LETTERS OF INTENT. Reduced sales charges 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 Prudential Active Balanced Fund and shares
of other Prudential Mutual Funds. All shares of Prudential Active Balanced 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
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the Transfer
Agent or through Prudential Securities. The Distributor must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charges will be granted subject to confirmation of the investor's
holdings. Letters of Intent are not available to individual participants in any
retirement or group plans.

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

     The Letter of Intent does not obligate the investor to purchase, nor the
Company to sell, the indicated amount. 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 sales charges 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 Prudential Active Balanced Fund pursuant to a Letter
of Intent should carefully read such Letter of Intent.

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

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

    Category Of Waiver                       Required Documentation
    ------------------                       ----------------------
 Death                                    A copy of the shareholder's death
                                          certificate or, in the case of a
                                          trust, a copy of the grantor's death
                                          certificate, plus a copy of the trust
                                          agreement identifying the grantor.

Disability--An individual will be         A copy of the Social Security
considered  disabled if he or she         Administration award letter 
is unable to engage in any                or a letter from a physician on the
that substantial gainful                  physician's letterhead
activity by reason of any                 stating the shareholder (or, in the
medically determinable physical or        case of a trust, the grantor) is
mental impairment which can be            permanently disabled. The letter must 
expected to result in death or to         also indicate the date of disability.
be of long-continued and indefinite
duration.

Distribution from an IRA or 403(b)        A copy of the distribution form
Custodial Account                         from the custodial firm indicating (i)
                                          the date of birth of the shareholder
                                          and (ii) that the shareholder is over
                                          age 591 @2 and is taking a normal
                                          distribution--signed by the
                                          shareholder.


                                      B-28
<PAGE>


    Category Of Waiver                       Required Documentation
    ------------------                       ----------------------
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.

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

                         SHAREHOLDER INVESTMENT ACCOUNT

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

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

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

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

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

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

       Prudential California Municipal Fund
        (California Money Market Series)

       Prudential Government Securities Trust
        (Money Market Series)
        (U.S. Treasury Money Market Series)

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

       Prudential MoneyMart Assets, Inc. (Class A shares)
       Prudential Tax-Free Money Fund, Inc.


                                      B-29
<PAGE>

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

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

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

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

     Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec.

     The Exchange Privilege may be modified, terminated or suspended on 60 days'
notice, and any fund, including a 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 of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(1)


                                      B-30
<PAGE>


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

<TABLE>
<CAPTION>

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

</TABLE>
- -------------
(1)  Source information concerning the costs of education at public and private
     universities is available from The College Board Annual Survey of Colleges,
     1993. Average costs for private institutions include tuition, fees, room
     and board for the 1993-1994 academic year.

(2)  The chart assumes an effective rate of return of 8% (assuming monthly
     compounding). This example is for illustrative purposes only and is not
     intended to reflect the performance of an investment in shares of a 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.

     See  "Automatic Savings Accumulation Plan."

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

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

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

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

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

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

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

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

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


                                      B-31
<PAGE>


TAX-DEFERRED RETIREMENT ACCOUNTS

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

                           TAX-DEFERRED COMPOUNDING(1)

 Contributions                          Personal
 Made Over:                              Savings           IRA
- --------------                          --------        --------
 10 years ....................          $ 26,165        $ 31,291
 15 years ....................            44,676          58,649
 20 years ....................            68,109          98,846
 25 years ....................            97,780         157,909
 30 years ....................           135,346         244,692

- -----------
(1)  The chart is for illustrative purposes only and does not represent the
     performance of a Fund or any specific investment. It shows taxable versus
     tax-deferred compounding for the periods and on the terms indicated.
     Earnings in the IRA account will be subject to tax when withdrawn from the
     account.

MUTUAL FUND PROGRAMS

     From time to time, the Company (or a portfolio of the Company, if
applicable) 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 promoted collectively. Typically, these programs are created with an
investment theme, e.g., to seek greater diversification, protection from
interest rate movements or access to different management styles. In the event
such a program is instituted, there may be a minimum investment requirement for
the program as a whole. A Fund may waive or reduce the minimum initial
investment requirements in connection with such a program.

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

                                 NET ASSET VALUE

     Portfolio securities of each Fund are generally valued as follows: (1)
Securities for which the primary market is on an exchange are valued at the last
sale price on such exchange on the day of valuation or, if there was no sale on
such day, at the average of readily available closing bid and asked prices on
such day; (2) Securities that are actively traded in the OTC market, including
listed securities for which the primary market is believed to be
over-the-counter, are valued at the average of the most recently quoted bid and
asked prices provided by a principal market maker; (3) Securities issued in
private placements are valued at the mean between the bid and asked prices
provided by primary market dealers or, if no primary dealers are able to provide
a market value, at fair value determined by a valuation committee of Trustees
(the Valuation Committee); (4) U.S. Government securities for which market
quotations are available are valued at a price provided by an independent
broker/dealer or pricing service; (5) Short-term debt securities, including
bonds, notes, debentures and other debt securities, and money market instruments
such as certificates of deposit, commercial paper, bankers' acceptances and
obligations of domestic and foreign banks, with remaining maturities of more
than 60 days for which reliable market quotations are readily available, are
valued at current market quotations as provided by an independent broker/dealer
or pricing service; (6) Short-term investments with remaining maturities of 60
days or less are valued at cost with interest accrued or discount amortized to
the date of maturity, unless the Trustees determine that such valuation does not
represent fair value; (7) Options on securities that are listed on an exchange
are valued at the last sales price at the close of trading on such exchange or,
if there was no sale on the applicable options exchange on such day, at the
average of the quoted bid and asked prices as of the close of such exchange; (8)
Futures contracts and options thereon traded on a commodities exchange or board
of trade are valued at the last sale price at the close of trading on such
exchange or board of trade or, if there was no sale on the applicable
commodities exchange or board of trade on


                                      B-32
<PAGE>


such day,  at the  average of quoted bid and asked  prices as of the close
of such exchange or board of trade; (9) Quotations of foreign securities in a
foreign currency shall be converted to U.S. dollar equivalents at the current
rate obtained from a recognized bank or dealer; (10) Forward currency exchange
contracts are valued at the current cost of covering or offsetting such
contracts; (11) OTC options are valued at the mean between bid and asked prices
provided by a dealer, with additional prices obtained for comparison, monthly
and as indicated by monitoring of the underlying securities; (12) Securities for
which market quotations are not available, other than private placements, are
valued at a price supplied by a pricing agent approved by the Trustees; (13)
Securities for which reliable market quotations are not available or for which
the pricing agent or principal market maker does not provide a valuation or
provides a valuation that, in the judgment of the applicable Subadviser, does
not represent fair value, are valued by the Valuation Committee on the basis of
cost of the security, transactions in comparable securities, relationships among
various securities and other factors determined by the Subadviser to materially
affect the value of the security. The Company may engage pricing services to
obtain any prices.

     Portfolio securities traded on more than one U.S. national securities
exchange or foreign securities exchange are valued at the last sale price on the
business day as of which such value is being determined at the close of the
exchange representing the principal market for such securities. The value of all
assets and liabilities expressed in foreign currencies will be converted into
U.S. dollar values at the current rate obtained from a recognized bank or
dealer. If such quotations are not available, the rate of exchange will be
determined in good faith by or under procedures established by the Trustees of
the Company.

     Trading in securities on European and Far Eastern securities exchanges and
OTC markets is normally completed well before the close of business on each
business day in New York (i.e., a day on which the NYSE is open for trading). In
addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all business days in New
York. Furthermore, trading takes place in Japanese markets on certain Saturdays
and in various foreign markets on days which are not business days in New York
and on which the Funds' net asset values are not calculated. Such calculation
does not take place contemporaneously with the determination of the prices of
the majority of the portfolio securities used in such calculation. Events
affecting the values of portfolio securities that occur between the time their
prices are determined and the close of the regular trading on the NYSE will not
be reflected in a Fund's calculation of net asset values unless, pursuant to
procedures adopted by the Trustees, the Subadviser deems that the particular
event would materially affect net asset value, in which case an adjustment will
be made.

     The proceeds received by each Fund for each issue or sale of its shares,
and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to such Fund and constitute the underlying assets of that Fund. The underlying
assets of each Fund will be segregated on the books of account, and will be
charged with the liabilities in respect to such Fund and with a share of the
general liabilities of the Company. Expenses with respect to any two or more
Funds are to be allocated in proportion to the net asset values of the
respective Funds except where allocations of direct expenses can otherwise be
fairly made.

                                      TAXES

     The following is a brief summary of some of the more important tax
considerations affecting the Company, the Funds and their shareholders. No
attempt is made to present a detailed explanation of all federal, state, local,
and foreign income tax considerations. Neither this discussion nor the tax
discussion in the Prospectus is intended to substitute for careful individual
tax planning. Accordingly, potential investors are urged to consult their own
tax advisers with specific reference to their own tax situation.

TAX CONSEQUENCES TO THE FUNDS

     As a separate entity for federal tax purposes, each Fund intends to
continue to qualify separately for tax treatment as a regulated investment
company (RIC) under subchapter M of the Internal Revenue Code. If so qualified,
each Fund will not be subject to federal income tax with respect to its net
investment income and net realized capital gains, if any, that are distributed
to its shareholders. In order to qualify for treatment as a RIC, each Fund will
have to meet income diversification, distribution, and certain other
requirements set forth in the Internal Revenue Code. If, in any year, a Fund
should fail to qualify under the Internal Revenue Code for tax treatment as a
RIC, the Fund would incur a regular federal corporate income tax on its taxable
income, if any, for that year.

     INCOME AND DIVERSIFICATION REQUIREMENTS. The income tests require each Fund
to derive (i) at least 90% of its gross income in each taxable year from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of stock, securities, or foreign currencies, or
other income (including gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies

                                      B-33
<PAGE>

(Income Requirement) and (ii) less than 30% of its gross income in each taxable
year from the sale or other disposition of (A) stock or securities held for less
than three months, (B) options, futures, or forward contracts (other than those
on foreign currencies) held for less than three months, and (C) foreign
currencies (or options, futures, or forward contracts on foreign currencies)
held for less than three months but only if such currencies (or options,
futures, or forward contracts) are not directly related to the Fund's principal
business of investing in stock or securities (or options or futures with respect
to stock or securities) ("Short-Short Limitation"). Each Fund also must
diversify its holdings so that, at the end of each quarter of its taxable year,
(i) at least 50% of the value of the Fund's total assets is represented by cash
and cash items, U.S. Government securities, securities of other RICs, and other
securities, with such other securities limited, in respect of any one issuer, to
an amount not greater in value than 5% of the Fund's total assets and not more
than 10% of the outstanding voting securities, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities or the securities of other RICs).

     DISTRIBUTION REQUIREMENT. Each Fund must distribute (or be deemed to have
distributed) 90% or more of its investment company taxable income (generally
consisting of net investment income, net short-term capital gain, and net gains
from certain foreign currency transactions) for each taxable year. Each Fund
also must meet certain other distribution requirements to avoid a 4%
nondeductible excise tax (these requirements are collectively referred to below
as the "RIC distribution requirements").

     ZERO COUPON SECURITIES AND ORIGINAL ISSUE DISCOUNT. The Funds may invest in
zero coupon securities and other securities issued with original issue discount.
Such securities generate current income subject to the distribution requirements
without providing cash available for distribution. The Funds do not anticipate
that such investments will adversely affect their ability to meet the RIC
distribution requirements.

     FOREIGN INVESTMENTS. If a Fund purchases shares in certain foreign
corporations called "passive foreign investment companies" (PFICs), the Fund may
be subject to U.S. federal income tax on a portion of any "excess distribution"
or gain from the disposition of such shares even if such income is distributed
as a dividend by the Fund to its shareholders. Because a credit for this tax
could not be passed through to shareholders, the tax effectively would reduce
the Fund's economic return from its PFIC investment. Additional charges in the
nature of interest may be imposed on a PFIC investor in respect of deferred
taxes arising from such distributions or gains. If a Fund were to invest in a
PFIC and elected to treat the PFIC as a "qualified electing fund" under the
Internal Revenue Code, then in lieu of the foregoing tax and interest, the Fund
might be required to include in income each year a portion of the ordinary
earnings and net capital gains of the qualified electing fund, even if not
distributed to the Fund, and such amounts would be subject to the RIC
distribution requirements. Management of the Company will consider these
potential tax consequences in evaluating whether to invest in a PFIC.

     Net investment income or capital gains earned by a Fund's investments in
foreign securities may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries that entitle the Funds to a reduced rate of tax or exemption from tax
on this related income and gains. It is impossible to determine the effective
rate of foreign tax in advance since the amount and the countries in which the
Fund's assets will be invested are not known. The Fund intends to operate so as
to qualify for treaty-reduced rates of tax where applicable.

     CURRENCY FLUCTUATIONS--SECTION 988 GAINS AND LOSSES. Gains or losses
attributable to fluctuations in exchange rates between the time Prudential
Active Balanced Fund accrues dividends, 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, generally will
be treated as ordinary income or loss. Similarly, gains or losses on the
disposition of foreign currencies or debt securities held by the Fund
denominated in a foreign currency, if any, to the extent attributable to
fluctuations in exchange rates between the acquisition and disposition dates,
generally will also be treated as ordinary income or loss. These gains and
losses are referred to under the Internal Revenue Code as "Section 988" gains
and losses.

     Furthermore, foreign currency gains and losses attributable to certain
forward contracts, futures contracts that are not "regulated futures contracts,"
equity options and unlisted non-equity options also will be treated as Section
988 gains and losses. (In certain circumstances, however, the Company may elect
capital gain or loss treatment for such transactions.) Section 988 gains and
losses will increase or decrease the amount of the Company's investment company
taxable income available for distribution. The Company does not anticipate that
any Section 988 gains and losses the Fund may realize will adversely affect the
ability of the Fund to qualify as a RIC under the Internal Revenue Code.

     OPTION AND FUTURES TRANSACTIONS. The use of hedging strategies, such as
writing (selling) and purchasing options and futures contracts and entering into
forward contracts, involves complex rules that will determine for income tax


                                      B-34
<PAGE>

purposes the character and timing of recognition of the gains and losses each
Fund realizes in connection therewith. Income from foreign currencies (except
certain gains therefrom that may be excluded by future regulations), and income
from transactions in options, futures, and forward contracts derived by a Fund
with respect to its business of investing in stock, securities, or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short Limitation
if they are held for less than three months. Income from the disposition of
foreign currencies, and options, futures, and forward contracts thereon, that
are not directly related to the Fund's principal business of investing in stock
or securities (or options and futures with respect thereto) also will be subject
to the Short-Short Limitation if they are held for less than three months.

         If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. Each
Fund will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent a Fund does not so qualify, it may be forced
to defer the closing out of certain options, futures, and forward contracts
beyond the time when it otherwise would be advantageous to do so, in order for
the Fund to qualify as a RIC.

     Under Section 1256 of the Internal Revenue Code, gain or loss on certain
options, futures contracts, options on futures contracts (Section 1256
contracts), other than Section 1256 contracts that are part of a "mixed
straddle" with respect to which a Fund has made an election not to have the
following rules apply, will be treated as 60% long-term and 40% short-term
capital gain or loss (blended gain or loss). In addition, Section 1256 contracts
held by a Fund at the end of each taxable year will be required to be treated as
sold at fair market value on the last day of such taxable year for federal
income tax purposes and the resulting gain or loss will be treated as blended
gain or loss and will affect the amount of distributions required to be made by
a Fund in order to satisfy the RIC distribution requirements.

     Offsetting positions held by a Fund involving certain futures and options
transactions may be considered to constitute "straddles" which are subject to
special rules under the Internal Revenue Code. Under these rules, depending on
different elections which may be made by the Company, the amount, timing and
character of gain and loss realized by the Company and its shareholders may be
affected.

TAX CONSEQUENCES TO SHAREHOLDERS

     Ordinarily, distributions of a RIC's investment company taxable income
would be taxable to shareholders as ordinary income to the extent of the
earnings and profits of the RIC. To the extent that a distribution exceeds the
RIC's earnings and profits, it would be treated as a nontaxable return of
capital to the extent of the shareholder's tax basis in the shares of the RIC.
Distributions of net capital gain ordinarily would be taxable as long-term
capital gains. The rules discussed in this paragraph generally would apply
regardless of the length of time a shareholder holds the shares of the RIC.

     The Company's present intention is to offer shares of the Funds primarily
to qualified retirement plans and other tax-exempt investors to whom the
foregoing rules do not apply. The Funds intend to satisfy the RIC distribution
requirements by distributions in the form of additional shares to its
shareholders. However, shareholders may redeem their shares, including shares
received as dividends or distributions, at any time for cash. Distributions are
generally not taxable to the participants in the shareholder plans.
Distributions from a qualified retirement plan to a participant or beneficiary
are subject to special rules. Because the effect of these rules varies greatly
with individual situations, potential investors are urged to consult their own
tax advisers.

     TAX CONSEQUENCES TO NON-EXEMPT SHAREHOLDERS. Dividends and other
distributions declared by a Fund in October, November or December of any year
and payable to shareholders of record on a date in any of those months are
deemed to have been paid by the Fund and received by the shareholders on
December 31 of that year if the distributions are paid by the Fund during the
following January. Accordingly, those distributions will be taxed to
shareholders that are not tax-exempt entities for the year in which that
December 31 falls.

     If shares of a Fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Non-exempt investors also should be aware that if shares are purchased shortly
before the record date for a dividend or other distribution, the purchaser will
receive some portion of the purchase price back as a taxable distribution.

                                      B-35
<PAGE>


                        PERFORMANCE AND YIELD INFORMATION

     From time to time, the Company may quote a Fund's yield or total return in
advertisements or in advertisements, sales literature, reports and other
communications to shareholders.

AVERAGE ANNUAL TOTAL RETURN

     A Fund's "average annual total return" is computed according to a formula
prescribed by the SEC, expressed as follows:

                                 P(1+T) n = ERV

Where:   P  = a hypothetical initial payment of $1,000.
         T  = average annual total return.
         n  = number of years.
       ERV  = Ending Redeemable Value (ERV) at the end of a 1-, 5- or 10-year
              period (or fractional portion thereof) of a hypothetical $1,000
              investment made at the beginning of a 1-, 5- or 10-year period
              assuming reinvestment of all dividends and distributions and the
              effect of the maximum annual fee for participation in the
              Company.
   
     The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period. A Fund's net investment income changes in response
to fluctuations in interest rates and the expenses of the Fund. The Average
Annual Total Return for the year ended September 30, 1996 and for the period
from commencement of each Fund's operations (November 5, 1992 for Prudential
Stock Index Fund, and January 4, 1993 for Prudential Active Balanced Fund)
through September 30, 1996 was: Prudential Active Balanced, 9.1% and 10.1%,
respectively; Prudential Stock Index, 19.7% and 16.0%, respectively. These
amounts are computed by assuming a hypothetical initial payment of $1,000. It
was then assumed that all of the dividends and distributions paid by the Fund
over the relevant time period were reinvested. It was then assumed that at the
end of the time period, the entire amount was redeemed.
    

AGGREGATE TOTAL RETURN

     A Fund's aggregate total return represents the cumulative change in the
value of an investment in the Fund for the specified period and is computed by
the following formula:

                                     ERV - P
                                     -------
                                        P

Where:    P = a hypothetical initial payment of $1,000.

        ERV = Ending Redeemable Value (ERV) at the end of a 1-, 5- or 10-year
              period (or fractional portion thereof) of a hypothetical $1,000
              investment made at the beginning of a 1-, 5- or 10-year period
              assuming reinvestment of all dividends and distributions and the
              effect of the maximum annual fee for participation in the Company.

     The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period.

     A Fund's net investment income changes in response to fluctuations in
interest rates and the expenses of the Fund. Consequently, the given performance
quotations should not be considered as representative of the Fund's performance
for any specified period in the future.

                                      B-36

<PAGE>

   
     A Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of a Fund's performance for any specified period in the future.
In addition, because performance will fluctuate, it may not provide a basis for
comparing an investment in the Fund with certain bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors
comparing a Fund's performance with that of other mutual funds should give
consideration to the quality and maturity of the respective investment
companies' portfolio securities. The aggregate total return for the period from
commencement of each Fund's operations through September 30, 1996 was:
Prudential Active Balanced, 43.4 % and Prudential Stock Index, 78.3%.
    

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

                                      [CRC]

                                     [CHART]



- ---------
(1) Source: Ibbotson Associates Stocks, Bonds, Bills and Inflation--1995
Yearbook (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. Common stock returns
are based on the Standard and Poor's 500 Stock Index, a market-weighted,
unmanaged index of 500 common stock 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.

  CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND INDEPENDENT ACCOUNTANTS

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

     Prudential Mutual Fund Services, Inc., Raritan Plaza One, Edison, New
Jersey 08837 serves as the Transfer and Dividend Disbursing Agent of each Fund.
PMFS is a wholly owned subsidiary of PMF. PMFS provides customary transfer
agency services to the Company, 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 $9.50, 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 $0.20. PMFS is also reimbursed for its out-of-pocket expenses, including, but
not limited to, postage, stationery, printing allocable communications expenses
and other costs.

     Deloitte & Touche LLP, Two World Financial Center, New York, New York
10281, serves as the Company's independent accountants, and in that capacity
audits the annual reports of each Fund. Only two of the Funds included in the
financial statements, Prudential Active Balanced Fund and Prudential Stock Index
Fund, currently exist.

                                      B-37

<PAGE>

Portfolio of Investments as of        THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996                    ACTIVE BALANCED FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                
Shares      Description                     Value (Note 1)      
<C>         <S>                                    <C>          
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--79.3%
COMMON STOCKS--46.9%
- ------------------------------------------------------------    
Aerospace/Defense--0.3%
    5,600   Boeing Co.                             $     529,200
- ------------------------------------------------------------
Airlines--2.1%
   16,300   AMR Corp.(a)                               1,297,887
   26,800   Delta Airlines, Inc.                       1,929,600
                                                   -------------
                                                       3,227,487
- ------------------------------------------------------------
Automobiles & Trucks--2.0%
   65,500   General Motors Corp.                       3,144,000
- ------------------------------------------------------------
Banking--4.2%
   19,500   Boatmen's Bancshares                       1,089,562
   18,400   Chase Manhattan Corp.                      1,474,300
   48,500   Fleet Financial Group, Inc.                2,158,250
  147,000   Hibernia Corp.                             1,672,125
                                                   -------------
                                                       6,394,237
- ------------------------------------------------------------
Business Services--1.4%
   23,000   Manpower, Inc.                               764,750
   49,000   Ryder System, Inc.                         1,451,625
                                                   -------------
                                                       2,216,375
- ------------------------------------------------------------
Chemicals--2.2%
   39,100   Betz Laboratories, Inc.                    2,052,750
   43,100   Dexter Corp.                               1,287,612
                                                   -------------
                                                       3,340,362
- ------------------------------------------------------------
Commercial Services--1.2%
   21,850   CUC International, Inc.(a)                   871,269
   18,900   York International Corp.                     914,287
                                                   -------------
                                                       1,785,556
Computer Software & Services--1.6%
   34,700   Geoworks                               $     902,200
   43,000   Macromedia, Inc.(a)                          892,250
   13,700   Symbol Technologies, Inc.(a)                 630,200
                                                   -------------
                                                       2,424,650
- ------------------------------------------------------------
Computers--4.0%
   29,300   Digital Equipment Corp.                    1,047,475
   24,000   Hewlett-Packard Co.                        1,170,000
   31,600   International Business Machines
              Corp.                                    3,934,200
                                                   -------------
                                                       6,151,675
- ------------------------------------------------------------
Drugs & Medical Supplies--1.3%
   15,500   Smithkline Beecham PLC (ADR)
              (United Kingdom)                           943,563
   35,900   Vertex Pharmaceuticals, Inc.(a)            1,059,050
                                                   -------------
                                                       2,002,613
- ------------------------------------------------------------
Electronics--0.3%
   35,600   International Rectifier Corp.(a)             493,950
- ------------------------------------------------------------
Insurance--2.3%
   23,400   CIGNA Corp.                                2,805,075
   14,700   The PMI Group, Inc.                          780,938
                                                   -------------
                                                       3,586,013
- ------------------------------------------------------------
Leisure--0.4%
   12,800   ITT Corp. (New)                              558,400
- ------------------------------------------------------------
Lodging--0.9%
   48,800   Hilton Hotels Corp.                        1,384,700
</TABLE>
- -------------------------------------------------------------------------------
                                             See Notes to Financial Statements.
 

                                      B-38
<PAGE>

Portfolio of Investments as of        THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996                    ACTIVE BALANCED FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                
Shares      Description                     Value (Note 1)      
<C>         <S>                                    <C>          
- ------------------------------------------------------------    
Machinery--1.2%
   13,347   Harnischfeger Industries, Inc.         $     503,849
   40,500   Kennametal, Inc.                           1,392,188
                                                   -------------
                                                       1,896,037
- ------------------------------------------------------------
Media--7.5%
   81,700   Dow Jones & Co., Inc.                      3,022,900
   13,800   Dun & Bradstreet Corp.                       822,825
   45,000   McGraw-Hill Companies, Inc.                1,918,125
   78,300   New York Times Co.                         2,642,625
   19,500   Omnicom Group                                911,625
    9,200   Scholastic Corp.(a)                          667,000
   19,000   Tribune Co.                                1,482,000
                                                   -------------
                                                      11,467,100
- ------------------------------------------------------------
Mineral Resources--1.0%
   32,574   Newmont Mining Corp.                       1,539,122
- ------------------------------------------------------------
Miscellaneous Basic Industry--4.2%
   80,550   Avalon Properties, Inc.                    1,872,787
   16,500   Champion International Corp.                 756,938
   15,400   Mead Corp.                                   902,825
   27,000   Reynolds Metals Co.                        1,380,375
   85,300   Westinghouse Electric Corp.                1,588,712
                                                   -------------
                                                       6,501,637
- ------------------------------------------------------------
Office Equipment & Supplies--0.5%
   15,200   Alco Standard Corp.                          758,100
Petroleum--1.4%
   27,900   Amerada Hess Corp.                     $   1,475,213
   17,300   Unocal Corp.                                 622,800
                                                   -------------
                                                       2,098,013
- ------------------------------------------------------------
Petroleum Services--2.5%
   25,200   Anadarko Petroleum Corp.                   1,408,050
   79,900   Dresser Industries, Inc.                   2,377,025
                                                   -------------
                                                       3,785,075
- ------------------------------------------------------------
Railroads--1.1%
   22,461   Union Pacific Corp.                        1,645,268
- ------------------------------------------------------------
Retail--1.6%
    9,800   Harcourt General, Inc.                       541,450
  103,679   Limited, Inc.                              1,982,861
                                                   -------------
                                                       2,524,311
- ------------------------------------------------------------
Steel - Producers--0.6%
   30,100   USX Corp. -U.S. Steel Group                  857,850
- ------------------------------------------------------------
Technology--0.4%
   33,320   Chiron Corp.(a)                              633,080
- ------------------------------------------------------------
Telecommunications--0.7%
   41,200   MCI Communications Corp.                   1,055,750
                                                   -------------
            Total common stocks
              (cost $61,594,335)                      72,000,561
                                                   -------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.                                            
 

                                      B-39
<PAGE>

THE PRUDENTIAL INSTITUTIONAL FUND
ACTIVE BALANCED FUND
Portfolio of Investments as of September 30, 1996
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000)       Description                     Value (Note 1)
<C>         <S>                                    <C>       
- ------------------------------------------------------------
DEBT OBLIGATIONS--32.4%
- ------------------------------------------------------------
U.S. Government Securities--32.4%
   $3,230   United States Treasury Bond,
            7.875%, 2/15/21                        $   3,527,774
            United States Treasury Notes,
    6,575   8.875%, 11/15/98                           6,925,316
    5,510   7.50%, 11/15/01                            5,748,473
   17,435   6.25%, 2/15/03                            17,157,086
   17,190   5.75%, 8/15/03                            16,397,713
                                                   -------------
            Total debt obligations
              (cost $49,168,316)                      49,756,362
                                                   -------------
            Total long-term investments
              (cost $110,762,651)                    121,756,923
                                                   -------------
SHORT-TERM INVESTMENT--20.3%
- ------------------------------------------------------------
Repurchase Agreement--20.3%
   31,159   Joint Repurchase Agreement Account,
              5.72%, 10/01/96 (Note 4)
              (cost $31,159,000)                      31,159,000
- ------------------------------------------------------------
Total Investments--99.6%
            (cost $141,921,651; Note 3)              152,915,923
            Other assets in excess of
              liabilities--0.4%                          672,374
                                                   -------------
            Net Assets--100%                       $ 153,588,297
                                                   -------------
                                                   -------------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
- -------------------------------------------------------------------------------
                                             See Notes to Financial Statements.
 

                                      B-40
<PAGE>
                                           THE PRUDENTIAL INSTITUTIONAL FUND
Statement of Assets and Liabilities        ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<S>                                                                                                          <C>
Assets                                                                                                      September 30, 1996
Investments, at value (cost $141,921,651)..............................................................         $152,915,923
Cash...................................................................................................                  709
Receivable for investments sold........................................................................            4,101,702
Interest and dividends receivable......................................................................              786,652
Receivable for Fund shares sold........................................................................              200,595
Deferred expenses and other assets.....................................................................               20,549
                                                                                                             ------------------
    Total assets.......................................................................................          158,026,130
                                                                                                             ------------------
Liabilities
Payable for investments purchased......................................................................            4,175,455
Payable for Fund shares reacquired.....................................................................               98,648
Management fee payable.................................................................................               83,648
Accrued expenses.......................................................................................               63,447
Administration fee payable.............................................................................               16,635
                                                                                                             ------------------
    Total liabilities..................................................................................            4,437,833
                                                                                                             ------------------
Net Assets.............................................................................................         $153,588,297
                                                                                                             ------------------
                                                                                                             ------------------
Net assets were comprised of:
   Shares of beneficial interest, at par...............................................................         $     11,806
   Paid-in capital in excess of par....................................................................          130,668,621
                                                                                                             ------------------
                                                                                                                 130,680,427
   Undistributed net investment income.................................................................            3,302,693
   Accumulated net realized gain on investments........................................................            8,610,905
   Net unrealized appreciation on investments..........................................................           10,994,272
                                                                                                             ------------------
Net assets, September 30, 1996.........................................................................         $153,588,297
                                                                                                             ------------------
                                                                                                             ------------------
Shares of beneficial interest issued and outstanding...................................................           11,806,338
                                                                                                             ------------------
                                                                                                             ------------------
Net asset value per share..............................................................................               $13.01
                                                                                                             ------------------
                                                                                                             ------------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.                                            
 

                                      B-41
<PAGE>

THE PRUDENTIAL INSTITUTIONAL FUND
ACTIVE BALANCED FUND
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
                                                Year Ended
Net Investment Income                       September 30, 1996
<S>                                         <C>
Income
   Interest..............................      $  4,497,838
   Dividends (net of foreign withholding
      taxes of $2,577)...................         1,314,110
                                            ------------------
    Total income.........................         5,811,948
                                            ------------------
Expenses
   Management fee........................           994,182
   Administration fee....................           188,579
   Custodian's fees and expenses.........            80,000
   Registration fees.....................            40,000
   Reports to shareholders...............            34,000
   Transfer agent's fees and expenses....            32,350
   Legal fees and expenses...............            15,000
   Amortization of organization
      expenses...........................            13,249
   Audit fee and expenses................            12,500
   Trustees' fees........................            12,000
   Miscellaneous.........................             6,057
                                            ------------------
    Total expenses.......................         1,427,917
Less: Expense subsidy (Note 2)...........            (7,656)
                                            ------------------
   Net expenses..........................         1,420,261
                                            ------------------
Net investment income....................         4,391,687
                                            ------------------
Realized and Unrealized Gain on
Investment Transactions
Net realized gain on investment
   transactions..........................         9,129,045
Net change in unrealized appreciation on
   investments...........................        (1,120,181)
                                            ------------------
Net gain on investments..................         8,008,864
                                            ------------------
Net Increase in Net Assets
Resulting from Operations................      $ 12,400,551
                                            ------------------
                                            ------------------
</TABLE>


THE PRUDENTIAL INSTITUTIONAL FUND
ACTIVE BALANCED FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase                              Year Ended September 30,
<S>                                 <C>             <C>
in Net Assets                           1996            1995
Operations
   Net investment income..........  $  4,391,687    $  3,695,777
   Net realized gain on
      investment..................     9,129,045       1,585,229
   Net change in unrealized
      appreciation on
      investments.................    (1,120,181)     12,809,504
                                    ------------    ------------
   Net increase in net assets
      resulting from operations...    12,400,551      18,090,510
                                    ------------    ------------
Dividends and distributions
   Dividends to shareholders from
      net investment income.......    (3,972,955)     (2,260,245)
                                    ------------    ------------
   Distributions to shareholders
      from net realized gains.....    (1,932,789)       (272,788)
                                    ------------    ------------
Fund share transactions
   Net proceeds from shares
      sold........................    36,454,403      54,908,716
   Net asset value of shares
      issued to shareholders in
      reinvestment of dividends
      and distributions...........     5,905,744       2,533,033
   Cost of shares redeemed........   (28,618,544)    (20,823,769)
                                    ------------    ------------
   Net increase in net assets from
      Fund share transactions.....    13,741,603      36,617,980
                                    ------------    ------------
Net increase......................    20,236,410      52,175,457
Net Assets
Beginning of year.................   133,351,887      81,176,430
                                    ------------    ------------
End of year.......................  $153,588,297    $133,351,887
                                    ------------    ------------
                                    ------------    ------------
</TABLE>
- -------------------------------------------------------------------------------
                                             See Notes to Financial Statements.
 

                                      B-42
<PAGE>
                                             THE PRUDENTIAL INSTITUTIONAL FUND
Notes to Financial Statements                ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
The Prudential Institutional Fund, (the ``Company'') is registered under the
Investment Company Act of 1940 as an open-end, diversified management investment
company. The Company was established as a Delaware business trust on May 11,
1992 and currently consists of two separate funds: Stock Index Fund and Active
Balanced Fund (the ``Fund''). Prior to September 21, 1996 the Company consisted
of seven separate funds, five of which were subsequently reorganized and
combined with existing funds in the Prudential Mutual Funds family of funds (see
Note 6.)

The Company had no operations until July 7, 1992 when 10,000 shares of
beneficial interest of the Company were sold for $100,000 to Prudential
Institutional Fund Management, Inc. (``PIFM''). Investment operations of the
Fund commenced on January 4, 1993. The Fund's investment objective is to achieve
total returns approaching equity returns, while accepting less risk than an
all-equity portfolio, through an actively-managed portfolio of equity
securities, fixed income securities and money market instruments.
- ------------------------------------------------------------
Note 1. Accounting Policies

The following is a summary of significant accounting policies followed by the
Fund.

Securities Valuation: Securities, including options, warrants, futures contracts
and options thereon, for which the primary market is on a national securities
exchange, commodities exchange or board of trade and NASDAQ national market
equity securities are valued at the last sale price on such exchange or board of
trade on the date of valuation or, if there was no sale on such day, at the
average of readily closing bid and asked prices quoted on such day.

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, shall be valued at the average of the most recently quoted bid
and asked prices provided by a principal market maker or dealer.

U.S. government securities for which market quotations are available shall be
valued at a price provided by an independent broker/dealer or pricing service.

Securities for which reliable market quotations are not available or for which
the pricing agent or principal market maker does not provide a valuation or
provides a valuation that, in the judgement of the subadviser, does not
represent fair value, shall by valued at fair value as determined under
procedures established by the Trustees.

In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians, as the case may be under
triparty repurchase agreements, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines or, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.

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

Dividends and Distributions: Dividends and distributions of the Fund are
declared in cash and automatically reinvested in additional shares of the Fund.
The Fund will declare and distribute its net investment income and net capital
gains, if any, at least annually. Dividends and distributions are recorded on
the ex-dividend date.

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

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

Withholding taxes on foreign dividends have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
Deferred Organizational Expenses: Approximately $450,000 of costs were incurred
in connection with the organization and initial registration of the Company and
have been deferred and are being amortized ratably over the date each of the
Funds' commenced investment operations.
- --------------------------------------------------------------------------------

                                      B-43
<PAGE>

                                             THE PRUDENTIAL INSTITUTIONAL FUND
Notes to Financial Statements                ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
Note 2. Agreements

The Fund has a management agreement with PIFM through October 30, 1996. Pursuant
to this agreement, PIFM has responsibility for all investment advisory services
and supervises the subadviser's performance of such services.

PIFM has a subadvisory agreement with Jennison Associates Capital Corp.
(''Jennison'') through October 30, 1996. Jennison furnishes investment advisory
services in connection with the management of the Fund. PIFM will pay for the
costs and expenses attributable to the subadvisory agreements and the salaries
and expenses of all personnel of the Fund except for fees and expenses of
unaffiliated Trustees. The Fund will bear all other costs and expenses.

The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .70 of 1% of the average daily net assets of the Fund.

Effective October 31, 1996 the Fund will enter into a management agreement with
Prudential Mutual Fund Management LLC (``PMF''). Pursuant to this agreement PMF
will have responsibility for all investment advisory services. PMF will enter
into a subadvisory agreement with Jennison. Jennison, subject to the supervision
of PMF, will manage the assets of the Fund in accordance with its investment
objectives and policies and in a manner consistent with the previous
arrangement. PMF pays for the compensation of officers of the Fund, occupancy
and certain clerical and bookkeeping costs of the Fund. The Fund will bear all
other costs and expenses.

Effective October 31, 1996 the management fee paid PMF will be computed daily
and payable monthly at an annual rate of .65 of 1% of the average daily net
assets of the Fund. Pursuant to the subadvisory agreement, Jennison is
compensated by PMF for its services at an annual rate of .30 of 1% of the Fund's
average daily net assets up to and including $300 million and .25 of 1% of the
Fund's average daily net assets in excess of $300 million.

PIFM voluntarily agreed to subsidize a portion of the operating expenses of the
Fund until October 30, 1996. Such expenses may be recovered by PIFM through
October 30, 1996 so long as the total expense ratio does not exceed the
predetermined level set forth in the Fund's prospectus of 1.00% per annum. For
the year ended September 30, 1996, PIFM subsidized $7,656 of the expenses of the
Fund (.005% of the average net assets of the Fund/$0.0006 per share).

The Fund has an administration agreement with PMF through October 30, 1996. The
administration fee paid PMF is computed daily and payable monthly, at an annual
rate of .17% of the Company's average daily net assets up to $250 million and
 .15% of the Company's average daily net assets in excess of $250 million. PMF
will furnish to the Fund such services as the Fund may require in connection
with the administration of the Fund's business affairs. PMF will also provide
certain transfer agent services through its wholly-owned subsidiary, Prudential
Mutual Fund Services, Inc. (``PMFS''). For such services, PMFS will be paid .03%
of the Company's average daily net assets up to $250 million and .02% of the
Company's average daily net assets in excess of $250 million from the
administration fee paid to PMF. PMFS will enter into a separate transfer agency
agreement directly with the Fund.

Effective October 31, 1996 Prudential Securities Incorporated (``PSI'') will
become the distributor of the Fund's Class A, Class B and Class C shares. PSI
will also incur 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.

Pursuant to plans of distribution (the ``Class A, B and C plans''), the Fund
compensates 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 Class A, Class B and Class C plans
will be .25%, 1% and 1%, respectively, of the average daily net assets of the
Fund.

PIFM, Jennison, PMF and PSI are indirect wholly-owned subsidiaries of The
Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the year ended September 30, 1996 aggregated $65,518,520 and $59,659,372,
respectively.

The cost basis of investments for federal income tax purposes is $142,086,519 As
of September 30, 1996, net unrealized appreciation for federal income tax
purposes was $10,829,404 (gross unrealized appreciation--$11,585,277, gross
unrealized depreciation--$755,872).
- --------------------------------------------------------------------------------

                                      B-44
<PAGE>
                                             THE PRUDENTIAL INSTITUTIONAL FUND
Notes to Financial Statements                ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
Note 4. Joint Repurchase Agreement Account

The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. At September 30, 1996, the Fund
had a 3.12% undivided interest in the repurchase agreements in the joint
account. As of such date, each repurchase agreement in the joint account and the
collateral therefore was as follows:

Bear, Stearns & Co., Inc., 5.72%, in the principal amount of $333,000,000,
repurchase price $333,052,910, due 10/1/96. The value of the collateral
including accrued interest was $339,757,925.

J.P. Morgan Securities, Inc., 5.70%, in the principal amount of $109,000,000,
repurchase price $109,017,258, due 10/1/96. The value of the collateral
including accrued interest was $111,181,257.

Goldman, Sachs & Co., Inc., 5.70%, in the principal amount of $333,000,000,
repurchase price $333,052,725, due 10/1/96. The value of the collateral
including accrued interest was $339,860,615.

Smith Barney, Inc., 5.75%, in the principal amount of $224,000,000, repurchase
price $224,035,778, due 10/1/96. The value of the collateral including accrued
interest was $228,481,010.
- ------------------------------------------------------------
Note 5. Capital
The Fund has authorized an unlimited number of shares of beneficial interest at
$.001 par value per share. Transactions in shares of beneficial interest during
the fiscal years ended September 30, 1996 and September 30, 1995 were as
follows:

<TABLE>
<CAPTION>
                                                Year ended September 30,
                                               ---------------------------
                                                  1996             1995
                                               ----------       ----------
<S>                                            <C>              <C>
Shares sold..................................   2,893,381        4,883,689
Shares issued in reinvestment of dividends
 and distributions...........................     483,285          242,395
Shares reacquired............................  (2,273,501)      (1,856,069)
                                               ----------       ----------
Net increase.................................   1,103,165        3,270,015
                                               ----------       ----------
                                               ----------       ----------
</TABLE>
 
Of the shares outstanding at September 30, 1996, PIFM and affiliates owned
2,487,564 shares of the Fund.

Note 6. Reorganization
On May 17, 1996, the Trustees of the Company approved an Agreement and a Plan of
Reorganization (the ``Plan of Reorganization'') for the Company. The Plan of
Reorganization was approved by shareholders on September 6, 1996 and October 30,
1996.

Under the Plan of Reorganization, all of the assets and liabilities of the
Growth Stock Fund, Balanced Fund, Income Fund and Money Market Fund (``Series'')
were transferred at net asset value for equivalent value Class Z shares of
Prudential Jennison Fund, Inc., Prudential Allocation Fund--Balanced Portfolio,
Prudential Government Income Fund, Inc. and Prudential MoneyMart Assets, Inc.,
respectively. These Series then ceased operations.

International Stock Fund joined the Prudential Global Fund as separate series of
a newly named Prudential World Fund. Existing shareholders became Class Z
shareholders and the International Stock Fund also began offering Classes A, B
and C shares.

Stock Index Fund and the Fund remained with The Prudential Institutional Fund
(to be renamed the Prudential Dryden Fund) as separate funds. Existing
shareholders of the Fund became Class Z shareholders and the Fund will begin
offering Classes A, B and C shares. Stock Index Fund will offer a single class
of shares. Effective October 31, 1996 these funds will be managed by PMF, PMFS
will provide transfer agency services and PSI will act as distributor.
- --------------------------------------------------------------------------------
                                                                               
 
                                      B-45
<PAGE>
                                            THE PRUDENTIAL INSTITUTIONAL FUND
Financial Highlights                        ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                                January 4,
                                                                                                                  1993(a)
                                                                            Year Ended September 30,              Through
                                                                       -----------------------------------     September 30,
                                                                          1996          1995        1994           1993
                                                                       ----------     --------     -------     -------------
<S>                                                                    <C>            <C>          <C>         <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...............................     $  12.46      $  10.92     $ 11.05        $ 10.00
                                                                       ----------     --------     -------        -------

Income from investment operations:
Net investment income(b)...........................................          .29           .33         .24            .21
Net realized and unrealized gain (loss) on investment
   transactions....................................................          .81          1.54        (.12)           .84
                                                                       ----------     --------     -------        -------
   Total from investment operations................................         1.10          1.87         .12           1.05
                                                                       ----------     --------     -------        -------
Less distributions:
Dividends from net investment income...............................         (.37)         (.29)       (.14)            --
Distributions from net realized gains..............................         (.18)         (.04)       (.11)            --
                                                                       ----------     --------     -------        -------
   Total distributions.............................................         (.55)         (.33)       (.25)            --
                                                                       ----------     --------     -------        -------
Net asset value, end of period.....................................     $  13.01      $  12.46     $ 10.92        $ 11.05
                                                                       ----------     --------     -------        -------
                                                                       ----------     --------     -------        -------
TOTAL RETURN(d)....................................................         9.11%        17.66%       1.07%         10.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....................................     $153,588      $133,352     $81,176        $38,786
Average net assets (000)...........................................     $142,026      $104,821     $58,992        $12,815
Ratios to average net assets:(b)
   Expenses........................................................         1.00%         1.00%       1.00%          1.00%(c)
   Net investment income...........................................         3.09%         3.53%       3.06%          2.68%(c)
Portfolio turnover rate............................................           51%           30%         40%            47%
Average commission rate paid per share.............................     $  .0654           N/A         N/A            N/A
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) 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 return for periods of 
    less than a full year are not annualized. Total return includes the effect 
    of expense subsidies.
N/A--Data not required for these periods.
- --------------------------------------------------------------------------------
                                              See Notes to Financial Statements.
 

                                      B-46
<PAGE>
                                             THE PRUDENTIAL INSTITUTIONAL FUND
Report to Independent Accountants            ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
The Prudential Institutional Fund--Active Balanced Fund

We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Prudential Institutional Fund--Active
Balanced Fund as of September 30, 1996, the related statements of operations for
the year then ended and of changes in net assets for each of the two years in
the period then ended, and the financial highlights for the three years in the
period then ended and for the period January 4, 1993 (commencement of investment
operations) to September 30, 1993. These financial statements and financial
highlights are the responsibility of the Portfolio's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
September 30, 1996 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Prudential
Institutional Fund--Active Balanced Fund as of September 30, 1996, the results
of its operations, the changes in its net assets and the financial highlights
for the respective stated periods in conformity with generally accepted
accounting principles.

DELOITTE & TOUCHE LLP
New York, New York
November 13, 1996


                                      B-47

<PAGE>

Portfolio of Investments as of              THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996                          STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                
Shares      Description                     Value (Note 1)      
<C>         <S>                                    <C>          
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--94.0%
COMMON STOCKS AND EQUIVALENTS--94.0%
- ------------------------------------------------------------ 
Aerospace/Defense--2.1%
   9,400   Allied-Signal, Inc.                      $     619,225
  11,500   Boeing Co.                                   1,086,750
   2,100   General Dynamics Corp.                         144,638
   6,630   Lockheed Martin Corp.                          597,529
   7,300   McDonnell Douglas Corp.                        383,250
   1,900   Northrop Grumman Corp.                         152,475
   7,900   Raytheon Co.                                   439,437
   7,200   Rockwell International Corp.                   405,900
                                                    -------------
                                                        3,829,204
- ------------------------------------------------------------
Airlines--0.3%
   2,950   AMR Corp.(a)                                   234,894
   2,600   Delta Airlines, Inc.                           187,200
   4,700   Southwest Airlines Co.                         107,512
   2,300   USAir Group, Inc.(a)                            37,950
                                                    -------------
                                                          567,556
- ------------------------------------------------------------
Aluminum--0.4%
   7,500   Alcan Aluminum Ltd.                            225,000
   5,800   Aluminum Co. of America                        342,200
   2,150   Reynolds Metals Co.                            109,919
                                                    -------------
                                                          677,119
- ------------------------------------------------------------
Automobiles & Trucks--2.0%
  24,700   Chrysler Corp.                                 707,038
   1,400   Cummins Engine, Inc.                            55,125
   3,400   Dana Corp.                                     102,850
   2,000   Echlin Inc.                                     62,750
  39,300   Ford Motor Co.                               1,228,125
  25,100   General Motors Corp.                         1,204,800
   4,000   Genuine Parts Co.                              175,000
   1,400   Johnson Controls, Inc.                         105,000
   2,420   Navistar International Corp.(a)                 20,570
   1,900   Safety Kleen Corp.                              31,350
                                                    -------------
                                                        3,692,608
Banking--7.1%
  15,030   Banc One Corp.                           $     616,230
   5,100   Bank of Boston Corp.                           295,163
  12,800   Bank of New York Co., Inc.                     376,000
  12,100   BankAmerica Corp.                              993,712
   2,600   Bankers Trust NY Corp.                         204,425
   6,200   Barnett Banks, Inc.                            209,250
   5,300   Boatmen's Bancshares                           296,138
  14,408   Chase Manhattan Corp.                        1,154,441
  16,100   Citicorp                                     1,459,062
   3,800   Comerica, Inc.                                 195,700
   7,400   CoreStates Financial Corp.                     320,050
   3,400   Fifth Third Bancorp                            197,625
   4,600   First Bank System, Inc.                        307,625
  10,401   First Chicago Corp.                            470,645
   9,400   First Union Corp.                              627,450
   8,587   Fleet Financial Group, Inc.                    382,122
   1,900   Golden West Financial Corp.                    110,913
   4,600   Great Western Financial Corp.                  121,900
   3,800   H.F. Ahmanson & Co.                            106,400
   7,600   KeyCorp                                        334,400
   4,525   Mellon Bank Corp.                              268,106
   6,200   Morgan (J.P.) & Co., Inc.                      551,025
   7,400   National City Corp.                            311,725
   9,900   NationsBank Corp.                              860,062
  12,300   Norwest Corp.                                  502,762
  11,300   PNC Bank Corp.                                 377,138
   1,800   Republic New York Corp.                        124,425
   7,500   Suntrust Banks, Inc.                           307,500
   5,400   U.S. Bancorp                                   213,300
   3,227   Wells Fargo & Co.                              838,933
                                                    -------------
                                                       13,134,227
- ------------------------------------------------------------
Beverages--3.7%
   1,200   Adolph Coors Co.                                26,325
  16,800   Anheuser Busch Cos., Inc.                      632,100
   2,400   Brown-Forman Corp.                              93,900
</TABLE>
- --------------------------------------------------------------------------------
                                              See Notes to Financial Statements.
 

                                      B-48
<PAGE>

Portfolio of Investments as of              THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996                          STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                
Shares      Description                     Value (Note 1)      
<C>         <S>                                    <C>          
- ------------------------------------------------------------
Beverages (cont'd.)
  82,900   Coca-Cola Co.                            $   4,217,537
  52,100   PepsiCo, Inc.                                1,471,825
  12,300   Seagram Co., Ltd.                              459,713
                                                    -------------
                                                        6,901,400
- ------------------------------------------------------------
Chemicals--2.2%
   3,700   Air Products & Chemicals, Inc.                 215,525
   8,300   Dow Chemical Co.                               666,075
  18,600   du Pont (E.I.) de Nemours & Co.              1,641,450
   2,600   Eastman Chemical Co.                           151,775
   3,600   Hercules, Inc.                                 197,100
  19,400   Monsanto Co.                                   708,100
   2,300   Nalco Chemical Co.                              83,375
   2,200   Rohm & Haas Co.                                144,100
   1,700   Sigma-Aldrich                                   96,900
   4,400   Union Carbide Corp.                            200,750
                                                    -------------
                                                        4,105,150
- ------------------------------------------------------------
Chemical-Specialty--0.5%
   4,625   Engelhard Corp.                                106,375
   2,100   Great Lakes Chemical Corp.                     119,700
   4,900   Morton International, Inc.                     194,775
   5,100   Praxair, Inc.                                  219,300
   1,500   Raychem Corp.                                  112,500
   3,200   W.R. Grace & Co.                               166,400
                                                    -------------
                                                          919,050
- ------------------------------------------------------------
Commercial Services--0.3%
   8,150   CUC International, Inc.(a)                     324,981
   2,800   Deluxe Corp.                                   105,700
   1,000   Harland (John H.) Co.                           30,000
   3,300   Moore Corp. Ltd.                                60,638
                                                    -------------
                                                          521,319
- ------------------------------------------------------------
Computer Software & Services--4.6%
   5,700   3Com Corp. (a)                                 342,356
   1,500   AutoDesk, Inc.                                  38,813
   9,600   Automatic Data Processing, Inc.          $     418,800
   6,200   Bay Networks, Inc.(a)                          168,950
   2,500   Cabletron Systems, Inc.(a)                     170,938
   2,200   Ceridian Corp.(a)                              110,000
  21,500   Cisco Systems, Inc.(a)                       1,334,344
  12,050   Computer Associates International,
             Inc.                                         719,987
   2,450   Computer Sciences Corp.(a)                     188,344
   2,900   Dell Computer Corp. (a)                        225,475
   7,800   EMC Corp.(a)                                   176,475
   1,300   Intergraph Corp.(a)                             14,300
   6,900   Micron Technology Inc.                         210,450
  19,900   Microsoft Corp.(a)                           2,624,312
  12,700   Novell, Inc.(a)                                139,700
  21,875   Oracle Systems Corp.(a)                        931,055
   3,500   Seagate Technology, Inc.(a)                    195,562
   5,800   Silicon Graphics Inc.(a)                       128,325
   6,200   Sun Microsystems Inc.(a)                       385,175
   3,800   Tandem Computers Inc.(a)                        40,850
                                                    -------------
                                                        8,564,211
- ------------------------------------------------------------
Construction--0.1%
   2,800   Fluor Corp.                                    172,200
   1,300   Foster Wheeler Corp.                            56,875
   1,100   Kaufman & Broad Home Corp.                      14,300
     900   Pulte Corp.                                     23,063
                                                    -------------
                                                          266,438
- ------------------------------------------------------------
Consumer Goods--0.6%
     900   Centex Corp.                                    29,363
   1,200   Fleetwood Enterprises, Inc.                     36,900
   5,800   Lowes Companies, Inc.                          237,075
   5,200   Masco Corp.                                    156,000
   3,500   Maytag Corp.                                    68,250
   1,800   Owens-Corning Fiberglas Corp.(a)                66,375
   2,700   Pioneer Hi-Bred International, Inc.            163,350
   3,000   Stanley Works                                   84,375
   2,000   Tupperware Corp.                                98,000
   2,500   Whirlpool Corp.                                126,562
                                                    -------------
                                                        1,066,250
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.                                             
 

                                      B-49
<PAGE>

Portfolio of Investments as of              THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996                          STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                
Shares      Description                     Value (Note 1)      
<C>         <S>                                    <C>          
- ------------------------------------------------------------
Containers--0.1%
   1,200   Ball Corp.                               $      29,400
   1,700   Bemis, Inc.                                     57,588
   4,200   Crown Cork & Seal, Inc.(a)                     193,725
                                                    -------------
                                                          280,713
- ------------------------------------------------------------
Cosmetics & Soaps--2.3%
     900   Alberto Culver Co.                              39,038
   4,400   Avon Products, Inc.                            218,350
   1,700   Clorox Co.                                     162,988
   4,800   Colgate-Palmolive Co.                          417,000
  14,700   Gillette Co.                                 1,060,237
   3,650   International Flavors & Fragrances
             Inc.                                         159,231
  22,800   Procter & Gamble Co.                         2,223,000
                                                    -------------
                                                        4,279,844
- ------------------------------------------------------------
Diversified Gas--0.2%
   3,600   Coastal Corp.                                  148,500
     700   Eastern Enterprises, Inc.                       26,425
   2,400   Enserch Corp.                                   50,100
   1,700   NICOR Inc.                                      57,375
     900   Oneok Inc.                                      24,750
                                                    -------------
                                                          307,150
- ------------------------------------------------------------
Drugs & Medical Supplies--9.1%
  26,000   Abbott Laboratories                          1,280,500
   2,900   ALZA Corp.(a)                                   77,937
  21,100   American Home Products Corp.                 1,345,125
   8,800   Amgen, Inc.(a)                                 555,500
   1,900   Bard (C.R.), Inc.                               59,138
   1,800   Bausch & Lomb, Inc.                             66,150
   9,000   Baxter International, Inc.                     420,750
   4,200   Becton Dickinson & Co.                         185,850
   3,800   Biomet, Inc.(a)                                 62,225
   5,900   Boston Scientific Corp.(a)                     339,250
  16,650   Bristol-Myers Squibb Co.                     1,604,644
   3,357   Fresenius Medical Care AG (ADR)(a)
             (Germany)                                     78,050
  44,300   Johnson & Johnson Co.                        2,270,375
  18,200   Lilly (Eli) & Co.                            1,173,900
   8,000   Medtronic, Inc.                          $     513,000
  40,600   Merck & Co., Inc.                            2,857,225
  21,400   Pfizer, Inc.                                 1,693,275
  16,955   Pharmacia & Upjohn, Inc.                       699,394
  12,300   Schering-Plough Corp.                          756,450
   2,600   St. Jude Medical, Inc.(a)                      104,975
   2,000   United States Surgical Corp.                    85,000
   9,000   Warner Lambert Co.                             594,000
                                                    -------------
                                                       16,822,713
- ------------------------------------------------------------
Electronics--4.2%
   4,700   Advanced Micro Devices, Inc.(a)                 69,325
   4,400   Amdahl Corp.(a)                                 41,525
   7,284   AMP Inc.                                       282,255
   4,000   Apple Computer, Inc.                            88,750
   1,100   Data General Corp.(a)                           15,400
   5,200   Digital Equipment Corp.(a)                     185,900
   1,600   EG&G, Inc.                                      28,600
   7,400   Emerson Electric Co.                           666,925
   4,500   General Instrument Corp.(a)                    111,375
   1,300   Harris Corp.                                    84,663
  34,000   Hewlett-Packard Co.                          1,657,500
  27,400   Intel Corp.                                  2,614,987
   4,300   LSI Logic Corp.(a)                              99,975
  19,700   Motorola, Inc.                               1,017,012
   4,700   National Semiconductors Corp.(a)                94,588
   1,400   Perkin Elmer Corp.                              81,025
   2,000   Tandy Corp.                                     80,750
   1,000   Tektronix, Inc.                                 40,875
   6,300   Texas Instruments Inc.                         347,287
   1,300   Thomas & Betts Corp.                            53,300
                                                    -------------
                                                        7,662,017
- ------------------------------------------------------------
Financial Services--2.9%
  15,900   American Express Co.                           735,375
   1,800   Beneficial Corp.                               103,500
   3,300   Block (H&R), Inc.                               98,175
   5,458   Dean Witter Discover & Co.                     300,190
   5,900   Federal Home Loan Mortgage Corp.               577,462
  36,200   Federal National Mortgage Assn.              1,262,475
</TABLE>
- --------------------------------------------------------------------------------
                                              See Notes to Financial Statements.
 

                                      B-50
<PAGE>

Portfolio of Investments as of              THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996                          STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                
Shares      Description                     Value (Note 1)      
<C>         <S>                                    <C>          
- ------------------------------------------------------------
Financial Services (cont'd.)
   7,400   First Data Corp.                         $     604,025
   4,500   Green Tree Financial Corp.                     176,625
   3,200   Household International Corp.                  263,200
   7,425   MBNA Corp.                                     258,019
   5,700   Merrill Lynch & Co., Inc.                      374,062
   5,000   Morgan Stanley Group, Inc.                     248,750
   3,500   Salomon, Inc.                                  159,688
   2,250   Transamerica Corp.                             157,219
                                                    -------------
                                                        5,318,765
- ------------------------------------------------------------
Food & Beverage--2.6%
  18,035   Archer-Daniels-Midland Co.                     347,169
   8,300   Campbell Soup Co.                              647,400
   8,100   ConAgra, Inc.                                  398,925
   4,800   CPC International, Inc.                        359,400
   1,300   Fleming Cos., Inc.                              22,587
   5,250   General Mills, Inc.                            316,969
   2,000   Giant Foods, Inc.                               68,000
  12,200   Heinz (H.J.) Co.                               411,750
   5,200   Hershey Foods Corp.                            261,300
   7,050   Kellogg Co.                                    485,569
   4,500   Quaker Oats Co.                                164,812
   3,500   Ralston Purina Co.                             239,750
  16,100   Sara Lee Corp.                                 575,575
   6,000   Sysco Corp.                                    201,750
   3,900   Wrigley (W.M.) Junior Co.                      234,975
                                                    -------------
                                                        4,735,931
- ------------------------------------------------------------
Forest Products--1.5%
   1,700   Boise Cascade Corp.                             57,800
   3,100   Champion International Corp.                   142,212
   3,050   Georgia Pacific Corp.                          241,331
  10,017   International Paper Co.                        425,717
   2,900   James River Corp.                               80,113
   9,408   Kimberly Clark Corp.                           829,080
   3,600   Louisiana Pacific Corp.                         81,900
   1,700   Mead Corp.                                      99,663
     900   Potlatch Corp.                                  34,875
   3,600   Stone Container Corp.                           56,250
   1,800   Temple Inland Inc.                              94,950
   2,300   Union Camp Corp.                         $     112,413
   3,400   Westvaco Corp.                                 100,725
   6,500   Weyerhaeuser Co.                               299,812
   1,800   Willamette Industries, Inc.                    117,900
                                                    -------------
                                                        2,774,741
- ------------------------------------------------------------
Gas Pipelines--0.7%
   5,318   Cinergy Corp.                                  164,193
   1,800   Columbia Gas System, Inc.(a)                   100,800
   3,100   Consolidated Natural Gas Co.                   166,237
   8,400   Enron Corp.                                    342,300
   4,700   Noram Energy Corp.                              69,913
   5,000   PanEnergy Corp.                                173,125
   1,100   Peoples Energy Corp.                            37,400
   3,500   Williams Cos., Inc.                            178,500
                                                    -------------
                                                        1,232,468
- ------------------------------------------------------------
Hospital Management--1.0%
   3,300   Beverly Enterprises, Inc.(a)                    35,888
  14,852   Columbia Healthcare Corp.                      844,707
   1,100   Community Psychiatric Centers                   10,313
   5,500   Humana, Inc.(a)                                111,375
   2,100   Manor Care, Inc.                                80,588
   7,800   Service Corp. International                    235,950
     900   Shared Medical Systems Corp.                    51,300
   7,200   Tenet Healthcare Corp.(a)                      160,200
   6,100   United Healthcare Corp.                        253,912
                                                    -------------
                                                        1,784,233
- ------------------------------------------------------------
Housing Construction
   1,200   Armstrong World Industries                      74,850
- ------------------------------------------------------------
Insurance--3.7%
   4,900   Aetna Life & Casualty Co.                      344,838
   1,400   Alexander & Alexander Services, Inc.            23,275
  14,674   Allstate Corp.                                 722,694
   6,900   American General Corp.                         260,475
  15,612   American International Group, Inc.           1,572,909
   3,600   Aon Corp.                                      195,300
   5,800   Chubb Corp.                                    266,800
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.                                             
 

                                      B-51
<PAGE>

Portfolio of Investments as of              THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996                          STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                
Shares      Description                     Value (Note 1)      
<C>         <S>                                    <C>          
- ------------------------------------------------------------
Insurance (cont'd.)
   2,550   CIGNA Corp.                              $     305,681
   2,700   General Re Corp.                               382,725
   3,900   ITT Hartford Group Inc.                        230,100
   2,325   Jefferson-Pilot Corp.                          120,319
   3,400   Lincoln National Corp.                         149,175
   2,400   Marsh & McLennan Cos.                          233,100
   1,900   MGIC Investment Corp.                          128,013
   3,100   Providian Corp.                                133,300
   4,400   SAFECO Corp.                                   154,000
   2,700   St. Paul Cos, Inc.                             149,850
   2,350   Torchmark Corp.                                107,806
  15,947   Travelers, Inc.                                783,372
   2,400   UNUM Corp.                                     153,900
   4,000   USF&G Corp.                                     74,000
   1,150   USLIFE Corp.                                    34,500
   5,500   Wachovia Corp.                                 272,250
                                                    -------------
                                                        6,798,382
- ------------------------------------------------------------
Leisure--1.2%
   1,800   Bally Entertainment Group(a)                    51,075
   3,100   Brunswick Corp.                                 74,400
  22,492   Disney (Walt) Co.                            1,425,430
   3,500   Harrahs Entertainment Inc.(a)                   65,188
   2,800   Hasbro, Inc.                                   103,950
   3,900   ITT Corp. (New)                                170,137
   1,300   King World Productions, Inc.(a)                 47,938
   9,287   Mattel, Inc.                                   240,301
                                                    -------------
                                                        2,178,419
- ------------------------------------------------------------
Lodging--0.4%
   4,000   HFS Inc.(a)                                    267,500
   6,400   Hilton Hotels Corp.                            181,600
   4,200   Marriott International, Inc.(a)                231,525
                                                    -------------
                                                          680,625
- ------------------------------------------------------------
Machinery--1.1%
     900   Briggs & Stratton Corp.                         39,938
   2,400   Case Corp.                                     117,000
   6,400   Caterpillar Inc.                         $     482,400
   1,400   Cincinnati Milacron, Inc.                       26,425
   3,600   Cooper Industries, Inc.                        155,700
   8,700   Deere & Co.                                    365,400
   3,700   Dover Corp.                                    176,675
   2,500   Eaton Corp.                                    150,937
   1,000   Giddings & Lewis, Inc.                          11,875
   1,600   Harnischfeger Industries, Inc.                  60,400
   3,600   Ingersoll Rand Co.                             171,000
   1,302   PACCAR Inc.                                     71,284
   2,550   Parker Hannifin Corp.                          107,100
   1,950   Snap-On Inc.                                    62,644
   1,000   Timken Co.                                      39,250
                                                    -------------
                                                        2,038,028
- ------------------------------------------------------------
Media--1.7%
   7,750   Comcast Corp.                                  119,156
   5,100   Donnelley (R.R.) & Sons, Co.                   164,475
   3,300   Dow Jones & Co., Inc.                          122,100
   5,600   Dun & Bradstreet Corp.                         333,900
   4,650   Gannett, Inc.                                  327,244
   2,600   Interpublic Group Cos., Inc.                   122,850
   3,300   Knight-Ridder, Inc.                            122,100
   3,300   McGraw Hill, Inc.                              140,663
     900   Meredith Corp.                                  44,438
   3,100   New York Times Co.                             104,625
  13,000   Time Warner, Inc.                              502,125
   3,400   Times Mirror Co.                               151,300
   2,000   Tribune Co.                                    156,000
  15,500   U.S. West Media Group                          261,562
  12,139   Viacom Inc.(a)                                 430,934
                                                    -------------
                                                        3,103,472
- ------------------------------------------------------------
Mineral Resources--0.8%
   1,300   ASARCO Inc.                                     34,613
  12,000   Barrick Gold Corp. (ADR) (Canada)              301,500
   3,050   Cyprus Amax Minerals Co.                        65,575
   4,700   Echo Bay Mines, Ltd.                            41,419
   6,500   Freeport-McMoRan Copper & Gold Inc.            203,125
   4,900   Homestake Mining Co.                            71,663
</TABLE>
- --------------------------------------------------------------------------------
                                              See Notes to Financial Statements.
 

                                      B-52
<PAGE>

Portfolio of Investments as of              THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996                          STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                
Shares      Description                     Value (Note 1)      
<C>         <S>                                    <C>          
- ------------------------------------------------------------
Mineral Resources (cont'd.)
   5,600   INCO, Ltd.                               $     172,200
   3,298   Newmont Mining Corp.                           155,830
   2,200   Phelps-Dodge Corp.                             141,075
   7,900   Placer Dome, Inc.                              186,637
   4,140   Santa Fe Pacific Gold Corp.                     51,750
                                                    -------------
                                                        1,425,387
- ------------------------------------------------------------
Miscellaneous Basic Industry--4.9%
   6,100   Applied Materials, Inc.(a)                     168,512
   7,000   Browning Ferris Industries, Inc.               175,000
   1,000   Crane Co.                                       44,375
   2,200   Ecolab, Inc.                                    74,250
   1,250   FMC Corp.(a)                                    84,844
  55,000   General Electric Co.                         5,005,000
   1,600   General Signal Corp.                            70,400
   1,700   Grainger (W.W.) Inc.                           119,425
   4,000   Illinois Tool Works, Inc.                      288,500
   3,900   ITT Industries Inc.                             94,088
   3,800   Loews Corp.                                    294,025
   2,500   Mallinckrodt Group Inc.                        104,062
   1,400   Millipore Corp.                                 55,300
     250   NACCO Industries, Inc.                          11,938
   3,733   Pall Corp.                                     105,457
   6,200   PPG Industries, Inc.                           337,125
   2,800   Textron, Inc.                                  238,000
     900   Trinova Corp.                                   28,350
   2,200   TRW Inc.                                       204,600
   5,000   Tyco International Ltd.                        215,625
   4,000   United Technologies Corp.                      480,500
  13,900   Westinghouse Electric Corp.                    258,887
  16,400   WMX Technologies, Inc.                         539,150
                                                    -------------
                                                        8,997,413
- ------------------------------------------------------------
Miscellaneous Consumer Growth--1.9%
   2,100   Allergan, Inc.                                  80,063
   2,400   American Greetings Corp.                        68,700
   2,900   Black & Decker Corp.                           120,350
   7,800   Corning, Inc.                                  304,200
  11,400   Eastman Kodak Co.                        $     894,900
   1,500   Jostens, Inc.                                   31,313
  13,900   Minnesota Mining & Manufacturing Co.           971,262
   1,500   Polaroid Corp.                                  66,000
   4,900   Rubbermaid, Inc.                               120,050
   5,300   Unilever N.V.                                  835,412
   3,500   Whitman Corp.                                   80,938
                                                    -------------
                                                        3,573,188
- ------------------------------------------------------------
Office Equipment & Supplies--2.3%
   4,300   Alco Standard Corp.                            214,462
   1,700   Avery Dennison Corp.                            94,350
   9,000   Compaq Computer Corp.(a)                       577,125
   4,200   Honeywell, Inc.                                265,125
  17,800   International Business Machines Corp.        2,216,100
   4,900   Pitney Bowes, Inc.                             257,862
   5,300   Unisys Corp.(a)                                 32,463
  10,750   Xerox Corp.                                    576,469
                                                    -------------
                                                        4,233,956
- ------------------------------------------------------------
Petroleum--7.6%
   3,100   Amerada Hess Corp.                             163,913
  16,500   Amoco Corp.                                  1,163,250
   2,200   Ashland Oil, Inc.                               87,450
   5,350   Atlantic Richfield Co.                         682,125
   4,200   Burlington Resources Inc.                      186,375
  21,700   Chevron Corp.                                1,358,962
  41,250   Exxon Corp.                                  3,434,062
   1,600   Kerr-McGee Corp.                                97,400
   1,100   Louisiana Land & Exploration Co.                57,888
  13,100   Mobil Corp.                                  1,516,325
  10,700   Occidental Petroleum Corp.                     250,112
   1,500   Pennzoil Co.                                    79,313
   8,700   Phillips Petroleum Co.                         371,925
  17,800   Royal Dutch Petroleum Co. (ADR)
             (Netherlands)                              2,779,025
   2,900   Santa Fe Energy Resources, Inc.(a)              41,325
   2,400   Sun Co., Inc.                                   55,200
   5,700   Tenneco, Inc.                                  285,712
   8,800   Texaco Inc.                                    809,600
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.                                            
 

                                      B-53
<PAGE>

Portfolio of Investments as of              THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996                          STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                
Shares      Description                     Value (Note 1)      
<C>         <S>                                    <C>          
- ------------------------------------------------------------
Petroleum (cont'd.)
   8,200   Unocal Corp.                             $     295,200
   9,600   USX Marathon Corp                              207,600
   1,800   Western Atlas, Inc.(a)                         112,050
                                                    -------------
                                                       14,034,812
- ------------------------------------------------------------
Petroleum Services--0.8%
   4,600   Baker Hughes Inc.                              139,725
   5,900   Dresser Industries, Inc.                       175,525
   3,800   Halliburton Co.                                196,175
     900   Helmerich & Payne, Inc.                         39,263
   1,700   McDermott International, Inc.                   36,975
   3,400   Oryx Energy Co.(a)                              60,350
   2,800   Rowan Cos., Inc.(a)                             52,150
   8,100   Schlumberger, Ltd.                             684,450
   2,800   Sonat Inc.                                     123,900
                                                    -------------
                                                        1,508,513
- ------------------------------------------------------------
Precious Metals
   7,500   Battle Mountain Gold Co.                        58,125
- ------------------------------------------------------------
Railroads--1.1%
   5,065   Burlington Northern Santa Fe                   427,359
   2,600   Consolidated Rail Corp.                        188,175
   6,900   CSX Corp.                                      348,450
   4,200   Norfolk Southern Corp.                         383,775
   8,100   Union Pacific Corp.                            593,325
                                                    -------------
                                                        1,941,084
- ------------------------------------------------------------
Restaurants--0.7%
   4,850   Darden Restaurants Inc.                         41,831
     900   Luby's Cafeterias, Inc.                         21,600
  23,100   McDonald's Corp.                             1,094,362
   1,600   Ryan's Family Steak Houses, Inc.(a)             12,200
   1,100   Shoney's Inc.(a)                                10,038
   4,100   Wendy's International, Inc.                     88,150
                                                    -------------
                                                        1,268,181
Retail--5.0%
   8,300   Albertsons, Inc.                         $     349,637
   4,900   American Stores Co.                            196,000
   3,400   Charming Shoppes, Inc.                          20,400
   3,200   Circuit City Stores, Inc.                      115,600
   7,100   Dayton Hudson Corp.                            234,300
   3,800   Dillard Department Stores, Inc.                122,550
   7,000   Federated Department Stores, Inc.(a)           234,500
   9,600   Gap, Inc.                                      277,200
   1,200   Great Atlantic & Pacific Tea Inc.               31,050
   2,300   Harcourt General, Inc.                         127,075
  15,966   Home Depot, Inc.                               908,066
  16,300   Kmart Corp.                                    167,075
   4,100   Kroger Co.(a)                                  183,475
   8,988   Limited, Inc.                                  171,896
   2,400   Liz Claiborne, Inc.                             89,400
     600   Longs Drug Stores Corp.                         26,100
   8,300   May Department Stores Co.                      403,587
   3,500   Melville Corp.                                 154,438
   1,200   Mercantile Stores, Inc.                         64,800
   5,300   Newell Co.                                     159,000
   4,700   NIKE, Inc.                                     571,050
   2,800   Nordstrom, Inc.                                106,400
   7,500   Penney (J.C.), Inc.                            405,937
   2,100   Pep Boys - Manny, Moe & Jack                    74,813
   6,552   Price Costco, Inc.(a)                          134,316
   2,400   Reebok International, Ltd.                      83,400
   2,800   Rite-Aid Corp.                                 101,500
  13,000   Sears Roebuck & Co.                            581,750
   2,800   Sherwin Williams Co.                           129,850
   1,100   Stride Rite Corp.                                9,900
   2,400   Supervalue, Inc.                                66,000
   2,400   TJX Companies, Inc.                             86,100
   9,100   Toys 'R' Us Inc.(a)                            265,037
  76,200   Wal-Mart Stores, Inc.                        2,009,775
   8,200   Walgreen Co.                                   303,400
   5,000   Winn-Dixie Stores, Inc.                        174,375
   4,300   Woolworth Corp.                                 88,688
                                                    -------------
                                                        9,228,440
</TABLE>
- --------------------------------------------------------------------------------
                                              See Notes to Financial Statements.
 

                                      B-54
<PAGE>

Portfolio of Investments as of              THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996                          STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                
Shares      Description                     Value (Note 1)      
<C>         <S>                                    <C>          
- ------------------------------------------------------------
Rubber--0.2%
   2,800   Cooper Tire & Rubber                     $      60,550
   1,800   Goodrich (B.F.) Co.                             81,225
   5,200   Goodyear Tire & Rubber Co.                     239,850
                                                    -------------
                                                          381,625
- ------------------------------------------------------------
Steel - Producers--0.3%
   5,673   Allegheny Teldyne Inc.                         128,340
   3,800   Armco Inc.(a)                                   17,100
   3,700   Bethlehem Steel Corp.(a)                        37,000
   1,800   Inland Steel Industries, Inc.                   32,175
   2,900   Nucor Corp.                                    147,175
   2,900   USX Corp. - U.S. Steel Group                    82,650
   2,850   Worthington Industries, Inc.                    57,000
                                                    -------------
                                                          501,440
- ------------------------------------------------------------
Telecommunications--1.4%
   6,200   ALLTEL Corp.                                   172,825
   1,925   Andrew Corp.(a)                                 96,009
   4,000   DSC Communications Corp.(a)                    100,000
  23,100   MCI Communications Corp.                       591,937
   8,600   Northern Telecom Ltd.                          496,650
   2,400   Scientific Atlanta, Inc.                        38,100
  14,400   Sprint Corp.                                   559,800
  21,400   Tele-Communications, Inc.(a)                   319,663
   3,000   Tellabs, Inc.(a)                               211,875
                                                    -------------
                                                        2,586,859
- ------------------------------------------------------------
Textiles--0.2%
   2,600   Fruit of the Loom, Inc.(a)                      80,600
   1,500   National Service Industries, Inc.               52,500
   1,200   Russell Corp.                                   38,700
     700   Springs Industries, Inc.                        31,150
   2,100   VF Corp.                                       126,263
                                                    -------------
                                                          329,213
- ------------------------------------------------------------
Tobacco--1.6%
   5,700   American Brands Inc.                           240,825
  27,450   Philip Morris Cos., Inc.                 $   2,463,637
   6,500   UST, Inc.                                      192,563
                                                    -------------
                                                        2,897,025
- ------------------------------------------------------------
Trucking & Shipping--0.2%
   1,200   Caliber Systems Inc.                            19,350
   1,600   Consolidated Freightways, Inc.                  39,200
   1,900   Federal Express Corp.(a)                       150,575
  10,100   Laidlaw Inc.                                   111,100
   2,600   Ryder System, Inc.                              77,025
     800   Yellow Corp.                                    10,400
                                                    -------------
                                                          407,650
- ------------------------------------------------------------
Utility Communications--5.7%
  16,500   AirTouch Communications(a)                     455,813
  18,300   Ameritech Corp.                                963,037
  53,600   AT&T Corp.                                   2,800,600
  14,500   Bell Atlantic Corp.                            868,187
  33,100   BellSouth Corp.                              1,224,700
  32,200   GTE Corp.                                    1,239,700
  14,500   NYNEX Corp.                                    630,750
  14,300   Pacific Telesis Group                          480,837
  20,200   SBC Communications Inc.                        972,125
  15,900   U.S. West Communications Group                 473,025
   7,300   Unicom Corp.                                   183,413
  12,900   WorldCom Inc.(a)                               275,738
                                                    -------------
                                                       10,567,925
- ------------------------------------------------------------
Utilities - Electric--2.7%
   6,300   American Electric Power, Inc.                  255,937
   5,000   Baltimore Gas & Electric Co.                   130,625
   5,100   Carolina Power & Light Co.                     175,950
   6,900   Central & South West Corp.                     179,400
   7,900   Consolidated Edison Co.                        219,225
   6,000   Dominion Resources, Inc.                       226,500
   4,700   DTE Energy Co.                                 131,600
   6,800   Duke Power Co.                                 317,050
  14,800   Edison International                           264,550
   7,600   Entergy Corp.                                  205,200
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.                                             
 

                                      B-55
<PAGE>

Portfolio of Investments as of              THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996                          STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                
Shares      Description                     Value (Note 1)      
<C>         <S>                                    <C>          
- ------------------------------------------------------------
Utilities - Electric (cont'd.)
   6,100   FPL Group, Inc.                          $     263,825
   3,900   General Public Utilities Corp.                 119,925
   8,800   Houston Industries, Inc.                       194,700
   4,700   Niagara Mohawk Power Corp.                      37,600
   2,300   Northern States Power Co.                      107,238
   4,900   Ohio Edison Co.                                 94,938
   2,700   Pacific Enterprises                             81,675
  13,800   Pacific Gas & Electric Co.                     300,150
   9,800   Pacificorp                                     202,125
   7,300   PECO Energy Co.                                173,375
   5,200   PP & L Resources Inc.                          113,750
   8,000   Public Service Enterprise Group                214,000
  22,400   Southern Co.                                   506,800
   7,500   Texas Utilities Co.                            297,187
   3,300   Union Electric Co.                             121,687
                                                    -------------
                                                        4,935,012
                                                    -------------
           Total common stocks
             (cost $137,197,051)                      173,192,731
- ------------------------------------------------------------
Preferred Stock
Insurance
     367   Aetna Life & Casualty Co.
             (cost $23,902)                                26,745
                                                    -------------
           Total stocks
             (cost $137,220,953)                      173,219,476

SHORT-TERM INVESTMENTS--6.0%
- ------------------------------------------------------------
U.S. Government Securities--0.3%
           United States Treasury Bills,
$  100(b)  5.05%, 12/19/96                          $      98,892
     400   5.11%, 12/19/96                                395,519
                                                    -------------
           Total U.S. Government Securities
             (cost $494,411)                              494,411
- ------------------------------------------------------------
Repurchase Agreement--5.7%
  10,590   Joint Repurchase Agreement Account,
             5.70%, 10/01/96 (Note 4)
             (cost $10,590,000)                        10,590,000
                                                    -------------
           Total short-term investments
             (cost $11,084,411)                        11,084,411
- ------------------------------------------------------------
Total Investments--100.0%
           (cost $148,305,364; Note 3)                184,303,887
           Other assets in excess of liabilities           74,629
                                                    -------------
           Net Assets--100%                         $ 184,378,516
                                                    -------------
                                                    -------------
</TABLE>
- ---------------
(a) Non-income producing security.
(b) Pledged as initial margin on futures contracts.
ADR--American Depository Receipt.
- -------------------------------------------------------------------------------
                                              See Notes to Financial Statements.
 

                                      B-56
<PAGE>

                                           THE PRUDENTIAL INSTITUTIONAL FUND
Statement of Assets and Liabilities        STOCK INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
<S>                                                                                                           <C>
Assets                                                                                                      September 30, 1996
Investments, at value (cost $148,305,364)...............................................................         $184,303,887
Cash....................................................................................................                  141
Receivable for Fund shares sold.........................................................................              987,571
Interest and dividends receivable.......................................................................              333,902
Deferred expenses and other assets......................................................................               52,660
Receivable for investments sold.........................................................................               32,681
                                                                                                              ------------------
   Total assets.........................................................................................          185,710,842
                                                                                                              ------------------
Liabilities
Payable for investments purchased.......................................................................              842,997
Payable for Fund shares reacquired......................................................................              331,310
Accrued expenses........................................................................................              114,637
Management fee payable-net..............................................................................               23,057
Administration fee payable..............................................................................               19,475
Due to broker - variation margin........................................................................                  850
                                                                                                              ------------------
   Total liabilities....................................................................................            1,332,326
                                                                                                              ------------------
Net Assets..............................................................................................         $184,378,516
                                                                                                              ------------------
                                                                                                              ------------------
Net assets were comprised of:
   Shares of beneficial interest, at par................................................................         $     11,480
   Paid-in capital in excess of par.....................................................................          144,874,735
                                                                                                              ------------------
                                                                                                                  144,886,215
   Undistributed net investment income..................................................................            2,125,171
   Accumulated net realized gain on investments.........................................................            1,352,382
   Net unrealized appreciation on investments...........................................................           36,014,748
                                                                                                              ------------------
Net assets, September 30, 1996..........................................................................         $184,378,516
                                                                                                              ------------------
                                                                                                              ------------------
Shares of beneficial interest issued and outstanding....................................................           11,480,178
                                                                                                              ------------------
                                                                                                              ------------------
Net asset value per share...............................................................................               $16.06
                                                                                                              ------------------
                                                                                                              ------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.                                            
 

                                      B-57
<PAGE>

THE PRUDENTIAL INSTITUTIONAL FUND
STOCK INDEX FUND
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
                                                   Year Ended
Net Investment Income                          September 30, 1996
<S>                                            <C>
Income
   Interest.................................      $    444,547
   Dividends (net of foreign withholding
      taxes of $20,498).....................         3,154,570
                                               ------------------
      Total income..........................         3,599,117
                                               ------------------
Expenses
   Management fee...........................           570,160
   Administration fee.......................           188,037
   Custodian's fees and expenses............           170,000
   Reports to shareholders..................            50,000
   Registration fees........................            42,000
   Transfer agent's fees and expenses.......            33,752
   Legal fees and expenses..................            15,000
   Amortization of organization expenses....            13,421
   Trustees' fees...........................            12,000
   Audit fee and expenses...................            11,500
   Miscellaneous............................             5,624
                                               ------------------
      Total expenses........................         1,111,494
Less: Expense subsidy (Note 2)..............          (256,185)
                                               ------------------
      Net expenses..........................           855,309
                                               ------------------
Net investment income.......................         2,743,808
                                               ------------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain on:
   Investment transactions..................           685,464
   Financial futures contracts..............         1,106,100
                                               ------------------
                                                     1,791,564
                                               ------------------
Net change in unrealized appreciation
   (depreciation) on:
   Investments..............................        20,470,266
   Financial futures contracts..............          (177,000)
                                               ------------------
                                                    20,293,266
                                               ------------------
Net gain on investments.....................        22,084,830
                                               ------------------
Net Increase in Net Assets
Resulting from Operations...................      $ 24,828,638
                                               ------------------
                                               ------------------
</TABLE>
 
THE PRUDENTIAL INSTITUTIONAL FUND
STOCK INDEX FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>

Increase                              Year Ended September 30,
<S>                                 <C>             <C>
in Net Assets                           1996            1995
Operations
   Net investment income..........  $  2,743,808    $  1,829,951
   Net realized gain on investment
      transactions................     1,791,564       4,044,854
   Net change in unrealized
      appreciation on
      investments.................    20,293,266      13,914,900
                                    ------------    ------------
   Net increase in net assets
      resulting from operations...    24,828,638      19,789,705
                                    ------------    ------------
Dividends and distributions
   Dividends to shareholders from
      net investment income.......    (2,181,628)     (1,015,394)
   Distributions to shareholders
      from net realized gains.....    (4,441,170)       (165,297)
                                    ------------    ------------
   Total dividends and
      distributions...............    (6,622,798)     (1,180,691)
                                    ------------    ------------
Fund share transactions
   Net proceeds from shares
      sold........................   113,692,034      52,960,096
   Net asset value of shares
      issued to shareholders in
      reinvestment of dividends
      and distributions...........     6,622,798       1,180,691
   Cost of shares redeemed........   (56,086,722)    (20,924,559)
                                    ------------    ------------
   Net increase in net assets from
      Fund shares transactions....    64,228,110      33,216,228
                                    ------------    ------------
Net increase......................    82,433,950      51,825,242
Net Assets
Beginning of year.................   101,944,566      50,119,324
                                    ------------    ------------
End of year.......................  $184,378,516    $101,944,566
                                    ------------    ------------
                                    ------------    ------------
</TABLE>
- --------------------------------------------------------------------------------
                                              See Notes to Financial Statements.
 
                                      B-58
<PAGE>
                                           THE PRUDENTIAL INSTITUTIONAL FUND
Notes to Financial Statements              STOCK INDEX FUND
- --------------------------------------------------------------------------------

The Prudential Institutional Fund, (the ``Company'') is registered under the
Investment Company Act of 1940 as an open-end, diversified management investment
company. The Company was established as a Delaware business trust on May 11,
1992 and currently consists of two separate funds: Stock Index Fund (the
``Fund'') and Active Balanced Fund. Prior to September 21, 1996 the Company
consisted of seven separate funds, five of which were subsequently reorganized
and combined with existing funds in the Prudential Mutual Funds family of funds
(see Note 6).

The Company had no operations until July 7, 1992 when 10,000 shares of
beneficial interest of the Company were sold for $100,000 to Prudential
Institutional Fund Management, Inc. (``PIFM''). Investment operations of the
Fund commenced on November 5, 1992. The Fund's investment objective seeks to
provide investment results that correspond to the price and yield performance of
Standard & Poor's 500 Composite Stock Price Index.
- ------------------------------------------------------------
Note 1. Accounting Policies

The following is a summary of significant accounting policies followed by the
Fund.

Securities Valuation: Securities, including options, warrants, futures contracts
and options thereon, for which the primary market is on a national securities
exchange, commodities exchange or board of trade and NASDAQ national market
equity securities are valued at the last sale price on such exchange or board of
trade on the date of valuation or, if there was no sale on such day, at the
average of readily closing bid and asked prices quoted on such day.

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, shall be valued at the average of the most recently quoted bid
and asked prices provided by a principal market maker or dealer.

U.S. Government securities for which market quotations are available shall be
valued at a price provided by an independent broker/dealer or pricing service.

Securities for which reliable market quotations are not available or for which
the pricing agent or principal market maker does not provide a valuation or
provides a valuation that, in the judgement of one of the subadvisers, does not
represent fair value, shall by valued at fair value as determined under
procedures established by the Trustees.

In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians, as the case may be under
triparty repurchase agreements, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines or, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.

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

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 their existing
portfolio securities, or securities the Fund intends to purchase, against
fluctuations in value. Under a variety of circumstances, 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 and the underlying
assets.

Dividends and Distributions: Dividends and distributions of the Fund are
declared in cash and automatically reinvested in additional shares of the Fund.
The Fund will declare and distribute its net investment income and
- --------------------------------------------------------------------------------
                                                                              
 
                                      B-59
<PAGE>

                                           THE PRUDENTIAL INSTITUTIONAL FUND
Notes to Financial Statements              STOCK INDEX FUND
- --------------------------------------------------------------------------------
net capital gains, if any, at least annually. Dividends and distributions are
recorded on the ex-dividend date.

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

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

Withholding taxes on foreign dividends have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.

Deferred Organizational Expenses: Approximately $450,000 of costs were incurred
in connection with the organization and initial registration of the Company and
have been deferred and are being amortized ratably over the date each of the
Funds' commenced investment operations.
- ------------------------------------------------------------
Note 2. Agreements

The Fund has a management agreement with PIFM through October 30, 1996. Pursuant
to this agreement, PIFM has responsibility for all investment advisory services
and supervises the subadviser's performance of such services.

PIFM has a subadvisory agreement with The Prudential Investment Corporation
(``PIC'') through October 30, 1996. PIC furnishes investment advisory services
in connection with the management of the Fund. PIFM will pay for the costs and
expenses attributable to the subadvisory agreement and the salaries and expenses
of all personnel of the Fund except for fees and expenses of unaffiliated
Trustees. The Fund will bear all other costs and expenses.

The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .40 of 1% of the average daily net assets of the Fund.

Effective October 31, 1996 the Fund will enter a management agreement with
Prudential Mutual Fund Management LLC (``PMF''). Pursuant to this agreement PMF
will have responsibility for all investment advisory services. PMF will enter
into a subadvisory agreement with PIC. PIC, subject to the supervision of PMF,
will manage the assets of the Fund in accordance with its investment objectives
and policies and in a manner consistent with the previous agreement. PMF will
pay for the costs and expenses attributable to the subadvisory agreement and the
salaries and expenses of all personnel of the Fund except for fees and expenses
of unaffiliated Trustees.

Effective October 31, 1996 the management fee paid PMF will be computed daily
and payable monthly at an annual rate of .30 of 1% of the average daily net
assets of the Fund.

PIFM voluntarily agreed to subsidize a portion of the operating expenses of the
Fund until October 30, 1996. Such expenses may be recovered by PIFM through
October 30, 1996 so long as the total expense ratio does not exceed the
predetermined level set forth in the Fund's prospectus of .60% per annum. For
the year ended September 30, 1996, PIFM subsidized $256,185 of the expenses of
the Fund (.18% of the average net assets of the Fund/$.022 per share).

The Fund has an administration agreement with PMF through October 30, 1996. The
administration fee paid PMF will be computed daily and payable monthly, at an
annual rate of .17% of the Company's average daily net assets up to $250 million
and .15% of the Company's average daily net assets in excess of $250 million.
PMF will furnish to the Fund such services as the Fund may require in connection
with the administration of the Fund's business affairs. PMF will also provide
certain transfer agent services through its wholly-owned subsidiary, Prudential
Mutual Fund Services, Inc. (``PMFS''). For such services, PMFS will be paid .03%
of the Company's daily net assets up to $250 million and .02% of the Company's
average daily net assets in excess of $250 million from the administration fee
paid to PMF. Upon termination of the administration agreement, PMFS will enter
into a separate transfer agency agreement directly with the Fund.

Effective October 31, 1996 Prudential Securities Incorporated (``PSI'') will
become the distributor of the Fund's shares. Under the distribution agreement,
PSI will incur the expenses of distributing the Fund's shares, none of which is
reimbursed by or paid for by the Fund.

PIFM, PIC, PMF and PSI are indirect wholly-owned subsidiaries of the Prudential
Insurance Company of America.
- ------------------------------------------------------------
Note 3. Portfolio Securities

Purchases and sales of portfolio securities, excluding short-term investments,
for the year ended September 30, 1996 aggregated $71,134,529 and $2,335,704,
respectively.
- --------------------------------------------------------------------------------

 
                                      B-60
<PAGE>

                                           THE PRUDENTIAL INSTITUTIONAL FUND
Notes to Financial Statements              STOCK INDEX FUND
- --------------------------------------------------------------------------------
On September 30, 1996, the Stock Index Fund purchased 16 financial futures
contracts on the S&P 500 Index expiring December, 1996. The cost of such
contracts was $10,700,475. The value of such contracts on September 30, 1996 was
$10,716,700, thereby resulting in an unrealized gain of $16,225.

The cost basis of investments for federal income tax purposes is substantially
the same as for financial reporting purposes and, accordingly, as of September
30, 1996, net unrealized appreciation for federal income tax purposes was
$35,953,398 (gross unrealized appreciation--$38,097,945 gross unrealized
depreciation--$2,144,547).
- ------------------------------------------------------------
Note 4. Joint Repurchase Agreement Account

The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. At September 30, 1996, the Fund
had a 1.06% undivided interest in the repurchase agreements in the joint
account. The undivided interest represented $10,590,000 in principal amount. As
of such date, each repurchase agreement in the joint account and the collateral
therefor was as follows:

Bear, Stearns & Co., Inc., 5.72%, in the principal amount of $333,000,000,
repurchase price $333,052,910, due 10/1/96. The value of the collateral
including accrued interest was $339,757,925.

J.P. Morgan Securities, Inc., 5.70%, in the principal amount of $109,000,000,
repurchase price $109,017,258, due 10/1/96. The value of the collateral
including accrued interest was $111,181,257.

Goldman, Sachs & Co., Inc., 5.70%, in the principal amount of $333,000,000,
repurchase price $333,052,725, due 10/1/96. The value of the collateral
including accrued interest was $339,860,615.

Smith Barney, Inc., 5.75%, in the principal amount of $224,000,000, repurchase
price $224,035,778, due 10/1/96. The value of the collateral including accrued
interest was $228,481,010.
- ------------------------------------------------------------
Note 5. Capital

The Fund has authorized an unlimited number of shares of beneficial interest at
$.001 par value per share. Transactions in shares of beneficial interest during
the fiscal years ended September 30, 1996 and September 30, 1995 were as
follows:

<TABLE>
<CAPTION>
                                                Year ended September 30,
                                               ---------------------------
                                                  1996             1995
                                               ----------       ----------
<S>                                            <C>              <C>
Shares sold..................................   7,589,233        4,340,797
Shares issued in reinvestment of dividends
 and
 distributions...............................     467,712          107,238
Shares reacquired............................  (3,745,568)      (1,725,892)
                                               ----------       ----------
Net increase.................................   4,311,377        2,722,143
                                               ----------       ----------
                                               ----------       ----------
</TABLE>
 
Of the shares outstanding at September 30, 1996, PIFM and affiliates owned
5,017,951 shares of the Fund.
- ------------------------------------------------------------
Note 6. Reorganization

On May 17, 1996, the Trustees of the Company approved an Agreement and a Plan of
Reorganization (the ``Plan of Reorganization'') for the Company. The Plan of
Reorganization was approved by shareholders on September 6, 1996 and October 31,
1996.

Under the Plan of Reorganization, all of the assets and liabilities of the
Growth Stock Fund, Balanced Fund, Income Fund and Money Market Fund (``Series'')
were transferred at net asset value for equivalent value Class Z shares of
Prudential Jennison Fund, Inc., Prudential Allocation Fund--Balanced Portfolio,
Prudential Government Income Fund, Inc. and Prudential MoneyMart Assets, Inc.,
respectively. These Series then ceased operations.

International Stock Fund joined the Prudential Global Fund as separate series of
a newly named Prudential World Fund. Existing shareholders became Class Z
shareholders and the International Stock Fund also began offering Classes A, B
and C shares.

Active Balanced Fund and the Fund remained with The Prudential Institutional
Fund (to be renamed the Prudential Dryden Fund) as separate funds. Existing
shareholders of the Active Balanced Fund became Class Z shareholders and Active
Balanced Fund will begin offering Classes A, B and C shares. The Fund will offer
a single class of shares. Effective October 31, 1996 these funds will be managed
by PMF, PMFS will provide transfer agency services and PSI will act as
distributor.
- --------------------------------------------------------------------------------
                                                                              
 
                                      B-61
<PAGE>
                                           THE PRUDENTIAL INSTITUTIONAL FUND
Financial Highlights                       STOCK INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                November 5,
                                                                                                  1992(a)
                                                             Year Ended September 30,             Through
                                                         ---------------------------------     September 30,
                                                           1996         1995        1994           1993
                                                         --------     --------     -------     -------------
<S>                                                      <C>          <C>          <C>         <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................   $  14.22     $  11.27     $ 11.12       $   10.00
                                                         --------     --------     -------     -------------
Income from investment operations:
Net investment income (b).............................        .25          .23         .26             .23
Net realized and unrealized gain on investment
   transactions.......................................       2.44         2.97         .11             .94
                                                         --------     --------     -------     -------------
  Total from investment operations....................       2.69         3.20         .37            1.17
                                                         --------     --------     -------     -------------
Less distributions:
Dividends from net investment income..................       (.28)        (.22)       (.18)           (.05)
Distributions from net realized gains.................       (.57)        (.03)       (.04)             --
                                                         --------     --------     -------     -------------
  Total distributions.................................       (.85)        (.25)       (.22)           (.05)
                                                         --------     --------     -------     -------------
Net asset value, end of period........................   $  16.06     $  14.22     $ 11.27       $   11.12
                                                         --------     --------     -------     -------------
                                                         --------     --------     -------     -------------
TOTAL RETURN(d).......................................      19.72%       29.02%       3.33%          11.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................   $184,379     $101,945     $50,119       $  27,142
Average net assets (000)..............................   $142,540     $ 71,711     $38,098       $  18,807
Ratios to average net assets: (b)
  Expenses............................................        .60%         .60%        .60%            .60%(c)
  Net investment income...............................       1.92%        2.55%       2.34%           2.41%(c)
Portfolio turnover rate...............................          2%          11%          2%              1%
Average commission rate paid per share................   $ 0.0250          N/A         N/A             N/A
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) 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 return for periods of 
    less than a full year are not annualized. Total return includes the effect 
    of expense subsidies.
N/A--Data not required for these periods.
- --------------------------------------------------------------------------------
                                              See Notes to Financial Statements.
 

                                      B-62
<PAGE>
                                         THE PRUDENTIAL INSTITUTIONAL FUND
Report of Independent Accountants        STOCK INDEX FUND
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
The Prudential Institutional Fund--Stock Index Fund

We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Prudential Institutional Fund--Stock Index
Fund as of September 30, 1996, the related statements of operations for the year
then ended and of changes in net assets for each of the two years in the period
then ended, and the financial highlights for the three years in the period then
ended and for the period November 5, 1992 (commencement of investment
operations) to September 30, 1993. These financial statements and financial
highlights are the responsibility of the Portfolio's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
September 30, 1996 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Prudential
Institutional Fund--Stock Index Fund as of September 30, 1996, the results of
its operations, the changes in its net assets and its financial highlights for
the respective stated periods in conformity with generally accepted accounting
principles.

DELOITTE & TOUCHE LLP
New York, New York
November 13, 1996

                                      B-63

<PAGE>

                                    APPENDIX
   
                 S&P RATINGS, MOODY'S AND DUFF & PHELPS RATINGS
    

S&P CORPORATE BOND RATINGS:

     AAA-Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.

     AA-Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.

     A-Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.

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

     BB, B, CCC, CC, C-Bonds rated BB, B, CCC, CC, or C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
represents the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.

MOODY'S CORPORATE BOND RATINGS:

     Aaa-Bonds rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
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 these issues.

     Aa-Bonds 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 a greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.

     A-Bonds 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 rate 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.

                                      A-1
<PAGE>

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

     C-Bonds 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.

     Moody's applies the numerical modifiers 1, 2 and 3 in the Aa and A rating
categories. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category. 

DUFF & PHELPS BOND RATINGS:

     AAA-Bonds rated AAA by Duff & Phelps are considered to be of the highest
credit quality. The risk factors are negligible, being only slightly more than
for risk-free U.S. Treasury debt.

     AA+, AA, AA-Bonds rated AA, AA or AA- are considered to be of high credit
quality. Protection factors are strong. Risk is modest but may vary slightly
from time to time because of economic conditions.
   
     A+, A, A-Bonds rated A+, A or A- have protection factors which are average
but adequate; however, risk factors are more variable and greater in periods of
economic stress.
    
     BBB+, BBB, BBB-Bonds rated BBB, BBB or BBB- have below average protection
factors but are still considered sufficient for prudent investment. These bonds
demonstrate considerable variability in risk during economic cycles.

     BB+, BB, BB-Bonds rated BB+, BB, or BB- are below investment grade but are
still deemed likely to meet obligations when due. Present or prospective
financial protection factors fluctuate according to industry conditions or
company fortunes. Overall quality may move up or down frequently within this
category.
   
     B+, B, or B-Bonds rated B+, B, or B- are below investment grade and possess
the risk that obligations will not be met when due. Financial protection factors
will fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
    
     CCC-Bonds rated CCC are well below investment grade securities.
Considerable uncertainty exists as to timely payment of principal, interest or
preferred dividends. Protection factors are narrow and risk can be substantial
with unfavorable economic/industry conditions, and/or with unfavorable company
developments.

     DD-Bonds rated DD are defaulted debt obligations. The issuer failed to meet
scheduled principal and/or interest payments.

                                      A-2

<PAGE>

S&P COMMERCIAL PAPER RATINGS:

     Commercial paper rate A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted A-1+.
Capacity for timely payment on commercial paper rated A-2 is strong, but the
relative degree of safety is not as high as for issues designated A-1.

MOODY'S COMMERCIAL PAPER RATINGS:

     The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated prime-2 (or related supporting institutions) are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics of
issuers rated Prime-1 but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.

DUFF & PHELPS COMMERCIAL PAPER RATINGS:

     Duff & Phelps commercial paper ratings are divided into three categories,
ranging from "1" for the highest quality obligations to "3" for the lowest. No
ratings are issued for companies whose paper is not deemed investment grade.
Issues assigned the Duff 1 rating are considered top grade. This category is
further divided into three gradations as follows: Duff 1 plus--highest certainty
of timely payment, short-term liquidity, including internal operating factors
and/or ready access to alternative sources of funds, is clearly outstanding and
safety is just below risk-free U.S. Treasury short-term obligations; Duff
1--very high certainty or timely payment liquidity factor are excellent and
supported by strong fundamental protection factors, risk factors are minor; Duff
1 minus-high certainty of timely payment, liquidity factors are strong and
supported by good fundamental protection factors, risk factors are very small.
Issues rated Duff 2 represent a good certainty of timely payment; liquidity
factors and company fundamentals are sound; although ongoing internal funds
needs may enlarge total financing requirements, access to capital markets is
good; risk factors are small. Duff 3 represents a satisfactory grade;
satisfactory liquidity and other protection factors qualify issue as to
investment grade; risk factors are larger and subject to more variation;
nevertheless timely payment is expected.






                                      A-3
<PAGE>


                     APPENDIX I--HISTORICAL PERFORMANCE DATA

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

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

                               CAMERA READY GRAPH

Source: Prudential Investment Corporation based on data from Ibbotson
Associates' EnCORR Software, Chicago, Illinois. Used with permission. This chart
is for illustrative purposes only and is not indicative of the past, present, or
future performance of any portfolio.

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

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

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

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

                                      I-1


<PAGE>

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

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



                                     [Chart]



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

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

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

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

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

                                      I-2


<PAGE>

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

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

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

                                     [Chart]

Source: Stocks, Bonds, Bills and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is used for illustrative
purposes only and is not intended to represent the past, present or future
performance of any Prudential Mutual Fund. Common stock total return is based on
the Standard & Poor's 500 Stock Index, a market-value-weighted index made up of
500 of the largest stocks in the U.S. based upon their stock market value.
Investors cannot invest directly in indices.

                                     [Chart]

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

                                      I-3

<PAGE>

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


                                     (CHART)

- ---------------
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of the long-term U.S. Treasury Bond from 1926-1994. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.

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


                                     (CHART)


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

                                      I-4
<PAGE>

   
                   APPENDIX II--GENERAL INVESTMENT INFORMATION
    

     The following terms are used in mutual fund investing.

ASSET ALLOCATION

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

DIVERSIFICATION

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

DURATION

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

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

MARKET TIMING

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

POWER OF COMPOUNDING

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


                                      II-1
<PAGE>


   
              APPENDIX III--INFORMATION RELATING TO THE PRUDENTIAL
    

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

INFORMATION ABOUT PRUDENTIAL

     The Manager and PIC1 are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1995. Its primary business is to offer a full range of products and services in
three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs more
than 92,000 persons worldwide, and maintains a sales force of approximately
13,000 agents and 5,600 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the Rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.

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

   
     Money Management. The Prudential is one of the largest pension fund
managers in the country, providing pension services to 1 in 3 Fortune 500 firms.
It manages $36 billion of individual retirement plan assets, such as 401(k)
plans. In July 1996, Institutional Investor ranked Prudential the fifth largest
institutional money manager of the 300 largest money management organizations in
the United States as of December 31, 1995. As of December 31, 1995, Prudential
had more than $314 billion in assets under management. Prudential Investments, a
business group of Prudential,(of which Prudential Mutual Funds is a key part)
manages over $190 billion in assets of institutions and individuals.
    

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

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

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

INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS

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

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

     From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.

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

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

2   As of December 31, 1994.

                                     III-1
<PAGE>


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

   
     High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of its
kind in the country) along with 100 or so other high yield bonds, which may be
considered for purchase3. Non-investment grade bonds, also known as junk bonds
or high yield bonds, are subject to a greater risk of loss of principal and
interest including default risk than higher-rated bonds. Prudential high yield
portfolio managers and analysts meet face-to-face with almost every bond issuer
in the High Yield Fund's portfolio annually, and have additional telephone
contact throughout the year.
    

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

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

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

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

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

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

   
     Trading Data4. On an average day, Prudential Mutual Funds' U.S. and foreign
equity trading desks traded $77 million in securities representing over 3.8
million shares with nearly 200 different firms. Prudential Mutual Funds' bond
trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets5. Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities6.
    

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

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

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

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

6  As of December 31, 1994.

                                     III-2



<PAGE>

INFORMATION ABOUT PRUDENTIAL SECURITIES

     Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI7.

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

     In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey. Five
Prudential Securities' analysts were ranked as first-team finishers8.

     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 ArchitectSM, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.

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











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

7  As of December 31, 1994.

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

                                     III-3
<PAGE>

                                     PART C
                                OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

   (A) FINANCIAL STATEMENTS:

   
       1. Financial Statements included in the Prospectuses constituting Part A
          of this Registration Statement:
    

          Financial Highlights.

       2. Financial Statements included in the Statement of Additional
     Information constituting Part B of this Registration Statement:

   
          Portfolio of Investments at September 30, 1996.

          Statement of Assets and Liabilities at September 30, 1996.

          Statement of Operations for the year ended September 30, 1996.

          Statements of Changes in Net Assets for the years ended September 30,
          1996 and 1995.
    
          Financial Highlights.

          Notes to Financial Statements.

          Independent Auditors' Report.

   (B) EXHIBITS:

       1.  (a) Certificate of Trust of the Registrant. Incorporated by reference
           as Exhibit 1(a) to Pre-Effective Amendment No. 2 to the Registration
           Statement on Form N-1A filed on October 30, 1992 (File No. 33-48066).

           (b) First Amendment to Certificate of Trust of the Registrant.
           Incorporated by reference as Exhibit 1(b) to Pre-Effective Amendment
           No. 2 to the Registration Statement on Form N-1A filed on October 30,
           1992 (File No. 33-48066).

   
           (c) Second Amendment to Certificate of Trust of the Registrant.*
    

           (d) Declaration of Trust of the Registrant. Incorporated by reference
           as Exhibit 1(c) to Pre-Effective Amendment No. 2 to the Registration
           Statement on Form N-1A filed on October 30, 1992 (File No. 33-48066).

           (e) First Amendment to Declaration of Trust of the Registrant.
           Incorporated by reference as Exhibit 1(d) to Pre-Effective Amendment
           No. 2 to the Registration Statement on Form N-1A filed on October 30,
           1992 (File No. 33-48066).

   
           (f) Second Amendment to Declaration of Trust of the Registrant.*
    

       2.  By-Laws of the Registrant as revised and restated October 5, 1992.
           Incorporated by reference as Exhibit 2 to Pre-Effective Amendment No.
           2 to the Registration Statement on Form N-1A filed on October 30,
           1992 (File No. 33-48066).

       3.  Not Applicable.

       4.  Instruments defining rights of shareholders.

       5.  (a) Management Agreement between the Registrant and Prudential
           Institutional Fund Management, Inc. Incorporated by reference as
           Exhibit 5(a) to Post-Effective Amendment No. 2 to the Registration
           Statement on Form N1-A filed on May 4, 1993 (File No. 33-48066).

           (b) (i) Subadvisory Agreement between Prudential Institutional Fund
           Management, Inc. and The Prudential Investment Corporation.
           Incorporated by reference as Exhibit 5(b)(i) to Post-Effective
           Amendment No. 2 to the Registration Statement on Form N1-A filed on
           May 4, 1993 (File No. 33-48066).

           (ii) Cash Management Subadvisory Agreement between Prudential
           Institutional Fund Management, Inc. and The Prudential Investment
           Corporation. Incorporated by reference as Exhibit 5(b)(ii) to
           Post-Effective Amendment No. 2 to the Registration Statement on Form
           N1-A filed on May 4, 1993 (File No. 33-48066).

           (c) Subadvisory Agreement between Prudential Institutional Fund
           Management, Inc. and Jennison Associates Capital Corp. Incorporated
           by reference as Exhibit 5(c) to Post-Effective Amendment No. 2 to the
           Registration Statement on Form N-1A filed on May 4, 1993 (File No.
           33-48066).

                                      C-1
<PAGE>

   
           (d) Subadvisory Agreement between Prudential Institutional Fund
           Management, Inc. and Mercator Asset Management, L.P. Incorporated by
           reference as Exhibit 5(d) to Post-Effective Amendment No. 5 to the
           Registration Statement on Form N-1A filed via EDGAR on January 26,
           1996.

           (e) Management Agreement.*

           (f)(i) Subadvisory Agreement between Prudential Mutual Fund
           Management LLC and The Prudential Investment Corporation.*

           (ii) Cash Management Agreement between Prudential Mutual Fund
           Management LLC and The Prudential Investment Corporation.*

           (g) Subadvisory Agreement between Prudential Mutual Fund Management
           LLC and Jennison Associates Capital Corp.*

       6.  (a) Distribution Agreement between the Registrant and Prudential
           Retirement Services, Inc. Incorporated by reference as Exhibit 6 to
           Post-Effective Amendment No. 2 to the Registration Statement on Form
           N-1A filed on May 4, 1993 (File No. 33-48066).

           (b) Form of Distribution Agreement.*
    

       7.  Not Applicable.

       8.  Custodian Agreement between the Registrant and State Street Bank and
           Trust Company. Incorporated by reference as Exhibit 8 to
           Post-Effective Amendment No. 2 to the Registration Statement on Form
           N-1A filed on May 4, 1993 (File No. 33-48066).

       9.  (a) Amended Administration, Transfer Agency and Service Agreement
           between the Registrant and Prudential Mutual Fund Management, Inc.
           Incorporated by reference as Exhibit 9(a) to Post-Effective Amendment
           No. 3 to the Registration Statement on Form N-1A filed via EDGAR on
           January 19, 1994 (File No. 33-48066).

           (b) Transfer Agency and Service Agreement between Prudential Mutual
           Fund Management, Inc. and Prudential Mutual Fund Services, Inc.
           Incorporated by reference as Exhibit 9(b) to Post-Effective Amendment
           No. 2 to the Registration Statement on Form N-1A filed on May 4, 1993
           (File No. 33-48066).

   
           (c) Form of Transfer Agency and Service Agreement. Incorporated by
               reference as Exhibit 9(c) to Post-Effective Amendment No. 6 to
               the Registration Statement on Form N-1A filed via EDGAR on
               October 11, 1996.
    

       10. (a) Opinion of Arnold & Porter. Incorporated by reference as Exhibit
           10(a) to Pre-Effective Amendment No. 2 to the Registration Statement
           on Form N-1A filed on October 30, 1992 (File No. 33-48066).

           (b) Opinion of Morris, Nichols, Arsht & Tunnell. Incorporated by
           reference as Exhibit 10(b) to Pre-Effective Amendment No. 2 to the
           Registration Statement on Form N-1A filed on October 30, 1992 (File
           No. 33-48066).

   
           (c) Opinion of Kirkpatrick & Lockhart.*
    

       11. Consent of Independent Accountants.*

       12. Not Applicable.

       13. Subscription Agreement between the Registrant and Prudential
           Institutional Fund Management, Inc. Incorporated by reference as
           Exhibit 13 to Pre-Effective Amendment No. 2 to the Registration
           Statement on Form N-1A filed on October 30, 1992 (File No. 33-48066).

       14. Not Applicable.

   
       15. (a) Distribution and Service Plan for Class A shares.* 

           (b) Distribution and Service Plan for Class B shares.*

           (c) Distribution and Service Plan for Class C shares.*
    

       16. Schedule of Computation of Performance Quotations. Incorporated by
           reference as Exhibit 16 to Post Effective Amendment No. 4 to the
           Registration Statement on Form N-1A filed via EDGAR on January 30,
           1995 (File No. 33-48066).

   
       18. Rule 18f-3 Plan.*

       27. Financial Data Schedules.*
    

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

                                      C-2
<PAGE>


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

        None.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

   
     As of November 22, 1996 there were 220 recordholders of shares of
beneficial interest of Prudential Stock Index Fund and 3 Class A shareholders, 2
Class B shareholders, 2 Class C shareholders and 28 Class Z shareholders of
Prudential Active Balanced Fund, $.001 par value per share, of the Registrant.
Certain of these recordholders may be sponsors of qualified retirement programs.
    

ITEM 27. INDEMNIFICATION.

     As permitted by Section 17(h) and (i) of the Investment Company Act of 1940
(the "1940 Act") and pursuant to Del. Code Ann. title 12 sec. 3817, a Delaware
business trust may provide in its governing instrument for the indemnification
of its officers and trustees from and against any and all claims and demands
whatsoever. Article VII, Section 2 of the Agreement and Declaration of Trust
states that (i) the Registrant shall indemnify any present trustee or officer to
the fullest extent permitted by law against liability, and all expenses
reasonably incurred by him or her in connection with any claim, action, suit or
proceeding in which he or she is involved by virtue of his or her service as a
trustee, officer or both, and against any amount incurred in settlement thereof
and (ii) all persons extending credit to, contracting with or having any claim
against the Registrant shall look only to the assets of the appropriate Series
(or if no Series has yet been established, only to the assets of the
Registrant). Indemnification will not be provided to a person adjudged by a
court or other adjudicatory body to be liable to the Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his or her duties (collectively "disabling conduct"). In
the event of a settlement, no indemnification may be provided unless there has
been a determination, as specified in the Declaration of Trust, that the officer
or trustee did not engage in disabling conduct. As permitted by Section 17(i) of
the 1940 Act, pursuant to Section 8 of the Distribution Agreement (Exhibit 6) to
the Registration Statement), the Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.

     Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (Securities Act) may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1940 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer, or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such trustee,
officer or controlling person 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 intends to purchase an insurance policy insuring its
officers and trustees against liabilities, and certain costs of defending claims
against such officers and trustees, to the extent such officers and trustees are
not found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and trustees under certain circumstances.

   
     Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreements (Exhibits 5(b-d) to the
Registration Statement) limit the liability of Prudential Mutual LLC, The
Prudential Investment Corporation ("PIC") and Jennison Associates Capital Corp.
("Jennison"), respectively, to liabilities arising from willful misfeasance, bad
faith or gross negligence in the performance of their respective duties or from
reckless disregard by them of their respective obligations and duties under the
agreements.
    

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

                                      C-3

<PAGE>

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

   
     (a) Prudential Mutual Fund Management LLC.
    

     See Management of the Company in the Prospectus constituting Part A of this
Registration Statement and Management of the Company in the Statement of
Additional Information constituting Part B of this Registration Statement.

   
     The business and other connections of the officers of PMF are listed in
Schedules A and D of Form ADV of PMF as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104, originally filed on November 13, 1987).

     The business and other connections of PMF's directors and principal
executive officers are set forth below. The address of each person is Gateway
Center Three, 100 Mulberry Street, 9th Floor, Newark, NJ 07107-4077.
    

Name and Address     Position with PMF              Principal Occupations
- ----------------     -----------------              ---------------------
   
Brian M. Storms      President and Chief           President and Chief
                     Executive Officer             Executive Officer, PMF
    

     (b) The Prudential Investment Corporation (PIC)

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

     The business and other connections of PIC's directors and principal
executive officers are as set forth below. Except as otherwise indicated, the
address of each person is 751 Broad Street, Newark, NJ 07102.


Name and Address        Position with PIC           Principal Occupations
- ----------------        -----------------           ----------------------
       

   
E. Michael Caulfield    Chairman of the Board,       Chief Executive Officer of
                        President and Chief           Prudential Investments
                        Executive Officer and         
                        Director

Jonathan M. Greene      Senior Vice President and    President--Investment
                        Director                      Management of Prudential
                                                      Investments

John R. Strangfeld      Vice President and Director  President of Private Asset
                                                       Management Group of
                                                       Prudential
    

     (c) Jennison Associates Capital Corp.

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

     Information as to Jennison's directors and principal executive officers is
included in its Form ADV filed with the Securities and Exchange Commission (File
No. 801-5608) as most recently amended, the text of which is incorporated
herein by reference.
    

ITEM 29. PRINCIPAL UNDERWRITERS

     (a) Prudential Securities Incorporated

   
     Prudential Securities Incorporated is distributor for The BlackRock
Government Income Trust, Command Government Fund, Command Money Fund, Command
Tax-Free Fund, The Global Government Plus Fund, Inc., The Global Return Fund,
Inc., Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc.
(Nicholas-Applegate Growth Equity Fund), Prudential Allocation Fund, Prudential
California Municipal Fund, Prudential Diversified Bond Fund, Inc., Prudential
Distressed Securities Fund, Inc., Prudential Dryden Fund, Prudential Emerging
Growth Fund, Inc., Prudential Equity Fund, Inc., Prudential Equity Income Fund,
Prudential Europe Growth Fund, Inc., Prudential Global Genesis Fund, Inc.,
Prudential Global Limited Maturity Fund, Inc., Prudential Government Income
Fund, Inc., Prudential Government Securities Trust, Prudential High Yield Fund,
Inc., Prudential Institutional Liquidity Portfolio, Inc.,
    

                                      C-4

<PAGE>

   
Prudential Intermediate Global Income Fund, Inc., Prudential Jennison Series
Fund, Inc., Prudential MoneyMart Assets, Inc., Prudential Mortgage Income Fund,
Inc., Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund,
Prudential Municipal Series Fund, Prudential National Municipals Fund, Inc.,
Prudential Natural Resources Fund, Inc., Prudential Pacific Growth Fund, Inc.,
Prudential Small Companies Fund, Inc., Prudential Special Money Market Fund,
Inc., Prudential Structured Maturity Fund, Inc., Prudential Tax-Free Money Fund,
Inc., Prudential Utility Fund, Inc., Prudential World Fund, Inc. and The Target
Portfolio Trust. Prudential Securities is also a depositor for the following
unit investment trusts:
    
                   The Corporate Investment Trust Fund
                   Prudential Equity Trust Shares
                   National Equity Trust
                   Prudential Unit Trusts
                   Government Securities Equity Trust
                   National Municipal Trust

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

<TABLE>
<CAPTION>

                                  Positions and                                                 Positions and
                                  Offices with                                                  Offices with
  Name(1)                         Underwriter                                                   Registrant
  --------                        --------------                                                --------------
  <S>                             <C>                                                                <C>
  Robert Golden ............      Executive Vice President and Director                              None
  Alan D. Hogan ............      Executive Vice President and Director                              None
  George A. Murray .........      Executive Vice President and Director                              None
  Leland B. Paton ..........      Executive Vice President and Director                              None
  One New York Plaza
  New York, NY
  Martin Pfinsgraff ........      Executive Vice President, Chief Financial Officer                  None
                                   and Director
  Vincent T. Pica, II ......      Executive Vice President and Director                              None
  One New York Plaza
  New York, NY
       
  Hardwick Simmons .........      Chief Executive Officer, President and Director                    None
  Lee B. Spencer, Jr. ......      Executive Vice President, Secretary General                        None
                                   Counsel, and Director
</TABLE>

- --------------
(1)  The address of each person named is One Seaport Plaza, New York, NY
     10292 unless otherwise indicated.

     (c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS

   
     All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the
offices of State Street Bank and Trust Company, One Heritage Drive, North
Quincy, Massachusetts, The Prudential Investment Corporation, Prudential Plaza,
751 Broad Street, Newark, New Jersey; the Registrant, 751 Broad Street, Newark,
New Jersey; Prudential Mutual Fund Management LLC, Gateway Center Three, Newark,
NJ 07102-4077 and Prudential Mutual Fund Services, Inc., Raritan Plaza One,
Edison, New Jersey. Documents required by Rules 31a-1(b)(5), (6), (7), (9), (10)
and (11) and 31a-1(f) will be kept at 751 Broad Street, Newark, New Jersey 07102
and 51 JFK Parkway, Short Hills, New Jersey 07078, for Prudential Stock Index
Fund, and 466 Lexington Avenue, New York, New York 10017, for Prudential Active
Balanced Fund, documents required by Rules 31a-1(b)(4) and (11) and 31a-1(d) at
One Seaport Plaza and the remaining accounts, books and other documents required
by such other pertinent provisions of Section 31(a) and the rules promulgated
thereunder will be kept by State Street Bank and Trust Company and Prudential
Mutual Fund Services, Inc.
    

ITEM 31. MANAGEMENT SERVICES
   
     Other than as set forth under the caption "How the Fund is Managed" in the
Prospectuses and under the caption "Manager and Subadvisers" in the Statement
of Additional Information, constituting Parts A and B, respectively, of this
Registration Statement, Registrant is not a party to any management-related
service contract.
    
ITEM 32. UNDERTAKINGS

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

                                      C-5
<PAGE>

                                   SIGNATURES

   
     Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all of the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under The Securities Act of 1933 and has duly caused
this Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Newark, and the State of New Jersey, on the 27th day of November, 1996.


                                    PRUDENTIAL DRYDEN FUND

                                    By      /s/  ROBERT F. GUNIA
                                       -----------------------------------
                                         Robert F. Gunia, Vice President

     Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 7 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/   EUGENE S. STARK                     Treasurer and Principal Financial            November 27, 1996
- ------------------------------                and Accounting Officer
      Eugene S. Stark

/s/   RICHARD A. REDEKER                     Trustee                                     November 27, 1996
- ------------------------------
      Richard A. Redeker

/s/   EDWARD  D. BEACH                       Trustee                                     November 27, 1996
- ------------------------------
      Edward D. Beach

/s/   DELAYNE  DEDRICK GOLD                  Trustee                                     November 27, 1996
- ------------------------------
      Delayne Dedrick Gold

/s/   ROBERT F. GUNIA                        Trustee                                     November 27, 1996
- ------------------------------
      Robert F. Gunia

/s/   DONALD D. LENNOX                       Trustee                                     November 27, 1996
- ------------------------------
      Donald D. Lennox

/s/   DOUGLAS H. McCORKINDALE                Trustee                                     November 27, 1996
- ------------------------------
      Douglas H. McCorkindale

/s/   MENDEL A. MELZER                       Trustee                                     November 27, 1996
- ------------------------------
      Mendel A. Melzer

/s/   THOMAS T. MOONEY                       Trustee                                     November 27, 1996
- ------------------------------
      Thomas T. Mooney

/s/   STEPHEN P. MUNN                        Trustee                                     November 27, 1996
- ------------------------------
      Stephem P. Munn

/s/   ROBIN B. SMITH                         Trustee                                     November 27, 1996
- ------------------------------
      Robin B. Smith

/s/   LOUIS A. WEIL, III                     Trustee                                     November 27, 1996
- ------------------------------
      Louis A. Weil, III

/s/   CLAY T. WHITEHEAD                      Trustee                                     November 27, 1996
- ------------------------------
      Clay T. Whitehead
</TABLE>

    

                                      C-6
<PAGE>


                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>

Sequentially
  Numbered
 Exhibit No.                                       Description                                  Page
- ------------                                       -----------                                  ----
   <S>                                             <C>                                          <C>

   1.   (a) Certificate of Trust of the Registrant. Incorporated by reference as
        Exhibit 1(a) to Pre-Effective Amendment No. 2 to the Registration
        Statement on Form N-1A filed on October 30, 1992 (File No. 33-48066).

        (b) First Amendment to Certificate of Trust of the Registrant.
        Incorporated by reference as Exhibit 1(b) to Pre-Effective Amendment No.
        2 to the Registration Statement on Form N-1A filed on October 30, 1992
        (File No. 33-48066).

   
        (c) Second Amendment to Certificate of Trust of the Registrant.*
    

        (d) Declaration of Trust of the Registrant. Incorporated by reference as
        Exhibit 1(c) to Pre-Effective Amendment No. 2 to the Registration
        Statement on Form N-1A filed on October 30, 1992 (File No. 33-48066).

        (e) First Amendment to Declaration of Trust of the Registrant.
        Incorporated by reference as Exhibit 1(d) to Pre-Effective Amendment No.
        2 to the Registration Statement on Form N-1A filed on October 30, 1992
        (File No. 33-48066).

   
        (f) Second Amendment to Declaration of Trust of the Registrant.*
    

   2.   By-Laws of the Registrant as revised and restated October 5, 1992.
        Incorporated by reference as Exhibit 2 to Pre-Effective Amendment No. 2
        to the Registration Statement on Form N-1A filed on October 30, 1992
        (File No. 33-48066).

   3.   Not Applicable.

   4.   Instruments defining rights of shareholders.

   5.   (a) Management Agreement between the Registrant and Prudential
        Institutional Fund Management, Inc. Incorporated by reference as Exhibit
        5(a) to Post-Effective Amendment No. 2 to the Registration Statement on
        Form N1-A filed on May 4, 1993 (File No. 33-48066).

        (b)(i) Subadvisory Agreement between Prudential Institutional Fund
        Management, Inc. and The Prudential Investment Corporation. Incorporated
        by reference as Exhibit 5(b)(i) to Post-Effective Amendment No. 2 to the
        Registration Statement on Form N1-A filed on May 4, 1993 (File No.
        33-48066).

        (ii) Cash Management Subadvisory Agreement between Prudential
        Institutional Fund Management, Inc. and The Prudential Investment
        Corporation. Incorporated by reference as Exhibit 5(b)(ii) to
        Post-Effective Amendment No. 2 to the Registration Statement on Form
        N1-A filed on May 4, 1993 (File No. 33-48066).

        (c) Subadvisory Agreement between Prudential Institutional Fund
        Management, Inc. and Jennison Associates Capital Corp. Incorporated by
        reference as Exhibit 5(c) to Post-Effective Amendment No. 2 to the
        Registration Statement on Form N-1A filed on May 4, 1993 (File No.
        33-48066).

        (d) Subadvisory Agreement between Prudential Institutional Fund
        Management, Inc. and Mercator Asset Management, L.P. Incorporated by
        reference as Exhibit 5(d) to Post-Effective Amendment No. 5 to the
        Registration Statement on Form N-1A filed via Edgar on January 26, 1996.

   
        (e) Management Agreement.*

        (f)(i) Subadvisory Agreement between Prudential Mutual Fund Management
        LLC and The Prudential Investment Corporation.*

        (ii) Cash Management Agreement between Prudential Mutual Fund Management
        LLC and The Prudential Investment Corporation.*

        (g) Subadvisory Agreement between Prudential Mutual Fund Management LLC
        and Jennison Associates Capital Corp.*
    
   6.   (a) Distribution Agreement between the Registrant and Prudential
        Retirement Services, Inc. Incorporated by reference as Exhibit 6 to
        Post-Effective Amendment No. 2 to the Registration Statement on Form
        N-1A filed on May 4, 1993 (File No. 33-48066).
   
        (b) Form of Distribution Agreement.*
    
</TABLE>


<PAGE>


<TABLE>
<CAPTION>


Sequentially
  Numbered
 Exhibit No.                                       Description                                  Page
- ------------                                       -----------                                  ----
   <S>                                             <C>                                          <C>
   7.   Not Applicable.

   8.   Custodian Agreement between the Registrant and State Street Bank and
        Trust Company. Incorporated by reference as Exhibit 8 to Post-Effective
        Amendment No. 2 to the Registration Statement on Form N-1A filed on May
        4, 1993 (File No. 33-48066).

   9.   (a) Amended Administration, Transfer Agency and Service Agreement
        between the Registrant and Prudential Mutual Fund Management, Inc.
        Incorporated by reference as Exhibit 9(a) to Post-Effective Amendment
        No. 3 to the Registration Statement on Form N-1A filed via EDGAR on
        January 19, 1994 (File No. 33-48066).

        (b) Transfer Agency and Service Agreement between Prudential Mutual Fund
        Management, Inc. and Prudential Mutual Fund Services, Inc. Incorporated
        by reference as Exhibit 9(b) to Post-Effective Amendment No. 2 to the
        Registration Statement on Form N-1A filed on May 4, 1993 (File No.
        33-48066).

        (c) Form of Transfer Agency and Service Agreement. Incorporated by
        reference as Exhibit 9(c) to Post-Effective Amendment No. 6 to the
        Registration Statement on Form N-1A filed via Edgar on October 11, 1996.

   10.  (a) Opinion of Arnold & Porter. Incorporated by reference as Exhibit
        10(a) to Pre-Effective Amendment No. 2 to the Registration Statement on
        Form N-1A filed on October 30, 1992 (File No. 33-48066).

        (b) Opinion of Morris, Nichols, Arsht & Tunnell. Incorporated by
        reference as Exhibit 10(b) to Pre-Effective Amendment No. 2 to the
        Registration Statement on Form N-1A filed on October 30, 1992 (File No.
        33-48066).

   
        (c) Opinion of Kirkpatrick & Lockhart.*
    

   11.  Consent of Independent Accountants.*

   12.  Not Applicable.

   13.  Subscription Agreement between the Registrant and Prudential
        Institutional Fund Management, Inc. Incorporated by reference as Exhibit
        13 to Pre-Effective Amendment No. 2 to the Registration Statement on
        Form N-1A filed on October 30, 1992 (File No. 33-48066).

   14.  Not Applicable.

   
   15.  (a) Distribution and Service Plan for Class A Shares.*
        (b) Distribution and Service Plan for Class B Shares.*
        (c) Distribution and Service Plan for Class C Shares.*
    

   16.  Schedule of Computation of Performance Quotations. Incorporated by
        reference as Exhibit 16 to Post Effective Amendment No. 4 to the
        Registration Statement on Form N-1A filed via EDGAR on January 30, 1995
        (File No. 33-48066).

   
   18.  Rule 18f-3 Plan.*

   27.  Financial Data Schedules.*
    
</TABLE>

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



                                SECOND AMENDMENT
                                       TO
                              CERTIFICATE OF TRUST
                                       OF
                        THE PRUDENTIAL INSTITUTIONAL FUND

     This Second Amendment to the Certificate of Trust (the "Certificate") of
The Prudential Institutional Fund (the "Business Trust") is being executed as of
October 30, 1996, for the purpose of amending the terms of the Certificate, as
originally filed in the Office of the Secretary of the State of Delaware on May
11, 1992, to reflect the change in current paragraph FIRST giving the name of
the Business Trust.

     NOW, THEREFORE, the undersigned do hereby certify as follows:

          1. The Certificate is hereby amended by changing current paragraph
     FIRST as follows:

               "FIRST: The name of the Business Trust is Prudential Dryden
          Fund."

          2. This Second Amendment to the Certificate shall become effective on
     October 30, 1996.

          3. Except as amended pursuant to the foregoing paragraph, the
     Certificate is hereby ratified and confirmed in all respects.


<PAGE>


     IN WITNESS WHEREOF, the undersigned, being the Trustees of the Business
Trust, have duly executed this Amendment to the Certificate as of the day and
year first above written.


                                          TRUSTEES


                                          /s/ MARK R. FETTING
                                          -----------------------------
                                          Mark R. Fetting


                                          /s/ DAVID A. FINLEY
                                          -----------------------------
                                          David A. Finley


                                          /s/ WILLIAM E. FRUHAN, JR.
                                          -----------------------------
                                          William E. Fruhan, Jr.


                                          /s/ AUGUST G. OLSEN
                                          -----------------------------
                                          August G. Olsen


                                          /s/ HERBERT G. STOLZER
                                          -----------------------------
                                          Herbert G. Stolzer

                                        2




                                SECOND AMENDMENT
                                       TO
                       AGREEMENT AND DECLARATION OF TRUST
                                       OF
                        THE PRUDENTIAL INSTITUTIONAL FUND

     This Second Amendment to the Agreement and Declaration of Trust (the
"Declaration of Trust") of The Prudential Institutional Fund (the "Trust") is
being executed as of October 30, 1996, for the purpose of changing the name of
the Trust as reflected in Article I of the Declaration of Trust.

     NOW, THEREFORE, the undersigned do hereby direct that the Declaration of
Trust be amended as follows:

          1. Section 1 of Article I of the Declaration of Trust is hereby
     amended by substituting the name "Prudential Dryden Fund" for the name "The
     Prudential Institutional Fund" in the second line thereof.

          2. This Second Amendment to the Declaration of Trust shall become
     effective on October 30, 1996.

          3. Except as amended pursuant to the foregoing paragraph, the
     Declaration of Trust is hereby ratified and confirmed in all respects.

                                      A-1

<PAGE>


     IN WITNESS WHEREOF, the undersigned, being the Trustees of the Trust, have
duly executed this Second Amendment to the Declaration of Trust as of the day
and year first above written.


                                         /s/ MARK R. FETTING
                                         ------------------------------------
                                         Mark R. Fetting
                                         Trustee


                                         /s/ DAVID A. FINLEY
                                         ------------------------------------
                                         David A. Finley
                                         Trustee


                                         /s/ WILLIAM E. FRUHAN, JR.
                                         ------------------------------------
                                         William E. Fruhan, Jr.
                                         Trustee


                                         /s/ AUGUST G. OLSEN
                                         ------------------------------------
                                         August G. Olsen
                                         Trustee


                                         /s/ HERBERT G. STOLZER
                                         ------------------------------------
                                         Herbert G. Stolzer
                                         Trustee

                                       A-2





                                                                 EXHIBIT 99.5(e)

                            PRUDENTIAL DRYDEN FUND
                 (formerly The Prudential Institutional Fund)

                             MANAGEMENT AGREEMENT

     Agreement, made this 30th day of October, 1996 between Prudential
Dryden Fund, a Delaware business trust (the Trust), and Prudential Mutual Fund
Management LLC, a limited liability company (the Manager).

                              W I T N E S S E T H

     WHEREAS, the Trust is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the 1940 Act);

     WHEREAS, the shares of beneficial interest of the Trust are divided into
separate series or funds (each a Fund), each of which is established pursuant to
a resolution of the Trustees of the Trust, and the Trustees may from time to
time terminate such Funds or establish and terminate additional Funds; and

     WHEREAS, the Trust desires to retain the Manager to render or contract to
obtain as hereinafter provided investment advisory services to the Trust, and
the Manager is willing to render such investment advisory services;



<PAGE>


     NOW, THEREFORE, the parties agree as follows:

     1. The Trust hereby appoints the Manager to act as manager of the Trust and
administrator of its corporate affairs for the period and on the terms set forth
in this Agreement. The Manager accepts such appointment and agrees to render the
services herein described, for the compensation herein provided. The Manager is
authorized to enter into subadvisory agreements for investment advisory services
in connection with the management of the Trust and each Fund thereof. Any such
agreement may be entered into by the Manager on such terms and in such manner as
may be permitted by the 1940 Act and the rules thereunder. The Manager will
continue to have responsibility for all investment advisory services furnished
pursuant to any such investment advisory agreements. The Manager will review the
performance of all subadvisers, as well as the Distributor, Transfer Agent and
Custodian and make recommendations to the Trustees of the Trust with respect to
the retention and renewal of contracts.

     2. Subject to the supervision of the Trustees of the Trust, the Manager
shall administer the Fund's corporate affairs and, in connection therewith,
shall furnish the Fund with office facilities and with clerical, bookkeeping and
recordkeeping services at such office facilities and, subject to Section 1
hereof, the Manager shall manage the investment operations of the Trust and each
Fund thereof and the composition of each Fund's portfolio, including the
purchase, retention and disposition thereof, in accordance with the Trust's and
the Fund's investment objectives, policies and restrictions as stated in the
Prospectus (hereinafter defined) and subject to the following understandings:

          (a) The Manager shall provide supervision of each Fund's investments
     and determine from time to time what investments or securities will be
     purchased, retained, sold or loaned


                                      2



<PAGE>


     by each Fund, and what portion of the assets will be invested or held
     uninvested as cash.

          (b) The Manager, in the performance of its duties and obligations
     under this Agreement, shall act in conformity with the Declaration of
     Trust, By-Laws and Prospectus (hereinafter defined) of the Trust and with
     the instructions and directions of the Trustees of the Trust and will
     conform to and comply with the requirements of the 1940 Act and all other
     applicable federal and state laws and regulations.

          (c) The Manager shall determine the securities and futures contracts
     to be purchased or sold by each Fund and will place orders pursuant to its
     determinations with or through such persons, brokers, dealers or futures
     commission merchants (including but not limited to Prudential Securities
     Incorporated) in conformity with the policy with respect to brokerage as
     set forth in the Trust's Registration Statement and Prospectus (hereinafter
     defined) or as the Trustees may direct from time to time. In providing the
     Trust with investment supervision, it is recognized that the Manager will
     give primary consideration to securing the most favorable price and
     efficient execution. Consistent with this policy, the Manager may consider
     the financial responsibility, research and investment information and other
     services provided by brokers, dealers or futures commission merchants who
     may effect or be a party to any such transaction or other transactions to
     which other clients of the Manager may be a party. It is understood that
     Prudential Securities Incorporated may be used as principal broker for
     securities transactions but that no formula has been adopted for allocation
     of the Trust's investment transaction business. It is also understood that
     it is desirable for the Trust that the Manager have access to supplemental
     investment and market research and security and economic analysis provided
     by brokers or futures commission merchants and that such


                                      3



<PAGE>


     brokers may execute brokerage transactions at a higher cost to the Trust
     than may result when allocating brokerage to other brokers or futures
     commission merchants on the basis of seeking the most favorable price and
     efficient execution. Therefore, the Manager is authorized to pay higher
     brokerage commissions for the purchase and sale of securities and futures
     contracts for the Trust to brokers or futures commission merchants who
     provide such research and analysis, subject to review by the Trustees of
     the Trust from time to time with respect to the extent and continuation of
     this practice. It is understood that the services provided by such broker
     or futures commission merchant may be useful to the Manager in connection
     with its services to other clients.

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

          (d) The Manager shall maintain all books and records with respect to
     each Fund's portfolio transactions and shall render to the Trustees of the
     Trust such periodic and special reports as the Board may reasonably
     request.

          (e) The Manager shall be responsible for the financial and accounting
     records to be


                                      4



<PAGE>


     maintained by the Trust (including those being maintained by the Trust's
     Custodian).

          (f) The Manager shall provide the Trust's Custodian on each business
     day with information relating to all transactions concerning the Trust's
     assets.
         
          (g) The investment management services of the Manager to the Trust
     under this Agreement are not to be deemed exclusive, and the Manager shall
     be free to render similar services to others.

     3. The Trust has delivered to the Manager copies of each of the following
documents and will deliver to it all future amendments and supplements thereto,
if any:

          (a) Agreement and Declaration of Trust, as filed with the Secretary of
     State of Delaware (such Agreement and Declaration of Trust, as in effect on
     the date hereof and as amended from time to time, are herein called the
     "Declaration of Trust");

          (b) By-Laws of the Trust (such By-Laws, as in effect on the date
     hereof and as amended from time to time, are herein called the "By-Laws");

          (c) Certified resolutions of the Trustees of the Trust authorizing the
     appointment of the Manager and approving the form of this Agreement;

          (d) Registration Statement under the 1940 Act and the Securities Act
     of 1933, as amended, on Form N-1A (the Registration Statement), as filed
     with the Securities and Exchange Commission (the Commission) relating to
     the Trust and shares of beneficial interest of the Trust and all amendments
     thereto;

          (e) Notification of Registration of the Trust under the 1940 Act on
     Form N-8A as filed with the Commission and all amendments thereto; and

          (f) Prospectus of the Trust (such Prospectus and Statement of
     Additional


                                      5



<PAGE>


     Information, each as currently in effect and as amended or supplemented
     from time to time, being herein collectively called the "Prospectus").

     4. The Manager shall authorize and permit any of its directors, officers
and employees who may be elected as Trustees or officers of the Trust to serve
in the capacities in which they are elected. All services to be furnished by the
Manager under this Agreement may be furnished through the medium of any such
directors, officers or employees of the Manager.

     5. The Manager shall keep the Trust's books and records required to be
maintained by it pursuant to paragraph 2 hereof. The Manager agrees that all
records which it maintains for the Trust are the property of the Trust and it
will surrender promptly to the Trust any such records upon the Trust's request,
provided however that the Manager may retain a copy of such records. The Manager
further agrees to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act any such records as are required to be maintained by the Manager
pursuant to paragraph 2 hereof.

     6. During the term of this Agreement, the Manager shall pay the following
expenses:

          (i) the salaries and expenses of all personnel of the Trust and the
     Manager except the fees and expenses of Trustees who are not affiliated
     persons of the Manager or the Trust's investment adviser,

          (ii) all expenses incurred by the Manager or by the Trust in
     connection with managing the ordinary course of the Trust's business other
     than those assumed by the Trust herein, and

            (iii) the costs and expenses payable pursuant to any subadvisory
      agreements. 

     The Trust assumes and will pay the expenses described below:

          (a) the fees and expenses incurred by the Trust in connection with the
     management of the investment and reinvestment of each Fund's assets,


                                      6



<PAGE>


          (b) the fees and expenses of Trustees who are not affiliated persons
     of the Manager or a Fund's investment adviser,

          (c) the fees and expenses of the Custodian that relate to (i) the
     custodial function and the recordkeeping connected therewith, (ii)
     preparing and maintaining the general accounting records of the Trust and
     the providing of any such records to the Manager useful to the Manager in
     connection with the Manager's responsibility for the accounting records of
     the Trust pursuant to Section 31 of the 1940 Act and the rules promulgated
     thereunder, (iii) the pricing of the shares of the Trust, including the
     cost of any pricing service or services which may be retained pursuant to
     the authorization of the Trustees of the Fund, and (iv) for both mail and
     wire orders, the cashiering function in connection with the issuance and
     redemption of the Trust's securities,

          (d) the fees and expenses of the Trust's Transfer and Dividend
     Disbursing Agent, which may be the Custodian, that relate to the
     maintenance of each shareholder account,

          (e) the charges and expenses of legal counsel and independent
     accountants for the Trust,

          (f) brokers' commissions and any issue or transfer taxes chargeable to
     the Trust in connection with its securities and futures transactions,

          (g) all taxes and corporate fees payable by the Trust to federal,
     state or other governmental agencies,

          (h) the fees of any trade associations of which the Trust may be a
     member,

          (i) the cost of share certificates representing, and/or non-negotiable
     share deposit receipts evidencing, shares of the Trust,


                                      7



<PAGE>


          (j) the cost of fidelity, directors and officers and errors and
     omissions insurance,

          (k) the fees and expenses involved in registering and maintaining the
     registration of the Trust and of its shares with the Securities and
     Exchange Commission, registering the Trust as a broker or dealer and
     qualifying its shares under state securities laws, including the
     preparation and printing of the Trust's registration statements,
     prospectuses and statements of additional information for filing under
     federal and state securities laws for such purposes,

          (l) allocable communications expenses with respect to investor
     services and all expenses of shareholders' and Trustees' meetings and of
     preparing, printing and mailing reports to shareholders in the amount
     necessary for distribution to the shareholders, and

          (m) litigation and indemnification expenses and other extraordinary
     expenses not incurred in the ordinary course of the Trust's business, and

          (n) any expenses assumed by the Fund pursuant to a Plan of
     Distribution adopted in conformity with Rule 12b-1 under the 1940 Act.

     7. In the event the expenses of the Trust for any fiscal year (including
the fees payable to the Manager 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 Trust's
business) exceed the lowest applicable annual expense limitation established and
enforced pursuant to the statute or regulations of any jurisdictions in which
shares of the Trust are then qualified for offer and sale, the compensation due
the Manager will be reduced by the amount of such excess, or, if such reduction
exceeds the compensation payable to the Manager, the Manager will pay to the
Trust the amount of such reduction which exceeds the amount of such
compensation.

     8. For the services provided and the expenses assumed pursuant to this
Agreement, the Trust


                                      8



<PAGE>


will pay to the Manager as full compensation therefor fees as set forth below.
These fees will be computed daily and will be paid to the Manager monthly. Any
reduction in the fees payable and any payments by the Manager to the Trust
pursuant to paragraph 7 shall be made monthly. Any such reductions or payments
are subject to readjustment during the year.

                                               Rate as a percentage of
            Name of Fund                       average daily net assets
            ------------                       ------------------------
         Stock Index Fund                            .30 of 1%
         Active Balanced Fund                        .65 of 1%
 
     9. The Manager shall not be liable for any error of judgment or for any
loss suffered by the Fund in connection with the matters to which this Agreement
relates, except a loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation for services (in which case any award of damages
shall be limited to the period and the amount set forth in Section 36(b)(3) of
the 1940 Act) or loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement.

     10. The Trust shall indemnify the Manager and hold it harmless from and
against all damages, liabilities, costs and expenses (including reasonable
attorneys' fees and amounts reasonably paid in settlement) incurred by the
Manager in or by reason of any pending, threatened or completed action, suit,
investigation or other proceeding (including an action or suit by or in the
right of the Trust or its security holders) arising out of or otherwise based
upon any action actually or allegedly taken or omitted to be taken by the
Manager in connection with the performance of any of its duties or obligations
under this Agreement; provided, however, that nothing contained herein shall
protect


                                      9



<PAGE>


or be deemed to protect the Manager against or entitle or be deemed to entitle
the Manager to indemnification in respect of any liability to the Trust or its
security holders to which the Manager would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties, or by reason of its reckless disregard of its duties and obligations
under this Agreement.

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

     12. Nothing in this Agreement shall limit or restrict the right of any
director, officer or employee of the Manager who may also be a Trustee, officer
or employee of the Trust to engage in any other business or to devote his or her
time and attention in part to the management or other aspects of any business,
whether of a similar or dissimilar nature, nor limit or restrict the right of
the Manager to engage in any other business or to render services of any kind to
any other corporation, firm, individual or association.

     13. Except as otherwise provided herein or authorized by the Trustees of
the Trust from time to time, the Manager shall for all purposes herein be deemed
to be an independent contractor and shall have no authority to act for or
represent the Trust in any way or otherwise be deemed an agent of the Trust.


                                      10



<PAGE>


     14. During the term of this Agreement, the Trust agrees to furnish the
Manager at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature, or other material prepared for distribution to
shareholders of the Trust or the public, which refer in any way to the Manager,
prior to use thereof and not to use such material if the Manager reasonably
objects in writing within five business days (or such other time as may be
mutually agreed) after receipt thereof. In the event of termination of this
Agreement, the Trust will continue to furnish to the Manager copies of any of
the above mentioned materials which refer in any way to the Manager. Sales
literature may be furnished to the Manager hereunder by first class or overnight
mail, facsimile transmission equipment or hand delivery. The Trust shall furnish
or otherwise make available to the Manager such other information relating to
the business affairs of the Trust as the Manager at any time, or from time to
time, reasonably requests in order to discharge its obligations hereunder.

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

     16. Any notice or other communication required to be given pursuant to this
Agreement shall be deemed duly given if delivered or mailed by registered mail,
postage prepaid, (1) to the Manager at One Seaport Plaza, New York, New York
10292-0132, Attention: Secretary; or (2) to the Trust at Prudential Plaza, 751
Broad Street, Newark, NJ 07102-3777, Attention: Assistant Secretary.

     17. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without reference to choice of law principles
thereof and in accordance with the 1940 Act. In the case of any conflict the
1940 Act shall control.


                                      11



<PAGE>


     18. The Trust may use the name "Prudential Dryden Fund" or any name
including the word "Prudential" only for so long as this Agreement or any
extension, renewal or amendment hereof remains in effect, including any similar
agreement with any organization which shall have succeeded to the Manager's
business as Manager or any extension, renewal or amendment thereof remain in
effect. At such time as such an agreement shall no longer be in effect, the
Trust will (to the extent that it lawfully can) cease to use such a name or any
other name indicating that it is advised by, managed by or otherwise connected
with the Manager, or any organization which shall have so succeeded to such
businesses. In no event shall the Trust use the name "Prudential Dryden Fund" or
any name including the word "Prudential" if the Manager's function is
transferred or assigned to a company of which The Prudential Insurance Company
of America does not have control.

     19. The Trust is a business trust organized under the Delaware Business
Trust Act pursuant to a certificate of trust dated May 11, 1992. The Trust is a
series trust and all debts, liabilities, obligations and expenses of a
particular Fund shall be enforceable only against the assets of that Fund and
not against the assets of any other Fund or of the Trust as a whole. Neither the
Trustees, officers, agents or shareholders of the Trust assume any personal
liability for obligations entered into on behalf of the Trust (or a Fund
thereof).

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


                                        PRUDENTIAL DRYDEN FUND


                                        By /s/ ROBERT F. GUNIA
                                           ----------------------------------
                                           Robert F. Gunia



                                        PRUDENTIAL MUTUAL FUND MANAGEMENT LLC


                                        By /s/ BRIAN M. STORMS
                                           ----------------------------------
                                           Brian M. Storms

                                      12




                                                             EXHIBIT 99.5(f)(i)

                             PRUDENTIAL DRYDEN FUND
                              (Stock Index Fund)

                             SUBADVISORY AGREEMENT

     Agreement made as of this 30th day of October, 1996, between Prudential
Mutual Fund Management LLC, a limited liability company, (PMF or the Manager),
and The Prudential Investment Corporation, a New Jersey Corporation (the
Subadviser).

                               W I T N E S S E T H

     WHEREAS, the Manager has entered into a Management Agreement, dated
October 30, 1996 (the Management Agreement), with Prudential Dryden Fund
(formerly The Prudential Institutional Fund) (the Trust), a Delaware business
trust and a diversified, open-end management investment company registered under
the Investment Company Act of 1940 (the 1940 Act), pursuant to which PMF will
act as Manager of the Trust;

     WHEREAS, the shares of beneficial interest of the Trust are divided into
separate series or funds, each of which is established pursuant to a resolution
of the Trustees of the Trust, and the Trustees may from time to time terminate
such series or funds or establish and terminate additional series or funds;


<PAGE>


     WHEREAS, the Manager desires to retain the Subadviser to provide investment
advisory services to Pudential Stock Index Fund (the Fund) in connection with
the management of the Trust and the Subadviser is willing to render such
investment advisory services;

     NOW, THEREFORE, the Parties agree as follows:

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

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

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

          (iii) The Subadviser shall determine the securities and futures
     contracts to

                                      2


<PAGE>



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

                                      3


<PAGE>



     merchants, subject to review by the Trustees of the Trust from time to time
     with respect to the extent and continuation of this practice. It is
     understood that the services provided by such brokers or futures commission
     merchants may be useful to the Subadviser in connection with the
     Subadviser's services to other clients.

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

          (iv) The Subadviser shall maintain all books and records with respect
     to the Fund's portfolio transactions required by subparagraphs (b)(5), (6),
     (7), (9), (10) and (11) and paragraph (f) of Rule 31a-1 under the 1940 Act
     and shall render to the Trustees of the Trust such periodic and special
     reports as the Board may reasonably request.

          (v) The Subadviser shall provide the Trust's Custodian on each
     business day with information relating to all transactions concerning the
     Fund's assets and shall

                                      4


<PAGE>



     provide the Manager with such information upon request of the Manager.

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

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

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


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

                                      5


<PAGE>



     3. The Manager shall reimburse the Subadviser for reasonable costs and
expenses incurred by the Subadviser determined in a manner acceptable to the
Manager in furnishing the services provided in paragraph 1 hereof.

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

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

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

                                      6


<PAGE>



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

     8. Any notice or other communication required to be given pursuant to this
Agreement shall be deemed duly given if delivered or mailed by registered mail,
postage prepaid, (1) to the Manager at One Seaport Plaza, New York, New York
10292-0125, Attention: Secretary; or (2) to the Subadviser at Prudential Plaza,
751 Broad Street, Newark, NJ 07102-3777, Attention: President.

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

     10. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without reference to choice of law principles
thereof and in accordance with the 1940 Act. In the case of any conflict the
1940 Act shall control.

                                      7


<PAGE>


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

                                         PRUDENTIAL MUTUAL FUND MANAGEMENT LLC


                                        By /s/ BRIAN M. STORMS
                                           ----------------------------------
                                           Brian M. Storms
                                           President




                                         THE PRUDENTIAL INVESTMENT CORPORATION


                                        By /s/ JONATHAN M. GREENE
                                           ----------------------------------
                                           Jonathan M. Greene
                                           Senior Vice President


                                         8




                                                            EXHIBIT 99.5(f)(ii)

                            PRUDENTIAL DRYDEN FUND
                 (formerly the Prudential Institutional Fund)
                        (Prudential Active Balanced Fund)

                            CASH MANAGEMENT AGREEMENT

     Agreement made as of this 30th day of October, 1996 between Prudential
Mutual Fund Management LLC (PMF or the Manager), a limited liability company,
and The Prudential Investment Corporation (PIC), a New Jersey Corporation.

                             W I T N E S S E T H

     WHEREAS, the Manager has entered into a Management Agreement, dated
October 30, 1996 (the Management Agreement), with Prudential Dryden Fund (the
Trust), a Delaware business trust and a diversified, open-end management
investment company registered under the Investment Company Act of 1940 (the 1940
Act), pursuant to which PMF will act as Manager of the Trust;

     WHEREAS, the shares of beneficial interest of the Trust are divided into
separate series or portfolios, each of which is established pursuant to a
resolution of the Trustees of the Trust, and the Trustees may from time to time
terminate such funds or establish and terminate additional funds;

                                    

<PAGE>



     WHEREAS, the Manager has entered into a separate subadvisory agreement for
the Prudential Active Balanced Fund (the Fund) with Jennison Associates Capital
Corp. (the Subadviser) pursuant to which investment advisory services will be
provided to the Fund except with respect to (i) the management of short-term
assets, including cash, money market instruments and repurchase agreements and
(ii) the lending of portfolio securities;

     WHEREAS, the Manager desires to retain PIC to provide investment advisory
services to the Active Balanced Fund with respect to (i) the management of
short-term assets, including cash, money market instruments and repurchase
agreements and (ii) the lending of portfolio securities in connection with the
management of the Trust and PIC is willing to render such investment advisory
services;

     NOW, THEREFORE, the Parties agree as follows:

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

               (i) PIC shall provide supervision of the Fund's investments and
          determine from time to time what investments and securities will be
          purchased, retained,

                                        2


<PAGE>



          sold or loaned by the Fund, and what portion of the assets will be
          invested or held uninvested as cash.

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

               (iii) The Subadviser shall advise PIC of the dollar amount of the
          Fund's assets that shall be invested in repurchase agreements, money
          market instruments or held in cash and advise PIC as to the securities
          available for lending and the securities to be recalled from loan.

               (iv) Upon receipt of information from the Subadviser as to the
          amount of funds available for short-term investment, as described in
          paragraph 1(a)(iii) above, PIC shall determine the securities to be
          purchased or sold by the Fund and will place orders with or through
          such persons, brokers or dealers (including but not limited to
          Prudential Securities Incorporated) to carry out the policy with
          respect to brokerage as set forth in the Trust's Registration
          Statement and Prospectus or as the Trustees may direct from time to
          time. In providing the Fund with investment supervision, it is
          recognized that PIC will give primary consideration to securing the
          most favorable price and efficient execution. Within the framework of
          this policy, PIC may consider the financial

                                        3


<PAGE>



          responsibility, research and investment information and other services
          provided by brokers or dealers who may effect or be a party to any
          such transaction or other transactions to which PIC's other clients
          may be a party. On occasions when PIC deems the purchase or sale of a
          security to be in the best interest of a Fund as well as other clients
          of PIC, PIC, to the extent permitted by applicable laws and
          regulations, may, but shall be under no obligation to, aggregate the
          securities to be sold or purchased in order to obtain the most
          favorable price or lower brokerage commissions and efficient
          execution. In such event, allocation of the securities so purchased or
          sold, as well as the expenses incurred in the transaction, will be
          made by PIC in the manner PIC considers to be the most equitable and
          consistent with its fiduciary obligations to the Fund, the Trust and
          to such other clients.

               (v) PIC shall maintain all books and records with respect to the
          Fund's portfolio transactions required by subparagraphs (b)(5), (6),
          (7), (9), (10) and (11) and paragraph (f) of Rule 31a-1 under the 1940
          Act and shall render to the Trustees of the Trust such periodic and
          special reports as the Board may reasonably request.

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

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

                                        4


<PAGE>



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


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

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

     3. The Manager shall reimburse PIC for reasonable costs and expenses
incurred by PIC determined in a manner acceptable to the Manager in furnishing
the services provided in paragraph 1 hereof.

     4. PIC shall not be liable for any error of judgment or for any loss
suffered by the Fund or the Manager in connection with the matters to which this
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on PIC's part in the performance of

                                        5


<PAGE>



its duties or from its reckless disregard of its obligations and duties under
this Agreement.

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

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

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

                                        6


<PAGE>



     8. Any notice or other communication required to be given pursuant to this
Agreement shall be deemed duly given if delivered or mailed by registered mail,
postage prepaid, (1) to the Manager at One Seaport Plaza, New York, New York
10292-0125, Attention: Secretary; or (2) to the Subadviser at 466 Lexington
Avenue, New York, New York 10017, Attention: President.

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

     10. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without reference to choice of law principles
thereof and in accordance with the 1940 Act. In the case of any conflict the
1940 Act shall control.

                                        7


<PAGE>


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

                                        PRUDENTIAL MUTUAL FUND MANAGEMENT LLC



                                        By /s/ BRIAN M. STORMS
                                           ----------------------------------
                                           Brian M. Storms
                                           President




                                         THE PRUDENTIAL INVESTMENT CORPORATION


                                        By /s/ JONATHAN M. GREENE
                                           ----------------------------------
                                           Jonathan M. Greene
                                           Senior Vice President


                                        8



                                                                EXHIBIT 99.5(g)

                             PRUDENTIAL DRYDEN FUND
                  (formerly The Prudential Institutional Fund)
                       (Prudential Active Balanced Series)

                              SUBADVISORY AGREEMENT

     Agreement made as of this 30th day of October, 1996, between Prudential
Mutual Fund Management LLC, a limited liability company, (PMF or the Manager),
and Jennison Associates Capital Corp., a New York Corporation (the Subadviser).

                               W I T N E S S E T H

     WHEREAS, the Manager has entered into a Management Agreement, dated
October 30, 1996 (the Management Agreement), with Prudential Dryden Fund
(formerly The Prudential Institutional Fund) (the Trust), a Delaware business
trust and a diversified, open-end management investment company registered under
the Investment Company Act of 1940 (the 1940 Act), pursuant to which PMF will
act as Manager of the Trust;

     WHEREAS, the shares of beneficial interest of the Trust are divided into
separate series or funds, each of which is established pursuant to a resolution
of the Trustees of the Trust, and the Trustees may from time to time terminate
such series or funds or establish and terminate additional series or funds;


<PAGE>



     WHEREAS, the Manager has entered into a separate subadvisory agreement
dated October 30, 1996 with The Prudential Investment Corporation (PIC), a
New Jersey corporation, pursuant to which PIC will provide investment advisory
services to the Trust with respect to (i) the management of short-term assets,
including cash, money market instruments and repurchase agreements and (ii) the
lending of portfolio securities;

     WHEREAS, the Manager desires to retain the Subadviser to provide investment
advisory services to the Prudential Active Balanced Fund (the Fund) in
connection with the management of the Trust and the Subadviser is willing to
render such investment advisory services;

     NOW, THEREFORE, the Parties agree as follows:

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

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

                                        2


<PAGE>



          invested or held uninvested as cash.

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

               (iii) The Subadviser shall advise PIC of the dollar amount of
          each Fund's assets that shall be invested in repurchase agreements,
          money market instruments or held in cash and advise PIC as to the
          securities available for lending and the securities to be recalled
          from loan. In the event the agreement with PIC is terminated, the
          Subadviser shall provide investment advisory services to the Fund with
          respect to the management of short-term assets and the lending of
          portfolio securities under this Agreement.

               (iv) The Subadviser shall determine the securities and futures
          contracts to be purchased or sold by the Fund and will place orders
          with or through such persons, brokers, dealers or futures commission
          merchants (including but not limited to Prudential Securities
          Incorporated) to carry out the policy with respect to brokerage as set
          forth in the Trust's Registration Statement and Prospectus or as the
          Trustees may direct from time to time. In providing the Fund with
          investment supervision, it is recognized that the Subadviser will give
          primary consideration to securing the most favorable price and
          efficient execution.

                                        3


<PAGE>



          Within the framework of this policy, the Subadviser may consider the
          financial responsibility, research and investment information and
          other services provided by brokers, dealers or futures commission
          merchants who may effect or be a party to any such transaction or
          other transactions to which the Subadviser's other clients may be a
          party. It is understood that Prudential Securities Incorporated may be
          used as principal broker for securities transactions but that no
          formula has been adopted for allocation of the Trust's investment
          transaction business. It is also understood that it is desirable for
          the Fund that the Subadviser have access to supplemental investment
          and market research and security and economic analysis provided by
          brokers or futures commission merchants who may execute brokerage
          transactions at a higher cost to the Fund than may result when
          allocating brokerage to other brokers on the basis of seeking the most
          favorable price and efficient execution. Therefore, the Subadviser is
          authorized to place orders for the purchase and sale of securities and
          futures contracts for the Fund with such brokers or futures commission
          merchants, subject to review by the Trustees of the Trust from time to
          time with respect to the extent and continuation of this practice. It
          is understood that the services provided by such brokers or futures
          commission merchants may be useful to the Subadviser in connection
          with the Subadviser's services to other clients.

               On occasions when the Subadviser deems the purchase or sale of a
          security or futures contract to be in the best interest of the Fund as
          well as other

                                        4


<PAGE>



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

               (v) The Subadviser shall maintain all books and records with
          respect to the Fund's portfolio transactions required by subparagraphs
          (b)(5), (6), (7), (9), (10) and (11) and paragraph (f) of Rule 31a-1
          under the 1940 Act and shall render to the Trustees of the Trust such
          periodic and special reports as the Board may reasonably request.

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

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

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

                                        5


<PAGE>



     this Agreement may be furnished through the medium of any of such
     directors, officers or employees.

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

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

     3. The Manager shall compensate the Subadviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement, a fee at an
annual rate of .30 of 1% of the Fund's average daily net assets up to $300
million and .25 of 1% of average daily net assets in excess of $300 million.
This fee will be computed daily and paid monthly.

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

                                        6


<PAGE>



in the performance of its duties or from its reckless disregard of its
obligations and duties under this Agreement.

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

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

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

                                        7


<PAGE>



thereof. Sales literature may be furnished to the Subadviser hereunder by
first-class or overnight mail, facsimile transmission equipment or hand
delivery.

     8. Any notice or other communication required to be given pursuant to this
Agreement shall be deemed duly given if delivered or mailed by registered mail,
postage prepaid, (1) to the Manager at One Seaport Plaza, New York, New York
10292-0125, Attention: Secretary; or (2) to the Subadviser at 466 Lexington
Avenue, New York, NY 10017, Attention: President.

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

     10. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without reference to choice of law principles
thereof and in accordance with the 1940 Act. In the case of any conflict the
1940 Act shall control.

                                        8


<PAGE>


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

                                        PRUDENTIAL MUTUAL FUND MANAGEMENT LLC


                                        By /s/ BRIAN M. STORMS
                                           ----------------------------------
                                           Brian M. Storms
                                           President




                                        JENNISON ASSOCIATES CAPITAL CORPORATION


                                        By /s/ JOHN H. HOBBS
                                           ----------------------------------
                                           John H. Hobbs
                                           President




                                        9




                                                                 EXHIBIT 99.6(b)

                             PRUDENTIAL DRYDEN FUND
                  (formerly The Prudential Institutional Fund)

                             Distribution Agreement

     Agreement made as of May 8, 1996 between Prudential Dryden Fund, a
Delaware business trust (the Fund), and Prudential Securities Incorporated, a
Delaware corporation (the Distributor).

                                   WITNESSETH

     WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended (the Investment Company Act), as a diversified, open-end, management
investment company and it is in the interest of the Fund to offer its shares for
sale continuously;

     WHEREAS, the shares of the Fund may be divided into classes and/or series
(all such shares being referred to herein as Shares) and the Fund currently is
authorized to offer Class A, Class B, Class C and Class Z Shares;

     WHEREAS, the Distributor is a broker-dealer registered under the Securities
Exchange Act of 1934, as amended, and is engaged in the business of selling
shares of registered investment companies either directly or through other
broker-dealers;

     WHEREAS, the Fund and the Distributor wish to enter into an agreement with
each other, with respect to the continuous offering of the Fund's Shares from
and after the date hereof in order to promote the growth of the Fund and
facilitate the distribution of its Shares; and

     WHEREAS, upon approval by the holders of the respective classes and/or
series of Shares of the Fund it is contemplated that the Fund will adopt a plan
(or plans) of distribution pursuant to Rule 12b-1 under the Investment Company
Act with respect to certain of its classes and/or series of Shares (the Plans)
authorizing payments by the Fund to the Distributor with respect to the



<PAGE>



distribution of such classes and/or series of Shares and the maintenance of
related shareholder accounts.

     NOW, THEREFORE, the parties agree as follows:

Section 1. Appointment of the Distributor

     The Fund hereby appoints the Distributor as the principal underwriter and
distributor of the Shares of the Fund to sell Shares to the public on behalf of
the Fund and the Distributor hereby accepts such appointment and agrees to act
hereunder. The Fund hereby agrees during the term of this Agreement to sell
Shares of the Fund through the Distributor on the terms and conditions set forth
below.

Section 2. Exclusive Nature of Duties

     The Distributor shall be the exclusive representative of the Fund to act as
principal underwriter and distributor of the Fund's Shares, except that:

     2.1 The exclusive rights granted to the Distributor to sell Shares of the
Fund shall not apply to Shares of the Fund issued in connection with the merger
or consolidation of any other investment company or personal holding company
with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding shares of any such company by
the Fund.

     2.2 Such exclusive rights shall not apply to Shares issued by the Fund
pursuant to reinvestment of dividends or capital gains distributions or through
the exercise of any conversion feature or exchange privilege.

     2.3 Such exclusive rights shall not apply to Shares issued by the Fund
pursuant to the reinstatement privilege afforded redeeming shareholders.

     2.4 Such exclusive rights shall not apply to purchases made through the
Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean the
Prospectus and Statement of Additional Information included as part of the
Fund's



                                       2


<PAGE>



Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.

Section 3. Purchase of Shares from the Fund

     3.1 The Distributor shall have the right to buy from the Fund on behalf of
investors the Shares needed, but not more than the Shares needed (except for
clerical errors in transmission) to fill unconditional orders for Shares placed
with the Distributor by investors or registered and qualified securities dealers
and other financial institutions (selected dealers).

     3.2 The Shares shall be sold by the Distributor on behalf of the Fund and
delivered by the Distributor or selected dealers, as described in Section 6.4
hereof, to investors at the offering price as set forth in the Prospectus.

     3.3 The Fund shall have the right to suspend the sale of any or all classes
and/or series of its Shares at times when redemption is suspended pursuant to
the conditions in Section 4.3 hereof or at such other times as may be determined
by the Trustees. The Fund shall also have the right to suspend the
sale of any or all classes and/or series of its Shares if a banking moratorium
shall have been declared by federal or New York authorities.

     3.4 The Fund, or any agent of the Fund designated in writing by the Fund,
shall be promptly advised of all purchase orders for Shares received by the
Distributor. Any order may be rejected by the Fund; provided, however, that the
Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Shares. The Fund (or its agent) will confirm
orders upon their receipt, will make appropriate book entries and upon receipt
by the Fund (or its agent) of payment therefor, will deliver deposit receipts
for such Shares pursuant to the instructions of the Distributor. Payment shall
be made to the Fund in New York Clearing House funds or federal funds. The




                                       3


<PAGE>


Distributor agrees to cause such payment and such instructions to be delivered
promptly to the Fund (or its agent).

Section 4. Repurchase or Redemption of Shares by the Fund

     4.1 Any of the outstanding Shares may be tendered for redemption at any
time, and the Fund agrees to repurchase or redeem the Shares so tendered in
accordance with its Articles of Inbusiness trust as amended from time to time,
and in accordance with the applicable provisions of the Prospectus. The price to
be paid to redeem or repurchase the Shares shall be equal to the net asset value
determined as set forth in the Prospectus. All payments by the Fund hereunder
shall be made in the manner set forth in Section 4.2 below.

     4.2 The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of the Distributor on or
before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Shares shall be
paid by the Fund as follows: (i) in the case of Shares subject to a contingent
deferred sales charge, any applicable contingent deferred sales charge shall be
paid to the Distributor, and the balance shall be paid to or for the account of
the redeeming shareholder, in each case in accordance with applicable provisions
of the Prospectus; and (ii) in the case of all other Shares, proceeds shall be
paid to or for the account of the redeeming shareholder, in each case in
accordance with applicable provisions of the Prospectus.

     4.3 Redemption of any class and/or series of Shares or payment may be
suspended at times when the New York Stock Exchange is closed for other than
customary weekends and holidays, when trading on said Exchange is restricted,
when an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or during any
other period when the Securities and Exchange Commission, by order, so permits.

Section 5. Duties of the Fund


                                       4


<PAGE>


     5.1 Subject to the possible suspension of the sale of Shares as provided
herein, the Fund agrees to sell its Shares so long as it has Shares of the
respective class and/or series available.

     5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Shares, and this shall
include one certified copy, upon request by the Distributor, of all financial
statements prepared for the Fund by independent public accountants. The Fund
shall make available to the Distributor such number of copies of its Prospectus
and annual and interim reports as the Distributor shall reasonably request.

     5.3 The Fund shall take, from time to time, but subject to the necessary
approval of the Trustees and the shareholders, all necessary action to
fix the number of authorized Shares and such steps as may be necessary to
register the same under the Securities Act, to the end that there will be
available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.

     5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Shares for sales under the
securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Articles of
Incorporation or By-Laws to comply with the laws of any state, to maintain an
office in any state, to change the terms of the offering of its Shares in any
state from the terms set forth in its Registration Statement, to qualify as a
foreign corporation in any state or to consent to service of process in any
state other than with respect to claims arising out of the offering of its
Shares. Any such qualification may be withheld, terminated or withdrawn by the
Fund at any time in its discretion. As provided in Section 9 hereof, the expense
of qualification and maintenance of




                                       5


<PAGE>



qualification shall be borne by the Fund. The Distributor shall furnish such
information and other material relating to its affairs and activities as may be
required by the Fund in connection with such qualifications.

Section 6. Duties of the Distributor

     6.1 The Distributor shall devote reasonable time and effort to effect sales
of Shares, but shall not be obligated to sell any specific number of Shares.
Sales of the Shares shall be on the terms described in the Prospectus. The
Distributor may enter into like arrangements with other investment companies.
The Distributor shall compensate the selected dealers as set forth in the
Prospectus.

     6.2 In selling the Shares, the Distributor shall use its best efforts in
all respects duly to conform with the requirements of all federal and state laws
relating to the sale of such securities. Neither the Distributor nor any
selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.

     6.3 The Distributor shall adopt and follow procedures for the confirmation
of sales to investors and selected dealers, the collection of amounts payable by
investors and selected dealers on such sales and the cancellation of unsettled
transactions, as may be necessary to comply with the requirements of the
National Association of Securities Dealers, Inc. (NASD).

     6.4 The Distributor shall have the right to enter into selected dealer
agreements with registered and qualified securities dealers and other financial
institutions of its choice for the sale of Shares, provided that the Fund shall
approve the forms of such agreements. Within the United States, the Distributor
shall offer and sell Shares only to such selected dealers as are members in good
standing of the NASD. Shares sold to selected dealers shall be for resale by
such dealers only at the offering price determined as set forth in the
Prospectus.

Section 7. Payments to the Distributor



                                       6


<PAGE>



     7.1 With respect to classes and/or series of Shares which impose a
front-end sales charge, the Distributor shall receive and may retain any portion
of any front-end sales charge which is imposed on such sales and not reallocated
to selected dealers as set forth in the Prospectus, subject to the limitations
of Article III, Section 26 of the NASD Rules of Fair Practice. Payment of these
amounts to the Distributor is not contingent upon the adoption or continuation
of any applicable Plans.

     7.2 With respect to classes and/or series of Shares which impose a
contingent deferred sales charge, the Distributor shall receive and may retain
any contingent deferred sales charge which is imposed on such sales as set forth
in the Prospectus, subject to the limitations of Article III, Section 26 of the
NASD Rules of Fair Practice. Payment of these amounts to the Distributor is not
contingent upon the adoption or continuation of any Plan.

Section 8. Payment of the Distributor under the Plan

     8.1 The Fund shall pay to the Distributor as compensation for services
under any Plans adopted by the Fund and this Agreement a distribution and
service fee with respect to the Fund's classes and/or series of Shares as
described in each of the Fund's respective Plans and this Agreement.

     8.2 So long as a Plan or any amendment thereto is in effect, the
Distributor shall inform the Trustees of the commissions and account
servicing fees with respect to the relevant class and/or series of Shares to be
paid by the Distributor to account executives of the Distributor and to
broker-dealers and financial institutions which have dealer agreements with the
Distributor. So long as a Plan (or any amendment thereto) is in effect, at the
request of the Trustees or any agent or representative of the Fund,
the Distributor shall provide such additional information as may reasonably be
requested concerning the activities of the Distributor hereunder and the costs
incurred in performing such activities with respect to the relevant class and/or
series of Shares.

Section 9. Allocation of Expenses




                                       7


<PAGE>



     The Fund shall bear all costs and expenses of the continuous offering of
its Shares (except for those costs and expenses borne by the Distributor
pursuant to a Plan and subject to the requirements of Rule 12b-1 under the
Investment Company Act), including fees and disbursements of its counsel and
auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and all amendments and supplements thereto, and preparing
and mailing annual and periodic reports and proxy materials to shareholders
(including but not limited to the expense of setting in type any such
Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of qualification of
the Shares for sale, and, if necessary or advisable in connection therewith, of
qualifying the Fund as a broker or dealer, in such states of the United States
or other jurisdictions as shall be selected by the Fund and the Distributor
pursuant to Section 5.4 hereof and the cost and expense payable to each such
state for continuing qualification therein until the Fund decides to discontinue
such qualification pursuant to Section 5.4 hereof. As set forth in Section 8
above, the Fund shall also bear the expenses it assumes pursuant to any Plan, so
long as such Plan is in effect.

Section 10. Indemnification

     10.1 The Fund agrees to indemnify, defend and hold the Distributor, its
officers and directors and any person who controls the Distributor within the
meaning of Section 15 of the Securities Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) which the Distributor,
its officers, directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except insofar as such claims,
demands, liabilities or expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in 




                                       8


<PAGE>



conformity with information furnished in writing by the Distributor to the Fund
for use in the Registration Statement or Prospectus; provided, however, that
this indemnity agreement shall not inure to the benefit of any such officer,
director, trustee or controlling person unless a court of competent jurisdiction
shall determine in a final decision on the merits, that the person to be
indemnified was not liable by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations under this Agreement (disabling conduct), or, in
the absence of such a decision, a reasonable determination, based upon a review
of the facts, that the indemnified person was not liable by reason of disabling
conduct, by (a) a vote of a majority of a quorum of directors or trustees who
are neither "interested persons" of the Fund as defined in Section 2(a)(19) of
the Investment Company Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and directors and any such controlling person as
aforesaid is expressly conditioned upon the Fund's being promptly notified of
any action brought against the Distributor, its officers or directors, or any
such controlling person, such notification to be given by letter or telegram
addressed to the Fund at its principal business office. The Fund agrees promptly
to notify the Distributor of the commencement of any litigation or proceedings
against it or any of its officers or directors in connection with the issue and
sale of any Shares.

     10.2 The Distributor agrees to indemnify, defend and hold the Fund, its
officers and Trustees and any person who controls the Fund, if any, within the
meaning of Section 15 of the Securities Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending against such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) which the Fund, its
officers and Directors or any such controlling person may incur under the
Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Trustees or officers or such
controlling person resulting from such claims or demands shall arise out of or
be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration



                                       9


<PAGE>



Statement or Prospectus or shall arise out of or be based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or Prospectus or necessary to make
such information not misleading. The Distributor's agreement to indemnify the
Fund, its officers and Trustees and any such controlling person as aforesaid, is
expressly conditioned upon the Distributor's being promptly notified of any
action brought against the Fund, its officers and Trustees or any such
controlling person, such notification being given to the Distributor at its
principal business office.

Section 11. Duration and Termination of this Agreement

     11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Trustees of the Fund, or by the
vote of a majority of the outstanding voting securities of the applicable class
and/or series of the Fund, and (b) by the vote of a majority of those
Directors who are not parties to this Agreement or interested persons
of any such parties and who have no direct or indirect financial interest in
this Agreement or in the operation of any of the Fund's Plans or in any
agreement related thereto (Independent Directors), cast in person at a meeting
called for the purpose of voting upon such approval.

     11.2 This Agreement may be terminated at any time, without the payment of
any penalty, by a majority of the Independent Trustees or by vote of a majority
of the outstanding voting securities of the applicable class and/or series of
the Fund, or by the Distributor, on sixty (60) days' written notice to the other
party. This Agreement shall automatically terminate in the event of its
assignment.

     11.3 The terms "affiliated person," "assignment," "interested person" and
"vote of a majority of the outstanding voting securities", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.



                                       10


<PAGE>



Section 12. Amendments to this Agreement

     This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Trustees of the Fund, or by the vote of a
majority of the outstanding voting securities of the applicable class and/or
series of the Fund, and (b) by the vote of a majority of the Independent
Trustees cast in person at a meeting called for the purpose of voting on such
amendment.

Section 13. Separate Agreement as to Classes and/or Series

     The amendment or termination of this Agreement with respect to any class
and/or series shall not result in the amendment or termination of this Agreement
with respect to any other class and/or series unless explicitly so provided.

Section 14. Governing Law

     The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.




                                       11


<PAGE>



     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year above written.


                                             PRUDENTIAL SECURITIES INCORPORATED


                                             By: /s/
                                                 ------------------------------
                                                 Robert F. Gunia
                                                 Senior Vice President





                                              PRUDENTIAL DRYDEN FUND


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




                                       12



                                                                Exhibit 99.10(c)
                           Kirkpatrick & Lockhart LLP
                   1800 Massachusetts Avenue, N.W. 2nd Floor
                             Washington, D.C. 20036


ROBERT J. ZUTZ
(202) 778-9059


                               November 27, 1996


Prudential Dryden Fund
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102-4077


Gentlemen:

     Prudential Dryden Fund (formerly The Prudential Institutional Trust) (the
"Trust") is a business trust organized under the laws of the State of Delaware.
We understand that the Trust is about to file Post-Effective Amendment No. 7 to
its Registration Statement on Form N-1A to, among other things, register
additional of its shares of beneficial interest ("Shares") under the Securities
Act of 1993, as amended ("1933 Act"), pursuant to Section 24(e)(1) of the
Investment Company Act of 1994, as amended ("1940 Act").

     We have, as counsel, participated in various business and other matters
relating to the Trust. We have examined copies, either certified or otherwise
proved to be genuine, of its Agreement and Declaration of Trust and By-Laws, as
now in effect, the minutes of meetings of its Trustees and other documents
relating to its organization and operation, and we generally are familiar with
its business affairs. For certain matters of fact, we have relied upon
representations of the officers of the Trust. Based on the foregoing, it is our
opinion that the Shares currently being registered pursuant to Section 24(e)(1)
as reflected in Post-Effective Amendment No. 7 may be sold in accordance with
the Trust's Declaration of Trust and By-Laws and subject to compliance with the
1933 Act, the 1940 Act and applicable state laws regulating the offer and sale
of securities and, when so sold, will be legally issued, fully paid and
nonassessable.

     The Trust is a business trust established pursuant to the Delaware Business
Trust Act ("Delaware Act"). The Delaware Act provides that a shareholder of the
Trust is entitled to the same limitation of personal liability extended to
shareholders of for-profit corporations. To the extent that the Trust of any of
its shareholders become subject to the jurisdiction of courts in states that do
not have statutory or other authority limiting the liability of business trust
shareholders, such courts may not apply the Delaware Act and thus, could subject
Trust shareholders to liability. To guard

<PAGE>


Prudential Dryden Fund
November 27, 1996
Page 2

against this risk, the Declaration of Trust states that creditors of,
contractors with and claimants against the Trust shall look only to the assets
of the Trust for payment. It also requires that notice of such disclaimer be
given in each contract or instrument made or issued by the officers or the
Trustees of the Trust on behalf of the Trust. The Declaration of Trust further
provides: (i) for indemnification from Trust assets for all loss and expense of
any shareholder held personally liable for the obligations of the Trust by
virtue of ownership of Shares of the Trust; and (ii) for the Trust to assume the
defense of any claim against the shareholder for any act or obligation of the
Trust. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Trust would be
unable to meet its obligations.

     We hereby consent to this opinion accompanying Post-Effective Amendment No.
7 that you are about to file with the Securities and Exchange Commission.


                                        Very truly yours,

                                        KIRKPATRICK & LOCKHART LLP


                                        By /s/ ROBERT J. ZUTZ
                                           -------------------------------------
                                               Robert J. Zutz

                                                                   Exhibit 99.11

CONSENT OF INDEPENDENT AUDITORS

We consent to the use in Post-Effective Amendment No. 7 to Registration
Statement No. 33-48066 of Prudential Dryden Fund (formerly The Prudential
Institutional Fund) of our reports dated November 13, 1996, appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the references to us under the headings "Financial Highlights"
in the Prospectuses, which are a part of such Registration Statement, and
"Custodian, Transfer and Dividend Disbursing Agent and Independent Accountants"
in the Statement of Additional Information.

Deloitte & Touche LLP
New York, New York
November 26, 1996





                                                                Exhibit 99.15(a)

                             PRUDENTIAL DRYDEN FUND
                  (formerly The Prudential Institutional Fund)
                       (Prudential Active Balanced Fund)

                          Distribution and Service Plan
                                (Class A Shares)

                                  INTRODUCTION

     The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential Dryden Fund (the Fund) and by
Prudential Securities Incorporated, the Fund's distributor (the Distributor).

     The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class A shares issued by the Fund
(Class A shares). Under the Plan, the Fund intends to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class A shares.

     A majority of the Board of Trustees of the Fund, including a majority of
those Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any agreements related to it (the Rule 12b-1
Trustees), have determined by votes cast in person at a meeting called for the
purpose of voting on this Plan that there is a reasonable likelihood that
adoption of this Plan will benefit the Fund and its shareholders. Expenditures
under this Plan by the Fund for Distribution Activities (defined below) are
primarily intended to result in the sale of Class A shares of the Fund within
the meaning of paragraph (a)(2) of Rule 12b-1 promulgated under the Investment
Company Act.



<PAGE>


     The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.

                                    THE PLAN

     The material aspects of the Plan are as follows:

1. Distribution Activities

     The Fund shall engage the Distributor to distribute Class A shares of the
Fund and to service shareholder accounts using all of the facilities of the
Prudential Securities distribution network, including sales personnel and branch
office and central support systems, and also using such other qualified
broker-dealers and financial institutions as the Distributor may select,
including Pruco Securities Corporation (Prusec). Services provided and
activities undertaken to distribute Class A shares of the Fund are referred to
herein as "Distribution Activities." 

2. Payment of Service Fee

     The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class A shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class A
shares of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Trustees may determine.


                                        2



<PAGE>


3. Payment for Distribution Activities

     The Fund shall pay to the Distributor as compensation for its services a
distribution fee, together with the service fee (described in Section 2 hereof),
of .30 of 1% per annum of the average daily net assets of the Class A shares of
the Fund for the performance of Distribution Activities. The Fund shall
calculate and accrue daily amounts payable by the Class A shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors may determine. Amounts payable under the Plan shall be
subject to the limitations of Article III, Section 26 of the NASD Rules of Fair
Practice.

         Amounts paid to the Distributor by the Class A shares of the Fund will
not be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class A shares according to the
ratio of the sales of Class A shares to the total sales of the Fund's shares
over the Fund's fiscal year or such other allocation method approved by the
Board of Trustees. The allocation of distribution expenses among classes will be
subject to the review of the Board of Trustees.

         The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:

     (a)  sales commissions and trailer commissions paid to, or on account of,
          account executives of the Distributor;

     (b)  indirect and overhead costs of the Distributor associated with
          Distribution Activities, including central office and branch expenses;


                                        3



<PAGE>


     (c)  amounts paid to Prusec for performing services under a selected dealer
          agreement between Prusec and the Distributor for sale of Class A
          shares of the Fund, including sales commissions, trailer commissions
          paid to, or on account of, agents and indirect and overhead costs
          associated with Distribution Activities;

     (d)  advertising for the Fund in various forms through any available
          medium, including the cost of printing and mailing Fund prospectuses,
          statements of additional information and periodic financial reports
          and sales literature to persons other than current shareholders of the
          Fund; and

     (e)  sales commissions (including trailer commissions) paid to, or on
          account of, broker-dealers and financial institutions (other than
          Prusec) which have entered into selected dealer agreements with the
          Distributor with respect to Class A shares of the Fund.

4. Quarterly Reports; Additional Information

     An appropriate officer of the Fund will provide to the Board of Trustees of
the Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Board of Trustees of the Fund such additional information as the
Board shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.

     The Distributor will inform the Board of Trustees of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and financial institutions
which have selected dealer agreements with the Distributor.

5. Effectiveness; Continuation

     The Plan shall not take effect until it has been approved by a vote of a
majority of the


                                        4



<PAGE>


outstanding voting securities (as defined in the Investment Company Act) of the
Class A shares of the Fund.

     If approved by a vote of a majority of the outstanding voting securities of
the Class A shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Trustees of the Fund and a majority of the Rule 12b-1
Trustees by votes cast in person at a meeting called for the purpose of voting
on the continuation of the Plan.

6. Termination

     This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Trustees, or by vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class A shares of the Fund.

7. Amendments

     The Plan may not be amended to change the combined service and distribution
fees to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class A shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Trustees of the Fund and a majority of the Rule 12b-1 Trustees by votes cast in
person at a meeting called for the purpose of voting on the Plan.

8. Rule 12b-1 Directors

     While the Plan is in effect, the selection and nomination of the Trustees
shall be committed to the discretion of the Rule 12b-1 Trustees.


                                        5



<PAGE>


9. Records

     The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.

Dated: October 30, 1996


                                        6




                                                                Exhibit 99.15(b)


                            PRUDENTIAL DRYDEN FUND
                 (formerly The Prudential Institutional Fund)
                       (Prudential Active Balanced Fund)

                         Distribution and Service Plan
                               (Class B Shares)

                                 INTRODUCTION

     The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential Dryden Fund (the Fund) and by
Prudential Securities Incorporated (Prudential Securities), the Fund's
distributor (the Distributor).

     The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class B shares issued by the Fund
(Class B shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class B shares.

     A majority of the Board of Trustees of the Fund including a majority of
those Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any agreements related to it (the Rule 12b-1
Trustees) have determined by votes cast in person at a meeting called for the
purpose of voting on this Plan that there is a reasonable likelihood that
adoption of this Plan will benefit the Fund and its shareholders. Expenditures
under this Plan by the Fund for Distribution Activities (defined below) are
primarily intended to result in the sale of Class B shares of the Fund within
the meaning of paragraph (a)(2) of Rule 12b-1 promulgated under the Investment
Company Act.



<PAGE>


     The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.

                                    THE PLAN

     The material aspects of the Plan are as follows:

1. Distribution Activities

     The Fund shall engage the Distributor to distribute Class B shares of the
Fund and to service shareholder accounts using all of the facilities of the
Prudential Securities distribution network including sales personnel and branch
office and central support systems, and also using such other qualified
broker-dealers and financial institutions as the Distributor may select,
including Pruco Securities Corporation (Prusec). Services provided and
activities undertaken to distribute Class B shares of the Fund are referred to
herein as "Distribution Activities."

2. Payment of Service Fee

     The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class B shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class B
shares of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Directors may determine.


                                        2



<PAGE>


3. Payment for Distribution Activities

     The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class B shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class B shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors may determine. Amounts payable under the Plan shall be
subject to the limitations of Article III, Section 26 of the NASD Rules of Fair
Practice.

     Amounts paid to the Distributor by the Class B shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class B shares according to the
ratio of the sale of Class B shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Trustees. The allocation of distribution expenses among classes will be subject
to the review of the Board of Trustees.

     The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:

     (a)  sales commissions (including trailer commissions) paid to, or on
          account of, account executives of the Distributor;

     (b)  indirect and overhead costs of the Distributor associated with
          performance of Distribution Activities including central office and
          branch expenses;

     (c)  amounts paid to Prusec for performing services under a selected dealer
          agreement between Prusec and the Distributor for sale of Class B
          shares of the Fund, including sales commissions and trailer
          commissions paid to, or on account of, agents and indirect
          and  overhead costs associated with Distribution Activities;


                                        3



<PAGE>


     (d)  advertising for the Fund in various forms through any available
          medium, including the cost of printing and mailing Fund prospectuses,
          statements of additional information and periodic financial reports
          and sales literature to persons other than current shareholders of the
          Fund; and

     (e)  sales commissions (including trailer commissions) paid to, or on
          account of, broker-dealers and other financial institutions (other
          than Prusec) which have entered into selected dealer agreements with
          the Distributor with respect to Class B shares of the Fund.

4. Quarterly Reports; Additional Information

      An appropriate officer of the Fund will provide to the Board of Trustees
of the Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Board of Trustees of the Fund such additional information as they
shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.

     The Distributor will inform the Board of Trustees of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.

5. Effectiveness; Continuation

     The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund.


                                        4



<PAGE>


     If approved by a vote of a majority of the outstanding voting securities of
the Class B shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Trustees of the Fund and a majority of the Rule 12b-1
Trustees by votes cast in person at a meeting called for the purpose of voting
on the continuation of the Plan. 

6. Termination

     This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Trustees, or by vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class B shares of the Fund.

7. Amendments

     The Plan may not be amended to change the combined service and distribution
fees to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class B shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Trustees of the Fund and a majority of the Rule 12b-1 Trustees by votes cast in
person at a meeting called for the purpose of voting on the Plan. 

8. Rule 12b-1 Directors

     While the Plan is in effect, the selection and nomination of the Rule 12b-1
Trustees shall be committed to the discretion of the Rule 12b-1 Trustees.


                                        5



<PAGE>


9. Records

      The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.


Dated: October 30, 1996


                                      6





                                                                Exhibit 99.15(c)
 
                           PRUDENTIAL DRYDEN FUND
                 (formerly The Prudential Institutional Fund)
                      (Prudential Active Balanced Fund)


                         Distribution and Service Plan
                               (Class C Shares)

                                 INTRODUCTION

     The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential Dryden Fund (the Fund) and by
Prudential Securities Incorporated (Prudential Securities), the Fund's
distributor (the Distributor) and will become effective upon the approval of the
Plan by the sole shareholder of the Class C shares.

     The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class C shares issued by the Fund
(Class C shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class C shares.

     A majority of the Board of Trustees of the Fund, including a majority of
the Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any agreements related to it (the Rule 12b-1
Trustees), have determined by votes cast in person at a meeting called for the
purpose of voting on this Plan that there is a reasonable likelihood that
adoption of this Plan will benefit the Fund and its shareholders. Expenditures
under this Plan by the Fund for Distribution Activities (defined below) are
primarily intended to result in the sale of Class C shares of the Fund within
the meaning of paragraph (a)(2) of Rule 12b-1 promulgated under the Investment
Company Act.



<PAGE>


     The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.

                                    THE PLAN

     The material aspects of the Plan are as follows:

1. Distribution Activities

     The Fund shall engage the Distributor to distribute Class C shares of the
Fund and to service shareholder accounts using all of the facilities of the
Prudential Securities distribution network including sales personnel and branch
office and central support systems, and also using such other qualified
broker-dealers and financial institutions as the Distributor may select,
including Pruco Securities Corporation (Prusec). Services provided and
activities undertaken to distribute Class C shares of the Fund are referred to
herein as "Distribution Activities." 

2. Payment of Service Fee

     The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class C shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class C
shares of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Trustees may determine.


                                      2

<PAGE>


3. Payment for Distribution Activities

     The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class C shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class C shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors may determine. Amounts payable under the Plan shall be
subject to the limitations of Article III, Section 26 of the NASD Rules of Fair
Practice.

     Amounts paid to the Distributor by the Class C shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class C shares according to the
ratio of the sale of Class C shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Trustees. The allocation of distribution expenses among classes will be subject
to the review of the Board of Trustees. Payments hereunder will be applied to
distribution expenses in the order in which they are incurred, unless otherwise
determined by the Board of Trustees.

     The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:

     (a)  sales commissions (including trailer commissions) paid to, or on
          account of, account executives of the Distributor;

     (b)  indirect and overhead costs of the Distributor associated with
          performance of Distribution Activities including central office and
          branch expenses;

     (c)  amounts paid to Prusec for performing services under a selected dealer
          agreement between Prusec and the Distributor for sale of


                                      3



<PAGE>


          Class C shares of the Fund, including sales commissions and trailer
          commissions paid to, or on account of, agents and indirect and
          overhead costs associated with Distribution Activities;

     (d)  advertising for the Fund in various forms through any available
          medium, including the cost of printing and mailing Fund prospectuses,
          statements of additional information and periodic financial reports
          and sales literature to persons other than current shareholders of the
          Fund; and

     (e)  sales commissions (including trailer commissions) paid to, or on
          account of, broker-dealers and other financial institutions (other
          than Prusec) which have entered into selected dealer agreements with
          the Distributor with respect to Class C shares of the Fund.

4. Quarterly Reports; Additional Information

      An appropriate officer of the Fund will provide to the Board of Trustees
of the Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Board of Trustees of the Fund such additional information as they
shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.

     The Distributor will inform the Board of Trustees of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.

5. Effectiveness; Continuation

     The Plan shall not take effect until it has been approved by a vote of a
majority of the

                                      4



<PAGE>


outstanding voting securities (as defined in the Investment Company Act) of the
Class C shares of the Fund.

     If approved by a vote of a majority of the outstanding voting securities of
the Class C shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Trustees of the Fund and a majority of the Rule 12b-1
Trustees by votes cast in person at a meeting called for the purpose of voting
on the continuation of the Plan.

6. Termination

     This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Trustees, or by vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class C shares of the Fund.

7. Amendments

     The Plan may not be amended to change the combined service and distribution
expenses to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class C shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Trustees of the Fund and a majority of the Rule 12b-1 Trustees by votes cast in
person at a meeting called for the purpose of voting on the Plan. 

8. Rule 12b-1 Directors

     While the Plan is in effect, the selection and nomination of the Rule 12b-1
Trustees shall be committed to the discretion of the Rule 12b-1 Trustees.


                                      5



<PAGE>


9. Records

     The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.


Dated: October 30, 1996


                                      6




                             PRUDENTIAL DRYDEN FUND
                        (Prudential Active Balanced Fund)
                                   (the Fund)

                           PLAN PURSUANT TO RULE 18F-3

     The Fund hereby adopts this plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940 (the 1940 Act), setting forth the separate
arrangement and expense allocation of each class of shares. Any material
amendment to this plan is subject to prior approval of the Trustees, including a
majority of the independent Trustees.

                              CLASS CHARACTERISTICS

CLASS A SHARES:     Class A shares are subject to a high initial sales charge 
                    and a distribution and/or service fee pursuant to Rule 12b-1
                    under the 1940 Act (Rule 12b-1 fee) not to exceed .30 of 1%
                    per annum of the average daily net assets of the class. The
                    initial sales charge is waived or reduced for certain
                    eligible investors.

CLASS B SHARES:     Class B shares are not subject to an initial sales charge
                    but are subject to a high contingent deferred sales charge
                    (declining by 1% each year) which will be imposed on certain
                    redemptions and a Rule 12b-1 fee of not to exceed 1% per
                    annum of the average daily net assets of the class. The
                    contingent deferred sales charge is waived for certain
                    eligible investors. Class B shares automatically convert to
                    Class A shares approximately seven years after purchase.

CLASS C SHARES:     Class C shares are not subject to an initial sales charge
                    but are subject to a low contingent deferred sales charge
                    (declining by 1% each year) which will be imposed on certain
                    redemptions and a Rule 12b-1 fee not to exceed 1% per annum
                    of the average daily net assets of the class.

CLASS Z SHARES:     Class Z shares are not subject to either an initial or 
                    contingent deferred sales charge nor are they subject to any
                    Rule 12b-1 fee and are limited to institutional offerees.


                                        1



<PAGE>


                         INCOME AND EXPENSE ALLOCATIONS

     Income, any realized and unrealized capital gains and losses, and expenses
not allocated to a particular class, will be allocated to each class on the
basis of the net asset value of that class in relation to the net asset value of
the Fund.

                           DIVIDENDS AND DISTRIBUTIONS

     Dividends and other distributions paid by the Fund to each class of shares,
to the extent paid, will be paid on the same day and at the same time, and will
be determined in the same manner and will be in the same amount, except that the
amount of the dividends and other distributions declared and paid by a
particular class may be different from that paid by another class because of
Rule 12b-1 fees and other expenses borne exclusively by that class.

                               EXCHANGE PRIVILEGE

     Each class of shares is generally exchangeable for the same class of shares
(or the class of shares with similar characteristics), if any, of the other
Prudential Mutual Funds (subject to certain minimum investment requirements) at
relative net asset value without the imposition of any sales charge.

     Class B and Class C shares (which are not subject to a contingent deferred
sales charge) of shareholders who qualify to purchase Class A shares at net
asset value will be automatically exchanged for Class A shares on a quarterly
basis, unless the shareholder elects otherwise.

                               CONVERSION FEATURES

     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.

                                     GENERAL

A.   Each class of shares shall have exclusive voting rights on any matter
     submitted to shareholders that relates solely to its arrangement and shall
     have separate voting rights on any matter submitted to shareholders in
     which the interests of one class differ from the interests of any other
     class.

B.   On an ongoing basis, the Trustees, pursuant to their fiduciary
     responsibilities under the 1940 Act and otherwise, will monitor the Fund
     for the existence of any material conflicts


                                      2



<PAGE>


     among the interests of its several classes. The Trustees, including a
     majority of the independent Trustees, shall take such action as is
     reasonably necessary to eliminate any such conflicts that may develop.
     Prudential Mutual Fund Management LLC, the Fund's Manager, will be
     responsible for reporting any potential or existing conflicts to the
     Trustees.

C.   For purposes of expressing an opinion on the financial statements of the
     Fund, the methodology and procedures for calculating the net asset value
     and dividends/distributions of the Fund's several classes and the proper
     allocation of income and expenses among such classes will be examined
     annually by the Fund's independent auditors who, in performing such
     examination, shall consider the factors set forth in the relevant auditing
     standards adopted, from time to time, by the American Institute of
     Certified Public Accountants.


Dated: October 30, 1996


                                      3



<TABLE> <S> <C>


<ARTICLE>                              6
<CIK>                         0000887991
<NAME>    THE PRUDENTIAL INSTITUTIONAL FUND: ACTIVE BALANCE FUND
<SERIES>
   <NUMBER>                          001
   <NAME> THE PRUDENTIAL INSTITUTIONAL FUND: ACTIVE BALANCE FUND
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          SEP-30-1996
<PERIOD-END>                               SEP-30-1996
<INVESTMENTS-AT-COST>                      141,921,651
<INVESTMENTS-AT-VALUE>                     152,915,923
<RECEIVABLES>                                5,088,949
<ASSETS-OTHER>                                  21,258
<OTHER-ITEMS-ASSETS>                                 0
<TOTAL-ASSETS>                             158,026,130
<PAYABLE-FOR-SECURITIES>                     4,175,455
<SENIOR-LONG-TERM-DEBT>                              0
<OTHER-ITEMS-LIABILITIES>                      262,378
<TOTAL-LIABILITIES>                          4,437,833
<SENIOR-EQUITY>                                      0
<PAID-IN-CAPITAL-COMMON>                   130,680,427
<SHARES-COMMON-STOCK>                       11,806,338
<SHARES-COMMON-PRIOR>                       10,703,173
<ACCUMULATED-NII-CURRENT>                    3,302,693
<OVERDISTRIBUTION-NII>                               0
<ACCUMULATED-NET-GAINS>                      8,610,905
<OVERDISTRIBUTION-GAINS>                             0
<ACCUM-APPREC-OR-DEPREC>                    10,994,272
<NET-ASSETS>                               153,588,297
<DIVIDEND-INCOME>                            1,314,110
<INTEREST-INCOME>                            4,497,838
<OTHER-INCOME>                                       0
<EXPENSES-NET>                               1,420,261
<NET-INVESTMENT-INCOME>                      4,391,687
<REALIZED-GAINS-CURRENT>                     9,129,045
<APPREC-INCREASE-CURRENT>                   (1,120,181)
<NET-CHANGE-FROM-OPS>                       12,400,551
<EQUALIZATION>                                       0
<DISTRIBUTIONS-OF-INCOME>                   (3,972,955)
<DISTRIBUTIONS-OF-GAINS>                    (1,932,789)
<DISTRIBUTIONS-OTHER>                                0
<NUMBER-OF-SHARES-SOLD>                     36,454,403
<NUMBER-OF-SHARES-REDEEMED>                (28,618,544)
<SHARES-REINVESTED>                          5,905,744
<NET-CHANGE-IN-ASSETS>                      20,236,410
<ACCUMULATED-NII-PRIOR>                      2,883,961
<ACCUMULATED-GAINS-PRIOR>                    1,414,649
<OVERDISTRIB-NII-PRIOR>                              0
<OVERDIST-NET-GAINS-PRIOR>                           0
<GROSS-ADVISORY-FEES>                          994,182
<INTEREST-EXPENSE>                                   0
<GROSS-EXPENSE>                              1,412,605
<AVERAGE-NET-ASSETS>                       142,026,000
<PER-SHARE-NAV-BEGIN>                            12.46
<PER-SHARE-NII>                                   1.10
<PER-SHARE-GAIN-APPREC>                           0.00
<PER-SHARE-DIVIDEND>                             (0.37)
<PER-SHARE-DISTRIBUTIONS>                        (0.18)
<RETURNS-OF-CAPITAL>                              0.00
<PER-SHARE-NAV-END>                              13.01
<EXPENSE-RATIO>                                   1.00
<AVG-DEBT-OUTSTANDING>                               0
<AVG-DEBT-PER-SHARE>                              0.00
        


</TABLE>

<TABLE> <S> <C>


<ARTICLE>                              6
<CIK>                         0000887991
<NAME>    THE PRUDENTIAL INSTITUTIONAL FUND: STOCK INDEX FUND
<SERIES>
   <NUMBER>                          002
   <NAME> THE PRUDENTIAL INSTITUTIONAL FUND: STOCK INDEX FUND
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          SEP-30-1996
<PERIOD-END>                               SEP-30-1996
<INVESTMENTS-AT-COST>                      148,305,364
<INVESTMENTS-AT-VALUE>                     184,303,887
<RECEIVABLES>                                1,354,154
<ASSETS-OTHER>                                  52,801
<OTHER-ITEMS-ASSETS>                                 0
<TOTAL-ASSETS>                             185,710,842
<PAYABLE-FOR-SECURITIES>                       842,997
<SENIOR-LONG-TERM-DEBT>                              0
<OTHER-ITEMS-LIABILITIES>                      489,329
<TOTAL-LIABILITIES>                          1,332,326
<SENIOR-EQUITY>                                      0
<PAID-IN-CAPITAL-COMMON>                   144,886,215
<SHARES-COMMON-STOCK>                       11,480,178
<SHARES-COMMON-PRIOR>                        7,168,801
<ACCUMULATED-NII-CURRENT>                    2,125,171
<OVERDISTRIBUTION-NII>                               0
<ACCUMULATED-NET-GAINS>                      1,352,382
<OVERDISTRIBUTION-GAINS>                             0
<ACCUM-APPREC-OR-DEPREC>                    36,014,748
<NET-ASSETS>                               184,378,516
<DIVIDEND-INCOME>                            3,154,570
<INTEREST-INCOME>                              444,547
<OTHER-INCOME>                                       0
<EXPENSES-NET>                                 855,309
<NET-INVESTMENT-INCOME>                      2,743,808
<REALIZED-GAINS-CURRENT>                     1,791,564
<APPREC-INCREASE-CURRENT>                   20,293,266
<NET-CHANGE-FROM-OPS>                       24,828,638
<EQUALIZATION>                                       0
<DISTRIBUTIONS-OF-INCOME>                   (2,181,628)
<DISTRIBUTIONS-OF-GAINS>                    (4,441,170)
<DISTRIBUTIONS-OTHER>                                0
<NUMBER-OF-SHARES-SOLD>                    113,692,034
<NUMBER-OF-SHARES-REDEEMED>                (56,086,722)
<SHARES-REINVESTED>                          6,622,798
<NET-CHANGE-IN-ASSETS>                      82,433,950
<ACCUMULATED-NII-PRIOR>                      1,562,991
<ACCUMULATED-GAINS-PRIOR>                    4,001,988
<OVERDISTRIB-NII-PRIOR>                              0
<OVERDIST-NET-GAINS-PRIOR>                           0
<GROSS-ADVISORY-FEES>                          570,160
<INTEREST-EXPENSE>                                   0
<GROSS-EXPENSE>                                599,124
<AVERAGE-NET-ASSETS>                       142,540,000
<PER-SHARE-NAV-BEGIN>                            14.22
<PER-SHARE-NII>                                   2.69
<PER-SHARE-GAIN-APPREC>                           0.00
<PER-SHARE-DIVIDEND>                             (0.28)
<PER-SHARE-DISTRIBUTIONS>                        (0.57)
<RETURNS-OF-CAPITAL>                              0.00
<PER-SHARE-NAV-END>                              16.06
<EXPENSE-RATIO>                                   0.60
<AVG-DEBT-OUTSTANDING>                               0
<AVG-DEBT-PER-SHARE>                              0.00
        


</TABLE>


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